Fair Lending

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The CFPB has issued a new annual report covering its fair lending activities during 2017.  Since Mick Mulvaney did not become Acting Director until the end of November 2017, the fair lending activities described in the report largely took place under former Director Cordray’s leadership.

The Bureau’s last annual fair lending report under former Director Cordray (which covered its fair lending activities in 2016) identified the Bureau’s 2017 fair lending priorities.  Consistent with those priorities, the new report indicates that, in 2017, the Bureau focused on redlining, mortgage and student loan servicing, and small business lending.  The new report, however, provides no insights into the Bureau’s 2019 fair lending priorities.

Indeed, even if the report had identified 2019 priorities, it is unclear how meaningful that would have been given that the CFPB will be led by Kathy Kraninger, its new Director, in 2019.  Ms. Kraninger is likely to play a significant role in setting the Bureau’s fair lending agenda going forward.  During her initial press conference as Director earlier this week, Ms. Kraninger deflected questions she was asked about fair lending matters, including the Bureau’s use of the disparate impact theory to prove violations of ECOA, by saying that she has not reached any conclusions about the Bureau’s future fair lending policy and awaits staff briefings.

In the report’s section on supervisory activities, the Bureau reviews information previously provided in its Spring 2017 and Summer 2017 editions of Supervisory Highlights.  In the section on enforcement, the Bureau reviews its two public 2017 fair lending enforcement actions and its implementation of several consent orders.  It also reports that it referred two matters with ECOA violations to the Justice Department in 2017 and the DOJ declined to open its own investigation, deferring to the Bureau’s handling of both matters.  The Bureau states that at the end of 2017, it had a number of pending redlining investigations as well as a number of pending investigations in other areas.

In the section on rulemaking, the Bureau discusses various HMDA/Regulation C developments and its final rule amending Regulation B to facilitate Regulation C compliance.  In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the Bureau references its May 2017 RFI seeking information on the small business lending market.  (Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.)  In the Bureau’s Spring 2018 rulemaking agenda, the Section 1071 rulemaking was included in the list of current rulemakings, with an estimated March 2019 date for prerule activities.  Its Fall 2018 agenda, however, reclassifies the Section 1071 rulemaking as a long-term action item.

The report also contains sections that discuss the Bureau’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights).  Another section is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.

 

 

While the pace of the CFPB’s fair lending activities has slowed under its new leadership, significant fair lending developments are occurring elsewhere.  In this week’s podcast, we discuss several of those developments and their broader implications.  Our discussion focuses on New York and Connecticut fair lending developments involving auto finance, a private redlining lawsuit, and the FDIC’s recent report on the use of digital footprint data for credit underwriting.  We conclude with a discussion of a letter recently issued by the Department of Justice to a Congressman regarding the website accessibility standards that companies must follow to be compliant with the Americans with Disabilities Act.

To listen and subscribe to the podcast, click here.

 

As part of an investigation launched earlier this year into allegations of redlining in the Philadelphia area, the Pennsylvania Attorney General Josh Shapiro recently called on mortgage borrowers and home loan applicants in the Philadelphia area to file complaints with his office “if they believe they may have been victims of redlining or experienced irregularities when looking for a mortgage or home loan.”

As examples of “redlining tactics or irregularities,” the AG’s press release lists:

  • Difficulty getting an in-person appointment with a loan officer
  • Not receiving a written pre-approval or quote promised by the loan officer
  • Not receiving return phone calls from a loan officer, and
  • Refusal to provide a loan application after the loan officer learns of the applicant’s race, the racial makeup of the neighborhood where the applicant intends to buy the home, or other information relating to the area’s racial or ethnic characteristics.

The PA AG launched the redlining investigation in response to an investigative article that identified a pattern of discrimination in which African American borrowers were 2.7 times more likely to be denied a home mortgage in Philadelphia than white borrowers.  The article found that white applicants received 10 times as many loans as black applicants, even though they made up similar proportions of the population.  Based on an analysis of publicly available HMDA data, the article concluded that black applicants were denied conventional mortgage loans at significantly higher rates than white applicants in 48 cities, including Philadelphia..

