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FHFA updates GSE equitable housing finance plans
On April 5, FHFA announced updates to Fannie Mae and Freddie Mac’s (GSEs) equitable housing finance plans for 2023. (See plans here and here.) The updates include adjustments to plans first announced last year (covered by InfoBytes here), which faced pushback from several Republican senators who argued that the plans raised “significant legal concerns” and that “no law authorizes FHFA to use a GSE’s assets to pursue affirmative action in housing.” (Covered by InfoBytes here.) The senators also argued that the Biden administration was “conscripting the GSEs as instrumentalities of its progressive racial equity agenda to achieve outcomes it cannot achieve legislatively or even legally.”
According to FHA’s announcement, the updated plans provide the GSEs with a three-year roadmap to address barriers to sustainable housing opportunities. Updates include (i) taking actions to remove barriers faced by Latino renters and homeowners in Fannie Mae’s plan; (ii) an improved focus on ensuring existing borrowers are able to receive fair loss mitigation support and outcomes through monitoring and developing strategies to close gaps; (iii) providing financial capabilities coaching to build credit and savings; (iv) supporting locally-owned modular construction facilities in communities of color; and (v) increasing the reach of GSE special purpose credit programs to support homeownership attainment and housing sustainability in underserved communities.
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, HUD say Fair Housing Act extends to algorithm-based tenant screening
On January 9, the DOJ and HUD announced they filed a joint statement of interest in a pending action alleging discrimination under the Fair Housing Act (FHA) against Black and Hispanic rental applicants based on the use of an algorithm-based tenant screening system. The lawsuit, filed in the U.S. District Court for the District of Massachusetts, alleged that Black and Hispanic rental applications who use housing vouchers to pay part of their rent were denied rental housing due to their “SafeRent Score,” which is derived from the defendants’ algorithm-based screening software. The plaintiffs claimed that the algorithm relies on factors that disproportionately disadvantage Black and Hispanic applicants, such as credit history and non-tenancy related debts, and fails to consider that the use of HUD-funded housing vouchers makes such tenants more likely to pay their rents. Through the statement of interest, the agencies seek to clarify two questions of law they claim the defendants erroneously represented in their motions to dismiss: (i) the appropriate standard for pleading disparate impact claims under the FHA; and (ii) the type of companies that fall under the FHA’s application.
The agencies first challenged that the defendants did not apply the proper pleading standard for a claim of disparate impact under the FHA. Explaining that in order to establish an FHA disparate impact claim, “plaintiffs must show ‘the occurrence of certain outwardly neutral practices’ and ‘a significantly adverse or disproportionate impact on persons of a particular type produced by the defendant’s facially neutral acts or practices,’” The agencies disagreed with the defendants’ assertion that the plaintiffs “must also allege specific facts establishing that the policy is ‘artificial, arbitrary, and unnecessary.” This contention, the agencies said, “conflates the burden-shifting framework for proving disparate impact claims with the pleading burden.” The agencies also rejected arguments that the plaintiffs must challenge the entire “formula” of the scoring system and not just one element in order to allege a statistical disparity, in addition to providing “statistical findings specific to the disparate impact of the scoring system.” According to the agencies, the plaintiffs adequately identified an “essential nexus” between the algorithm’s scoring system and the disproportionate effect on certain rental applicants based on race.
The agencies also explained that residential screening companies, including the defendants, fall under the FHA’s purview. While the defendants argued that the FHA does not apply to companies “that are not landlords and do not make housing decisions, but only offer services to assist those that do make housing decisions,” the agencies contended that this misconstrues the clear statutory language of the FHA and presented case law affirming that FHA liability reaches “a broad array of entities providing housing-related services.”
“Housing providers and tenant screening companies that use algorithms and data to screen tenants are not absolved from liability when their practices disproportionately deny people of color access to fair housing opportunities,” Assistant Attorney General Kristen Clarke of the DOJ’s Civil Rights Division stressed. “This filing demonstrates the Justice Department’s commitment to ensuring that the Fair Housing Act is appropriately applied in cases involving algorithms and tenant screening software.”
District Court grants summary judgment to bank in discriminatory lending suit
On December 19, the U.S. District Court for the Northern District of Illinois granted summary judgment in favor of a national bank with respect to discriminatory lending allegations brought by the County of Cook in Illinois (County). As previously covered by InfoBytes, the County alleged that the bank’s lending practices were discriminatory and led to an increase in foreclosures among Black and Latino borrowers, causing the County to incur financial injury, including foreclosure-related and judicial proceeding costs and municipal expenses due to an increase in vacant properties. In 2021, the court denied the bank’s motion to dismiss the alleged Fair Housing Act violations after determining that all the County had to do was show a reasonable argument that the bank’s lending practices resulted in foreclosures, and that the bank failed to dispute that the County properly alleged a financial injury sufficient to support standing.
