A recent first district ruling holds that redlining discrimination actions can be brought against lawyers and others who purport to provide loan modification assistance.

A recent decision by the Illinois Appellate Court, First District, holds that redlining discrimination actions can apply to parties that purport to provide loan modification assistance. Typically, redlining is the practice of offering loans to minority borrowers that include terms less desirable than those offered to similarly qualified white borrowers. In People v. Wildermuth, 2016 IL App (1st) 143592, the first district held that those who target minorities with false promises of providing a loan modification for a fee are considered mortgage lenders under the Illinois Human Rights Act ("the Act").

In 2011, Attorney General Lisa Madigan sued Matthew Wildermuth, an attorney, and George Kleanthis, a real estate broker, alleging that they targeted underwater minority homeowners, making false promises about assisting them with obtaining a loan modification. The pair charged large, nonrefundable, up-front fees.

The complaint alleges that they made "unreasonable assurances" regarding their ability to lower a mortgage payment by a specific amount in a specific period of time. Wildermuth, ¶ 6. Instead, the services provided were allegedly limited to "merely filling out and submitting the paperwork to apply for a traditional affordable home loan modification program." Id.

Additionally, the attorney general alleged that Wildermuth and Kleanthis failed to provide legally required disclosures pursuant to the Illinois Mortgage Rescue Fraud Act and the Mortgage Assistance Relief Services Rule. The defendants allegedly targeted African-American and Latino homeowners by exclusively advertising on radio stations popular in those communities and by using a well-known radio personality to promote their services.

The defendants filed a motion to dismiss, arguing that Wildermuth was providing legal services and that they were not performing real estate transactions as defined in the Illinois Human Rights Act. The Circuit Court of Cook County denied the motion to dismiss, finding that the defendants functioned as mortgage brokers when they "conducted short sale negotiations and sought loan modifications." Id. ¶ 11. An interlocutory appeal was filed, and the first district affirmed the trial court's ruling.

Construing the Act liberally

The Wildermuth court began its analysis by noting that since the Act is remedial legislation, it must be construed liberally to achieve its purposes. The Act prohibits discrimination in real estate transactions and related services. 775 ILCS 5/3-102(B). It defines real estate transactions to include providing financial assistance for maintaining a dwelling secured by residential real estate. 775 ILCS 5/3-101.

The defendants argued that "reverse" redlining (preying on nonwhites, as opposed to denying them service) involves discrimination in the extension of credit. Since the services they provided were to people who had already obtained credit, the Act did not apply to them. Wildermuth, ¶ 18. The attorney general argued that because the defendants targeted African-Americans and Latinos, their conduct was discriminatory. Moreover, because they were negotiating loan modifications and short sales, they were real estate brokers under the Act.

The court found that "the plain language of [the Act] merely requires that the entity engage in a real estate transaction, which includes 'providing other financial assistance for maintaining a dwelling.'" Id. ¶ 25. The court further held that the defendants' alleged conduct "interfered with consumers' ability to obtain a particular type of financial assistance - residential loan modifications - for maintaining their homes against the risk of foreclosure." Id. ¶ 27.

The Wildermuth court observed that federal cases interpreting the Fair Housing Act (FHA) had interpreted "financial assistance" to include entities that "hold themselves out as a channel through which relief flows." Id. ¶ 28. In this case, that relief was loan modifications obtained through government-backed programs.

The court also rejected the notion that the defendants had to be mortgage lenders for the Act to apply. It looked to Eva v. Midwest National Mortgage Banc, Inc., 143 F. Supp. 2d 862 (N.D. Ohio 2001), which interpreted a similar provision of the FHA. The Eva court found that the FHA does not require a defendant to be a mortgage lender, but simply engaged in business that includes real estate-related transactions. Eva, 143 F. Supp. 2d at 889. The Wildermuth court agreed and held that a §3-102(B) claim against a defendant does not need to allege that the defendant was a mortgage broker. Wildermuth, ¶ 31.

The court also rejected the defendants' argument that reverse redlining claims exclusively apply to the extension of credit. Noting that federal courts had also addressed reverse redlining in the context of claims "involving the issuance and cancellation of property insurance policies," it found that the Act's purposes would be frustrated if it did not prohibit discrimination at all stages of the home purchasing process, including offering "loan modification services in order to avoid foreclosure." Id. ¶ 34.