The District of Columbia’s AG as well as the AGs of other states, such as Washington, Illinois, Iowa, and Delaware, are reported to also be conducting redlining investigations.  In 2015, the New York AG entered into a settlement with Evans Bank to resolve a lawsuit filed by the NY AG alleging that the bank had engaged in redlining.  HMDA data was recently used by a Connecticut fair housing advocacy group to support redlining claims in a lawsuit filed in Connecticut federal district court alleging that Liberty Bank had engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.

We expect state AGs to continue to focus on redlining unless and until the CFPB and/or DOJ re-focus on the issue.

 

 

In June 2018, HUD issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Fair Housing Act disparate impact rule (Rule) should be revised in light of the U.S. Supreme Court’s 2015 Inclusive Communities decision.  Comments on the ANPR were due by August 20, 2018.  The Rule is the subject of a lawsuit originally filed in June 2013 by the American Insurance Association and National Association of Mutual Insurance Companies in the D.C. federal district court.  In April 2016, the trade groups amended their complaint to include a claim that the Rule is inconsistent with the limitations on disparate impact claims set forth in Inclusive Communities.  As described more fully below, the district court entered an order last week that contemplates HUD’s issuance of a proposal to revise the Rule by December 18, 2018.

Oral argument on the parties’ cross summary judgment motions was initially scheduled for February 13, 2017.  However, on February 8, 2017, the court granted in part a motion filed by HUD seeking a continuance of the oral argument to allow the Trump Administration to install new HUD and Department of Justice officials, and continued the argument until a date to be determined by the court.  In addition, on February 15, 2017, the court stayed the case pending further discussions between the parties.

On October 19, 2018, the parties filed a joint status report in which the trade groups urged the court to schedule oral argument on the cross summary judgment motions in light of uncertainty as to what HUD’s proposal might provide and its refusal to commit not to take enforcement action against the trade groups’ members under the Rule.

On October 26, upon consideration of the joint status report, the court entered a minute order continuing the stay until December 18, 2018 to allow HUD “to issue a Notice of Proposed Rulemaking in response to public comments.”  The parties were also ordered to file another joint status report by December 18 “updating the Court on the status of HUD’s issuance of the rule and proposing any next steps in this litigation.”

Disparate impact also appears to be on the CFPB’s rulemaking agenda.  On October 17, the CFPB released its Fall 2018 rulemaking agenda.  In its preamble to the agenda and a blog post about the agenda, the CFPB indicated that future rulemaking it is considering includes the requirements of the Equal Credit Opportunity Act (ECOA).  More specifically, the blog post referenced the Bureau’s May 2018 announcement that “it is reexamining the requirements of the [ECOA] concerning the disparate impact doctrine in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”

 

On October 17, the Bureau released its Fall 2018 Rulemaking Agenda, but it included a surprise for those interested in fair lending.  Under the section of the associated blog post entitled “Future Planning” appears the following statement:

“The Bureau is considering future [rulemaking] activity with regard to specific areas of consumer financial law of significant public interest.  For example, the Bureau announced in May 2018 that it is reexamining the requirements of the Equal Credit Opportunity Act (ECOA) concerning the disparate impact doctrine in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”

This is a very interesting development, because it suggests that the Bureau’s “reexamination” of disparate impact may not merely be a matter of informal interpretation or enforcement/supervision priorities, but may become enshrined in a rule (presumably an amendment to Regulation B).  If this happens, its effects would likely be more permanent and widespread than a more informal statement of position relating to disparate impact.  A rule, once finalized, would presumably:

  • remain in effect indefinitely, until altered by another notice-and-comment rulemaking;
  • be binding on other federal agencies (like the Department of Justice) and on courts, as an authoritative interpretation of ECOA;
  • survive any leadership change at the Bureau, again subject to the rulemaking process being restarted; and
  • prevent the Bureau from applying any different standard for disparate impact retroactively upon a change in leadership at the agency.

So, a disparate impact rulemaking could be very significant over the long term.  But what direction might such a rulemaking take?

