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On September 18, the U.S. District Court for the Northern District of Georgia denied a national bank’s motion to dismiss claims that the bank and its subsidiaries’ (collectively, “defendants”) mortgage originating and servicing practices and policies had a disparate impact on, and resulted in disparate treatment of, minority borrowers, in violation of the Fair Housing Act (FHA). The plaintiffs, three Georgia counties, filed a second amended complaint raising two disparate impact claims and one disparate treatment claim under the FHA, claiming the defendants’ lending and servicing practices—which included allegedly targeting minority borrowers for higher cost loan products, approving unqualified minority borrowers for loans they could not afford, and providing less favorable terms for loan modifications—were “designed to reduce the overall equity minority borrowers located within their counties had in their homes.” The practices, among other things, allegedly caused African-American and Latino borrowers to receive disproportionately higher cost mortgage loans than similarly situated white, non-Latino borrowers, creating an increase in defaults and foreclosures, and causing the plaintiffs to incur alleged damages, including out-of-pocket foreclosure-related costs and increased municipal expenses, and loss of property tax revenues due to decreased home values.
The defendants moved to dismiss, asserting, among other things, that the plaintiffs failed to properly allege their disparate impact claims under Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a previous Buckley Special Alert). The defendants also argued that the plaintiffs’ municipal “economic injuries were not proximately cause by the [d]efendants’ discriminatory policies under [City of Miami Garden v. Wells Fargo & Co.]” (covered by InfoBytes here), and that the plaintiffs failed to allege specific allegations within the FHA’s two-year statute of limitations.
The court granted the motion in part and denied it in part. With respect to the disparate impact claims, the court applied Inclusive Communities and held that the plaintiffs identified several specific policies that caused the alleged disparate impact. The court also rejected the statute of limitations arguments and held that the plaintiffs “‘can prove a set of facts’ showing a timely violation of the FHA.” The court dismissed certain of the counties’ injury claims—the plaintiffs’ attempts to recover franchise tax and municipal expenses (police, fire, and sanitation services related to vacant or foreclosed-upon properties)—ruling that plaintiffs failed to establish proximate cause and “explain how their municipal services injuries ‘are anything more than merely foreseeable consequences’ of [the d]efendants’ discriminatory acts.”
The Department of Housing and Urban Development earlier this month issued a final disparate impact regulation under the Fair Housing Act (Final Rule). HUD’s new Final Rule is intended to align its disparate impact regulation, adopted in 2013 (2013 Rule), with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Inclusive Communities). While the new Final Rule is a notable development, the relatively recent Supreme Court decision makes it unclear to what extent courts and federal agencies will look to the rule for guidance.
On September 4, HUD released the final rule amending agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”). The final rule, among other things, seeks to (i) codify the burden-shifting framework from the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert); (ii) create a uniform standard for determining when a policy or practice has a discriminatory effect in violation of the Fair Housing Act; and (iii) codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Based on public feedback, the final rule largely adopts the August 2019 proposed rule (covered by InfoBytes here) with a number of clarifying and substantive changes.
A Special Alert from Buckley on the details of the final rule will soon be available.
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 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 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.
On July 18, the U.S. District Court for the District of Maryland denied defendants’ motion to dismiss claims that they violated the Fair Housing Act’s anti-discrimination provisions by allegedly failing to properly maintain bank-owned properties in African American and Latino neighborhoods. According to the plaintiffs—a group of private fair housing organizations along with three individual homeowners—the bank and its maintenance contractor regularly maintained similar bank-owned properties in white neighborhoods, while properties in minority neighborhoods were allowed to fall into disrepair. The plaintiffs cited claims for discrimination under both disparate treatment and disparate impact theories, and asserted that the conduct allegedly depreciated the property values of current residents, discouraged buyers from purchasing homes in a particular neighborhood, and limited available housing. The defendants argued, however, that the fair housing organizations do not have standing to sue because they failed to trace their alleged injury to the conduct at issue or to sufficiently demonstrate they were harmed by the alleged conduct. Moreover, the defendants asserted that the Maryland court does not have jurisdiction over the dispute and that the claims were untimely.
