Statement of Interest - Fair Housing Center of Central Indiana, Inc. v. Rainbow Realty Group, Inc. (S. D. Ind.)

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 1 of 11 PageID #: 8764

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF INDIANA

INDIANAPOLIS DIVISION

FAIR HOUSING CENTER OF CENTRAL

INDIANA, INC., et al.,

Plaintiffs,

RAINBOW REALTY GROUP, INC., et al.,

Defendants.

)

Case No. 1:17-cv-01782-JMS-TAB

____________________________________

STATEMENT OF INTEREST OF THE UNITED STATES

The United States respectfully submits this Statement of Interest pursuant to 28 U.S.C. §

517

to address the proper interpretation and application of the Equal Credit Opportunity Act

(ECOA), 15 U.S.C. § 1691, et seq. The Department of Justice is among the federal agencies

responsible for enforcement of ECOA. 15 U.S.C. § 1691e(h). The Court’s Order resolving the

parties’ cross motions for summary judgment [Filing No. 332] raises questions regarding the

application of ECOA, including some for which Plaintiffs have now requested reconsideration.

The United States has a strong interest in the interpretation and application of this statute and

believes that its participation will aid the Court in resolution of these issues.

This case raises the question of whether ECOA can apply to a contract which finances the

sale of real property but also has terms found in a residential lease. ECOA’s applicability does not

hinge merely on whether a contract is a lease. Rather, the Court must determine whether the

transaction constitutes “any aspect of a credit transaction” as defined by ECOA. 15 U.S.C. §

28 U.S.C. § 517 provides that “[t]he Solicitor General, or any officer of the Department of Justice, may

be sent by the Attorney General to any State or district in the United States to attend to the interests of the

United States in a suit pending in a court of the United States, or in a court of a State, or to attend to any

other interest of the United States.”

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 2 of 11 PageID #: 8765

1691(a)(1); 12 C.F.R. § 1002.2(m). Here, that analysis demonstrates that ECOA applies to this

type of transaction, and the dismissal of Plaintiffs’ ECOA claims should be reconsidered.

I. Background

Plaintiffs sued Defendants Rainbow Realty Group, Inc., Empire Holding Corp., James R.

Hotka, and other associated entities, regarding Defendants’ “Rent-to-Buy” program in

Indianapolis, Indiana. [Filing No. 100, at 2; Filing No. 332, at 1.] Plaintiffs allege that the program

exploits consumers in predominantly Black and Hispanic neighborhoods by selling properties in

poor condition at inflated prices and high interest rates through contracts that are designed to fail.

[Filing No. 100, at 2-6.]

Under Defendants’ “Rent-to-Buy” program, customers sign a contract called a “Purchase

Agreement,” subtitled as a “Rent to Buy Agreement” (hereinafter “RTB Agreement”). [See, e.g.,

Filing No. 309-1, at 2.] The parties to the RTB Agreement are the customer (“Buyer” in the

contract), Defendant Rainbow Realty Group, Inc. (“Landlord”), and the Individual Land Trust

that owns the property (“Seller”). [Id.] The RTB Agreement includes features of both a financed

sale

and a residential lease. The contract specifies a purchase price and states, “Buyer agrees to

pay [purchase price] for the Property.” [Id.] It also sets a fixed interest rate and a “term of contract”

(usually 30 years) over which payments are to be made. [Id.] Properties are sold “as-is,” and the

buyer is responsible for all repairs, real estate taxes, assessments, liens, and property insurance.

Mr. Hotka creates an Individual Land Trust for each property he purchases and then deeds one property

to each trust. [Filing No. 332, at 4 (citing Filing No. 308-7, at 5).] The Individual Land Trusts are not

named as defendants in this case.

Buyers also sign a “Purchase Agreement Declaration,” on which they select the option for “BUYING”

that states, “My intent is to purchase the property . . . I am not renting the property.” [See, e.g., Filing No.

309-5, at 2.] They then sign a “TRUTH-IN-LENDING DISCLOSURE,” which lists the buyer as

“Borrower” and discloses the finance charge and “TOTAL OF PAYMENTS” required to pay off the

home’s purchase price at the applicable interest rate. [See, e.g., Filing No. 309-10, at 2.]

