InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Trump signs legislation repealing CFPB auto guidance, Mulvaney praises action; CFPB to reexamine ECOA requirements
On May 21, President Trump signed resolution S.J. Res. 57, which repeals CFPB Bulletin 2013-02 on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). The president’s signature completes the disapproval process under the Congressional Review Act (CRA), which began after the Government Accountability Office (GAO) issued a letter in December 2017 to Senator Pat Toomey (R-Pa) stating that “the Bulletin is a general statement of policy and a rule” that is subject to override under the CRA. The Senate passed the disapproval measure in April and the House approved it in the beginning of May. (Previously covered by InfoBytes here.)
The repeal responds to concerns that the bulletin improperly attempted to regulate auto dealers, which the Dodd-Frank Act excluded from the Bureau’s authority. In a statement after the president’s signing, CFPB acting Director Mick Mulvaney praised the action and thanked the president and Congress for “reaffirming that the Bureau lacks the power to act outside of federal statutes.” He also stated that the repeal “clarifies that a number of Bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress. The Bureau welcomes such review, and will confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”
Additionally, acting Director Mulvaney announced plans to reexamine the requirements of ECOA, “[g]iven a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor.” Although the decision is not identified, it is likely the June 2015 Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which concluded that disparate impact claims are permitted under the Fair Housing Act but acknowledged some limitations on its application. (Covered by a Buckley Sandler Special Alert.)
DOJ, CFPB agree to early termination of consent order with indirect auto lender
On May 15, the auto lending branch of an international automobile company (indirect auto lender) reported in an 8-K filing that the DOJ and CFPB had reached an agreement that the indirect auto lender has met the requirements for early termination of a consent order entered into in 2016 over allegations of unfair lending practices. As previously covered in InfoBytes, a joint agency investigation under ECOA found that the indirect auto lender’s policies allowed for dealers to mark up a consumer’s interest rate on the retail installment contract above the established risk-based buy rate. The parties currently await final court approval of a joint stipulation and proposed order for early termination of the consent order from three years to two years in the U.S. District Court for the Central District of California.
HUD announces plan to seek public comment on Disparate Impact Regulation
On May 10, the Department of Housing and Urban Development announced its intention to seek public comment on whether the 2013 Disparate Impact Regulation (Regulation), which provides a framework for establishing legal liability for facially neutral practices that have a discriminatory effect under the Fair Housing Act (FHA), is consistent with the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Covered by a Buckley Sandler Special Alert.) The Supreme Court upheld the use of a disparate impact theory to establish liability under the Fair Housing Act, but according to HUD’s announcement, the Court only referenced the Regulation in its ruling but did not directly rule upon it.
As previously covered by InfoBytes, in October 2017, the Treasury Department called on HUD to reconsider the Regulation as it relates to the insurance industry – specifically, to homeowner’s insurance.
DOJ settles with Minnesota community bank to resolve fair lending violations
On May 8, the Department of Justice announced a settlement with a Minnesota community bank to resolve allegations that the lender excluded predominantly minority neighborhoods from its mortgage lending service in violation of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). According to the complaint filed in 2017, between 2010 and 2015, the bank engaged in unlawful redlining in and around Minneapolis-St. Paul, Minnesota by meeting the residential credit needs of individuals in majority-white census tracts, but avoided serving similar needs in majority-minority census tracts. The settlement requires the bank to expand its banking services in predominantly minority neighborhoods, including opening one full service branch within the specified census tract. In addition to compliance monitoring and reporting requirements, the bank is also required to (i) employ a Community Development Officer and an Executive leader; (ii) spend a minimum of $300,000 on advertising, outreach, and education and credit repair initiatives; (iii) invest a minimum of $300,000 in a program for special purpose loan subsidies; and (iv) continue to provide fair lending training to all employees.
NYDFS announces investigation into rent-to-own as predatory lending
On April 16, the New York Department of Financial Services (NYDFS) announced an investigation into whether rent-to-own and land installment home purchase agreements constitute unlicensed, predatory mortgage lending in New York. NYDFS acknowledged the ongoing investigation while releasing a consumer alert to New Yorkers about rent-to-own and land installment contract pitfalls. The alert notifies consumers that the agreements may violate certain New York laws and regulations governing fair lending, mortgage protection, interest rates, habitability, and property condition. NYDFS encourages consumers to consider a traditional leasing option and be aware of the state of disrepair the property may be in before signing the agreement.
District Court grants Illinois county a chance to establish proximate cause in FHA lawsuit
On March 26, the U.S. District Court for the Northern District of Illinois issued a ruling that Cook County (the County) may move forward with a lawsuit against a national bank (the Bank) for allegedly violating the Fair Housing Act (FHA) by engaging in discriminatory lending practices, holding that the County “‘is entitled to a chance to prove its case’” and establish proximate cause. In 2015, the district court dismissed the County’s complaint against the Bank on the grounds that the alleged facts did not fall within the scope of the FHA, and that the County itself was not an “‘aggrieved person’ entitled to sue under the [FHA].” However, the County filed a second amended complaint after the Supreme Court issued a 2017 ruling (previously covered in a Buckley Sandler 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, but that such injuries must be proximately caused by the alleged misconduct rather than simply a foreseeable result.