One possibility would be to remove the “effects test” language from Regulation B (§ 1002.6(a)) and state affirmatively that there is no disparate impact theory of liability under ECOA.  There is certainly support in the statutory language, and the reasoning of Inclusive Communities, for that result.  Indeed, this conclusion was the one highlighted in the House Financial Services Committee’s Unsafe at Any Bureaucracy report, including a chart that shows the distinctions between ECOA and other federal statutes illustrating that there is no language in ECOA to support a disparate impact theory of liability.

Another idea might be to follow the path of the HUD disparate impact rulemaking under the Fair Housing Act, to carefully define the elements of a disparate impact claim in a way that limits application of the theory to more well-settled situations and which gives appropriate deference to reasonable business justifications.  We blogged about the HUD rulemaking most recently here.

A third potential would be to flesh out the “robust causality” requirement discussed in Inclusive Communities to require significant proof beyond statistical analysis for any disparate impact claim, which again could serve to curb what the Supreme Court labeled “abusive” claims of disparate impact.

We don’t know what the Bureau may do in this regard, or whether the foreshadowing of an ECOA rulemaking will actually be carried through to completion, but if it is, it could be a very significant, long-term development for fair lending law.

 

Last week, the Connecticut Fair Housing Center, Inc. filed a complaint against Liberty Bank in Connecticut federal district court alleging that the Bank engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.  The complaint describes the Bank as “the eighth-largest conventional home purchase lender and eleventh-largest refinancer in Connecticut.”

The complaint alleges that the Bank violated the FHA by engaging in the following conduct:

  • According to the complaint, the Bank deliberately drew its CRA assessment area so as to exclude and thereby avoid CRA scrutiny of its banking and lending activities in certain towns with racially diverse populations and generates a disproportionately low number of mortgage loans within its assessment area from non-white applicants, making “significantly fewer than expected loans than nearly all its peers in majority-non-white census tracks, even when controlling for underwriting criteria like income and whether the borrower will live in the property.”  The Bank is also alleged to over-concentrate its branches in white census tracts and, compared to its leading competitors, to have an insufficient number of branches in majority-non-white and racially diverse census tracts.  The complaint alleges that to test for redlining, the plaintiff “used a statistical measure called a shortfall.”   This measure “assumes that the number of loans is constant across the region and then estimates what the distribution of loans would be if they were made solely according to the income of loan applicants rather than some other factor like composition of neighborhood or race of the applicant.”  It then “allows a comparison between expected lending patterns and actual lending patterns for a single mortgage lender, and tests whether differences in origination volume are a result of applicant characteristics or variables such as discrimination against a protected class.”
  • Discrimination in extending credit.  The complaint alleges that the bank denies African-American and Latino loan applicants at a substantially higher rate than substantially similar white applicants after controlling for income and other neighborhood features.
  • Discouraging applications.  The complaint alleges that Bank representatives made statements that would discourage African-American and Latino applicants from applying for loans, provided significantly less information about the home-buying process to African-American and Latino applicants than white applicants, and offered loan terms to African-American and Latino applicants that were inferior to those offered to white applicants.  In support of these allegations, the complaint describes six different tests in which African-American, Latino, and white testers were allegedly sent by the plaintiff to various Bank locations to meet with a loan officer or obtain copies of advertising materials for mortgages.

The complaint serves as a reminder that while fair lending enforcement may appear to no longer be emphasized by the CFPB under Acting Director Mulvaney, lenders should keep fair lending issues front of mind.  In addition to private plaintiffs, state regulators continue to pursue initiatives to enforce fair lending laws.

 

The FDIC’s Center for Financial Research has issued a research paper that discusses the use of the information contained in a “digital footprint,” meaning the information that people leave online by accessing or registering on a website, for predicting consumer default.

