Court Denies Motion to Dismiss Government’s Reverse Redlining Suit Against Housing Developer

The U.S. District Court for the Southern District of Texas denied a housing developer’s motion to dismiss a complaint by the CFPB and DOJ alleging that the developer engaged in predatory lending against Hispanic borrowers.

The DOJ asserted that the developer engaged in reverse redlining by targeting Hispanic borrowers for loans with high interest rates and hidden expenses that the borrowers could not afford to repay. The developer sought to dismiss the suit because the government did not meet the appropriate reverse redlining standard, as well as because neither the Supreme Court nor the Fifth Circuit have issued opinions confirming that reverse redlining is a violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. 

The court found that reverse redlining could constitute discrimination under ECOA and the Fair Housing Act, and that the government’s complaint satisfied the elements of a reverse redlining claim.  Among other things, marketing for the loans was in Spanish and was directed towards Hispanic consumers.  The loans at issue had interest rates of up to 12.9%—which were significantly higher than the market average at the time—and the developer did not analyze the ability of customers to repay the loans.  Further, the court noted that the relevant disclosures and loan documents were usually only provided in English in an apparent effort to prevent borrowers with limited English proficiency from understanding the loan terms.

Separately, the Court dismissed related claims against the entity which provided the developer’s loan origination systems and document generation software.  The Court found that the complaint did not allege that this service provider played a role in the alleged discriminatory targeting of Hispanic borrowers or in setting the terms offered to the borrowers.  The court granted the government leave to amend its complaint to try and remedy the deficient allegations against the service provider.