On February 19, the DOJ announced a settlement with a $338 million Texas community bank to resolve allegations that the bank engaged in a pattern or practice of pricing discrimination on the basis of national origin. Specifically, the DOJ alleged, based on its own investigation and an examination conducted by the FDIC, the bank violated ECOA by charging Hispanic borrowers higher interest rates on unsecured consumer loans compared to the rates charged to similarly situated white borrowers. The consent order requires the bank to establish a $700,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. It also requires that the bank (i) establish uniform pricing policies, (ii) create a compliance monitoring program, (iii) provide borrower notices of non-discrimination, and (iv) conduct employee training. The new requirements apply not only to unsecured consumer loans, but also to all residential single-family real estate construction financing, automobile financing, home improvement loans, and mortgage loans.
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.
On January 18, the federal banking agencies issued a final rule amending Regulation Z to implement certain requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs), and to notify consumers who apply for these loans of their right to a copy of appraisal. On the same day, the Consumer Financial Protection Bureau issued a final rule under the Equal Credit Opportunity Act (ECOA), as amended by the Dodd-Frank Act, to require creditors to provide residential mortgage loan applicants with a copy of any and all appraisals and other written valuations developed in connection with an application for closed or open-end credit that is to be secured by a first lien on a dwelling. Both rules take effect on January 18, 2014. BuckleySandler has prepared a Special Alert that provides additional details regarding the HPML appraisal rule, as well as a Special Alert regarding the ECOA appraisal rule.
Special Alert: CFPB and DOJ Announce MOU to Coordinate Fair Lending Enforcement Efforts; CFPB Issues First Annual Report to Congress on Fair Lending Activities
On December 6, the Consumer Financial Protection Bureau (CFPB or Bureau) and the U.S. Department of Justice (DOJ) announced a Memorandum of Understanding (MOU) to coordinate enforcement of the federal fair lending laws, including the Equal Credit Opportunity Act (ECOA). Simultaneously, the CFPB issued its first annual Fair Lending Report to Congress as required by the Dodd-Frank Act, which describes the Bureau’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews its fair lending accomplishments. Together, these initiatives demonstrate that the CFPB and DOJ are continuing to work together closely to aggressively enforce the federal fair lending laws.
Memorandum of Understanding Regarding Fair Lending Coordination
The new MOU supplements an existing Information Sharing Agreement Regarding Fair Lending Investigations among the DOJ, the U.S. Department of Housing and Urban Development, and the Federal Trade Commission, which allows these fair lending enforcement agencies to share confidential information related to fair lending investigations, screening procedures, and investigative techniques. It also follows a general cooperation MOU that the DOJ and CFPB entered into earlier this year.
The new MOU focuses on information sharing and referral of matters alleging ECOA violations, but also governs the agencies’ referral processes for other fair lending-related laws and joint fair lending investigations.
Referral of ECOA Violations to DOJ: The MOU explains the circumstances under which the CFPB will refer potential ECOA violations to the DOJ for further investigation or prosecution. Consistent with the established practice of the prudential federal bank regulators, the MOU requires the CFPB to refer to the DOJ all matters where it has “reason to believe” that one or more creditors has engaged in a pattern or practice of lending discrimination. The CFPB may also refer to DOJ any violation of Section 701(a) of ECOA, including a recommendation that a civil action be commenced if the CFPB cannot obtain compliance from the financial institution.
