InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
DOJ says Fair Housing Act covers appraisal discrimination
On February 14, the DOJ filed a statement of interest in a lawsuit alleging defendants violated the Fair Housing Act (FHA or the Act) by discriminating on the basis of race in connection to a residential home appraisal. The plaintiffs, a Black couple, sought to refinance their home mortgage, and received an appraisal from the defendants valued at $995,000. However, a few weeks later a second appraiser valued their home at $1,482,500. The plaintiffs alleged that their race factored into the defendants’ low valuation, which violated federal and state law, including the FHA. The defendants moved to dismiss for failure to state a claim, arguing that the FHA does not apply to residential appraisers, and that the plaintiffs failed to allege facts that make out a prima facie case at this stage of litigation.
In its statement of interest, the DOJ noted that both the agency and HUD share enforcement authority under the FHA, including addressing appraisal discrimination. The DOJ also highlighted Executive Order 13985, which directed federal agencies “to address ‘[o]ngoing legacies of residential segregation and discrimination’–including ‘a persistent undervaluation of properties owned by families of color,’” (issued in 2021 and covered by InfoBytes here), and stated that President Biden also established an interagency task force to, among other things, “‘root out discrimination in the appraisal and homebuying process.’” To illustrate that the FHA applies to residential appraisals and appraisers, the DOJ pointed to the FHA’s text and to caselaw to demonstrate that the statute applies to residential mortgages. “[B]y its plain terms, the Act directly prohibits discrimination by ‘any person or other entity’ engaged in the “apprais[al] of residential real property,” the DOJ stated, adding that the appraisal exemption under Section 3605(c) clarifies that while appraisers may consider relevant and nondiscriminatory factors, they may not discriminate on the basis of protected classes. The DOJ also disagreed with the defendants’ position that under Section 3603 the FHA is not applicable to the subject property, stating that the section referenced by the defendants was only effective until 1968 and that henceforth, “all dwellings are covered by the FHA unless specifically exempted.” Additionally, the DOJ cited caselaw, which “found that proper defendants for appraisal-related discrimination may include not only appraisers, but their employers and the lenders who relied on their valuations.” With respect to the defendants’ prima facie argument, the DOJ contended, among other things, that the FHA “simply requires that Plaintiffs allege a plausible entitlement to relief as a result of Defendants’ ‘discriminatory housing practices.’”
District Court grants summary judgment in discriminatory lending suit
On February 10, the U.S. District Court for the Northern District of Illinois granted summary judgment in favor of a national bank, its subsidiary, and a lending corporation (collectively, “defendants”) with respect to discriminatory lending allegations brought by the County of Cook in Illinois (County). The County alleged that the defendants “identified and targeted minority borrowers ‘using advanced data mining techniques and predictive analysis methodologies,’” to make short-term profits from African American, Latino, and other borrowers protected by the Fair Housing Act through a purported “equity stripping scheme,” as well as by foreclosing disproportionately on their homes. The alleged illegal practices included, among other things, marketing loan products to consumers who were not qualified for them, offering incentives to employees to increase loan volume among borrowers with lower credit scores, and making high-risk loans. However, the court found that “even if a jury were persuaded that [the defendants] engaged in one or more of these practices at some point between 2004 and 2012, nothing in the county’s submissions offers a basis for the jury to leap from such a finding to the conclusion that defendants carried out an integrated equity stripping scheme targeting minority borrowers.” With respect to the County’s claim that defendants used “data mining” to identify and target minority populations for the purpose of marketing its home loans, the court found that “[I]f there is any authority for the proposition that soliciting business from minority prospects, or marketing in neighborhoods with a high concentration of minority residents, amounts to intentional discrimination in violation of the FHA, the county has not cited it.” The court also ruled that “[b]ecause the [County] acknowledges that its ledger (including the appropriations and expenditures of the three offices it claims had additional costs) was not affected by the alleged discrimination, compensatory damages are unavailable.”
