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  • Third Treasury Report Calls on HUD to Reconsider Application of Disparate Impact Rule to the Insurance Industry

    Federal Issues

    On October 26, the U.S. Treasury Department published a report outlining a number of recommendations for ways to manage systemic risk primarily within the asset management and insurance industry.  A section of the report, however, also discusses HUD’s potential application of the disparate impact rule to the insurance industry—specifically related to homeowner’s insurance. The report, “A Financial System That Creates Economic Opportunities—Asset Management and Insurance,” is the third in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772 (EO), which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert on the EO here and InfoBytes coverage on the first two reports here.)

    HUD is authorized to adjudicate housing discrimination claims and issue rules relating to the Fair Housing Act. According to the report, Treasury recommends that HUD reconsider the use of the disparate impact theory to the insurance industry. The report notes a number of problems and challenges that would arise from applying disparate impact to the insurance industry. In particular, the report identifies potential challenges because (i) “state insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk” and at least one state expressly prohibits the collection of this data; (ii) the rule could impose unnecessary burdens on insurers and lead to actions that are not actuarially sound in an effort to avoid underwriting practices that may result in disparate outcomes; and (iii) it may be inconsistent with the McCarran-Ferguson Act and other existing state laws.

    The report also recommends, among other things, that Congress clarify the “business of insurance” exception that generally excludes these services from the CFPB’s jurisdiction. The report recommends clarification to this exception to eliminate uncertainty about the CFPB’s jurisdiction and the potential overlap between the Bureau and state insurance regulators. A fact sheet accompanying the report further highlights Treasury’s recommendations to evaluate systemic risk, streamline regulations, rationalize international engagement, and promote economic growth.

    Federal Issues Department of Treasury FHA Asset Management HUD Disparate Impact CFPB Systemic Risk Insurance

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  • FinCEN Encourages Communication from Financial Institutions Affected by the California Wildfires; FDIC Offers Regulatory Relief; FHA Extends Foreclosure Moratorium

    Federal Issues

    California Wildfire Relief. On October 19, FinCEN announced that financial institutions affected by the California wildfires should contact FinCEN and their functional regulator regarding any delays in their ability to file Bank Secrecy Act reports and to keep FinCEN and the regulators apprised of subsequent changes in their circumstances.

    On October 20, the FDIC announced steps to provide regulatory relief to financial institutions and facilitate recovery in areas of California affected by recent wildfires. The FDIC is encouraging banks to work constructively with borrowers affected by the wildfires, including extending repayment terms, restructuring existing loans, or easing terms for new loans. The FDIC noted that financial institutions may receive favorable Community Reinvestment Act (CRA) consideration in support of disaster recovery and will consider regulatory relief from certain filing and publishing requirements.

    Hurricane Relief. On October 20, HUD issued an additional 90-day extension of the initial disaster foreclosure moratorium for FHA mortgaged properties located in specified areas impacted by the recent hurricanes. The foreclosure moratorium applies to the initiation of foreclosures and foreclosures already in process. The new extended dates are as follows: February 21, 2018 for Hurricane Harvey, March 9, 2018 for Hurricane Irma, and March 19, 2018 for Hurricane Maria.

    As previously discussed in InfoBytes, several federal agencies have announced regulatory relief for victims of recent natural disasters.

    Federal Issues Disaster Relief FinCEN Bank Secrecy Act FDIC FHA Foreclosure Mortgages HUD

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  • HUD Secretary Carson Testifies at House Financial Services Committee Hearing, Discusses Use of FCA Against FHA Lenders

    Federal Issues

    On October 12, Secretary of HUD, Ben Carson, testified at a hearing before the House Financial Services Committee. The hearing entitled “The Future of Housing in America: Oversight of the Department of Housing and Urban Development,” provided an update on HUD’s vision for federal housing policy and touched upon topics such as the conservatorship of Fannie Mae and Freddie Mac, the agency’s role in hurricane disaster relief, and regulatory reform efforts. In his written testimony, Carson reaffirmed his personal interest, and that of the President Trump’s Administration, in working with the Committee on housing finance reform, specifically referencing the FHA mortgage insurance program and Ginnie Mae mortgage-backed security guaranty as “vital components” of the housing finance system. Towards the end of the three-hour-long hearing, Carson was asked by Representative Dave Trott (R-MI) about the federal government’s “unprecedented” use of the False Claims Act (FCA) as a means to “impose outrageous penalties against lenders for immaterial defects” in HFA loan originations, which, according to Rep. Trott, is turning lenders away from FHA lending and is resulting in increased costs to borrowers. Carson stated that his staff is already engaged in discussions with the DOJ staff and is “committed to getting that resolved, because it’s ridiculous, quite frankly.” Carson added, “I’m not exactly sure why there had been such an escalation previously, but the long-term effects of that escalation is obviously providing fewer appropriate choices for consumers, and that’s exactly the opposite of what we should be doing.”

