An $18.4 million mortgage-subsidy fund resulting from the 2022 Trident Mortgage redlining settlement is now open to eligible borrowers in three Eastern states.
After a combined state and federal investigation last year found Trident — one of the largest mortgage lenders in the Philadelphia area before it ceased originations in 2020 — had regularly engaged in practices to discourage minority borrowing, the now-defunct company agreed to establish the fund under conditions of the settlement. The fund will support Black borrowers and majority-minority neighborhoods in a region that includes parts of Pennsylvania, New Jersey and Delaware.
“This subsidy program will make a difference to many hundreds, possibly thousands, of families impacted by historic redlining practices in Philadelphia,” said Pennsylvania Attorney General Michelle Henry in a press release.
The fund, called Pathway to Prosperity, includes two different programs — HomeAssist and HomeAccess — which will provide as much as $10,000 in financial assistance per qualifying mortgage. The rollout comes after Trident conducted a study to determine the needs of majority-minority communities in the Philadelphia area. Trident is contracting with nonbank lender Prosperity Home Mortgage to administer the fund.
HomeAssist will provide funding for the purchase or refinance of a primary residence located in a qualifying census tract. HomeAccess, meanwhile, is aimed at assisting current residents living in eligible neighborhoods to purchase a primary residence located in any state Prosperity is licensed.
“For too long, companies have avoided offering mortgages in neighborhoods that are home to predominantly people of color, denying them equal access to mortgage credit. This is one small step toward correcting that injustice,” Henry said.
Per the settlement, Trident will also provide consumer financial education and engage in community development partnerships within affected communities. Prosperity will open offices in some minority neighborhoods as well.
Although no longer conducting business as a home lender, Trident had agreed to continue operations to implement terms of the settlement. Both Trident and Prosperity are mortgage subsidiaries of Berkshire Hathaway-owned HomeServices of America, a consortium of companies serving real estate interests.
Following a four-year investigation, Trident was fined a total of $24.4 million, which included a penalty of $4 million owed to the Consumer Financial Protection Bureau for various violations. Among the investigation’s findings were derogatory language, including racial slurs, used in emails between Trident staff, and marketing campaigns that excluded minority consumers. More than half the population of Philadelphia is Black or Hispanic.
Attorneys general of the three affected states participated in the investigation, along with the CFPB and the U.S. Justice Department. All voiced approval of Trident’s program.
“The launch of this important loan subsidy fund marks a critical step in our efforts to redress Trident Mortgage Co.’s mortgage redlining practices, and to begin the process of making whole the communities that have been harmed by generations of systemic housing discrimination,” said New Jersey Attorney General Matthew J. Platkin.
“It will take generations to truly repair that harm — but this subsidy program will make a real, tangible difference for hundreds of redlining’s victims,” added Delaware Attorney General Kathy Jennings.
Redlining, defined as a systematic practice of underserving or discriminating against predominantly Black, Hispanic or other ethnic neighborhoods, has been prohibited since the 1960s with the enactment of the Fair Housing Act. But violations continue decades later, with multiple financial institutions this year involved in redlining lawsuits.
This past spring, Pennsylvania-based Essa Bank and Trust was also fined $3 million for purported infractions in the Philadelphia area. And in January, City National Bank of Los Angeles resolved allegations against it by agreeing to pay more than $31 million, the largest redlining settlement in history. Allegations have similarly hit the likes of KeyBank and HSBC in 2023.
The agencies intend to tackle two challenges evident during the Covid-years refi boom: higher costs due to appraiser shortages and concerns regarding bias in home valuations.
In their letter, MBA and CBA said that AVMs and technologies like them can alleviate appraiser shortages, reduce transaction costs, and safeguard against individual appraisal bias. Ultimately, a robust regulatory framework continues to be a critical imperative to achieve these outcomes.
However, any regulation should consider the practicalities of model risk management and its potential unintended consequences.
For example, the associations said the proposed rule includes Fannie Mae and Freddie Mac to the new standards, which creates a level playing field in the market. But the trade groups are worried about the impact of quality control standards on the GSEs’ alternative valuation methods, such as desktop appraisal, since these tools are essential in times of high demand.
“MBA and CBA suggest that the agencies consult with the GSEs to ensure that application of the quality control standards would not create adverse effects on the availability of alternative valuation methods,” the letter states.
In addition, regulators should be aware of any unbalanced market effects of AVMs regulations, conflicting interpretations of the legal framework, and the lack of established methodologies in examining systemic bias in the U.S., the trade groups state.
The agencies involved include the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the National Credit Union Administration; the Federal Deposit Insurance Corporation; the U.S. Department of the Treasury; and the Federal Reserve System.
