On February 28, HUD launched a mobile application for iPhone and iPad that will allow the public to learn about their housing rights and file housing discrimination complaints.  The application will also inform the housing industry of its responsibilities under the FHA. HUD expects the application to assist fair housing groups and other civil rights advocacy organizations seeking to enforce fair housing rights. Adaptive mobile pages will also allow web content to display properly on all smartphone and tablet brands, and for fair housing complaints to be completed and submitted in Spanish.

On February 8, HUD issued a final rule authorizing so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a “disparate impact” on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.

In its final 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 final 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.” As proposed, the defendant would have had the burden of proving that the challenged practice “has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests.” Read more…

On January 29, the U.S. District Court for the Western District of Virginia invoked the continuing violation theory in refusing to bar an otherwise untimely Fair Housing Act discrimination claim. Nat’l Fair Hous. Alliance, Inc. v. HHHunt Corp., No. 11-131, 2013 WL 335877 (W.D. Va. Jan. 29, 2013). The case against the defendant architect centered on the design and construction of two apartment complexes in North Carolina. The parties agreed that the FHA’s two year statute of limitations had not run on claims relating to one of the projects. Standing alone, the claims relating to the other apartment complex were outside the two year limitation. The plaintiffs argued, however, that the two allegedly wrongful designs together established a pattern or practice of discriminatory acts, the last of which having occurred within the statutory time frame, served to save all claims from the time limitation. The court found this theory viable and denied the defendant’s motion for summary judgment. In doing so the court held that multiple design and construction projects that are “sufficiently related” can constitute a pattern or practice that warrants extending the statute of limitations period. Whether the two apartment construction projects at issue were so related, the court reasoned, raised a genuine issue of material fact that prevented summary judgment.

On December 21, the National Fair Housing Alliance (NFHA) announced that it filed with HUD a housing discrimination complaint against a major insurance company regarding the offering of hazard insurance in a certain geographic area. According to the statement filed in support of its complaint, NFHA alleges that the company refuses to underwrite homeowners’ insurance policies for homes that have flat roofs in the Wilmington, Delaware area, a policy that NFHA charges has a racially disparate impact on African-American and minority communities. Although insurance and insurers are not explicitly covered in the Fair Housing Act, NFHA argues that federal courts have given deference to HUD’s interpretation of the statute, holding that the Fair Housing Act applies to all types of discriminatory insurance practices. NFHA’s complaint is based on its own testing of independent insurance agencies and a single university study of the relationship between roof type and race in the Wilmington area. NFHA claims that its testing of six insurance agencies shows that independent insurance agents were willing to underwrite policies on homes with flat roofs, while agents affiliated only with the insurance company targeted by NFHA cited a company policy that disallowed underwriting policies on such homes. Further, NFHA claims that the university study found a statistically significant relationship between minority populations and homes that have flat roofs, and therefore the “no flat roof policy” disproportionately impacts African-American and minority communities. Moreover, NFHA claims that there is no business justification for such a policy and that the insurance company does not apply the same policy in other cities. Under its fair housing complaint procedures HUD will now conduct its own investigation and determine whether further administrative action is required.

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 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 April 17, the National Fair Housing Alliance and certain of its member organizations (collectively NFHA) filed an administrative complaint with the Department of Housing and Urban Development alleging discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. This is the second of several complaints and lawsuits the NFHA is expected to file with regard to these alleged practices.

Last week we posted about plans by the National Fair Housing Alliance and certain of its member organizations to file administrative complaints and/or lawsuits against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. Yesterday, the first such complaint was filed with the Department of Housing and Urban Development. The filing triggers a process through which HUD will now conduct its own investigation of the issues presented. The complaint is based on an NFHA report released earlier this month, which overlooks key considerations with regard to servicer management of REO properties. In announcing this complaint, NFHA indicated another will be filed next week. Servicers should expect several additional complaints in the coming weeks and months.

According to reports, the National Fair Housing Alliance and several of its member organizations (collectively NFHA) indicated this week that they plan to take legal action against multiple financial institutions for alleged discriminatory practices with regard to real estate owned (REO) properties in violation of the Fair Housing Act. The NFHA promised that it will file administrative complaints with the U.S. Department of Housing and Urban Development and/or legal complaints in federal courts. The first such complaint could be filed as early as next week. The anticipated complaints will be based on the results of an investigation conducted by the NFHA concerning the practices of several lenders and investors responsible for maintaining and marketing REO properties in African-American and Latino neighborhoods.