In granting in part and denying in part the Bank’s motion to dismiss the County’s second amended complaint, the district court ruled that the County may proceed on its FHA claims only “to the extent they allege that [the Bank’s] equity-stripping practice directly resulted in increased expenditures” by the County, “in connection with administering and processing an increased number of foreclosures.” According to the court, foreclosures in majority-minority neighborhoods were more likely to occur than in neighborhoods with fewer minority residents. “Statistical analysis could establish the likelihood that a loan modification denial would lead to foreclosure, and therefore could help a factfinder assess how many unnecessary foreclosures [the] County processed as a result of [the Bank’s] conduct,” the district court stated. Other claims such as “lost property tax revenue, increased demand for County services” including housing-related counseling, and “diminished racial balance and stability” were dismissed because they would require estimating too many variables. Additionally, in response to the Bank’s challenge that the County’s suit was barred by the FHA’s statute of limitations, the district court ruled that the challenge is premature because it is not apparent when the County “‘knew or should have known’” that the Bank’s equity-stripping practice was an actionable violation under the FHA.
CFPB Succession: Mulvaney removes Fair Lending office enforcement power; Warren sends payday congressional inquiry
On February 1, it was reported that Mulvaney has moved The Office of Fair Lending and Equal Opportunity from the Supervision, Enforcement and Fair Lending division (SEFL) of the CFPB to the Office of the Director. According to sources, Mulvaney sent an email which states that the Fair Lending office will now be focused on “advocacy, coordination and education” as opposed to the day-to-day responsibility of enforcement and supervision oversight, which will remain in the SEFL division. A spokesperson for the acting director stated, “by elevating the Office of Fair Lending to the Director’s Office, we have enhanced its ability to focus on its other important responsibilities...by combining these efforts under one roof, we gain efficiency and consistency without sacrificing effectiveness.”
On January 31, Senator Elizabeth Warren and five other Democratic members of congress sent a letter to the CFPB inquiring about the Bureau’s decision to reconsider its final rule addressing payday loans, vehicle title loans, and certain other extensions of credit, as previously covered by InfoBytes. The letter expresses dissatisfaction with the lack of explanation for this decision and for the CFPB’s decision to end a multiyear investigation into a national installment loan lender (previously covered by InfoBytes here). The letter requests specific information related to the payday rule decision, such as, (i) lists of personnel involved in providing legal advice and lists of meetings attended by political appointees related to the payday decision; (ii) an explanation of the analysis that lead to the decision; and (iii) information related to communications with certain members of the payday loan industry. Interestingly, the letter is addressed to Leandra English as “Acting Director” of the CFPB and Mick Mulvaney as “Director” of the Office of Management and Budget.
As for Leandra English’s litigation, on January 31, English filed her corrected Appellant’s Brief with the U.S. Court of Appeals for the D.C. Circuit. The brief does not raise any significantly new arguments. The government’s response is due by February 23. Additionally, on February 1, a judge for the U.S. District Court for the Southern District of New York dismissed a similar complaint brought by a NY credit union (previously covered by InfoBytes here). In granting the government’s motion to dismiss, the judge agreed that the credit union did not allege a “concrete and particularized injury caused by CFPB actions under Mulvaney’s leadership” and therefore, did not have standing to bring the action.
City of Philadelphia’s discriminatory lending lawsuit moves forward
On January 16, a federal judge in the U.S. District Court for the Eastern District of Pennsylvania denied a national bank’s motion to dismiss the City of Philadelphia’s (City) claims that the bank engaged in alleged discriminatory lending practices in violation of the Fair Housing Act (FHA). As previously covered in InfoBytes, the City filed a complaint in May of last year against the bank alleging discrimination under both the disparate treatment and disparate impact theories. The City asserted that the bank’s practice of offering better terms to similarly-situated, non-minority borrowers or refusing to make loans in minority neighborhoods has led to foreclosures and vacant homes, which in turn, has resulted in a suppression of property tax revenue and increased cost of providing services such as police, fire fighting, and other municipal services. In support of its motion to dismiss, the bank argued, among other things, that the City’s claim (i) is time barred; (ii) improperly alleges the disparate impact theory; and (iii) fails to allege proximate cause as required by a recent U.S. Supreme Court ruling (see previous Special Alert here).
