By Doug Miller

Federal officials say the Obama administration is moving to aggressively combat discriminatory lending practices that have long undermined the ability of black and Latino Americans to become homeowners.

A special counsel to prosecute discriminatory lending will be in place at a new U.S. Department of Justice (DOJ) unit by the end of January, according to agency officials. They said one of the unit’s top priorities will be to shut the door on reverse red-lining—a practice in which lenders deliberately target minority communities with toxic subprime mortgages.

Alejandro Miyar, a Justice Department spokesman, said that the recently established Fair Lending unit “will include roughly a dozen lawyers and other professionals. Reverse red-lining is certainly a priority area,” he added, “but so is traditional red-lining.” The dedicated unit falls within the Housing Section of the Department’s Civil Rights Division.

“We already have 38 cases under way,” Miyar noted, essentially as a result of investigations undertaken by an interagency Financial Fraud Enforcement Task Force President Obama established last November. Justice Department officials lead the task force and those from the departments of Treasury, Housing and Urban Development and the Securities and Exchange Commission serve on a steering committee.

Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington, D.C., distinguished between red-lining and reverse red-lining. The former – in which banks and other mortgagors—deliberately avoided doing business in neighborhoods populated predominately by blacks—had been a characteristic of the American financial landscape since the creation of black urban ghettos in the early 1900s. The practice was outlawed by the federal Community Reinvestment Act (CRA) in 1977, which encouraged banks to help low-income families affordably buy homes.

Reverse red-lining, she explained, involves banks and mortgage companies “targeting people in districts who are higher risks.” Banks essentially push those customers toward insolvency by granting them home loans they can’t pay, Day advised. “That’s what we think happened in the subprime fiasco.”

Minorities hit hardest

Worse, she contended, a “disproportionate share of subprime loans was given to African Americans.” In 2005-2006, she noted, 50 percent of black families seeking home loans were the recipients of subprime mortgages. Forty-four percent of Latinos looking for new or second mortgages received the toxic loans, compared to 22 percent of non-Latino whites. The practice was fueled by mortgage brokers who Day said often got kickbacks from lenders, subprime mortgages were grouped in “higher concentration in black and Latino communities. The industry wanted them to not (be able to) afford the payment,” she maintained, “so they would have to refinance” and pay sizable prepayment penalties.

Compounding matters, Day noted that nine out of every 10 people who received a subprime mortgage already owned a home, and six out of 10 had a credit score that would have qualified them for a less expensive traditional loan.

“One fact is clear,” Tom Perez, an assistant attorney general with the DOJ’s Civil Rights Division, told attendees at the Rainbow PUSH Coalition’s recent Annual Wall Street Conference. “While the foreclosure crisis has touched so many communities across America, communities of color have been hit particularly hard.” Lending bias, he said, is “discrimination with a smile. The corrosive power of fine print is every bit as destructive as the cross burned in a neighborhood.”

Perez added that his division is dusting off the Fair Housing Act and the Equal Opportunity Act to combat that kind of discrimination, and warned that “many of those abusive brokers and loan originators who profited during the boom have turned their sights to the new frontier—loan modifications.” He said the Fair Lending unit will be focusing on that aspect of the housing crisis “so we can be sure that those minority homeowners who have already been hit hardest are not again subject to discrimination as they try to climb out of the hole.”

Doug Miller is a former director of internal communications for Citigroup and has written extensively about the use of technology in financial services.