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HUD proposes streamlined AFFH rule
Recently, HUD announced plans to publish a notice of proposed rulemaking (NPRM) entitled “Affirmatively Furthering Fair Housing” (AFFH). The new rule will update a 2015 final rule that was intended to implement the Fair Housing Act’s statutory mandate that HUD ensure that recipients of its funding work to further fair housing, which was repealed by the Trump administration. In 2021, the Biden administration published an interim final rule to restore certain definitions and certifications to its regulations implementing the Fair Housing Act’s requirement to affirmatively further fair housing (covered by InfoBytes here). “This proposed rule is a major step towards fulfilling the law’s full promise and advancing our legal, ethical, and moral charge to provide equitable access to opportunity for all,” HUD Secretary Marcia L. Fudge said in an announcement.
The NPRM incorporates much of the 2015 AFFH rule and will streamline the required fair housing analysis for states, local communities, and public housing agencies. Program participants would be required to ensure protected classes have equitable access to affordable housing opportunities, by, for example, submitting an equity plan to HUD every five years. HUD-accepted equity plan analysis, goals, and strategies would then be incorporated into program participants’ subsequent planning documents. Program participants would also be required to conduct and submit annual progress evaluations. Both the equity plans and annual progress evaluations would be made available online.
HUD further explained that the NPRM is intended to simplify required fair housing analysis, increase transparency for public review and comment, improve compliance oversight, provide a process for regular progress evaluations, and enhance accountability, among other things. Comments on the NPRM are due April 24. HUD’s quick reference guide provides additional information.
Credit union to pay $558,000 in cyber fraud case
On January 12, the U.S. District Court for the Eastern District of Virginia ruled that a credit union (defendant) is responsible for $558,000 in compensatory damages for processing a payment order that was allegedly induced through fraud by the beneficiary, but later rescinded its decision to award punitive damages. According to the initial opinion and order, in October 2018, the plaintiff received a “spoofed” email from an unknown third party claiming to be one of the plaintiff’s suppliers. The email instructed the plaintiff to change its banking remittance information for the supplier. However, unknown to the plaintiff, the new banking information contained in the email belonged to an individual who had opened a personal account with the defendant months prior. The order stated that from October to November in 2018, the plaintiff made four payments to the individual’s account held by the defendant, identifying the supplier as the beneficiary. The plaintiff sued alleging that the defendant failed to “comport with basic security standards that resulted in the unlawful diversion of funds.” According to the opinion and order, the court found that Virginia Commercial Code required the defendant to reject the deposits if it knew there was a discrepancy between the intended beneficiary and the account receiving the deposit. The court further wrote that the defendant did not have a duty to “proactively” discover a discrepancy, but found that “the evidence at trial illustrated that [the defendant] did not maintain reasonable routines for communicating significant information to the person conducting the transaction. If [the defendant] had exercised due diligence, the misdescription would have been discovered during the first [] transfer.” Additionally, the court stated the defendant did have “actual knowledge” of the fraud because “the transfers generated real-time warnings that the name of the intended beneficiary [] did not match the name of the owner of the account receiving the [deposits].” The court awarded the plaintiff $558,000 in compensatory damages and $200,000 in punitive damages. However, the court rescinded the punitive damage award stating that the plaintiff has not provided sufficient evidence to support punitive damages.
FDIC announces Alabama, California disaster relief
On January 18, the FDIC issued guidance (see FIL-03-2023 and FIL-04-2023) to provide regulatory relief to financial institutions and help facilitate recovery in areas of Alabama affected by severe storms, straight-line winds, and tornadoes occurring on January 12, and in areas of California affected by severe winter storms, flooding, and landslides occurring from December 27 and continuing. The FDIC wrote that in supervising impacted institutions, it will consider the unusual circumstances those institutions face. The guidance suggested that institutions work with borrowers impacted by the severe weather to extend repayment terms, restructure existing loans, or ease terms for new loans “in a manner consistent with sound banking practices.” The FDIC noted that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The agency will also consider relief from certain reporting and publishing requirements.
CFPB updates Mortgage Servicing Examination Procedures
On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.
