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Special Alert: SCOTUS Grants Cert. Petition Regarding Use of Disparate Impact Analysis Under the FHA
This morning, the U.S. Supreme Court granted certiorari in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al. (No. 11-1507). The case has been watched closely by financial institutions because it raised questions about the viability of disparate impact claims under the Fair Housing Act ("FHA"). Disparate impact theory allows government and private plaintiffs to establish "discrimination" based solely on the results of a neutral policy, without having to show any intent to discriminate - or even in the absence of an intent to discriminate.
The Court has agreed to address one of two disparate impact questions presented in a petition from the Township of Mount Holly, New Jersey (and other appellants) - specifically the threshold question of whether disparate impact claims are cognizable under the FHA. Though not a lending case, the case could offer the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory. Last year, the parties in another fair housing case brought before the Court, Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010), withdrew the case before the Court had an opportunity to decide the issue.
To date, eleven federal courts of appeals have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court's then-current Title VII jurisprudence regarding employment discrimination - which the appellate courts interpreted as permitting disparate impact claims - and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company's neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, culminating in Smith v. City of Jackson, 544 U.S. 228 (2005), that call into question the prior appellate court holdings regarding the FHA into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII's specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, the courts of appeals have offered almost no guidance as to whether the FHA's statutory text permits disparate impact claims.
Earlier this year, the Department of Housing and Urban Development issued a rule on the use of disparate impact under the FHA that codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Citing that rule, among other things, the government urged the Court not to grant cert. and instead allow courts to implement the HUD rule.
While the Court now may have the opportunity to resolve the basic question of whether disparate impact claims are cognizable under the FHA, it could bypass certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in a multi-part second question on which cert. was not granted. Additionally, the question before the Court is whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court's analysis, the question of whether Section 805 of the FHA - the section specifically applicable to mortgage financing - permits disparate impact claims may remain an open issue.
The parties in the Mt. Holly case have been involved in well-publicized settlement meetings, which will continue this week. For this reason, the prospect exists that this matter may also be resolved prior to the Court having a chance to determine the question it has certified for review.
If the parties do not resolve the matter, the Court likely will hear the case in the fall and will issue a ruling in the spring of 2014.
FHA Commissioner Issues Statement on Insurance Premiums and HPMLs
On June 3, FHA Commissioner Carol Galante issued a statement in response to lenders’ concern that new monthly mortgage insurance premium requirements will increase the APR on FHA mortgages resulting in more mortgages exceeding Regulation Z’s high priced mortgage loan (HPML) threshold. Mortgagee Letter 2013-04 requires most borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a policy adopted in 2001 under which the FHA cancelled premium requirements on loans when the outstanding principal balance reached 78 percent of the original principal balance. Commissioner Galante’s statement acknowledges the concern, but states that all lenders are expected to comply with existing Regulation Z requirement for HPMLs. Her statement provides guidance, based on consultation with the CFPB, as to how HPML requirements differ from FHA requirements related to escrow accounts, appraisals, ability to repay, and prepayment penalties. Commissioner Galante also stated that the FHA continues to work on defining an FHA qualified mortgage standard to address these issues.
HUD Issues Mortgagee Letters on Title Approval at Conveyance, Partial Claim Documentation
On May 31, HUD issued two mortgagee letters to update and clarify certain mortgagee requirements. In Mortgagee Letter 2013-18, HUD replaced prior, delayed guidance related to title approval at conveyance, and explained that, effective August 29, 2013 for single-family REO properties, mortgagees must pay in full prior to conveyance to HUD all taxes, homeowners’ association fees, and water, sewer or other assessments. The letter also details documentation requirements for such payments. With Mortgagee Letter 2013-19, HUD reminded mortgagees about procedures for preparing partial claim documents, calculating claim amounts, and submitting partial claims to HUD. The letter explains that, if a mortgagee does not provide HUD with the original promissory note and security instruments related to the partial claim within prescribed deadlines, the mortgagee will be required to reimburse the full claim amount, including the incentive fee. After the letter takes effect on July 30, 2013, HUD will begin issuing demand letters for the full reimbursement of all amounts associated with overdue partial claim documents.
