InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
DOJ, CFPB, and OCC announce aggressive redlining initiative; take action against national bank for alleged lending discrimination
On October 22, the DOJ, in collaboration with the CFPB and the OCC, announced a new initiative to combat redlining and lending discrimination. The Combatting Redlining Initiative will be led by the DOJ’s Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s offices, and will, among other things, (i) “ensure that fair lending enforcement is informed by local expertise on housing markets and the credit needs of local communities of color”; (ii) “[e]xpand the department’s analyses of potential redlining to both depository and non-depository institutions” (the DOJ noted that non-depository lenders now make the majority of mortgages in the U.S.); (iii) strengthen financial regulator partnerships to ensure fair lending violations are identified and referred to the DOJ; and (iv) increase fair lending coordination with state attorneys general to identify potential violations. Attorney General Merrick Garland stated that the initiative will “address[] modern-day redlining by making far more robust use of our fair lending authorities,” and marks the DOJ’s “most aggressive, coordinated effort to address redlining.” Garland noted that several redlining investigations are currently ongoing and more are expected to be opened in the upcoming months.
In his remarks, CFPB Director Rohit Chopra also warned that the Bureau will be “closely watching for digital redlining, disguised through so-called ‘neutral algorithms, that may reinforce the biases that have long existed.’” He added that “the speed with which banks and lenders are turning lending and advertising decisions over to algorithms is concerning,” and cautioned against assuming that algorithms will be bias free.
In conjunction with the announcement of the multi-agency initiative, the DOJ, CFPB, and OCC, took action against a national bank for alleged redlining practices. According to the complaint, the bank violated the Fair Housing Act, ECOA, and the CFPA by deliberately engaging in conduct that discouraged consumers in majority-Black and Hispanic neighborhoods in the Memphis metropolitan area from seeking credit. The bank also allegedly established a limited number of branches in majority-Black and Hispanic communities, and did not provide mortgage-lending services to walk-in customers in these neighborhoods. The complaint further alleged, among other things, that the bank’s fair lending policies and procedures did not adequately ensure equal access to credit to majority-Black and Hispanic neighborhoods, and that internal governance and oversight committees to oversee fair lending were not established until after the OCC initiated a fair lending examination of the bank.
Under the terms of the proposed settlement, the bank will be required to pay a $5 million civil money penalty. The bank will also have to invest $3.85 million through a loan subsidy program to increase access to credit, and provide $400,000 to develop community partnerships to increase access to residential mortgage credit. The loan subsidy program will go towards closing cost assistance, down payment assistance, and payment of mortgage insurance premiums. Additionally, the bank must increase branches and outreach efforts in majority-Black and Hispanic neighborhoods, devote at least $200,000 in targeted advertising annually to generate applications for mortgages in these neighborhoods, and take remedial efforts to improve its fair lending compliance.
OCC releases bank supervision operating plan for FY 2022
On October 15, the OCC’s Committee on Bank Supervision released its bank supervision operating plan for fiscal year 2022. The plan outlines the agency’s supervision priorities and highlights several supervisory focus areas including: (i) strategic and operational planning; (ii) credit risk management, including allowances for loan and lease losses and credit losses; (iii) cybersecurity and operational resiliency; (iv) third-party oversight; (v) Bank Secrecy Act/anti-money laundering compliance; (vi) consumer compliance management systems and fair lending risk assessments; (vii) Community Reinvestment Act performance; (viii) LIBOR phase-out preparations; (ix) payment systems products and services; (x) fintech partnerships involving potential cryptocurrency-related activities and other services; and (xi) climate-change risk management. The plan will be used by OCC staff members to guide the development of supervisory strategies for individual national banks, federal savings associations, federal branches, federal agencies, and technology service providers.
The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes has previously covered.
En banc 9th Circuit: FHA does not support downstream injuries
On September 28, the U.S. Court of Appeals for the Ninth Circuit issued an en banc decision concluding that the Fair Housing Act (FHA) “is not a statute that supports proximate cause for injuries further downstream.” As previously covered by InfoBytes, the City of Oakland sued a national bank alleging violations of the FHA and the California Fair Employment and Housing Act, claiming the bank provided minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, which led to disproportionate defaults and foreclosures and caused (i) decreased property tax revenue; (ii) increased city expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. In 2020, a three-judge panel affirmed both the district court’s denial of the bank’s motion to dismiss claims for decreased property tax revenue, as well as the court’s dismissal of Oakland’s claims for increased city expenditures. (Covered by InfoBytes here.) The panel further held that Oakland’s claims for injunctive and declaratory relief were also subject to the FHA’s proximate-cause requirement and, on remand, the district court must determine whether Oakland’s allegations satisfied this requirement. The bank filed a petition for panel rehearing and rehearing en banc last year arguing, among other things, that the panel had “fashioned a looser, FHA-specific proximate-cause standard” in conflict with the U.S. Supreme Court’s decision in Bank of America Corp. v. City of Miami. As covered by a Buckley Special Alert, in 2017, the Supreme Court held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, but that such injuries must be proximately caused by, rather than simply the foreseeable result of, the alleged misconduct.
