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Real estate brokerage firm settles claims of discriminatory practices
On March 15, the New York attorney general announced a settlement with a real estate brokerage firm to resolve claims that it allegedly discriminated against Black, Hispanic, and other homebuyers of color on Long Island. According to the announcement, the Office of the Attorney General commenced investigations into several brokerage firms, in which it found that agents employed by the brokerage firm at issue violated the Fair Housing Act and New York state law when they allegedly “subjected prospective homebuyers of color to different requirements than white homebuyers, directed homebuyers of color to homes in neighborhoods where residents predominantly belonged to communities of color, and otherwise engaged in biased behavior.” In certain instances, agents allegedly disparaged neighborhoods of color and “warned white potential homebuyers about the diverse racial makeup of the neighborhood but did not share the same comments with Black and Hispanic potential homebuyers.”
Under the terms of the assurance of discontinuance, the brokerage firm agreed to stop the alleged conduct, will offer comprehensive fair housing training to all agents, and will provide a discrimination complaint form on its website. The brokerage firm will also pay $20,000 in penalties and $10,000 to Suffolk County to promote enforcement and compliance with fair housing laws. This is the fourth action taken by the AG’s office against real estate brokerage firms in the state. As previously covered by InfoBytes, last August three Long Island real estate brokerage firms entered settlements to resolve claims of discriminatory practices.
HUD restores 2013 discriminatory effects rule
On March 17, HUD announced the submission of a final rule—Reinstatement of HUD’s Discriminatory Effects Standard—which would rescind the agency’s 2020 regulation governing Fair Housing Act (FHA or the Act) disparate impact claims and reinstate the agency’s 2013 discriminatory effects rule. Explaining that “the 2013 rule is more consistent with how the [FHA] has been applied in the courts and in front of the agency for more than 50 years,” HUD emphasized that it also “more effectively implements the Act’s broad remedial purpose of eliminating unnecessary discriminatory practices from the housing market.”
As previously covered by InfoBytes, in 2021, HUD proposed rescinding the 2020 rule, which was intended to align the 2013 rule with the U.S. Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. The 2020 rule included, among other things, a modification of the three-step burden-shifting framework in its 2013 rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. According to HUD’s recent announcement, the modifications contained within the 2020 rule complicated the discriminatory effects framework, created challenges for establishing whether a policy violates the FHA, and made it harder for entities regulated by the Act to assess whether their policies were lawful.
The final rule is effective 30 days after publication in the Federal Register. According to HUD, the 2020 rule never went into effect due to a preliminary injunction issued by the U.S. District Court for the District of Massachusetts, and the 2013 rule has been and currently is in effect. Regulated entities that have been complying with the 2013 rule will not need to change any practices currently in place to comply with the final rule, HUD said.
DOJ, CFPB: Lenders that rely on discriminatory appraisals violate the FHA and ECOA
On March 13, the DOJ and CFPB filed a statement of interest saying that a “lender violates both the [Fair Housing Act (FHA)] and ECOA if it relies on an appraisal that it knows or should know to be discriminatory.” (See also CFPB blog post here.) Pointing out that the case raises important legal questions regarding the issue of appraisal bias, the agencies explained that the DOJ has enforcement authority under both the FHA and ECOA, and the Bureau has authority to interpret and issue rules under ECOA and enforce the statute’s requirements.
The case, which is currently pending in the U.S. District Court for the District of Maryland, concerns whether an appraiser, a real estate appraisal company, and an online mortgage lender (collectively, “defendants”) violated federal and state law by undervaluing plaintiffs’ home on the basis of race and denying a mortgage refinancing application based on the appraisal. Plaintiffs, who are Black, claimed their home was appraised for a lower amount on the basis of race, and maintained that the lender denied their loan even after being told the appraisal was discriminatory. Additionally, plaintiffs claimed that after they replaced family photos with pictures of white people and had a white colleague meet a new appraiser, that appraiser appraised the house for $750,000—a nearly 60 percent increase despite there not being any significant improvements made to the house or meaningful appreciation in the value of comparable homes in the market.
