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On November 25, Senators Elizabeth Warren (D-Mass) and Sherrod Brown (D-Ohio) wrote to CFPB Director Kathy Kraninger requesting a breakdown of how the Bureau enforces fair lending laws in light of recent allegations brought against a global financial services company that reportedly offered lower credit limits to women than to similarly creditworthy men. According to the Senators, the allegations raise questions as to whether a pattern of sex discrimination exists in the underwriting of the credit product and “underscore the importance of the CFPB adequately monitoring the lending practices of financial institutions . . . that are new to the consumer lending space.” The Senators also expressed concern that adjustments to the structure of the Bureau under President Trump’s administration have affected its “commitment to enforcing fair lending laws and carrying out its statutory responsibilities.” (Previous InfoBytes coverage here.) The Senators stated: “We’re concerned that this new structure, where many offices have varying degrees of authority, may allow new potentially discriminatory products to get to market without adequate oversight.” Specifically, the Senators asked the Bureau to respond to the following questions by December 9: (i) how does the Bureau “prioritize and evaluate risk when determining which financial institutions to examine for compliance with fair lending laws”; (ii) has the Bureau ever conducted a supervisory examination of the global financial services company’s fair lending compliance management system; (iii) have changes made to the Bureau’s structure affected its fair lending enforcement abilities; and (iv) are the Bureau’s standards used to determine violations of ECOA different under Director Kraninger.
On November 22, the Democratic members of the House Financial Services Committee sent a letter to Secretary of HUD Ben Carson, opposing the agency’s proposed rule amending its interpretation of the Fair Housing Act’s (FHA) disparate impact standard (also known as the “2013 Disparate Impact Regulation”). The letter argues that the proposed rule would “make it harder for everyday Americans who find themselves victims of housing discrimination to get justice.” As previously covered by InfoBytes, in August, HUD issued the proposed rule in order to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Specifically, the proposed rule codifies the burden-shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable policy or practice has a discriminatory effect. Moreover, the proposal provides methods for defendants to rebut a disparate impact claim.
The letter urges Secretary Carson to “immediately rescind” the proposed rule, calling the proposal a “huge departure from a standard and framework that has been expressly supported by HUD…[and] a deviation from decades of legal precedent, including a Supreme Court decision affirming the legitimacy of the disparate impact standard under the [FHA].” Moreover, the letter argues that “[i]n 2018, Black homeownership rates reached the lowest they had since before the [FHA] was passed,” and that HUD’s mission to build inclusive and sustainable communities will be “seriously compromised” with this proposed rule.
On November 19, the New York attorney general’s office announced the launch of a Civil Rights Bureau investigation into allegations that Long Island real estate agents have engaged in discriminatory practices. The announcement follows a newspaper’s recent publication of findings based on a three-year examination of residential brokering firms, where, according to the report, several agents allegedly (i) “steered undercover testers to neighborhoods whose composition matched their own race or ethnicity”; (ii) directed white testers to neighborhoods with the highest white representations, whereas minority testers were sent to more integrated areas; and (iii) subjected minority testers to financial bars that were not imposed on white testers, such as requiring mortgage preapproval in order to view properties. The AGs office encourages Long Island residents to report any instances of housing discrimination.
On November 6, the CFPB held a symposium covering small business lending and Section 1071 of the Dodd-Frank Act, which amends ECOA to require financial institutions to compile, maintain, and submit to the Bureau certain information concerning credit applications by women-owned, minority-owned, and small businesses, and also directs the Bureau to promulgate regulations to implement these requirements. In her opening remarks, Director Kraninger, noted that the symposium was being convened to assist the Bureau with information gathering for upcoming rulemaking and emphasized that the Bureau is focused on a rulemaking that would not impede small business access to credit by imposing unnecessary costs on financial institutions. The symposium consisted of two panels, with the first covering policy issues related to small business lending, while the second discussed specific aspects of the requirements of Section 1071. Highlights of the panels include:
- Panel #1. During the policy discussion, panelists focused on non-traditional lenders, namely fintech firms, that have entered the small business lending market, with most noting that these online alternative lenders have filled a necessary lending gap left by traditional banks and depository institutions. While concerns around bad actors in the online lending space were discussed, most panelists agreed that online financing may provide an opportunity for women and minority-owned businesses to avoid potential biases in underwriting, with one panelist noting that his company does not collect gender or race information in its online application.
