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DOJ Intervenes in False Claims Act Litigation Against City of Los Angeles for Alleged Misuse of HUD Funds
On June 7, the Department of Justice (DOJ) announced that the United States has intervened (see proposed order here) in a lawsuit against the city of Los Angeles (City) alleging that the City misused Department of Housing and Urban Development (HUD) funds intended for affordable housing that is accessible to people with disabilities. See U.S. ex rel Ling et al v. City of Los Angeles et al, No. 11-00974 (D.C. Cal. 2017).
The DOJ joins in the lawsuit originally instituted by a disabled Los Angeles resident, who filed the False Claims Act (FCA) suit as a whistleblower. The FCA whistleblower provision allows private citizens to file suit on behalf of the government and likewise permits the government to intervene in the suit. Together, the DOJ and the whistleblower allege that the City and a city agency called the CRA/LA falsely certified compliance with federal accessibility laws, including the Fair Housing Act and Section 504 of the Rehabilitation Act as well as the duty to further fair housing in the City, in order to receive millions of dollars in HUD housing grants.
As recipients of the HUD funds, the City and the CRA/LA were obligated to ensure that (i) “five percent of all units in certain federally-assisted multifamily housing be accessible for people with mobility impairments”; (ii) “an additional two percent be accessible for people with visual and auditory impairments”; (iii) “the City and the CRA/LA maintain a publicly available list of accessible units and their accessibility features”; (iv) “the City and the CRA/LA have a monitoring program in place to ensure people with disabilities are not excluded from participation in, denied the benefits of, or otherwise subjected to discrimination in, federally-assisted housing programs and activities solely on the basis of a disability.” The false certifications resulted in too few accessible housing units, the suit claims.
The City denies the allegations.
Appeal Denied in Los Angeles Fair Housing Suit
On May 26, the Ninth Circuit issued decisions affirming the District Court’s decisions to grant summary judgments in two separate lawsuits brought against two different national banks by the city of Los Angeles (city). (View the district court’s summary judgments here and here). In separate appeals, the city alleged that each of the banks violated the Fair Housing Act by engaging in discriminatory mortgage lending to minority borrowers. The city also asserted that this practice resulted in risky loans and increased foreclosures, which lowered the city’s property tax revenues.
The appellate court disagreed with the city. In both decisions, the court observed that the city’s theory of liability was based on alleged “disparate impact,” which requires the city to demonstrate both the existence of a disparity and a facially neutral policy that caused the disparity.” The court noted that under established precedent a disparate impact claim, to succeed, must be supported by evidence of a robust causal connection between the disparity and the facially neutral policy. In the first case, the court held that the city failed to show such a robust causal connection, and in the second, it found “[t]he record does not reflect that the city raised a genuine issue of material fact as to a policy or policies with a robust casual connection to the racial disparity.” (View appellate memoranda for these cases here and here).
Special Alert: Supreme Court Holds Cities Have Standing Under FHA, But Limits Potential Claims
On May 1, the Supreme Court ruled 5-3 that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the Fair Housing Act against lenders for injuries allegedly flowing from discriminatory lending practices. However, the Court held that such injuries must be proximately caused by the alleged misconduct—rather than simply a foreseeable result. Some commentators suggest that the Court’s zone of interest analysis will result in the filing of new claims. Our view of this decision is that it will reduce such litigation efforts as prospective municipal plaintiffs recognize that it will be more difficult to survive early dispositive motions focused on whether the damages claims bear a direct relationship to the conduct alleged.
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Click here to read full special alert.If you have questions about the ruling or other related issues, visit our Fair Lending practice page for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.
Illinois-Based Lender, HUD Resolve Fair Housing Act Matter
On March 10, HUD released a Conciliation Agreement with an Illinois-based lender alleged to have discriminated against African-American and Hispanic borrowers seeking mortgage loans. The complaint, brought by HOPE Fair Housing Center (HOPE), claims the lack of bank branches in majority African-American and Hispanic communities resulted in fewer financial services being offered to applicants based on their race and national origin in violation of the Fair Housing Act. HOPE’s complaint also claims that African-American and Hispanic applicants were more likely to receive less favorable mortgage terms than other races. As part of the settlement, the lender will establish a $1 million loan program to “increase mortgage lending to residents in majority African-American and Hispanic areas” and will pay $75,000 to HOPE. Among other things, the agreement also states the lender will offer consumer education outreach in minority areas and provide fair lending training for its staff.
