National Community Reinvestment Coalition files complaint against Standard & Poor's

The National Community Reinvestment Coalition recently filed a complaint with HUD's office of Fair Housing and Equal Opportunity against credit rating agency Standard & Poor's. You can find the press release, along with NCRC's complaint and exhibits, here

NCRC's complaint alleges violations of sections 804 and 805 of the Fair Housing Act, which have both been interpreted by courts to forbid discrimination in mortgage lending. NCRC Complaint at 3, 6-7 (Jan, 2008). S&P and other credit rating agencies have come under fire for inflating the ratings of securities backed by subprime loans. Investors purchased mortgage-backed securities based on these inflated ratings, which created an incentive for mortgage originators to sell more subprime loans. Studies show that subprime loans were disproportionately targeted towards Borrowers of Color, including those who would have qualified for prime credit. See Debbie Gruenstein et al, Center for Responsible Lending, Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages 10-12, 16 (2006); Institute on Race and Poverty (IRP), Draft Report, Communities in Crisis: Race and Mortgage Lending in the Twin Cities 2 (2008). Credit rating agencies like S&P are potentially liable under the Fair Housing Act for the role that they play in creating financial incentives for lending discrimination.

It will be interesting to see how aggressively the new HUD will enforce fair lending complaints. The Fair Housing Act provides the agency with a wide range of enforcement tools to remedy the effects of past discrimination. It would be a nice change if they ask for more than a court order telling S&P to stop breaking the law.