InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Senate Confirms New HUD Deputy Secretary
On December 2, the U.S. Senate confirmed Nani Coloretti to be appointed as the new Deputy Secretary of HUD. Nominated in March, Coloretti currently serves as the Assistant Secretary for Management at the Department of Treasury where she advises on the development and execution of Treasury’s budget, strategic plans, and the internal management of the Department and its bureaus. Following the passage of the Dodd-Frank Act, she also helped stand-up the CFPB by serving as its Acting COO.
Nevada District Court Bars Foreclosure Sale of First Lien HUD-Insured Mortgage
Recently, a federal district court held that a homeowners association (HOA) foreclosure sale is not valid against HUD-insured loans. The District Court noted that the Ninth Circuit has held that federal rather than state law applies in cases involving FHA-insured mortgages to assure the protection of the federal program against loss, state law notwithstanding. The court reasoned, therefore, that in situations where a mortgage is insured by a federal agency under the FHA insurance program, state laws cannot operate to undermine the federal agency’s ability to obtain title after foreclosure and resell the property. Because an HOA foreclosure on property insured under the FHA insurance program would have the effect of limiting the effectiveness of the remedies available to the United States, the District Court held that the Supremacy Clause of the U.S. Constitution bars such foreclosure sales and renders them invalid. Washington & Sandhill Homeowners Association v. Bank of America and HUD, U.S. Dist. Ct., District of Nevada, No. 2:13-cv-01845-GMN-GWF (Sept. 25, 2014).
Federal Court Vacates HUD Disparate Impact Rule
On November 3, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (Emphasis in original.)
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulated a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3). In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (Emphasis in original.) The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
The court also explains that its decision to vacate the Disparate Impact Rule is required by the Supreme Court’s decision in Smith v. City of Jackson, in which the Supreme Court “made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.” In so reasoning, the court further noted that “none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court’s decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding.” (Emphasis added.) The court also noted that the Supreme Court has three times granted certiorari to address whether disparate impact claims are cognizable under the FHA, most recently in Texas Department of Housing, however, two cases were settled before the Court could rule and the third is currently pending.
This case comes in the wake of the holding of the United States District Court for the Northern District of Illinois that “HUD’s response to the insurance industry’s concerns [regarding the Disparate Impact Rule] was arbitrary and capricious” and remand to HUD “for further explanation.” Property Cas. Insurers Ass’n of Am. v. Donovan, No. 13 C 8564, at 46-47 (N.D. Ill. Sept. 3, 2014).
Even prior to HUD’s rule, the federal enforcement agencies took the position that both the FHA and the Equal Credit Opportunity Act (ECOA) permit disparate impact claims. Today’s decision does not expressly address ECOA. For a discussion of the cognizability of disparate impact claims under the FHA and ECOA, see here, here, and here.
Special Alert: Federal Court Vacates HUD's Disparate Impact Rule
Today, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (emphasis in original).
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulates a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3).
In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (emphasis in original). The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
The court also explains that its decision to vacate the Disparate Impact Rule is required by the Supreme Court’s decision in Smith v. City of Jackson, in which the Supreme Court “made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.” In so reasoning, the court further noted that “none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court’s decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding.” (emphasis added). The court also noted that the Supreme Court has three times granted certiorari to address whether disparate impact claims are cognizable under the FHA, most recently in Texas Department of Housing.
This case comes in the wake of the holding of the United States District Court for the Northern District of Illinois that “HUD’s response to the insurance industry’s concerns [regarding the Disparate Impact Rule] was arbitrary and capricious” and remand to HUD “for further explanation.” Property Cas. Insurers Ass’n of Am. v. Donovan, No. 13 C 8564, at 46-47 (N.D. Ill. Sept. 3, 2014).
Even prior to HUD’s rule, the federal enforcement agencies took the position that both the FHA and the Equal Credit Opportunity Act (ECOA) permit disparate impact claims. Today’s decision does not expressly address ECOA. For a discussion of the cognizability of disparate impact claims under the FHA and ECOA, see here, here, and here.
