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Redlining has long been outlawed, but in New York City, the federal government is again disproportionately hurting black homeowners, according to a federal lawsuit filed by a nonprofit that represents low-income New Yorkers, the New York Times reported today. This time, the suit says, the government is fueling racial disparities not through its lending policies but in how it handles foreclosures. Since the financial crisis pushed thousands of homeowners in New York and across the country into foreclosure, the federal Department of Housing and Urban Development has been selling insured delinquent mortgages to private investors, typically hedge funds and private equity funds, which then collect monthly payments. The investors, according to the lawsuit filed against the housing agency and a large private equity firm, Lone Star Funds, provide fewer protections to homeowners who fall behind on their mortgage payments than the federal government does, leading to higher rates of foreclosure. Most of the mortgages being sold to these investors are in predominantly black neighborhoods like in southeast Queens and the Canarsie section of Brooklyn. From 2012 to 2014, more than 61 percent of the government-backed mortgages sold to investors were in predominantly black neighborhoods, according to the lawsuit.

Price Waterhouse Cooper (PwC)is being sued for a record $5.5bn for failing to detect fraud that led to a bank collapse during the global financial crisis, in a case that could bring more auditing firms into the line of fire, the Financial Times reported today. The case — the biggest against an auditing firm — has been filed in a Florida state court on behalf of a trustee of Taylor, Bean & Whitaker (TBW), a defunct mortgage underwriter, and accuses PwC of failing to catch a multibillion-dollar conspiracy between Lee Farkas, the company’s founder, and executives at Colonial Bank, an Alabama-based lender that supplied TBW with loans. PwC gave the bank’s parent, Colonial BancGroup, a clean audit opinion every year from 2002 to 2008. Colonial collapsed in 2009, becoming the sixth-largest U.S. bank failure in history. According to TBW’s trustee, PwC certified the existence of more than $1bn of Colonial Bank assets that did not exist, that had been sold or were worthless. Steven Thomas, lead trial lawyer for the trustee, described the case as “particularly egregious” given that Dennis Nally, who retired last month after eight years as PwC’s global chairman, told the Wall Street Journal in 2007 that the “audit profession has always had a responsibility for the detection of fraud.”

A new report released yesterday from Pew Charitable Trusts said that payday lenders are increasingly shifting to installment lending to get ahead of federal regulation, creating new risks for borrowers, the Wall Street Journal reported today. The Consumer Financial Protection Bureau released a proposed rule in June meant to rein in abusive practices in the payday industry. But if the rule is enacted in its current form, it “would expedite the transition toward installment loan[s],” according to the report from Pew Charitable Trusts. The loans often have high interest rates and result in borrowers taking out new loans to repay old ones — the same onerous features that have accompanied payday loans. The report is notable because Pew is generally an advocate of the CFPB’s efforts. But the research group was critical of the regulator on a call discussing its report with reporters. If enacted in its current version, “the net effect is moving from 400 percent APR for two-week loans to 400 percent APR for installment loans,” said Nick Bourke, a project director at Pew. A CFPB spokesman said the proposed rule would require lenders to make “a reasonable determination whether a consumer will have the ability to repay.” This includes whether the borrower can pay the loan without being forced to sign up for another one shortly after.

A government effort to crack down on payday loans has given new energy to installment loans, the Wall Street Journal reported today. Payday loans, which typically carry triple-digit annual percentage rates, are made against a person’s paycheck, usually for just a few hundred dollars for a few weeks. Installment loans often carry triple-digit rates, too, but have longer repayment periods, often from six months to more than a year, and may be for a few thousand dollars. The loans are paid a bit at a time, rather than in one balloon payment, as payday loans are. Both types of lending target borrowers with low credit scores who likely can’t get credit from traditional sources like banks. Payday loans, though, are believed by critics to be more onerous for borrowers, which has spurred regulatory action from the Consumer Financial Protection Bureau. So lenders have been switching gears. Lenders extended nearly $24.2 billion in installment loans to borrowers with credit scores of 660 or less in 2015. That was up 78 percent from the prior year and nearly triple the amount in 2012, based on loan data submitted by mostly nonbank lenders to credit-reporting firm Experian.

