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.
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by the U.S. District Court for the District of New Jersey, after which we expect that the Supreme Court appeal will be withdrawn.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. Read more…
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.
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.
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. Read more…
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.”
On June 26, two insurance associations filed a lawsuit challenging a rule promulgated earlier this year by HUD that authorizes so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The rule provides support to 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 permits practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns. The insurance associations allege that the rule violates the Administrative Procedures Act because it contradicts the plain language of the relevant portion of the Fair Housing Act, which prohibits only intentional discrimination. The complaint also alleges that the rule, if applied to homeowners’ insurance, would require insurers “to consider characteristics such as race and ethnicity and to disregard legitimate risk-related factors,” thereby forcing insurers “to provide and price insurance in a manner that is wholly inconsistent with well-established principles of actuarial practice and applicable state insurance law.”
On June 6, HUD announced an agreement to resolve an administrative complaint filed last year by the National Fair Housing Alliance (NFHA) and numerous individual fair housing organizations alleging that a national bank engaged in discriminatory practices with regard to real estate owned (REO) properties. The complaint was one of several that followed an investigation conducted by the fair housing groups, which allegedly revealed that REO properties in predominantly minority neighborhoods are more likely to have maintenance problems and are less likely to have a “For Sale” sign than properties in predominantly white neighborhoods. The report suggested that 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. Under the conciliation agreement, the bank will invest $39 million in 45 communities to support homeownership, neighborhood stabilization, property rehabilitation, and housing development. The bank also will (i) use a revised Real Estate Broker Procedure Manual and property inspection checklist, (ii) implement an enhanced training program for real estate brokers and agents who list REO properties, and bank staff responsible for managing REO properties, and (iii) extend the amount of time that individual REO properties will be available exclusively for purchase by an owner-occupant or a non-profit organization.
On March 12, the Chicago-based Woodstock Institute released research claiming that mortgage lenders discriminate against female applicants. The research is presented in a “fact sheet” and previews a longer report the group plans to publish later this year. The study reviewed 2010 HMDA data on first lien single-family home purchase and refinance mortgage applications in the Chicago area and purports to show that (i) female-headed joint applications are much less likely to be originated than male-headed joint applications and (ii) this disparity holds true across all racial categories and is most pronounced for African American women. The Woodstock Institute further claims that these disparities are more pronounced for refinance loans. Based on its conclusions, the group urges federal regulators and enforcement authorities to conduct further investigation, including through enforcement of HUD’s recently finalized disparate impact rule. It also recommends that the CFPB prioritize enhancing the HMDA rules to make public more information to better identify discriminatory lending practices.
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.