CBA urges CFPB to supervise nonbank small business lenders
On February 9, the Consumer Bankers Association (CBA) sent CFPB Director Rohit Chopra a letter regarding the supervision of nonbank small business lenders. The letter noted that the landscape for business lending has recently altered “substantially,” specifically with the alternative banking options offered by financial technology companies having “significant market share.” The letter considered small businesses to be “vulnerable” because the activities of fintechs engaged in small business lending are not supervised by the Bureau. The letter urged the Bureau to “evaluate all possible avenues for supervising these nonbank small business lenders, including adding nonbank small business lending to the larger participant rule.” The letter also pointed out that the “lack of supervisory authority over nonbank small business lenders” undermines the CFPB’s other regulatory efforts, such as identifying and addressing fair lending concerns through a final rule covering small business lending data collection pursuant to Section 1071 of Dodd-Frank. The CBA argued that the absence of authority over nonbank lenders “will negatively impact the accuracy and utility of any data the Bureau receives under a Section 1071 final rule.” The CBA also advised the Bureau to utilize its ability under 12 U.S.C. Section 5514 to increase its authority over larger participants in the small business lending market.
Agencies emphasize illegality of appraisal discrimination
On February 4, CFPB Fair Lending Director Patrice Ficklin, along with senior staff from the Federal Reserve Board, OCC, FDIC, NCUA, HUD, FHFA, and DOJ, sent a joint letter to The Appraisal Foundation (TAF) emphasizing that discrimination prohibitions under the Fair Housing Act (FHA) and ECOA extend to appraisals. The joint letter, sent in response to a request for comments on proposed changes to the 2023 Appraisal Standards Board Ethics Rule (Ethics Rule) and Advisory Opinion 16, noted that while provisions prohibit an appraiser from relying on “unsupported conclusions relating to characteristics such as race, color, religion, national origin, sex, sexual orientation, gender, marital status, familial status, age, receipt of public assistance income, disability, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value,’” the “provisions do not prohibit an appraiser from relying on ‘supported conclusions’ based on such characteristics and, therefore, suggest that such reliance may be permissible.” The letter noted that the federal ban on discrimination under the FHA and ECOA is not limited only to “unsupported” conclusions, and any discussions related to potential appraisal bias should be consistent with all applicable nondiscrimination laws. The joint letter encouraged TAF to present the nondiscrimination requirements as “an essential part of any guidance provided in the Ethics Rule or Advisory Opinion 16 to ensure compliance with fair housing and fair lending laws.”
In a blog post, Ficklin noted that despite the fact that federal law prohibits racial, religious, and other discrimination in home appraisals, there are still reports of appraisers making “value judgments on biased, unfounded assumptions about borrowers and the neighborhoods in which they live.” Additionally, Ficklin noted that the Bureau is carefully reviewing findings presented in a report funded by the Federal Financial Institutions Examination Council's Appraisal Subcommittee, which raised serious concerns related to existing appraisal standards and provided recommendations with respect to fairness, equity, objectivity, and diversity in appraisals and the training and credentialing of appraisers.
District Court dismisses discriminatory lending allegations
On January 27, the U.S. District Court for the Eastern District of California entered a stipulated final judgment and order dismissing the City of Sacramento’s suit against a national bank concerning alleged discriminatory lending following a decision issued by U.S. Court of Appeals for the Ninth Circuit, which affirmed in part and reversed in part the district court’s decision to partially dismiss an action brought by the City of Oakland, alleging a national bank violated the Fair Housing Act (FHA) and California Fair Employment and Housing Act. (Covered by InfoBytes here.) Oakland alleged that the national bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) reduced spending in Oakland’s fair-housing programs. (Covered by InfoBytes here.) In September 2021, as previously covered by InfoBytes here, the 9th 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.” The Oakland decision was binding in this action, and, following Oakland’s decision not to pursue a petition for writ of certiorari in the U.S. Supreme Court, the court dismissed Sacramento’s complaint with prejudice.