The court explained in its December 19 order, however, that two of the County’s expert witnesses did not make valid comparisons when measuring the denial rate for minority borrowers compared to white borrowers. According to the court, the expert witnesses failed to properly account for the financial conditions of the borrowers seeking mortgage modifications, leaving the County with “no other evidentiary basis to establish that [the bank] engaged in intentionally discriminatory servicing practices that caused minority borrowers to disproportionately suffer default and foreclosure.” The court found that, accordingly, the County cannot demonstrate “intentional discrimination against minority borrowers that proximately caused the County’s injuries, and its disparate treatment claim accordingly cannot survive summary judgment.” Additionally, the court found that the County failed to cite authority for its arguments that the bank can be liable for loans it purchased “and for which it did not commit any discriminatory acts in servicing” or for loans it originated but sold and never serviced.
District Court grants summary judgment concerning TILA, ECOA, FHA claims
On August 12, the U.S. District Court for the Southern District of Indiana issued an order denying plaintiffs’ motion for partial summary judgment and granting defendants’ cross-motion for summary judgment in an action concerning alleged violations of TILA, ECOA, and FHA disparate impact claims. According to the court’s determination, the defendant corporate entity was not a “creditor” during the leasing portion of the underlying rent-to-buy (RTB) agreements, and the plaintiffs lacked standing on certain claims because the wrong parties were targeted.
The defendant realty group purchases, sells, and manages real estate. The plaintiffs all entered into RTB agreements with the realty group that allowed the renter to make 24 payments and then execute a sales contract for the property. The agreements carried interest rate terms between 9.87 and 18 percent. According to the plaintiffs, the defendants, among other things, did not provide TILA-required disclosures for high-cost mortgages, did not require written certifications that tenants had obtained counseling prior to entering into the transaction, and did not provide property appraisals to tenants.
The plaintiffs sued alleging several claims under TILA for failure to provide required information. However, the court concluded that during the 24-month rental period, the realty group was not a “creditor” but was instead a “landlord.” Moreover, the court determined that “the only entities that could arguably be considered creditors are the Individual Land Trusts as the sellers and parties to the Conditional Sales Contract.” These trusts were not named as defendants, the court observed, adding that the plaintiffs failed to meet the burden of showing that the land trusts were sufficiently related to the named defendants to allow the court to “pierce the corporate veil” and hold the named defendants liable for actions conducted by the non-party individual land trusts.
With respect to the plaintiffs’ ECOA claims, which claimed that the realty group’s policies and practices were intentionally discriminatory and had a disparate impact on the basis of race, color, and/or national origin, the court applied the same rationale as it did to the TILA claims and again ruled that the realty group was not a “creditor.” In terms of plaintiffs’ FHA claims, the court said that “the racial disparity must have been created by the defendant.” In this action, the court determined that the realty group did not create the condition, reasoning that “the fact that lower-priced homes are more likely to exist in minority neighborhoods is not of Defendants’ making and existed before, and without, the RTB Program.”
However, the court’s order does allow certain individual and class claims related to disparate treatment under the FHA to proceed, as well as certain claims regarding Indiana law related to standard contract terms and the condition of homes in the RTB program.
Halperin discusses invoking UDAAP under CFPA
On June 29, the American University Washington College of Law held a symposium centered in part around the CFPB’s new approach for examining institutions for unfair conduct. During the CFPB’s New Approach to Discrimination: Invoking UDAAP symposium, CFPB Assistant Director for the Office of Enforcement Eric Halperin answered questions related to updates recently made to the Bureau’s Unfair, Deceptive, or Abusive Acts or Practices Examination Manual. These updates detail the agency’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service as an unfair act or practice. (Covered by a Buckley Special Alert here.) The Bureau published a separate blog post by its enforcement and supervision heads explaining that they were “cracking down on discrimination in the financial sector,” and that the new procedures would guide examiners to look “beyond discrimination directly connected to fair lending laws” and “to review any policies or practices that exclude individuals from products and services, or offer products or services with different terms, in an unfairly discriminatory manner.”
Assistant Director Halperin’s remarks were followed by a discussion of the Bureau’s revisions to its Examination Manual by a panel that consisted of David Silberman of the Center for Responsible Lending, Kitty Ryan of the American Bankers Association, and John Coleman of Buckley LLP, which was moderated by Jerry Buckley. Topics covered included a June 28 letter that trade associations sent to the CFPB urging recission of revisions to the Examination Manual.
