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Biden administration to reinstate fair housing rules
On April 12, the Office of Management and Budget posted notices pending regulatory review related to two HUD fair housing rules rescinded under the Trump administration. The first notice announces a pending proposed rule to reinstate HUD’s Discriminatory Effects Standard related to a September 2020 final rule issued by the agency, which amended its interpretation of the Fair Housing Act’s 2013 disparate impact standard. As previously covered by a Buckley Special Alert, the final rule was intended to align HUD’s 2013 Rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs et al. v. Inclusive Communities Project, Inc. The final rule included, among other things, a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. Earlier in January, President Biden directed HUD to examine the effects of the final rule, emphasizing that HUD has a “statutory duty to ensure compliance with the Fair Housing Act.” (Covered by InfoBytes here.)
The second notice relates to a pending interim final rule: Affirmatively Furthering Fair Housing; Restoring Statutory Definitions and Certifications. As previously covered by InfoBytes, last July HUD announced plans to terminate the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule, and proposed a new final rule titled “Preserving Community and Neighborhood Choice.” At the time, HUD stated that the AFFH rule was, among other things, overly burdensome, costly, and ineffective.
9th Circuit affirms some of Oakland’s claims against national bank
On August 26, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the district court’s decision to partially dismiss an action brought by the City of Oakland, alleging a national bank violated the Fair Housing Act (FHA) and California Fair Employment and Housing Act. As previously covered by InfoBytes, Oakland alleged that the national bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) reduced spending in Oakland’s fair-housing programs. The district court dismissed the City’s municipal expenditure claims, but allowed claims based on decreased property tax revenue to continue. The district court also held that the City could pursue its claims for injunctive and declaratory relief.
On appeal, the 9th Circuit affirmed the court’s denial of the bank’s motion to dismiss as to Oakland’s claims for decreased property tax revenue and the court’s dismissal of Oakland’s claims for increased city expenditures. Specifically, with respect to claims for reduced tax revenue, the appellate court concluded that the “FHA’s proximate-cause requirement is sufficiently broad and inclusive to encompass aggregate, city-wide injuries.” Based on allegations that the City could use statistical regression analysis “to precisely calculate the loss in property values in Oakland’s minority neighborhoods that is attributable to foreclosures caused by [the bank’s] predatory loans,” the 9th Circuit found that Oakland’s claim for decreased property tax revenues “has some direct and continuous relation to [the bank]’s discriminatory lending practices.” Regarding the City’s alleged municipal expenditure injuries, the appellate court agreed with the district court that Oakland’s complaint failed to account for independent variables that may have contributed or caused such injuries and that those alleged injuries therefore did not satisfy the FHA’s proximate-cause requirement. Finally, the appellate court held that the City’s claims for injunctive and declaratory relief were also subject to the FHA’s proximate-cause requirement, and that on remand, the district court must determine whether Oakland’s allegations satisfied this requirement.
HUD unveils new rule to replace 2015 AFFH rule
On July 23, HUD announced plans to ultimately terminate the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule, while proposing a new final rule titled “Preserving Community and Neighborhood Choice.” The new final rule includes a detailed history of the expansion of the AFFH concept and details concerns with the 2015 rule. According to HUD, the AFFH rule is, among other things, overly burdensome, costly, and ineffective. However, several senators argued against HUD’s originally proposed replacement (covered by InfoBytes here), contending that the proposed rule would reverse efforts to make access to housing fair and equitable and “relies on the faulty premise that simply increasing housing supply can address the problems of housing discrimination and segregation.” HUD stated that after reviewing comments on the proposed changes, the agency ultimately determined them to be “unworkable and ultimately a waste of time for localities to comply with,” and noted that it had instead established programs to bring capital into underserved communities where affordable housing is present but opportunities are not. The new final rule broadly defines “fair housing” to be “housing that, among other attributes, is affordable, safe, decent, free of unlawful discrimination, and accessible under civil rights laws,” and defines “affirmatively furthering fair housing” as “any action rationally related to promoting” any of the attributes of fair housing. Specifically, a grantee’s certification that it has affirmatively furthered fair housing would be deemed sufficient provided it proposed taking action to further fair housing policy during the relevant period. The new final rule will become effective 30 days after publication in the Federal Register.
11th Circuit will not rehear en banc city’s Fair Housing Act suit
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.”