The defendant appraiser filed a counterclaim against the plaintiffs providing technical arguments for why he valued the home at $472,000, including that the property next door was listed for $500,000, but was later reduced to $475,000, only 10 days after he completed the appraisal. He further claimed that the second appraisal failed to include that property as a comparison and relied on home sales that had not happened as of the time of the first appraisal. The lender argued that it should not be held liable because it was relying on a third-party appraiser and that “it can be liable only if it took discriminatory actions that were entirely separate from [the appraiser’s].”
While the statement does not address the issue of vicarious liability, the DOJ and CFPB asserted that lenders can be held liable under the FHA and ECOA for relying on discriminatory appraisals. They explained that it is “well-established that a lender is liable if it relies on an appraisal that it knows or should know to be discriminatory.” The statement also provided that for disparate treatment claims under the FHA and ECOA, “plaintiffs need only plead facts that plausibly allege discriminatory intent.” The agencies also argued that a violation of Section 3617 of the FHA (which includes “a prohibition against retaliating in response to the exercise of fair housing rights”) “does not require a ‘predicate violation’ of the FHA.
CFPB publishes HMDA review
On March 3, the CFPB published findings from a voluntary review of the 2015 HMDA Final Rule issued in October 2015, as well as subsequent related amendments that eased certain reporting requirements and permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit (covered by InfoBytes here). Under Section 1022(d) of Dodd-Frank, the Bureau is required to conduct an assessment of each significant rule or order adopted by the agency under federal consumer financial law. The Bureau noted that it previously determined that the 2015 HMDA Final Rule “is not a significant rule for purposes of section 1022(d)” and said the decision to conduct the review was voluntary.
The Report on the Home Mortgage Disclosure Act Rule Voluntary Review found, among other things, that (i) “[c]onsistent with the 2015 HMDA Final Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018, from 97.0 percent to 93.8 percent”; (ii) for all financial institutions originating closed-end mortgages, “the share of those institutions reporting HMDA data decreased between 2015 and 2020, with the largest decreases observed in 2017 and 2020” after the reporting threshold rose from 25 loan originations to 100 loan originations; (iii) revising data points to include the age of applicant and co-applicant race, ethnicity, gender, and income, increased the amount of compiled data; and (iv) analyzing data assists in detecting fair lending risk and discrimination in mortgage lending. “HMDA’s expanded transactional coverage improved the risk screening used to identify institutions at higher risk of fair lending violation by improving the accuracy of analysis and thus reducing the false positive rate at which lenders were mistakenly identified as high risk,” the report said.
The report also noted that interest rate data “provides an important observation that enables data users, including government agencies, researchers, and consumer groups to analyze mortgage pricing in order to better serve HMDA’s purposes. In particular, interest rate information brings a greater transparency to the market and facilitates enforcement of fair lending laws.” The Bureau further noted that HMDA data is “crucial” to federal regulators when conducting supervisory examinations and enforcement investigations. The Bureau commented that the “requirement to report new HMDA data points greatly increased the accuracy of supervisory data since the additional data points are now used to assess fair lending risks and are subject to supervisory exams for accurate filing to HMDA,” adding that the data is “also used to estimate appropriate remuneration amounts for harmed consumers.”
DOJ announces $9 million redlining settlement with Ohio bank
On February 28, the DOJ announced a settlement with an Ohio-based bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in the Columbus metropolitan area. The DOJ’s complaint claimed that from at least 2015 to 2021, the bank failed to provide mortgage lending services to Black and Hispanic neighborhoods in the Columbus area. The DOJ also alleged that all of the bank’s branches were concentrated in majority-white neighborhoods, and that the bank did not take meaningful measures to compensate for not having a physical presence in majority-Black and Hispanic communities.
