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American Scheme

Blog Category: The Economics of Discrimination

Written by: *Brandon Perloff

Before the “Great Recession” beginning in 2008, the average, informed American never heard of the term “subprime mortgage,” but now, the term can now be heard on on Main Street just as frequently heard on Wall Street.  The hardships of the financial crisis has not, however, affected everyone equally. Three major metro Atlanta counties has identified the cause of that disparate effect on another increasingly more commonly heard term “predatory lending.”[1]

For borrowers, a predatory loan is just as sinister as its name suggests.  It is a loan excessively higher than those granted to similarly situated borrowers, not justified by the borrower’s credit-worthiness, and is secured by the borrower’s home.[2]   After reality sets in and the borrower defaults on the loan, the “American Dream” of owning your own home soon becomes a nightmare after lenders swoop in for the foreclosure.[3]

Three Georgia counties, DeKalb, which was 54.4% African- American in 2011, Cobb (25.9 %), and Fulton (45.45%), are suing the London-based mortgage lender HSBC under the federal Fair Housing Act (“FHA”).[4]   The FHA makes it illegal to “discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.”[5]   HSBC allegedly took advantage of minority borrowers by placing them in mortgages they couldn’t afford, or accompanying expensive loans with high fees when they might have qualified for cheaper mortgages.[6]   According to the complaint, HSBC generated billions in fee income nationally by using improper marketing tactics to lock African-American and Hispanic borrowers into subprime loans.[7]  Tactics included: targeted mailings, which offered credit cards, car loans and other consumer credit lines were used to “up-sell” clients to high-cost mortgages that were more lucrative to HSBC, which placed the volume over the quality.[8]

Kevin Jacques, a finance professor at Baldwin-Wallace College in Ohio and a former economist and regulator for the U.S. Treasury Department and the Office of the Comptroller of the Currency said, “We are seeing so many lawsuits because the banks got sloppy and abusive at times in their mortgage practices and their foreclosure practices. Now they have to pay for it.”[9]    Well that may be true, but is “paying for it” just another cost of doing business that allows billions of dollars to pour into their capital accounts? As more lawsuits are brought into federal courts, juries will have their say in determining if these suits are just another entry to the accounts payable column or serious deterrent.

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*Brandon Perloff is currently a staff member on the Widener Journal of Law, Economics & Race. To learn more about Brandon Perloff, click here to visit his page: Brandon Perloff
[1] Atlanta Banker. Law News, Metro Atlanta Counties Sue HSBC for Predatory Lending, BEFOREIT’SNEWS.COM, (Oct. 20, 2012, 0:12), http://beforeitsnews.com/the-law/2012/10/metro-atlanta-counties-sue-hsbc-for-predatory-lending-2445808.html
[2] Id.
[3] Id.
[4] United States Census Bureau, State & County QuickFacts, (last visited Oct. 20, 2012, 5PM), available at  http://quickfacts.census.gov/qfd/meta/long_RHI225211.htm
[5] Discrimination in the sale or rental of housing and other prohibited practices, 42 U.S.C.A. § 3604(b) (1988).
[6] J. Scott Trubey, Counties file suit in housing crisis, THE ATLANTA JOURNAL-CONSTITUTION (Oct. 18, 2012, 7:59 PM), http://www.ajc.com/news/news/cobb-fulton-dekalb-sue-british-bank-allege-predato/nSg9Y/
[7] Id.
[8] Id.
[9] Id.
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