Racially Restrictive Covenants Move Out of Homeowner Associations and Into Banks
While the pursuit of private property ownership is a distinctly American obsession, for many everyday Americans, this dream remains stubbornly elusive. Although the current housing market reflects increasing demand for property in a low supply market, the data consistently supports a historical truth: many consumers of color find themselves barred from obtaining real estate. In fact, Black Americans are statistically less represented than any other racial or ethnic group in the country, with only a 42 percent homeownership rate; Hispanic-Americans are only slightly ahead at 48.1 percent. [1] To this day, housing discrimination is among the most prominent examples of legal and industry-specific practices intended to spatially isolate racial and ethnic minorities. While the underlying intent to legally segregate homebuyers remains the same, the private institutions that engage in such discriminatory practices have morphed over the last few decades from homeowner associations (HOAs) to regional banks.
The long-term effects of obstructing housing rights for racial minorities can be best understood through Jones v. Alfred H. Mayer Co. (1968). Joseph Lee Jones, a prospective Black homebuyer living in Missouri, brought the suit against Alfred H. Mayer Company, a St. Louis-based real estate corporation, for refusing to sell him a home on the account of his race, raising the question of whether housing discrimination on the basis of race is a violation of guaranteeing equal rights to property acquisition. [2] In a 7-2 decision, the Supreme Court established that the Thirteenth Amendment, in addition to the abolishment of slavery, allowed for the passing of “all laws necessary and proper for abolishing all badges and incidents of slavery in the United States.” Therefore, Jones set the precedent for housing discrimination to be a “badge” of slavery—a term best understood as a “public or widespread private action” that “mimics the law of slavery” towards a racial group that has faced a history of enslavement. [3] Furthermore, a “badge of slavery” puts that racial population at legal risk of “de facto reenslavement” or “subjugation.” [4]
The significance behind the Jones decision is that it recognized the denial of homeownership on the basis of race as unconstitutional. Despite this decision, the legacies of discriminatory practice persist. An example of such is the use of restrictive covenants, or contractual agreements that outline to whom the land should be given access to for the enjoyment of the residents, in real estate proceedings. Corrigan v. Buckley (1926) established decades prior to Jones that the very restrictive covenants that were discriminatory towards African Americans were valid. The Court’s ruling in Corrigan further stated that those covenants should “run with the land and bind their respective heirs for twenty-one years,” binding even future owners of that real estate to the covenant. [5] The Supreme Court later overruled Corrigan with Shelley v. Kraemer (1948), which rejected the constitutionality of racially restrictive covenants. However, Shelley itself is extremely ambiguous: while it holds the judicial enforcement of racially restrictive covenants as unconstitutional, “private parties abiding by the covenant” are not considered to be violating the Fourteenth Amendment. [6] This means that the need for state enforcement of racially restrictive covenants would be unconstitutional, while the personal practice of restrictive covenants would still be permitted. [7] Furthermore, the validity of Shelley—and the ambiguity surrounding the distinction of the private versus public matter on restrictive covenants—is in question given the Supreme Court’s hesitance to extend the Shelley ruling to very similar cases of “racial discrimination that raise state action.” [8] While the private practices of racially restrictive covenants are still not considered as violations of the Fourteenth Amendment, HOAs are no longer the main perpetrators of discriminatory real estate practices; regional banks are. Given the increasing complexity of how covenants are enforced— and the extent to which the government can intervene in that enforcement––HOAs are no longer a consistent force in maintaining racial homogeneity. In contrast, banks continue to adhere to white homebuyers’ demands for homogeneous neighborhoods and perpetuate de facto segregation. [9]
Modern practices of housing discrimination are similar to the use of racially restrictive covenants since they engage in acts of discrimination that “restrict the use of land,” typically to white homeowners’ benefit. U.S. v. Hudson City Savings Bank (2015) best demonstrates the discriminatory practice of redlining. The Department of Justice and the Consumer Financial Protection Bureau filed a joint complaint alleging that Hudson City engaged in systematic business operations to avoid “providing credit services in predominantly minority neighborhoods.” [10] By doing so, Hudson City Savings Bank was accused of excluding Black and Hispanic populations from home mortgage lending services in the market areas of New Jersey, New York, Connecticut, and Pennsylvania. [11] Their denials of credit were ruled as violations of the Equal Credit Opportunity Act (ECOA). [12] Furthermore, these denials discouraged Black and Hispanic residents of neighborhoods with high concentrations of minorities from obtaining home mortgages “on account of their racial composition.” [13]
As demonstrated by Hudson City Savings Bank, regional banks have the unique ability to determine the demographic makeup of a neighborhood by denying access and opportunity to credit to certain racial groups in specific residential areas. Banks often reproduce the results of racially restrictive covenants as a result. Notably, a neighborhood’s demographic makeup is heavily influenced by consumers with the most social and economic capital— who are typically Non-Hispanic white. [14] Due to this, banks have an economic incentive to follow traditional redlining practices: there is still a prominent desire amongst white homeowners to live in homogeneous neighborhoods. [15] This desire for a racially homogeneous neighborhood has given third-party white home buyers “zoning powers,” which have prompted local banks and governments––through cooperation with real estate developers to cater to white housing––to provide segregated housing options. [16] White homeowners have historically been given options where the only difference in neighborhood options was the concentration of minority populations. [17] U.S. v. Hudson City Savings Bank is reflective of this desire to maintain racial homogeneity through discriminatory practices in loans.
