In what the plaintiffs’ attorneys are calling a “first of its kind” decision, a federal jury in Brooklyn ruled this week that Emigrant Savings Bank and Emigrant Mortgage Company engaged in predatory lending by “aggressively marketing toxic mortgages to Black and Latino homeowners with poor credit” in the run-up to the housing crisis.
According to Legal Services NYC, which represented several aggrieved homeowners in the case, a federal jury found that Emigrant Bank violated the Fair Housing Act, Equal Credit Opportunity Act, and New York City Human Rights Law.
The decision is the first jury verdict finding a bank liable for targeting grossly unfavorable and predatory financial products to African-American and Hispanic communities, a practice known as reverse redlining, Legal Services NYC said in a release.
The plaintiffs’ attorneys also said that this is the “first case where a jury had the opportunity to hold a bank accountable for predatory practices that contributed to the financial crisis in 2008.”
According to Legal Services NYC, the jury awarded six plaintiffs a combined $950,000 in damages.
The decision stems from a lawsuit initially filed in 2011 by Brooklyn Legal Services, Legal Services NYC’s Brooklyn program.
According to the plaintiffs’ attorneys, between 1999 and 2008, Emigrant “targeted” minority borrowers who had poor credit but had had significant equity in their homes with a loan program called “STAR NINA.” (i.e. No Income No Assets).
“Emigrant went so far as to market this product as being designed for borrowers with ‘dismal’ or ‘scary’ credit,” Legal Services NYC said in a statement.
“The loans were ‘no doc’ loans, meaning that the bank did not examine the borrower’s ability to repay the loan and Emigrant wrote the loans based on the value of people’s homes,” Legal Services NYC continued. “If a borrower fell behind on one payment, Emigrant imposed an automatic 18% default interest rate, forcing many to sell their homes or face foreclosure.”
The plaintiffs’ attorneys added that Emigrant targeted STAR NINA loans to communities of color in New York City.
According Legal Services NYC, testimony given during the trial suggested that more than 75% of Emigrant’s advertising budget went to four newspapers with an “almost exclusively African-American or Hispanic” readership: Black Star, Caribbean Life, Hoy, and Mizona Hispana.
The plaintiffs’ attorneys said that even when controlling for variables like credit score, income, and education levels, STAR NINA loans were 32% more likely to end up in majority African-American neighborhoods than similarly situated majority white neighborhoods.
“The combination of features to Emigrant’s predatory loan product—low credit score, high equity, and an exorbitant 18% default interest rate—created a disastrous result for New York City homeowners,” said Rachel Geballe, attorney at Brooklyn Legal Services.
“Too many borrowers lost their homes and their equity through Emigrant’s actions; still more struggle in foreclosure today,” Geballe added. “The landmark verdict this week demonstrates that banks such as Emigrant Mortgage Company can and will be held accountable for targeting minority communities with predatory financial products.”
According to the plaintiffs’ attorneys, Emigrant’s loan program resulted in a “massive loss of equity and financial disaster” for the plaintiffs and their families, as well as the African-American and Hispanic communities that Emigrant “targeted.”
The plaintiffs’ attorneys also stated Emigrant was aware of the high rates of delinquency, foreclosures, and equity losses that this program created – even before the financial crisis – as more than 1 in 3 borrowers were in delinquency, which triggered the 18% default interest, but decided to continue the program in spite of those measures.
The bank continued to make these loans until the very end of 2008, when they were forced by regulators to abandon the 18% default interest rate, the plaintiff’s attorneys stated.
“The evidence at trial demonstrated that the grossly unfavorable terms underlying the STAR NINA loans were buried in the loan terms and closing documents, and were never explained or highlighted to borrowers,” said Tara Ramchandani, co-counsel for the plaintiffs and an attorney for Relman, Dane & Colfax. “This was despite Emigrant’s knowledge of rising delinquencies in the product and its awareness of borrowers’ shock and dismay when the 18% default interest rate went into effect.”
In an extensive statement in response the verdict, Emigrant Bank states that disagrees with the decision and a number of the plaintiffs’ attorneys’ contentions.
The bank also said that it intends to appeal the decision.
“We respectfully disagree with the decision of the jury, which we believe is contrary to the law and the facts presented at trial,” Emigrant Bank said in its statement.
“It is important to remember that this is just the first step in this process, and we will certainly appeal the decision,” the bank continued. “We presented a compelling case at trial that proved our STAR NINA loan was a legal and valuable offering for borrowers with low credit scores who otherwise would have been shut out of credit markets completely. We have no doubt an appeals court will agree.”
Emigrant argues that its loans were not predatory. The bank also states that it did not “target” any borrower or neighborhood, nor did it intentionally discriminate against anyone.
“The plaintiffs in this case, like nearly all borrowers in the loan program, had existing mortgages with other banks or other pending debts, and most were under the imminent threat of foreclosure if they didn’t get an Emigrant loan,” Emigrant said in its statement. “As the plaintiffs’ own expert conceded, Emigrant loans were a “lifeline” for these consumers—which is why more than 70% of the borrowers in this program succeeded and kept their homes.”
In its statement, Emigrant argues that evidence presented in the trial also showed Emigrant’s history of “taking extra steps to assist its borrowers wherever possible to ensure they stayed in their homes.”
According to Emigrant, it was “clear” from the evidence that Emigrant often modified loan terms and waived default interest to borrowers in need.
“It was also clear from the evidence presented at trial that each of the plaintiffs greatly benefited from their Emigrant loans when compared to any gain they would have realized from selling their homes earlier,” Emigrant said.
Additionally, Emigrant said that it should be noted that STAR NINA loans were offered at interest rates “consistent with rates at the time and the risk level of the borrowers.”
In fact, the majority of the plaintiffs in the case had interest rates below 10%, including as low as 8.75%, Emigrant contends.
“We are very proud of Emigrant’s efforts over the years to ensure that credit is available to all the communities we serve,” Emigrant said.
Civil rights advocates, quoted in the plaintiffs’ release on the suit, celebrated the importance of the decision.
“The civil rights community celebrates this important victory,” said Wade Henderson, president and CEO of the Leadership Conference on Civil and Human Rights and the Leadership Conference Education Fund.
“The case is historic for two reasons: it is the first case in which a jury has held a bank accountable for the predatory lending practices that led to the financial collapse; and it is the first case to prove in a court of law that minorities were targeted for unfair and deceptive loans,” Henderson said. “The Brooklyn jury affirmed what civil rights advocates have long known: that reverse redlining wreaks havoc on communities of color.”
Mike Calhoun, the president of the Center for Responsible Lending, agreed.
“As shown in this case, predatory home lenders targeted communities of color, and they devastated families and neighborhoods,” Calhoun said.
“Going forward, fair and sustainable home loans are essential in order for these communities to recover from this travesty,” Calhoun added. “This is the first case in which a jury, as opposed to a governmental institution, was tasked with deciding whether a bank should be held accountable for the toxic products it pushed into the marketplace while profiting on the backs of minority borrowers. The jury came back with an unequivocal yes.”