The U.S. Department of Housing and Urban Development (HUD) has issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Disparate Impact Rule (Rule) should be revised in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. 

On July 19, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “HUD’s Reconsideration of its Disparate Impact Rule: Background, Analysis and Potential Implications.”  Click here to register.

The ANPR provides an important opportunity for the mortgage industry and other interested parties to address whether the Rule reflects the limitations outlined by the Supreme Court in Inclusive Communities and other concerns with the Rule.  Comments on the ANPR must be filed by August 20, 2018.

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 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.”  Significantly, while Inclusive Communities held that liability may be established under the FHA based on disparate impact, the district court subsequently dismissed the disparate impact claim against the Texas Department of Housing and Community Affairs based on the limitations on such claims prescribed by the Supreme Court in its opinion.

In the ANPR, HUD notes that in response to a notice it published in the Federal Register in May 2017 inviting comments to assist HUD’s identification of outdated, ineffective, or excessively burdensome regulations, it received numerous comments both critical and supportive of the Rule and taking opposing positions on whether the Rule is inconsistent with Inclusive Communities.  HUD also notes that in a report issued in October 2017, the Treasury Department recommended that HUD reconsider applications of the Rule, particularly in the context of the insurance industry.  (We have previously reported on a challenge to the Rule by the American Insurance Association and National Association of Mutual Insurance Companies in D.C. federal district court.)

The ANPR contains a list of 6 questions of particular interest to HUD.   Issues addressed in the questions include the Rule’s: burden of proof standard and burden-shifting framework; the definition of “discriminatory effect” as it relates to the burden of proof for stating a prima facie case; and the causality standard for stating a prima facie case.

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.  Recent comments by CFPB Acting Director Mick Mulvaney that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities suggest that the CFPB might review references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary.  In doing so, the CFPB might consider not only whether such references should be eliminated but also, if they are retained, what safeguards should apply.  As a result, changes to the Rule made by the FHA could impact the CFPB’s approach to ECOA liability.





The FRB recently hosted a fair lending “hot topics” webinar in conjunction the DOJ, HUD, CFPB, FDIC, OCC, and NCUA. The seven agencies discussed fair lending developments, including the revised HMDA reporting requirements, compliance management for consumer loans, and various issues related to fair lending complaints, investigations, and enforcement.

HMDA and Revised Regulation C:

Eric Wang, Deputy Fair Lending Director of the CFPB’s Office of Fair Lending and Equal Opportunity, emphasized that the CFPB is currently updating its HMDA exam procedures and that the industry should be “on the lookout” for the revised “Getting it Right” guide. He noted that the new HMDA requirements expand reporting to include 48 data elements (from 23, of which 14 have been modified), and 110 data fields (from 39). Addressing industry outcry, Wang confirmed that file resubmission will not be required based upon overall error rates. Instead, resubmission will be required where the error rates of individual fields exceed applicable thresholds. The new data resubmission guidelines also include error tolerances for certain data fields.

Wang stated that the Bureau’s 2018 examinations will prioritize whether entities have made “good faith efforts” to comply with revised Regulation C. Good faith may be shown by the creation of an implementation plan or updates to policies and procedures. Wang reiterated that after the revised rule takes effect, the Bureau’s role will be “diagnostic and corrective, not punitive;” however, he refused to confirm whether the CFPB will use all HMDA data fields in its examinations. He stated that the CFPB has not prioritized “key fields” because it “would like to maintain the flexibility to examine all HMDA data fields [for] accuracy.” Vonda Eanes, Director for CRA and Fair Lending Policy at the OCC, confirmed that all agencies will have access to all HMDA data and, despite the OCC, FDIC and FRB joint guidance prioritizing 37 “key fields,” the OCC “expects to leverage all the additional HMDA data fields” in its fair lending risk analysis.

Notably, the panel failed to clarify the impact of Regulation C’s changes upon lenders’ CRA obligations. Although cautioning that no final decision has been made, Eanes confirmed that the OCC, FRB, and FDIC are considering the issuance of interagency guidance that recognizes the expanded mandatory reporting in revised Regulation C. In particular, for lenders with a sufficient number of originations, the reporting of open end lines of credit is no longer optional. Additionally, the definitions of dwelling, reverse mortgage, and manufactured home have changed. Reporting under the new HMDA data elements is required for applications on which final action is taken on or after January 1, 2018, except that for applicant demographic data the institution has the option to report under the requirements in effect at the time of application or under the 2018 rule requirements regardless of when the application was taken.