HUD Issues Series of Mortgagee Letters
Over the past week, HUD issued numerous mortgagee letters applicable to single-family mortgagees. Mortgagee Letter 2013-14, dated May 9, 2013, establishes documentation requirements for mortgagees to demonstrate eligibility for FHA mortgage insurance of loans when a governmental entity, or its agency or instrumentality, directly provides the borrower’s required minimum cash investment. The letter also provides guidance on resolving concerns with extending secondary financing by a governmental entity when such an entity provides the minimum cash investment through secondary financing. The letter becomes effective July 1, 2013. Also on May 9, HUD issued Mortgagee Letter 2013-15, which introduces new status codes for reporting delinquent mortgages in the Single Family Default Monitoring System and announces a new requirement to report each non-incentivized loan modification. The reporting and status code requirements become effective November 9, 2013. On May 14, HUD issued Mortgagee Letters 2013-16 and 2013-17. The former permits the subordination of partial claim liens for FHA streamlined refinances and eliminates consideration of partial claim notes from the 125% combined loan-to-value ratio calculation for streamlined refinances. Mortgagees have until July 13, 2013 to implement the changes. The latter provides guidance for determining interest rates to use when implementing loss mitigation home retention options for trial payment plans offered on or after July 1, 2013.
HUD Supplements Guidance on FHA Lender Insurance Program
On May 1, HUD issued Mortgagee Letter 2013-12, which updates and replaces another recently issued letter – 2013-10 – on the FHA’s Lender Insurance Program. The letter explains enhancements to that program, which allows high-performing mortgagees to conduct pre-endorsement reviews and insure loans. Those enhancements were implemented by a January 2012 HUD rule. The letter summarizes changes made by that rule, reviews mortgagee eligibility requirements for participation in the Lender Insurance program, and outlines the initial application process. Among other things, the letter also discusses the conditions under which a mortgagee’s lender insurance authority can be terminated or suspended and explains how mortgages with such authority are subject to a revised indemnification policy.
HUD Updates FHA Flood Zone Guidance, Issues Lender Insurance Program Guidance
On April 11, HUD issued Mortgagee Letter 2013-11, which amends prior guidance related to the origination and servicing of FHA-insured loans in declared disaster areas. The letter stresses that prior guidance requiring a moratorium on foreclosures of properties in disaster areas for 90 days applies to the initiation of foreclosures and foreclosures already in process. The letter outlines steps servicers should take to determine the appropriate course of action for each borrower, including a review of individual facts and circumstances to determine whether to offer forbearance and other loss mitigation alternatives. The letter details such loss mitigation options and servicer requirements. The policy changes took effect immediately.
On April 9, HUD issued Mortgagee Letter 2013-10 to explain enhancements to the Lender Insurance program that allows high-performing mortgagees to conduct pre-endorsement reviews and insure loans. Those enhancements were implemented by a January 2012 HUD rule. The letter summarizes changes made by that rule, reviews mortgagee eligibility requirements for participation in the Lender Insurance program, and outlines the initial application process. Among other things, the letter also discusses the conditions under which a mortgagee’s lender insurance authority can be terminated or suspended and explains how mortgages with such authority are subject to a revised indemnification policy.