CFPB: Negative option marketing practices could violate the CFPA
On January 19, the CFPB released Circular 2023-01 to reiterate that companies offering “negative option” subscription services are required to comply with federal consumer financial protection laws. According to the Circular, “‘negative option’ [marketing] refers to a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.” The Bureau clarified that negative option marketing practices could violate the CFPA where a seller: (i) misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program; (ii) fails to obtain consumers’ informed consent; or (iii) misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with its promised cancellation procedures.
The Bureau described receiving consumer complaints from older consumers about being repeatedly charged for services they did not intend to buy or no longer wanted to continue purchasing. Other consumers reported being enrolled in subscriptions without knowledge of the program or the costs. Consumers also submitted complaints regarding the difficulty of cancelling subscription-based services and about charges on their credit card or bank account after they requested cancellation.
The Bureau also warned that negative option programs can be particularly harmful when paired with dark patterns. The Circular noted that the Bureau and the FTC have taken action to combat the rise of digital dark patterns, which can be used to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent. The Bureau noted that consumers could be misled into purchasing subscriptions and other services with recurring charges and be unable to cancel the unwanted products and services or avoid their charges.
States file brief in support of Biden’s student loan debt-relief program
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent[] affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.
DOJ settles with bank for $31 million to resolve alleged redlining allegations
On January 12, the DOJ announced a more than $31 million settlement with a national bank over redlining allegations. Calling the action the largest redlining settlement agreement in the department’s history, the DOJ’s complaint alleged that the bank violated the Fair Housing Act and ECOA by, among other things, failing to provide mortgage lending services to majority-Black and Hispanic neighborhoods in Los Angeles County. The DOJ contended that because the bank’s internal fair lending oversight, polices, and procedures allegedly failed to ensure that it was able to provide equal access to credit to residents of majority-Black and Hispanic neighborhoods, the bank generated disproportionately low numbers of loan applications and home loans from these neighborhoods compared to similarly-situated lenders.
Under the terms of the consent order (which was finalized January 30), the bank (which denies the allegations) has agreed to invest a minimum of $29.5 million in a loan subsidy fund to increase credit for home mortgage loans, home improvement loans, and home refinance loans extended to residents of majority-Black and Hispanic neighborhoods in Los Angeles County. The bank has also agreed to spend at least half a million dollars on advertising and outreach targeted toward residents of these neighborhoods, while it will spend at least another half a million dollars on a consumer financial education program to increase residents’ access to credit. An additional $750,000 is earmarked for use in developing community partnerships to provide services for increasing access to residential mortgage credit.
Additionally, the bank agreed to (i) open one new branch in a majority-Black and Hispanic neighborhood and explore future opportunities for expansion within Los Angeles County; (ii) dedicate at least four mortgage loan officers to serving majority-Black and Hispanic neighborhoods; and (iii) employ a full-time community lending manager to oversee the continued development of lending in majority-Black and Hispanic neighborhoods. A community credit needs research-based market assessment will also be conducted by the bank to identify financial services’ needs for majority-Black and Hispanic census tracts within Los Angeles County. According to the DOJ’s announcement, the bank stated it is proactively taking measures to expand its lending services in other markets around the county to improve access to credit in communities of color. Measures include “creating a residential mortgage special purpose credit program to cover geographic areas in various locations throughout the country, including New York, Georgia, Nevada, and Tennessee,” and launching “a small business lending program that will be aimed at assisting underserved business owners in operating and growing their business.” The bank also agreed to spend at least $100,000 per year on advertising and outreach in the identified areas and $100,000 on a consumer financial education program.
Credit unions to pay $4 million in GAP fee refunds
On January 4, the Colorado attorney general announced settlements with two credit unions that will pay a combined $4 million in refunds to borrowers in the state who were entitled to “guaranteed automobile protection” (GAP) fee refunds. An investigation conducted by the Consumer Protection Section of the Colorado Department of Law found that the credit unions historically failed to refund unearned GAP fees owed to consumers. According to the state, the credit unions act as creditors by purchasing retail installment sales contracts from auto dealers that include GAP purchased by Colorado consumers. The state explained in its announcement that borrowers pay the full GAP fee when they purchase a car (the fee is typically only earned gradually over the loan’s lifetime). However, should a borrower prepay the loan prior to maturity or the car is repossessed and sold at auction before the loan is paid off, Colorado law requires lenders to refund the unearned portion of the GAP fee to the borrower, the state said.
