On October 21, HUD announced a proposed rule that would formalize the standards for evaluating harassment claims in housing or housing-related transactions under the FHA. The rule – “Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices under the Fair Housing Act” – would define “quid pro quo harassment” and “hostile environment harassment,” respectively, as (i) subjecting a person to an unwelcome request or demand because of the person’s protected characteristic and submission to the request or demand is, explicitly or implicitly, made a condition related to the person’s housing; and (ii) subjecting a person to unwelcome conduct that is sufficiently severe or pervasive such that it interferes with or deprives the person the right to use and enjoy the housing or to exercise other rights protected by the FHA. In addition, the proposed rule also would describe standards for “direct liability” and “vicarious liability”, which would apply to all violations under the Act, not solely harassment. In particular, the proposed rule would define “direct liability” to include (i) a person’s own conduct; (ii) failure to take prompt action with respect to a discriminatory housing practice by an employee or action; and (iii) failing to fulfill a duty to take prompt action to correct and end a discriminatory housing practice by a third-party, where the person knew or should have known of the discriminatory conduct. The proposal was published in the Federal Register on October 21, and comments are due by December 21, 2015.
On November 16, HUD released FHA’s annual report to Congress on the financial condition of its Mutual Mortgage Insurance (MMI) Fund. For the first time since 2008, the report shows that FHA’s MMI fund’s capital ratio exceeds the congressionally required 2% threshold, standing at 2.07%. The report points to FHA policy changes and program improvements as the driving factors behind the improved MMI fund capital ratio. Notably, the report states that the agency’s decision to reduce annual mortgage insurance premiums by a half percent (i) marginally decreased the projected time to reach the 2% capital ratio; (ii) enabled over 75,000 new creditworthy borrowers to purchase homes; and (iii) compensated for the credit risk of the Forward mortgage loan program. Finally, the report highlights the agency’s efforts to reduce risk and improve loss mitigation by making substantial revisions to its credit guidelines, including strengthening its underwriting guidelines to discourage extreme risk layering and prohibiting seller-funded down-payment assistance.
On October 16, HUD’s FHA published a notice of partial withdrawal of its July 6 proposed rule to limit the time frame in which FHA-approved lenders must file insurance claims for benefits. The July 6 proposal would have required mortgagees to file claims (i) within three months from when marketable title to the property was obtained; or (ii) when the property was sold to a third party. In addition, the proposal sought to terminate the FHA’s insurance contract as a penalty for missing the proposed filing deadlines. Based on feedback that HUD received through its notice and comment process, HUD withdrew the proposed provisions to limit the FHA insurance claim period and its proposed amendment to the penalty provisions.
On October 7, HUD announced a September 24 Charge of Discrimination against a group of Colorado landlords for allegedly “steering” families with children to apartments located at the rear end of the apartment building, an alleged violation of the FHA. According to HUD, from September 2013 to February 2014, Complainant DMFHC, a Colorado non-profit organization dedicated to promoting equal housing opportunities throughout the Denver, Colorado area, conducted various tests to show that respondents discriminated against families with children by making units in the front of the apartment building unavailable to them. HUD alleges that, “Respondents violated the Act by restricting the housing choices of families with children and perpetuating segregated housing patterns within the Subject Property by assigning families with children to the rear building.” The charge, which assesses a $16,000 civil money penalty fee for each violation of the FHA, will be heard by a United States Administrative Law Judge, unless a party elects to have the case heard in federal district court.
On September 28, HUD, the FDIC, and the U.S. Attorney for the Eastern District of New York filed suit against a non-profit housing counseling corporation and certain mortgage lenders for allegedly running a scheme to defraud the United States and various banks out of over $5,000,000 in false claims. Filed in the Eastern District of New York, the complaint alleges that, in order to remain in HUD’s Direct Endorsement Program, a federal program that insures mortgage loans through the FHA, the mortgage lenders sought to fraudulently conceal the high default rates of their loans by funneling money through the corporation to pay their borrowers’ payments, in direct violation of FHA regulations. The mortgage lenders would then sell the federally-insured loans to FDIC-insured banks. Once either a bank’s indemnification or repurchase rights, or the period during which HUD monitored loans for early payment defaults, lapsed, the mortgage lenders would stop making payments, resulting in the ultimate default of the borrowers. The complaint seeks treble damages under the FCA, the FIRREA, and under common law theories of gross negligence, breach of fiduciary trust, and unjust enrichment.