Following referral, the DOJ has 60 days to determine whether to proceed with its own investigation. Within that period, the CFPB may not unilaterally commence its own action with regard to the referred violation(s). Even if exigent circumstances arise during the 60-day review period, the CFPB must first consult with the DOJ before taking independent action. Read more…
On October 30, the U.S. District Court of the Northern District of California dismissed, without prejudice, claims brought by two borrowers alleging that their mortgage lender engaged in fraudulent loan practices which violated RICO. The court held that the claims were time-barred and that the complaint failed to allege facts about predicate acts and a pattern of activity necessary to sustain a civil RICO claim. Cabrera v. Countrywide Fin., No. 11-4869, 2012 WL 5372116 (N.D. Cal. Oct. 30, 2012). The court rejected the borrowers’ arguments that (i) the statute of limitations began to run not from the date they entered into their adjustable rate mortgage, but from the date the rate adjusted, and (ii) equitable tolling should apply because the borrowers’ could not have discovered their adjusted rate absent a forensic loan audit they obtained years into the contract. With regard to equitable tolling, the court held that the plain terms of the mortgage provide information about the rate at issue, which could have been uncovered by “a reasonably diligent investigation of the loan documents.” The court similarly dismissed the borrowers’ claims that the lender discriminated against minority borrowers in violation of the ECOA, as time-barred. It also held that the borrowers, who are Hispanic, failed to state a claim under ECOA in that, although they offered statistical evidence that Hispanics were given less favorable loans than white borrowers with the same risk characteristics, they failed to allege that they themselves qualified for better loans. The borrowers’ claim of unfair business practices under the state’s unfair competition law survived. The court held that the borrowers pled facts sufficient to support their claim that the lender’s effort to initiate a foreclosure while a loan modification was pending violated public policy reflected in the California Homeowner Bill of Rights, even though the specific provision of that statute that prohibits such practices was not codified until after the foreclosure occurred.
ACLU Fair Lending Case Against Mortgage Securitizer Highlights New Fair Lending Litigation Risk; Fair Lending Litigation Against Lenders Continues
On October 15, the ACLU filed a putative class action suit on behalf of a group of private citizens against a financial institution alleged to have financed and purchased subprime mortgage loans to be included in mortgage backed securities. The complaint alleges that the institution implemented policies and procedures that supported the market for subprime loans in the Detroit area so that it could purchase, pool, and securitize those loans. The plaintiffs claim those policies violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (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. The suit seeks injunctive relief, including a court appointed monitor to ensure compliance with any court order or decree, as well as unspecified monetary damages. The National Consumer Law Center, which developed the case with the ACLU, reportedly is investigating similar activity by other mortgage securitizers, suggesting additional suits could be filed. The ACLU also released a report on the fair lending aspects of mortgage securitization and called for, among other things, DOJ and HUD to expand their Fair Housing Testing Program, and for Congress to increase penalties for FHA and ECOA violations and provide additional funding for DOJ/HUD fair lending enforcement. Read more…
Anyone who has been following enforcement activity in consumer financial services knows that fair lending is a key focal point for federal regulators, with recent huge monetary settlements and more likely to occur. It’s not just a large bank issue; community banks have also been targeted. What can bank boards of directors and management do to avoid or mitigate such regulatory actions? Identify the risks and address and resolve them before they become big risks.
Over the past year, the U.S. Department of Justice (DOJ) has entered into the three largest fair lending settlements in history – all of which carried multimillion dollar price tags to resolve allegations of discrimination in retail and wholesale mortgage lending by major lenders. The DOJ, Consumer Financial Protection Bureau (CFPB), U.S. Department of Housing and Urban Development (HUD) and prudential banking regulators (FDIC, Federal Reserve, and OCC) are all aggressively pursuing, and in some cases actively soliciting, fair lending cases. Many of these cases are based on the controversial “disparate impact” theory of discrimination, which narrowly escaped review by the U.S. Supreme Court in early 2012, to determine whether this legal theory is even cognizable under federal fair lending laws. Notwithstanding the unresolved question over the use of disparate impact in the fair lending context, the federal banking regulatory and enforcement agencies have uniformly stated that they will prosecute fair lending cases under this legal theory.
Fair lending allegations are not limited to large national retail banks. Community banks have also been targeted in these investigations and complaints. For example, in June 2011, DOJ reached a settlement with Nixon State Bank to resolve allegations that the bank had violated the Equal Credit Opportunity Act (ECOA) by charging higher prices on unsecured consumer loans made to Hispanic borrowers, which required Nixon to pay approximately $100,000 in restitution. Nixon State Bank did not maintain written loan pricing guidelines for its unsecured consumer loans; instead, the bank’s loan officers were granted broad discretion in handling all aspects of the unsecured consumer loan transaction. DOJ alleged that this policy had a disparate impact on Hispanic borrowers. In a more recent case from September 2012, Luther Burbank Savings Bank (discussed below) agreed to settle with DOJ for $2 million for setting a minimum residential mortgage loan amount that adversely impacted African American and Hispanic borrowers.