Senators urge HUD to withdraw new version of AFFH rule
On March 16, thirty-seven Senators led by Senator Sherrod Brown (D-OH) sent a letter to HUD in response to the agency’s proposed replacement for the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule (proposed rule). As previously covered by InfoBytes, in January, HUD announced that the proposed rule would provide state and local government participants with more straightforward advice “to help them improve affordable housing choices in their community.” The Senators contend, however, that the proposed rule will reverse efforts to make access to housing fair and equitable and “relies on the faulty premise that simply increasing housing supply can address the problems of housing discrimination and segregation.” Among other things, the Senators argue that the proposed rule undermines the following “three core elements of any approach to fair housing”: (i) “detailed, comprehensive analysis of fair housing issues”; (ii) “judicious enforcement”; and (iii) “the public input necessary to ensure that our communities can provide inclusive pathways of opportunity for all Americans.” The Senators request that HUD withdraw the proposed rule and re-implement the 2015 AFFH final rule.
Treasury, HUD release housing finance reform plans
On September 5, the U.S. Treasury Department and HUD released complementary proposals in response to a presidential memorandum issued last March (previously covered by InfoBytes here) directing the departments to develop plans to end the conservatorships of Fannie Mae and Freddie Mac (GSEs) and reform the housing finance system.
According to a press release released by the Treasury Department, the Treasury Housing Reform Plan outlines several broad goals and legislative and administrative reforms intended to protect taxpayers and assist homebuyers. Included in the Reform Plan are measures to privatize the GSEs, with the Treasury Department emphasizing that FHFA “should begin the process of ending” the conservatorships. “Central to this objective will be ensuring that the GSEs and their successors are appropriately capitalized to remain viable as going concerns after a severe economic downturn and also to ensure that shareholders and unsecured creditors, rather than taxpayers, bear losses.” Other notable agency and limited congressional action highlights include:
- Congress should authorize an explicit, paid-for guarantee by Ginnie Mae on qualified mortgage-backed securities for single-family and multifamily loans.
- Private sector participation should increase in the mortgage market to compete with the GSEs, and ensure a level playing field for lenders of all sizes.
- Congress should replace GSEs’ statutory affordable housing goals with a “more efficient, transparent, and accountable mechanism” to support underserved borrowers and expand HUD’s affordable housing activities.
- GSEs under FHFA’s capital rule should be required to maintain “capital sufficient to remain viable as a going concern after a severe economic downturn,” the cap on the GSEs’ investments in mortgage-related assets should be further reduced, and GSEs’ retained mortgage portfolios should be restricted to “solely supporting [the] business of securitizing mortgage-backed securities.”
- Mortgages eligible for GSE guarantees should have to comply with strict underwriting requirements.
- The Qualified Mortgage rule should be simplified and the so-called QM patch that allows GSEs to avoid certain regulations should be eliminated (see previous InfoBytes coverage on the CFPB’s advance notice of proposed rulemaking to allow the QM patch to expire here).
- Access to 30-year fix-rate mortgages for qualified homebuyers should be preserved.
HUD’s Housing Finance Reform Plan, released in conjunction with Treasury’s proposal, addresses the role of FHA and Ginnie Mae, and outlines steps to reduce risk in the FHA portfolio. According to HUD’s press release, the proposal focuses on four objectives: refocusing FHA to its core mission, protecting American taxpayers, providing tools to FHA and Ginnie Mae to appropriately manage risk, and providing liquidity to the housing finance system. Among other objectives, HUD’s plan (i) stresses that FHA, which serves low- and moderate-income borrowers, “must ensure that borrowers are creditworthy and that they have access to loans that meet their financial needs without creating undue risk”; (ii) recommends that FHA and FHFA establish a “formalized collaborative approach” to streamline government-supported mortgage programs to ensure they are “not competing and do not crowd private capital out of the marketplace;” (iii) encourages continued efforts to reduce loan churning; (iv) encourages a continued partnership between FHA and DOJ “to provide more clarity on how the agencies will consult on the appropriate use of the [False Claims Act]” to provide regulatory certainty to lenders; (v) encourages FHA to develop servicing standards for home equity conversion mortgage programs to reduce operational and financial burdens; and (vi) recommends that FHA develop a mortgage origination risk tool that integrates an automated underwriting system.
