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On October 22, the Pennsylvania Attorney General announced a request for mortgage borrowers and home-loan applicants who believe they may be victims of redlining to file complaints with that office. The announcement states that the Attorney General is investigating evidence of redlining by financial institutions in Philadelphia neighborhoods where lenders either refused to make loans due to the applicant’s race or dissuaded minorities from applying for mortgage loans. The investigation is in response to an investigative article identifying a pattern of racial discrimination in mortgage lending in the Philadelphia area.
On October 18, the U.S. Court of Appeals for the 7th Circuit affirmed summary judgment for a mortgage servicer, holding that the plaintiff homeowners failed to show racial discrimination in violation of the Equal Credit Opportunity Act (ECOA) when the servicer required the homeowners to bring the prior loan current before assuming it. According to the opinion, the homeowners purchased a home from the previous homeowner with an existing mortgage. Soon after the purchase, the homeowners learned that the previous owner had stopped making his mortgage payments and that the bank had begun to foreclose on the home. After receiving notice of foreclosure, the homeowners tried repeatedly to assume the previous owner’s mortgage which the mortgage servicer conditioned on the homeowners bringing the loan current. Unable to do so, the homeowners sued, bringing various state and federal law claims, including under ECOA, after an employee of the servicer allegedly made a remark that implied that the homeowners were not being allowed to assume the loan because of their race. The district court rejected the claims and entered summary judgment for the mortgage servicer.
On appeal, the 7th Circuit affirmed, concluding that the homeowners failed to counter the servicer’s representation that they never produced a complete application. Moreover, the court held that the alleged statement, which attributed the servicer’s decision to a race, was vague and “require[d] too much speculation to conclude that their race” was a determining factor in the requirement to satisfy the outstanding loan payments, a requirement that was otherwise consistent with the loan agreement.
On September 5, a coalition of 14 state Attorneys General sent a comment letter to the CFPB raising concerns about statements made by acting Director Mick Mulvaney in May suggesting that the Bureau may reexamine its requirements and enforcement of the Equal Credit Opportunity Act (ECOA). The letter notes that Mulvaney’s comments followed the Bureau’s repeal of the agency’s 2013 guidance on indirect auto lending and compliance with ECOA last May. (See previous InfoBytes coverage on resolution S.J. Res. 57 disapproving the guidance here.) The Attorneys General point out that the resolution did not eliminate regulations promulgated in 1977 and adopted by the Bureau in 2011 that interpret “ECOA to provide for disparate impact liability without limitation to the type of lending.” The Attorneys General express concern over the Bureau’s possible break with “the federal government’s longstanding interpretation that ECOA provides for disparate impact liability” both because states share ECOA enforcement authority with the Bureau and because many states model their antidiscrimination statutes on ECOA.
The comment letter asserts that dropping disparate impact from ECOA reviews would be inconsistent with the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (as covered by a Buckley Sandler Special Alert). The Attorneys General cite to the Supreme Court’s holding that disparate impact liability was provided for under a provision of the Federal Housing Act, and assert that the holding “dictates that the text of ECOA unambiguously provides for disparate impact liability.” Because, they claim, the “CFPB has no authority to overrule the Supreme Court's interpretation of unambiguous text, any action to reinterpret ECOA not to provide for disparate impact liability could be set aside by a court as arbitrary, capricious, and otherwise not in accordance with law.”
As previously covered in InfoBytes, last month 17 state Attorneys General sent a comment letter to HUD urging the agency to not make any changes to its 2013 Disparate Impact Regulation, which implements the Fair Housing Act’s disparate impact standard, as well as the 2016 Application of the Fair Housing Act’s Discriminatory Effects Standard to Insurance.
