Recently, the FHA published a new Multifamily Accelerated Processing Guide (MAP Guide) that consolidates underwriting and program requirements in one document. The revised MAP Guide is intended to “cut the time required to approve loan applications and to assure consistent application of program requirements and credit standards across all HUD processing offices.” The revised MAP Guide comes after the FHA’s February 2015 release of a draft version of the guide and incorporates revisions into four main areas: (i) technical corrections and edits based on operational guidance; (ii) incorporation of previously published policy issued since 2011, including Mortgagee Letters, Housing Notices, and Memos; (iii) inclusion of significant organizational and operational business model changes related to the Multifamily for Tomorrow transformation initiative; and (iv) revisions to policy. The new MAP Guide will become effective for all applications for FHA multifamily mortgage insurance received after May 28, 2016.
As previously noted, the White House released the FY 2017 Budget Proposal this week. President Obama’s proposed HUD budget for FY 2017 would revise the FHA downpayment assistance requirements found under Section 203(b)(9) of the National Housing Act (12 U.S.C. 1709) by (i) replacing subparagraph (C) (Prohibited sources), and adding a new subparagraph (D) (Government assistance). The proposed amendment to the National Housing Act “seeks to clarify that down payment assistance from state and local governments and their respective agencies and instrumentalities are not impermissible sources of down payment assistance.”
On February 1, HUD announced a $1.9 million settlement with a Memphis-based bank to resolve alleged violations of the Fair Housing Act. Specifically, the complainant alleged that the bank “was responsible for discriminatory terms and conditions for making loans, discrimination in the making of loans, and discriminatory financing, with respect to real estate transactions.” In addition, the complainant alleged that the bank engaged in discriminatory practices by failing to place bank branches in minority-concentrated areas, ultimately denying African-American and Hispanic applicants mortgage loans. The bank denied the allegations, but agreed to “voluntarily settle [the] controversy and resolve [the] matter without the necessity of an evidentiary hearing or other judicial process . . . .” Under the agreement, the bank will (i) establish a subsidy fund of $1.5 million over three years to provide interest rate reductions on home mortgages, along with down payment or closing cost assistance to qualified borrowers in identified regional areas; (ii) contribute $270,000 over the course of three years to support governmental or community-based organizations’ efforts to help homeowners repair properties in predominantly minority communities, or to provide credit, financial, homeownership, or foreclosure-prevention services to homeowners in affected areas; (iii) pay directly to the complainant $105,000 to fund similar home repair, credit, financial, homeownership, and foreclosure services; and (iv) pay directly to the complainant $25,000 in damages.
On December 9, FHA announced new maximum loan limits for forward mortgages for 2016 in 188 counties due to changes in housing prices. The new loan limits for forward mortgages are effective for case numbers assigned on or after January 1, 2016 through the end of the year. FHA noted that no areas saw a decrease in the maximum loan limits for forward mortgages and that, as detailed in Mortgagee Letter 2015-30, the national standard loan limits for low cost and high cost areas remain unchanged at $271,050 and $625,500, respectively.
On November 30, the DOJ announced the filing of a complaint and proposed consent order against a Massachusetts-based bank alleged to have violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by charging African-American and Hispanic borrowers higher prices for home loans than similarly situated white borrowers. From 2011 until at least 2014, the bank allegedly used a “target pricing” mortgage origination policy, assigning loan officers with a Minimum Base Price (MBP) they were expected to achieve on each home loan without regard to the borrower’s creditworthiness. According to the DOJ’s complaint, “African-American and Hispanic borrowers were served disproportionately by loan officers with higher MBPs than the loan officers serving white borrowers.” The complaint further alleges that, from April 2011 through December 2013, the bank authorized loan officers to price a loan higher than their assigned MBP, without documenting the reasons for doing so. Pending court approval, the DOJ’s proposed consent order will require the bank to (i) pay $1,175,000 as compensation to borrowers affected by its practices; (ii) establish a new loan pricing policy and a new loan officer compensation policy; (iii) provide fair lending and fair housing training to loan officers and bank employees; and (iv) establish a monitoring program designed to, at a minimum, assess loan pricing disparities.
In May 2013, the FDIC conducted a consumer compliance examination of the bank and found reason to believe that its lending practices violated the FHA and ECOA, prompting the agency to refer the matter to the DOJ on February 7, 2014.
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 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 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…