    Federal Issues HUD House Financial Services Committee DOJ False Claims Act / FIRREA Mortgages FHA

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  • HUD IG Blames Ginnie Mae for Inadequate Supervision; HUD IG Concludes HUD Did Not Follow Requirements When Forgiving Debts

    Federal Issues

    On September 21, the HUD Inspector General (IG) released an audit report of Ginnie Mae’s oversight of nonbanks in the mortgage servicing industry. The report found that Ginnie Mae did not adequately respond to the growth in its nonbank issuer base; a base, the report notes, that tends to have more complex financial and operating structures than banking institutions. The IG found, among other things, that Ginnie Mae may not be prepared to identify problems with nonbank issuers prior to default, requiring additional funds from the U.S. Treasury to pay back investors in the event of a large default.

    On the same day, the IG also announced a report which found that HUD did not always follow applicable requirements when forgiving debts and terminating debt collections. The report determined that HUD’s review process for evaluating debt forgiveness or collection termination was not thorough enough to ensure that statutory, regulatory, and policy requirements associated with this process were met—such as ensuring DOJ approval was obtained when required.

    Federal Issues HUD OIG DOJ Ginnie Mae Mortgage Servicing Mortgages Debt Cancellation Nonbank Supervision Department of Treasury

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  • District Court Fines Mortgage Brokers More Than $298 Million for Alleged FCA/FIRREA Violations

    Courts

    On September 14, a federal judge in the U.S. District Court for the Southern District of Texas ruled after a five-week jury trial that defendants, who allegedly submitted fraudulent insurance claims after acquiring risky loans, were liable for treble damages and the maximum civil penalties allowed under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). According to the court, the evidence presented at trial demonstrated that the damages suffered by the U.S. were a “foreseeable consequence” of the defendants’ misconduct and that such misconduct was part of an “prolonged, consistent enterprise of defrauding the [U.S.],” warranting a higher level of penalties. The jury found that one of the defendants along with its CEO “submitted or caused to be submitted 103 insurance claims” while misrepresenting that its branches were registered by HUD, causing the Federal Housing Administration (FHA) to sustain damages in excess of $7 million. A separate mortgage broker defendant was found to have submitted or caused to be submitted 1,192 insurance claims causing over $256 million in damages to the FHA due to the “reckless” underwriting of loan applications, in violation of FCA. The court rejected the defendants’ request for lenient civil penalties, finding the defendants’ behavior to be “custom-designed to flout the very program that relied upon [defendants’] diligence and compliance” and demonstrating “a patent unwillingness to accept responsibility for their actions.” The FIRREA penalties resulted from defendants submitting false annual certifications to HUD that were intended “to serve as a separate and independent quality check on the [defendant’s] branches,” but instead led to injury in the form of borrowers entering into default or foreclosures, as well as elevated mortgage insurance premiums.

    The judge imposed over $291 million in FCA treble damages and penalties against the three defendants. Additionally, each defendant was fined $2.2 million in FIRREA penalties for actions that “were neither isolated or relatively benign . . . [but] were reckless, egregious, and widely injurious.”

    Courts Lending Mortgages False Claims Act / FIRREA Litigation Insurance FHA HUD

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  • HUD Releases Mortgagee Letter Providing Home Equity Conversion Mortgage Servicing Implementation Guidance

    Agency Rule-Making & Guidance

    On August 24, HUD published Mortgagee Letter 2017-11, which provides directions for FHA-approved mortgagees to implement certain servicing policy changes outlined in the Federal Housing Administration: Strengthening the Home Equity Conversion Mortgage Program Final Rule (HECM Final Rule), published in the Federal Register in January 2017. The HECM Final Rule’s servicing requirements (including the additional guidance set forth in Mortgagee Letter 2017-11), will take effect for all FHA case numbers assigned on or after September 19, 2017. The Mortgagee Letter furnishes additional details on the following areas of servicing policy included in the HECM Final Rule: (i) “Default for Unpaid Property Charges”; (ii) “Sale of Property Securing a Due and Payable HECM”; and (iii) “Cash for Keys Incentive and Relocation Incentive.”

    Agency Rule-Making & Guidance HUD FHA Mortgage Servicing Federal Register Home Equity Loans HECM

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  • DOJ Announces Settlements with Non-Bank Mortgage Lender to Resolve Alleged False Claims Act Violations

    Lending

    On August 8, the DOJ announced a $74.5 million settlement with a non-bank mortgage lender and certain affiliates to resolve potential claims that they violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development and the Veterans Administration (VA), and by selling certain loans to Fannie Mae and Freddie Mac that did not meet applicable requirements. According to the terms of the two settlement agreements, $65 million of the settlement will be paid to resolve allegations relating to FHA loans, and $9.45 million will be paid to resolve potential civil claims relating to certain specified VA, Fannie Mae, and Freddie Mac loans. The settlements also fully resolved a False Claims Act qui tam lawsuit that had been pending in the United States District Court for the Eastern District of New York.

