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Special Alert: DOJ settles claims of algorithmic bias
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.
DOJ: $4.5 million judgment in case targeting Hispanic homeowners
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.
HUD announces $65,000 payment for FHA violations
On June 2, HUD announced a conciliation agreement with a mortgage lender to resolve allegations that it engaged in discriminatory lending practices based on race and national origin, in violation of the Fair Housing Act (FHA). The agreement arises from a complaint filed with HUD by the National Community Reinvestment Coalition (NCRC), which alleged that testing in the Seattle-Tacoma area revealed that Black and Hispanic testers were treated differently than White testers who sought housing loans. While the respondent denied that it provided less favorable treatment to testers based on race or national origin, it has agreed to pay $65,000 to NCRC and will “contribute an additional $10,000 to a Seattle-area non-profit organization specializing in providing financial literacy and housing education and counseling for persons in majority-minority census tracts in the Seattle-Tacoma-Bellevue metropolitan area.” The respondent will also conduct an event in the Seattle metro area to improve homeownership rates of Black homebuyers and will provide additional fair lending training to employees. The conciliation agreement does not constitute an admission by respondent or evidence of a finding by HUD of a violation of the FHA.
National Fair Housing Alliance settles redlining allegations against real estate company
On April 29, the National Fair Housing Alliance (NFHA) announced a settlement agreement with a real estate company resolving allegations that the company perpetuated redlining practices through its policies and procedures. NFHA, along with nine other fair housing organizations, sued the company following an investigation into its practices. The fair housing organizations alleged that the company’s minimum home price policy violated the Fair Housing Act by discriminating against sellers and buyers of homes in communities of color. Limiting or denying services for homes priced under a certain value can “perpetuate racial segregation and contribute to the racial wealth gap” the organizations claimed in the press release. According to the complaint, the company disproportionately withheld its services to homebuyers and sellers in these communities at a higher rate than in White zip codes in multiple major cities across the U.S, thereby disincentivizing homebuying within these communities, reducing housing demand and values, and perpetuating residential segregation. Under the terms of the settlement, the company will make several national operational changes and enhancements, including (i) expanding housing opportunities for consumers in communities of color in major cities throughout the country; (ii) eliminating its minimum housing price policy for a period of five years; and (iii) appointing a fair housing compliance officer, adopting an equal opportunity in housing policy, and developing a fair housing training program. The company will also pay $4 million to go towards expanding homeownership opportunities in the covered cities and to cover conduct monitoring, compliance efforts, litigation fees and costs.
HUD announces $15,000 payment for FHA violations
On April 19, HUD announced a conciliation agreement with a national bank and one if its loan officers to resolve allegations that respondents violated the Fair Housing Act (FHA) by denying a mortgage loan to a couple until after one of the applicants returned to work from maternity leave. Under the FHA, it is unlawful to discriminate in the terms, conditions, or privileges associated with the sale of a dwelling on the basis of race, color, national origin, religion, sex, disability, or familial status, including denying a mortgage loan because an applicant is on maternity leave. In addition to requiring a $15,000 payment be made to the couple, the bank must “adhere to a policy wherein applicants on temporary leave, including parental leave, can be approved for a mortgage prior to returning to active work status,” and provide fair lending training to employees. The conciliation agreement does not constitute an admission by respondents or evidence of a finding by HUD of a violation of the FHA.
HUD outlines plan for reducing the racial homeownership gap
On April 14, HUD released its first ever Equity Action Plan (the Plan) to address procurement and resources for the agency’s Office of Fair Housing and Equal Opportunity in coordination with President Biden’s 2021 Executive Order 13985 on “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.” Among other things, the Plan requests funding increases to process, investigate, and resolve fair housing complaints and “to improve capacity to pursue Secretary-initiated investigations and compliance reviews” that do not necessarily stem from public complaints. The Plan also outlines HUD’s approach to reducing the racial homeownership gap, including future rulemakings to implement the Fair Housing Act’s mandate to Affirmatively Further Fair Housing (covered by InfoBytes here) as well as other actions to promote equity. HUD also plans to engage in a range of actions in partnership with federal and non-federal organization to maximize homeownership for creditworthy first-time homebuyers and preserve homeownership for existing homeowners. This includes (i) “improving the efficiency of the [Federal Housing Administration] program by leveraging technologies and removing perceived bias of the program so individuals, lenders, and others can use it more with first time, lower income home buyers”; (ii) increasing outreach to non-traditional lenders; and (iii) considering ways “to increase the availability of small-dollar mortgage loans by addressing the financial and operational barriers limiting origination of these loans.” HUD intends to continue to monitor data on borrowers to determine statistical changes in Black and Hispanic households that access FHA-insured loans and the rest of the mortgage market, and will track FHA lending activity in underserved markets.