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 3 of 11 PageID #: 8766

[Id. at 2-3.] However, the RTB Agreement also allows the seller to “enter, repair and/or inspect

the property” if it so chooses, and includes a remedy of eviction if the buyer does not make timely

payments – both of which are often features of rental contracts. [Id. at 2.]

The RTB Agreement’s payment terms are also a hybrid of sale and lease language. The

contract requires a “down payment” and calculates a “Total Monthly PITI [principal, interest,

taxes, and insurance] Payment” that is based on the purchase price, fixed interest rate, and a 30-

year “Term of Contract.” [Id.] However, the contract describes these monthly charges as “rental

payments to the Landlord that are equal to the PITI Payment stated below.” [Id.] The RTB

Agreement calls for the execution of a second document after two years of successful payment,

with the same terms of sale: “Once the Buyer has made (24) twenty-four or more rental payments,

the parties hereto shall execute a ‘Conditional Sales Contract’ (Land Contract) form embodying

the terms contained herein.” [Id.]

The majority of RTB customers are unable to maintain compliance with the RTB

Agreements; Mr. Hotka (the “principal actor in connection with all of the Defendant entities”

[Filing No. 332, at 4]) estimates that 70% of contracts fail in the first six months. [Filing No. 308-

7, at 6 (Hotka AG Dep. at p. 12, lines 13-15).] Notably, there is no option for the buyer to terminate

the RTB Agreement or decline to proceed with the purchase of the property without defaulting and

incurring significant penalties and financial loss. [See, e.g., Filing No. 309-1, at 3.] This includes

losing the value of repairs and improvements made to the property, the “forfeit [of] all amounts

paid (as rent)” that had accrued as equity, a “processing fee” of several hundred dollars if “for any

reason the Property is returned to the Seller,” and responsibility for lost rental income for up to 12

months if possession is returned to the seller. [Id.]

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 4 of 11 PageID #: 8767

On August 12, 2022, the Court ruled on the parties’ cross motions for partial summary

judgment, granting summary judgment to Defendants on Plaintiffs’ ECOA claims (among other

rulings). [Filing No. 332, at 28-30, 36.] The Court reasoned that ECOA could not apply to the

RTB Agreement because the contract is a residential lease under Indiana state law for at least the

initial two-year period. [Id. at 29.] It further found that Rainbow could not be a “creditor” under

ECOA because “Rainbow is the landlord during the first two years of the RTB Agreements,

when the Agreements are residential leases, and Rainbow’s involvement in the RTB transactions

ends at the conclusion of that two-year period.” [Id. at 30.] On August 26, 2022, Plaintiffs sought

reconsideration of that Order. [Filing No. 338; Filing No. 339, at 4-9.] Plaintiffs also sought to

clarify the status of the ECOA claims of those Plaintiffs who continued to make payments on

RTB Agreements to Rainbow for more than two years. [Filing No. 337, at 1-2.] The Court has

not yet ruled on these motions.

II. Argument

A. A Contract Can Both Be a Lease and Also Be an “Aspect of a Credit Transaction”

for Purposes of ECOA.

Relying on Rainbow Realty Group., Inc. v. Carter, 131 N.E. 3d 168 (Ind. 2019), the Court

concluded that the RTB Agreement is a residential lease for at least its first two years. [Filing No.

332, at 15-16 (citing Carter, 131 N.E. 3d at 173 (“For at least the first two years, the [RTB]

Agreement was a residential lease with a contingent commitment to sell.”)).] The Court further

determined that because the RTB Agreement was a lease, it was not subject to ECOA. [Id. at 29

(“[ECOA] does not apply to residential leases.”) (citing Laramore v. Ritchie Realty Mgmt. Co.,

397 F.3d 544, 547 (7th Cir. 2005)).]

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 5 of 11 PageID #: 8768

The fact that the RTB Agreement may be considered a lease under Indiana (or any other)

state law does not control whether ECOA applies.

ECOA provides that it is unlawful “for any

creditor to discriminate against any applicant, with respect to any aspect of a credit transaction[.]”

