Banks Sued No Matter What They Do

Banks get sued for discrimination no matter what they do.  If they don’t make enough loans in low-income, predominantly minority neighborhoods, they get accused of “redlining,” and are subject to sanctions under politically-correct laws like the Community Reinvestment Act, which contributed to the financial crisis by pressuring lenders to make risky mortgage loans

But if they do make such loans, they get accused of “reverse redlining,” and get sued by the liberal special-interest groups and municipalities that encouraged them to make such loans during the mortgage bubble.  Baltimore and various borrowers have also brought “reverse redlining” lawsuits against banks.

The Washington Post reported yesterday that bond-rating agencies like Moody’s and Fitch are now getting sued, too, for reverse redlining,” under the theory that they encouraged risky loans to low-income minorities (who subsequently regretted taking out those loans) by giving respectable ratings to the mortgage-backed securities produced by packaging those mortgage loans.  The plaintiffs include the National Community Reinvestment Coalition, which has been pressuring lenders to make risky loans to low-income minorities for years.  They blame the ratings-agencies for allowing lenders to make loans to minorities with “insufficient borrower income levels.”

I’ve been a big critic of the ratings agencies in the past, even before the current financial crisis, for their lousy record of rating many kinds of securities, but this suit is meritless, and ignores legal limits such as proximate causation to boot.

We wrote earlier about how federal affordable housing mandates and diversity pressures contributed to the financial crisis.  Those federal mandates, which helped bring about the collapse of the government-backed mortgage giants Fannie Mae and Freddie Mac, remain in force even after the nationalization of Fannie Mae and Freddie Mac, which continue to buy up risky loans at taxpayer expense.