Regulators or plaintiffs typically demonstrate “disparate impact” through a burden-shifting test that begins with an allegation that a lender applies a facially neutral policy or practice consistently to all credit applicants, but the policy or practice has a disproportionately adverse impact on members of a group protected under ECOA or the Fair Housing Act, the federal fair lending laws (protected class group).* If the first prong of the analysis is satisfied, the burden shifts to the lender who must prove that there was a legitimate, non-discriminatory business justification for the policy at issue. If this prong is satisfied by the lender, the burden shifts back to the regulator or plaintiff to prove that there is a less discriminatory alternative that achieves the same result. Under the disparate impact theory, no evidence of intentional discrimination is required.
Example of disparate impact:
- A community bank maintains a residential mortgage lending policy that precludes mortgages on homes that are more than 50 years old. The area of town where homes tend to be over 50 years in age is predominantly Hispanic. As a result, the bank’s lending policy, which appears facially neutral, has a disproportionately adverse impact on Hispanic borrowers as a protected class group and has the effect of restricting access to credit for Hispanic borrowers. The bank is unable to offer a legitimate, nondiscriminatory business justification for the policy.
Set forth below are six “red flags” for fair lending risk that you should be aware of so you can determine whether your institution is taking appropriate action. Read more…
On September 18, the FDIC announced in Financial Institution Letter FIL-39-2012 that it plans to host two teleconferences in the coming weeks to discuss the CFPB’s mortgage-related proposed rules. The teleconferences will be conducted by staff from the FDIC’s Division of Depositor and Consumer Protection and are being offered to officers and employees of FDIC-supervised institutions. The first call will take place on September 27, 2012 and will cover (i) mortgage origination standards, (ii) appraisals for “higher-risk” mortgages, (iii) ECOA appraisal requirements, and (iv) mortgage servicing standards. On October 10, 2012, FDIC staff will discuss (i) RESPA/TILA mortgage disclosure integration, (ii) qualified mortgages and the ability to repay standard, (iii) escrow requirements for “higher-priced mortgage loans”, and (iv) high-cost HOEPA loans.
On September 18, the U.S. District Court for the District of Massachusetts decertified a class of borrowers who allege that their mortgage lender violated the Equal Credit Opportunity Act and the Fair Housing Act by allowing its brokers to impose charges not related to a borrower’s creditworthiness. Barrett v. Option One Mortg. Corp., No. 08-10157, 2012 WL 4076465 (D. Mass. Sep. 18, 2012). The borrowers claim that the lender’s policy had a disparate impact on African-American borrowers who allegedly received higher rates than similar white borrowers. In March 2011, the court certified this class of borrowers, holding that the plaintiffs demonstrated commonality sufficient for class certification based on a statistical analysis comparing APRs paid by white and African-American borrowers that appeared to show slightly higher APRs for minority borrowers. Subsequent to the court’s March 2011 decision, the Supreme Court held in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) that a policy that allows local units discretion to act can only present a common question if the local units share a mode of exercising that discretion. Following the Supreme Court’s decision, the lender in this case moved to decertify the class. The court agreed with the lender that the borrowers’ statistical analysis based on aggregate data does not consider each individual broker. The court held that the borrowers in this case lack commonality because they cannot show that all of the lender’s brokers exercised discretion in the same way and granted the lenders motion to decertify the class.