DOJ: Property owner’s LEP policies violate FHA
On April 1, the DOJ filed a statement of interest in a 2021 lawsuit alleging defendants violated the Fair Housing Act (FHA) by refusing to rent to applicants with limited English proficiency (LEP) unless someone who speaks and reads English resides in the apartment unit. The complaint, filed in the U.S. District Court for the Northern District of New York, also alleged that the defendants refused offers made by the applicants to bring their own interpreters to translate lease documents and assist with communications.
According to the plaintiff fair housing organization, “the defendants’ LEP exclusion policy imposes an unjustified disparate impact on the basis of national origin and race,” with the defendants’ restrictive language policy acting as “a pretext to discriminate against applicants based on” these protected classes. The defendants moved to dismiss the case, “arguing that their LEP exclusion policy cannot, as a matter of law, violate the FHA” and that HUD’s 2016 HUD Office of General Counsel Guidance on Fair Housing Act Protections for Persons with Limited English Proficiency (2016 HUD LEP Guidance), which explains how restrictive language policies may violate the FHA, is wrong and does not deserve deference by the court.
In its statement of interest, the DOJ agreed with the plaintiff that dismissal of the complaint would be inappropriate. In explaining how policies that screen on the basis of an applicant’s language ability may violate the FHA, the DOJ pointed out that some courts have held that language policies can have an unjustified disparate impact on the basis of national origin or race, while others “have recognized that language polices can serve as proxies or pretexts for intentional discrimination based on national origin or race.” As such the DOJ contended that the defendants’ claim that LEP status is not a protected class under the FHA “misses the point.” The DOJ also defended the 2016 HUD LEP Guidance as a reasonable interpretation of the FHA.
District Court dismisses time-barred mortgage discrimination claims
On March 17, the U.S. District Court for the Northern District of Georgia agreed that claims against a group of mortgage lenders for conduct arising prior to November 2013 were barred under the two-year statute of limitations of the Fair Housing Act (FHA). Plaintiffs Cobb County, DeKalb County, and Fulton County, Georgia (collectively, “Counties”) alleged that the defendants “engaged in, and continue to engage in, discriminatory schemes that expose borrowers to unreasonable levels of risk; needlessly inflate interest rates, penalties, and fees; generate unauthorized and inflated charges for default related services; and lead to higher foreclosure rates among minority borrowers.” According to the Counties, these alleged practices have caused them to incur financial injury, including foreclosure-related costs, loss of property tax revenue, increased segregation, and organizational harm to County departments and authorities due to the forced reallocation of funds to address harms caused by the defendants’ actions. The Counties filed a complaint on November 20, 2015, asserting three counts related to disparate impact and disparate treatment theories under the FHA. Defendants moved for partial summary judgment on statute-of-limitations grounds, arguing that the Counties’ allegations are time-barred because they are based on allegedly discriminatory conduct occurring before November 20, 2013. Defendants further contended that the Counties could not “allege a ‘continuing violation’ that tolls the statute of limitations for each allegedly discriminatory act until the continuing violation ends because [a plaintiff’s] knowledge of a claim, or reason to have knowledge of a claim, cuts off equitable tolling of the statute of limitations for claims based on a continuing violation, and the Counties knew or should have known of their FHA claims at least as of May 2011.”
The court agreed with the defendants, pointing out that, among other things, there is “copious circumstantial evidence” that the Counties knew or should have known of their claims prior to May 2011, including well publicized allegations against the same defendants for similar conduct, and their retention of outside counsel in 2010 to investigate potential discrimination claims. According to the court, while a reasonable jury could find that the Counties themselves did not know of their claims, the record left no doubt that the outside counsel “knew of the claims prior to the statutory period, or would have known of the claims if he conducted himself with reasonable prudence.” Because the outside counsel’s “knowledge is imputed to his clients, no reasonable jury could find in the Counties’ favor on the statute-of-limitations issue.”
PAVE task force delivers plan on appraisal bias
On March 23, HUD delivered the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan to President Biden. Created in June 2021 to address racial bias in home lending and appraisals and establish actions to root out inequity, PAVE Task Force members include HUD Secretary Marcia L. Fudge and White House Domestic Policy Advisor Susan Rice, the U.S. Attorney General, the Secretaries of Agriculture, Labor, and Veterans Affairs, the Comptroller of the Currency, the Chairmen of the Federal Reserve Board, FDIC, NCUA, Directors of the CFPB and FHFA, and the Executive Director of the Appraisal Subcommittee of the FFIEC.
According to the announcement, the Action Plan to Advance Property Appraisal and Valuation Equity (the Plan) will represent “the most wide-ranging set of reforms ever put forward to advance equity in the home appraisal process.” According to the Task Force’s executive summary, “[o]n average, homes in majority-Black neighborhoods are valued at less than half of those in neighborhoods with few or no Black residents.” The summary also reports that the impact of undervaluation on homebuyers, sellers, and communities can sometimes result in higher down payments for home buyers, often causing sales to fall through, while low valuations in a refinance transaction can reduce the cash-out available and sometimes affect the refinance interest rate and mortgage insurance premiums paid by the homeowner. The Task Force further notes that since the Fair Housing Act was passed more than 50 years ago, “the racial wealth gap is wider than ever: in 2021, the Black homeownership rate reached only 44 percent, while the white homeownership rate reached 74 percent.”