Similar to exclusionary credit access implemented by banks to shape a neighborhood’s demographic composition, predatory lending has the ability to maintain racially discriminated neighborhoods by presenting minority homebuyers with risky loans. [18] This is best exemplified in Bank of America Corp. v. City of Miami (2017). In 2015, the Miami government brought forth a suit against Bank of America (BOA) for intentionally targeting Black and Latino homebuyers to accept “predatory loans” with high risk and “steeper fees.” [19] Miami argued two claims: First, BOA violated the Fair Housing Act as the economic harms it caused were within the law’s “zone of interest,” and second, BOA’s lending practices were the proximate cause for the city’s economic injuries. [20] After BOA appealed, the Supreme Court concluded that it was difficult to place housing discrimination as the proximate cause since the Fair Housing Act’s proximate cause standard only places the liability of the consequences to the “first step of a causal chain,” or focuses on the first cause and effect of the injury in question. [21] The Fair Housing Act’s proximate cause standard requires that there be a “direct cause between the injury asserted and the injurious conduct alleged.” [22] The connection between housing discrimination (the injury asserted) and the economic harms done (injurious conduct alleged) were determined to be too far apart to be seen as a “direct cause.” Due to the Court's inability to extend BOA’s liability past the first causal step to their policies’ consequences, it is difficult to distinguish predatory lending as the proximate causes of restrictive homeownership for homebuyers of color. In conclusion, the scope of the Fair Housing Act’s proximate cause standard limits predatory lending from being labeled as the direct cause for discriminatory housing policies, allowing harmful economic practices to continue in the housing market without legal consequences.
Although legal measures have been put in place to curb housing discrimination, it is critical to recognize that what constitutes racially restrictive covenants remains flexibile in the real estate industry, allowing for continued exploitation by private interests. Cases such as U.S. v. Hudson Savings Bank and BOA v. Miami beg the question of whether enough work has been done to address discriminatory housing practices in the modern day. Similarly, the increase in the number of prospective homebuyers in the current housing market and the continuous denial of Black and Hispanic homeownership raises the worrying possibility that despite a surplus in housing, Black and Hispanic residents will continue to be deprioritized and marginalized by ever-present discriminatory practices. The larger implications of the racial limitations on capital and property must be questioned as the means to homeownership continue to limit and exclude for far too many Americans.
Edited by David Jung
Sources:
[1] “NAR Finds Black Home Buyers More Than Twice as Likely to Have Student Loan Debt, Be Rejected for Mortgage Loans Than White Home Buyers,” National Association of Realtors (February 17, 2021), online at https://www.nar.realtor/newsroom/nar-finds-black-home-buyers-more-than-twice-as-likely-to-have-student-loan-debt-be-rejected-for (visited August 6, 2021).
[2] “Jones v. Alfred H. Mayer Company,” Oyez, online at https://www.oyez.org/cases/1967/645 (visited July 13, 2021).
[3] Jennifer Mason McAward, “Defining the Badges and Incidents of Slavery,” 14 Notre Dame Law School 3, 566 (2012).
[4] Id.
[5] “Restrictive covenant,” Oxford Reference, online at https://www.oxfordreference.com/view/10.1093/acref/9780199551248.001.0001/acref-9780199551248-e-3412 (visited July 13, 2021).
[6] “Shelley v. Kraemer,” Oyez, online at https://www.oyez.org/cases/1940-1955/334us1 (visited July 13, 2021).
[7] Mark D. Rosen, “Was Shelley v. Kraemer Incorrectly Decided? Some New Answers,” 95 California Law Review 45, 451 (2007).
[8] Id.
[9] Loan Agreement and Promissory Note, U.S. Securities and Exchange Commission, online at https://www.sec.gov/Archives/edgar/data/926287/000101041210000341/wharton27500loanagree.htm (visited July 15, 2021).
[10] CFPB and DOJ Order Hudson City Savings Bank to Pay $27 Million to Increase Mortgage Credit Access in Communities Illegally Redlined, Consumer Financial Protection Bureau (September 4, 2015), online at https://www.consumerfinance.gov/about-us/newsroom/cfpb-and-doj-order-hudson-city-savings-bank-to-pay-27-million-to-increase-mortgage-credit-access-in-communities-illegally-redlined/ (visited August 5, 2021).
[11] Consumer Finance Protection Bureau and United States v. Hudson City Savings Bank, FSB (DNJ), U.S. Department of Justice (July 1, 2019), online at https://www.justice.gov/crt/case/consumer-financial-protection-bureau-and-united-states-v-hudson-city-savings-bank-fsb-d-nj (visited August 5, 2021).
[12] Id.
[13] Consent Order: Consumer Finance Protection Bureau and United States v. Hudson City Savings Bank, FSB (DNJ), U.S. Department of Justice, online at https://www.justice.gov/crt/case-document/file/791046/download (visited August 5, 2021).
[14] Stacy E. Seicshnaydre, “The Fair Housing Choice Myth,” 23 Journal of Affordable Housing and Community Development Law 2 (2015).
[15] Id.
[16] Id.
[17] Id.
[18] CITY OF MIAMI v. BANK OF AMERICA CORPORATION, FindLaw (September 1, 2015), online at https://caselaw.findlaw.com/us-11th-circuit/1712081.html
[19] Id.
[20] Id.
[21] “Fair Housing Act — Standing and Proximate Cause —Bank of America Corp. v. City of Miami,” 13 Harvard Law Review, 373 (2017).
[22] Id.