Foreclosure Crisis: Civil Rights Complaint Filed Over Subprime Loans

On November 18, 2008, the National Community Reinvestment Coalition filed a complaint with the federal Office of Fair Housing & Equal Opportunity, alleging that Fitch Ratings Ltd. and Moody’s Investors Services unlawfully inflated ratings of subprime mortgage securities. The securities were based upon mortgages made in black and Hispanic communities, contributing to high rates of mortgage foreclosure in those communities and fueling the crisis in the mortgage and credit markets.

The NCRC’s complaint alleges that Fitch’s and Moody’s irresponsible ratings of subprime mortgage securities harmed black and Hispanic communities in violation of the Federal Fair Housing Act.  Both Fitch’s and Moody’s ratings encouraged imprudent mortgage lending, as well as irresponsible secondary market purchasing of securities backed by subprime loans, according to the NCRC complaint.

The complaint states that black and Hispanic communities were targeted for subprime mortgage loans containing high fees, high interest rates, and other unusual costs, and that Fitch and Moody’s “knew or should have known” that a disproportionate number of these mortgages would ultimately go into default or foreclosure. It noted that a 2006 Federal Reserve study estimated that 45 percent of mortgages marketed to Hispanic communities, and 55 percent of those marketed to black communities, were subprime; this was three to four times the rate found in white communities.

The NCRC alleges that Fitch and Moody’s “reaped millions of dollars in fees” for rating the discriminatory subprime mortgages securities.  Because the ratings agencies are paid fees by the issuers of the subprime mortgage securities, rather than by investors, the NCRC states that the ratings agencies had a conflict of interest in issuing the ratings at all.  A copy of the NCRC complaint may be found on its website, www.ncrc.org.

My colleague Cathy Moran has a slightly different take on the complaint.

Related posts:

1. More Home Loans Are In Trouble
2. Sub-Prime Mortgage Meltdown, Chickens Coming Home to Roost?
3. Stop Blaming Poor and Minority Homeowners for Credit Crisis