Prepare to Fight Suits Claiming Bias in REO Maintenance

As if they didn't face enough challenges already, banks and mortgage servicers now must prepare for the threat of litigation claiming bias in the maintenance of foreclosed properties.

The evidence presented so far for such claims is questionable, but the complainant has a track record of aggressive actions against financial services companies.

On April 4, the National Fair Housing Alliance published a report prepared for it by the Relman, Dane and Colfax law firm concluding that banks and mortgage servicers maintained repossessed homes in a discriminatory manner in nine major metropolitan areas.

The report, entitled "The Banks Are Back – Our Neighborhoods Are Not: Discrimination in the Maintenance and Marketing of REO Properties," concluded that banks and servicers maintain and market real estate owned properties less favorably in minority neighborhoods in violation of the Fair Housing Act.

The report calls for federal banking regulators, including the Consumer Financial Protection Bureau, and Congress to conduct nationwide investigations into banks' and servicers' maintenance and marketing of REO properties. The report also asserts that municipalities have standing to pursue claims based on maintenance of such properties and highlights alleged harms to municipalities from maintenance practices.

In a press release announcing the findings, NFHA vows that it will begin filing complaints with the Department of Housing and Urban Development and lawsuits in federal district court citing the report as evidence. The plaintiffs' class action law firm Cohen Milstein Sellers & Toll will represent the group in these matters.

The report was prepared between May 2011 and February 2012, and was funded in part through grants from HUD and Fannie Mae. NFHA claims its staff visited over 1,000 REO properties in nine major metropolitan areas to evaluate the exterior condition of those properties.

The report concludes that REO homes in majority white neighborhoods were "cared for in a substantially better manner than those in communities of color." Specifically, the report stated that REO properties in white neighborhoods were more likely to have well-maintained lawns, secured entrances, and professional sales marketing, whereas REO properties in African-American and Latino neighborhoods were more likely to appear vacant and have poorly maintained yards, unsecured entrances, broken windows, and poor curb appeal. NFHA claims that the allegedly poor maintenance of REO properties in majority African-American and Latino census tracts has harmed residents and potential homeowners, purchasers of REO properties, and local governments.

Among a myriad of methodological defects, these drive-by observations appear to be entirely subjective. They do not account for the state of the evaluated properties before they were seized or whether the banks or servicers in fact improved the property from its original condition. Nor do they include properties that were undergoing repairs or renovations at the time of the evaluation.

Nevertheless, past NFHA discrimination initiatives against the property insurance industry and others suggest that servicers should expect a series of press releases and HUD complaints followed by federal court actions. Indeed, on Tuesday, the NFHA filed a discrimination complaint with HUD against one major bank based on the allegations in the report.

Servicers are well advised to evaluate existing policies, procedures, and practices relating to REO property maintenance, marketing, and sales, and ensure that their property preservation and sale activities are conducted in a non-discriminatory manner and consistent with their policies.

Andrew L. Sandler, Benjamin P. Saul, and Aaron C. Mahler are the chairman and executive partner, a partner, and an associate, respectively, at BuckleySandler LLP.