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National Non-Profit Fair Housing Organization Files Complaint Against Fannie Mae Alleging Racial Discrimination
On May 12, 2015, the National Fair Housing Alliance (NFHA) and 19 local fair housing organizations (collectively, the “Complainants”) filed a fair housing discrimination complaint with the U.S. Department of Housing & Urban Development against Fannie Mae alleging a pattern of maintaining and marketing its foreclosed houses in white areas better than in minority areas. The complaint is the result of a five year investigation where investigators visited and documented the conditions of the foreclosed properties that Fannie Mae owns in 34 metro areas. In each of the investigated metropolitan areas, the Complainants allege that Fannie Mae engaged in the practice of maintaining and marketing its REO properties in a state of disrepair in communities of color while maintaining and marketing REO properties in predominantly White communities in a materially better condition. Fannie Mae REO properties in White communities were far more likely to have a small number of maintenance deficiencies or problems than REO properties in communities of color, while REO properties in communities of color were far more likely to have large numbers of such deficiencies or problems compared to those in White communities. As a result, the Complainants allege that Fannie Mae violated the Fair Housing Act, Title VIII of the Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988, including but not limited to 42 U.S.C. §§ 3604(a)-(d). The housing advocacy groups are calling for Fannie Mae to clean up the neglected properties and spend "millions" of dollars on grants or other compensation for those trying to buy foreclosed houses and people living in communities affected by them.
FHA Revises Single-Family Housing Policy HandBook, Extends Effective Dates
On April 30, the FHA announced revisions to its Single Family Housing Policy HandBook (HandBook) and extended the effective date for various policies contained within from June 15 to September 14, 2015. The policy topics affected include, (i) the annual mortgage insurance premium reductions, (ii) the maximum mortgage limits 2015, (iii) the electronic appraisal delivery portal, and (iv) the refinance of borrowers in negative equity positions program.
U.S. Files Complaint Against Leading Non-Bank Mortgage Lender For Alleged Improper Underwriting Practices on FHA-Insured Loans After Lender Files Suit Against U.S. Alleging Arbitrary and Capricious Investigation Practices
On April 17, Quicken Loans filed a preemptive lawsuit against the DOJ and HUD in the Eastern District of Michigan against HUD, the HUD-IG, and DOJ, asserting that it “appears to be one of the targets (due to its large size) of a political agenda under which the DOJ is “investigating” and pressuring large, high-profile lenders into paying nine- and ten-figure sums and publicly ‘admitting’ wrongdoing, including conceding that the lenders had made ‘false claims’ and violated the False Claims Act.” Specifically, the complaint alleged that HUD, the HUD-IG, and DOJ retroactively changed the process for evaluating FHA loans, from an individual assessment of a loan’s compliance, taking into account a borrower’s individual situation, the unique nature of each property, and the specific underwriting guidelines in effect, to a sampling method which extrapolates any defects found in a small subset of loans across the entire loan population, contrary to HUD’s prior guidance and in violation of the Administrative Procedures Act. The complaint further alleged that the sampling method used by the government was flawed, and asked for declaratory and injunctive relief against the government’s use of sampling. Quicken also asked the court to rule that the FHA loans it made between 2007-2011 in fact were “originated properly in accordance with the applicable FHA guidelines and program requirements, and pose no undue risk to the FHA insurance fund,” asserting that “HUD reviewed a number of these loans and, except in a few rare instances, either concluded the loans met all FHA guidelines or that any issues were immaterial or had been cured.”
Six days later, the government filed its own lawsuit against Quicken in the District of Columbia seeking damages and civil penalties under the False Claim Act. U.S. v. Quicken Loans Inc, No. 15-0613, (D.D.C. April 23, 2015). The government’s complaint alleges that from September 2007 through December 2011, Quicken knowingly approved loans that violated FHA rules while falsely certifying compliance with those rules. The complaint alleged that Quicken encouraged practices that “allow ‘exceptions’ to HUD’s underwriting requirements, requesting inflated appraisals, manipulating key data, pressuring underwriters to approve loans faster, paying prohibited commission to its underwriters for approved loans, and encouraging underwriters to disregard risks that were evident in the loan files.” The complaint also criticized Quicken’s quality control process, alleging that the lender “underreported the magnitude of underwriting deficiencies, failed to adequately assess compliance with FHA requirements, and failed to disclose Quicken’s underwriting failures to HUD.”
HUD Announces National Fair Housing Media Campaign; DOJ Acting Assistant AG Gupta Delivers Remarks
On April 1, HUD held a special Fair Housing event and announced a national media campaign to help ensure that all Americans – regardless of race, color, national origin, religion, gender, family status, and disability – receive equal access to housing, as per the FHA. Through various media channels, the new campaign will (i) increase the public’s awareness of housing discrimination; and (ii) explain how to report violations of the FHA. The new campaign is designed to further the agency’s enforcement efforts when FHA violations occur. At the same event, DOJ Acting Assistant AG Gupta delivered remarks regarding recent actions taken in response to alleged housing discrimination. Specifically, Gupta noted that while racial discrimination remains prevalent, familial status discrimination has recently become a significant concern and that the DOJ and HUD “continue to see the scourge of sexual harassment in housing.” Finally, Gupta emphasized that HUD’s proposed rule on Affirmatively Furthering Fair Housing is “an important way to ensure that the promises of the Fair Housing Act will continue to be fulfilled.”
Trade Association Urges HUD to Delay Effective Date on Single-Family Housing Policy HandBook
On March 26, 2015, the Mortgage Bankers Association (MBA) sent a letter to HUD’s Deputy Assistant Secretary Zadareky seeking clarification, guidance, and answers to outstanding questions raised by HUD’s early drafts of its new comprehensive Federal Housing Administration Single-Family Housing Policy Handbook. The MBA raises five particular concerns and requests a possible delay for the scheduled implementation date of June 15, 2015 for the following reasons in order to give the industry time to adapt including (i) some of the policy changes in the Handbook are expected to mean changes for the TOTAL Scorecard, and lenders will need access to a revised Developers Guide in order to align their systems with HUD’s systems; (ii) lenders are adapting to a large number of new legal and regulatory requirements. The TILA-RESPA Integrated Disclosure rule alone constitutes a major shift for lenders; (iii) it is currently not clear where a lender would go to find out if a borrower’s federal debt has been referred to the US Treasury for collection in order to comply with the Handbook’s requirement that delinquent Federal debt be resolved in accordance with the Debt Collection Improvement Act; (iv) the new required treatment of excluded parties puts an impossible burden on lenders because the lender must now guarantee that an employee of another company with which the lender is working does not have an employee who has been suspended or debarred by HUD; and (iv) the Handbook’s new definition of satisfactory credit is unclear and conflicts with payment history requirements in other sections of the Handbook.
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.
ABA Requests Guidance On SCRA Notice Form Expiration
On December 3, the ABA sent a letter to HUD’s General Deputy Assistant Secretary for the Office of Housing requesting guidance on the use of form HUD-92070 under the Servicemembers Civil Relief Act. HUD Form 92070 relates to the debt protections servicemembers receive under the SCRA. However, the most current version of the form expired on November 30, 2014. The letter seeks guidance regarding (i) compliance requirements now that the form has expired; and (ii) how to provide an accurate notice to servicemembers since the current form will be inaccurate effective January 1, 2015. Finally, the letter requests that HUD advise lenders as to how they should remain in compliance with the Congressional mandate until a new form is published.