The researchers considered ten digital footprint variables that included:

  • The device type (e.g. tablet or mobile)
  • The operating system (e.g. iOS or Android)
  • The channel through which a customer comes to a website (e.g. search engine or price comparison site)
  • Two pieces of information about the user’s email address (e.g. includes first and/or last name and includes a number)

According to the researchers, the results of their research suggest that “even the simple, easily accessible variables from the digital footprint proxy for income, character and reputation are highly valuable for default prediction.”  For example, ownership of an iOS device was found to be one of the best predictors for being in the top quartile of income distribution, customers coming from a price comparison website were found to be almost half as likely to default as customers directed to the website by search engine ads, and customers having their names in the email address were found to be 30% less likely to default.  The researchers also found that digital footprint information complements rather than substitutes for credit bureau information, suggesting that a lender that uses information from both sources can make superior lending decisions.

The researchers observe that “digital footprints can facilitate access to credit when credit bureau scores do not exist, thereby fostering financial inclusion and lowering inequality.”  They indicate that their results “suggest that digital footprints have the potential to boost financial inclusion to parts of the currently two billion working-age adults worldwide that lack access to services in the formal financial sector.”

The researchers also comment that regulators are likely to closely watch the use of digital footprints, noting that U.S. lenders using digital footprint information “are likely to face scrutiny whether the digital footprint proxies for [borrower characteristics such as race and gender that may not be considered under the Equal Credit Opportunity Act] and therefore violate fair lending laws.”

 

Ballard Spahr attorneys Chris Willis, Scott Pearson, and Taylor Steinbacher discuss recent noteworthy developments in California law. Chris, who chairs Ballard’s Consumer Financial Services Litigation Group, and Scott, a partner in the Consumer Financial Services group, discuss the recently decided California Supreme Court De La Torre case, which makes licensed lenders vulnerable to claims that high-interest rate loans over $2,500 may be unconscionable. Chris and Taylor, an associate in the Consumer Financial Services group, discuss the California Consumer Privacy Act of 2018, a statute giving substantial new privacy rights to California consumers. Finally, Scott and Chris discuss reactions to, and the effects of, the 2017 California Supreme Court McGill case. That case limits the ability to enforce arbitration clauses in cases requesting public injunctive relief.

To listen and subscribe to the podcast, click here.

The CFPB’s newly-released Summer 2018 edition of Supervisory Highlights represents the CFPB’s first Supervisory Highlights report covering supervisory activities conducted under Acting Director Mick Mulvaney’s leadership.  The Bureau’s most recent prior Supervisory Highlights report was its Summer 2017 edition, which was issued in September 2017.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.”  The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of two consent orders entered into by the Bureau, including its settlement with Triton Management Group, Inc., a small-dollar lender, regarding the Bureau’s allegations that Triton had violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing the finance charge on auto title pledges entered into with consumers.)

The report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.  It includes the following information:

Automobile loan servicing.  The report indicates that in examinations of auto loan servicing activities, Bureau examiners focus primarily on whether servicers have engaged in unfair, deceptive, or abusive acts or practices prohibited by the CFPA.  It discusses instances observed by examiners in which servicers had sent billing statements to consumers who had experienced a total vehicle loss showing that the insurance proceeds had been applied to the loan so that the loan was paid ahead and the next payment was due months or years in the future.  The CFPB found the due dates in these statements to be inconsistent with the terms of the consumers’ notes which required the insurance proceeds to be applied to the loans as a one-time payment and any remaining balance to be collected according to the consumers’ regular payment schedules.  According to the CFPB, sending such statements was a deceptive practice.  The CFPB indicates that in response to the examination findings, servicers are sending billing statements that accurately reflect the account status after applying insurance proceeds.

The Bureau also found instances where servicers, due to incorrect account coding or the failure of their representatives to timely cancel the repossession, had repossessed vehicles after the repossession should have been cancelled because the consumer had entered into an extension agreement or made a payment.  This was found to be an unfair practice.  The CFPB indicates that in response to the examination findings, servicers are stopping the practice, reviewing the accounts of affected consumers, and removing or remediating all repossession-related fees.