CFPB reaches settlement with online lender
On December 30, the U.S. District Court for the Northern District of California approved the stipulated final judgment and order against a California-based online lender (defendant) for alleged violations of fair lending regulations and a 2016 consent order. As previously covered by InfoBytes, the CFPB filed a complaint against the defendant (the third action taken against the defendant by the CFPB) for allegedly violating the terms of a 2016 consent order related to false claims about its lending program. The 2016 consent order alleged that the defendant engaged in deceptive practices by misrepresenting, among other things, the fees it charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies, in violation of the CFPA, TILA, and Regulation Z (covered by InfoBytes here). According to the September 8 complaint, the defendants continued with much of the same illegal and deceptive marketing that was prohibited by the 2016 consent order. Among other things, the complaint alleged that the defendants violated the terms of the 2016 consent order and various laws by: (i) deceiving consumers about the benefits of repeat borrowing; and (ii) failing to provide timely and accurate adverse-action notices, which is in violation of ECOA and Regulation B.
The settlement prohibits the defendant from: (i) making new loans; (ii) collecting on outstanding loans to harmed consumers; (iii) selling consumer information; and (iv) making misrepresentations when providing loans or collecting debt or helping others that are doing so. The order also imposes a $100,000 civil money penalty based on the defendant’s inability to pay.
CFPB asks tech workers to report AI lending discrimination
On December 15, the CFPB released a blog post calling on technology workers to report potential violations of federal consumer financial laws, including related to artificial intelligence (AI), as part of the Bureau’s efforts to adapt to the evolving financial landscape. According to the Bureau, AI has become a part of nearly every consumer financial market, creating the potential for intentional and unintentional discrimination within the decision-making process. As an example, while algorithmic mortgage underwriting has the potential to reduce discrimination, the Bureau warned that “researchers found discriminatory effects of these new technologies, as Black and Hispanic families have been more likely to be denied a mortgage compared to similarly situated white families.” The Bureau asked tech workers, including engineers, data scientists, and others with detailed knowledge of these algorithms and technologies, to report potential discrimination or other misconduct to the Bureau to help ensure these technologies are not being misused or abused. “Tech workers may have entered the field to change the world for the better, but then discover their work being misused or abused for unlawful ends,” CFPB Chief Technologist Erie Meyer stated. The Bureau updated its whistleblower webpage to provide additional information on the whistleblower submission process, and noted that fair lending experts and technologists will review submitted whistleblower tips. The webpage also describes the type of information the Bureau is seeking, and outlines whistleblower protections.
CFPB supervisory highlights cover wide range of violations
On December 8, the CFPB released its fall 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. The report’s findings cover examinations that were completed between January and June of 2021 in addition to prior supervisory findings that led to public enforcement actions in the first half of 2021. Highlights of the examination findings include:
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse late fees after determining a missed payment was not credited to a consumer’s account; and (iii) conduct reasonable investigations into billing error notices concerning missed payments and unauthorized transactions. Examiners also identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors represented to consumers that their creditworthiness would improve upon final payment under a repayment plan and the deletion of the tradeline. Because credit worthiness is impacted by numerous factors, examiners found “that such representations could lead the least sophisticated consumer to conclude that deleting derogatory information would result in improved creditworthiness, thereby creating the risk of a false representation or deceptive means to collect or attempt to collect a debt in violation of Section 807(10).”
- Deposits. The Bureau discussed violations related to Regulation E, including error resolution violations related to misdirected payment transfers and failure to investigate error notices where consumers alleged funds were sent via a person-to-person payment network but the intended recipient did not receive the funds.
- Fair Lending. The report noted instances where examiners cited violations of ECOA and Regulation B by lenders "discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” which led to observed pricing disparities, specifically as compared to similarly situated non-Hispanic white and male borrowers. Among other things, examiners also observed that lenders’ policies and procedures contributed to pricing discrimination, and that lenders improperly inquired about small business applicants’ religion and considered religion in the credit decision process.