On August 23, the New York Department of Finance Services (NYDFS) released updated guidance reminding institutions engaged in indirect auto lending through third parties that they must comply with the state’s Fair Lending Law, despite the May repeal of the CFPB’s Bulletin 2013-02 on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA). (The repeal was previously covered by InfoBytes here.) The updated guidance “consolidates, streamlines and reinforces previous guidance issued by [NYDFS]’s predecessor, the New York State Banking Department,” which applies to supervised financial institutions and their subsidiaries and affiliates (lenders). The guidance provides a list of actions lenders should take to develop a fair lending compliance program for indirect auto lending, including (i) submitting all applications for loans that are rejected or withdrawn to an automatic review by a higher-level supervisor; (ii) implementing a fair lending training program for both new hires and current employees; (iii) obtaining written agreements from all dealers that certify that the dealer acknowledges its responsibility to comply with fair lending laws and the policies and procedures contained in the fair lending plan; and (iv) extending fair lending plan principles to refinancing and collection practices.
On August 20, 17 state Attorneys General in a comment letter urged HUD to not make any changes to its 2013 Disparate Impact Regulation (regulation), which implements the Fair Housing Act’s disparate impact standard, as well as the 2016 Application of the Fair Housing Act’s Discriminatory Effects Standard to Insurance (supplement). The comment letter responded to HUD’s June advance notice of proposed rulemaking (ANPR), which sought comments on whether the 2013 regulation and the 2016 supplement are consistent with the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Covered by a Buckley Sandler Special Alert.)
In the letter, the Attorneys General state that the regulation “strikes the proper balance between promoting an integrated society and protecting housing providers from unmeritorious discrimination claims” and is “entirely consistent” with the Supreme Court decision. The letter cites to multiple federal and state court decisions, which have held that the regulation is “‘adopted’ by, or consistent with, the Supreme Court decision” and emphasizes that, to their awareness, no court has held the regulation to be inconsistent. Conversely, even if the Supreme Court decision left room for revisions to the regulation, the letter notes that the issues of segregation and discrimination in the housing and lending market have not dissipated in the five years since the regulation was finalized and therefore, no revisions are warranted. Lastly, among other points, the Attorneys General conclude that any revisions would “reduce clarity and add uncertainty because any revision would likely fail to rely on the half century of disparate impact case law.”
The letter was led by North Carolina Attorney General, Josh Stein. The other state Attorneys General included California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia and Washington as well as the District of Columbia.
On August 17, Congressman Emanuel Cleaver, II (D-MO) released a report detailing his findings from an investigation into the small business lending practices of fintech companies, concluding that the algorithms used in the application process may not reduce the risk of discrimination. The report notes that one company disclosed utilized a third-party fair lending consulting firm to assist in preventing discrimination, but that some survey responses “lacked key information or were willfully vague” about how the algorithms help avoid income-based and racial bias. The report cites to other criticisms of small business lending in the fintech industry, including (i) the use of forced arbitration clauses; and (ii) utilizing personal credit scores to establish a business’ credit worthiness. In contrast, the report emphasizes that fintech lending “can be potentially advantageous for small businesses looking to get a leg up in a competitive market” and that fintech companies often serve markets traditionally ignored by banks. The report concludes with a list of best practices and principles for fintech companies that will lend to small businesses, such as (i) registering with the CFPB’s complaint database; (ii) replicating TILA disclosures required for consumers; and (iii) securing third party fair-lending audits.
On August 13, HUD announced an advance notice of proposed rulemaking (ANPR) seeking comment on potential amendments to its 2015 Affirmatively Furthering Fair Housing (AFFH) regulations. As previously covered by InfoBytes, AFFH was aimed at helping communities who receive HUD funding meet their fair housing obligations to provide affordable housing in more communities; however, HUD now states that the rule “proved ineffective, highly prescriptive, and effectively discouraged the production of affordable housing.” The ANPR requests public comment on changes that will, among other things, (i) minimize regulatory burden; (ii) create a process focused on accomplishing positive results; (iii) provide for greater local control; (iv) encourage actions that will increase housing choice; and (v) efficiently utilize HUD resources. The ANPR also details a list of substantive questions HUD is interested in commenters responding to, including “[w]hat type of community participation and consultation should program participants undertake in fulfilling their AFFH obligations?” and “[h]ow should HUD evaluate the AFFH efforts of program participants?” Comments on the ANPR must be received by October 15.
