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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 July 23, the DOJ and U.S. Attorney’s Office for the Eastern District of New York filed a complaint and proposed settlement agreement with a national bank to settle charges that the bank engaged in a pattern or practice of discrimination against people with disabilities in violation of the Fair Housing Act. According to the complaint, policies put in place by the bank beginning in January 2010 allegedly denied mortgage and home equity loans to adults with disabilities living under guardianships or conservatorships. The complaint further claims that the bank, in certain circumstances, denied mortgage loans to applicants who “made explicit requests” for the bank to “reconsider its denial” and accept court orders specifically permitting the guardian or conservator to act on behalf of the disabled individual. These policies were changed in 2016 for mortgage loans and in 2017 for home equity loans, the DOJ noted. The bank, however, denied the allegations, asserting that it did not, and does not, unlawfully discriminate on any prohibited basis, and that during the time period in question, it made “mortgage loans to persons with handicaps and disabilities without restrictions, including some adult applicants who had legal guardians or conservatorships.” Under the terms of the proposed settlement, the bank has agreed to pay $4,000 to each affected loan applicant, with a total expected payout of approximately $300,000. The bank is also required to (i) maintain the revised loan underwriting policies; (ii) train employees on the new policies; and (iii) monitor loan processing and underwriting activities to ensure Fair Housing Act compliance.
On July 20, a group of eighteen senators wrote to the acting Comptroller of the OCC, Brian Brooks, regarding reports that senior officials at the agency “have undermined OCC examiners’ efforts to investigate and pursue violations of civil rights laws,” including the Fair Housing Act (FHA) and ECOA. The letter cites to reports of at least three instances where examiners allegedly found discriminatory lending patterns present, yet OCC leadership failed to pursue action against the institutions.
The senators argue that failing to pursue fair lending violations “not only harms borrowers and their communities, but also undermines meaningful bank evaluations under the Community Reinvestment Act (CRA).” The senators list a series of questions regarding the OCC’s supervision of the FHA and ECOA since 2017, including information covering the number of fair lending citations that the OCC has issued, as well the number of fair lending referrals the OCC has made to the DOJ. The letter sets a response deadline of July 31.
On June 11, HUD announced that it worked with an online search platform to better align the platform’s advertising policies with the requirements of the Fair Housing Act (Act)—specifically, the Act’s prohibition on discriminatory advertising in connection with the sale, rental, or financing of housing, with HUD noting that the prohibition “includes restricting who sees housing-related ads on these bases.” HUD states that the online search platform adopted a policy that prohibits “advertisers from engaging in certain discriminatory practices when placing housing-related ads using [the platform]’s advertising services” and has indicated that it will continue to work with HUD to uphold the principles of the Act in the online and targeted advertising space. The announcement notes that HUD will continue to review online advertising platforms to ensure compliance with the Act.
On April 27, a majority panel for the U.S. Court of Appeals for the Eleventh Circuit denied the City of Miami Gardens’s petition for rehearing en banc after determining that the City “faced an uphill battle” to establish standing to bring a Fair Housing Act lawsuit against a national bank because it mainly relied on “an attenuated theory of injury.” As previously covered by InfoBytes, last July the 11th Circuit dismissed the City’s lawsuit against the bank for lack of standing after concluding, among other things, 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,’” and that the City failed to provide evidence that certain foreclosed loans had an effect on property-tax revenues or municipal spending or were issued on discriminatory terms. In explaining their decision to not rehear its 2019 ruling en banc, the majority stated that its decision—that the City failed to satisfy its burden of establishing standing—respects “the concerns and fairness and notice demanded by” both U.S. Supreme Court and 11th Circuit precedent. Two dissenting judges countered, however, that the rehearing should have been granted because, among other things, the 11th Circuit’s dismissal for lack of standing was done sua sponte “even though the City received neither proper notice that it failed to prove standing nor a legitimate opportunity to discover or produce the requisite evidence.”
