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Fair Housing Group Issues Annual Report
On August 13, the National Fair Housing Alliance (NFHA) published its annual fair housing report titled “Expanding Opportunity: Systemic Approaches to Fair Housing.” The paper summarizes 2013 fair housing enforcement actions and litigation, as well as federal policy developments, and provides fair housing-related data. NFHA reports that, overall, the number of fair housing complaints filed in 2013 remained flat compared to recent years, but notes that private fair housing organizations received more complaints of discrimination in real estate sales and homeowners insurance, as well as complaints of discriminatory housing advertisements by housing providers. According to the report, the DOJ Housing Section filed 43 cases in 2013, including 24 cases involving pattern and practice claims, compared to 36 cases in 2012, of which 21 involved pattern and practice. Of the 2013 pattern or practice cases, five alleged fair lending claims; 11 alleged rental discrimination on the basis of race, disability, sex, familial status, national origin, or religion; three alleged violations of the accessibility provisions of the Fair Housing Act; three alleged discrimination in land use and zoning practices or policies by local governments; and one alleged disability discrimination by a homeless shelter. Finally, the report provides, for the first time, an analysis of HUD data by region, which includes a breakdown of complaints by protected class within each of HUD’s 10 regions.
Eighth Circuit Holds Loan Guarantors Are Not Applicants Under ECOA
On August 5, the U.S. Court of Appeals for the Eighth Circuit held that ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another. Hawkins v. Comm. Bank of Raymmore, No. 13-3065, 2014 WL 3826820 (8th Cir. Aug. 5, 2014). In this case, two individuals executed personal guaranties to secure several loans made to a residential development company owned by their husbands. After the company defaulted on the loans, the bank accelerated the loans and demanded payment from the company and the two individual guarantors. The guarantors, in turn, sued the bank, seeking damages and an order declaring their guaranties void and unenforceable, alleging that the bank required them to execute the guaranties securing the company’s loans solely because they are married to their respective husbands—the owners of the company. The guarantors asserted that such a requirement constituted discrimination against them on the basis of their marital status, in violation of ECOA. The court held that “the plain language of ECOA unmistakably provides that a person is an applicant only if she requests credit,” and that “a person does not, by executing a guaranty, request credit.” In doing so the court rejected the Federal Reserve Board’s implementing regulation that interpreted the term applicant to include guarantors. The court’s holding also creates a split with the Sixth Circuit, which recently “came to the contrary conclusion, finding it to be ambiguous whether a guarantor qualifies as an applicant under the ECOA.”
CFPB Issues Guidance On Ensuring Equal Treatment For Married Same-Sex Couples
On July 8, the CFPB released guidance designed to ensure equal treatment for legally married same-sex couples in response to the Supreme Court’s decision in United States v. Windsor, 133 S. Ct. 2675 (2013). Windsor held unconstitutional section 3 of the Defense of Marriage Act, which defined the word “marriage” as “a legal union between one man and one woman as husband and wife” and the word “spouse” as referring “only to a person of the opposite sex who is a husband or a wife.”
The CFPB's guidance, which took the form of a memorandum to CFPB staff, states that regardless of a person’s state of residency, the CFPB will consider a person who is married under the laws of any jurisdiction to be married nationwide for purposes of enforcing, administering, or interpreting the statutes, regulations, and policies under the Bureau’s jurisdiction. The Bureau adds that it “will not regard a person to be married by virtue of being in a domestic partnership, civil union, or other relationship not denominated by law as a marriage.”
The guidance adds that the Bureau will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status in all statutes, regulations, and policies administered, enforced or interpreted by the Bureau (including ECOA and Regulation B, FDCPA, TILA, RESPA) to include same-sex marriages and married same-sex spouses. The Bureau’s stated policy on same-sex marriage follows HUD’s Equal Access Rule, which became effective March 5, 2012, which ensures access to HUD-assisted or HUD-insured housing for LGBT persons.