    The settlement included no admission of liability by the lender. The lender issued a statement responding to the settlements: “We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation. While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of [the company] and its constituents.”

    Lending Mortgages False Claims Act / FIRREA Mortgage Origination HUD Fannie Mae Freddie Mac FHA Settlement DOJ Nonbank Supervision

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  • HUD-OIG Report: Single-Family Note Sales Program Failed to Follow Rulemaking Requirements

    Lending

    On July 14, the HUD Office of Inspector General (HUD-OIG) published a report on HUD’s rulemaking process for its single-family note sales program, now referred to as the Distressed Asset Stabilization Program (DASP), under which HUD has sold more than 108,000 notes with over $18 billion in unpaid principal balances. According to the report, HUD-OIG conducted an audit to determine whether HUD adhered to open public rulemaking requirements when it implemented the program. The report concluded that while HUD issued an advance notice of proposed rulemaking in 2006, it did not finalize the comment process or prepare the program for a final rule. The report further stated that there was a lack of formal guidance and procedures for the program, stating that “[s]ince its inception, HUD has issued 31 enhancements, or changes, to its single-family note sales program . . . [but does not have] a handbook or guidebook that establishe[s] its formal requirements or policies for the administration of the program.”

    As a result, HUD-OIG recommended that HUD (i) “[c]omplete the rulemaking process for [its] single-family note sales program,” and (ii) “[d]evelop and implement formal procedures and guidance for the note sales program.”

    Lending HUD Mortgages OIG Federal Register

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  • House Appropriations Committee Approves Fiscal Year 2018 Funding Bills Affecting Housing and Urban Development, and Cybersecurity

    Federal Issues

    On July 17, the House Appropriations Committee (Committee) approved the fiscal year 2018 transportation, housing and urban development funding bill by a vote of 31-20. Of the total $56.5 billion in funding provided by the bill, $38.3 billion is allocated to the Department of Housing and Urban Development (HUD) for community planning and development, which is $487 million below fiscal year 2017 but $6.9 billion above President Trump’s request. According to Committee Chairman Rodney Frelinghuysen, the bill “includes responsible funding to ensure communities across the nation have access to necessary community development funds, and [will] provide housing to those who need it the most – including the poor, elderly, and disabled.”

    • A summary of the bill is available here.
    • A copy of the legislative text of the bill is available here.
    • A copy of the bill report is available here.

    On July 18, the Committee approved the fiscal year 2018 homeland security bill by a vote of 30-22. The bill allocates $703 million to cybersecurity programs, which is $18 million less than President Trump’s request but $33 million above fiscal 2017 levels.

    • A summary of the bill is available here.
    • A copy of the legislative text of the bill is available here.
    • A copy of the bill report is available here.

    Federal Issues Federal Legislation Financial CHOICE Act HUD Budget House Appropriations Committee Privacy/Cyber Risk & Data Security

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  • ABA, State Bankers Associations Respond to HUD’s Request for Comment; Discuss Need to Clarify Disparate Impact

    Agency Rule-Making & Guidance

    On May 15, HUD issued a request for comment on its review of regulations as required by Executive Order 13777, which compels each agency to review and carry out regulatory reform. According to the request for comment, the self-assessment will address suggestions for “specific current regulations that may be outdated, ineffective, or excessively burdensome, and therefore, warranting repeal, replacement, or modification.” The request, which closed for public comment on June 14, received 100 comments from state bankers associations, financial institutions, and individuals.

    American Bankers Association (ABA) and State Bankers Associations. On June 14, a joint comment letter was sent on behalf of the ABA and state bankers associations representing all 50 states. A key issue raised by the letter was that HUD adopted an incorrect and improper standard for disparate impact liability in its rule implementing the Fair Housing Act’s discriminatory effects standard—a rule the groups calls “outdated and legally wrong.” Under the terms of the rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent” and then articulated a burden shifting framework for such claims in which a plaintiff can establish a prima facie case using statistics alone. However, the groups claim that the burden shifting framework conflicts with a Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, and assert that “a case premised on statistics alone is a prime example of an abuse of disparate impact.” The groups further wonder if HUD will “maintain the supervisory view that statistics alone can establish a prima facie case, as stated in the [r]ule[.]” It is the opinion of the groups that the Supreme Court enforced strict limitations of the use of disparate impact—“in stark contrast to the Rule’s approach”—in order to “avoid injecting the consideration of race into decision making and . . . address important constitutional concerns.” Thus, “[a] rule that creates, rather than eliminates, confusion undermines its own purpose and is entirely ineffective.” Furthermore, the letter (i) indicates that the groups are willing to engage in discussions with HUD on the topic of disparate impact, and (ii) raises the issue of whether a revised rule or a reopening of comments on the existing rule are in order.

    Agency Rule-Making & Guidance ABA HUD Fair Housing Disparate Impact

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