15 U.S.C. § 1691(a)(1). So long as a contract contains or constitutes “any aspect of a credit

transactions” under ECOA, ECOA may apply. There is nothing in ECOA that carves out

exceptions for contracts deemed to contain lease provisions under state law. In fact, during the

time that the Board of Governors of the Federal Reserve was charged with oversight of ECOA, it

stated that ECOA applies to “credit sales” as defined in TILA, which expressly includes certain

leases. See Official Staff Commentary, Equal Credit Opportunity, Revision of Regulation B, 50

Fed. Reg. 48018-01 (1985 WL 126616) (Nov. 20, 1985) (ECOA applies to “credit sale[s]” as

defined in the TILA regulations); see also 12 C.F.R. § 1026.2(16) (TILA definition of “credit sale”

encompasses certain contracts “in the form of a bailment or lease”).

In Laramore v. Ritchie Realty Management Co., 397 F.3d 544 (7th Cir. 2005), the Seventh

Circuit examined whether ECOA applied to a standard residential lease with no terms of sale in

which monthly rent was exchanged for term-limited use of an apartment. The court held that this

standard lease involved contemporaneous exchange of consideration (rent due by the first for

continued occupancy that month) rather than deferment of debt. Laramore, 397 F.3d at 547.

However, the Seventh Circuit specifically limited its ruling to the type of lease before it and noted

that a lease with different terms could fall within ECOA:

We say the “typical” residential lease because, even though the terms of a residential

lease are often constrained by state and local laws, we do not foreclose the possibility

that the parties to such a lease may craft a lease that might, by its terms, come under

the terms of the ECOA.

As the Court observed, the issue of whether the RTB Agreement was a “credit transaction” under ECOA

was not relevant to or examined in Carter. [Filing No. 332, at 15.]

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 6 of 11 PageID #: 8769

Id. at 547 n.2.

As Laramore suggests, a contract can both be a lease (or have some elements of a lease)

and also involve an “aspect of a credit transaction” under ECOA. 15 U.S.C. § 1691(a). Thus, the

finding in Carter that the RTB Agreement is a lease for purposes of Indiana state law does not

mean the RTB Agreement cannot also include “any aspect of a credit transaction” under ECOA.

15 U.S.C. § 1691(a)(1). Both can be true: the RTB Agreement may include lease provisions and

also involve an aspect of a credit transaction under ECOA.

B. There Is Ample Evidence in the Record That the RTB Agreement Extends “Credit”

and Involves an “Aspect of a Credit Transaction” as Defined by ECOA.

ECOA makes it “unlawful for any creditor to discriminate against any applicant, with

respect to any aspect of a credit transaction” on the basis of race, national origin, or other protected

characteristics. 15 U.S.C. § 1691(a)(1). Congress intended that ECOA be broadly construed to

achieve its purpose of protecting against discrimination in credit transactions. See, e.g., RL BB

Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380, 385 (6th Cir. 2014)

(noting ECOA’s “broad remedial goals”) (quoting Barney v. Holzer Clinic, Ltd., 110 F.3d 1207,

1211 n.6 (6th Cir. 1997)). To that end, it gave the primary agency charged with overseeing ECOA

(first the Federal Reserve Board and now the Consumer Financial Protection Bureau) the authority

to promulgate regulations

“to carry out the [statute’s] purposes” and “prevent circumvention or

evasion” of ECOA’s requirements. 15 U.S.C. § 1691b(a).

ECOA defines “credit” as “the right granted by a creditor to a debtor to defer payment of

debt or to incur debts and defer its payment or to purchase property or services and defer payment

therefor.” 15 U.S.C. § 1691a(d); see also 12 C.F.R. § 1002.2(j) (providing same definition of

The rules implementing ECOA are known as “Regulation B.” See 12 C.F.R. pt. 1002.

