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HUD Obtains First Settlement Under Rule Requiring Sexual Orientation and Gender Identity Equal Access
On January 2, HUD announced that a lender agreed to settle a claim that it refused to provide FHA financing to a lesbian couple. HUD noted that the agreement is the first enforcement action taken under a rule finalized in January 2012 that aims to provide equal access to housing, regardless of sexual orientation, gender identity, or marital status, including by prohibiting lenders from determining FHA-insured financing eligibility based on sexual orientation or gender identity. The lender denies the allegations, but HUD required the lender to pay $7,500 so the parties could avoid additional costs associated with the administrative proceedings. The agreement also requires the lender to update its fair lending training program to support compliance with the new rule.
Senate Confirms FHA Commissioner and Other Key Agency Nominees
On December 30, the Senate confirmed Carol Galante as Assistant Secretary of Housing and Urban Development and Federal Housing Administration Commissioner. Ms. Galante, who was nominated for the position in October 2011, has been serving in an acting role. Her confirmation was made possible after certain Senators, including Bob Corker (R-TN), who had expressed concerns about the pace of reforms at the FHA, secured a commitment from Ms. Galante to (i) place a moratorium on the full drawdown reverse mortgage program, (ii) substantially increase underwriting criteria for borrowers with FICO scores between 580 and 620 by establishing a meaningful maximum debt-to-income ratio, (iii) increase the down payment requirement and the insurance pricing for loans between $625,000 and $729,000, and (iv) increase underwriting requirements for borrowers who have been foreclosed upon within the last seven years. On January 1, as described in media reports, the Senate confirmed Joshua Wright as FTC Commissioner and Mignon Clyburn as FCC Commissioner, and also confirmed Richard Berner for the new position of Director of the Treasury Department’s Office of Financial Research.
HUD Issues Mortgagee Letters Regarding Flood Zone and Small Supervised Lender Reporting Requirements
Last month, HUD issued Mortgagee Letter 2012-28, which restates and updates guidance regarding flood zone requirements for FHA-insured mortgages. The letter states that, effective February 9, 2012, (i) FHA will require all mortgagees to obtain a flood zone determination on all properties and to retain evidence that clearly indicates that the flood zone determination service is for the life of the loan, and (ii) properties within a designated Coastal Barrier Resource System unit will not be eligible for an FHA-insured mortgage. The letter attaches a chart demonstrating the Flood Zone Requirements within a given scenario. A second letter, Mortgagee Letter 2012-29, advises supervised lenders of the method by which they should submit their call reports in place of audited financial statements, as permitted by prior HUD guidance.
California Appeals Court Enjoins Nonjudicial Foreclosure for Lenders' Failure to Comply with HUD Servicing Requirements
On December 13, the California Court of Appeal for the First Appellate District held that the HUD servicing requirements were incorporated by reference into the borrowers’ FHA deed of trust and served as conditions precedent to the acceleration of the debt or to foreclosure. Pfeifer v. Countrywide Home Loans, No. A133071, 2012 WL 6216039 (Cal. Ct. App. Dec. 13, 2012). In this case, after the lender declared the borrowers’ FHA-insured mortgage in default and commenced nonjudicial foreclosure proceedings, the borrowers filed suit against the lender seeking general and punitive damages, as well as to enjoin the foreclosure proceedings and to obtain declaratory relief, for failure prior to provide the 30-day advance debt validation notice required by the Fair Debt Collection Practices Act (FDCPA) or to conduct a face-to-face interview required by HUD’s servicing regulations prior to commencing foreclosure proceedings. On appeal, the court affirmed the lower court’s ruling that the borrowers did not have a claim for damages against the collection firm under the FDCPA, because that firm was not a debt collector under the statute. However, the court reversed the trial court’s judgment as to the borrowers’ request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. The court agreed with the borrowers that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to commencing a valid nonjudicial foreclosure. The court also held that tender was not required, because the borrowers were seeking to enjoin a pending foreclosure sale based on the lenders’ failure to comply with the HUD servicing requirements. Concurring with those courts that distinguish an offensive action from a defensive action, the court explained that the borrowers had no private right of action for failure to comply with the HUD regulations and could not seek damages based on their wrongful foreclosure action, but held that the HUD regulations may be used as an affirmative defense to a judicial foreclosure action instituted by the creditor.
HUD Revises FHA Recertification Fee Calculation, Issues 2013 Loan Limits
On December 11, Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2012-27, which changes the way the Federal Housing Administration (FHA) will calculate the recertification fee for its approved lenders. Effective immediately, FHA will calculate recertification fees based on the number of FHA-approved branch offices as of the first business day of the lender’s annual reporting period. Lenders that wish to terminate branches and thereby not pay a recertification fee for the next annual period must do so on or before the last business day of the annual reporting period. On December 6, Mortgagee Letter 12-26 announced the FHA’s single-family loan limits for 2013. The FHA national loan limit floor remains at 65 percent of the national conforming limit (which holds constant at $417,000 for a one-unit property). The letter also lists the maximum FHA loan limits by property size for areas designated as high-cost. The letter also identifies certain exceptions to the limits, and notes that the FHA maximum claim amount for reverse mortgages remains at the statutory limit of $625,500.
