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Special Alert: USDA-RHS Proposes Its Own QM Rule
On March 5, 2015, the USDA-RHS released a proposed rule to amend the regulations for the Single Family Housing Guaranteed Loan Program (SFHGLP) to provide that a loan guaranteed by USDA-RHS is a QM if it meets certain requirements set forth by the CFPB. In addition, USDA-RHS proposed to add the definition of “Qualified Mortgage” to its regulations. The proposal follows the adoption of separate QM definitions for FHA and VA loans last year.
The proposed rule also seeks to: (i) expand USDA-RHS’ lender indemnification authority for loss claims in certain instances, such as fraud , misrepresentation, and noncompliance with loan origination requirements, (ii) add a new special loan servicing option, (iii) revise the interest rate reduction requirement for refinances, and (iv) add a streamlined-assist refinance option. Comments to the proposed rule must be received on or before May 4, 2015.
Questions regarding the proposed rule may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Sherry-Maria Safchuk, (310) 424-3917
CFPB Takes Action Against Mortgage Companies for Deceptive Advertising
On February 12, the CFPB announced a civil suit against a Maryland-based mortgage company and consent orders with two additional mortgage companies headquartered in Utah and California for allegedly misleading consumers with advertisements implying U.S. government approval of their products in violation of the Mortgage Acts and Practices Advertising Rule (MAP Rule or Regulation N) of the Consumer Financial Protection Act (CFPA). In its complaint against the Maryland-based mortgage company, the CFPB alleges that the company’s reverse mortgage advertisements appeared as if they were U.S. government notices. Further, the CFPB claims that the company misrepresented whether monthly payments or repayments could be required and that there was a scheduled expiration date or deadline for the FHA-insured reverse mortgage program. The CFPB is seeking a civil fine and permanent injunction to prevent future violations with respect to the Maryland company. Similarly, the CFPB alleges that the Utah-based mortgage company disseminated direct-mail mortgage loan advertisements that improperly suggested that the lender was, or was affiliated with the FHA or VA, including that the company was “HUD approved” when it was not. The Utah company was ordered to pay a $225,000 civil penalty. In the separate consent order with the California-based mortgage company, the CFPB alleges that the lender’s mailings contained an FHA-approved lending institution logo and a website address that implied the advertisements were from, or affiliated with, the U.S. government, and were therefore deceptive and in violation of the CFPA. The company was ordered to pay an $85,000 civil penalty. In addition to civil penalties, each consent order requires the mortgage companies to submit a compliance plan to the CFPB and comply with specified record keeping, reporting, and compliance monitoring requirements.
HUD Secretary Defends FHA in House Testimony
On February 11, HUD Secretary Julián Castro delivered remarks at the U.S. House Financial Services Committee (HFSC) hearing, “The Future of Housing in America: Oversight of the Federal Housing Administration.” In his testimony, Castro stressed that FHA did not cause the housing crisis, but actually saved the market stating, “FHA stepped in and stepped up to fill the void created when private capital retreated – work that independent economists say prevented a further collapse in home prices.” Looking forward, Castro noted that FHA’s challenge will be to make homeownership more affordable, and he emphasized the importance of improving underwriting standards and strengthening the agency’s Mutual Mortgage Insurance Fund.
Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
On January 21, the U.S. Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). In their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions of the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether the Court should defer to HUD’s disparate impact rule. The Court is expected to issue its ruling by the end of June. For more information on the oral argument, please refer to our previously issued Special Alert.
Special Alert: Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
This morning, the Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.
As described further below, in their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.
“Disparate treatment” discrimination under the FHA is defined as intentional discrimination in the provision of housing on the basis of a protected class, such as race, religion, or national origin. However, to assert a “disparate impact” claim, a plaintiff need not show any intent to discriminate by the defendant in order to establish a prima facie case. Although eleven federal courts of appeals have recognized disparate impact discrimination, all of these decisions were issued prior to the Supreme Court’s holding in Smith v. City of Jackson. In Smith, the Court held that language addressing “adverse effects” in the Age Discrimination in Employment Act (ADEA) provided textual support for disparate impact claims under the ADEA, as it does under Title VII. One of the issues addressed in Inclusive Communities is whether the FHA contains “effects-based” language permitting disparate impact claims.
Counsel for Texas argued that the Court’s holding in Smith required the Court to hold here that disparate impact claims were barred by the statutory text of the FHA, because the FHA lacks the “effects” language present in the ADEA and Title VII. Justices Scalia, Breyer, Sotomayor, and Kagan, however, focused on the language of Section 804 of the FHA which provides that it is unlawful to “otherwise make unavailable or deny a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” These Justices asked whether the phrase “otherwise make unavailable” is the equivalent of the “adversely affect” language in other civil rights statutes. Counsel for Texas responded that “making unavailable” is an active verb, and therefore requires an affirmative action intended to make a dwelling unavailable. In response, Justice Scalia asked whether “adversely affects” similarly required action on the part of a defendant.
The Justices also focused on Congress’s 1988 amendments to the FHA, which created three exceptions from liability under the FHA for (i) appraisers under Section 805(c), (ii) decisions based upon an individual’s prior conviction for manufacturing or distributing illegal drugs under Section 807(b)(4), or (iii) the application of local, state, or federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling under Section 807(b)(1). Justice Scalia stated that the Court is required to read the statute as a whole, including these exceptions. Justice Scalia noted that “what hangs me up” is how these exceptions can be reconciled with the statutory text if the FHA does not permit disparate impact claims. Counsel for Texas responded that these exceptions also apply to disparate treatment claims, and do not suggest specific Congressional acknowledgement that the FHA permits disparate impact claims.
