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A novel legal argument is at the heart of a federal lawsuit against the sprawling Colony Ridge housing development in Liberty County that could prove a test case for similar claims around the country, experts say.
The lawsuit filed by the U.S. Justice Department and the Consumer Financial Protection Bureau in December is one of two initiated against Colony Ridge that claim the developers misled property buyers.
The federal government’s case may pose a more serious threat to Colony Ridge than the action brought by Texas Attorney General Ken Paxton in March because of its argument that the developers use language barriers as a tool to deceive customers and aim that deception at a protected class of people.
“In this case, it was very clear that they were targeting and identifying immigrants that come from specific countries and speak specific languages, so it shows an intent to target a particular group,” said Nicole Cabañez, a Skadden Fellow at the National Consumer Law Center who studies market access for those with limited English proficiency.
The federal government is attempting to interpret federal laws for housing and credit access to prove a theory of “reverse redlining” that argues Colony Ridge is harming a protected group by offering credit under unfavorable terms.
The two, separate lawsuits represent the best opportunity for restitution for the former Colony Ridge residents who say they were duped into buying property at sky-high interest rates that have caused thousands to default on their loans, experts say.
On their face, the lawsuits are similar. Both were filed in federal court. Both accuse the developers of lying to consumers about the land they were buying. Both spell out a business model built around flipping foreclosed lots of land at a profit for Colony Ridge, and both seek restitution for victims.
Lying to consumers about a product is illegal, no matter who is being lied to. But there are additional penalties written into the law against targeting people based on their race or national origin, Cabañez said.
Details about Colony Ridge’s business model and marketing scheme included in both lawsuits have convinced Cabañez the federal government’s additional argument is a “slam dunk.”
Colony Ridge marketing material frequently featured flags from Latin American nations, encouraging potential customers to “achieve the American dream here” in Spanish-language advertisements.
“You can’t get clearer on national origin than flags,” Cabañez said.
By accusing the developers of violating the Equal Credit Opportunity Act and the Fair Housing Act, which the state lawsuit does not do, the federal government hopes to prove discrimination against Spanish speakers is baked into Colony Ridge’s business model.
Neither federal law has been used in this fashion before, experts say.
Attorneys for Colony Ridge called the Justice Department’s argument an “extra-statutory legal theory that is unmoored from the statutory text and has not been recognized” by the courts, according to a February motion to dismiss the federal case.
The federal lawsuit is the Department of Justice’s first “reverse redlining” action under its Combating Redlining Initiative.
Redlining is the illegal practice of denying credit to protected groups of people. Reverse redlining is where lenders offer loans to protected groups, but at inflated interest rates and with faulty products as a way to take advantage of those protected groups that historically have been denied credit, Cabañez said.
By advertising in Spanish, targeting marketing toward people from Latin American countries, conducting in-person interactions in Spanish, then locking residents into contracts drafted in English for faulty properties at exorbitant interest rates, altogether the federal government believes it can prove a pattern of discrimination against Latinos, Cabañez said.
Colony Ridge developer John Harris declined comment Monday, citing the ongoing legal case.
The developers’ response to the lawsuit nods at the novelty of the federal government’s arguments, but rejects it.
Rather than denying a protected group credit, a practice the Equal Credit Opportunity Act was authored to prevent, Colony Ridge is extending credit to protected groups who may not otherwise have access, according to the February motion to dismiss the case.
Harris has blamed the lawsuits on recent attention around the development as a flashpoint in the national immigration debate.
“They want a chance to build a home for themselves and their children but are shut out of just about every opportunity to do so — and we give them that chance,” Harris wrote in a statement responding to the state’s lawsuit. “We cater to a segment of society that simply wants to experience the American dream and we help them achieve that dream.”
‘They want to win’
It could be years before either lawsuit reaches a conclusion.
In their motion to dismiss, Colony Ridge’s attorneys argue the government failed to state a claim of wrongdoing. The two parties currently are trading filings while awaiting a ruling from the judge on the motion, according to court records.
