The shaky legal ground of Bank of America’s new race-based mortgage program

The shaky legal ground of Bank of America’s new race-based mortgage program

North Carolina’s largest corporation, Bank of America, received pushback after announcing last week they created a home loan program only available in black and Hispanic neighborhoods. Legal scholars told Carolina Journal that the program appears to violate federal civil rights laws by favoring certain racial groups over others. Bank of America, however, told Carolina Journal that the loans are legal under an exception in lending law.

“Homeownership strengthens our communities and can help individuals and families to build wealth over time,” said AJ Barkley, head of neighborhood and community lending for Bank of America, in a press release announcing the program. “Our Community Affordable Loan Solution [CALS] will help make the dream of sustained homeownership attainable for more Black and Hispanic families, and it is part of our broader commitment to the communities that we serve.”

The CALS program would offer zero down payment, zero closing cost mortgages to first-time homebuyers in certain black and Hispanic neighborhoods in Bank of America’s hometown of Charlotte, as well as in Dallas, Detroit, Los Angeles, and Miami. 

In Bank of America’s press release, they cited data from the National Association of Realtors that found a 30-percentage-point gap in homeownership between black and white Americans, and a 20-percentage-point gap between white and Hispanic Americans, adding that “the competitive housing market has made it even more difficult for potential homebuyers, especially people of color, to buy homes.”

Gail Heriot is a professor at University of San Diego Law School and a member of the U.S. Commission on Civil Rights. She also sits on the board of directors of the American Civil Rights Project, Californians for Equal Rights, and the National Association of Scholars. Heriot told Carolina Journal that she believes the Bank of America program runs afoul of civil rights law. 

“A good rule of thumb when you are unsure of whether something violates anti-discrimination laws is to ‘flip it,’” Heriot said. “If Bank of America were to announce a special lending program only for people buying homes in white or Asian neighborhoods, the law would rightly prohibit it. It prohibits it here too.”

David Bernstein is executive director of the Liberty & Law Center at George Mason University’s Antonin Scalia Law School as well as a professor of law at the school. He agreed with Heriot, telling Carolina Journal that “the short answer is that at the very least this violates section 1981, the 1866 Civil Rights Act,” which he said has “been interpreted to broadly prohibit private discrimination in contract on the basis of race.” 

But a spokesperson for Bank of America responded to these concerns, telling Carolina Journal on Sept. 6 that:

CALS is a special purpose credit program. Special purpose credit programs allow lenders to offer credit on favorable terms to economically disadvantaged borrowers. The Equal Credit Opportunity Act (ECOA), which was passed by Congress, explicitly authorizes these kinds of programs. The ECOA and Regulation B encourages lenders to offer SPCPs, enabling them to extend credit on favorable terms to classes of borrowers who have suffered economic disadvantages and share common characteristics, such as race, income, or geography. The Federal government has also encouraged lenders to explore opportunities exactly like this on [sic] to better serve historically disadvantaged individuals and communities.

Recent guidance from federal regulators supports their position. In December of 2020, the Consumer Finance Bureau, which oversees application of lending laws like the ECOA, issued guidance that said discriminating based on racial characteristics was allowed under these circumstances.

Once a special purpose credit program has been established, a creditor may then request
and consider information regarding common characteristic(s) if needed to determine the
applicant’s eligibility for the program. For example, if a creditor establishes a special purpose
credit program that requires that an applicant resides in an area that is designated as a low-to-
moderate income census tract and is Black, Hispanic, or Asian, a creditor could request race or
ethnicity information from applicants to confirm eligibility for the program.

Even after the CFB’s sign-off, lenders were still wary of creating credit programs targeting people by race or sex because the Fair Housing Act does not have exceptions that allow for discriminating in order to benefit an “economically disadvantaged class.”

So lenders and other stakeholders pushed for clarification from U.S. Department of Housing and Urban Development (HUD), who oversees enforcement of the Fair Housing Act. On Dec. 6, 2021, HUD gave lenders like Bank of America the legal assurance they wanted, determining that these special-purpose credit programs (SPCPs) did not violate the Fair Housing Act’s prohibition on discriminating based on race or sex.

The guidance said that Congress “intended the [Fair Housing] Act and ECOA to coexist harmoniously and complement each other rather than create any conflict between these laws. Congress intended both statutes to operate similarly (albeit sometimes with respect to different subject matters), both prohibiting certain discriminatory conduct and encouraging affirmative conduct to address long unmet needs and disparities.”

But constitutional scholars like Heriot and Bernstein believe these kind of one-sided race preferences violate the fundamentals of civil rights law. Bernstein, for example, said that if the ECOA allows “mortgages to be offered on more favorable terms based on race, then it might be unconstitutional.”

Jon Guze, John Locke Foundation’s senior fellow of legal studies, said, “It’s clearly unconstitutional and won’t stand up in court.”

The same day as the minority mortgage program was announced, Bank of America also announced they were starting a “Small Business Down Payment Grant Program to drive business growth and help create generational wealth opportunities for minority and women business owners.” This program was also identified as an SPCP in the press release.

Criticism of Bank of America has had little effect on the company’s commitment to pursuing controversial diversity, equity, and inclusion (DEI) programs.

Earlier this year, a shareholder proposal requested an audit of Bank of America’s DEI efforts to see if they were legal. Scott Shepard of the free-market group Boardroom Initiative, who drafted the proposal, told Carolina Journal at the time that Bank of America “listed in its own proxy report all sorts of programs — lending programs, internship programs, community programs, hiring programs — that are all explicitly discriminatory on the basis of race, sex and other basis.”

Shepard said that “All of this just strikes me as insanely unconstitutional.”

Another North Carolina-based company’s recent loss in court over a DEI program shows the risk of implementing these types of efforts. David Duvall, a white male, was awarded $10 million in a 2021 lawsuit after he was able to convince the court that he was dismissed from his position as an executive with Novant Health because of his race and sex. 

Shepard said more lawsuits like this may be the only way that illegal discrimination from activist corporations can be checked.

“One or two jury verdicts that took big money out of a couple CEO’s pockets and all of this would wilt like a good analogy about wilting,” Shepard said.

Global Industry Analysts, considered a premier market analysis firm, predicts that the “market” for DEI programs by major corporations will rise from $7.5 billion in 2020 to $15.4 billion by 2026, more than doubling over this period.

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