Indirect Auto Finance:

Matthew Nixon, Program Director of the NCUA’s Office of Consumer Financial Protection and Access, refused to state whether the NCUA will focus on any “hot topic” fair lending issues in 2018, but noted that it anticipates examinations will reflect the agency’s current focal points—45% related to specific concerns noted by district examiners or regional offices, 20% related to pricing disparities, 30% related to HMDA data integrity, and 5% related to follow-on work from the previous year. When prompted during the question and answer segment, NCUA noted that examinations are risk focused and indirect auto lending programs are reviewed on a case-by-case basis according to the entity’s risk profile (which includes compensation structure, complaints received, input from the district examiner, and oversight and monitoring practices). The NCUA noted that virtually all exams included cursory review of indirect auto lending programs, but only about 10% resulted in more intensive review.

Compliance Management for Consumer Loans:

Katrina Blodgett, Counsel in the FRB’s Fair Lending Enforcement Section of the Division of Consumer and Community Affairs, noted that the FRB engages in risk-focused supervision and expects that an entity’s CMS provide oversight commensurate with the level of pricing discretion provided by each consumer loan program. The FRB expects that an entity clearly communicate the basis for any exceptions offered to its loan officers, including waiving, reducing, or increasing fees. Blodgett encouraged the use of rate sheets to track all exception variables and advised that rate sheets should be reviewed as part of monthly compliance meetings. Moreover, loan officer training should include the proper use of rate sheets. Tara Oxley, Chief of Fair Lending and CRA Examinations at the FDIC, emphasized that fair lending monitoring programs should be conducted portfolio-wide and only limited to a branch-specific analysis where policies and procedures differ across branches. According to Oxley, an entity’s review must include an analysis of its lending data and its pricing exceptions and overrides, regardless of entity size or complexity.

Investigations and Enforcement:

Jacy Gaige, HUD’s Director of the Office of Systemic Investigations, reviewed the agency’s roughly 1,000 fair lending complaints in 2016. Gaige noted that the most common policy-related complaints involved requiring cosigners or unnecessary documentation for applicants with disability income, such as a doctor’s note that a disability is likely to continue. Gaige emphasized that lenders may face FHA liability where unclear policies and procedures create confusion or delay regarding application requirements or where extra help (friendlier service and quicker callback times) are provided for some individuals as compared with protected classes.

With parental leave, HUD has found that lenders have been impermissibly requiring a parent to return to work before income may be counted or impermissibly requiring a letter that an employer expects the employee to return to work. Lenders have also made statements that applicants may change their mind about returning to work or that many people do not return to work after having a baby. Gaige noted that in these situations, elevated damages may be available on account of the emotional distress associated with an early return to work.

Common complaints also included allegations that lender policies allow investor loans for small rental properties but not for group homes (which often include persons with disabilities), prohibit lending on Native American reservations, prohibit lending to those persons with less than $500,000 or more in collateral, or prohibit lending in a specific community based on the false perception of the prevalence of fraud. Novel complaints include lenders’ use of social media to target specific geographic areas or individuals (including use of a network’s parent/non-parent designation).

Marta Campos of the DOJ Civil Rights Division provided no indication of what new direction, if any, the DOJ will take in 2018. Her comments were limited to the BancorpSouth Bank joint investigation with the CFPB, which settled in June 2016. In response to a public question highlighting the dated settlement, Campos stated that there “may be” similar cases coming down the pike. She noted that lenders’ CMS programs should be able to detect similar redlining and underwriting red flags identified in Bancorp.

In addition to the guidance regarding Hurricane Harvey disaster relief, the housing agencies and government-sponsored enterprises (GSEs) recently addressed the mortgage-related relief available to victims of both Hurricane Harvey and Hurricane Irma in Presidentially-declared disaster areas.  Click here for a summary of these announcements.

U.S. Department of Housing and Urban Development (HUD)

On Monday, August 28, HUD announced that it was committed to “speed federal disaster assistance to the State of Texas and provide support to homeowners and low-income renters forced from their homes due to Hurricane Harvey.”

