Subprime lender NovaStar Financial Inc. has been hit with a Fair Housing Act lawsuit charging that it refused to make mortgage loans for purchases of row houses in Baltimore.

The lawsuit, filed Wednesday by the National Community Reinvestment Coalition (NCRC), also alleges that NovaStar had a written policy instructing loan officers to reject mortgage applications involving property on American Indian reservations or homes used for adult foster care.

A NovaStar spokesman, Richard Johnson, said the company is “troubled” by “deliberate misrepresentations” by NCRC and looks forward to a “full and fair opportunity to rebut the charges in court.”

In its complaint, NCRC said that on two occasions in 2006 it used a “tester” to call NovaStar about obtaining a loan on a row house in Baltimore.

In the first call in January 2006, “After the tester stated that the house was a row house, the agent stated that the company had stopped financing row houses a few months before the tester’s call,” the complaint alleged. “The agent asked where the house was located, and … after looking up the address, the agent informed the tester that ‘we don’t do row houses in Baltimore.’ “

A call the following month produced similar results, and the complaint alleges that “NovaStar has continued to enforce this policy up to the present time.”

The policy is discriminatory because of the high concentration of African Americans and Latinos in Baltimore, the suit alleges.

“A loan applicant in Baltimore with a row house, despite having substantial assets, a strong FICO score, a low LTV (loan-to-value) and or/DTI (debt-to-income) ratio, and steady income, would not qualify for a loan of any size,” NCRC alleged.

Johnson said NovaStar’s policy on Baltimore row houses is a result of mortgage fraud problems and “does not discriminate against any groups.”

“There have been serious fraud problems for lenders, regarding the ability to get valid appraisals on row houses in Baltimore,” Johnson said.

The suit said NCRC filed a complaint with the U.S. Department of Housing and Urban Development on March 16, 2006, alleging that NovaStar’s no-row-house policy violated the Fair Housing Act, which HUD has not yet issued a finding on.

Johnson said NovaStar cooperated fully in HUD’s investigation.

“Rather than wait for a determination from HUD, (NCRC) withdrew its complaint against NovaStar, and now seeks to impugn the company’s reputation by making public misstatements and filing baseless litigation,” Johnson said.

NCRC — a coalition of 640 nonprofit organizations that promotes the investment of private capital in underserved communities — was awarded $500,000 in September after filing a similar complaint with HUD about the lending practices of SouthStar Funding LLC. HUD negotiated a settlement in which SouthStar agreed to fund NCRC programs over a four-year period, including training seminars for housing counselors.

In its lawsuit against NovaStar, NCRC cited as evidence a manual issued to company employees that listed “unacceptable property types” for loans, including “properties located on Indian reservations” and “properties used for adult foster care.”

NCRC said the alleged “no Indian reservation policy” has “the purpose and effect of limiting access to capital for Native Americans,” noting that Native Americans make up more than half the population of reservations nationwide. The alleged policy against financing properties used for adult foster care “excludes homes typically licensed for people with disabilities” resulting in an “adverse impact on loan applicants associated with, or living with, persons with disabilities.”

The lawsuit seeks an injunction against NovaStar forcing it to halt its alleged discriminatory practices, and also seeks compensatory and punitive damages.

Johnson said that, as is the case with NovaStar’s treatment of Baltimore row houses, there are valid business reasons for the lender’s policies on properties on reservations and homes used for adult foster care.

“Reservation property is subject to the particular laws of (each) reservation, and the fact that there are restricted deeds … makes it difficult for lenders to offer mortgages on those properties,” Johnson said. “NovaStar does not discriminate in terms of who the borrowers are, but having a different legal structure governing the property is the issue.”

With adult foster-care facilities, “Because the owners of the house are providing residential care to multiple people, these are commercial properties essentially, and that creates substantial issues for lenders,” Johnson said. “Some lenders do residential, some commercial, and some both, but NovaStar specializes in single-family residential loans, and does not do any commercial loans.”


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