In his interview with American University Law School Professor V. Gerard Comizio, Halperin stated that the CFPB’s Examination Manual updates provide guidance on how examiners will implement the Bureau’s statutory authority to examine whether an act or practice is unfair because it may cause or is likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by countervailing benefits to consumers or competition. He stressed that the update does not create a new legal standard under the three prongs of the unfairness standard. Halperin also discussed how the Bureau’s UDAAP authority interacts with laws enacted specifically to prevent discriminatory conduct such as ECOA and the Fair Housing Act, and touched on steps institutions should consider taking to ensure compliance. Notably, when asked whether the Bureau intends to pursue disparate impact claims under the CFPA, Halperin stated that disparate impact, along with disparate treatment, are wholly distinct concepts from Dodd-Frank’s prohibition on unfair acts and practices. He added that in assessing an unfair act and practice, the key is to examine the substantial injury prong and then assess the reasonable avoidability and the countervailing benefits prongs. He further explained that the unfairness test does not contain an intentional standard and noted that there have been cases brought by both the FTC and the Bureau where there was injurious conduct that was not intentional or specifically known to the party engaging in this practice. According to Halperin, substantial injury alone is not sufficient to prove unfairness and using disparate impact as the mechanism of proof is not what the Bureau uses to prove an unfairness claim.
Halperin reiterated that the CFPB Examination Manual is designed to provide transparency to financial institutions about the types of issues that examiners will be inquiring about in furtherance of determining whether there has been an unfair act or practice under the current framework, and does not extend or create new law. In terms of practical compliance implications, Halperin said most financial institutions should already have robust UDAAP compliance systems in place and should already be looking for potential unfair acts or practices and examining patterns and group characteristics to identify the root cause of any issues, and to avoid substantial injury to consumers. With respect to a white paper recently sent to CFPB Director Rohit Chopra from several industry groups and the U.S Chamber of Commerce urging the Bureau to rescind the UDAAP exam manual (covered by InfoBytes here), Halperin commented that he has not had time to fully digest the white paper in detail but hoped that some of what was discussed during the symposium, particularly on the legal principles that will be used both in the exam manual and in any supervision and enforcement actions, clarifies that the Bureau is looking for conduct that violates the unfairness test.
Special Alert: DOJ settles claims of algorithmic bias
On June 21, the United States Department of Justice announced that it had secured a “groundbreaking” settlement resolving claims brought against a large social media platform for allegedly engaging in discriminatory advertising in violation of the Fair Housing Act. The settlement is one of the first significant federal actions involving claims of algorithmic bias and may indicate the complexity of applying “disparate impact” analysis under the anti-discrimination laws to complex algorithms in this area of increasingly intense regulatory focus.
GSEs issue Equitable Housing Finance Plans
On June 8, Fannie Mae and Freddie Mac (GSEs) released their Equitable Housing Finance Plans for 2022-2024 (available here and here), affirming their commitment to addressing racial and ethnic disparities in homeownership and wealth. The plans were developed following FHFA’s September 2021 request for public input, which invited comments to help the GSEs prepare their first plans and to aid FHFA in overseeing the plans (covered by InfoBytes here). Among other things, the plans (which will be updated annually) include activities to (i) address future consumer education initiatives for renters and homeowners; (ii) help tenants build credit profiles and enable better access to financial services; (iii) expand counseling services to support housing stability; (iv) launch technology to increase access to sustainable credit and fair home appraisals; and (v) deploy Special Purpose Credit Programs to address barriers to sustainable homeownership, focusing particularly on consumers living in formerly redlined and underserved areas with majority Black populations. FHFA’s press release also announced the establishment of a new pilot transparency framework for the GSEs, which will require Fannie and Freddie to publish and maintain a list of pilot programs and “test-and-learn activities” on their public websites to help FHFA determine whether such activities address disparities identified in the plans.
Earlier in the week, FHFA released its inaugural Mission Report describing housing finance activities taken in 2021 by the GSEs and Federal Home Loan Banks related to targeted economic development and affordable, equitable, and sustainable housing. The report highlighted, among other things, that the gap between mortgage acceptance rates for minority and white borrowers “remains persistent,” with Black and Latino borrowers representing 6.3 percent and 14.2 percent of all mortgages purchased by the GSEs, respectively, in the fourth quarter of 2021. The report also discussed fair lending geographical trends as well as data on multifamily and single-family loan acquisitions.