The following forms of relief are available to people in impacted counties (currently, Aransas, Atascosa, Austin, Bee, Bexar, Brazoria, Brazos, Caidwell, Calhoun, Cameron, Chambers, Colorado, Comal, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Hardin, Harris, Jackson, Jasper, Jefferson, Jim Wells, Karnes, Kerr, Kleberg, Lavaca, Lee, Leon, Liberty, Live Oak, Madison, Matagorda, Montgomery, Newton, Nueces, Refugio, San Patricio, Tyler, Victoria, Walker, Waller, Washington, Wharton, Willacy and Wilson counties) (the “disaster area”):

Expedited Funds.  State and local governments may request that the awarding of annual Community Development Block Grant (CDBG) and HOME Investment Partnerships (HOME) funds be expedited or that program year start dates be moved up. HUD is currently contacting state and local officials to explore streamlining its CDBG and HOME programs in order to expedite the repair and replacement of damaged housing.

Foreclosure Relief.  HUD is granting a 90-day moratorium on foreclosures and foreclosure forbearance on Federal Housing Administration (FHA)-insured home mortgages located within the geographic boundaries of the disaster area.  A borrower can also qualify for foreclosure relief if he or she is a household member of someone who is deceased, missing or injured directly due to the disaster, or if his or her financial ability to pay mortgage debt was directly or substantially affected by  the disaster.

Mortgage Insurance.   HUD’s Section 203(h) program provides FHA insurance to disaster victims who have lost their homes, enabling them to finance the purchase or rehabilitation of a home. Borrowers working with participating FHA-approved lenders may be eligible for 100% financing.  Additionally, HUD’s Section 203(k) loan program enables the purchase, refinance, and rehabilitation of a home that has been lost or damaged.

Section 108 Loan Guarantee Program.  HUD will offer state and local governments federally- guaranteed loans for housing rehabilitation, economic development, and repair of public infrastructure.  Loans typically range from $500,000 to $140 million, depending on the scale of the project or program. Under this program, project costs can be spread over time with flexible repayment terms and low interest rates.

Freddie Mac

On August 25, Freddie Mac confirmed that under its Single-Family Seller/Servicer Guide, it requires servicers to suspend foreclosure proceedings for up to 12 months for disaster-affected borrowers and waive penalties or late fees for borrowers with disaster-damaged homes, and  bars servicers from   reporting forbearance or delinquencies caused by the disaster to  credit bureaus.  Freddie Mac also reminded servicers to obtain quality contact information for borrowers as soon as possible, help borrowers with disaster assistance, and monitor and coordinate the insurance claim process.

Moreover, recognizing that property inspections may be required to assess property damage and the costs of such inspections are typically not reimbursable, Freddie Mac will create a process for servicers to seek reimbursement.

In addition to confirming its existing policies, on August 29, Freddie Mac issued Bulletin 2017-14 (the “Bulletin”), which provides temporary servicing requirements related to Hurricane Harvey that are effective immediately.  The Bulletin applies to borrowers with mortgaged properties or places of employment within the disaster area.  Under the Bulletin, servicers and foreclosure firms must suspend all foreclosure sales and eviction activities for 90 days from when the area was declared to be a disaster area.

Fannie Mae

On August 25, Fannie Mae reminded servicers and homeowners to take advantage of its disaster relief policies, which allow servicers to suspend or reduce a homeowner’s mortgage payment for up to 90 days if the servicer believes a natural disaster reduced the value or habitability of the property or  temporarily impacted the homeowner’s ability to make mortgage payments.  Under Fannie Mae’s Servicing Guide, servicers do not need to contact homeowners in order to suspend payments for 90 days, but after contacting the homeowner, they can offer forbearance for up to six months, which can be extended up to an additional six months as needed for homeowners that were current or less than 90-days delinquent at the time of the storm.

Under its Selling Guide, Fannie Mae allows borrowers to use lump-sum disaster-relief grants or loans to satisfy Fannie Mae’s minimum borrower contribution requirement.  The Selling Guide also provides that a lender must warrant, for each mortgage loan it delivers to Fannie Mae, that (1) the property is not damaged by fire, wind, or other cause of loss, (2) there are no proceedings pending for the partial or total condemnation of the property, (3) the mortgage is an acceptable investment, and (4) the mortgage’s value or marketability has not been adversely affected.

On August 29, Fannie Mae announced that it is implementing a 90-day foreclosure sale suspension and a 90-day eviction suspension for borrowers with properties located within the disaster area.  Fannie Mae also reiterated that homeowners impacted by Hurricane Harvey may qualify for forbearance.