DOJ, CFPB Fair Lending Enforcement Actions Target Credit Card Repayment Programs, Marketing Of Add-On Products
On June 19, the CFPB and the DOJ announced parallel enforcement actions against a federal savings bank that allegedly violated ECOA in the offering of credit card debt-repayment programs and allegedly engaged in deceptive marketing practices in the offering of certain card add-on products. The bank will pay a total of $228.5 million in customer relief and penalties to resolve the allegations.
ECOA Violations
The CFPB and DOJ charge that the bank excluded borrowers who indicated that they preferred communications to be in Spanish or who had a mailing address in Puerto Rico, even if the consumers met the promotion’s qualifications. The CFPB and DOJ assert that as a result, Hispanic populations were unfairly denied the opportunity to benefit from the promotions, which constitutes a violation of the ECOA’s prohibition on creditors discriminating in any aspect of a credit transaction on the basis of characteristics such as national origin.
To resolve the joint fair lending actions, the bank entered into separate consent orders with the CFPB and the DOJ. As detailed in the DOJ order, the bank will make $37 million in payments, credits and waivers to affected borrowers. The bank already has provided the benefits of the offers or their equivalent value to approximately 84,000 borrowers, totaling $131.8 million in relief. In total the bank will provide $169 million in relief, making the settlement the largest ever fair lending credit card action. The CFPB did not assess a civil money penalty for the ECOA violations because the bank self-reported the potential violations, self-initiated remediation to affected borrowers, and cooperated in the investigation. The CFPB did require the bank to review its credit offering strategies and enhance fair lending training and compliance.
Add-On Product Marketing Violations
The CFPB further alleges that its examiners identified several deceptive marketing practices used by the bank to promote five credit card add-on products. The CFPB alleges that the bank’s and its service providers misrepresented the products by (i) marketing them as free of charge when the fee was avoidable only in certain specific circumstances; (ii) failing to disclose consumers’ ineligibility, causing certain consumers to purchase products from which they could receive no benefit; (iii) failing to disclose that consumers were making a purchase, leading consumers to believe they were receiving a benefit or updating their account; and (iv) marketing as a limited time offer products that were not so limited.
Under the CFPB consent order, the bank will refund $56 million to approximately 638,000 consumers who were subjected to the allegedly deceptive marketing practices, and will pay a $3.5 million civil money penalty. The bank also must develop an enhanced add-on product compliance plan that includes, among other things, a revised vendor management policy.
California Federal Court Allows City's Fair Housing Case To Proceed
On May 28, the U.S. District Court for the Central District of California held, without addressing the merits, that the City of Los Angeles has standing to pursue Fair Housing Act and restitution claims against a mortgage lender, and that the claims were sufficiently and timely pled. Los Angeles v. Wells Fargo & Co., No. 13-9007, 2014 WL 2206368 (C.D. Cal. May 28, 2014). The court denied the lender’s motion to dismiss. The city alleges the lender engaged in predatory lending in minority communities, that the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s tax base and increased the costs of providing municipal services. The court found that by identifying specific properties alleged to have caused injury and asserting that regression analysis would support its claims and attenuated theory of causation, the city adequately pled a connection between the injury and the alleged conduct sufficient to support Article III standing. The court further concluded that the city adequately pled statutory standing under the FHA insofar as it alleged that its injuries are separate and distinct from the injuries of borrowers, and were proximately caused by the alleged lending practices. The court also held that the city’s claims were timely under the FHA’s two-year statute of limitations because it alleged broad discriminatory practices that are alleged to continue, no matter how changed over time (e.g., from redlining to reverse redlining). Notably, the court did not consider whether the city slept on its rights and could have filed sooner notwithstanding the alleged continuing nature of the practices. Finally, the court found that the city sufficiently pled facts, for purposes of surviving the motion to dismiss, to support claims of disparate treatment and disparate impact under the FHA.
