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New York Federal District Court Holds FHA Disparate Impact Claims Against Mortgage Securitizer Timely, ECOA Claims Time-Barred
On July 25, the U.S. District Court for the Southern District of New York held that a putative class of African-American borrowers can pursue claims against a financial institution alleged to have financed and purchased so-called predatory subprime mortgage loans to be included in mortgage backed securities. Adkins v. Morgan Stanley, No. 12-7667, slip op. (S.D.N.Y. Jul. 25, 2013). The borrowers allege that the institution implemented policies and procedures that supported the subprime lending of a mortgage originator in the Detroit area so that the institution could purchase, pool, and securitize those loans. The borrowers claim those policies violated the FHA and the ECOA because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure.
In resolving the financial institution’s motion to dismiss, the court held that the borrowers sufficiently alleged a disparate impact under the FHA and, although the lawsuit was filed more than five years after the originator stopped originating mortgages, the two-year statute of limitations on their FHA claims is tolled by the discovery rule. The court explained that the disparate impact of a facially neutral policy may not become immediately apparent, and “[g]iving full effect to the FHA’s language and the policy behind the language requires a discovery rule recognizing that [the borrowers’] claim here did not accrue until they knew or had reason to know” that the policies were discriminatory. The court left open the possibility that the institution may prove at a later stage that public knowledge of the facts underlying the suit may be imputed to the borrowers to render their claims "discovered" at an earlier time and therefore time-barred.
The court held that the borrowers’ ECOA claims were not similarly timely because ECOA contains specific exceptions to its statute of limitations, and to apply a general discovery rule to ECOA claims would render those exceptions meaningless. Further, the court held that the ECOA claims are not timely pursuant to a continuing violations theory or equitable tolling.
The court granted the motion to dismiss the ECOA claims and a state law claim, and denied the motion to dismiss the FHA claims.
CFPB Publishes ECOA Baseline Review Modules
Yesterday afternoon, the CFPB released its ECOA baseline review modules, which supplement the recently updated ECOA examination procedures. Completed baseline modules will be included in an institution’s examination work papers and may be considered in conjunction with any fair lending statistical analysis to assess an institution’s fair lending compliance and risks.
The baseline review procedures provide examiners with a series of questions in six modules to assess the following:
- Fair lending supervisory history;
- Fair lending compliance management system – management participation, policies and procedures, training, and internal controls and monitoring;
- Mortgage lending - policies and procedures for mortgage underwriting and pricing, including frequency of deviations, compensation structures, third-party involvement, and marketing practices;
- Mortgage servicing - policies and procedures as they relate to fair lending;
- Auto lending – policies and procedures for direct and indirect auto lending, including information related to pricing, underwriting, referrals, origination, and third-party compensation; and
- Other products – policies and procedures with respect to any additional products selected for review, e.g. secured and unsecured consumer lending, credit cards, add-on products, private student lending, payday lending, and small business lending.
The CFPB baseline review differs from the CFPB’s targeted review process, during which a supervised institution can be subject to an in-depth look at a specific area of fair lending risk, and is separate from the CFPB’s HMDA review, which includes transactional testing for HMDA data accuracy.
CFPB, Federal Reserve Board, DOJ Plan Indirect Auto Fair Lending Compliance Event
On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.