According to a report that was released on April 4, the investigation covered more than 1,000 REO properties in nine metropolitan areas including Atlanta, Baltimore, Dallas, Dayton, Miami/Fort Lauderdale, Oakland, Philadelphia, Phoenix and Washington, DC. The investigation claims to have revealed that, among other things, REO properties in predominantly minority neighborhoods are 42 percent more likely to have maintenance problems and are 33 percent less likely to have a “For Sale” sign than properties in predominantly White neighborhoods. The report suggests that the poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. NFHA maintains that these alleged practices violate the Fair Housing Act and HUD’s implementing regulations and leave those neighborhoods in “crisis.” The NFHA report also makes several policy recommendations. The report offers recommendations for financial institutions to (i) enhance their vendor selection and oversight, (ii) better market and sell properties, and (iii) make REO data more transparent. The NFHA also (i) urges federal regulators, including the CFPB, to conduct a major nationwide investigation into REO practices, (ii) proposes a policy to make REO properties available exclusively to owner-occupants and non-profit organizations prior to offering them more broadly, and (iii) suggests further development of lease-purchase programs for REO properties.

On February 10, the parties in a major fair housing case under review by the U.S. Supreme Court requested that the Court dismiss the case. As reported previously by BuckleySandler, the City of St. Paul, Minnesota withdrew its petition in Magner v. Gallagher, No. 10-1032, due to concerns that “a victory could substantially undermine important civil rights enforcement throughout the nation.” A Supreme Court decision in Magner likely would have definitively decided whether disparate impact claims are cognizable under the Fair Housing Act (FHA), and if they are, the applicable legal standards for such claims. Under the disparate impact theory of discrimination, a plaintiff can establish “discrimination” based solely on the results of a neutral policy, without having to show any intent to discriminate.  The result of the Supreme Court review would have had profound impact both in private litigation and government enforcement actions, and as such had drawn significant attention from civil rights groups, state attorneys general, and financial services trade groups. The withdrawal of Magner means that these important questions will remain open.

In Magner, the City had asked the Supreme Court to consider whether the FHA permits disparate impact claims. Private landlords, seeking to limit the City’s “aggressive” enforcement of its housing code, sued the City for violating the FHA. The landlords argue that the City’s attempts to close housing that violates its housing code reduces the amount of affordable housing available to minority renters. The landlords claim that as a result, the City’s enforcement efforts have a disparate impact on minority renters in violation of the FHA. Although the District Court ruled for the City, the Eighth Circuit reversed, holding that the landlords had stated a cognizable claim under the FHA. The City petitioned the Eighth Circuit for rehearing en banc, but the court denied the petition. As previously reported, the U.S. Supreme Court granted the City’s petition for certiorari on November 7, 2011.  The parties and numerous amici had submitted briefs to the Court, and oral argument was scheduled for February 29.

Magner was the Supreme Court’s first opportunity to evaluate whether disparate impact claims can exist under the FHA since Smith v. City of Jackson, 544 U.S. 228 (2005). In City of Jackson, the Court held that disparate impact claims are grounded in Title VII’s statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, the courts of appeals have offered almost no guidance as to whether the FHA permits disparate impact claims. Reviewing parallel language in the Equal Credit Opportunity Act in Garcia v. Johanns, 444 F.3d 625 (D.C. Cir. 2006), the D.C. Circuit stated in dicta that “[t]he Supreme Court has held that this ["effects"] language gives rise to a cause of action for disparate impact discrimination under Title VII and the ADEA.  ECOA contains no such language.”

Read more…

On February 10, several media outlets reported that a major fair housing case under review by the U.S. Supreme Court had been dismissed by agreement of the parties. The case, Magner v. Gallagher, No. 10-1032, described previously in a BuckleySandler alert, poses the question of whether disparate impact claims are cognizable under the Fair Housing Act. The result of the Supreme Court review would have had profound impact both in private litigation and government enforcement actions, and as such had drawn significant attention from civil rights groups, state attorneys general, and financial services trade groups. The City of St. Paul, which raised the question on appeal, reportedly decided not to pursue the appeal out of concern that “a victory could substantially undermine important civil rights enforcement throughout the nation.” Instead, the City will now take its case to trial in the U.S. District Court for the District of Minnesota. For additional reports regarding these developments, please click here and here.

In the February 2012 volume of The Banking Law Journal, BuckleySandler partners Jeff Naimon and Kirk Jensen published “The Fair Housing Act, Disparate Impact Claims, and Magner v. Gallagher“, in which the authors review the text of the Fair Housing Act, its legislative history, and past federal appellate court decisions holding that the FHA permits disparate impact claims. They argue that recent Supreme Court decisions cast doubt on the past federal appellate court decisions, and show that the statutory text of the FHA, unlike the text of some other civil rights laws, does not permit disparate impact claims. They also discuss the case currently pending before the Court in which the Court may address for the first time whether the FHA permits disparate impact claims.