White House plan aims to increase housing supply, ease housing costs
On May 16, President Biden released a plan intended to “help close” the housing supply gap and lower housing costs. The White House’s Housing Supply Action Plan is structured to ease the burden of housing costs over five years by increasing the supply of quality, affordable housing units in the next three years. “When aligned with other policies to reduce housing costs and ensure affordability, such as rental assistance and down payment assistance, closing the gap will mean more affordable rents and more attainable homeownership for Americans in every community,” the Administration said in a statement. “This is the most comprehensive all of government effort to close the housing supply shortfall in history.”
Under the Plan, the Administration would:
- Reward jurisdictions that have reformed zoning and land-use policies with higher scores in certain federal grant processes, including by immediately leveraging transportation funding to encourage state and local governments to boost housing supply (where consistent with current statutory requirements), integrating affordable housing into Department of Transportation programs, and including land use within the U.S. Economic Development Administration’s investment priorities. These actions build on strategies that the Administration has called on Congress to pass such as establishing a grant program to “help states and localities eliminate needless barriers to affordable housing production” and creating a mandatory spending proposal to provide billions of dollars in grants to reward states and localities that have taken action to reduce affordable housing barriers.
- Pilot new financing mechanisms for housing production and preservation where financing gaps currently exist. Immediate action will include supporting production and availability of manufactured housing (including with chattel loans that the majority of manufactured housing purchasers rely on), accessory dwelling units, 2-4 unit properties, and smaller multifamily buildings.
- Expand and improve existing forms of federal financing, including for affordable multifamily development and preservation. Immediate actions include strengthening Fannie Mae and Freddie Mac financing for multifamily development and rehabilitation by “making Construction to Permanent loans (where one loan finances the construction but is also a long-term mortgage) more widely available by exploring the feasibility of Fannie Mae purchase of these loans.” The Administration also plans to promote the use of state, local, and Tribal government American Rescue Plan recovery funds to increase affordable housing supply; finalize the Low Income Housing Tax Credit “Income Averaging” proposed rule, whereby developers commit to creating affordable housing for households that meet specific income thresholds; reauthorize and update guidance for the HOME Investment Partnerships Program, which provides grants to states and localities that communities use to fund a range of housing activities; and improve “the alignment of federal funds to reduce transaction costs and duplications and accelerate development” by having the White House, HUD, Treasury, and USDA “convene state housing agencies to discuss best practices on the alignment of applications, reviews, and funding.”
- Preserve the availability of affordable single-family homes for owner-occupants by ensuring that more government-owned homes and other housing goes to owners who will live in them or mission-driven entities instead of large investors. The Administration will also encourage the use of CDBG for local acquisition and local sales to owner-occupants and mission-driven entities.
- Address supply chain disruptions by working with the private sector to address challenges. The Administration will also promote modular, panelized, and manufactured housing, as well as construction research and development to increase housing productivity and supply.
“Rising housing costs have burdened families of all incomes, with a particular impact on low- and moderate-income families, and people and communities of color,” the Administration stressed, noting that it has urged Congress to pass investments in housing production and preservation. The Administration’s 2023 budget includes investments that would lead to production or rehabilitation of another 500,000 homes.
HUD outlines plan for reducing the racial homeownership gap
On April 14, HUD released its first ever Equity Action Plan (the Plan) to address procurement and resources for the agency’s Office of Fair Housing and Equal Opportunity in coordination with President Biden’s 2021 Executive Order 13985 on “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.” Among other things, the Plan requests funding increases to process, investigate, and resolve fair housing complaints and “to improve capacity to pursue Secretary-initiated investigations and compliance reviews” that do not necessarily stem from public complaints. The Plan also outlines HUD’s approach to reducing the racial homeownership gap, including future rulemakings to implement the Fair Housing Act’s mandate to Affirmatively Further Fair Housing (covered by InfoBytes here) as well as other actions to promote equity. HUD also plans to engage in a range of actions in partnership with federal and non-federal organization to maximize homeownership for creditworthy first-time homebuyers and preserve homeownership for existing homeowners. This includes (i) “improving the efficiency of the [Federal Housing Administration] program by leveraging technologies and removing perceived bias of the program so individuals, lenders, and others can use it more with first time, lower income home buyers”; (ii) increasing outreach to non-traditional lenders; and (iii) considering ways “to increase the availability of small-dollar mortgage loans by addressing the financial and operational barriers limiting origination of these loans.” HUD intends to continue to monitor data on borrowers to determine statistical changes in Black and Hispanic households that access FHA-insured loans and the rest of the mortgage market, and will track FHA lending activity in underserved markets.