The state’s lawsuit was filed recently enough that no additional proceedings or filings have occurred.
The likeliest outcome for either lawsuit is that the case will settle, but the state suit will be easier to come to an agreement on, said Rex Mann, a real estate attorney based in Houston.
By accusing the developers of not only misleading consumers but also discriminating against a protected group, the federal government likely will not accept terms that do not include an admission of guilt to both, Mann said.
“The government has, ostensibly, unlimited resources, and they want to win,” Mann said. “When you’re in a prosecutorial position … you want a head because that’s something you can throw at the feet of the people.”
Business practices at Colony Ridge
The two lawsuits broadly focus on an accusation that Colony Ridge misrepresented a “good” to consumers, Mann said.
The first step in Colony Ridge’s business model is an aggressive marketing campaign targeted primarily at Spanish speakers, according to the lawsuits.
The state suit brought by Texas Attorney General Ken Paxton’s office offers more specifics about how the marketing scheme works.
Former employees told investigators with Paxton’s office that management instructed them to avoid potential customers who could speak English, according to the state lawsuit.
Employees were instructed to use multiple SIM cards to create dozens of fake social media accounts used to deceive consumers into believing they are communicating with an individual homeowner in a “for sale by owner” transaction. Employees also listed fake homes and lots for sale around the area to find more potential customers, the suit claims.
In reality, the accounts are a front to harvest contact information for prospective Latino land buyers, according to the state lawsuit.
Once their contact information is secured, consumers are subject to “relentless” telemarketing, according to both lawsuits.
Advertising primarily in Spanish, Colony Ridge offers cheap land and no credit checks to obtain a loan from the developer to buy the land.
“They’re saying, ‘We know you don’t have access to traditional credit, so we are going to target you for that vulnerability,’” Cabañez said.
Alleged misrepresentation
The key accusation in each lawsuit is that Colony Ridge lied to consumers about the quality of land they bought, in violation of federal law.
Colony Ridge advertisements tell prospective buyers that the lots are “move-in ready,” hooked up to sewer, water and electricity lines, according to the lawsuits.
In reality, customers found they sometimes would have to wait months before they could inhabit the property, some having to pay thousands of dollars to install utilities, including light poles and transformers, the lawsuits state.
Colony Ridge also omitted flooding concerns despite multiple lawsuits against the developers alleging severe flooding at the development, according to the state lawsuit.
Dozens of complaints have been filed with the Texas Commission on Environmental Quality alleging raw sewage discharge and violations of proper construction procedures. In 2022, the agency assessed Colony Ridge a $23,280 penalty that could rise to $29,100 for violations of regulations for stormwater runoff from developments, according to the order.
After selling land, Colony Ridge’s developers further enrich themselves by requiring customers to pay mandatory $120 annual dues to a homeowners association controlled by Colony Ridge, according to the state lawsuit.
Despite advertising almost exclusively in Spanish, contracts provided to consumers are in English, according to the lawsuits. Buyers agree to pay a 12.9 percent interest rate that’s nearly three times the national average for a 20-year fixed rate home loan.
No credit checks are performed when Colony Ridge reviews a loan application, “so, predictably, many consumers default,” according to the state lawsuit.
A traditional lender loses money when a borrower defaults, but foreclosures are part of the Colony Ridge business model, federal and state lawyers say.
By offering seller-financed loans on properties in need of improvements, more foreclosures means a high likelihood Colony Ridge will be able to reacquire residential lots with improvements that make the foreclosure profitable. The land then can be sold again for a higher price, initiating the process all over again, according to both lawsuits.
“What they’re doing is not typical,” Mann said. “This is not standard practice.”
At least 30 percent of all seller-financed Colony Ridge lots sold between 2019 and 2022 went into foreclosure within three years of their purchase. That is 15 times the national average, federal officials wrote in their lawsuit.
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