Per the proposed rules, each institution using AVMs will adopt and maintain its practices, procedures, and control systems, reducing the burden on smaller institutions. But the trade groups request the agencies to include a small lender/servicer exemption from the standards, as these companies are likely to rely on larger outside service providers subject to a thorough review by regulators or larger clients.
Regarding third-party providers, the associations suggest that the CFPB expand its Compliance Bulletin 2016-02, Service Providers to outline expectations and potential recourse “for quality control and fair lending oversight” of third-parties providing AVMs services. In addition, MBA and CBA said that creditors should not be liable for violating nondiscrimination law when relying on third-party AVMs, disagreeing with the agencies’ interpretation of the Fair Housing Act.
The MBA and the CBA requested an adequate implementation timeline of at least 12 months.
The White House supports a new rule for AVMs, which follows goals set out by the president in addressing issues of racial bias that have exacerbated homeownership and wealth gaps. When announcing the proposed rule, Vice President Kamala Harris weighed in.
“Today, I’m proud to announce we are developing a rule that will require that financial institutions ensure that their appraisal algorithms are not biased, for example, that they do not produce lower valuations for homes owned by people of color,” Harris said. “We are also releasing the guidance to make it easier for consumers to appeal what they suspect to be unbiased valuation.”
Another trade group weighed in on the newly proposed rule.
The National Association of Mortgage Brokers (NAMB) said it supports new federal regulatory proposals governing the use of AVMs.
“The reality is the systems and structures are themselves, in some cases, problematic,” said NAMB President Ernest Jones in a statement. “Even when appraisers follow the intended approach, it may result in an outcome that disenfranchises people. They could be doing everything in a way they feel is consistent with the approaches they’ve learned and for which they’re certified, but there are some underlying issues that need to be addressed.”
During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, executive vice president of strategy and growth for the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
City National Bank has agreed to pay $31 million to settle a U.S. Justice Department lawsuit alleging racial bias in its home mortgage lending in Los Angeles County.
The government’s complaint, filed Thursday in Los Angeles, accused the bank of violating federal housing and banking discrimination laws by avoiding loans to buyers of homes in neighborhoods that are majority Black or Latino.
City National Bank is the largest bank headquartered in L.A., but just one of the 11 branches it has opened in the county over the last 20 years is in a predominantly Black or Latino neighborhood. The county’s population of nearly 10 million is 49% Latino and 9% Black.
From 2017 to 2020, City National Bank maintained just three of its 37 branches in majority Black and Latino neighborhoods, the complaint said.
The bank relied on “relationship managers” to generate home loan applications from existing customers, who were predominantly white, the government alleged, and it failed to act on internal reports showing it risked running afoul of fair lending laws.
Other banks serving L.A. County received more than six times as many loan applications in Black and Latino areas, the government found.
City National Bank denied breaking discrimination laws, but said it agreed to settle the case to avoid prolonged litigation.
Under the proposed settlement, which was filed simultaneously with the complaint and requires court approval, the bank would provide $29.5 million in home loan subsidies to borrowers in Black and Latino areas, including interest-rate cuts and down-payment assistance.
Assistant Atty. Gen. Kristen Clarke and U.S. Atty. Martin Estrada announced the agreement at Second Baptist Church Los Angeles in Historic South Central, one of the city’s oldest Black churches. Nobody from the bank participated in the event.
“Through this agreement, we’re sending a strong message to the financial industry that we will not stand for unlawful barriers when it comes to residential mortgage lending,” Clarke said. “We will not stand for unlawful modern-day redlining.”
City National Bank released a statement saying it supports the Justice Department’s efforts to ensure equal access to loans regardless of race.
“At City National, we are committed to ensuring that all consumers have an equal opportunity to apply for and obtain credit,” it said.
Founded in Beverly Hills in 1953, City National Bank has deep ties to the entertainment industry. It was acquired in 2015 by the Royal Bank of Canada.
As part of the settlement agreement, City National Bank has agreed to spend $500,000 on advertising targeting residents of Black and Latino neighborhoods and $500,000 on a consumer financial education program to enhance their access to credit.
The bank also said it planned to open a new branch in a majority Black or Latino neighborhood and ensure that at least four loan officers are dedicated to serving those areas.
Atty. Gen. Merrick Garland launched a program in 2021 to step up enforcement of housing discrimination laws. It has yielded $75 million in relief to borrowers in Houston, Memphis, Philadelphia, Newark and Los Angeles.
The racial gap in denial rates for home-purchase loans widened last year as the Federal Reserve began tightening credit conditions via interest-rate increases, according to new data from U.S. regulators.
Black Americans experienced denial rates of 16.4% in 2022, up from 15.7% the year before, the Federal Financial Institutions Examination Council said last week. Rates for non-Hispanic-identifying White applicants ticked up to 5.8%, from 5.6%.