The Plan will focus primarily on actions to substantially reduce racial bias in home appraisals, as well as steps federal agencies can “take using their existing authorities to enhance oversight and accountability of the appraisal industry and empower homeowners and homebuyers to take action when they receive a valuation that is lower than expected.” Among other things, the Plan states that Task Force members will exercise broad oversight and compliance authority to strengthen “guardrails against unlawful discrimination in all stages of residential valuation.” Agencies will also issue guidance on FHA and ECOA’s application to the appraisal industry and update appraisal-specific policies to “ensure that appraisers or regulated institutions’ use of appraisals are directly included in supervisory [FHA] and ECOA compliance requirements, and are considered in every review of relevant existing and future policies and guidance.” Relevant agencies have also committed to addressing potential bias in the use of technology-based valuation tools through a rulemaking related to automated valuation models (AVMs), including the addition of a nondiscrimination quality control standard in the proposed rule. In consultation with Congress, Task Force members will also pursue legislation to modernize the governance structure of the appraisal industry.
In the coming months, the Task Force will assess: (i) the “expanded use of alternatives to traditional appraisals as a means of reducing the prevalence and impact of appraisal bias”; (ii) the use of “range-of-value estimates instead of point estimates as a means of reducing the impact of racial or ethnic bias in appraisals”; (iii) the “potential use of alternatives and modifications to the sales comparison approach that may yield more accurate and equitable home valuation”; and (iv) “public sharing of a subset of historical appraisal data to foster development of unbiased valuation methods.”
CFPB Director Rohit Chopra stated that the Bureau will take an active leadership role in the Appraisal Subcommittee and will work “to implement a dormant authority in federal law to ensure that algorithmic valuations are fair and accurate.”
Acting Comptroller of the Currency Michael J. Hsu also announced that the OCC plans to enhance its supervisory methods for identifying discrimination in property valuations and will take steps to ensure consumers are aware of their rights regarding appraisals. The agency also intends to “support research that may lead to new ways to address the undervaluation of housing in communities of color caused by decades of discrimination.”
Additionally, acting FDIC Chairman Martin J. Gruenberg noted that the agency is committed to taking several concrete actions, including collaborating with Task Force members to exercise authorities “to support a more equitable state appraisal certification and licensing system.”
DOJ says Fair Housing Act covers appraisal discrimination
On February 14, the DOJ filed a statement of interest in a lawsuit alleging defendants violated the Fair Housing Act (FHA or the Act) by discriminating on the basis of race in connection to a residential home appraisal. The plaintiffs, a Black couple, sought to refinance their home mortgage, and received an appraisal from the defendants valued at $995,000. However, a few weeks later a second appraiser valued their home at $1,482,500. The plaintiffs alleged that their race factored into the defendants’ low valuation, which violated federal and state law, including the FHA. The defendants moved to dismiss for failure to state a claim, arguing that the FHA does not apply to residential appraisers, and that the plaintiffs failed to allege facts that make out a prima facie case at this stage of litigation.
In its statement of interest, the DOJ noted that both the agency and HUD share enforcement authority under the FHA, including addressing appraisal discrimination. The DOJ also highlighted Executive Order 13985, which directed federal agencies “to address ‘[o]ngoing legacies of residential segregation and discrimination’–including ‘a persistent undervaluation of properties owned by families of color,’” (issued in 2021 and covered by InfoBytes here), and stated that President Biden also established an interagency task force to, among other things, “‘root out discrimination in the appraisal and homebuying process.’” To illustrate that the FHA applies to residential appraisals and appraisers, the DOJ pointed to the FHA’s text and to caselaw to demonstrate that the statute applies to residential mortgages. “[B]y its plain terms, the Act directly prohibits discrimination by ‘any person or other entity’ engaged in the “apprais[al] of residential real property,” the DOJ stated, adding that the appraisal exemption under Section 3605(c) clarifies that while appraisers may consider relevant and nondiscriminatory factors, they may not discriminate on the basis of protected classes. The DOJ also disagreed with the defendants’ position that under Section 3603 the FHA is not applicable to the subject property, stating that the section referenced by the defendants was only effective until 1968 and that henceforth, “all dwellings are covered by the FHA unless specifically exempted.” Additionally, the DOJ cited caselaw, which “found that proper defendants for appraisal-related discrimination may include not only appraisers, but their employers and the lenders who relied on their valuations.” With respect to the defendants’ prima facie argument, the DOJ contended, among other things, that the FHA “simply requires that Plaintiffs allege a plausible entitlement to relief as a result of Defendants’ ‘discriminatory housing practices.’”