Department of Veterans Affairs

On August 29, the Department of Veterans Affairs (VA) published Circular 26-17-23 (the “Circular”), which describes the various disaster relief options available to its mortgagees and points to various regulations that facilitate the implementation of these options.  Specifically, the Circular encourages holders of guaranteed loans secured by properties in the disaster area to grant forbearance requests, institute a 90-day moratorium on initiating new foreclosures, waive late charges, and refrain from credit bureau reporting on affected loans.  The VA promises not to penalize servicers who suspend credit reporting for any late default reporting.  The Circular, which is valid until July 1, 2018, asks servicers to extend special forbearance to members of the National Guard who are called to active duty to assist in recovery efforts.

Many mortgage lenders and servicers are also providing disaster relief for customers in the disaster area.  We are monitoring the situation and will provide further updates as needed.

A federal district court in Kentucky recently ruled against the CFPB in a long-standing case under the Real Estate Settlement Procedures Act (RESPA) involving a Louisville, Kentucky law firm Borders & Borders, PLC (Borders).  In the case, CFPB v. Borders & Borders, PLC, the court granted the summary judgment motion of Borders, finding that joint ventures related to Borders satisfied the statutory conditions of the RESPA section 8(c)(4) affiliated business arrangement exemption.  The court referred to the exemption as a “safe harbor”.  The CFPB had alleged that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services.

Borders is a law firm that performs residential real estate closings, and also is an agent authorized to issue title insurance policies for a number of title insurers.  In 2006, the principals of Borders established nine joint venture title agencies with the principals of real estate and mortgage brokerage companies.  In February 2011, the Department of Housing and Urban Development (HUD) notified Borders that it was investigating the firm for potential violations of the RESPA referral fee prohibitions based on the joint ventures.  (HUD was the federal agency responsible for interpreting and enforcing RESPA before such authority was transferred to the CFPB.)  Upon receipt of the notice, Borders ceased operating all of the joint ventures.

In October 2013 the CFPB filed a complaint against Borders asserting that the firm violated the RESPA referral fee prohibition through the establishment and operation of the joint ventures.  The CFPB asserted that Borders paid kickbacks to the principals of the real estate and mortgage brokerage companies that were disguised as profit distributions from the joint ventures, and that the kickbacks were for the referral of customers to Borders by the principals.

The CFPB claimed that the joint ventures were not subject to the affiliated business arrangement safe harbor under RESPA section 8(c)(4), which permits referrals and payments of ownership distributions among affiliated parties if the conditions of the safe harbor are met.  The conditions are that (1) when a person is referred to a settlement servicer provider that is a party to an affiliated business arrangement, a disclosure is made to the person being referred of the existence of the affiliated business arrangement, along with a written estimate of the charge or range of charges generally made by the provider to which the person is being referred, (2) the person is not required to use any particular provider of settlement services (subject to certain exceptions), and (3) the only thing of value that is received from the arrangement, other than payments otherwise permitted under RESPA section 8(c), is a return on the ownership interest or franchise relationship.

As noted above, the CFPB argued that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA.  The statutory safe harbor for affiliated business arrangements contains no such condition.  The position that a joint venture must be a bona fide provider of settlement services to qualify for the safe harbor previously was asserted by HUD in statement of policy 1996-2 (the “Statement of Policy”).  HUD set forth factors that it would examine in assessing whether or not a particular joint venture is a bona fide provider of settlement services.

Although the CFPB did not expressly reference the Statement of Policy in its complaint against Borders, it addressed many of the same factors that HUD identified in the Statement of Policy.  The CFPB asserted that:

  • In most instances Borders provided the initial capitalization for the joint ventures, and the capital was comprised of only enough funds to cover a joint venture’s errors and omissions insurance.
  • Each joint venture had a single staff member, who was an independent contractor shared by all of the joint ventures and concurrently employed by Borders.
  • Borders’ principals, employees and agents managed the affairs of the joint ventures.
  • The joint ventures did not have their own office spaces, email addresses or phone numbers, and could not operate independent of Borders.
  • The joint ventures did not advertise themselves to the public
  • All of the business of the joint ventures was referred by Borders.
  • The joint ventures did not perform substantive title work—such work was performed by Borders.

With regard to the disclosure condition of the affiliated business arrangement safe harbor, the CFPB asserted that when Borders referred a customer to a joint venture, Borders “sometimes used a disclosure form intended to notify customers of a business affiliation between the owners of the law firm and  [the joint venture].”  The CFPB also asserted that the notice did not contain the ownership interest percentages in the joint venture or include a customer acknowledgment section, which are elements of the form of notice in Appendix D to Regulation X, the regulation under RESPA.