Ninth Circuit Holds Repeated Erroneous Default Notices Can Be ECOA Adverse Action
On July 3, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit held that a mortgage servicer’s alleged repeated delivery of notices of default and acceleration to borrowers who were current on their obligation could be “adverse action,” triggering the ECOA notification requirements. Schlegel v. Wells Fargo Bank, No. 11-6816, 2013 WL 3336727 (9th Cir. July 3, 2013). According to the borrowers, although they received a discharge in bankruptcy, they reaffirmed their mortgage loan, subject to a modification that apparently reduced their monthly payment obligation. The borrowers claimed that the servicer did not correct its records to reflect the loan modification and sent several notices of default and acceleration. The Ninth Circuit held that, while sending a mistaken default notice would not necessarily constitute an adverse action, the conduct alleged in the complaint, in which the creditor repeatedly stated that the obligation was immediately due and payable, fell within the definition of an “adverse action” as, among other things, a “revocation of credit.” Therefore, the court reversed the district court’s dismissal of the borrowers’ claim that the mortgage servicer had failed to provide a notification within 30 days after taking adverse action, as required under ECOA. The appellate court, however, upheld the district court’s dismissal of the borrowers’ claim under the FDCPA, holding that the complaint failed to adequately allege that the servicer was a “debt collector” under the FDCPA — i.e., either that its principal business was the collection of debts or that it was collecting the subject debt “for another.”
Congress, CFPB Trade Letters on Fair Auto Lending Guidance
On June 20, 35 Republican Members of the U.S. House of Representatives sent a letter to CFPB Assistant Director of the Office of Fair Lending and Equal Opportunity, Patrice Ficklin, questioning the manner in which recent CFPB guidance regarding lending practices in the auto lending industry was rendered and requesting details concerning the process of analyzing potential fair lending violations. The letter comes on the heels of a similar inquiry made by 13 Democratic Members of the House Financial Services Committee to CFPB Director Richard Cordray on May 28, 2013. The CFPB guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.
The Republican letter takes issue with the CFPB “initiating [a] process without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy.” The letter notes that “allegations of disparate impact do not involve intentional conduct, but instead consist solely of statistical analysis of past transactions” and that any model assessing such impact must be reliable and accurate. Because the guidance fails to disclose the model for assessing fair lending violations, Congress requested the CFPB provide all pertinent details regarding its methodology to evaluate whether the statistical model supports its supervision and examination of financial institutions.
In addition to taking issue with the CFPB’s statistical analysis, the Republican letter also characterized the ECOA compliance controls suggested in the CFPB bulletin as “onerous and unrealistic,” noting that “restricting consumer choice is highly problematic.” To support the controls prescribed by the guidance, the Republican letter requested that the CFPB provide “all studies, analysis, and information it relied upon in developing its guidance document.” Specifically, the two congressional letters requested the analysis conducted by the CFPB on the impact of these prescribed controls on the auto lending industry and any coordination activities undertaken with other agencies in developing the guidance. The House members, like many in the auto industry, are concerned the guidance will have an adverse impact on competition, result in increased overall costs for consumers, and potentially exclude lower-income customers from the credit market entirely.
Amid these growing concerns regarding the CFPB’s guidance and inquiry into auto finance practices, on June 20, Director Cordray provided a response to the May 28 Democrat letter. Mr. Cordray’s response essentially reiterates both the CFPB’s authority to supervise and investigate financial institutions engaged in auto finance and the CFPB’s concerns that pricing discretion may create a significant risk of discrimination. In responding to the issues of the Democrat letter, Director Cordray indicated that the CFPB uses a proxy methodology to analyze disparate impact in the auto lending industry, though it is short on the specifics behind the methodology used. The CFPB response acknowledged that ECOA fair lending analysis is more complex than mortgage lending analysis given the absence of data similar to that collected in the mortgage context under the Home Mortgage Disclosure Act. Director Cordray also posited that the use of proxies for unavailable data is a widely accepted mathematical and systematic approach in various arenas, including for marketing in the auto industry itself. According to Director Cordray, the CFPB uses both surnames and geographic location as proxies for unavailable characteristics. The proxy analysis is then conducted through publicly available data from the Social Security Administration and Census Bureau.
Notwithstanding the information provided regarding the CFPB’s methodology for analyzing potential discrimination within the auto finance industry, it appears that both Members of Congress and industry participants remain skeptical of the accuracy of such an approach and continue to call for increased transparency from the CFPB regarding its due diligence in creating this proxy methodology and disclosure of the methodology itself. Opponents also question the manner in which the guidance was released and absence of public hearings or public comment periods. The most recent Republican letter raised these precise issues and requested a response from the CFPB within 30 days.