CFPB and DOJ Take Action Against Bank over Mortgage Lending Practices
On June 29, the CFPB announced a joint action with the DOJ against a regional bank with operations in Memphis, Tennessee for allegedly engaging in discriminatory mortgage lending practices in violation of the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). According to the CFPB’s and the DOJ’s complaint, between January 1, 2011 and December 31, 2015, the bank (i) engaged in redlining practices in the Memphis area by structuring its business to meet the credit needs of majority-White neighborhoods while ignoring the credit needs of individuals in majority-minority neighborhoods; (ii) discriminated against African American borrowers by allowing its employees to practice discretion in making credit decisions on mortgage loans, which ultimately resulted in African Americans being denied certain mortgages at significantly greater rates than similarly situated white applicants; (iii) charged African Americans, on average, 30 basis points more for first lien and 64 basis points more for second lien mortgage loans than similarly situated white borrowers; and (iv) implemented a policy under which loan officers were advised to deny minority applicants more quickly than other applicants and to deny credit assistance to “borderline” applicants. The complaint further alleges that a series of matched-pair tests at Memphis branches “revealed that the Bank treated African American testers less favorably than similarly situated white testers.”
Subject to approval, the proposed consent order would require the bank to take several remedial actions to improve its allegedly discriminatory mortgage lending practices, among which include: (i) allocating $4 million to a loan subsidy program that offers mortgage loans on a more affordable basis to applicants in majority-minority neighborhoods; (ii) spending at least $300,000 on a targeted advertising and outreach campaign that considers the results of a credit needs assessment performed by an independent third-party auditor, advertises the loan subsidy program, and generates mortgage loan applicants from qualified residents in majority-minority neighborhoods; (iii) spending $500,000 on local partnerships that provide education, credit repair, and other assistance in majority-minority neighborhoods; (iv) opening an additional branch or loan production office in a high-minority neighborhood; (v) extending credit offers to African American consumers who were denied mortgage loans as a result of the bank’s allegedly discriminatory underwriting policy; and (vi) implementing policies that ensure employees provide equal assistance to mortgage loan applicants, regardless of race or other prohibited characteristics. Under the proposed consent order, the bank would pay $2.78 million in consumer redress and a $3 million civil penalty. The CFPB’s proposed consent order notes that the bank has “recently taken a number of steps to improve its compliance management system, reduce its fair lending risk, and increase its lending in minority areas.”
HUD Settles with North Carolina Commercial Lender Over Alleged Fair Lending Violations
On June 8, HUD announced a conciliation agreement with a North Carolina-chartered commercial lender to resolve allegations that, as the successor of a merger with a South Carolina-based bank, it denied mortgage loans to African American, Latino, and Asian American applicants at a disproportionately higher rate than white applicants in violation of Section 804(b) and 805 of the Federal Fair Housing Act. After conducting an analysis of mortgage loans originated by the South Carolina bank between 2010 and 2011, the Department found that the bank demonstrated preferential treatment of white mortgage loan applicants through the retail channel via manual override of its automated underwriting system. Under the terms of the settlement agreement, the commercial lender, having cooperated with HUD’s investigation, must among other things, (i) provide nonprofit organizations with $140,000 to use toward credit and housing counseling, financial literacy training, and related programs for first-time homebuyers in South Carolina; (ii) spend an aggregate amount of $20,000 on positive marketing, advertising, and outreach to residents in majority-minority census tracts in South Carolina; (iii) partner with a non-profit organization or community groups involved in financial education to conduct, at a minimum, 24 financial education programs in South Carolina for individuals and small business owners; (iv) hire three mortgage banker market specialists to “focus on diverse lending in Charleston-North Charleston-Summerville, Columbia, and Greenville-Anderson-Mauldin metro areas”; (v) require fair housing training for all employees and agents substantially involved in manual underwriting of mortgages; and (vi) implement “a new standardized and objective set of guidelines for a second review of retail channel residential loan applications initially denied by the automated underwriting system.”
AG Schneiderman Announces Settlement with Real Estate Brokerages for Alleged Housing Discrimination Based on Income Source
On May 23, New York AG Eric Schneiderman announced that his office reached settlements with three real estate brokerages operating in New York City, Nassau County, and Westchester County. According to the AG’s press release, the three firms unlawfully discriminated against potential housing applicants with Section 8 vouchers, which provide rental assistance and a home ownership option to low income households in New York State. During the AG’s investigation, undercover phone testers posing as prospective tenants with Section 8 vouchers were allegedly told by one firm that they would be placed on a months-long waitlist for the apartment in question; in contrast, testers who did not mention the vouchers were told that the units were immediately available. That firm’s manager allegedly testified, in substance, that “a waitlist was essentially used to reject unwanted prospective tenants.” Similarly, the other two firms allegedly “told undercover testers that Section 8 and other government assistance programs would not be accepted at certain properties.” The press release also emphasized that one firm failed to follow its written policy prohibiting income-source discrimination, and another firm did not have a written fair-housing compliance policy at all. Under the settlement agreements, the brokerages must: (i) forward any complaints and documentation regarding housing discrimination to the AG; (ii) develop new non-discriminatory policies; (iii) maintain rental information about certain properties and provide such information to the AG for compliance review; and (iv) pay fines ranging from $13,000 to $40,000. Two of the firms must also have their employees attend training on fair housing.