About a month after the CFPB filed its complaint, the US Court of Appeals for the Sixth Circuit issued a decision in Carter v. Wells Bowen Realty, Inc., 736 F.3d 722 (6th 2013).  It appears the opinion of the court presented a hurdle that the CFPB could not clear in its case against Borders.  In the Carter case, private plaintiffs asserted that certain joint ventures did not qualify for the affiliated business arrangement safe harbor based on the bona fide settlement service provider requirement that HUD set forth in the Statement of Policy.  The court determined that the defendants satisfied the three statutory conditions of the affiliated business arrangement safe harbor, and based on this determination the court ruled in favor of the defendants.  The court refused to apply what it considered a fourth condition to the safe harbor asserted by HUD—that the entity receiving referrals must be a bona fide provider of settlement services.  The court stated that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”

The court in the Borders case stated that the joint ventures each had an operating agreement, were authorized to conduct business in Kentucky, were approved by a title insurer to issue title insurance policies, were subject to audit, had a separate operating bank account, had a separate escrow bank account, maintained an errors and omission insurance policy, issued lender’s and owner’s title insurance policies, had operating expenses, generated revenue, made profit distributions, filed tax returns, issued IRS K-1 forms and were solvent.  The court also stated that each of the joint ventures were staffed by the same individual, who worked from her home office and was categorized as an independent contractor.

Citing the Carter case, the court set forth the three statutory conditions of the affiliated business arrangement safe harbor.  The court determined that the joint ventures satisfied the three conditions.  With regard to the disclosure condition, the court determined that the provision of the disclosure by Borders to its customers at the closing of a real estate transaction was sufficient, because it was the first contact that Borders had with the customers, and that the customer then decided at the closing whether to accept the referral of title insurance to one of the joint ventures.  (The court had earlier noted in its opinion that customers had 30 days from the date of closing to decide whether to purchase owner’s title insurance from the joint venture.)  With regard to the deviation of the notice from the form notice in Regulation X, the court found the content of the Borders’ notice to be sufficient to meet the statutory notice condition.

The decision of the court that the delivery of the notice at closing was sufficient is raising more than a few eyebrows in the industry.  In any event, based on the determination that the three statutory conditions of the affiliated business arrangement were satisfied, the court granted Borders’ motion for summary judgment.  The court did not impose the fourth condition asserted by the CFPB that the joint ventures had to be bona fide settlement service providers.  It interesting that the court nonetheless decided to note various aspects of the joint ventures in an apparent attempt to demonstrate their legitimacy.

The CFPB can appeal the decision to the Sixth Circuit, but if it does so the CFPB will have to face the hurdle of the Carter decision.  So the CFPB would need to assert one or more theories supporting why the Carter decision does not preclude a finding of a RESPA violation in the Borders case.

The CFPB’s final rule amending certain provisions of the 2013 Title XIV final mortgage rules which includes a post-consummation points and fees cure mechanism for qualified mortgage loans, became effective on Monday, November 3, when it was published in the Federal Register.  (The only exception is a commentary revision in the final rule dealing with the relationship between the QM cure and the RESPA/Regulation X tolerance cure under the
TILA-RESPA integrated disclosure rule that becomes effective next year.)  The cure provision will apply to loans consummated on or after November 3, 2014 and on or before January 10, 2021.

The CFPB’s final rule also includes an amendment to the exemption in the ability-to-repay rule for certain nonprofits that make mortgage loans to low or moderate income borrowers from certain provisions of the rule if they make no more than 200 dwelling-secured loans per year and meet other specific requirements.  The rule amended the exemption so that subordinate lien loans for down payment assistance and certain other purposes that are interest-free, forgivable, and meet certain other conditions (so-called “soft seconds”) would not count toward the annual 200 loan limit.

In an announcement also published in the November 3 Federal Register, HUD announced that it was adopting the CFPB’s amendment to the nonprofits exemption for purposes of HUD’s QM rule that applies to FHA-insured mortgages.  However, HUD also announced that it was not adopting the CFPB’s post-consummation QM cure mechanism for purposes of HUD’s QM rule.  Among the reasons given by HUD is that FHA loans must meet all eligibility requirements, including the QM points and fees limit, prior to insurance endorsement and the CFPB’s cure is inconsistent with this requirement because it would allow a points and fees cure beyond insurance endorsement.


