I. Introduction 101
II. Reverse-Redlining Claims 103
A. Evidence that Minority Borrowers Suffered More, the Fair Housing Act, and Reverse-Redlining Plaintiffs 103
B. Varying Tests Adopted for Stating a Reverse-Redlining Claim 105
C. Recommendations for Judges Deciding Reverse-Redlining Claims 109
III. Supporting the New Standard Through Critical Race Theory Ill
A. The Subprime Mortgage Collapse, Critical Race Theory, and Neoclassical Economics 111
B. Efficiency: Discrimination, Informational Asymmetry, and the Neoclassical "Rational Actor" 113
C. Judges as Actors for Combating Information Asymmetry.118
IV. Conclusion 118
The economic collapse of 2008 affected an extraordinary number of Americans.1 The implosion of the mortgage-backed securities market, which accelerated the recession, was rooted in the American subprime loan market. Lending institutions made high-priced, dangerous loans to individuals whose credit profiles and incomes indicated that they were likely to default. As defaults mounted and housing prices fell, the worth of the complex financial instruments plummeted, as did the Wall Street institutions that used the instruments to leverage themselves with debt many times greater than their operating capital. The financial crisis exposed Wall Street as a house of cards, and much of the regulatory conversation in the years since has focused on preventing Wall Street institutions from so cavalierly mishandling the vast amounts of money the public entrusts to them.2 Yet while chief executives and financial officers face closer scrutiny in the eyes of the law and public opinion, a graver reality confronts the borrowers who signed mortgages they were unlikely to ever pay off.
Some of these borrowers have turned to courts for redress. As a theoretical matter, these lawsuits straddle a precarious line: though the terms of these mortgages were unfavorable, could the borrowers seek compensation despite willingly accepting these unfavorable terms? Part II of this Note focuses on lawsuits alleging that banks engaged in predatory lending-that is, offering subprime loans to individuals who either could have qualified for a fairly administered loan or who should not have qualified for any loan. Plaintiffs have brought claims of this nature under the Fair Housing Act (FHA), the Truth in Lending Act, and the Equal Credit Opportunity Act. This Note will focus on claims alleged under the FHA.
The author will argue that courts should adopt a test for stating a prima facie claim of reverse redlining that does not penalize plaintiffs disadvantaged by information asymmetry. The tests used by courts have, to an extent, depended upon the plaintiffs showing the unfairness and discrimination in their loan terms by examining the loan terms of non-minority borrowers, even though such terms are quite complex and rarely available. Consequently, plaintiffs have to obtain, interpret, and explain loan terms that lenders have created, organized, and have easier access to.
In order to alleviate the information asymmetry, judges should first utilize a test for stating a reverse-redlining claim that allows plaintiffs, whenever possible, to make out a prima facie case by producing information from their own records or publicly available sources. Second, where statistical analysis of documents not belonging to plaintiffs is required, judges should clearly identify which statistics could be used to make out a prima facie claim.
In Part III, the Note will explore its thesis from Part II through critical race theory and neoclassical economics. The counter-arguments utilize notions of efficiency and rationality within the housing market, both before and after the 2008 crisis. In response, the Note will criticize several assumptions underlying the neoclassical approach, focusing on the realities disadvantaged minority plaintiffs face and detail attributes that make courts well suited to serve as institutions for reform. …