Spotlight on HDMA: Your Institution's Public HMDA Data and What to Do with It
In an annual rite of autumn, on September 18 the Federal Financial Institutions Examination Council released 2011 Home Mortgage Disclosure Act (HMDA) data for U.S. mortgage lenders. The public data contains information regarding nearly all home mortgage applications acted on in the prior calendar year, designated by loan purpose (i.e., home purchase, home refinance and home improvement). The HMDA data covers home loan applications made to over 7,600 U.S. financial institutions, including banks, savings associations, credit unions and mortgage companies, and contains information on approximately 11.7 million applications, 7.1 million originations and 2.9 million purchases.
HMDA data provides a wealth of mortgage industry-related information, including data on application and loan volume, the proportion of loans backed by the Fair Housing Administration and Veterans Administration, and lender concentration in the mortgage market. However, its most important function and the reason HMDA was enacted is the role the data plays in fair lending enforcement. Toward this end, the outcome of each home mortgage loan application is classified according to the applicant’s race, ethnicity and gender. HMDA data further allows analyses based on the site of the subject property, as well as the location of the lender.
It is important to recognize that while HMDA data alone does not prove or disprove discrimination, it is an important component of fair lending examinations. According to the Federal Reverse Board, which provides a lengthy analysis that accompanies the annual release of HMDA data:
Although the HMDA data include some detailed information about each mortgage transaction, many key factors that are considered by lenders in credit underwriting and pricing are not included. Accordingly, it is not possible to determine from HMDA data alone whether racial and ethnic pricing disparities reflect illegal discrimination. However, analysis using the HMDA data can account for some factors that are likely related to the lending process.
In other words, notwithstanding its limitations, HMDA data is often the starting point for regulators seeking indicia of possible discrimination. Additionally, advocacy groups and the media frequently focus on lending disparities suggested by HMDA data. These factors, and the very public nature of HMDA data, make it important that lenders fully understand their own data and consider it in the context of what the national HMDA data suggests.
Here’s a list of the key fair lending-related findings from the 2011 data:
- Denial Rates - Black applicants and Hispanic-white applicants had notably higher denial rates than non-Hispanic white applicants. The denial rates for conventional home-purchase loans were 30.9 percent for blacks, 21.7 percent for Hispanic whites, 14.8 percent for Asians, and 11.9 percent for non-Hispanic whites.
- Higher-Priced Loans - The incidence of higher-priced lending across all products in 2011 was about 3.7 percent, up from 3.2 percent in 2010. Black and Hispanic-white borrowers were more likely to obtain higher-priced loans than were non-Hispanic white borrowers.
- Loan Penetration in Distressed Areas - Lending activity has not yet rebounded in neighborhoods experiencing high levels of distress. Home purchase lending in census tracts identified by the Neighborhood Stabilization Program as being highly distressed declined by a larger percentage since 2010 than less-distressed tracts. This decline was particularly pronounced for lower- and middle-income borrowers.
These industry-wide findings help guide the analyses that individual lenders should conduct on their own HMDA data. Here are three basic statistical reviews that we recommend each lender undertake to better understand what the data shows:
- Evaluate the share of applications received from protected class applicants.
- Compare denial rates for minority applicants and non-Hispanic white applicants.
- Determine the proportion of higher priced loans originated to minority applicants and non-Hispanic white applicants.
We reiterate that HMDA data alone does not prove or disprove mortgage lending discrimination. A HMDA review that suggests fair lending concerns should be followed by further statistical analysis that considers credit-related factors that are not part of HMDA, such as credit score and loan-to-value ratios. Review of individual loan files may also be necessary before making a final determination that there are lending patterns that cannot be explained, and that ameliorative action is necessary.
Nevertheless, it is important to understand your institution’s raw, public HMDA data and be prepared to defend and follow-up on any lending disparities it may suggest. Put simply, the best way to avoid getting blind-sided by a regulator, community group, or media representative is to know your HMDA data better than they do.
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Warren W. Traiger, counsel at BuckleySandler LLP, advises clients on consumer regulatory matters, particularly fair lending and Community Reinvestment Act (“CRA”) compliance. Mr. Traiger is a nationally recognized expert in CRA and fair lending issues. His research and analysis of mortgage lending data has been cited in publications of the Federal Reserve Banks of San Francisco, Boston, and Dallas, the Federal Deposit Insurance Corporation, and in testimony before the U.S. House Financial Services Committee.
