Reverse Redlining Ruling Reaffirmed

McGlawn & McGlawn’s attorney, Jeffry Homel, said his client has not yet decided whether it would appeal the top court’s decision not to reconsider the case and is in negotiations to settle the $910,000 damage award for a lesser amount than what was originally assessed against the broker.

Homel said the company is still in business but these days is getting much of its business from walk-ins and referrals.

The company and its cofounder, Reginald McGlawn, landed before the state’s Human Relations Commission after complaints by 10 borrowers that, from 1998 through 2000, the mortgage broker discriminated against them in the terms of their mortgages and home equity loans because of their race and the racial composition of their neighborhood.

McGlawn & McGlawn specializes in arranging subprime mortgage loans for its customers.

The commission ruled in the borrowers’ favor — noting the broker exercised an “aggressive marketing plan” using radio, television and newspaper ads specifically targeting African Americans and African American neighborhoods, selling loans with predatory lending features.

High interest rates, often with loan amounts higher than the applicant had asked for, hidden fees, prepayment penalties and balloon payments were among the loan terms criticized. The commission said the broker also discouraged loan applicants from taking advantage of their right to rescind the transactions within three days of the execution of the loan documents.

Sixty-five of 66 mortgage applications in which the borrower’s race was identified involved black customers, according to the ruling.

The commission assessed nearly $910,000 in damages and fines, including $185,000 for embarrassment and humiliation.

The commission at that time also directed McGlawn & McGlawn to make repayments to the 10 customers, making up the difference between the rates they were charged and the prevailing market rates at the time.

When the case went to the appellate court, the court upheld the commission’s ruling, noting that it was the first time the court had been called upon to rule on an accusation of “reverse redlining.”

“Redlining” is the practice of denying the extension of credit to specific geographic areas due to the income, race or ethnicity of its residents. The term is derived from the actual practice of drawing a red line around certain areas in which credit would be denied. Reverse redlining is the practice of extending credit on unfair terms to those same communities.

Reverse redlining is a newly recognized form of housing discrimination in many jurisdictions.

In a case of first impression, the three-judge Commonwealth Court panel agreed with the commission that the company had engaged in reverse redlining but said $700,000 of the damage award had to be recalculated, taking into account whether the borrowers would have qualified for the then prevailing market interest rate.

The state’s top court has now declined to review the holding, allowing the legal precedent to stand as Pennsylvania law.

McGlawn & McGlawn has previously faced state regulatory action. Published reports indicate that Reginald McGlawn was cited by the Pennsylvania Banking Department for failing to report lawsuits that had been filed against the company.

The consent order was signed by Reginald McGlawn, who was listed as president of the firm. McGlawn was also ordered to take 66 hours of classes “in the areas of ethics, business law, fiduciary law, real estate, truth-in-lending and consumer laws and federal and state mortgage laws or lending laws,” the order stipulated.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]