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Our Nation's Housing

Lenders' restrictive policies draw fair housing lawsuit

Published May 19, 2007


WASHINGTON - When mortgage lenders refuse to write loans on central city row houses, does that violate federal fair housing rules?

What about refusing to write mortgages on houses in entire communities dominated by specific ethnic groups, such as American Indians? Or not offering mortgage loans for houses that may be used in part to accommodate disabled adults in a "foster care" setting?

Just how much protection do fair lending and other civil rights laws provide to mortgage applicants who are rejected not because of their credit scores or financial capacities, but because of the location, type or possible use of their homes?

A major consumer group is mounting a campaign aimed at nailing down the answers. The National Community Reinvestment Coalition, or NCRC, filed suit May 9 against NovaStar Mortgage Inc., a subsidiary of publicly traded NovaStar Financial, based in Kansas City, Mo. The suit, filed in federal district court in Washington, D.C., charges that NovaStar repeatedly has violated the Fair Housing Act by refusing to make mortgages on row houses in downtown Baltimore, on homes located on American Indian reservations anywhere in the country, or on houses that may be used in part to shelter and care for disabled adults.

Such bans have "no business justification, " according to the suit, and illegally discriminate against African-Americans, Latinos, American Indians and disabled individuals.

Richard Johnson, a spokesman for NovaStar, called the charges baseless and said the suit "makes deliberate misrepresentations" about NovaStar's policies. Johnson confirmed that the company does restrict mortgage lending in the categories identified by NCRC, but said there are valid business-related reasons for each policy.

For example, in the case of row houses in Baltimore, Johnson said, there had been widespread appraisal fraud involving row houses in prior years, making the company leery about extending new loans. But officials at NCRC said those problems dated back eight years or more, and have long been corrected.

John Taylor, NCRC president and CEO, said, "NovaStar intentionally structured its underwriting to exclude . . . persons with disabilities and row house neighborhoods where African-Americans and Latinos reside, " as well as mortgages to American Indians who live in "tribal communities" across the country.

The company "discriminated against people with the least amount of ability to fight back, " Taylor said. "They did it because they thought they could get away with it."

The NCRC is expected to soon file a series of lawsuits and fair housing complaints against other mortgage lenders who allegedly avoid specific types of houses that are closely associated with minority groups. Urban row houses are shunned by a large number of lenders, according to NCRC, and the net effect is to deny mortgage money to African-Americans and other minority group members who live in neighborhoods where row houses predominate.

The NovaStar suit charges that "nearly two-thirds of all row houses in Baltimore are occupied by African-Americans, and the majority of row houses are located in African-American neighborhoods." Property type is "strongly correlated to the racial composition of neighborhoods, " and by denying loans on all row houses, NovaStar thereby "intentionally treats African-American homeowners and predominantly African-American neighborhoods . . . differently from non-African-American homeowners and neighborhoods."

NovaStar's policy against extending mortgage credit to anyone living on a reservation "has the purpose and effect of limiting access to capital for Native Americans" in 35 states, the suit charges. "NovaStar excludes loans without regard to traditional lending criteria." Applicants on reservations with substantial assets, strong credit scores, large down payments and other financial strengths are denied loans "solely on the fact that their property is located on an Indian reservation."

NovaStar's Johnson said the company does not offer mortgages on homes located inside reservations because "they are governed by different sets of laws, " and sometimes entail deed restrictions that can raise risks for lenders. An NCRC official argued in response, however, that mortgage giants Fannie Mae and Freddie Mac both have loan programs designed to handle such legal issues, and the programs are readily available to national lenders including NovaStar.

Johnson said NovaStar's ban against mortgages on homes that offer adult foster care is not intended to discriminate against disabled people, but rather reflects the fact that "there is an active business" under way on the property, rendering it a commercial, not purely residential, use. NCRC challenged that contention, noting that "huge numbers of homes have small businesses or home offices, and mortgages on them are written every day."

NovaStar's policy is "discriminatory based on disability, " the suit charges, "and explicitly treats loan applicants differently based on their association with, or residing with, persons with disabilities" - ignoring applicants' credit histories, assets, down payments and other normal tests of financial capacity.

E-mail Kenneth R. Harney at


[Last modified May 18, 2007, 11:42:47]

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