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DOJ and North Carolina AG Settle First-Ever Federal Discrimination Suit Involving Auto Lending
On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending."
NY Attorney General Announces Agreement To End Bank's Alleged Mortgage Redlining
On January 19, the New York Attorney General (AG) announced an agreement with a New York-based community bank that the AG alleged had excluded predominantly minority neighborhoods from its mortgage lending business. As part of the agreement, the bank will (i) open two branches in neighborhoods with a minority population of at least 30 percent, with the first located within two miles of a majority-minority neighborhood and the second located within one mile of a majority-minority neighborhood; (ii) create a special financing program to provide $500,000 in discounts or subsidies on loans to residents of majority-minority neighborhoods; and (iii) create a marketing program directed at minority communities. Additionally, the bank agreed to submit to reporting and monitoring by the AG for a three-year period and pay $150,000 in costs to the State of New York.
New York AG Sues Bank for Alleged Redlining
On September 2, the NY AG sued a regional bank claiming the bank engaged in unlawful discriminatory practices by intentionally avoiding offering mortgage loan products to predominately African-American neighborhoods in Buffalo. People of the State of New York v. Evans Bancorp, Inc. et al., No. 14-cv-00726 (W.D.N.Y. Sept. 2, 2014). In the complaint, the NY AG asserts that by creating a map of its lending area in Buffalo that included most of the city and its surroundings, but excluded certain African-American neighborhoods on the city’s east side, the bank engaged in redlining in violation of the Fair Housing Act, New York state human rights law, and city code. The suit also alleges that the bank did not market its loan products to minority customers and located bank branches and ATMs outside of minority neighborhoods. The NY AG further claims that the bank’s rates of lending and receiving applications from African-American borrowers allegedly lags behind comparable banks and that these purported discriminatory effects are due to the bank’s alleged redlining practices. The NY AG seeks injunctive relief, damages, civil penalties, punitive damages, fees and costs. In its release announcing the lawsuit, the NY AG stated that the suit is part of ongoing investigations by the AG into potential mortgage redlining across the state.
California Federal Court Allows City's Fair Housing Case To Proceed
On May 28, the U.S. District Court for the Central District of California held, without addressing the merits, that the City of Los Angeles has standing to pursue Fair Housing Act and restitution claims against a mortgage lender, and that the claims were sufficiently and timely pled. Los Angeles v. Wells Fargo & Co., No. 13-9007, 2014 WL 2206368 (C.D. Cal. May 28, 2014). The court denied the lender’s motion to dismiss. The city alleges the lender engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services. The court found that by identifying specific properties alleged to have caused injury and asserting that regression analysis would support its claims and attenuated theory of causation, the city adequately pled a connection between the injury and the alleged conduct sufficient to support Article III standing. The court further concluded that the city adequately pled statutory standing under the FHA insofar as it alleged that its injuries are separate and distinct from the injuries of borrowers, and were proximately caused by the alleged lending practices. The court also held that the city’s claims were timely under the FHA’s two-year statute of limitations because it alleged broad discriminatory practices that are alleged to continue, no matter how changed over time (e.g., from redlining to reverse redlining). Notably, the court did not consider whether the city slept on its rights and could have filed sooner notwithstanding the alleged continuing nature of the practices. Finally, the court found that the city sufficiently pled facts, for purposes of surviving the motion to dismiss, to support claims of disparate treatment and disparate impact under the FHA.
DOJ Announces Redlining Enforcement Action against Community Bank
On January 15, the Department of Justice (DOJ) announced that it reached a settlement with a Michigan community bank regarding alleged redlining practices. In its complaint, the DOJ charged that between 2006 and 2009, the bank served the credit needs of white neighborhoods in the Saginaw and Flint, Michigan metropolitan areas to a significantly greater extent than it served the credit needs of majority African-American neighborhoods. Under the terms of the consent order, the bank is required to open a loan production office in an African-American neighborhood in Saginaw, invest $75,000 in a special financing program to increase the amount of credit the bank extends to majority African-American neighborhoods in and around Saginaw, invest $75,000 in partnerships with organizations that provide credit, financial, homeownership, and/or foreclosure prevention services to the residents of those neighborhoods, and invest $15,000 in outreach that promotes the bank’s products and services to potential customers in those neighborhoods.
Fair Housing Group Accuses Insurance Company of Redlining
On December 21, the National Fair Housing Alliance (NFHA) announced that it filed with HUD a housing discrimination complaint against a major insurance company regarding the offering of hazard insurance in a certain geographic area. According to the statement filed in support of its complaint, NFHA alleges that the company refuses to underwrite homeowners’ insurance policies for homes that have flat roofs in the Wilmington, Delaware area, a policy that NFHA charges has a racially disparate impact on African-American and minority communities. Although insurance and insurers are not explicitly covered in the Fair Housing Act, NFHA argues that federal courts have given deference to HUD’s interpretation of the statute, holding that the Fair Housing Act applies to all types of discriminatory insurance practices. NFHA’s complaint is based on its own testing of independent insurance agencies and a single university study of the relationship between roof type and race in the Wilmington area. NFHA claims that its testing of six insurance agencies shows that independent insurance agents were willing to underwrite policies on homes with flat roofs, while agents affiliated only with the insurance company targeted by NFHA cited a company policy that disallowed underwriting policies on such homes. Further, NFHA claims that the university study found a statistically significant relationship between minority populations and homes that have flat roofs, and therefore the “no flat roof policy” disproportionately impacts African-American and minority communities. Moreover, NFHA claims that there is no business justification for such a policy and that the insurance company does not apply the same policy in other cities. Under its fair housing complaint procedures HUD will now conduct its own investigation and determine whether further administrative action is required.
ACLU Fair Lending Case Against Mortgage Securitizer Highlights New Fair Lending Litigation Risk; Fair Lending Litigation Against Lenders Continues
On October 15, the ACLU filed a putative class action suit on behalf of a group of private citizens against a financial institution alleged to have financed and purchased subprime mortgage loans to be included in mortgage backed securities. The complaint alleges that the institution implemented policies and procedures that supported the market for subprime loans in the Detroit area so that it could purchase, pool, and securitize those loans. The plaintiffs claim those policies violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure. The suit seeks injunctive relief, including a court appointed monitor to ensure compliance with any court order or decree, as well as unspecified monetary damages. The National Consumer Law Center, which developed the case with the ACLU, reportedly is investigating similar activity by other mortgage securitizers, suggesting additional suits could be filed. The ACLU also released a report on the fair lending aspects of mortgage securitization and called for, among other things, DOJ and HUD to expand their Fair Housing Testing Program, and for Congress to increase penalties for FHA and ECOA violations and provide additional funding for DOJ/HUD fair lending enforcement.
On October 18, three Georgia counties filed suit on behalf of their communities and certain residents against a financial institution the counties allege targets FHA-protected minority borrowers with “predatory high cost, subprime, ALT-A and conforming mortgages without considering the borrowers’ ability to repay such loans.” The complaint claims that the lender’s practices caused and continue to cause minority borrowers to be more at risk of default and foreclosure than similarly situated white borrowers, and, as such, constitute a pattern or practice of discriminatory lending and reverse redlining in violation of the FHA. The counties are seeking injunctive relief and unspecified compensatory and punitive damages.
BuckleySandler’s Fair and Responsible Financial Services Team has extensive experience litigating fair lending cases and assisting financial institutions seeking to manage fair lending risk. For a review of fair lending red flags for banks and strategies for addressing them, see our recent article.