New York Federal District Court Holds FHA Disparate Impact Claims Against Mortgage Securitizer Timely, ECOA Claims Time-Barred

Fair Housing ECOA Disparate Impact

On July 25, the U.S. District Court for the Southern District of New York held that a putative class of African-American borrowers can pursue claims against a financial institution alleged to have financed and purchased so-called predatory subprime mortgage loans to be included in mortgage backed securities. Adkins v. Morgan Stanley, No. 12-7667, slip op. (S.D.N.Y. Jul. 25, 2013). The borrowers allege that the institution implemented policies and procedures that supported the subprime lending of a mortgage originator in the Detroit area so that the institution could purchase, pool, and securitize those loans. The borrowers claim those policies violated the FHA and the ECOA because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure.

In resolving the financial institution’s motion to dismiss, the court held that the borrowers sufficiently alleged a disparate impact under the FHA and, although the lawsuit was filed more than five years after the originator stopped originating mortgages, the two-year statute of limitations on their FHA claims is tolled by the discovery rule. The court explained that the disparate impact of a facially neutral policy may not become immediately apparent, and “[g]iving full effect to the FHA’s language and the policy behind the language requires a discovery rule recognizing that [the borrowers’] claim here did not accrue until they knew or had reason to know” that the policies were discriminatory. The court left open the possibility that the institution may prove at a later stage that public knowledge of the facts underlying the suit may be imputed to the borrowers to render their claims "discovered" at an earlier time and therefore time-barred.

The court held that the borrowers’ ECOA claims were not similarly timely because ECOA contains specific exceptions to its statute of limitations, and to apply a general discovery rule to ECOA claims would render those exceptions meaningless. Further, the court held that the ECOA claims are not timely pursuant to a continuing violations theory or equitable tolling.

The court granted the motion to dismiss the ECOA claims and a state law claim, and denied the motion to dismiss the FHA claims.