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Saint-Jean v. Emigrant Mortg. Co.

United States District Court, E.D. New York

September 25, 2014

JEAN ROBERT SAINT-JEAN, et al., Plaintiff,
v.
EMIGRANT MORTGAGE COMPANY, et al., Defendants

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[Copyrighted Material Omitted]

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For Plaintiffs: Sara Linda Manaugh, Jennifer Sinton, Meghan Faux, Rachel Geballe, SOUTH BROOKLYN LEGAL SERVICES, Brooklyn, NY.

For Plaintiffs: John P. Reiman, Glenn Schlactus, Tara Ramchandani, Timothy Smyth, RELMAN & DANE, PLLC, Washington, DC.

For Plaintiffs: Michael D. Calhoun, CENTER FOR RESPONSIBLE LENDING, Washington, DC.

For Defendant: Bettina B. Plevan, Evandro Cristiano Gigante, Keisha-Ann G. Gray, PROSKAUER ROSE LLP, New York, NY.

For Defendant: David A. Scheffel, Eric B. Epstein, Gina Susan Spiegelman, DORSEY & WHITNEY LLP, New York, NY.

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MEMORANDUM AND ORDER

Sterling Johnson, Jr., Senior United States District Judge.

This case comes before the Court on a motion to amend the complaint and on the defendant's motion to dismiss. Jean-Robert and Edith Saint-Jean, Felix and Yantil Saintil, Linda Commodore, Felipe Howell, and Jean and Beverly Small, (the " Plaintiffs" ), homeowners and former homeowners who refinanced mortgages, received financing, or had related financial dealings with Emigrant Mortgage Company, Inc., Emigrant Savings-Bank Manhattan, Emigrant Bancorp, Inc., or Emigrant Bank (collectively " Defendant" or " Emigrant" ), claim Emigrant engaged in a predatory practice of originating discriminatory and abusive mortgage refinance instruments through an equity-stripping " No Income, No Assets" (" NINA" ) loan program until 2009. In short, the plaintiffs allege that Emigrant originated loans to individuals with significant home equity and very low credit scores, disregarding their ability to make payments and ensuring a stake in homeowner equity with very high interest rates triggered upon the inevitable default on these loans. Plaintiffs claim this program, even where facially neutral, disproportionately saddled minority homeowners in New York City with exorbitant, unaffordable mortgages that were expected and intended to fail at origination.

In 2011, Plaintiffs brought the present action, filing a complaint (" Complaint" ) alleging violations of the Fair Housing Act (" FHA" ), 42 U.S.C. § § 3604, 3605; the Equal Credit Opportunity Act (" ECOA" ), 15 U.S.C. § 1691, et seq.; New York State Human Rights Law, N.Y. Exec. Law § 296-a; New York City Administrative Code § 8-502; and the Truth in Lending Act (" TILA" ), 15 U.S.C. § 1691, et seq. (See Original Complaint ¶ ¶ 227-78.) On January 31, 2014, Plaintiffs moved to amend their complaint, attaching the proposed Second Amended Complaint (" SAC" ). On March 31, 2014, Magistrate Judge James Orenstein, at this Court's request, issued a Report and Recommendations (" the Report" ) with respect to Emigrant's pending motion to dismiss and Plaintiffs' pending motion to amend. This Court reviews those recommendations, and the objections thereto, herein.

BACKGROUND

A. The Report and Recommendation

This Court referred Defendant's motion to dismiss to the assigned magistrate judge in this case, Magistrate Judge James Orenstein, for a Report and Recommendation on July 29, 2013. A district court judge may designate a magistrate judge to hear and determine certain motions pending before the Court and to submit to the Court proposed findings of fact and a recommendation as to the disposition of the motion. See 28 U.S.C. § 636(b)(1). Within fourteen days of service of the recommendation, any party may file written objections to the magistrate's report. See id. Upon de novo review of those portions of the record to which objections were made, the district court judge may affirm or reject the recommendations.

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See id. The Court is not required to review, under a de novo or any other standard, the factual or legal conclusions of the magistrate judge as to those portions of the report and recommendation to which no objections are addressed. See Thomas v. Arn, 474 U.S. 140, 150, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985).