HUD Issues Guidance Regarding the Application of Fair Housing Act Standards to the Use of Criminal Records
On April 4, HUD issued guidance deploying a disparate impact analysis with respect to the Fair Housing Act’s application to the use of criminal history by those who come under the Fair Housing Act, and in particular by providers or operators of housing and real-estate related transactions. The guidance indicates that, because African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population, criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers. HUD then walks through the three step burden-shifting disparate impact analysis to support its argument. To determine whether the use of criminal history has, on its face, a discriminatory effect, HUD looks at national statistics to demonstrate that incarceration rates are disproportionate for African Americans and Hispanics. HUD also notes that, while state or local statistics should be presented when available, national statistics may be used where state or local statistics are not readily available and there is no reason to believe they would differ markedly from the national statistics. HUD then moves to a discussion of whether the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. HUD warns that, while ensuring resident safety and protecting property may be considered substantial and legitimate interests, bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record would be insufficient to satisfy the burden set by the second prong. For the final prong, regarding the availability of a less discriminatory alternative, HUD notes that the inquiry is fact specific, but suggests that individualized assessment of relevant mitigating information beyond that contained in an individual’s criminal record is likely to have a less discriminatory effect than a categorical exclusion that does not take additional information into account. The guidance also discusses the potential for intentional discrimination, and notes that a disparate treatment violation may be proven based on evidence that exceptions to a general disqualification based on criminal record are provided to white applicants, but not African American applicants.
HUD Reaches $2.8 Million Settlement Over Redlining Allegations
On February 29, HUD announced an agreement with a Kansas City-based bank over its alleged redlining practices against African-American mortgage applicants. Two fair housing organizations (Complainants) filed separate complaints with HUD in October 2015 alleging that the bank engaged in discriminatory acts and violated the Fair Housing Act. According to Complainants, the bank’s “lack of market penetration in African-American communities made residential real estate products less available to persons based on race.” Complainants further alleged that the bank “designated their service area, or assessment area, in a way that excluded areas of high African-American concentration, which resulted in making residential real estate products less available to persons based on race” – a practice generally referred to as redlining. The agreement requires that the bank must, during the three-year agreement period: (i) allocate $75,000 in subsidy funds to provide discounts on home purchase loans to majority African-American census tracts in the Kansas City area; and (ii) originate $2.5 million in mortgage loans in African-American neighborhoods. Additional fair lending financing commitments pursuant the agreement require that the bank: (i) establish a loan pool of $105,000 to rehabilitate vacant or destroyed homes; (ii) spend $50,000 on marketing and outreach to African-American communities; (iii) provide $30,000 to support financial education in African-American communities; and (iv) spend $50,000 in support of the Complainants’ fair lending and community reinvestment work. The bank will also be required to appoint a Community Development Lender to focus on African-American neighborhoods and other lower-income communities. Finally, dependent upon the OCC’s approval of the bank’s application for a merger, the bank will be required to maintain three full-service branches in majority-minority census tract in the Kansas City area.
District Court Applies Supreme Court's Inclusive Communities Decision in Rejecting Disparate Impact Claim
On July 17, the U.S. District Court for the Central District of California granted summary judgment for Wells Fargo in a Fair Housing Act (FHA) case brought by the City of Los Angeles. City of Los Angeles v. Wells Fargo & Co., No. 2:13-cv-09007-ODW (RZx) (C.D. Cal. July 17, 2015). The City alleged that the bank engaged in mortgage lending practices that had a disparate impact on minority borrowers. In rejecting the City’s claims, the court’s opinion heavily relied on the Supreme Court’s recent decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which imposed limitations on the disparate impact theory of liability under the FHA, despite holding that the theory remains cognizable. 135 S. Ct. 2507 (2015). Citing Inclusive Communities, the district court warned that disparate impact claims may only seek to “remove policies that are artificial, arbitrary, and unnecessary barriers and not valid governmental and private priorities.” The court further held that the City failed to point to a specific defendant policy that caused the disparate impact and failed to show “robust causality” between any of defendant’s policies and the alleged statistical disparity, as Inclusive Communities requires. The court also rejected the notion that disparate impact claims could be used to impose new policies on lenders, and said that the City’s argument that lenders should adopt policies to avoid disproportionate lending was a “roundabout way of arguing for a racial quota,” which Inclusive Communities also warns against. Finally, the court was sharply critical of the City’s argument that Federal Housing Administration loans are harmful to minority borrowers, and that, in any event, any disparate impact from these loans would be a result of the federal government’s policies, not the defendant’s policies.