CFPB Report Recaps Fair Lending Activities
On April 30, the CFPB published its second annual report to Congress on its fair lending activities. According to the report, in 2013 federal regulators referred 24 ECOA-related matters to the DOJ—6 by the CFPB—as opposed to only 12 referrals in 2012. The report primarily recaps previously announced research, supervision, enforcement, and rulemaking activities related to fair lending issues, devoting much attention to mortgage and auto finance. However, the Bureau notes that it is conducting ongoing supervision and enforcement in other product markets, including credit card lending. The Bureau also identifies the most frequently cited technical Regulation B violations.
With regard to housing finance supervision and enforcement, the CFPB reports that while many lenders have strong compliance management systems and no violations, the CFPB’s ECOA baseline reviews have identified factors that indicate heightened fair lending risk at some institutions, including weak or nonexistent fair lending CMS, underwriting and pricing policies that consider prohibited bases in a manner that presents fair lending risk, and inaccurate HMDA data. The CFPB referred three mortgage-related cases to the DOJ. Two of those involved findings that a mortgage lender discriminated on the basis of marital status; the DOJ deferred to the Bureau’s handling of the merits of both. The third contained findings that a mortgage lender discriminated on the basis of race and national origin in the pricing of mortgage loans. That referral led to a joint DOJ-CFPB enforcement action.
In the area of auto finance, the report highlights the CFPB’s auto finance forum and March 2013 auto finance bulletin, and again defends the CFPB’s proxy methodology, which has been challenged by members of Congress and industry since the CFPB issued its auto finance bulletin. The CFPB states that it is currently investigating whether a number of indirect auto financial institutions unlawfully discriminated in the pricing of automobile loans, particularly in their use of discretionary dealer markup and compensation policies using a disparate impact analysis. During the reporting period, the Bureau made one referral to the DOJ, and subsequently took joint enforcement action with the DOJ against that indirect auto financial institution for alleged violations of ECOA.
The report indicates that the Bureau has expanded its focus beyond mortgage and auto finance, noting that the CFPB is conducting ECOA Baseline Reviews and ECOA Targeted Reviews of consumer financial services providers of other products, singling out credit cards as an example. The report adds that the CFPB also referred to DOJ three matters related to unsecured consumer lending, but that DOJ declined to act upon such referrals.
Ninth Circuit Reverses Denial Of Class Certification In Disparate Impact Case
On April 24, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s denial of class certification in a disparate impact age discrimination case, holding that the court erred in considering merits issues when determining class certification. Stockwell v. San Francisco, No. 12-15070, 2014 WL 1623736 (9th Cir. Apr. 24, 2014). The case involves claims brought by a group of police officers on behalf of a putative class alleging workplace age discrimination in violation of the California Fair Employment and Housing Act. The class representatives allege that the city’s promotion policy had a disparate impact on employees over the age of 40. The district court denied the named plaintiffs’ motion to certify the class, holding that the claims failed to satisfy Rule 23(a)(2)’s commonality requirement because the named plaintiffs’ statistical analysis did not establish a general policy of discrimination under Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and failed to demonstrate that the policy caused any resulting disparate impact. On appeal, the court determined that in considering the statistical analysis, the district court improperly relied on merits issues to reach its conclusion rather than focusing on whether the questions presented were common to the members of the putative class. The Ninth Circuit held that “the officers have identified a single, well-enunciated, uniform policy that, allegedly, generated all the disparate impact of which they complain,” and that “whatever the failings of the class’s statistical analysis, they affect every class member’s claims uniformly.” Further, the court held whether the policy caused the disparate impact is a single significant question of fact common to all class members. The court reversed the district court’s holding on commonality, and remanded for consideration of other class certification prerequisites, including predominance.