Presently before the Court is the Report and Recommendation (" Report" ) prepared by Magistrate Judge James Orenstein. Judge Orenstein issued the Report on March 31, 2014, recommending that this Court grant Emigrant's motion to dismiss Plaintiffs' claims under state and municipal law, deny Emigrant's motion to dismiss under federal law, deny Plaintiffs' leave to add new claims under state and municipal law, and grant Plaintiffs leave to add new plaintiffs, defendants, and federal claims. See March 31, 2014 Report and Recommendation of Magistrate Judge James Orenstein, Docket No. 206 at 1 (the " Report" ). All parties filed limited objections to the Report and Recommendation on April 17, 2014 and Plaintiffs responded to Defendant's objections to the Report on May 1, 2014. Upon review of the recommendations, objections, and responses thereto, and for the reasons stated herein, the conclusions in the Report are adopted in part and set aside in part, and the Court adopts and affirms the recommendations that Plaintiffs' motion to amend the complaint should be granted and Defendant's motion to dismiss is denied.

B. Brief Historical Overview

Separate from this Court's analysis of the specific issues raised here, the Plaintiffs have situated their claims in an arena of historical significance. Although this Court's analysis is limited to the sufficiency of the complaint, as is proper on a motion to dismiss, Plaintiffs claim discrimination in lending and cite decades of precedent in housing and lending discrimination in assuring this Court that their present claims in their original and amended complaints are not merely " speculative" or " bald assertions." While a general historical overview is entirely separate from this Court's substantive and procedural analysis of the specific claims in this case in the sections that follow, the Court sees merit in discussing the milieu in which these claims exist. Therefore, a brief review of the historical context appears warranted.

Historically, racial discrimination in lending barred Blacks and Latinos from home mortgages and financial products, a process known as " redlining." Redlining involved the widespread practice of delineating Black and Latino neighborhoods in red to indicate undesirable investment locations (another narrative locates this term in the drawing of red lines through certain zip codes),[1] in addition to other actions excluding minority neighborhoods from territories where banks would invest or

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offer financial products.[2] Even where these putative minority homeowners were well-qualified for the home loans or housing they sought, their applications were not considered.

The concept of redlining involved ongoing and detailed schemes whereby Black and Latino putative borrowers in minority neighborhoods would be denied opportunities for credit and home ownership.[3] Additional factors at play sometimes clouded or complicated recognition of the racialized aspects of redlining practices.

Redlining is a broader concept than discrimination and encompasses issues of class, region, and sector disinvestment ... in addition to the problems of the inner city. To the extent, however, that there is a significant racial pattern of differential credit grants and high geographical concentration of African-Americans, there is tremendous overlap between redlining and lending discrimination.

See Taibi, supra, at 1486. After the Supreme Court struck down racially restrictive covenants in Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948), racial discrimination continued in housing and lending through increasingly hidden and insidious redlining practices. The pervasiveness of redlining practices fueled the development of a civil rights litigation and associated social reforms.

A modern iteration of this discriminatory practice, often termed " reverse redlining," discriminates by erecting barriers to favorable credit treatment, even where qualified, in extending credit to minority neighborhoods on unfair terms.[4] See e.g., Linda E. Fisher, Target Marketing Of Subprime Loans: Racialized Consumer Fraud & Reverse Redlining, 18 J.L. & Pol'y 121, 125-27 (2009) (the strong correlation between race and subprime lending suggests " African-Americans and Latinos were either intentionally singled out for the worst loans or have suffered disproportionately from the effects of facially neutral lending policies" ). The practice involved targeting neighborhoods, overwhelmingly Black and Latino, with inflated

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credit, subprime loans, and other predatory lending practices although consumers might be eligible for preferable credit or loans. The same communities which faced redlining previously now received credit on grossly unfair terms in reverse redlining schemes.[5] Reverse redlining has become a target of civil rights litigation and has been found cognizable as a claim in the federal courts. See e.g., Justin Steil, Innovative Responses To Foreclosures: Paths To Neighborhood Stability And Housing Opportunity, 1 Colum. J. Race & L. 63 (2011) (citing Hargraves v. Capital City Mortg. Corp., 140 F.Supp.2d 7 (D.D.C. 2000); Matthews v. New Century Mortg. Corp., 185 F.Supp.2d 874 (S.D. Ohio 2002); Barkley v. Olympia Mortg. Co., No. 04-cv-875, 2010 WL 3709278 (E.D.N.Y. Sep. 13, 2010)).