Under the proposed consent order, the bank will, among other things, (i) invest a minimum of $7.75 million in a loan subsidy fund for majority-Black and Hispanic neighborhoods in the Columbus area to increase access to credit for home mortgage, improvement, and refinance loans, and home equity loans and lines of credit; (ii) invest $750,000 to go towards outreach, advertising, consumer financial education, and credit counseling initiatives; (iii) invest $500,000 to be spent in developing community partnerships to expand access to residential mortgage credit for Black and Hispanic consumers; (iv) establish one new branch and one new mortgage loan production office in majority-Black and Hispanic neighborhoods in the Columbus area (the bank must “ensure that a minimum of four mortgage lenders, at least one of whom is Spanish-speaking, are assigned to serve these neighborhoods” and employ a full-time community development officer to oversee lending in these neighborhoods); and (v) conduct a community credit needs assessment to identify financial services needs in majority-Black and Hispanic census tracts in the Columbus area. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns.
NYC Banking Commission to combat lending and employment discrimination
On February 10, the New York City Banking Commission, which consists of the city’s mayor, the comptroller, and the Commissioner of the Department of Finance, announced two transparency measures to combat lending and employment discrimination by designated banks. Designated banks are those eligible to hold NYC deposits and are expected to provide approved banking products and services for city entities. The announcement states that beginning with this year’s biennial designation cycle, a public comment process will now be included prior to and during the Banking Commission’s public hearing to designate banks that will be eligible to hold deposits of city funds. Revisions have also been made to the certifications that banks are required to submit ahead of designation in order “to reinforce the obligation for depository banks to provide detailed plans and specific steps to combat different forms of discrimination in their operations.” NYC Mayor Eric Adams added “[t]hese new steps will ensure the Banking Commission is designating only those banks that have shown that they can protect taxpayer money and that are committed to promoting equity in all aspects of their operations.”
FTC provides 2022 ECOA summary to CFPB
On February 9, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- Last June, the FTC released a report to Congress discussing the use of artificial intelligence (AI), and warning policymakers to use caution when relying on AI to combat the spread of harmful online conduct. The report also raised concerns that AI tools can be biased, discriminatory, or inaccurate, could rely on invasive forms of surveillance, and may harm marginalized communities. (Covered by InfoBytes here.)
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA.”
- The FTC initiated an enforcement action last April against an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. In October, the FTC initiated a second action against a different auto dealer group and two of its officers for allegedly engaging in deceptive advertising and pricing practices and discriminatory and unfair financing. (Covered by InfoBytes here and here.)
- The FTC engaged in consumer and business education on fair lending issues, and reiterated that credit discrimination is illegal under federal law for banks, credit unions, mortgage companies, retailers, and companies that extend credit. The FTC also issued consumer alerts discussing enforcement actions involving racial discrimination and disparate impact, as well as agency initiatives centered around racial equity and economic equality.
Barr says AI should not create racial disparities in lending
On February 7, Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, delivered remarks during the “Banking on Financial Inclusion” conference, where he warned financial institutions to make sure that using artificial intelligence (AI) and algorithms does not create racial disparities in lending decisions. Banks “should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” Barr said, pointing to findings that show “significant and troubling disparities in lending outcomes for Black individuals and businesses relative to others.” He commented that “[w]hile research suggests that progress has been made in addressing racial discrimination in mortgage lending, regulators continue to find evidence of redlining and pricing discrimination in mortgage lending at individual institutions.” Studies have also found persistent discrimination in other markets, including auto lending and lending to Black-owned businesses. Barr further commented that despite significant progress over the past 25 years in expanding access to banking services, a recent FDIC survey found that the unbanked rate for Black households was 11.3 percent as compared to 2.1 percent for White households.
Barr suggested several measures for addressing these issues and eradicating discrimination. Banks should actively analyze data to identify where racial disparities occur, conduct on-the-ground testing to identify discriminatory practices, and review AI or other algorithms used in making lending decisions, Barr advised. Banks should also devote resources to stamp out unfair, abusive, or illegal practices, and find opportunities to support and invest in low- and moderate-income (LMI) communities, small businesses, and community infrastructure. Meanwhile, regulators have a clear responsibility to use their supervisory and enforcement tools to make sure banks resolve consumer protection weaknesses, Barr said, adding that regulators should also ensure that rules provide appropriate incentives for banks to invest in LMI communities and lend to such households.