On September 2, U.S. Attorney General Loretta Lynch delivered remarks at HUD’s Fair Housing Policy Conference. In her remarks, Lynch stressed the importance of fair housing as being a primary driver “to access to employment, to education, to credit, to transportation, to safety and to a whole range of institutions and opportunities.” Lynch stated that she is “more determined than ever to vigorously enforce the Fair Housing Act (FHA).” Among other things, Lynch provided an overview on how the DOJ is implementing new programs, technology, and research to conduct electronic testing, allowing the DOJ to expand the reach of its Fair Housing Testing Program. The Attorney General also expressed her support of HUD’s recently issued “Affirmatively Furthering Fair Housing” rule, and signaled that the DOJ intends to “vigorously enforce” the FHA using every available tool, including the disparate impact theory, which the Supreme Court ruled recently as a valid enforcement tool to challenge unfair mortgage lending practices.
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.
On July 14, the DOJ, in coordination with HUD’s Office of Inspector General and the U.S. Attorney’s Office for the Southern District of Florida, announced that a Miami-area real estate developer and mortgage company owner, his business partner, and a senior underwriter with the mortgage company each pleaded guilty to a mortgage fraud scheme that resulted in $64 million in losses to the FHA. According to the August 2014 indictment, the three defendants knowingly participated in a scheme to alter important information contained in potential borrowers’ loan applications so that they appeared qualified for FHA-insured loans when, in reality, they were not qualified. According to the DOJ, the developer/owner and his business partner “admitted to pressuring their employees to approve and close loans using earnings statements and verification of employment forms that made it appear as if the borrowers had higher incomes and more favorable work histories than they actually did, and documents falsely improving or explaining borrowers’ credit histories.” The senior underwriter admitted to providing false information to her co-workers and endorsing borrowers’ applications when she knew that they did not qualify for the loans. Eventually, many of the loans went into foreclosure and HUD was obligated to pay the outstanding loan balances to the financial institution investors. To date, 25 individuals have pleaded guilty to offenses related to this mortgage fraud scheme.
On July 13, HUD announced guidance regarding discrimination on the basis of sexual orientation, gender identity, and marital status. The guidance on Multifamily Assisted and Insured Housing Programs was intended to clarify the 2012 Equal Access to Housing in HUD Programs Regardless of Sexual Orientation or Gender Identity Rule (“Equal Access Rule”). HUD clarified that, in addition to individual program eligibility requirements established by HUD, a determination of eligibility for housing that is assisted by HUD or subject to a mortgage insured by the FHA “will be made available without regard to actual or perceived sexual orientation, gender identity, or marital status.” The guidance also clarifies that owners, administrators, and other recipients and sub-recipients of HUD funds associated with HUD-assisted housing or housing whose financing is insured by HUD may not inquire about the sexual orientation or gender identity of an applicant for, or occupant of, such housing, and notes that the rule is applicable whether such housing is renter or owner occupied. HUD noted that future Management and Occupancy Reviews may include a review for compliance with the Equal Access Rule. The guidance was coordinated with the July 13 White House Conference on Aging, with the White House emphasizing that the Equal Access Rule also applies to Section 202 Supportive Housing for the Elderly.
On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.
Applicability to ECOA
When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA. Read more…
Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims
Today, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”
The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . .” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.” Read more…
FHA Announces Updated Defect Taxonomy to Clarify its Plan for Classifying Loan Defects Found in its Single-Family Loan Portfolio
On June 18, the FHA released its Single-Family Housing Loan Quality Assessment Methodology (“Defect Taxonomy”), a framework outlining the agency’s plans to identify and capture information related to loan defects found in Single-Family FHA endorsed loans. The new framework is intended to increase the efficacy of FHA’s Quality Assurance efforts and focuses on three core concepts – (i) identifying defects, (ii) capturing the sources and causes of defects, and (iii) assessing the severity of defects. Once implemented, the Defect Taxonomy will reduce the number of codes that the FHA uses to describe loan defects from 99 to nine. Additionally, the Defect Taxonomy will implement “Basis of Ratings Codes” that will capture both the sources and causes of defects. Finally, the Defect Taxonomy will refine FHA’s process for communicating the severity of defects by subdividing its current categories of “Unacceptable” and “Deficient” findings into four tiers of findings that will describe defects in greater detail. The FHA anticipates that these changes will provide greater transparency to lenders so that they can mitigate their credit risk when originating FHA loans. FHA further hopes that the Defect Taxonomy will help FHA monitor for deficiency trends and enhance its program policies. In its announcement, FHA warns that the Defect Taxonomy “is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the Federal Government and does not establish standards for administrative or civil enforcement action….” FHA also maintains that the Defect Taxonomy does not address how FHA will respond (i) to findings of patterns and practices of loan-level defects in FHA originations or (ii) to findings of fraud or misrepresentation in connection with any FHA-insured loan. FHA has yet to set a date for the Defect Taxonomy to take effect.