Factual Background[6]

Plaintiffs in this case allege that Defendant Emigrant Mortgage Company aggressively marketed and originated high-cost mortgage refinance products to Black and Latino homeowners in majority-minority census tracts in New York City from 2004 through 2009.[7] (SAC ¶ ¶ 1-2.) Marketed to people with low credit scores and high likelihood of default, Plaintiffs allege that the default 18% interest rate imposed was predatory, targeted toward minority homeowners, and functioned, effectively, as an equity-stripping scheme against Black and Latino homeowners. Id. In addition, Emigrant did not encounter Black and Latino borrowers innocuously in their NINA lending program. Instead, racially explicit analyses of Emigrant's own lending histories allowed Emigrant to discover and exploit neighborhoods where, historically, NINA loans were most profitable. (SAC ¶ 3.) Emigrant's equity-stripping scheme was facilitated through the use of inaccurate consumer disclosures that concealed the true annual percentage rates (" APR" ) and through affirmative misstatements by Emigrant's agents, among other things. (SAC at ¶ ¶ 4, 31-43.)

Plaintiffs situate Emigrant's conduct within widespread practices of predatory lending, subprime lending, mortgage fraud and abuse, and other misconduct underlying the foreclosure crisis in progress at the time Plaintiffs commenced their case.

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(SAC ¶ ¶ 21-26.[8]) Plaintiffs note that minority neighborhoods are the " epicenter" of the foreclosure crisis.

Even controlling for income, credit history, and other factors, minority borrowers were more likely to receive costly subprime loans than their white counterparts. (SAC ¶ 25 (citing Unequal Burden: Income and Racial Disparities in Subprime Lending, Department of Housing and Urban Development (2000)) (Black neighborhoods four times more likely to use subprime products; upper-income Black areas over twice as likely as in middle-income white neighborhoods to refinance in subprime market) (available at http://www.huduser.org/Publications/pdf/newyork.pdf).) In addition, the practice had the effect of draining wealth tied up in people's homes, and critically compromising entire communities.[9]

The Equity Stripping Scheme

Plaintiffs allege that Emigrant engaged in a wholesale shift of its lending policies in the mid-1990s. (SAC ¶ ¶ 26-31.) Whereas Emigrant had traditionally been a conservative lender that experienced few defaults, it began offering NINA loans, traditionally reserved for borrowers with good credit, in 1995. (SAC ¶ 26.) Emigrant made loans overwhelmingly in white, upper-income census tracts in 1994 and prior, with only 4% of its total loans in minority census tracts and 66% in white census tracts. (SAC ¶ 29.) Conversely, by 2004, 83% of Emigrants loans were NINA loans and 57% of those were originated in majority-minority census tracts. (SAC ¶ 31.)

By 2005, Plaintiffs allege that Emigrant had fully developed a predatory lending program delivering high-cost loans to vulnerable minority borrowers who already had substantial equity in their homes. (SAC ¶ ¶ 32-33.) Unlike other NINA programs, Emigrant would lend to consumers with low credit (applying even higher interest rates and virtually ensuring default), unusual even among Emigrant's competitors. (SAC ¶ ¶ 34-35.) Whereas many mortgage lenders were selling their loans in the secondary market during this period, and therefore were required to accommodate investor and rating agency loan and credit quality assessments, Emigrant held the loans it issued or transferred

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them within its family of banking institutions. (SAC ¶ ¶ 36, 38.)