The 9th Circuit agreed with the bank and remanded the case for dismissal of the FHA claims and proceedings consistent with the opinion. Citing the Miami decision as one of the leading factors, the panel stated that “[w]e begin where Miami began, with ‘[t]he general tendency. . .not to go beyond the first step,’” adding that “[t]here is no question that Oakland’s theory of harm goes beyond the first step—the harm to minority borrowers who receive predatory loans. Oakland’s theory of harm runs far beyond that—to depressed housing values, and ultimately to reduced tax revenue and increased municipal expenditures. Oakland thus fails a strict application of the general tendency not to stretch proximate causation beyond the first step.” The panel also affirmed the district court’s decision that Oakland failed to sufficiently plead claims related to increased municipal expenditures and reversed the district court’s denial of the bank’s motion to dismiss claims for lost property tax revenue and injunctive and declaratory relief.
HUD and FHFA clarify Freddie Mac policies on purchasing group-home mortgages
On September 22, HUD and FHFA announced policy clarifications concerning Freddie Mac’s purchase of mortgages secured by property owned by an individual that is occupied by people with disabilities. According to HUD and FHFA, the assurance that Freddie Mac will purchase mortgages secured by group homes (which are protected under the Fair Housing Act) “should encourage lenders in extending credit for such mortgages, thus providing more community-based living opportunities for persons with disabilities.” These clarifications were included in a Freddie Mac update earlier this month to its seller/servicer guide. The announcement follows a HUD investigation of a mortgage lender who allegedly denied a consumer’s loan for a group home based on the incorrect premise that Freddie Mac would not agree to buy the mortgage. (Covered by InfoBytes here.) After HUD reported the misunderstanding to Freddie Mac and FHFA, Freddie Mac agreed to revise its policies to clarify that it has always been willing to buy mortgages secured by a group home.
HUD charges homeowner association with Fair Housing Act violations
On September 3, HUD announced a Charge of Discrimination against a Florida-based homeowner association (respondent) for allegedly violating the Fair Housing Act by discriminating against residents with disabilities. According to HUD, the complainants alleged that the respondents refused to accommodate their request to leave their shoes outside of their units to prevent tracking contaminants inside and exacerbating a respiratory disability. In addition, the complainant allegedly provided medical documentation from a physician, which advised the need to keep their home free from outdoor allergens, chemicals, or pollutants. HUD determined that a disability under the Act existed, and that the respondents refused to grant a reasonable accommodation. The charge will be heard by a United States Administrative Law Judge unless a party elects to have the case heard in federal district court.
CFPB proposes collection of small business lending data
On September 1, the CFPB released a notice of proposed rulemaking (NPRM) and request for public comment on a proposed rule to implement Section 1071 of the Dodd-Frank Act, which requires the agency to collect and disclose data on lending to women and minority-owned small businesses. The NPRM would create a new subpart B to existing Regulation B, the implementing regulation for ECOA, in order to increase transparency in the lending marketplace. Covered financial institutions would be required to collect and report to the Bureau a broad set of data points relating to applications for several small business credit products with the stated goal of facilitating the enforcement of fair lending laws and enabling the identification of business and community development needs and opportunities for women-owned, minority-owned, and other small businesses.
The NPRM defines a covered “financial institution” as an entity that meets a specific origination threshold where at least 25 “covered credit transactions” are originated to small businesses in each of the two preceding calendar years. A “covered credit transaction” under the NPRM would include transactions that meet the definition of business credit under Regulation B, as well as loans, lines of credit, credit cards, merchant cash advances, credit transactions for agricultural purposes, and transactions covered by HMDA. The definition of a small business would be one that had less than $5 million in gross annual revenue for the preceding fiscal year. Additionally, the NPRM defines a “covered application” as “an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested.” Data points that covered financial institutions would be required to collect on a calendar-year basis to be reported by June 1 of the following year are also provided.
The Bureau proposes that an eventual final rule would become effective 90 days after publication in the Federal Register; however, compliance would not be required until approximately 18 months after publication. Additionally, the Bureau proposes certain transitional provisions that would allow covered financial institutions to begin collecting data prior to the compliance date and would permit covered financial institutions to “use either the two calendar years immediately preceding the effective date or the second and third years preceding the compliance date to determine coverage.” (See also the Bureau’s summary on the NPRM here.) Comments on the NPRM will be received for 90 days following publication in the Federal Register.
“This data will be used to support business and community development and foster fair lending,” acting Director Dave Uejio noted in a statement following the announcement of the NPRM. He added that the “rule is about providing greater transparency into which small businesses get credit and which ones do not.”