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 7 of 11 PageID #: 8770

“credit”). A “credit transaction” includes “every aspect of an applicant’s dealings with a creditor

regarding an application for credit or an existing extension of credit (including, but not limited to,

information requirements; investigation procedures; standards of creditworthiness; terms of credit;

furnishing of credit information; revocation, alteration, or termination of credit; and collection

procedures).” 12 C.F.R. § 1002.2(m); see also Matthews v. New Century Mortgage Corp., 185 F.

Supp. 2d 874, 887 (S.D. Ohio 2002) (noting that for purposes of ECOA, “[a] ‘credit transaction’

has been deemed to include not only the extension of credit itself, but also terms of credit, along

with various other matters”).

On its face, the RTB Agreement is the kind of atypical lease anticipated in Laramore, as

its terms fit within ECOA’s definition of “credit.” See Laramore, 397 F.3d at 547 n.2. Unlike the

“typical” residential lease, the RTB Agreement includes the right (and in fact obligates the buyer)

to purchase the property, with payment for the purchase deferred over a fixed term of usually 30

years. [See, e.g., Filing No. 309-1, at 2.] The RTB Agreement contains all of the essential terms

for this credit purchase, including the purchase price, interest rate, and payment schedule. [Id.] If

the buyer is able keep up with the payments and other requirements, she will own the home after

30 years of payments. Thus, there is sufficient evidence in the record to create a triable issue of

fact on whether the RTB Agreement meets ECOA’s definition of credit, even if the buyer is

ultimately unable to complete the purchase. 15 U.S.C. § 1691a(d) (defining credit as “the right

granted by a creditor to a debtor . . . to purchase property . . . and defer payment therefor.”)

(emphasis added).

That the RTB Agreement calls for a second document (the Conditional Sales Contract) to

be executed after two years of payments does not change the nature of the initial contract as a

stand-alone credit transaction. In fact, Rainbow affirmed that buyers can complete the purchase by

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 8 of 11 PageID #: 8771

paying the amount specified in the RTB Agreement without ever signing a Conditional Sales

Contract.

[Filing No. 308-16, at 54-55 (Rainbow 30(b)(6) Dep. at p. 305, line 4 to p. 307, line 4).]

Even if a fact-finder determines that the right to “purchase property . . . and defer payment

therefor[,]” 12 C.F.R. § 1002.2(j), is not established unless the parties sign the Conditional Sales

Contract, the RTB Agreement likely would still be an “aspect of an applicant’s dealings with a

creditor regarding an application for credit” under ECOA. 12 C.F.R. § 1002.2(m). Per the RTB

Agreement’s terms, making payments under the contract for two years is a prerequisite for a buyer

who wants to sign a Conditional Sales Contract for purchase of a property on the agreed-upon

terms. [See, e.g. Filing No. 309-3, at 2 (“Once the Buyer has made (24) twenty-four or more rental

payments, the parties hereto shall execute a ‘Conditional Sales Contract’ (Land Contract) form

embodying the terms contained herein.”).] Therefore, even if the RTB Agreement is found to not

extend credit itself, it may still be an “aspect of a credit transaction” for purposes of ECOA. 15

U.S.C. § 1691(a)(1).

C. There Is Ample Evidence in the Record That Rainbow Is a “Creditor” Under ECOA.

Whether Rainbow and other Defendants meet ECOA’s definition of “creditor” is a highly

fact-specific inquiry. ECOA’s definition of “creditor” includes entities beyond the party that signs

a credit agreement. A “creditor” under ECOA is a person (defined to include corporations) “who

regularly extends, renews, or continues credit; any person who regularly arranges for the extension,

renewal, or continuation of credit; or any assignee of an original creditor who participates in the

decision to extend, renew, or continue credit.” 15 U.S.C. § 1691a(e)-(f). Regulation B defines

“creditor” as “a person who, in the ordinary course of business, regularly participates in a credit

Although the RTB Agreement states that a second document will be executed after two years, Plaintiffs

cite evidence that over 600 buyers in the Plaintiff class did not in fact execute Conditional Sales Contracts

when the initial two-year period ended, but instead continued making payments towards the purchase of

their homes to Rainbow under the RTB Agreements. [Filing No. 337, at 2.]