The assurances of discontinuance (see here and here) apply to all consumer credit transactions entered into with consumers in the state related to any alleged unfair conduct committed by the credit unions related to GAP fee refund practices. In additional to paying consumer remediation and $100,000 each to the state, the credit unions also agreed to alter their business practices to ensure that applicable refunds will be provided to consumers going forward.
3rd Circuit: Now-invalid default judgment still in effect when debt collection attempts were made
On January 11, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s decision to grant summary judgment in favor of defendants accused of violating the FDCPA when attempting to collect on a judgment that was later vacated. According to the opinion, the plaintiff was sued in state court for an unpaid debt. Contradictory orders were entered by the Superior Court, one which dismissed the action due to one of the defendant’s failure to attend trial, and another that entered default judgment against the plaintiff (which was confirmed two years later by the state court).
A few years later, an attempt was made to collect on the debt. The plaintiff disputed the debt and later sued, claiming the defendants “knew or should have known” that the debt was unenforceable. The plaintiff later filed a motion in state court to vacate the default judgment and declare it “void ab initio,” which was eventually granted by the state court after it determined that the judgment was erroneously entered by the clerk after the court had already dismissed the case due to the debt collector’s failure to appear for trial. The plaintiff filed a cross-motion for summary judgment in the district court.
The district court, however, found that the defendants’ alleged efforts to collect the debt were not false or misleading because the now-invalid default judgment at issue was technically still valid and existed when the collection attempts were made. The plaintiff appealed, arguing that the summary judgment violated the Rooker-Feldman doctrine because the district court “‘could not have reached the decision that it did without necessarily supplanting’ the Superior Court’s order vacating the judgment against her.” The plaintiff also argued that the district court erred when it found the Superior Court judgment against the plaintiff to be “in effect . . . until such time as it was vacated, . . . rather than ‘per se not valid’” when the defendants engaged in their efforts to collect the debt.
On appeal, the 3rd Circuit disagreed with the plaintiff’s assertions. According to the appellate court, the plaintiff satisfied none of the four requirements to trigger the Rooker-Feldman doctrine, adding that regardless of whether the state court declared the judgment “void ab initio,” it was in effect when the defendant attempted to collect on the debt. Moreover, the appellate court noted that the plaintiff “failed to present a triable issue that any communication from Defendants to [the plaintiff] regarding the collection of the default judgment was made unlawful retroactively upon the Superior Court vacating its default judgment order.”
HUD discusses steps to address appraisal bias
On January 12, HUD Secretary Marcia L. Fudge announced at a Brookings Institute event that HUD is creating a process that people seeking FHA financing can use to request a review of their appraisal if they believe the results may have been affected by racial bias. According to the announcement, under the reconsideration of value (ROV) proposal, lenders will have clear guidance on how to review requests from borrowers for an ROV for the appraisal conducted in conjunction with their application for FHA-insured mortgage financing. The proposal also provides guidance for obtaining a second appraisal when material deficiencies are documented, and the appraiser is unwilling to resolve them. Fudge noted that the proposal “represents the first step to solidify the processes that lenders must follow when a borrower requests a [ROV] review if concerns arise around unlawful discrimination in residential property valuations.” Fudge also noted that the proposal supports the Biden-Harris administration’s PAVE Action Plan commitments and the continued work of the Interagency Task Force. As previously covered by InfoBytes, in March 2022, HUD delivered the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan to President Biden. PAVE focuses primarily on actions to substantially reduce racial bias in home appraisals, as well as steps federal agencies can “take using their existing authorities to enhance oversight and accountability of the appraisal industry and empower homeowners and homebuyers to take action when they receive a valuation that is lower than expected.”