District Court allows Sacramento's FHA claims to proceed against bank
On August 22, the U.S. District Court for the Eastern District of California granted in part and denied in part a national bank’s motion to dismiss an action by the City of Sacramento (City) alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its complaint, the City alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue and increased costs for municipal services for the city. The bank moved to dismiss the action. In reviewing the motion, the court looked to the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices. The court rejected the majority of the bank’s arguments, denying the motion as to the City’s tax revenue claims and non-economic claims. The court concluded that “there is ‘no reason to think as a general matter that the City’s [tax revenue] claims are out of step with the ‘nature of the statutory cause of action’ and the remedial scheme that Congress created’” in the FHA. Conversely, as for the claims for increased municipal services costs, such as police, fire fighting, and code enforcement, the court found that the claims “rely on conclusory allegations and a foreseeability-only theory without establishing proximate cause” and granted the bank’s motion to dismiss, but allowed the City leave to amend the complaint to establish proximate cause.
Court allows certain City of Oakland claims to proceed against national bank
On June 15, the U.S. District Court for the Northern District of California granted in part and denied in part a national bank’s motion to dismiss an action brought by the City of Oakland, alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its September 2015 complaint, Oakland alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue for the city. After the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Sandler Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, Oakland filed an amended complaint. The amended complaint expanded Oakland’s alleged injuries to include (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. The bank moved to dismiss all of Oakland’s claims on the basis that the city had failed to sufficiently allege proximate cause. The court granted the bank’s motion without prejudice as to claims based on the second alleged injury to the extent it sought monetary relief and claims based on the third alleged injury entirely. The court allowed the matter to proceed with respect to claims based on the first injury and, to the extent it seeks injunctive and declaratory relief, the second injury.
DOJ settles with Minnesota community bank to resolve fair lending violations
On May 8, the Department of Justice announced a settlement with a Minnesota community bank to resolve allegations that the lender excluded predominantly minority neighborhoods from its mortgage lending service in violation of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). According to the complaint filed in 2017, between 2010 and 2015, the bank engaged in unlawful redlining in and around Minneapolis-St. Paul, Minnesota by meeting the residential credit needs of individuals in majority-white census tracts, but avoided serving similar needs in majority-minority census tracts. The settlement requires the bank to expand its banking services in predominantly minority neighborhoods, including opening one full service branch within the specified census tract. In addition to compliance monitoring and reporting requirements, the bank is also required to (i) employ a Community Development Officer and an Executive leader; (ii) spend a minimum of $300,000 on advertising, outreach, and education and credit repair initiatives; (iii) invest a minimum of $300,000 in a program for special purpose loan subsidies; and (iv) continue to provide fair lending training to all employees.
ABA, State Bankers Associations Respond to HUD’s Request for Comment; Discuss Need to Clarify Disparate Impact
On May 15, HUD issued a request for comment on its review of regulations as required by Executive Order 13777, which compels each agency to review and carry out regulatory reform. According to the request for comment, the self-assessment will address suggestions for “specific current regulations that may be outdated, ineffective, or excessively burdensome, and therefore, warranting repeal, replacement, or modification.” The request, which closed for public comment on June 14, received 100 comments from state bankers associations, financial institutions, and individuals.
American Bankers Association (ABA) and State Bankers Associations. On June 14, a joint comment letter was sent on behalf of the ABA and state bankers associations representing all 50 states. A key issue raised by the letter was that HUD adopted an incorrect and improper standard for disparate impact liability in its rule implementing the Fair Housing Act’s discriminatory effects standard—a rule the groups calls “outdated and legally wrong.” Under the terms of the 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” and then articulated a burden shifting framework for such claims in which a plaintiff can establish a prima facie case using statistics alone. However, the groups claim that the burden shifting framework conflicts with a Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, and assert that “a case premised on statistics alone is a prime example of an abuse of disparate impact.” The groups further wonder if HUD will “maintain the supervisory view that statistics alone can establish a prima facie case, as stated in the [r]ule[.]” It is the opinion of the groups that the Supreme Court enforced strict limitations of the use of disparate impact—“in stark contrast to the Rule’s approach”—in order to “avoid injecting the consideration of race into decision making and . . . address important constitutional concerns.” Thus, “[a] rule that creates, rather than eliminates, confusion undermines its own purpose and is entirely ineffective.” Furthermore, the letter (i) indicates that the groups are willing to engage in discussions with HUD on the topic of disparate impact, and (ii) raises the issue of whether a revised rule or a reopening of comments on the existing rule are in order.