On January 30, the city of Miami dismissed fair housing lawsuits against four of the largest banks in the U.S. (see orders here, here, here and here). The suits—filed in 2013—claimed that redlining by the banks led to a high rate of mortgage loan defaults, foreclosures, and property vacancies, causing property values to go down, which resulted in reduced tax revenues to the city. As previously covered by InfoBytes, in May, the U.S. Court of Appeals for the Eleventh Circuit determined that Miami made plausible claims that the lending practices of two of the banks violated the Fair Housing Act (FHA) and eventually reduced property tax revenues. Philadelphia recently reached a settlement with a large bank after making similar allegations regarding discriminatory mortgage lending practices. (Covered by InfoBytes here.)
On January 16, Democratic members of the House Financial Services Committee sent a letter to the Government Accountability Office (GAO) inquiring about the benefits and drawbacks of using alternative data in mortgage lending, as well as the federal government’s role in overseeing the use of alternative data credit reporting agencies (CRAs) and lenders. The letter notes that while alternative data can be useful in helping lenders identify creditworthy potential borrowers who cannot be scored by CRAs through traditional measures, questions remain about how the use of alternative data may affect compliance with fair lending laws, including the Equal Credit Opportunity Act and Fair Housing Act. “While some alternative data, such as rental payment history, may provide an objective measure of creditworthiness, others might enable discrimination on the basis of a protected class, or infringe upon consumer privacy,” the letter cautions. The letter asks GAO to study the use of alternative data in expanding access to credit, with a particular focus on mortgage credit, and poses the following questions:
- How have different entities used alternative data to expand access to mortgage credit? Specifically, can alternative data determine consumer creditworthiness and whether a consumer is able to repay a mortgage? Additionally, are there certain alternative data sources that are better at predicting creditworthiness or some that are more likely to raise concerns about correlations with discriminatory factors? Furthermore, what federal activity has there been in this space?
- What are the potential benefits and risks associated with using alternative data and financial technology for access to mortgage credit, and are there variations in these benefits and risks across different groups, including minorities and younger borrowers?
- What potential risks does alternative data pose to fair lending compliance, and are the regulatory and enforcement agencies that govern the credit-granting system equipped to manage and prepare for an increased use of alternative data in mortgage lending?
- How do the benefits and trade-offs of other options for expanding access to mortgage credit compare to the use of alternative data in credit scoring?
On January 7, HUD published its proposed replacement for the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule. According to HUD, the proposed AFFH rule will provide state and local government participants with more straightforward advice “to help them improve affordable housing choices in their community.”
In August of 2018, HUD suspended requirements under the 2015 rule for HUD grant recipient communities to submit assessments of fair housing. Additionally, as previously covered in InfoBytes, HUD solicited comments on amendments to the 2015 AFFH regulations, which, according to the agency, “proved ineffective, highly prescriptive, and effectively discouraged the production of affordable housing.” The proposed rule suggests a change to the definition of AFFH to “advancing fair housing choice within the program participant’s control or influence,” and seeks to move the focus away from anti-segregation planning and toward creation of affordable housing options.
According to the proposed rule, fair housing choice includes (i) “[p]rotected choice, meaning absence of discrimination”; (ii) “[a]ctual choice, meaning not only that affordable housing options exist,” but that state and local governments are encouraged to educate the public on their rights; and (iii) “[q]uality choice, meaning that the available and affordable housing is decent, safe, and sanitary, and, for persons with disabilities, accessible as required under civil rights laws.”
- H Joshua Kotin to discuss "Being fair, responsible, & profitable" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- Kathryn L. Ryan to discuss "NMLS mortgage call report – Where’s NMLS 2.0?" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Jeffrey P. Naimon to discuss "2021 - A new beginning/what's to come" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- 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 "Cyber security, incident response, crisis management" at the Legal & Diversity Summit
- 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
- Daniel P. Stipano to discuss "BSA/AML - Covid impact and regulatory/guidance roundup" at an NAFCU webinar