- Mortgage Servicing. The Bureau noted that it is prioritizing mortgage servicing supervision attributed to the increase in borrowers needing loss mitigation assistance due to the Covid-19 pandemic. Examiners found violations of Regulations Z and X, as well as unfair and deceptive acts and practices. Unfair acts or practices included those related to (i) charging delinquency-related fees to borrowers in CARES Act forbearances; (ii) failing to terminate preauthorized EFTs; and (iii) assessing fees for services exceeding the actual cost of the performed services. Deceptive acts or practices found by examiners related to mortgage servicers included incorrectly disclosed transaction and payment information in a borrower’s online mortgage loan account. Mortgage servicers also allegedly failed to evaluate complete loss mitigation applications within 30 days, incorrectly handled partial payments, and failed to automatically terminate PMI in a timely manner. The Bureau noted in its press release that it is “actively working to support an inclusive and equitable economic recovery, which means ensuring all mortgage servicers meet their homeowner protection obligations under applicable consumer protection laws,” and will continue to work with the Federal Reserve Board, FDIC, NCUA, OCC, and state financial regulators to address any compliance failures (covered by InfoBytes here).
- Payday Lending. The report identified unfair and deceptive acts or practices related to payday lenders erroneously debiting consumers’ loan balances after a consumer applied and received confirmation for a loan extension, misrepresenting that consumers would only pay extension fees on the original due dates of their loans, and failing to honor loan extensions. Examiners also found instances where lenders debited or attempted one or more duplicate unauthorized debits from a consumer’s bank account. Lenders also violated Regulation E by failing “to retain, for a period of not less than two years, evidence of compliance with the requirements imposed by EFTA.”
- Prepaid Accounts. Bureau examiners found violations of Regulation E and EFTA related to stop-payment waivers at financial institutions, which, among other things, failed to honor stop-payment requests received at least three business days before the scheduled date of the transfer. Examiners also observed instances where service providers improperly required consumers to contact the merchant before processing a stop-payment request or failed to process stop-payment requests due to system limitations even if a consumer had contacted the merchant. The report cited additional findings where financial institutions failed to properly conduct error investigations.
- Remittance Transfers. Bureau examiners identified violations of Regulation E related to the Remittance Rule, in which providers “received notices of errors alleging that remitted funds had not been made available to the designated recipient by the disclosed date of availability” and then failed to “investigate whether a deduction imposed by a foreign recipient bank constituted a fee that the institutions were required to refund to the sender, and subsequently did not refund that fee to the sender.”
The report also highlights recent supervisory program developments and enforcement actions.
CFPB deputy director discusses future rulemaking research efforts
On November 5, CFPB Deputy Director Zixta Martinez spoke before the Bureau’s Academic Research Council (ARC) meeting, in which she discussed recent research efforts taken to inform future rulemaking and identify root causes of challenges facing consumers. Martinez highlighted Section 1022 orders recently sent to several big tech payment platforms seeking information on their products, plans, and practices (covered by InfoBytes here). She noted that the evaluation of these companies’ payments platform data will help inform the Bureau on the future of the payments system as well as potential emerging risks, and will provide insights that may impact future rulemaking under Section 1033 concerning the disclosure of consumer data by regulated entities. Among other things, Martinez also discussed the importance of small business lending research to better understand whether these businesses provide fair and equitable access to credit and referred to the Bureau’s Section 1071 notice of proposed rulemaking issued in September (covered by a Buckley Special Alert). Martinez also noted that one of the Bureau’s priorities is ensuring access to fair and affordable credit for low-income, minority, or traditionally underserved communities, and said the Office of Research will solicit “suggestions and advice for ways to integrate racial and economic equity analyses into the CFPB’s research agenda.”
NCRC files fair housing complaints with HUD against mortgage lenders
On November 1, the National Community Reinvestment Coalition (NCRC) announced it had filed fair housing complaints with HUD against two mortgage lenders for allegedly engaging in discriminatory behavior against prospective Black clients. The first complaint is based on a matched-pair test conducted in the Seattle/Tacoma, Washington area, which allegedly demonstrated that lending specialists provided different lending product information to prospective borrowers based on race. NCRC also alleged that the lender’s HMDA data showed lending behaviors consistent with discriminatory practices. NCRC also conducted matched-pair testing on a second lender’s practices in the Charlotte, North Carolina area. According to the complaint, the lender also allegedly provided different information and more favorable services to White testers. An examination of the lender’s HMDA data similarly showed alleged discriminatory lending patterns.