HUD Proposes Streamlined FHA Inspection and Warranty Requirements, New Jumbo Loan Maximum LTV
On February 6, HUD published a proposed rule that would eliminate two regulations in order to streamline the FHA inspection and warranty requirements. HUD proposes to repeal the regulations requiring a FHA-approved inspector to determine the construction quality of homes for which borrowers seek FHA insurance. HUD acknowledges that the market is sufficiently competitive and regulated to provide quality inspectors without FHA approval. HUD also proposes to remove requirements for borrowers to purchase 10-year protection plans to qualify for FHA insurance for high loan-to-value (LTV) mortgages on newly constructed homes. HUD expects the changes to yield savings for lenders and borrowers, and to eliminate related FHA administrative costs. Public comments are due by April 8, 2013. Also on February 6, HUD published in the Federal Register its previously announced proposal to increase the minimum down payment for FHA-insured loans over $625,500 by setting the maximum LTV ratio at 95 percent. HUD proposed this increase because the FHA Mutual Mortgage Insurance Fund reported a decline from fiscal year 2011. HUD is accepting comments on the proposal through March 8, 2013.
HUD, FHFA Extend Foreclosure Protections for Hurricane Sandy Victims
On January 31, HUD and the FHFA announced that the FHA, Fannie Mae, and Freddie Mac will extend for an additional 90 days protections against foreclosure actions for borrowers whose properties were damaged or destroyed due to Hurricane Sandy. Those protections were set to expire on January 31, 2013. For borrowers in certain counties, FHA is extending until April 30, 2013 its foreclosure moratorium and eviction suspension. Fannie Mae, through Lender Letter LL-2013-02, and Freddie Mac, through Bulletin 2013-1, also are extending their foreclosure and eviction moratoriums through the end of April.
HUD Announces Reverse Mortgage Program Changes, Increases Mortgage Insurance Premiums, Alters Underwriting Requirements
On January 30, HUD announced that for FHA case numbers assigned on or after April 1, 2013, FHA will use a consolidated pricing option for its home equity conversion mortgages, as explained in more detail in Mortgagee Letter 2013-01. Separately, HUD also announced that effective April 1, 2013, the mortgage insurance premiums for most new mortgages will increase by 10 basis points, and by 5 basis points for jumbo mortgages. To further support the stability of the Mutual Mortgage Insurance Fund, FHA also issued Mortgagee Letter 2013-04 to require most borrowers to continue paying annual premiums for the life of their mortgage loan, reversing a policy adopted in 2001 under which FHA cancelled premium requirements on loans when the outstanding principal balance reached 78 percent of the original principal balance. FHA also will (i) require lenders to manually underwrite loans for which borrowers have a decision credit score below 620 and a total debt-to-income ratio greater than 43 percent, (ii) increase from 3.5 to 5 percent the minimum down payment for jumbo loans, and (iii) increase its enforcement for FHA-approved lenders with regard to aggressive marketing to borrowers with previous foreclosures. Separately, HUD issued Mortgagee Letter 2013-02, which updates the certification language for all late endorsement requests for reverse mortgages. Finally, through Mortgagee Letter 2013-03, HUD extended to March 15, 2013 the date by which lenders must begin to assess borrowers in default under a new loss mitigation priority order and policies, as outlined in Mortgagee Letter 2012-22.
California District Court Unseals FCA Complaint Filed Against Numerous Banks
Last week, after the government declined to intervene in the case, the U.S. District Court for the Central District of California unsealed a qui tam False Claims Act (FCA) complaint filed by a whistleblower in April 2012 against numerous banks. U.S. ex rel Hastings v. Wells Fargo Bank, N.A., No. 12-3624, Complaint (C.D. Cal. Apr. 26, 2012). The relator claims that the banks knowingly endorsed for FHA-insurance mortgage loans originated in transactions where down payment gift programs were used fraudulently. According to allegations in the complaint, the banks’ programs generated gift funds by manipulating the sales price to pass FHA down payment assistance fees onto the buyer. Further, the alleged system forced the borrower to repay the down payment gift, a violation of FHA policy. The relator alleges that the banks then submitted to HUD false certifications for the non-compliant endorsed loans, upon which HUD relied to issue FHA mortgage insurance. The relator claims that the government was required to pay, and will continue to have to pay, FHA benefits on defaulted loans that contained material violations, and seeks treble damages and penalties under the FCA, a cease and desist order against the lenders, and a civil penalty of $5,500 to $11,000 for each alleged violation of the FCA.