While the court expressed “serious concerns about the viability of the economic injury aspect of the City’s claim with regard to proximate cause,” the court found that the bank “has not met its burden to show why the City’s entire FHA claim should be dismissed.” Consequently, the court held that the case may proceed to discovery beyond the two-year statute of limitations period for FHA violations in order to provide the City an opportunity to prove whether the bank’s policy caused a racial disparity that constituted a violation continuing into the limitations period.
English Litigation Continues as Mulvaney Delays CFPB Enforcement Cases and Lawmakers Begin New Payday CRA Action
On December 6, Deputy Director of the CFPB, Leandra English, filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction with a supporting memorandum. In her amended complaint, English adds, among other things, a constitutional claim alleging that President Trump’s appointment of Mulvaney violates Article II, section 2 of the U.S. Constitution, which empowers the President to appoint “Officers of the United States,” subject to “the Advice and Consent of the Senate.” According to English, since Mulvaney was appointed without Senate approval and the Federal Vacancies Reform Act (FVRA) allegedly does not provide the President with a separate authority, President Trump does not have the constitutional authority to appoint Mulvaney in the manner he chose.
The amended complaint also alleges that the appointment of Mulvaney under the FVRA is illegal because that act cannot be used to make an appointment to an “independent multi-member board or commission without Senate approval,” and the CFPB Director is, by law, a member of the FDIC’s board. This argument mirrors the argument made in a new complaint filed on December 5 by a New York-based credit union against President Trump and Acting CFPB Director Mick Mulvaney in the U.S. District Court for the Southern District of New York to contest the legality of Mulvaney’s appointment. The defendants have yet to respond to the credit union’s complaint.
With respect to English’s litigation, the defendants are set to respond to the motion for preliminary injunction, which builds off the arguments in the amended complaint, by December 18, and a hearing on the motion is set for December 22.
Mulvaney has continued his work as Acting Director at the CFPB. On December 4, according to sources, he met with reporters to announce his decision to delay at least two active litigation cases as part of his plan to reevaluate the Bureau’s enforcement and litigation practices. The first case concerns a district court dispute between the Bureau and an immigration bond company over whether the CFPB has the authority to enforce a civil investigative demand for personal information about the company’s customers. The second case involves Mulvaney’s decision to withdraw the Bureau’s demand that a mortgage payment company post bond after being ordered to pay a $7.9 million civil money penalty (see previous InfoBytes coverage here). Mulvaney’s December 4 statements also included a freeze on the Bureau’s collection of consumers’ personally identifiable information. These actions follow directions issued by Mulvaney during his first week at the Bureau as previously covered by InfoBytes here.
Mulvaney has also suggested that he would not seek to repeal the Bureau’s final rule concerning payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans but expressed his support for resolution H.J. Res. 122, which was introduced December 1 by a group of bipartisan lawmakers to override the rule under the Congressional Review Act (CRA). The final rule is set to take effect January 16, 2018, but compliance is not mandatory until August 19, 2019. A press release issued by the House Financial Services Committee in support of the resolution stated, “small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB’s rule would mark the first time the federal government has gotten involved in the regulation of these loans.”
On December 5, the Government Accountability Office (GAO) issued a letter to Senator Pat Toomey (R-Pa.) stating that CFPB Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA) is a “general statement of policy and a rule” that is subject to override under the CRA. According to GAO, the CRA’s definition of a “rule” includes both traditional rules, which typically require notice to the public and an opportunity to comment, and general statements of policy, which do not. GAO concluded that the Bulletin meets this definition “since it applies to all indirect auto lenders; it has future effect; and it is designed to prescribe the Bureau’s policy in enforcing fair lending laws.” GAO’s decision may allow Congress to repeal the four year old Bulletin through a House and Senate majority vote under the CRA, followed by the President’s signature. Sen. Toomey issued a statement saying, “I intend to do everything in my power to repeal this ill-conceived rule using the [CRA].”
Additionally, and as expected, on December 5, former Director Richard Cordray officially announced his candidacy for governor of Ohio.
Freddie Mac Announces Guide Bulletin 2017-26 Covering Changes to Eligibility for Certain Mortgage Products
On November 15, Freddie Mac announced the issuance of Guide Bulletin 2017-26 (Bulletin), which, among other things, expands borrower options for mortgage financing, eases certain underwriting requirements, and adds non-discrimination language. Specifically, the Bulletin announces the availability of 5-year ARMs as a newly eligible product under “Home Possible,” “Freddie Mac Relief Refinance,” and “Financed Permanent Buydown” mortgage programs. Freddie Mac is also removing the requirement that all income reported on Home Possible Mortgage applications must be verified. Additionally, effective March 15, 2018, consistent with the FHFA Minority and Women Inclusion Amendments Final Rule, all covered sellers “must not discriminate on the basis of race, color, religion, sex, age, marital status, disability, veteran status, genetic information (including family medical history), pregnancy, parental status, familial status, national origin, ethnicity, sexual orientation, gender identity or other characteristics protected by law.”