Credit cards.  The report indicates that in examinations of the credit card account management operations of supervised entities, Bureau examiners typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of add-on products.  The Bureau found instances where entities failed to properly re-evaluate credit card accounts for APR reductions in accordance with Regulation Z requirements where the APRs on the accounts had previously been increased. The report indicates that the issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to the examination findings.

Debt collection.  In examinations of larger participants, Bureau examiners found instances where debt collectors, before engaging in further collection activities as to consumers from whom they had received written debt validation disputes, had routinely failed to mail debt verifications to such consumers. The Bureau indicates that in response to the examination findings, the collectors are revising their debt validation procedures and practices to ensure that they obtain appropriate verifications when requested and mail them to consumers before engaging in further collection activities.

Mortgage servicing.  The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers.  In reviewing the practices of servicers with policies providing for permanent modifications of loans if consumers made four timely trial modification payments, the Bureau found that for nearly 300 consumers who successfully completed the trial modification, the servicers delayed processing the permanent modification for more than 30 days.  During these delays, consumers accrued interest and fees that would not have been accrued if the permanent modification had been processed.  The servicers did not remediate all of the affected consumers ,did not have policies or procedures for remediating consumers in such circumstances, and attributed the modification delays to insufficient staffing.  The Bureau indicates that in response to the examination findings, the servicers are fully remediating affected consumers and developing and implementing policies and procedures to timely convert trial modifications to permanent modifications where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, had engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes.  The Bureau indicates that in response to the examination findings, the servicers are remediating affected consumers (presumably by refunding or credit the unauthorized amounts) and correcting loan modification terms in their systems.

With regard to foreclosure practices, Bureau examiners found instances where mortgage servicers had approved borrowers for a loss mitigation option on a non-primary residence and, despite representing to borrowers that they would not initiate foreclosure if the borrower accepted loss mitigation offers in writing or by phone by a specified date, initiated foreclosures even if the borrowers had called or written to accept the loss mitigation offers by that date.  The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and stating that the servicer would notify the borrowers of their decision on the applications in writing within 30 days.  However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application.  Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

Payday/title lending.  Bureau examiners identified instances of payday lenders engaging in deceptive acts or practices by representing in collection letters that “they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities.”  The CFPB observed that such representations were made “despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles.”  The Bureau indicates that in response to the examination findings, these entities are ensuring that their collection letters do not contain deceptive content.  Bureau examiners also observed instances where lenders had used debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized them to use to debit funds in connection with a defaulted single-payment or installment loan.  According to the Bureau, when lenders’ attempts to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that a borrower had identified on authorization forms executed in connection with the defaulted loan were unsuccessful, the lenders would then seek to collect the entire loan balance via EFTs using debit card numbers or ACH credentials that the borrower had supplied to the lenders for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue.  The Bureau found this to be an unfair act or practice.  With regard to loans for which the consumer had entered into preauthorized EFTs to recur at substantially regular intervals, the Bureau found this conduct to also violate the Regulation E requirement that preauthorized EFTs from a consumer’s account be authorized by a writing signed or similarly authenticated by the consumer.  The Bureau indicates that in response to the examination findings, the lenders are ceasing the violations, remediating borrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.

Small business lending. The Bureau states that in 2016 and 2017, it “began conducting supervision work to assess ECOA compliance in institutions’ small business lending product lines, focusing in particular on the risks of an ECOA violation in underwriting, pricing, and redlining.”  It also states that it “anticipates an ongoing dialogue with supervised institutions and other stakeholders as the Bureau moves forward with supervision work in small business lending.”  In the course of conducting ECOA small business lending reviews, Bureau examiners found instances where financial institutions had “effectively managed the risks of an ECOA violation in their small business lending programs,” with the examiners observing that “the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework.  Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary.”  The Bureau adds that “[e]xaminations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”  With regard to self-monitoring, Bureau examiners found that institutions had “implemented small business lending monitoring programs and conducted semi-annual ECOA risk assessments that include assessments of small business lending.  In addition, one or more institutions actively monitored pricing-exception practices and volume through a committee.”  When the examinations included file reviews of manual underwriting overrides at one or more institutions, Bureau examiners “found that credit decisions made by the institutions were consistent with the requirements of ECOA, and thus the examinations did not find any violations of ECOA.”  The only negative findings made by Bureau examiners involved instances where institutions had collected and maintained (in useable form) only limited data on small business lending decisions.  The Bureau states that “[l]imited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.”