The court found that the plaintiffs did sufficiently plead an injury-in-fact, stating, “[h]ere the scope and specificity of the plaintiffs’ investigation and the alleged precision with which its proffered regression analysis can attribute the plaintiffs’ injuries to the defendants’ actions, provide plausible proximate cause.” The court also reasoned that it had jurisdictional authority because, even though none of the fair housing organizations are Maryland entities, some of the alleged conduct has occurred in Maryland and state residents have alleged harm. As to the question of timeliness, the court noted that the statute of limitations concerns are “obviated by the continuing violation doctrine.”
On March 12, Director of the CFPB, Kathy Kraninger, testified at a hearing held by the Senate Banking, Housing, and Urban Affairs Committee on the CFPB’s Semi-Annual Report to Congress. While Kraninger’s opening statement and question responses were similar to her comments made last week during a House Financial Services Committee hearing (detailed coverage here), notable highlights include:
- Fair Lending. Kraninger did not provide a status update on the Bureau’s pre-rulemaking activities as they relate to whether disparate impact is cognizable under ECOA, but emphasized that the Bureau is committed to the fair lending mission.
- Data Collection. In response to concerns over the Bureau’s history of expansive data collection, Kraninger noted that data collection is an especially important tool for rulemaking, but stated that going-forward she would ensure the Bureau only collects the information needed to carry out the Bureau’s mission, noting that the less personally identifiable information that is collected, the less that requires protection. She acknowledged the Bureau is reviewing the comments submitted in response to its fall 2018 data governance program report (covered by InfoBytes here) and stated the Bureau remains committed to reviewing the internal processes it has for collecting and using data.
- Military Lending Act (MLA). Kraninger stated that she disagrees with the Democratic Senator’s broad interpretation of Section 1024(b)(1)(C) of the Dodd-Frank Act allowing for the Bureau to examine for compliance with the MLA because that interpretation would permit the Bureau to examine for anything that is a “risk to consumers,” including things like safety and soundness, which is not currently under the Bureau’s purview. While she acknowledged that the Bureau has the direct authority to enforce the MLA, she repeatedly rejected the notion that this would also give the Bureau the authority to supervise for the MLA, as Dodd-Frank separates the Bureau’s enforcement and supervision powers.
- Payday Rule. Kraninger repeatedly emphasized that the reconsideration of the underwriting standards in the Payday Rule was to determine if the legal and factual basis used to justify certain practices as unfair and abusive was “robust” enough. She acknowledged that the Bureau will be reviewing all the comments to the proposal and that the evidence used for the original Rule will be part of the record for the reconsideration.
- GSE Patch. In response to questions regarding the 2021 expiration of the Qualified Mortgage (QM) Rule’s 43 percent debt-to-income ratio exception for mortgages backed by Fannie Mae and Freddie Mac (GSEs), Kraninger acknowledged the “non-QM” market hasn’t materialized over the last few years, as was originally anticipated. However, Kraninger was reluctant to provide any further details, noting that she would not be making any “dramatic changes” to the mortgage market. Additionally, she acknowledged that the GSE patch has the potential to expire at the end of the conservatorship as well.
- CFPB Structure. Kraninger did not specify whether she believes the Bureau should be led by a board, rather than a single director, or whether the Bureau should be under appropriations. Specifically Kraninger stated that she would “welcome any changes Congress made that would increase the accountability and transparency of the Bureau,” and would “dutifully carry out” legislation that would place the Bureau under appropriations if the President signed it.
- Student Lending. Kraninger stated that the Bureau intends to re-engage with the Department of Education on a Memorandum of Understanding (MOU) to assist with complaint and information sharing once a new Student Loan Ombudsmen has been hired. The MOUs were previously terminated by the Department in August 2018 (covered by Infobytes here).
- Daniel P. Stipano to discuss "High standards: Best practices for banking marijuana-related businesses" at the ACAMS AML & Anti-Financial Crime Conference
- Daniel P. Stipano to discuss "Wait wait ... do tell me! Where the panelists answer to you" at the ACAMS AML & Anti-Financial Crime Conference
- Matthew P. Previn and Walter E. Zalenski to discuss "Is valid when made ... valid?" at the Women in Housing & Finance Partner Series webinar
- Warren W. Traiger and Caroline K. Eisner to discuss "CRA modernization and the OCC final rule" at CBA Live
- Daniel R. Alonso to discuss "Transnational corruption: A chat with former U.S. federal prosecutors in New York" at Marval Live Talks
- Sherry-Maria Safchuk and Lauren Frank to discuss "New CFPB interpretation on UDAAP" at a California Mortgage Bankers Association Mortgage Quality and Compliance Committee webinar
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute