Late Tuesday, the Department of Justice (DOJ) announced its third redlining settlement against a non-bank mortgage company under its Combatting Redlining Initiative, compelling the Altamonte Springs, Fla.-based The Mortgage Firm to establish a $1.75 million loan subsidy fund to resolve allegations the mortgage company redlined neighborhoods in Miami-Dade County.
The Justice Department and Consumer Financial Protection Bureau (CFPB) settled similar redlining allegations with Fairway Independent Mortgage Corporation last mid-October, and after a protracted legal process that began in 2021, Townstone Financial in early November.
The Justice Department opened the investigation into The Mortgage Firm’s lending practices after receiving a referral from the CFPB. Unlike the recent actions against Fairway and Townstone, however, the CFPB is absent from Tuesday’s enforcement action against The Mortgage Firm.
Notably, The Mortgage Firm is not compelled to pay a civil money penalty, whereas Fairway was required to pay $1.9 million to the CFPB’s victims relief fund, and Townstone paid $105,000 to the victims relief fund.
The Mortgage Firm was represented by Daniella Casseres, partner and head of the mortgage practice group at Mitchell Sandler.
Awaiting court approval, Tuesday’s proposed consent order also requires The Mortgage Firm to conduct a Community Credit Needs Assessment; maintain at least one physical location in a majority-Black and Hispanic neighborhood in Miami-Dade County (which it does already); enhance its fair lending training, and increase the diversity of its advertising and loan officers — all activities geared toward facilitating the disbursement of the $1.75 million loan subsidy fund.
Allegations Against The Mortgage Firm
According to the DOJ’s filing, the investigation into The Mortgage Firm covered the company’s operations from 2016 to 2021, during which time The Mortgage Firm is alleged to have “significantly underperformed its peer lenders in generating home mortgage applications from majority- and high-Black and Hispanic neighborhoods in the Miami MSA.”
The DOJ describes The Mortgage Firm’s peer lenders as financial institutions that received between 50% (half as many) and 200% (twice as many) of The Mortgage Firm’s annual volume of home mortgage loan applications.
Of the 9,375 HMDA-reportable mortgage applications that The Mortgage Firm generated between 2016 and 2021 in the Miami MSA, only 30.4% came from residents of majority-Black and Hispanic neighborhoods. By contrast, The Mortgage Firm’s peers generated 59% of their HMDA applications from these same majority-Black and Hispanic neighborhoods during that period.
“The disparity between the rate of applications generated by The Mortgage Firm and the rate generated by its peer lenders from majority- and high-Black and Hispanic neighborhoods in the Miami MSA is both statistically significant—meaning unlikely to be caused by chance— and sizable in every year from 2016 through 2021,” the DOJ’s complaint reads.
Of the applications that The Mortgage Firm generated in majority-Black and Hispanic census tracts, on average, 42% of the applications came from white applicants. By contrast, of the applications from majority-Black and Hispanic areas generated by The Mortgage Firm’s peers, on average, only 19% of the applications came from white applicants.
The Mortgage Firm’s failure to hire and retain Black and Hispanic loan officers, include diverse-looking people in its advertising materials, and translate its website into Spanish or indicate on its website which offices could assist Spanish-speaking clients were cited as further evidence of intentional redlining.
The DOJ also noted three loan officer email exchanges that referred to certain neighborhoods in the Miami MSA as “ghetto” or “hood”, thus “implying a reticence to provide lending services to, or work with borrowers in, majority- and high-Black and Hispanic neighborhoods.”
As of 2019, the total population of the Miami MSA was approximately 6.1 million, of which 20% of the residents identified themselves as Black (non-Hispanic); 45% as Hispanic; 30% as white (non-Hispanic); and 2% as Asian, according to the DOJ’s complaint.
Referral Networks' Disparate Impact Problem
Attorneys across the mortgage industry have warned that regulators risk litigation over fair lending enforcement actions that do not align with federal regulations, especially as it relates to recent redlining settlements.
Experts warn that regulators are blurring the line between redlining allegations and demands for lenders to engage in race-based lending, marketing, and hiring, in defiance of the Supreme Court’s June 2023 rejection of race-based admissions policies in higher education.
Citing such regulatory and enforcement discrepancies, Rocket Mortgage sued the U.S. Department of Housing and Urban Development (HUD) in December in an effort to defend itself against allegations of appraisal bias levied against the lender in an October DOJ lawsuit.
After its settlement was announced, Fairway accused regulators of using a “quota analysis” to manufacture perceptions of discriminatory lending, inferring intentional redlining from peer-to-peer lending analyses.
In its Tuesday complaint, the DOJ cites The Mortgage Firm’s referral business model as the root cause of its intentional redlining and discriminatory lending practices from 2016-2021, while blaming the company's management for failing to track how loan officers generated their leads.
“The Mortgage Firm relied almost entirely on loan officers to develop referral sources, conduct outreach to potential customers, and distribute marketing materials related to The Mortgage Firm’s mortgage lending services,” Tuesday's complaint reads. “The Mortgage Firm’s management exercised minimal or no oversight into the creation or maintenance of referral networks.”
Specifically, the DOJ says The Mortgage Firm:
- Did not make notable efforts to develop referral networks in, or market to residents of, majority- or high-Black and Hispanic neighborhoods;
- Did not train or incentivize its loan officers to market, advertise, or develop referral partnerships in majority- or high-Black and Hispanic neighborhoods;
- Neither monitored nor documented where or to whom its loan officers distributed marketing materials of its mortgage lending services to ensure that such distribution reached all neighborhoods throughout the Miami MSA;
- Conducted minimal or no meaningful outreach or marketing to Hispanic communities, despite operating in an MSA where 45% of the population is Hispanic; and,
- Knew that its referral partners typically did not refer Spanish speaking customers to The Mortgage Firm and would likely refer Spanish speakers to other lenders but failed to take steps to solicit these referrals or to otherwise serve Spanish-speaking customers.
A July 2024 decision by the U.S. Court of Appeals for the Seventh Circuit in the Townstone redlining case upheld the CFPB's broad authority to enforce Regulation B of the Equal Credit Opportunity Act (ECOA), which protects applicants from discrimination in any aspect of a credit transaction, as prohibiting the discouragement of prospective applicants also.
Broadly, the discouragement of prospective applicants, by nature of the company's referral network, grounds the DOJ's allegations of intentional redlining.
"The Mortgage Firm’s failure to conduct outreach or market to majority- and high-Black and Hispanic areas, and failure to take any meaningful efforts to compensate for its lack of referral partners in majority-Black and Hispanic neighborhoods, discriminated against, including by discouraging, prospective applicants from seeking credit with The Mortgage Firm and was intended to deny, and had the effect of denying, equal access to home loans for those residing in, or seeking credit for properties located in, majority- and high-Black and Hispanic neighborhoods in the Miami MSA."