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 9 of 11 PageID #: 8772

decision, including setting the terms of the credit.” 12 C.F.R. § 1002.2(ℓ). For purposes of ECOA’s

regulations regarding discrimination and discouragement, 12 C.F.R §§ 1002.4(a) and (b),

“creditor” also includes “a person who, in the ordinary course of business, regularly refers

applicants or prospective applicants to creditors, or selects or offers to select creditors to whom

requests for credit may be made.” Id.

ECOA’s definition of “creditor” is broad enough to encompass many roles in a credit

transaction and is not limited to only the entity financing the transaction. See Treadway v. Gateway

Chevrolet Oldsmobile, Inc., 362 F.3d 971, 980 (7th Cir. 2004) (finding that Gateway was a

“creditor” under ECOA because it could “decide[] not to send an applicant’s credit application to

any lender,” “restructur[e] the terms of the sale in order to meet the concerns of the creditor,” and

set terms of credit, including the “the annual percentage rate (APR) associated with the sale,” from

which it would directly benefit).

There is evidence in the record that Rainbow’s role with respect to the RTB Agreements is

not one of a typical “landlord,” notwithstanding that designation in the contract. Rainbow makes

decisions regarding whether an application for an RTB Agreement will be approved, and also

determines the specific financial terms that will be offered for a property, including purchase price,

monthly payment amount, interest rate, and term of the contract. [See, e.g., Filing No. 308-16, at

10-11 (Rainbow 30(b)(6) Dep. at p. 41, line 15 to p. 44, line 4) and 34 (Rainbow 30(b)(6) Dep. at

p. 194, line 15 to p. 197, line 25).] The fact that Rainbow makes the decisions on application

approval and sets financial terms, including interest rate, indicates that Rainbow is acting like a

“creditor” under ECOA and Regulation B. By doing so, Rainbow “regularly arranges for the

extension . . . of credit,” 15 U.S.C. § 1691a(e), and “participates in a credit decision, including

setting the terms of the credit,” 12 C.F.R. § 1002.2(ℓ).

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 10 of 11 PageID #: 8773

There is also evidence that Rainbow makes decisions regarding whether and when to evict

a buyer or agree to a payment plan. [See, e.g., Filing No. 308-16, at 53 (Rainbow 30(b)(6) Dep. at

p. 298, lines 3-21) and 56 (Rainbow 30(b)(6) Dep. at p. 311, lines 7-23.] In this role, Rainbow

regularly makes decisions about whether or not to “continue[] credit,” impacting the buyer’s ability

to continue with the purchase of the home.

15 U.S.C. § 1691a(e). Thus, there is sufficient evidence

in the record – particularly when drawing all reasonable inferences in favor of the Plaintiffs – to

create a triable issue of fact on whether Rainbow is a “creditor” under ECOA.

III. Conclusion

For the reasons discussed above, the United States supports reconsideration of Plaintiffs’

ECOA claims.

Dated: September 12, 2022

Respectfully Submitted:

KRISTEN CLARKE

Assistant Attorney General

/s/ Anna Purinton

SAMEENA SHINA MAJEED

Chief

LUCY G. CARLSON

Deputy Chief

ANNA PURINTON

Trial Attorney

Housing and Civil Enforcement Section

Civil Rights Division

U.S. Department of Justice

150 M Street, NE

Washington, DC 20530

Phone: (202) 598-7768

Fax: (202) 514-1116

Email: [email protected]

Attorneys for the United States

The Court denied Plaintiffs’ request to pierce the corporate veil to hold the named Defendants liable for

the actions of the non-party Individual Land Trusts that sign the Conditional Sales Contracts. [Filing No.

332, at 30.] The United States does not address this issue, other than to note that it would likely subvert

the purposes of ECOA if a creditor were able to avoid ECOA’s requirements by creating a separate entity

for every transaction.

Case 1:17-cv-01782-JMS-TAB Document 349 Filed 09/12/22 Page 11 of 11 PageID #: 8774

CERTIFICATE OF SERVICE

On September 12, 2022, I caused a true and accurate copy of the foregoing to be filed

using the Court’s CM/ECF system, which will send an electronic notice of filing to all counsel of

record.

/s/ Anna Purinton