On May 28, the CFPB, along with the DOJ, filed a joint complaint against a California-based mortgage lender alleging that the lender violated the Equal Credit Opportunity Act by engaging in a pattern or practice of discrimination from 2006 to 2011 that increased loan prices for African-American and Hispanic borrowers. The DOJ also alleges that the lender violated the Fair Housing Act. According to the complaint, the lender’s mortgage broker compensation policy, which incented discretionary interest rate and fee increases to borrowers, resulted in approximately 14,000 African-American and Hispanic borrowers being charged higher total broker fees on wholesale mortgage loans than non-Hispanic white borrowers. The complaint alleges that the higher fees were not based on the borrowers’ credit risk profile, but rather on the basis of race or national origin. The parties separately filed a proposed consent order which would require the mortgage lender to, among other things, pay $9 million in consumer relief to affected borrowers to resolve the allegations. The proposed consent order is currently pending court approval.
On May 26, the DOJ announced a lawsuit against the city of Beaumont, Texas (Beaumont) for allegedly violating the Fair Housing Act (FHA) and the Americans with Disabilities Act. According to the DOJ’s complaint, Beaumont’s Zoning Code imposes a one-half mile spacing restriction on small community homes for persons with intellectual or developmental disabilities; this means that no such community home may operate within one-half mile of another such community home. The DOJ alleges that Beaumont’s Zoning Code does not similarly restrict the spacing of housing for persons without disabilities. In addition, the DOJ asserts that Beaumont imposes on community homes for persons with disabilities excessive fire safety requirements that are not imposed on similarly situated housing for persons without disabilities. According to the DOJ, Beaumont’s policies have “compelled the closure of several community homes” and prohibited “new community homes from opening or operating in most of Beaumont’s residential neighborhoods,” forcing residents with disabilities to move to institutional settings or out of Beaumont. The lawsuit, which arose after complaints were filed with HUD, requests that the Court enter an Order under which Beaumont, among other things, would be (i) enjoined from enforcing the one-half mile spacing rule or fire safety requirements that apply only to community homes of persons with disabilities, (ii) required to restore (to the extent practical) the alleged victims to the position they would have been in but for the alleged violations, and (iii) required to pay monetary damages.
National Non-Profit Fair Housing Organization Files Complaint Against Fannie Mae Alleging Racial Discrimination
On May 12, 2015, the National Fair Housing Alliance (NFHA) and 19 local fair housing organizations (collectively, the “Complainants”) filed a fair housing discrimination complaint with the U.S. Department of Housing & Urban Development against Fannie Mae alleging a pattern of maintaining and marketing its foreclosed houses in white areas better than in minority areas. The complaint is the result of a five year investigation where investigators visited and documented the conditions of the foreclosed properties that Fannie Mae owns in 34 metro areas. In each of the investigated metropolitan areas, the Complainants allege that Fannie Mae engaged in the practice of maintaining and marketing its REO properties in a state of disrepair in communities of color while maintaining and marketing REO properties in predominantly White communities in a materially better condition. Fannie Mae REO properties in White communities were far more likely to have a small number of maintenance deficiencies or problems than REO properties in communities of color, while REO properties in communities of color were far more likely to have large numbers of such deficiencies or problems compared to those in White communities. As a result, the Complainants allege that Fannie Mae violated the Fair Housing Act, Title VIII of the Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988, including but not limited to 42 U.S.C. §§ 3604(a)-(d). The housing advocacy groups are calling for Fannie Mae to clean up the neglected properties and spend “millions” of dollars on grants or other compensation for those trying to buy foreclosed houses and people living in communities affected by them.