On July 26, the Federal Reserve Board released its inaugural Consumer Compliance Supervision Bulletin (Bulletin) to share information about the agency’s supervisory observations and other noteworthy developments related to consumer protection, and provide practical steps for banking organizations to consider when addressing consumer compliance risk. The first Bulletin focuses on fair lending issues related to the practice of redlining and outlines key risk factors the Fed considers in its review, such as (i) whether a bank’s Community Reinvestment Act (CRA) assessment areas inappropriately exclude minority census tracts; (ii) whether a bank’s Home Mortgage Disclosure Act or CRA lending data show “statistically significant disparities in majority minority census tracts when compared with similar lenders”; or (iii) whether the bank’s branches, loan production offices, or marketing strategies appear to exclude majority minority census tracts. Practical steps for mitigating redlining risk are also provided. The Bulletin also discusses fair lending risk related to mortgage pricing discrimination against minority borrowers, small dollar loan pricing that discriminates against minorities and women, disability discrimination, and maternity leave discrimination.
The Bulletin additionally addresses unfair or deceptive acts or practices risks related to overdrafts, misrepresentations made by loan officers, and the marketing of student financial products and services. The Bulletin also highlights regulatory and policy developments related to the Federal Financial Institutions Examination Council’s updated Uniform Interagency Consumer Compliance Rating System along with recent changes to the Military Lending Act.
New York Attorney General announces settlement with auto dealership over deceptive practices targeting non-English speakers
On July 5, the New York Attorney General announced a settlement with an auto dealership to resolve allegations that it engaged in deceptive practices targeted towards non-English speakers. The auto dealership allegedly misled consumers about the actual cost of their purchases and offered false refinancing promises. According to the announcement, the dealership allegedly (i) provided English documents to non-English speaking consumers containing loan terms and aftermarket items different from those discussed during the actual sale, including “supplemental service contracts, gap insurance policies, or special protections for tires, fabric, glass, or paint that added thousands of dollars to the auto sale or lease contracts”; and (ii) told consumers it would refinance their loans at a lower rate after receiving complaints of overcharges and unwanted aftermarket items. However, the Attorney General asserts that the dealership failed to honor the refinancing promises. Under the terms of the settlement, the dealership is required to reform its business practices, refrain from engaging in the alleged deceptive business practices, modify its employee training and complaint handling process, and produce sales and lending documents in languages for non-English speakers prior to the signing of any documentation in English. The dealership must also pay over $423,000 to cover restitution, penalties, fees, and costs to the state.
On June 29, the U.S. District Court for the Southern District of Florida granted a national bank’s Motion for Summary Judgment against the City of Miami Gardens (City) on the City’s claims that the bank allegedly made loans to minority borrowers that were more expensive than those given to non-minority borrowers, resulting in greater rates of default and foreclosure, which led to reduced property values in the City and decreased the City’s property tax revenue. (See previous Buckley Sandler Special Alert on a 2017 Supreme Court ruling addressing whether cities have standing to bring discriminatory lending claims under the FHA to recover lost tax revenue and upkeep costs). The court, siding with the bank, found the City had failed to present sufficient evidence to support a claim of discriminatory lending. According to the order, the parties agreed that the bank had not made any predatory loans during the limitations period. Because the City only identified two types of loans from a total of 153 loans issued by the bank during the limitations period as having been made at a higher cost to minorities, the record was insufficient to show the bank’s policies produced “statistically imbalanced lending patterns” and failed to support a claim for disparate impact. The judge further determined that the bank established that there were “legitimate nondiscriminatory reasons that motivated the different pricing,” and that “the City ultimately cannot carry its burden to show by a preponderance of the evidence that [the bank’s] reasons for the price differentials were a mere pretext for discrimination.” On these bases, the court granted the motion.
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- David S. Krakoff to discuss "The DOJ corporate enforcement policy and your disclosure calculus one year in: Are companies benefitting?" at the American Conference Institute International Conference on the Foreign Corrupt Practices Act
- Moorari K. Shah to discuss "Legal & regulatory issues" at the Opal Group Marketplace Lending & Alternative Financing Summit
- Jonice Gray Tucker to discuss "Hot topics in consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference
- Daniel P. Stipano to discuss "Anti-money laundering/OFAC compliance" at the Institute of International Bankers U.S. Regulatory/Compliance Orientation Program