Regulators Jointly Approve Final Risk Retention Rule
On October 22, coordinated by the Department of Treasury, six federal agencies – the Board of Governors, HUD, FDIC, FHFA, OCC, and SEC – approved a final rule requiring sponsors of securitized transactions, such as asset-backed securities (ABS), to retain at least 5 percent of the credit risk of the assets collateralizing the ABS issuance. The final rule, which largely mirrors the proposed rule issued in August 2013, defines a “qualified residential mortgage” (QRM) and exempts securitized QRMs from the new risk retention requirement. Government-controlled Fannie and Freddie are exempt from the rule. Most notably, the final rule’s definition of a QRM parallels with that of a qualified mortgage as defined by the CFPB. Further, initially part of the proposed rule, the final rule does not include down payment provisions for borrowers. The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securities, and two years after publication for all other types of securitized assets.
HUD Continues To Fight Housing Discrimination
On October 15, HUD announced the award of more than $38 million to fair housing and non-profit organizations in 43 states and the District of Columbia to address discrimination in the housing industry. Through HUD’s Fair Housing Initiatives Program, grants are funded with the intent that they will “help enforce the Fair Housing Act through investigations and testing of alleged discriminatory practices.” Additionally, the grants are meant to help provide education on rights and responsibilities under the Fair Housing Act to housing providers, local governments, and potential victims of housing discrimination. HUD’s most recent categories of grants included: (i) Private Enforcement Initiative Grants; (ii) Education and Outreach Initiative Grants; and (iii) Fair Housing Organizations Initiative.
CFPB Updates Reverse Mortgage Guide
On September 24, the CFPB published an updated reverse mortgage guide on its blog to account for HUD’s recent changes to reverse mortgage programs. The blog post highlights new limits to lump sum, first-year payouts under reverse mortgages, as well as HUD’s new protections for non-borrowing spouses. For example, non-borrowing eligible spouses no longer need to choose between paying off the reverse mortgage or moving out when their borrowing spouse dies; instead, depending on the circumstances, they may be able to stay in the home. Consistent with its first reverse mortgage guide, issued in July 2012, the Bureau’s new guide strongly encourages consumers to consider all options before obtaining a reverse mortgage and points to HUD-approved housing counselors as their best resource.
Federal Housing Administration Posts Draft Servicing Section of its Single Family Housing Policy Handbook
On September 11, as part of its initiative to develop a single authoritative source for Federal Housing Administration (“FHA”) Single Family Policy, the FHA posted a draft of the servicing section of its Single Family Housing Policy Handbook. The draft servicing section covers post endorsement to the end of the mortgage insurance contract and provides specific guidance on the following: (i) general servicing requirements for FHA-insured mortgages; (ii) servicing of performing mortgages; (iii) default servicing, including HUD’s Loss Mitigation Program and conveyance standards; (iv) loss mitigation performance; and (v) special mortgage program servicing for active and inactive programs. On September 18, 2014, the FHA will host an industry briefing call to go over the organization and structure of the draft servicing section. The FHA is accepting comments on the draft servicing section through October 17, 2014.
HUD Announces $35,000 Maternity Leave Fair Housing Agreement
On September 12, HUD announced a conciliation agreement with a Tennessee mortgage lender, pursuant to which the lender will pay $35,000 to resolve allegations that it violated the Fair Housing Act when it denied a mortgage loan to a couple because the lender did not consider the couple’s ability to make loan payments during the wife’s maternity leave despite the husband’s salary and the wife’s short-term disability insurance payments. Under the Fair Housing Act, it is unlawful to discriminate in the terms, conditions, or privileges associated with the sale of a dwelling on the basis of sex or familial status, including denying a mortgage loan or mortgage insurance because an applicant is pregnant or on maternity leave. In addition to requiring a payment be made to the couple, the company must adopt a national parental leave policy and receive annual fair housing and fair lending training. HUD has brought similar cases against other mortgage lenders in recent years.
HUD Plans To Work With The Mortgage Industry To Expand Availability of Home Loans.
On September 16, HUD Secretary Julian Castro spoke at the Bipartisan Policy Center 2014 Housing Summit on the principles his department intends to implement in order to improve the economy. Castro focused on housing reform and referenced the “frustration from lenders when it comes to their FHA business” that the department has seen in the wake of the financial crisis. Castro assured the Summit that his department intends to work with the lenders to better manage their risk, pointing out that “[s]ome believe it was too easy to get a home loan [a few years ago]. Today it’s too hard.” The department’s overhaul of its “Single Family Handbook” will clarify the compliance process, helping lenders “better identify loan defects and determine how serious those loan defects are.”