- Panel #2. Panelists focused their discussion on specific implementation concerns of Section 1071, including compliance costs, definitions of small business and financial institutions, data elements to be reported, and privacy concerns. Among other things, panelists noted that the definition of “small business” should be limited to businesses under $1 million in revenue, which is a figure included in other regulations such as ECOA and the CRA. Panelists disagreed on whether the Bureau should exercise its exemptive authority under Section 1071 for the definition of “financial institution.” While some panelists believe that the broad definition included in the Act is necessary to hold all the players in the market accountable, others argued that large financial institutions that receive an “outstanding” CRA rating should be excluded from the reporting requirements. As for data elements, most agreed that the Bureau should only require the statutorily mandated elements and not include any others in the rulemaking, while one panelist suggested that APR must be included in order to ensure that approval rates for minority-owned small businesses are the result of actual innovation and effective business models and not just the charging of high rates. Moreover, panelists reminded the Bureau to be cognizant of the small business lending reporting requirements of the CRA and HMDA and cautioned the Bureau to keep Section 1071 data requirements compatible.
On October 18, 22 state attorneys general submitted comments opposing HUD’s proposed rule amending the agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”), arguing the proposal would “render disparate impact liability a dead letter under the Fair Housing Act (FHA).” As previously covered by InfoBytes, in August, HUD issued the proposed rule, to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Specifically, the proposal codifies the burden-shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable, policy or practice has a discriminatory effect. Moreover, the proposal provides methods for defendants to rebut a disparate impact claim.
In the comment letter, the attorneys general argue that the proposal ignores “the Supreme Court’s binding interpretation of the FHA” in Inclusive Communities, stating that the Court “emphasiz[ed] the continued importance of the FHA’s disparate impact theory of liability in advancing the nation’s efforts to advance justice and equality.” Additionally, the attorneys general suggest that the proposal ignores HUD’s statutory mandate and is “arbitrary and capricious in light of its numerous substantive defects.” The attorneys general assert that no changes to the rule are necessary, as there are no revisions “that would add clarity, reduce uncertainty, decrease unwarranted regulatory burdens, or otherwise assist in determining lawful conduct.” The letter concludes with a threat of a “meritorious legal challenge” should HUD approve the changes.
Similarly, on October 16, FTC Commissioner, Rohit Chopra, voiced his concerns with the proposal in a comment letter, stating that it “appears to fundamentally misunderstand how algorithms, big data, and machine learning work in practice,” and that “it would provide safe harbors to the same technologies at issue in HUD’s own action against [a social media company].” Chopra opposes HUD’s proposal for three reasons: (i) algorithms can provide discriminatory results because they are not neutral; (ii) safe harbors should not be created “around technologies that are proprietary, opaque, and rapidly evolving”; and (iii) incentives are distorted by “outsourcing [the] liability for algorithmic discrimination to third parties.” Chopra concludes that the proposal should not be finalized because it “moves enforcement against discrimination backwards.”
On October 15, a coalition of 13 state attorneys general submitted a comment letter in response to the CFPB’s Advance Notice of Proposed Rulemaking issued last May seeking information on the costs and benefits of reporting certain data points under HMDA. (Previously covered by InfoBytes here.) In the comment letter, the AGs argue, among other things, that the proposed rule would reduce transparency and “undermine the ability of local public officials to investigate unfair and discriminatory mortgage lending practices.” The AGs assert that the Bureau’s proposal to limit the data financial institutions are required to report to the CFPB under HMDA will open the door for financial institutions to engage in discriminatory lending, pointing to the 2018 national HMDA loan-level data released on August 30 (InfoBytes coverage here), which, according to the AGs, show “disturbing trends” that demonstrate the additional data fields are helping to achieve HMDA’s objectives. Specifically, the AGs cite to (i) disparities in manufactured home lending; (ii) racial and ethnic data that points to potential disparities in lending; (iii) the importance of collecting all data on denial reasons; (iv) loan pricing data as an indicator of fair lending; and (v) the importance of collecting debt-to-income and combined loan-to-value ratios.
The New York AG’s office also sent a second letter the same day in response to a Notice of Proposed Rulemaking (NPRM) issued last May by the Bureau that would permanently raise coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under the HMDA rules. (Previously covered by InfoBytes here.) The AG’s office argues that increasing the reporting threshold “would exempt thousands of lenders from reporting data” and would “inhibit the ability of communities and state and local law enforcement to ensure fair mortgage lending in New York and elsewhere, and violate the Administrative Procedure Act” since it fails to consider the full cost of the proposed rule on the states. Specifically, the AG’s office contends that the NPRM will (i) exempt a large number of depository institutions leading to significance loss of data on a local level; (ii) leave discriminatory lending in the rural and multifamily lending markets unchecked; and (iii) guarantee predatory lending if the threshold for open-end reporting is permanently set at 200 loans.