CFPB Updates TILA, ECOA Examination Procedures
On June 4, the CFPB released new TILA and ECOA examination procedures, which were updated to incorporate certain of the CFPB mortgage rules finalized in January 2013 that address appraisals, escrow accounts, and mortgage loan originator compensation and qualifications. Parts of the Regulation Z (TILA) amendments took effect June 1, 2013, while the majority of the changes to both Regulation Z and Regulation B (ECOA) take effect in January 2014. The CFPB explained that the procedures will help financial institutions and mortgage companies understand how they will be examined under the new requirements that, among other things: (i) set qualification and screening standards for loan originators, (ii) prohibit steering incentives, (iii) prohibit “dual compensation,” (iv) extend the required duration of an escrow account on higher-priced mortgage loans, (v) prohibit mandatory arbitration, (vi) require lenders to provide appraisal reports and valuations, and (vii) prohibit single premium credit insurance.
House Democrats Raise Concerns about CFPB Auto Lending Enforcement
On May 28, a group of 13 Democratic Members of the House Financial Services Committee sent a letter to CFPB Director Richard Cordray seeking “any and all background information about . . . [the CFPB’s] investigation into alleged practices within the auto lending industry.” As has been reported, earlier this year the CFPB issued guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and the CFPB has spent the past several months implementing that guidance through supervision and examination of lenders. In particular, the CFPB is focused on the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. In their letter to Director Cordray, the Members of Congress remind the Director that vehicle ownership can be critical to a consumer’s ability to obtain and maintain employment and find affordable housing, and raise concerns about the impact of the CFPB’s auto lending enforcement activity on consumers’ access to affordable credit for vehicle purchase. The Members ask the Director to provide specific information about allegations stemming from investigations of auto lenders and the methodology the CFPB is employing to determine whether fair lending violations exists. They also seek additional information about the CFPB’s compliance expectations for indirect auto lenders with regard to dealer compensation policies. The letter asks the CFPB to respond by June 7, 2013.
CFPB Publishes Additional Mortgage Rule Compliance Guides
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.
DOJ Charges Community Bank with Discriminatory Pricing of Unsecured Consumer Loans
On February 19, the DOJ announced a settlement with a $338 million Texas community bank to resolve allegations that the bank engaged in a pattern or practice of pricing discrimination on the basis of national origin. Specifically, the DOJ alleged, based on its own investigation and an examination conducted by the FDIC, the bank violated ECOA by charging Hispanic borrowers higher interest rates on unsecured consumer loans compared to the rates charged to similarly situated white borrowers. The consent order requires the bank to establish a $700,000 fund to compensate borrowers who may have suffered harm as a result of the alleged ECOA violations. It also requires that the bank (i) establish uniform pricing policies, (ii) create a compliance monitoring program, (iii) provide borrower notices of non-discrimination, and (iv) conduct employee training. The new requirements apply not only to unsecured consumer loans, but also to all residential single-family real estate construction financing, automobile financing, home improvement loans, and mortgage loans.
Special Alert: Analysis of Final ECOA and HPML Appraisal Rules
On January 18, the federal banking agencies issued a final rule amending Regulation Z to implement certain requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs), and to notify consumers who apply for these loans of their right to a copy of appraisal. On the same day, the Consumer Financial Protection Bureau issued a final rule under the Equal Credit Opportunity Act (ECOA), as amended by the Dodd-Frank Act, to require creditors to provide residential mortgage loan applicants with a copy of any and all appraisals and other written valuations developed in connection with an application for closed or open-end credit that is to be secured by a first lien on a dwelling. Both rules take effect on January 18, 2014. BuckleySandler has prepared a Special Alert that provides additional details regarding the HPML appraisal rule, as well as a Special Alert regarding the ECOA appraisal rule.