A Buckley Special Alert is forthcoming.
NYDFS offers guidance on preventing sexual orientation discrimination in mortgage lending
On August 31, NYDFS issued new guidance to regulated mortgage lenders for developing and implementing programs to comply with the state’s fair lending law, which “prohibits discrimination in, among other things, the granting, withholding, extending, or renewing, or in the fixing of the rates, terms, or conditions of any form of credit on the basis of sexual orientation.” According to an analysis conducted by NYDFS of mortgage loan applications and mortgage loan terms (between 2016 and 2018) from four non-depository lenders and one bank, “in all but two of the fifteen data sets reviewed, same-sex pairs of applicants were denied mortgage loans at higher rates than opposite-sex pairs of applicants.” Additionally, the analysis found that “in six of the data sets, same-sex pairs received between 9 and 17 basis points higher average annual percentage rates than opposite-sex pairs.” NYDFS emphasized that a “same-sex pair” does not necessarily involve LGBTQI individuals, but could also be a mortgage loan application from a father and son or two business partners of the same sex, among other pairings. As such, NYDFS acknowledged that it was “unable to determine with certainty whether discrimination based on sexual orientation occurred as to any particular same-sex pair within the data set.”
However, because NYDFS concluded that its findings raised enough concerns over the potential for discrimination against LGBTQI mortgage applicants, NYDFS advised mortgage lenders to take the following actions, among others, to mitigate discrimination: (i) vest responsibility in senior management to develop a fair lending plan and ensure mortgage lending practices comply; (ii) monitor the implementation of the fair lending plan and “continually address[] application and underwriting processes as well as pricing policies”; (iii) implement a training program and semi-annually provide updates on fair lending issues; (iv) “[e]nsure automatic and timely review by a higher-level supervisor of all rejected or withdrawn applications for loans from same-sex pairs who indicated that they would live together in the mortgaged property; (v) extend (in writing) a fair lending plan’s principles to a mortgage lender’s refinancing and collection practices; and (vi) periodically review and update fair lending compliance programs and fair lending plans to ensure they remain current. Mortgage lenders are also advised to utilize rate sheets and exception logs to document applications from same-sex pairs, document approved loans for such applicants that received less favorable terms, and conduct statistical and regression analysis of loan data.
DOJ, OCC settle redlining allegations
On August 30, the DOJ and the OCC announced coordinated efforts to resolve allegations of lending discrimination by a Georgia-based bank for violations of the Fair Housing Act and ECOA by allegedly redlining predominantly Black and Hispanic neighborhoods in Texas from 2013-2017. The OCC, which referred the matter to DOJ, ordered the bank to pay a $3.3 million civil money penalty. Under the DOJ’s settlement, the bank will invest more than $5.5 million to increase credit opportunities for residents of those neighborhoods.
FHFA proposes new GSE housing goals
On August 18, FHFA proposed new housing goals for Fannie Mae and Freddie Mac (GSEs) for 2022 to 2024, which are intended to ensure the reasonable promotion of “equitable access to affordable housing that reaches low- and moderate-income families, minority communities, rural areas, and other underserved populations.” Specifically, FHFA proposes two new single-family home purchase subgoals, which will replace the current low-income areas subgoal. The first new subgoal targets minority communities to improve access to fair and sustainable mortgage financing in communities of color. According to FHFA’s announcement, mortgages will qualify under this subgoal if (i) “the borrower has an income at or below area median income (AMI)”; and (ii) “the property is in a census tract where the median income is below AMI and minorities make up at least 30 percent of the population.” Under the proposed rule, the first new subgoal would establish a benchmark level of 10 percent for GSE purchases of mortgage loans on properties in minority census tracts “made to borrowers with incomes no greater than 100 percent of AMI.” The second new subgoal targets low-income neighborhoods and would establish a benchmark level of 4 percent for GSE purchases of “mortgage loans on properties in low-income census tracts that are not minority census tracts,” in addition to “mortgage loans on properties in low-income census tracts that are minority census tracts, made to families with incomes greater than 100 percent of AMI.” Acting Director Sandra L. Thompson noted that the GSEs’ “housing goals over the next three years should support equitable access to sustainable affordable housing opportunities in a safe and sound manner that bolsters the health of communities.”
HUD and FHFA announce fair housing collaboration
On August 12, HUD announced a Memorandum of Understanding (MOU) with FHFA regarding fair housing and fair lending coordination. The MOU—a “first-of-its-kind collaborative agreement”—will expire in December 2025, and is intended to enhance enforcement of the Fair Housing Act and the agencies’ oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. According to HUD, the agencies “anticipate that the MOU will lead to stronger oversight that will help advance vigorous fair housing enforcement that can begin to redress our nation’s history of discriminatory housing practices.”