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11th Circuit rejects city’s FHA suit against bank
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.
HUD proposes burden-shifting framework for Disparate Impact Regulation
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.
HUD approves settlement resolving redlining allegations
On July 29, HUD announced a conciliation agreement to resolve allegations that a California-based bank engaged in redlining practices from 2014 to at least 2017 against African-American and Latino mortgage applicants in the Los Angeles region. In 2017, a California-based community advocacy organization filed a complaint with HUD asserting that the bank violated the Fair Housing Act by engaging in discriminatory acts, which allegedly resulted in a lower number of mortgages made to African-American and Latino borrowers relative to the area’s demographics and to the industry as a whole. Additionally, the complaint claimed that the bank located and maintained its branches in areas that do not serve minority neighborhoods or borrowers. While the bank denies having engaged in any discriminatory behavior, it agreed to (i) invest $5 million in a loan subsidy fund to increase credit opportunities for residents of majority-minority neighborhoods; (ii) contribute $1.3 million to advertising and community outreach; and (iii) provide $1 million in grants for various financial education, counseling, community revitalization, and homelessness programs. The bank also committed to originating “$100,000,000 in home purchase, home improvement and home refinance loans to borrowers in majority-minority areas, and to open a full-service branch serving the banking and credit needs of residents in a majority-minority and low- and moderate-income neighborhood.”
DOJ announces settlements to resolve predatory loan modification allegations
On July 30, the DOJ announced several settlements with a group of California-based mortgage loan modification service providers to resolve allegations that the defendants violated the Fair Housing Act by targeting Hispanic homeowners for predatory mortgage loan modification services and interfering with the homeowners’ ability to keep their homes. According to the DOJ, the defendants persuaded as many as 400 Hispanic homeowners to pay approximately $5,000 for audits advertised as essential for loan modifications, but in actuality had no impact on the modification process and provided no financial benefit. Additionally, the DOJ claimed that the defendants “encouraged their clients to stop making mortgage payments and instructed them to cease contact with their lenders,” which led to many homeowners losing their homes due to defaulted mortgages. The lawsuit stemmed from complaints filed with HUD by two of the defendants’ former clients, who intervened in the lawsuit, along with their attorney, Housing and Economic Rights Advocates (HERA), and members of one of the former client’s family.
While three of the companies identified as defendants in the complaint ceased operations, the settlement agreements resolve allegations against the individuals responsible for owning and operating the now-defunct companies. Under the terms of the agreements, the individual defendants have agreed to, among other things, (i) refrain from engaging in the discriminatory conduct; and (ii) contribute more than $148,000 towards a restitution fund to reimburse fees paid to the defendants by former clients. Additionally, five of the individual defendants have agreed to pay an additional $405,699 in suspended judgments should it be determined the defendants misrepresented their current financial situations. The DOJ noted that the individual defendants have also agreed to an additional $91,650 in compensation in separate settlements reached with their former clients and HERA.
HUD approves settlement resolving Fair Housing Act violations
On July 23, HUD released a Conciliation Agreement with a real estate group and a mortgage company and its agents (collectively, the “respondents”) who allegedly discriminated against African-American home seekers. The complaint, brought by the Fair Housing Council of Riverside County (FHCRC), claims the respondents violated the Fair Housing Act during a series of FHCRC fair housing tests whereby African-American “testers” were falsely informed that there were no available homes and were subject to tougher pre-qualification requirements than white testers. While the respondents deny having engaged in any discriminatory behavior, they have agreed to pay $10,000 in relief and provide fair housing training to their agents.
CFPB reports on “credit invisibility” symposium
On July 19, the CFPB released a report titled, “Building a Bridge to Credit Invisibility,” which covers the Bureau’s September 2018 fair lending symposium of the same name. The symposium was a day-long event that explored the challenges consumers face in accessing credit. The Bureau uses the term “credit invisible” to describe consumers who do not have a credit record maintained by a national credit reporting agency, or who have a credit record that is deemed to have too little or too old information to be treated as “scorable” by widely used credit scoring models. (Coverage of a previous Bureau report on credit invisibility available here.) The symposium report includes summaries of each of the panel discussions: (i) several short talks on issues such as credit invisibility, lending deserts, and innovation to expand access to credit; (ii) Bridging to Credit Visibility Using Innovative Products; (iii) Credit Products and Services for Microenterprise; and (iv) Alternative Data: Innovative Products and Solutions. The report also highlights key themes from the symposium, noting that many panelists believe work needs to be done to make products for the credit invisible more profitable and sustainable for large financial service providers. Additionally, panelists noted the need for responsible innovation while ensuring that access to credit is facilitated in a way that is “safe, affordable, and non-discriminatory.”
