MORTGAGE DISCRIMINATION: LOS ANGELES SUES JP MORGAN

June 2, 2014

The City of Los Angeles filed a lawsuit against JP Morgan Chase Bank on May 30, 2014, accusing the bank of mortgage discrimination, specifically, steering minority borrowers into riskier home loans they could not afford.  The City alleges that these discriminatory lending practices drove up foreclosures among minority borrowers. Los Angeles filed similar lawsuits last December against Bank of America, Citigroup and Wells Fargo.  Cook County, Illinois, which includes Chicago, has filed similar lawsuits against Bank of America and HSBC Holdings. Lawsuits alleging mortgage discrimination have also been brought by Baltimore, Cleveland, Memphis and Providence and Atlanta-area counties.

Los Angeles said JPMorgan loans made from 2004 to 2011 in predominantly black or Latino neighborhoods were 2.19 times more likely to go into foreclosure than loans in mainly white areas. It said loans to minority borrowers went into foreclosure faster.

The City alleges that JP Morgan Chase, through acquisitions, is responsible for the predatory lending practices of Bank One, Bear Stearns, Washington Mutual, Encore Credit Corp., Long Beach Mortgage, Performance Credit Corp., JPE Home Finance and Bravo Credit Corp.

According to the Complaint: “Banks should not target minority neighborhoods for loans that discriminate nor make loans to minorities on terms that are worse than those offered to whites with similar credit characteristics.” The suit accuses the defendants of redlining (denying credit to certain neighborhoods based on race) and reverse redlining (flooding a minority community with exploitative loan products).

Among other charges, the lawsuit challenges the lenders’ practice of aggressively marketing debt consolidation refinance loans, accusing the defendants (in paragraph 43(c)) of:

Failing to prudently underwrite refinance loans, where borrowers substitute unaffordable mortgage loans for existing mortgages that they are well-suited for and that allow them to build equity. Such refinanced loans strip much or even all of that equity by charging substantial new fees, often hiding the fact that the high settlement costs of the new loan are also being financed. Lenders that aggressively market the ability of the borrower to pay off existing credit card and other debts by refinancing all of their debt into one mortgage loan mislead borrowers into believing that there is a benefit to debt consolidation, while obscuring the predictable fact that the borrower will not be able to repay the new loan. The refinanced loans are themselves often refinanced repeatedly with ever-increasing fees and higher interest rates, and with ever-decreasing equity, as borrowers seek to stave off foreclosure.

The lawsuit also accuses the defendants (in paragraph 43(e)) of ignoring traditional and prudent underwriting (essentially, forecasting the likelihood of successful repayment) for short-term gains:

Failing to underwrite loans based on traditional underwriting criteria such as debt-to-income ratio, loan-to-value ratio, FICO score, and work history. Properly applying these criteria ensure that a borrower is obtaining a loan that he or she has the resources and assets to repay, and ignoring them results in many loans that bear no relation to borrowers’ ability to repay them. This allows the lender to make a quick profit from the origination, but sets the borrower up for default and foreclosure.

The lawsuit alleges (paragraph 128) that there were 200,000 foreclosures in Los Angeles from 2008 through 2011 and that these foreclosures will result in $26 billion in lost home values throughout communities in Los Angeles.

The lawsuit seeks compensation for lost tax revenues and for the cost of repairing and maintaining properties that went into foreclosure due to discriminatory lending.

The case is City of Los Angeles v. JPMorgan Chase & Co., U.S. District Court, Central District of California, No. 14-04168.