House Financial Services Chairman Presses CFPB On Auto Finance Enforcement
House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter today to CFPB Director Richard Cordray once again pressing the CFPB for information about its March 2013 auto finance guidance and its actions since that time to pursue allegedly discriminatory practices by auto finance companies. That guidance, which the CFPB has characterized as a restatement of existing law, sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for the alleged effects of facially neutral pricing policies.
The letter recounts numerous exchanges between members of Congress—including both Democratic and Republican members of the Committee—and the CFPB on this issue to demonstrate what the Chairman characterizes as “a pattern of obfuscation” by the Bureau. Mr. Hensarling explains that through a series of written requests—see, e.g. here, here, and here—as well as in-person exchanges, lawmakers have sought detailed information about the CFPB’s application of the so-called disparate impact theory of discrimination to impose liability on auto finance companies. The letter states that the CFPB has repeatedly refused to provide certain key information used in applying that theory through compliance examinations and enforcement actions, including information about regression analyses, analytical controls, and numerical thresholds employed by the Bureau.
According to the letter, the CFPB has informed inquiring members that the CFPB’s fair lending tools and assessments are dependent upon a particular lender’s policies, practices, and procedures. Following the Bureau’s first auto finance fair lending action, announced in December 2013, the Chairman sought more specific information from the CFPB about how it applied its fair lending analysis in that case. The Chairman asserts the CFPB refused to provide the statistical analyses conducted in that case and CFPB staff who briefed committee staff were unwilling to respond to certain questions about the action, including “potential explanatory variables” and business justifications offered by the finance company.
Seeking once more to obtain additional details about the CFPB’s fair auto finance theories and their application, the letter restates numerous previous requests and demands that the Bureau respond by March 13, 2014. Specifically, the letter once again seeks the methods the Bureau uses to determine disparate impact, including, among others, (i) the factors it holds constant to ensure pricing differences are attributable to the consumer’s background; (ii) the controls applied to ensure sure that the consumers who are being compared are “similarly situated”; (iii) the basis point thresholds at which the Bureau determines a prohibited pricing disparity exists; (iv) the process used to determine the background of consumer credit applicants; (v) the potential explanatory variables offered by respondents in the December 2013 enforcement action, and for each variable offered, the Bureau’s reasons for asserting that the respondents failed to provide adequate evidence that additional variables appropriately reflected legitimate business needs; and (vi) the regression analysis used in the investigation that led to the December 2013 action.
Absent a sufficient response, the “Committee will have no choice but to consider involving its compulsory process.” The Committee’s rules allow it or its subcommittees to issue with a majority vote subpoenas “in the conduct of any investigation or series of investigations or activities.”
Senate Blocks DOJ Civil Rights Division Nominee
On March 5, the Senate voted 47-52 on a procedural motion that would have advanced President Obama’s nomination of Debo Adegbile to serve as Assistant Attorney General, Civil Rights Division. Seven Democrats joined all voting Republicans to defeat the nomination. Mr. Adegbile’s participation in the legal representation of Mumia Abu-Jamal, who was convicted in 1981 of killing a Philadelphia police officer, reportedly played a factor in the voting.
NADA Proposes Fair Credit Compliance Policy And Program For Its Member Dealers
On January 24, the National Automobile Dealers Association (NADA) distributed a proposed compliance program to its members aimed at reducing the risk of discrimination allegations stemming from CFPB Bulletin 2013-02, which places limits on how sources of indirect auto financing may compensate dealers. The bulletin and proposed program address the practice by which auto dealers “markup” an indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The NADA program recommends that dealerships adopt fixed markup limits and only exceed those limits if a legitimate business reason completely unrelated to a customer’s background is present. The proposal identifies seven “good faith” reasons for deviation—including a more competitive offer and generally-applicable promotional offers—which mirror those set forth in consent orders entered into between the DOJ and two automobile dealers accused of disparate impact discrimination in 2007. The CFPB has not commented on whether the program as proposed will satisfy regulatory scrutiny but plans to do so.