Rising disparities in denial rates help underscore the impact of tighter credit on progress toward a more inclusive economy. Even before the Fed began raising rates, the homeownership gap had been widening over the previous decade. By 2021, homeownership for Black Americans was nearly 29 percentage points less than that for White Americans, according to National Association of Realtors data published earlier this year.
Banks have failed to live up to promises to support Black homeowners in recent years. Major home lender Wells Fargo & Co. pledged in 2017 to lend $60 billion to generate 250,000 Black homeowners in a decade, though in 2020 the lender approved fewer than half of Black homeowners’ refinancing applications.
Hispanic and Asian individuals also face challenges securing home loans. Hispanic-White applicants saw denial rates of 11.1% last year, and Asian applicants faced denials at 9.2%. “Hispanic-White” identifies individuals with Hispanic ethnicity and White race, while “non-Hispanic-White” identifies individuals with non-Hispanic ethnicity and White race.
The FFIEC data are based on mortgage-lending transactions reported by U.S. financial institutions and are reported for first-lien, one-to-four family, site-built, owner-occupied conventional, closed-end home-purchase loans.
ESSA Bank & Trust will pay over $3 million to resolve redlining allegations, the Department of Justice announced Wednesday evening.
The Stroudsburg, Pennsylvania-based bank, from 2017 to 2021, did not sufficiently serve the credit needs of majority-Black and Hispanic neighborhoods in and around Philadelphia by “failing to provide mortgage lending services” and “discouraging such borrowers,” the DOJ alleges. The city has a history of redlining practices that goes back to the 20th century.
Per a consent order, which is subject to court approval, ESSA will invest $2.92 million in a loan subsidy fund to increase access in minority neighborhoods, $125,000 on community partnerships and $250,000 on outreach and consumer financial education efforts.
At least 50% of the subsidy fund must be used for consumers applying for loans in majority-Black and Hispanic census tracts within a five mile radius of the bank’s Upper Darby and Lansdowne branches, the court order said.
Additional stipulations of the order require the bank to hire two new mortgage loan officers to serve its existing branches in West Philadelphia, and for ESSA to conduct a research-based market study to identify the needs for financial services in communities of color. These requirements will stay in effect for five years.
ESSA’s President Gary Olson said he “vehemently [denies] the government’s allegations of redlining” but added that the company “cooperated expeditiously and fully with the investigation into this matter.”
Olson called the settlement a “constructive resolution to a dispute that has lasted several years.”
“We plan on using these loan subsidy funds to expand opportunities for qualified borrowers who can benefit from this assistance,” he added.
The now-settled allegations were brought to the attention of the DOJ by the Federal Deposit Insurance Corp. in June 2022, prompting the department to open an investigation on Aug. 15, 2022.
“Redlining in Philadelphia has deep roots, which has led decades of disinvestment in communities of color,” said Jacqueline C. Romero, U.S. attorney for the Eastern District of Pennsylvania, in a written statement.
“Accessing the American dream of owning your own home is possible only when there is equality for all in their opportunities to access lending in the residential mortgage markets,” she said. “We appreciate ESSA’s prompt cooperation with the department’s investigation.”
The settlement with ESSA is part of an interagency initiative involving the DOJ, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, which was launched in October 2021 by Attorney General Merrick B. Garland to combat redlining.
Since then, the DOJ has announced seven redlining cases and settlements totaling over $87 million in relief for communities of color, the department said. This includes a $9 million settlement with Park National Bank in March and a $31 million settlement with City National Bank in January, the largest in the department’s history.
Martin Gruenberg, chairman of the Federal Deposit Insurance Corp. said the agency’s efforts to root out appraisal bias will help “shift the public’s understanding of appraisal bias from a rare event affecting an occasional homeowner to a significant issue that affects wealth formation and opportunities in minority communities nationwide.”Bloomberg News The Federal Deposit Insurance Corp. … [Read more…]
Flagstar Bank, a subsidiary of New York Community Bancorp, has made a donation of $1 million to the Appraiser Diversity Initiative (ADI) – a collaboration between the National Urban League, Fannie Mae, Freddie Mac, and the Appraisal Institute, aimed at promoting diversity in the appraisal industry and breaking down barriers to success for aspiring appraisers. … [Read more…]
Regulators are gearing up to take a closer look at the “byzantine” regulatory structure overseeing the real estate appraisal profession. During a hearing on appraisal bias on Tuesday morning, Consumer Financial Protection Bureau Director Rohit Chopra turned the spotlight on the profession’s rulemaking entity: the Appraisal Foundation Chopra noted that the small nonprofit writes the … [Read more…]