CFPB issues latest fair lending report to Congress
On June 28, the CFPB issued its seventh fair lending report to Congress, which outlines the Bureau’s efforts in 2018 to fulfill its fair lending mandate. According to the report, in 2018, the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities that continued from years past such as mortgage origination, mortgage servicing, and small business lending. The Bureau also noted two new focus areas for fair lending examinations or investigations: (i) student loan origination, specifically, whether there is discrimination in underwriting and pricing; and (ii) debt collection and model use, specifically, whether there is discrimination in governing auto servicing and credit card collections, including the use of models that predict recovery outcomes. Additionally, the report highlighted several other Bureau activities from 2018, including, among other things (i) issuing guidance to facilitate the implementation of the August 2018 HMDA final rule (covered by InfoBytes here); and (ii) recommending supervisory reviews of third-party credit scoring models, noting that the “use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.”
DOJ announces redlining settlement with Indiana bank
On June 13, the DOJ announced a settlement with an Indiana bank resolving allegations the bank engaged in unlawful “redlining” in Indianapolis by intentionally avoiding predominantly African-American neighborhoods in violation of the Fair Housing Act and ECOA. In the complaint, the DOJ alleges that from 2011 to 2017, among other things, the bank (i) excluded Marion County in Indianapolis and its “50 majority-Black census tracts” from its Community Reinvestment Act assessment area; (ii) did not have any branch locations in majority-Black areas of the county; (iii) did not market in the majority-Black areas of the country; and (iv) had a residential mortgage lending policy that allegedly showed preference to the location of borrowers, not the creditworthiness. Under the settlement agreement, which is subject to court approval, the bank will, among other things, expand its business services and lending to the predominantly African-American neighborhoods in Indianapolis and will invest at least $1.12 million in a special loan subsidy fund to be used to increase credit opportunities in the specified neighborhoods. Additionally, the bank will designate a full-time Director of Community Lending and Development to oversee the continued development of the bank’s lending in the specified areas.
Nevada expands prohibition on credit discrimination
On June 1, the Nevada governor signed SB 311, which expands the state’s prohibition on discrimination against a person who seeks to obtain credit to include race, color, creed, religion, disability, national origin or ancestry, sexual orientation, and gender identity or expression, in addition to the existing law’s current protection of sex or marital status. Additionally, the bill permits an applicant who has no credit history and was/is married to request that the creditor deem the applicant’s credit history to be identical to that of the applicant’s spouse during the marriage; and violation of this provision is deemed to be “discrimination based on marital status.” Lastly, the bill requires the Nevada Commissioner of Financial Institutions to study the nature and extent of any discrimination based on the bill’s protected classes and requires the Division to assist with programs designed to prevent or eliminate such discrimination. The bill is effective October 1.
Democratic Senators ask regulators about fintech discriminatory lending
On June 10, Senators Elizabeth Warren (D-Mass.) and Doug Jones (D-Ala.) wrote to the Federal Reserve Board, the OCC, the FDIC, and the CFPB requesting information regarding the role the regulators can play in ensuring that fintech companies serve consumers on a nondiscriminatory basis. The letter asserts that ,while the fintech business model—using algorithms to underwrite loans, typically without face-to-face interaction with consumers—has “the potential to expand access to financial services for underserved populations,” it also has the potential to lead to discriminatory results. Based on recent reports cited in the letter, the Senators ask the regulators to, among other things, (i) identify what their agency is doing to combat lending discrimination by lenders using algorithmic underwriting; (ii) explain how the agencies’ oversight of fair lending laws extend to the fintech industry; and (iii) describe any analyses conducted on the impact of fintech algorithms on minority borrowers. The letter requests the agencies respond to the inquiries by June 24.