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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.
On December 15, the DOJ announced the approval of a consent decree by the U.S. District Court for the Northern District of Alabama, which resolves a Fair Housing Act lawsuit against an Alabama public housing authority, as well as several related parties, accused of engaging in racial steering. According to the DOJ, the defendants allegedly maintained largely segregated housing and steered Black applicants away from several overwhelmingly white housing communities to two predominantly Black housing communities. In the DOJ’s investigation, tenants and residents reportedly highlighted “the deep psychological stigma and harm suffered by hundreds of Black families who have lived in segregated housing for generations.” Under the consent decree, the defendants must pay $275,000 in damages to 23 current or former tenants who were allegedly harmed by the race discrimination, as well as a $10,000 civil money penalty. Among other requirements, the defendants must (i) implement policies and procedures to remedy the alleged segregation and to ensure applicants are not offered housing community units based on their race or color; (ii) undergo fair housing training; and (iii) periodically submit compliance reports to the DOJ.
On September 28, the DOJ announced a settlement with a New Jersey bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in the Newark metropolitan area in violation of the Fair Housing Act and ECOA. The DOJ’s complaint alleges that from at least 2015 to 2021, the bank failed to provide mortgage lending services to Black and Hispanic neighborhoods in the Newark metropolitan area. The DOJ also alleges that all of the bank’s branches were located outside of majority-Black and Hispanic neighborhoods and that these neighborhoods were also largely excluded from the bank’s marketing and outreach efforts.
Under the proposed consent order, the bank will, among other things, (i) invest a minimum of $12 million in a loan subsidy fund for majority-Black and Hispanic census tracts in the Newark metropolitan area, of which at least $150,000 per year will go towards advertising, outreach, consumer education, and credit counseling, and $400,000 will be spent on services to increase access to residential mortgage credit; (ii) establish new branches in neighborhoods of color, including at least one in the city of Newark, that will provide a full range of mortgage products; (iii) assign at least four mortgage loan officers dedicated to serving all neighborhoods in and around Newark; (iv) employ a full-time community development officer to oversee the continued development of lending in neighborhoods of color in the Newark area; and (iii) provide ECOA and fair lending training to employees and officials. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns. According to the announcement, this settlement represents the third-largest redlining settlement in DOJ’s history.
On August 30, the New York attorney general and governor announced a joint action taken against three Long Island real estate brokerage firms for allegedly engaging in illegal and discriminatory housing practices. According to the announcement, the Office of the Attorney General and New York Department of State commenced parallel investigations into the brokerage firms, in which they discovered that agents were allegedly violating the Fair Housing Act and New York state law when they allegedly “steered prospective homebuyers of color away from white neighborhoods and subjected them to different requirements than white homebuyers, and otherwise engaged in biased behavior.” In certain instances, agents were allegedly shown to have given preferential treatment to white homebuyers, disparaged neighborhoods of color, and directed prospective homebuyers of color to homes in neighborhoods predominantly resided by communities of color.
Under the terms of the assurance of discontinuance, the brokerage firms agreed to stop the alleged conduct and will offer comprehensive fair housing training to all agents. Agents will also be required to enroll and take state-approved Fair Housing Act compliance courses. Two of the brokerage firms are also required to provide $25,000 to Suffolk County to promote enforcement and compliance with fair housing laws, while the third brokerage firm will pay $30,000 in penalties and costs to the Office of the Attorney General and $35,000 to Nassau County for fair housing testing.
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.
On July 27, the CFPB and the DOJ jointly filed a lawsuit against a Delaware-based mortgage lender for engaging in unlawful discrimination. The complaint, filed in the U.S. District Court for the Eastern District of Pennsylvania, alleges that the defendant violated the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B and the Consumer Financial Protection Act (CFPA) by, among other things, engaging in unlawful discrimination on the basis of race, color, or national origin against applicants and prospective applicants, including by redlining majority-minority neighborhoods, and by engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit. The DOJ also alleged a violation of the Fair Housing Act, including the “making unavailable or denial of dwellings to persons because of race, color, and national origin,” among other things.
The proposed consent order, if entered by the court, would be Bureau’s first nonbank mortgage redlining resolution. It would require the defendant, among other things, to: (i) deposit $18.4 million into a loan subsidy program; (ii) pay a $4 million penalty to the Bureau; and (iii) pay $2 million to fund advertising to generate applications in redlined areas. The proposed order also notes the defendant neither admits nor denies the allegations in the complaint. According to a statement released by CFPB Director Rohit Chopra, the Bureau “will continue to seek new remedies to ensure all lenders meet and fulfill their responsibilities and obligations and the CFPB continues to be on the lookout for emerging digital redlining to ensure that discrimination cannot be disguised by an algorithm.”
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.
On June 17, the FDIC announced updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for FDIC examination staff when evaluating financial institutions’ compliance with federal consumer protection laws and regulations. The June update modifies Section VII Unfair, Deceptive, or Abusive Acts or Practices to reflect the FDIC’s existing supervisory authority regarding UDAP and UDAAP under Section 5 of the FTC Act, and Sections 1031 and 1036 of the Dodd-Frank Act, respectively. Among other updates, the new Section VII changes language related to the Equal Credit Opportunity Act and Fair Housing Act to add a reference to Dodd-Frank UDAAP provisions. The updated section provides the following:
ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that an applicant’s income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The FHA prohibits creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. FTC UDAPs and Dodd-Frank UDAAPs that target or have a disparate impact on consumers in one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act or the Dodd-Frank Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual orientation. Such conduct may also violate the FTC Act or the Dodd-Frank Act.
With respect to the legal standards for “unfair” and “deceptive” under the FTC Act and Dodd-Frank, Section VII notes that these standards are “substantially similar.”
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.
On June 10, the DOJ announced that the U.S. District Court for the Middle District of Florida entered a consent order against several defendants accused of violating the Fair Housing Act by targeting Hispanic homeowners for predatory mortgage loan modification services. After several Hispanic homeowners filed discrimination complaints with HUD, the agency conducted an investigation, issued charges of discrimination, and referred the matter to the DOJ for litigation. According to the DOJ’s complaint, the defendants targeted Hispanic homeowners with deceptive Spanish-language advertising “that falsely promised to cut their mortgage payments in half” and guaranteed “lower payments in a specific timeframe in exchange for thousands of dollars of upfront fees and continuing monthly fees of as much as $550, which defendants claimed were ‘non-refundable.’” The DOJ further contended that many of the targeted Hispanic homeowners (who had limited English proficiency) were told not to communicate with their lenders and were instructed to stop making monthly mortgage payments; however, the defendants allegedly “did little or nothing to obtain the promised loan modifications,” leading to defaults and foreclosures.
The consent order, reached in partnership with the Civil Rights Division’s Housing Section, enters a nearly $4.6 million judgment (which is mostly suspended) against the defendants to compensate harmed homeowners. Of this amount, $95,000 in total will go to three individuals who intervened as plaintiffs in the DOJ’s lawsuit. Defendants must also pay a $5,000 civil penalty. In addition to monetary relief, the consent order permanently enjoins defendants “from providing any mortgage relief assistance services, including, but not limited to, mortgage loan modification, foreclosure rescue, or foreclosure defense services.” The consent order also imposes training and reporting/recordkeeping requirements for defendants’ other real-estate activities.