NYDFS implements state CRA revisions
On February 8, NYDFS announced the adoption of updates to the state’s Community Reinvestment Act (CRA) regulation. The final regulation implements amendments to Banking Law § 28-b, and allows the Department to obtain necessary data to evaluate how well regulated banking institutions are serving minority- and women-owned businesses in their communities. These findings will be integrated into institutions’ CRA ratings, NYDFS said. As previously covered by InfoBytes, NYDFS issued proposed revisions last October, announcing that the modifications are intended to minimize compliance burdens by making sure the regulation’s proposed language complements requirements in the CFPB’s proposed rulemaking for collecting data on credit access for small and minority- and women-owned businesses. The final regulation details how regulated institutions must collect and submit the necessary data to NYDFS while abiding by fair lending laws. Regulated institutions must inquire as to whether a business applying for a loan or credit is minority- or women-owned or both, and submit a report to the Department providing application details, such as the date of application, type of credit applied for and the amount, whether the application was approved or denied, and the size and location of the business. The final regulation also includes a form for regulated institutions to use to obtain the required data from business loan applications. NYDFS said it will publish a data submission template in the coming months for regulated institutions to use during CRA evaluations. The final regulation takes effect August 8, and provides for a compliance date six months following the publication of the Notice of Adoption in the State Register. Regulated institutions will also have an additional transition period of three months from the compliance date to comply with certain provisions.
District Court dismisses CFPB redlining action against nonbank lender
On February 3, the U.S. District Court for the Northern District of Illinois dismissed with prejudice claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing and applicant outreach practices. The CFPB sued the defendants in 2020 alleging fair lending violations, including violations of ECOA and the CFPA, predicated, in part, on statements made by the company’s owner and other employees during radio shows and podcasts from 2014 through 2017. (Covered by a Special Alert.) The complaint (which was later amended) marked the first time a federal regulator has taken a public enforcement action against a nondepository institution based on allegations of redlining.
The Bureau claimed that the defendants discouraged African Americans from applying for mortgage loans from the company and redlined African American neighborhoods in the Chicago area by (i) discouraging their residents from applying for mortgage loans from the company; and (ii) discouraging nonresidents from applying for loans from the company for homes in these neighborhoods. The defendants moved to dismiss with prejudice, arguing that the Bureau improperly attempted to expand ECOA’s reach “beyond the express and unambiguous language of the statute.” The defendants explained that while the statute “regulates behavior towards applicants for credit, it does not regulate any behavior relating to prospective applicants who have not yet applied for credit.” The Bureau countered that courts have consistently recognized Regulation B’s discouragement prohibition even when applied to prospective applicants.
In dismissing the action with prejudice, the court applied step one of Chevron framework (which is to determine “whether Congress has directly spoken to the precise question at issue”) when reviewing whether the Bureau’s interpretation of ECOA in Regulation B is permissible. Explaining that ECOA’s plain text “clearly and unambiguously prohibits discrimination against applicants”—defined as a person who applies for credit—the court concluded (citing to case law in support of its decision) that Congress’s directive only prohibits discrimination against applicants and does not apply to prospective applicants. The court stressed that the agency’s authority to enact regulations is not limitless and that the statute’s use of the term “applicant” clearly marks the boundary of ECOA.
The court also rejected the Bureau’s argument that ECOA’s delegation of authority to the Bureau to adopt rules to prevent evasion means the anti-discouragement provision must be sustained provided it reasonably relates to ECOA’s objectives. The Bureau pointed to the U.S. Supreme Court’s decision in Mourning v. Fam. Publ’ns Serv., Inc. (upholding the “Four Installment Rule” under similar delegation language in TILA), but the court held that Mourning does not permit it to avoid Chevron’s two-step framework. Because the anti-discouragement provision does not survive the first step, the court did not reach whether the provision is reasonably related to ECOA’s objectives and dismissed the action with prejudice. The remaining claims, which depend on the ECOA claim, were also dismissed with prejudice.
The firm will be sending out a Special Alert in the next few business days providing additional thinking on this decision.
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