ACLU Fair Lending Case Against Mortgage Securitizer Highlights New Fair Lending Litigation Risk; Fair Lending Litigation Against Lenders Continues
On October 15, the ACLU filed a putative class action suit on behalf of a group of private citizens against a financial institution alleged to have financed and purchased subprime mortgage loans to be included in mortgage backed securities. The complaint alleges that the institution implemented policies and procedures that supported the market for subprime loans in the Detroit area so that it could purchase, pool, and securitize those loans. The plaintiffs claim those policies violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (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. The suit seeks injunctive relief, including a court appointed monitor to ensure compliance with any court order or decree, as well as unspecified monetary damages. The National Consumer Law Center, which developed the case with the ACLU, reportedly is investigating similar activity by other mortgage securitizers, suggesting additional suits could be filed. The ACLU also released a report on the fair lending aspects of mortgage securitization and called for, among other things, DOJ and HUD to expand their Fair Housing Testing Program, and for Congress to increase penalties for FHA and ECOA violations and provide additional funding for DOJ/HUD fair lending enforcement.
On October 18, three Georgia counties filed suit on behalf of their communities and certain residents against a financial institution the counties allege targets FHA-protected minority borrowers with “predatory high cost, subprime, ALT-A and conforming mortgages without considering the borrowers’ ability to repay such loans.” The complaint claims that the lender’s practices caused and continue to cause minority borrowers to be more at risk of default and foreclosure than similarly situated white borrowers, and, as such, constitute a pattern or practice of discriminatory lending and reverse redlining in violation of the FHA. The counties are seeking injunctive relief and unspecified compensatory and punitive damages.
BuckleySandler’s Fair and Responsible Financial Services Team has extensive experience litigating fair lending cases and assisting financial institutions seeking to manage fair lending risk. For a review of fair lending red flags for banks and strategies for addressing them, see our recent article.
DOJ Sues Mortgage Lender Over Alleged Fraudulent Certification of FHA Loans
On October 9, the U.S. Attorney for the Southern District of New York and the U.S. Department of Housing and Urban Development (HUD) announced a civil fraud suit against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. The suit, filed in coordination with the Financial Fraud Enforcement Task Force (FFETF), claims that from May 2001 through October 2005, the lender regularly and knowingly engaged in reckless origination and underwriting of FHA loans, while certifying to HUD that those loans met the FHA Direct Endorsement Lender Program requirements and were therefore eligible for FHA insurance. Further, the suit alleges that the lender failed to conduct adequate quality control, failed to comply with HUD self-reporting requirements, and later attempted to cover up its reporting failures. The government claims that it 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 False Claims Act, as well as Financial Institutions Reform, Recovery, and Enforcement Act penalties. The government also seeks compensatory damages under the common law theories of breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake of fact. This suit follows the settlements earlier this year of several other cases involving similar claims. One other similar suit is currently pending.
FFIEC Releases 2011 HMDA Data
On September 18, the Federal Financial Institutions Examination Council (FFIEC) released data collected in 2011 under the Home Mortgage Disclosure Act (HMDA). The data include information on loan amount, loan type and purpose, property type and location, pricing, and applicant characteristics. The FFIEC release notes that the 2011 data reflect that (i) the FHA’s share of first-lien loans declined in 2011, but there remains a heavy reliance on the FHA program, (ii) only a small minority of first lien loans had APRs above the loan price reporting thresholds, and (iii) for conventional home-purchase loans, black and Hispanic white applicants experienced higher denial rates than non-Hispanic white applicants, similar to in prior years. While examiners consider HMDA data when assessing lender compliance with fair lending laws, the FFIEC cautions that such data do not include many potential determinants of creditworthiness and loan pricing, such as the borrower's credit history, debt-to-income ratio, and the loan-to-value ratio.
House Passes FHA Solvency Legislation
On September 11, the U.S. House of Representatives voted overwhelmingly to pass legislation that seeks to bolster and protect FHA capital reserves. The bill, H.R. 4264, would set a minimum 0.55% annual premium and would increase the maximum annual premium from 1.55% to 2.05% for all FHA-insured single-family mortgage loans. The bill also would authorize the Secretary of Housing and Urban Development to require lenders to indemnify the FHA for claims paid on loan, if the lender knew or should have known that the loan included serious or material violations of FHA requirements under the direct endorsement program, regardless of whether the violations caused the loss. In cases of fraud or misrepresentation in connection with the origination or underwriting of a loan on which the FHA suffers a loss, the Secretary would be required to seek indemnification from the lender. As a condition of obtaining FHA lending approval, lenders would be required to notify HUD if the lender terminates purchases of FHA mortgages or servicing rights from another FHA lender based on evidence of fraud or material misrepresentation. Finally, under the bill, lenders could have their approval to originate and underwrite FHA mortgages terminated if their delinquency rates are comparatively high.