The U.S. Consumer Financial Protection Bureau said yesterday that Santander Bank would pay $10 million to settle charges that it engaged in illegal overdraft practices, Reuters reported. The regulator said the bank's telemarketing vendor deceptively marketed its overdraft protection services and then signed customers up for them without their consent. It said that some call representatives also misrepresented the protection as free, and mistakenly told customers they would be charged overdraft fees for one-time debit card purchases and cash machine withdrawals. Recent changes in the law allow customers to cancel those transactions after being notified they have insufficient funds, to avoid overdraft fees.

The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a joint action yesterday against BancorpSouth Bank for discriminatory mortgage lending practices that harmed African Americans and other minorities, according to a press release. The complaint filed by the CFPB and DOJ alleges that BancorpSouth engaged in numerous discriminatory practices, including illegally redlining in Memphis; denying certain African Americans mortgage loans more often than similarly situated non-Hispanic white applicants; charging African-American customers for certain mortgage loans more than non-Hispanic white borrowers with similar loan qualifications; and implementing an explicitly discriminatory loan denial policy. If the proposed consent order is approved by the court, BancorpSouth will pay $4 million in direct loan subsidies in minority neighborhoods in Memphis, at least $800,000 for community programs, advertising, outreach, and credit repair, $2.78 million to African-American consumers who were unlawfully denied or overcharged for loans, and a $3 million penalty.

The U.S. Supreme Court yesterday agreed to decide whether Miami can pursue lawsuits accusing major banks of predatory mortgage lending to black and Hispanic home buyers resulting in loan defaults that drove down city tax revenues and property values, Reuters reported. The justices will hear appeals filed by Bank of America Corp. and Wells Fargo & Co. of a lower court's decision to permit the lawsuits by the Florida city against the banks. They were filed under the Fair Housing Act, a federal law outlawing discrimination in housing. Last September, the U.S. Court of Appeals for the 11th Circuit overturned a lower court's decision to dismiss such lawsuits by the city against Bank of America, Wells Fargo and Citigroup Inc. Citigroup decided not to appeal to the Supreme Court. Miami accused the banks of a decade of lending discrimination in its residential housing market. The city accused Wells Fargo, Bank of America and Citigroup of steering non-white borrowers into higher-cost loans they often could not afford, even if they had good credit.

The Supreme Court declined yesterday to hear a case that could undermine the ability of some lenders to charge high interest rates, the New York Times reported today. The decision not to review a ruling by the U.S. Court of Appeals for the Second Circuit keeps intact a decision that directly affects only a narrow slice of the finance industry, namely debt collectors. But banking lawyers and lobbyists say the case, if applied more broadly, could wreak havoc on credit cards, student loans and other types of consumer lending. The case involves the National Bank Act that exempts national banks from various state laws limiting the interest rates lenders can charge. The federal law allows banks to follow the usury laws of whichever state they are in and then “export” that rate to borrowers living in other states. Unsurprisingly, many banks have located their lending operations in states that permit lenders to charge the highest rates. In this case, the Second Circuit ruled in May 2015 that when the debt collector, Midland Funding, bought soured loans from Bank of America, it was not exempt from state interest rate caps, known as usury laws. Because Midland is not a bank, the company does not qualify for exemption from various state usury laws, the appeals court ruled. The borrower in the case, Saliha Madden, argued that Midland could not collect the 27 percent interest rate on her credit card because it exceeded the rate caps in her home state, New York.

Under new guidelines released by the Consumer Financial Protection Bureau, lenders will be required in many cases to verify their customers’ income and to confirm that they can afford to repay the money they borrow, the New York Times reported today. The number of times that people could roll over their loans into newer and pricier ones would be curtailed. The new guidelines do not need congressional or other approval to take effect, which could happen as soon as next year. The Obama administration has said such curbs are needed to protect consumers from taking on more debt than they can handle. The consumer agency — which many Republicans, including Donald J. Trump, have said they would like to eliminate — indicated last year that it intended to crack down on the payday lending market. “The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” said Richard Cordray, the consumer agency’s director. Lenders say that the proposed rules would devastate their industry and cut vulnerable borrowers off from a financial lifeline. Read more. 

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