10 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
An individual who buys real property typically borrows the funds from a financial institution to pay for it. A
mortgage is a written instrument that gives the creditor an interest in, or a line on, the property as security for
REVERSE REDLINING IN THE MORTGAGE MARKET
In December 2011, Bank of America reached a settlement with the U.S. Department of Justice in which it
agreed to pay $335 million to compensate 200,000 borrowers who allegedly were discriminated against by
Countrywide Financial, a subsidiary that Bank of America had acquired in 2008 when Countrywide was
collapsing under its burden of bad loans. The Justice Department alleged that Countrywide had engaged in
FIRST, THERE WAS REDLINING
For decades, the mortgage lending industry was accused of redlining—that is, drawing a red line on a
map around poorer neighborhoods and refusing to offer mortgages to borrowers, often members of minority
groups, who wished to purchase homes in those areas. In 1977, Congress passed the Community
Reinvestment Act to require lenders to make mortgages more readily obtainable in redlined areas.
Nonetheless, in the mid-1990s African American and Hispanic applicants for mortgages were still being
rejected at a rate 1.6 times higher than white applicants with similar credit histories. Under the Clinton
administration (1993–2001), organizations in redlined areas increasingly pressured banks to make more
loans available. The lenders responded with reverse redlining.
THEN, REVERSE REDLINING BECAME POPULAR
Reverse redlining is the opposite of redlining—instead of denying mortgages to members of minority
groups, lenders targeted them. During the housing boom, lenders aggressively marketed their subprime
mortgages in poorer areas. Wells Fargo, for instance, enlisted pastors in churches in African American
communities to offer wealth-building seminars. The bank would make a donation to the church for every new
mortgage application it received.
Why were lenders suddenly so interested in these borrowers? The answer is that subprime mortgages
carry much higher interest rates than standard mortgages and are usually accompanied by higher up-front
fees. In many instances, the Justice Department asserted, mortgage companies pushed African American
and Hispanic borrowers into high-cost subprime mortgages even when they could qualify for standard
mortgages. (Subprime mortgages are higher risk loans given to borrowers with poor credit scores who cannot
qualify for standard mortgages.) Other borrowers were given mortgages that they would not be able to pay—
the lender pocketed the fees and sold the worthless mortgages to investors. As a result of such practices,
minority groups have incurred a disproportionate percentage of foreclosures.