Saying that reverse redlining is a form of discrimination, the U.S. District Court for the Southern District of Texas has refused to dismiss a discrimination case alleging that Texas developer Colony Ridge specifically targeted Limited English Proficient (LEP) people.
In issuing the ruling, the court dismissed a mortgage processing company from the suit, saying that the firm had not been involved in any lending decisions.
In December 2023, the CFPB and the Justice Department filed a complaint against Colony Ridge Development, LLC and three related entities (collectively, “Colony Ridge”) in which the agencies allege that Colony Ridge engaged in discriminatory targeting of Hispanic consumers with predatory financing and other unlawful conduct.
In rejecting Colony Ridge’s motion to dismiss, the court acknowledged that while the Supreme Court and the Fifth Circuit Court of Appeals have not ruled on whether reverse discrimination is a recognizable form of discrimination under the Equal Credit Opportunity Act, other courts have ruled that it is.
The DOJ and CFPB alleged that Colony Ridge has developed more than 40,000 lots spread across six residential subdivisions in Liberty County, Texas and that Colony Ridge has extended credit to consumers to purchase the lots. The additional facts alleged in the complaint include that:
- Colony Ridge advertises almost exclusively in Spanish. In its advertising, Colony Ridge features cultural markers associated with Latin America.
- Colony Ridge falsely represents that lots were sold with water, sewer, and electrical infrastructure already in place. It only discloses that lots may not have this infrastructure after applicants have paid a non-refundable deposit and the company makes that disclosure only in English.
- Colony Ridge employees fail to inform buyers of flood risk despite repeated past flooding of lots or falsely tell buyers that the lots have not flooded.
- Colony Ridge’s interest rates are significantly higher than prevailing rates. Colony Ridge’s interest rates are not based on an individualized assessment of risk related to a consumer’s actual likelihood of repaying the loan. Colony Ridge does not assess borrowers’ ability to repay before extending credit, requiring only self-reported–but unverified–gross income and a nominal down payment.
- From September 2019 through September 2022, Colony Ridge initiated foreclosures on at least 30% of seller-financed lots within just three years of the purchase date, with most credit failures occurring even sooner.
- Foreclosure and property deed records indicate that Colony Ridge flipped at least 40% of all the properties it sold between September 2019 and September 2022, selling approximately 8,237 properties twice, 3,267 properties three times, and 2,067 properties four or more times in three years.
With regard to legal matters, the complaint alleges that Colony Ridge:
- Engaged in unlawful discrimination against applicants in violation of the Equal Credit Opportunity Act and Regulation B, including by targeting Hispanic applicants on the basis of race or national origin with predatory seller financing.
- Engaged in unlawful discrimination against applicants in violation of the Fair Housing Act, including by targeting Hispanic applicants on the basis of race or national origin with predatory seller financing and exploiting applicants’ limited English proficiency.
- Engaged in conduct that violated the Interstate Land Sales Full Disclosure Act (ILSA) and Regulations K and J by:
- Selling lots without filing an initial Statement of Record with the CFPB and paying the required fee;
- Failing to provide purchasers with a printed Property Report in advance of signing a contract or agreement;
- Displaying advertising and promotional materials to prospective purchasers that were inconsistent with the information required to be disclosed in the Property Report (i.e., that the lots were subject to periodic flooding);
- Making misrepresentations or omitting material facts about the lots (i.e. representing they were sold with the infrastructure necessary to connect water, sewer, and electrical services pre-installed and omitting estimates of the costs required to connect those services); and
- Failing to file an Annual Report of Activity with the CFPB and to pay the required fee.
- Engaged in deceptive acts or practices in violation of the Consumer Financial Protection Act by misrepresenting that lots were sold with the infrastructure necessary to connect water, sewer, and electrical services pre-installed, and violated the CFPA based on the alleged ECOA and ILSA violations.
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