On September 30, the DOJ announced it filed a lawsuit in the U.S. District Court for the District of Maryland alleging that a Maryland used car dealership and its owner and manager violated ECOA by offering different terms of credit based on race to consumers seeking to finance cars. According to the complaint, between September 2017 and April 2018, compliance testing done by the DOJ concluded that the defendants’ “actions, policies, and practices discriminate against applicants on the basis of race with respect to credit transactions…by offering more favorable terms to white testers than to African American testers with similar credit characteristics.” Specifically, the complaint alleged that African American testers were, among other things, (i) told they needed higher down payment amounts than white testers for the same car; (ii) quoted higher bi-weekly payments for “buy here, pay here” financing than white testers for the same car; and (iii) not offered to fund down payments in two installments, as compared to white testers. The DOJ also alleges that the conduct was “intentional, willful, and taken in disregard of the rights of others” and seeks injunctive relief and monetary relief.
On August 22, the U.S. District Court for the Eastern District of California granted in part and denied in part a national bank’s motion to dismiss an action by the City of Sacramento (City) alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its complaint, the City alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue and increased costs for municipal services for the city. The bank moved to dismiss the action. In reviewing the motion, the court looked to the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices. The court rejected the majority of the bank’s arguments, denying the motion as to the City’s tax revenue claims and non-economic claims. The court concluded that “there is ‘no reason to think as a general matter that the City’s [tax revenue] claims are out of step with the ‘nature of the statutory cause of action’ and the remedial scheme that Congress created’” in the FHA. Conversely, as for the claims for increased municipal services costs, such as police, fire fighting, and code enforcement, the court found that the claims “rely on conclusory allegations and a foreseeability-only theory without establishing proximate cause” and granted the bank’s motion to dismiss, but allowed the City leave to amend the complaint to establish proximate cause.
On July 30, the U.S. Court of Appeals for the 11th Circuit dismissed the City of Miami Gardens (City) Fair Housing Act (FHA) suit against a national bank for lack of standing. This decision was the result of the appeal of a lower court decision previously covered by InfoBytes in June 2018. In the prior decision, the U.S. District Court for the Southern District of Florida granted the national bank’s motion for summary judgment. This was a loss for the City, which had argued that the bank made loans that were more expensive for minority borrowers as compared to non-minority borrowers, resulting in greater rates of default and foreclosure and leading to reduced property values and tax revenue for the City. The district court granted the national bank summary judgment based on the City’s failure to present sufficient evidence of discriminatory lending.
On appeal, the bank argued that the district court should have dismissed the claims for lack of standing because “‘the undisputed evidence confirmed that none of the 153 loans originated by [the bank] [within the limitation period] foreclosed,’ so the City could not have suffered an injury as a result of any of [the] loans.” The 11th Circuit agreed that the City lacked standing, concluding that the City’s evidence that certain loans may go into foreclosure at some point in the future “does not satisfy the requirement that a threatened injury be ‘imminent, not conjectural or hypothetical.’” Moreover, although the City referenced ten loans that had gone into foreclosure, the appellate court ruled that “the City did not produce any evidence of the effect of these foreclosures on property-tax revenues or municipal spending,” nor that the loans were issued on discriminatory terms. Accordingly, the 11th Circuit vacated the district court’s award of summary judgment, and held that the district court should have dismissed the action on standing grounds.
On August 16, HUD announced a proposed rule amending the agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”) to bring the rule “into closer alignment with the analysis and guidance” provided in the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert) and to codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance.
The proposal codifies the burden shifting framework outlined in Inclusive Communities, adding five elements that a plaintiff must plead to support allegations that a specific, identifiable, policy or practice has a discriminatory effect. The five elements would require a plaintiff to adequately allege (i) the challenged policy or practice is “arbitrary, artificial, and unnecessary” to achieve a valid interest or legitimate objective; (ii) a “robust causal link” between the challenged policy or practice and a disparate impact on members of a protected class; (iii) the challenged policy or practice has an adverse effect on members of a protected class; (iv) the disparity caused by the policy or practice is significant (the disparity must be material); and (v) the complaining party’s alleged injury is directly caused by the challenged policy or practice. HUD emphasizes that plaintiffs alleging a single event, “will likely not meet the standard” of the proposal unless “the plaintiff can establish that the one-time decision is in fact a policy or practice.”
The proposed rule also provides methods for defendants to rebut a disparate impact claim, including (i) showing its discretion is materially limited by a third party, such as through a controlling law or binding court order; and (ii) showing the algorithmic model relied on does not use inputs that are substitutes for protected characteristics and is predictive of risk or other valid objective, was created or maintained by a recognized third party, or that a neutral third party has analyzed the model and determined it is a demonstrably and statistically sound algorithm.
The proposal, which has yet to be released by HUD, is reportedly under review by Congress and is set to be published in the Federal Register afterward. Comments will be due 60 days after publication.
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