Supervision program developments.  The report discusses the March 2018 mortgage servicing final rule and the May 2018 amendments to the TILA-RESPA integrated disclosure rule.  With regard to fair lending developments, it discusses recent HMDA-related developments and small business lending review procedures.  With regard to small business lending, the Bureau highlights that its reviews include a fair lending assessment of an institution’s compliance management system (CMS) related to small business lending and that CMS reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring and/or audit, and complaint response), and service provider oversight.  The CFPB indicates that in some ECOA small business lending reviews, examiners may look at an institution’s fair lending risks and controls related to origination or pricing of small business lending products, including a geographic distribution analysis of small business loan applications, originations, loan officers, or marketing and outreach, in order to assess potential redlining risk.  It further indicates that such reviews may include statistical analysis of lending data in order to identify fair lending risks and appropriate areas of focus during the examination.  The Bureau states that “[n]otably, statistical analysis is only one factor taken into account by examination teams that review small business lending for ECOA compliance. Reviews typically include other methodologies to assess compliance, including policy and procedure reviews, interviews with management and staff, and reviews of individual loan files.”

In the CFPB’s RFI on its supervision program, one of the topics on which the CFPB sought comment is the usefulness of Supervisory Highlights to share findings and promote transparency.  The new report indicates that the Bureau “expects the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with Federal consumer financial law.”  Presumably, this means that we will now again be seeing new editions of Supervisory Highlights on a regular basis.

 

The American Bankers Association jointly with state bankers associations, the American Financial Services Association, and the Mortgage Bankers Association are urging the U.S. Department of Housing and Urban Development (HUD) to make significant changes to its 2013 Disparate Impact Rule (Rule) in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.  The trade groups’ views are set forth in comment letters submitted to HUD in response to its advance notice of proposed rulemaking seeking comment on the need for revisions to the Rule following Inclusive Communities.  The ANPR’s comment period ended on August 20.

The Rule provides that liability may be established under the Fair Housing Act (FHA) based on a practice’s discriminatory effect (i.e., disparate impact) even if the practice was not motivated by a discriminatory intent, and that a challenged practice may still be lawful if supported by a legally sufficient justification.  Under the Rule, a practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.  The Rule also addresses what constitutes a legally sufficient justification for a practice, and the burdens of proof of the parties in a case asserting that a practice has a discriminatory effect under the FHA.

While the Supreme Court held in Inclusive Communities that disparate impact claims may be brought under the FHA, it also set forth standards, safeguards, and limitations on such claims that “are necessary to protect potential defendants against abusive disparate impact claims.”  In particular, the Supreme Court indicated that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity” and that a “robust causality requirement” ensures that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create.”

The trade groups assert that in promulgating the Rule, HUD had improperly rejected the U.S. Supreme Court’s 1989 Wards Cove disparate impact standard in favor of the standard that applies to claims under Title VII of the Civil Rights Act of 1964.  The trade groups argue that in Inclusive Communities, the Supreme Court confirmed the continuing applicability of Wards Cove to disparate impact claims brought under statutes other than Title VII.  They further argue that the Rule needs to be amended to reflect the standards, safeguards, and limitations on disparate impact claims articulated by the Supreme Court in Inclusive Communities.

In contrast, a group of 16 state Attorneys General and the AG for the District of Columbia sent a comment letter to HUD urging it not to make any changes to the Rule, arguing that it is “fully consistent” with Inclusive Communities and that any changes would be “susceptible to meritorious legal challenge.”  The states whose AGs signed the comment letter were North Carolina, California, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington.

Although Inclusive Communities did not resolve the question of whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA), HUD’s approach to the Rule could have significance for ECOA disparate impact claims.  CFPB Acting Director Mick Mulvaney has indicated that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities.