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California Federal Court Allows City's Fair Housing Case To Proceed
On May 28, the U.S. District Court for the Central District of California held, without addressing the merits, that the City of Los Angeles has standing to pursue Fair Housing Act and restitution claims against a mortgage lender, and that the claims were sufficiently and timely pled. Los Angeles v. Wells Fargo & Co., No. 13-9007, 2014 WL 2206368 (C.D. Cal. May 28, 2014). The court denied the lender’s motion to dismiss. The city alleges the lender engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services. The court found that by identifying specific properties alleged to have caused injury and asserting that regression analysis would support its claims and attenuated theory of causation, the city adequately pled a connection between the injury and the alleged conduct sufficient to support Article III standing. The court further concluded that the city adequately pled statutory standing under the FHA insofar as it alleged that its injuries are separate and distinct from the injuries of borrowers, and were proximately caused by the alleged lending practices. The court also held that the city’s claims were timely under the FHA’s two-year statute of limitations because it alleged broad discriminatory practices that are alleged to continue, no matter how changed over time (e.g., from redlining to reverse redlining). Notably, the court did not consider whether the city slept on its rights and could have filed sooner notwithstanding the alleged continuing nature of the practices. Finally, the court found that the city sufficiently pled facts, for purposes of surviving the motion to dismiss, to support claims of disparate treatment and disparate impact under the FHA.
Senate Blocks DOJ Civil Rights Division Nominee
On March 5, the Senate voted 47-52 on a procedural motion that would have advanced President Obama’s nomination of Debo Adegbile to serve as Assistant Attorney General, Civil Rights Division. Seven Democrats joined all voting Republicans to defeat the nomination. Mr. Adegbile’s participation in the legal representation of Mumia Abu-Jamal, who was convicted in 1981 of killing a Philadelphia police officer, reportedly played a factor in the voting.
Special Alert: Settlement In Key Fair Housing Case Moves Forward, Supreme Court Unlikely To Hear Appeal
Last night, the Mount Holly, New Jersey Township Council voted to approve a settlement agreement that will resolve the underlying claims at issue in a closely watched Fair Housing Act (FHA) appeal pending before the U.S. Supreme Court, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507. The agreement is subject to approval by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.
The Court had agreed to address one of two disparate impact-related questions presented in the appeal—specifically, the threshold question of whether disparate impact claims are cognizable under the FHA. Under current interpretation by several agencies and some Circuit Courts of Appeal, disparate impact theory allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). Though not a lending case, the appeal could have offered the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory.
Instead, for the second time in two years, it appears likely that opportunity has been eliminated by a settlement entered shortly before the Court could decide the matter. Last year, the parties in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010) similarly settled and withdrew their Supreme Court appeal before the Court had an opportunity to decide the case. The Magner parties’ decision to settle and withdrawal the appeal was followed by numerous congressional inquiries into whether federal authorities intervened to assist the parties in reaching a settlement in order to avoid Supreme Court review of a prized legal theory. One member of Congress has already initiated a similar inquiry with regard to the resolution of Mt. Holly.
To date, eleven federal Circuits have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court’s then-current Title VII jurisprudence regarding employment discrimination – which the appellate courts interpreted as permitting disparate impact claims – and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company’s neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, most significantly in Smith v. City of Jackson, 544 U.S. 228 (2005), that call prior appellate court precedent into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII’s specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, federal courts have offered almost no guidance as to whether the FHA’s statutory text permits disparate impact claims.
It is worth noting that in Mt. Holly, the Court could have bypassed certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in Mt. Holly in a multi-part second question on which cert. was not granted, which would have required argument on “burden shifting,” “balancing” and other tests that have been developed by various Circuits. Additionally, the question before the Court was whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court’s analysis, the question of whether Section 805 of the FHA—the section specifically applicable to mortgage financing—permits disparate impact claims may have remained an open issue. Still, the Supreme Court generally does seem willing to review at least some aspects of disparate impact analysis in the fair housing context.
With the settlement of the underlying Mt. Holly litigation, attention will likely shift to a matter that is pending in the U.S. District Court for the District of Columbia, but which is currently stayed pending the conclusion of the Supreme Court appeal in Mt. Holly. In that action, insurance trade associations challenge a rule issued by the Department of Housing and Urban Development on the use of disparate impact analysis under the FHA, which codified the three-step burden-shifting approach to determine liability related to a disparate impact claim.
HUD Settlement Resolves Fair Housing Act Allegations
On November 5, HUD released a Conciliation Agreement with a lender alleged to have discriminated against African-American and Hispanic borrowers seeking mortgage loans. In an administrative complaint filed following a review of the lender’s internal loan data, HUD claimed that the lender’s wholesale lending program violated the Fair Housing Act by underwriting, approving, purchasing, and securitizing mortgage loans in a manner that allowed pricing and denial disparities on the basis of race and national origin. HUD stated that the lender’s wholesale business, which granted third-party brokers discretion to negotiate fees and compensated those brokers through direct fees paid by borrowers to brokers, and/or through yield spread premiums paid by the lender, allegedly resulted in African-American and Hispanic borrowers paying higher APRs, receiving higher-priced loans, and paying more fees than similarly situated white borrows. HUD also alleged that African-American and Hispanic applicants were more likely to have their loan applications denied. HUD did not allege any intentional discrimination, and instead based its claims on its finding that statistical dipartites existed. To resolve the HUD investigation and complaint without litigation, and without admitting the allegations, the lender agreed to establish a $12.1 million fund to compensate allegedly harmed consumers and to distribute any excess funds to housing advocacy and counseling groups.
Final Settlement In SCOTUS Fair Housing Case Delayed
On November 6, the Philadelphia Inquirer reported that a final settlement to resolve the underlying claims at issue in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507—an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act—has been delayed. Last week, the parties reportedly reached a tentative agreement, with the terms of such agreement subject to review and approval by the Mount Holly Township Council. The Council decided to table consideration of the settlement as the parties reportedly work to finalize the agreement.
Tentative Settlement Reached In SCOTUS Disparate Impact Case
On October 31, the Philadelphia Inquirer and national media outlets reported that a tentative agreement has been reached to resolve the underlying claims at issue in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act. Briefing before the Supreme Court has been ongoing—over the past week respondents filed their brief, as did numerous supporting parties, including a group of state attorneys general—and argument is scheduled for December 4. If the settlement holds, this will be the second time in recent years that a case involving these issues pending before the Court has settled before the Court had an opportunity to hear the case. Attention likely now will turn to litigation pending in the U.S. District Court for the District of Columbia over a HUD rule finalized earlier this year. That rule specifically authorized disparate impact or “effects test” claims under the Fair Housing Act. The case has been stayed by agreement of the parties pending the outcome in Mt. Holly.
Special Alert: Agencies Issue Joint Statement On Fair Lending Compliance And The CFPB's ATR/QM Rule
On October 22, the CFPB, the OCC, the FDIC, the Federal Reserve Board, and the NCUA (collectively, the Agencies) issued a joint statement (Interagency Statement) in response to inquiries from creditors concerning their liability under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B by originating only “qualified mortgages.” Qualified mortgages are defined under the CFPB’s January 2013 Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule). The DOJ and HUD did not participate in the Interagency Statement.
The Interagency Statement describes some general principles that will guide the Agencies’ supervisory and enforcement activities with respect to entities within their jurisdiction as the ATR/QM Rule takes effect in January 2014. The Interagency Statement does not state that a creditor’s choice to limit its offerings to qualified mortgage loans or qualified mortgage “safe harbor” loans would comply with ECOA; rather, the Agencies state that they “do not anticipate that a creditor’s decision to offer only qualified mortgages would, absent other factors, elevate a supervised institution’s fair lending risk.” Furthermore, the Interagency Statement will not necessarily preclude civil actions.
The Agencies acknowledge that although there are several ways to satisfy the ATR/QM Rule, some creditors may be inclined to originate all or predominantly qualified mortgages, particularly when the ATR/QM Rule first becomes effective. In selecting business models and product offerings, the Agencies “expect that creditors would consider and balance demonstrable factors that may include credit risk, secondary market opportunities, capital requirements, and liability risk.” The Agencies further understand that creditors may have a “legitimate business need” to fine-tune their product offerings over the next few years in response to the impact of the ATR/QM Rule, just as they have in response to other significant regulatory changes that have occurred in the past.
The Agencies advise creditors to continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. Nonetheless, the Agencies state that individual cases will be evaluated on their own merits.
The Agencies state that they “believe that the same principles…apply in supervising institutions for compliance with the Fair Housing Act.” However, because neither DOJ nor HUD participated in issuing the Interagency Statement, it remains to be seen how those agencies would view this issue.
It is noteworthy that the standard articulated in the Interagency Statement (“legitimate business needs”) differs from HUD’s disparate impact rule relating to the Fair Housing Act. In its rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent…or defendant…A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” (Emphasis added.)
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
Justice Department Announces Three Fair Lending Actions
Recently, the DOJ released information regarding three fair lending actions, all three of which included allegations related to wholesale lending programs. On September 27, the DOJ announced separate actions—one against a Wisconsin bank and the other against a nationwide wholesale lender—in which the DOJ alleged that the lenders engaged in a pattern or practice of discrimination on the basis of race and national origin in their wholesale mortgage businesses. The DOJ charged that, during 2007 and 2008, the bank violated the Fair Housing Act and ECOA by granting its mortgage brokers discretion to vary their fees and thus alter the loan price based on factors other than a borrower’s objective credit-related factors, which allegedly resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The bank denies the allegations but entered a consent order pursuant to which it will pay $687,000 to wholesale mortgage borrowers who were subject to the alleged discrimination. The allegations originated from an FDIC referral to the DOJ.
The DOJ charged the California-based wholesale lender with violations of the Fair Housing Act and ECOA, alleging that over a four-year period, the lender’s practice of granting its mortgage brokers discretion to set the amount of broker fees charged to individual borrowers, unrelated to an applicant’s credit risk characteristics, resulted in African-American and Hispanic borrowers paying more than non-Hispanic white borrowers for home mortgage loans. The lender did not admit the allegations, but agreed to enter a consent order to avoid litigation. Pursuant to that order the lender will pay $3 million to allegedly harmed borrowers. The order also requires the lender to take other actions including establishing race- and national origin-neutral standards for the assessment of broker fees and monitoring its wholesale mortgage loans for potential disparities based on race and national origin.
Finally, on September 30, the DOJ announced that a national bank agreed to resolve certain legacy fair lending claims against a thrift it acquired several years ago, which the bank and the OCC identified as part of the acquisition review. Based on its own investigation following the OCC referral, the DOJ alleged that, between 2006 and 2009, the thrift allowed employees in its retail lending operation to vary interest rates and fees, and allowed third-party brokers as part of its wholesale lending program to do the same, allegedly resulting in disparities between the rates, fees, and costs paid by non-white borrowers compared to similarly-situated white borrowers. The bank, which was not itself subject to the DOJ’s allegations, agreed to pay $2.85 million to approximately 3,100 allegedly harmed borrowers to resolve the legacy claims and avoid litigation.
New York Federal District Court Holds FHA Disparate Impact Claims Against Mortgage Securitizer Timely, ECOA Claims Time-Barred
On July 25, the U.S. District Court for the Southern District of New York held that a putative class of African-American borrowers can pursue claims against a financial institution alleged to have financed and purchased so-called predatory subprime mortgage loans to be included in mortgage backed securities. Adkins v. Morgan Stanley, No. 12-7667, slip op. (S.D.N.Y. Jul. 25, 2013). The borrowers allege that the institution implemented policies and procedures that supported the subprime lending of a mortgage originator in the Detroit area so that the institution could purchase, pool, and securitize those loans. The borrowers claim those policies violated the FHA and the ECOA because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure.
In resolving the financial institution’s motion to dismiss, the court held that the borrowers sufficiently alleged a disparate impact under the FHA and, although the lawsuit was filed more than five years after the originator stopped originating mortgages, the two-year statute of limitations on their FHA claims is tolled by the discovery rule. The court explained that the disparate impact of a facially neutral policy may not become immediately apparent, and “[g]iving full effect to the FHA’s language and the policy behind the language requires a discovery rule recognizing that [the borrowers’] claim here did not accrue until they knew or had reason to know” that the policies were discriminatory. The court left open the possibility that the institution may prove at a later stage that public knowledge of the facts underlying the suit may be imputed to the borrowers to render their claims "discovered" at an earlier time and therefore time-barred.
The court held that the borrowers’ ECOA claims were not similarly timely because ECOA contains specific exceptions to its statute of limitations, and to apply a general discovery rule to ECOA claims would render those exceptions meaningless. Further, the court held that the ECOA claims are not timely pursuant to a continuing violations theory or equitable tolling.
The court granted the motion to dismiss the ECOA claims and a state law claim, and denied the motion to dismiss the FHA claims.
HUD Proposes Framework for Affirmatively Furthering Fair Housing, HUD Secretary Promises Increased Enforcement
On July 18, HUD released a proposed rule to refine the fair housing elements of the existing planning process that recipients of HUD funds – states, local governments, insular areas, and public housing agencies (Program Participants) – already undertake. To aid Program Participants, HUD will provide local and regional data to allow Program Participants (i) to evaluate patterns of integration and segregation in their area, (ii) to identify disparities in access to community assets by members of protected classes, (iii) to locate racial and ethnic concentrations of poverty, and disproportionate housing needs based on protected class; (iv) to uncover areas for improvement in their fair housing programs; and (v) to develop the tools, strategies, and priorities to respond to problems identified by the data.
The proposed rule also (i) defines “affirmatively furthering fair housing” to clarify that the phrase requires proactive steps to foster more inclusive communities and greater access to community assets for all groups protected by the Fair Housing Act; (ii) refines current Analysis of Impediment requirements; (iii) requires Program Participants to incorporate fair housing planning in existing planning processes, such as the consolidated plan and PHA Annual Plan; and (iv) encourages Program Participants to take regional approaches to address fair housing issues.
In a speech earlier in the week in which he previewed the proposed rule, HUD Secretary Donovan also promised increased enforcement of the Fair Housing Act, stating: “I want to send a message to all those outside these doors. There are no stones we won’t turn. There are no places we won’t go. And there are no complaints we won’t explore in order to eliminate housing discrimination. Period. . . . HUD is enhancing its enforcement techniques by initiating investigations on our own without waiting for individuals to file complaints. We have more than tripled the number of Secretary-initiated complaints that we have filed since 2008.”