By identifying individuals with significant equity in their homes, Emigrant was able to profit as borrowers defaulted. (SAC ¶ 37-44.) Through the use of onerous mortgage terms, like the 18% default APR (used in 83% of Emigrant's 2007 mortgages and 91% of its 2008 mortgages), which could be imposed after a single late payment, Emigrant quickly " stripped" homeowners of their equity. (SAC ¶ 37.) By offering incentives, including payment premiums for brokers closing high-cost loans, Emigrant's brokers had a financial incentive to ignore borrowers' qualifications for preferable loans, in favor of higher cost loans that would generate this premium. (SAC ¶ 39.) In addition, delayed foreclosures allowed Emigrant to maximize accrued default interest on these loans. (SAC ¶ 42.) Despite careful and accurate appraisals of home equity and borrower eligibility, and despite clear evidence these were nonperforming loans as the overwhelming majority of Emigrants' foreclosures in 2007 and 2008 were on loans originating in the last two years, Emigrant's conduct continued. (SAC ¶ ¶ 38, 42.)

Plaintiffs' loans bear the hallmarks of this scheme, including but not limited to high interest rates and payment premiums rewarding mortgage brokers for locking in higher-cost loans. (SAC ¶ 37-39.) Plaintiffs claim that by focusing on borrowers with low credit scores at high interest rates, Emigrant ensured high default rates; by focusing on borrowers with high pre-existing home equity, Emigrant ensured the profitability of this scheme. (SAC ¶ ¶ 35, 38, 43.) By 2008, while NINA loans represented only 3% of refinance loans for all other lenders, they comprised 85% of Emigrant's one-to-four family refinance loans. (SAC ¶ 41.) In that same year, in New York City, Emigrant accounted for 30% of citywide NINA refinance losses, despite originating less than 1.5% of refinance loans citywide. (SAC ¶ 44.)

In addition, Emigrant is charged with misleading consumers as to the nature of the alleged equity-stripping scheme. (SAC ¶ ¶ 45-47.) Plaintiffs' claim Emigrant used legal disclosure requirements, like those stipulated by the Truth in Lending Act, to obscure rather than clarify the actual financial consequences attendant to this misconduct. (SAC ¶ 46.) Among other things, Emigrant's disclosures omitted foreseeable and fully expected outcomes, including the inevitable 18% APR. (SAC ¶ ¶ 46-47.) Whereas other lenders limited NINA refinancing to people with high credit scores, given the absence of other key underwriting elements like income, Emigrant failed to even attempt to meet the industry standards in this regard. (SAC ¶ 26, 34.)

Majority-minority census tracts in New York City also contained the majority of residents with poor credit. (SAC ¶ ¶ 48-53.) Concentrated in minority neighborhoods, Emigrant's NINA product foreseeably impacted minorities disproportionately, including in the context of default and foreclosures. (SAC ¶ ¶ 54-56.)

Plaintiffs also allege intentional targeting of Black and Latino borrowers by Emigrant. Emigrant selected advertising outlets that would reach Black and Latino neighborhoods and even grouped these outlets on the racial make-up of their audience. Emigrant's marketing, including advertising placement and purchases, was targeted to locations with significant or predominantly Black and Latino populations by design. Plaintiffs allege this targeting continued as the marketing of this loan package to Black and Latino borrowers enhanced profits for Emigrant, as Emigrant's

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own internal analyses demonstrated.[10] (SAC 57-61.)

The Plaintiffs

Plaintiffs in this case are five families alleged to be severely impacted by Emigrant's equity-stripping scheme and subject to subsequent foreclosure proceedings. For these Plaintiffs, Emigrant disclosed interest rates which did not reflect the foreseeable and expected 18% default APR; instead Emigrant disclosed the rate for uninterrupted on-time payments -- in some cases, assuming five or more years of timely payments plus a subsequent rate reduction. None of the Plaintiffs had high credit scores and all had modest incomes, often lower than the payments imposed. Ignorant of sophisticated credit transactions and terminology, the adjustable-rate mortgages and instruments driving Emigrant's alleged discriminatory conduct misled even those borrowers with pre-existing fixed-rate mortgages and experience meeting lender obligations. Many indicia, including prepayment penalties, premiums to brokers who secured higher cost loans, and attorneys representing Emigrant but characterized as a resource to the borrower, obscured the cost and risks of the loan to Plaintiffs. In the end, Emigrant often recovered outstanding balances, default fees, and other costs ...


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