Fannie Mae Agrees to Settle REO Discrimination Case

Bilzin Sumberg

Bilzin Sumberg

Fannie Mae has reached a historic $53 million settlement with the National Fair Housing Alliance (“NFHA”) and local fair housing organizations throughout the U.S. to resolve racial discrimination claims concerning Fannie Mae’s management and marketing of real estate owned (“REO”) properties.  The settlement is the largest one ever in the U.S. for discrimination in the handling of REOs. In 2016, the plaintiffs filed suit, alleging that Fannie Mae had failed to maintain foreclosed properties in non-white neighborhoods to the same quality and standards as it did in comparable white neighborhoods. The plaintiffs further alleged that Fannie Mae’s differential treatment exacerbated the damage caused to these neighborhoods by the 2008 real estate collapse and impeded their recovery.

Significantly, the lawsuit was the first time a federal court confirmed that fair housing laws govern the maintenance and disposition of REO properties. In other words, lenders can be held liable for fair housing violations in the management of their foreclosed properties.

The lawsuit came after a four-year investigation of more than 2,300 Fannie Mae-owned properties across 39 metropolitan areas revealed a systemic trend by Fannie Mae of allegedly neglecting REO properties in predominantly black and Latino neighborhoods.

In addition to the payment of $53 million, Fannie Mae agreed to enhance its REO maintenance and marketing activities, strengthen fair housing guidance for its vendors, increase inspections of REOs in majority minority areas, and “retool” its quality control methodology. According to counsel for NHFA, the vast majority of the settlement funds will be invested directly back into the communities harmed by the disparate treatment.

This is not the first time that the NFHA has made REO discrimination claims. In 2013, Wells Fargo settled similar claims with NFHA for $39 million. Similar cases filed by NFHA and local housing organizations are currently pending against private lenders. In February 2018, the NFHA and 19 fair housing organizations filed a housing discrimination suit against Deutsche Bank and its servicers, Ocwen Financial Corp. and Altisource Portfolio Solutions, who are responsible for maintaining and marketing the lender’s foreclosed properties. A few months later, a similar suit was filed by the NFHA and local housing organizations against Bank of America and Safeguard Properties Management. Both lawsuits allege that these private lenders and servicers intentionally failed to maintain REO properties in the same manner as other REO properties in comparable white communities.

Fannie Mae’s settlement is a major development. Not only is it the largest settlement of its kind, Fannie Mae has been pushed to evaluate and change its REO practices to ensure same standards are applied in all neighborhoods regardless of race or ethnic background. Private lenders should not wait for a claim against them to evaluate their own practices concerning REO properties in majority minority communities. As this settlement demonstrates, failure to address these types of issues can be costly. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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