On August 27, the U.S. District Court for the Southern District of New York approved a settlement between the DOJ and GFI Mortgage Bankers, Inc., a nonbank mortgage lender, resolving allegations that certain of the lender’s pricing policies disproportionately impacted African-American and Hispanic borrowers in violation of the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA). The DOJ brought the case in part under the disparate impact theory of discrimination, by which it attempts to establish discrimination based solely on a statistical analysis of the outcomes of a neutral policy without having to show that the lender intentionally discriminated against certain borrowers. In the consent order, the lender acknowledged that a statistical analysis performed by the government indicated that the note interest rates and fees it charged on mortgage loans to qualified African-American and Hispanic borrowers were higher than those charged to non-Hispanic white borrowers. Prior to the settlement, the lender had filed a motion to dismiss the DOJ lawsuit, arguing that the DOJ’s disparate impact claims are not cognizable under the FHA or ECOA, and challenging the government’s statistical analysis. Under the agreement, the lender agreed to pay $3.5 million over five years in compensation to several hundred borrowers identified by the DOJ, as well as a $55,000 civil penalty. The lender also agreed to enhance certain of its lending policies and monitor and document loan prices and pricing decisions. Whether disparate impact claims are cognizable under the FHA remains unsettled, though the U.S. Supreme Court may have an opportunity to address the issue in the near future. BuckleySandler recently prepared a white paper examining the issue and explaining why the FHA does not permit disparate impact claims. A copy of DOJ’s announcement of the settlement may be found at http://www.justice.gov/opa/pr/2012/August/12-crt-1052.html.
On July 30, the U.S. Court of Appeals for the Tenth Circuit overturned a district court ruling that would have required borrowers seeking rescission under TILA to state their ability to repay in the initial complaint. Sanders v. Mountain Am. Fed. Credit Union, No. 11-4008, 2012 WL 3064741 (10th Cir. Jul. 30, 2012). The borrowers timely sued to compel rescission of their mortgage loan, claiming that the lender failed to provide disclosures required under TILA. The district court held that the borrowers were not entitled to rescission because they failed to plead their ability to repay. On appeal the court held that, while TILA recognizes that a court may entertain a creditor’s petition for an order equitably modifying the rescission procedure, in this case the district court impermissibly altered that procedure and created a pleading standard that would require all borrowers seeking TILA rescission to plead their ability to repay. The court reasoned that such a standard would add a condition not supported by TILA or Regulation Z, and that categorical relief is outside of the district court’s equitable powers. However, the court maintained that a district court still may use its equitable powers to protect a creditor’s interest during the rescission process. The appellate court also reversed the district court’s dismissal of the borrowers’ ECOA claim related to a separate refinance transaction because the district court made factual assumptions about the refinance process in violation of its obligation to draw all reasonable inferences in favor of the plaintiff borrowers. While the TILA and ECOA claims were remanded for further proceedings, the court upheld the district court’s dismissal of the borrowers’ claims that the lender also violated FCRA when it reported false information to consumer reporting agencies, holding that FCRA does not provide a private right of action against the furnisher of credit information.
On July 13, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of a Department of Justice suit alleging that two automobile dealers violated the Equal Credit Opportunity Act by charging non-Asian customers higher “overages” or “dealer mark-ups” than similarly-situated Asian customers. United States v. Union Auto Sales, Inc. No. 9-7124, 2012 WL 2870333 (9th Cir. Jul. 13, 2012). A bank within whose network the automobile dealers operated, settled related charges concurrent with the filing of the case. The automobile dealers chose to litigate, eventually succeeding on a motion to dismiss. On appeal, the court reversed the district court’s holding that the complaint lacked sufficient supporting detail to give the defendants fair notice of the claim. Instead, the divided appeals court held that the government need not demonstrate discrimination at the pleading stage, but merely allege facts sufficient to make a discrimination claims plausible, a threshold met by the government’s complaint. One judge dissented from the majority opinion and argued that the government’s conclusory allegations do not meet the plausibility threshold established in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and a subsequent Ninth Circuit decision. The majority also held that the district court erred in dismissing the complaint for failing to articulate intent, noting that under both disparate impact and disparate treatment theories, intent is irrelevant. Further, the court held that the link between names and racial categorization for the purposes of discriminatory conduct is well-established. The case was remanded for further proceedings.