Next, the Justices asked counsel for Respondent Inclusive Communities whether the FHA’s “because of” language required intent to discriminate. Justices Kagan and Breyer specifically noted that the Court had recognized disparate impact claims under other civil rights statutes containing similar “because of” language. Counsel agreed and argued that there was no basis for treating the FHA’s “because of” language differently.
Justice Alito asked counsel for Respondents whether the 1988 amendments make disparate impact claims cognizable under the FHA if the original act did not. Justice Alito asked whether the 1988 amendments expanded the act. Counsel responded that the amendments did not expand the FHA—rather, that disparate impact was permitted in the original act.
Next, the Solicitor General directed the Court to HUD’s recent disparate impact rule and urged the Court to give deference to HUD’s interpretation under Chevron and noted that HUD issued its rule within days of the Court’s grant of certiorari in Magner v. Gallagher, a prior case raising the same issue. Justice Alito asked whether the Court should be “troubled” by the use of Chevron to “manipulate” the Court’s decisions. The Solicitor General responded that HUD had taken the position that the FHA permits disparate impact claims since 1992.
The Solicitor General further noted that defendants in disparate impact cases have protections under the burden-shifting framework, because claimants must point to a “specific practice” that gives rise to the alleged disparity to establish a prima facie case. Justice Breyer responded by asking whether it is necessary to eliminate disparate impact altogether given the protections provided by the burden-shifting framework.
NOTE: Quotations in this client alert are based on the notes of those who attended oral arguments, and not from any official transcript.
FHA Reduces Annual Insurance Premiums
On January 8, HUD announced that the Federal Housing Administration (FHA) will reduce the annual insurance premiums new borrowers pay by 50 basis points. This policy initiative is intended to boost FHA lending, and FHA projects that, as a result of the policy change, 250,000 new homebuyers will purchase their first home over the next three years.
Nevada District Court Bars Foreclosure Sale of First Lien HUD-Insured Mortgage
Recently, a federal district court held that a homeowners association (HOA) foreclosure sale is not valid against HUD-insured loans. The District Court noted that the Ninth Circuit has held that federal rather than state law applies in cases involving FHA-insured mortgages to assure the protection of the federal program against loss, state law notwithstanding. The court reasoned, therefore, that in situations where a mortgage is insured by a federal agency under the FHA insurance program, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property. Because an HOA foreclosure on property insured under the FHA insurance program would have the effect of limiting the effectiveness of the remedies available to the United States, the District Court held that the Supremacy Clause of the U.S. Constitution bars such foreclosure sales and renders them invalid. Washington & Sandhill Homeowners Association v. Bank of America and HUD, U.S. Dist. Ct., District of Nevada, No. 2:13-cv-01845-GMN-GWF (Sept. 25, 2014).
Federal Court Vacates HUD Disparate Impact Rule
On November 3, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (Emphasis in original.)
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulated a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3). In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (Emphasis in original.) The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
The court also explains that its decision to vacate the Disparate Impact Rule is required by the Supreme Court’s decision in Smith v. City of Jackson, in which the Supreme Court “made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.” In so reasoning, the court further noted that “none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court’s decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding.” (Emphasis added.) The court also noted that the Supreme Court has three times granted certiorari to address whether disparate impact claims are cognizable under the FHA, most recently in Texas Department of Housing, however, two cases were settled before the Court could rule and the third is currently pending.
This case comes in the wake of the holding of the United States District Court for the Northern District of Illinois that “HUD’s response to the insurance industry’s concerns [regarding the Disparate Impact Rule] was arbitrary and capricious” and remand to HUD “for further explanation.” Property Cas. Insurers Ass’n of Am. v. Donovan, No. 13 C 8564, at 46-47 (N.D. Ill. Sept. 3, 2014).
Even prior to HUD’s rule, the federal enforcement agencies took the position that both the FHA and the Equal Credit Opportunity Act (ECOA) permit disparate impact claims. Today’s decision does not expressly address ECOA. For a discussion of the cognizability of disparate impact claims under the FHA and ECOA, see here, here, and here.
HUD Continues To Fight Housing Discrimination
On October 15, HUD announced the award of more than $38 million to fair housing and non-profit organizations in 43 states and the District of Columbia to address discrimination in the housing industry. Through HUD’s Fair Housing Initiatives Program, grants are funded with the intent that they will “help enforce the Fair Housing Act through investigations and testing of alleged discriminatory practices.” Additionally, the grants are meant to help provide education on rights and responsibilities under the Fair Housing Act to housing providers, local governments, and potential victims of housing discrimination. HUD’s most recent categories of grants included: (i) Private Enforcement Initiative Grants; (ii) Education and Outreach Initiative Grants; and (iii) Fair Housing Organizations Initiative.
FHA Updates its Single Family Housing Policy Handbook
On September 30, the FHA published updates to several sections of its Single Family Housing Policy Handbook. The updates only apply to loans originated on or after June 15, 2015 and are a result of FHA’s attempt to create a consolidated Handbook that is intended to be a single authoritative source of relevant FHA policy. The updates relate to a variety of policies including origination/processing of loan applications, underwriting, and mortgage closing requirements. They also relate to several specific programs and products including refinances, ARM loans, new construction, weatherization, and solar and wind technologies. Future updates are anticipated regarding (i) doing business with FHA; (ii) servicing and loss mitigation; (iii) claims and disposition; and (iv) quality control, oversight, and compliance issues.