On March 13, 2014, HUD published a proposal to eliminate the requirement that an FHA loan borrower be required to pay interest after the loan is prepaid.  The move is needed because the requirement would effectively cause FHA loans to be prohibited under CFPB rules starting in January 2015.  Comments on the proposal are due by May 12, 2014.

Based on the use of monthly interest accrual amortization with FHA loans, if an FHA loan is prepaid on a date that is not a regular payment due date the borrower must pay interest through the end of the month even though the loan has been paid off.  In connection with the adoption of the Regulation Z ability to repay rule and modifications to the Regulation Z high-cost loan provisions that became effective in January 2014, the CFPB revised the definition of “prepayment penalty” to provide that interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty for FHA loans consummated before January 21, 2015, but is a prepayment penalty for loans consummated on or after such date.

The revised definition of “prepayment penalty” restored the application to FHA loans of a prior Fed position on such penalties.  Shortly before the higher-priced mortgage loan provisions became effective in October 2009, the prior position was clarified to exclude FHA loans to avoid an unintended consequence that would have prohibited the making of any FHA loan if it would be a higher-priced mortgage loan.

The ability to repay rule also imposes significant limits on when a loan may be subject to a prepayment penalty, and prohibits a penalty that could be imposed more than 36 months after consummation or that would exceed certain amounts.  Also, the modifications to the high-cost loan provisions include (1) a new prepayment penalty trigger under which the provisions apply to a loan if a prepayment penalty could be imposed more than 36 months after consummation or could exceed a certain amount, and (2) a complete prohibition against a high-cost loan being subject to a prepayment penalty (prior law permitted certain prepayment penalties).  The combination of these changes and the changes to the definition of “prepayment penalty” will effectively prohibit the further origination of FHA loans commencing January 21, 2015, unless the requirement to pay interest after a prepayment is eliminated.

During the rulemaking process, the CFPB and HUD conferred regarding the prepayment penalty issue and negotiated an arrangement under which a requirement to pay interest after a prepayment of an FHA loan would once again be considered a prepayment penalty, but the change would not apply for FHA loans consummated before January 21, 2015 in order to provide HUD with the time to modify its rules.

In November 2013, the CFPB published a tool to help consumers find local HUD-approved housing counselors.  Now, the CFPB has published open source code to allow lenders to integrate the web-based tool into lender applications or websites.  In the press release, the CFPB notes that the web-based tool can be used to find the 10 closest HUD-approved housing counselors to a consumer’s location and print or save the results.  The CFPB encourages lenders to use the source code to build their own web-based tools for consumer use. 

Also, the press release states that lenders can use the tool to comply with housing counseling requirements under Dodd-Frank.  It is unclear whether using this tool would create a presumption of compliance or a safe harbor for lenders who utilize the source code to build the tool into their websites or applications.  Further, there are issues regarding the manner in which the code can be altered and what display format is required for consumers to access the information.  As noted previously, to comply with housing counselor requirements, a lender can either obtain a list through the CFPB’s website or independently generate its own list using the same HUD data used by the CFPB.

At the very least, lenders will be able to use the CFPB-developed code to integrate into their web-based platforms and give consumers access to required housing counselor information.  The move could eventually decrease the amount of paper given to a mortgage applicant.

The settlement and Supreme Court’s dismissal of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. has increased the potential significance of the lawsuit filed in June 2013 in federal district court in Washington, D.C. challenging HUD’s final rule adopted in February 2013 that formalized HUD’s use of disparate impact liability under the FHA.  

The complaint in the D.C. lawsuit, which was filed by two insurance industry trade groups whose members sell homeowners insurance, alleges that, based on the FHA’s plain language, the FHA only prohibits intentional discrimination.  However, it also alleges that the HUD rule is invalid as applied to homeowners insurance companies because it conflicts with the federal McCarran-Ferguson Act.  That law generally reserves to the states the regulation of the insurance business and provides that federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law specifically relates to insurance. 

The lawsuit had been stayed pending the outcome of Mt. Holly.  On December 20, 2013, the court granted the parties’ joint motion to lift the stay and, on the same day, the plaintiffs filed a motion for summary judgment.  As we have previously observed, if the district court were to grant summary judgment on the grounds that based on McCarran-Ferguson the HUD rule is invalid as applied to the plaintiffs, the ruling would be of no consequence to lenders since it would not result in a judicial determination of whether disparate impact claims are permissible under the FHA. 

We find it encouraging, however, that that the McCarran-Ferguson grounds is the final argument presented in the plaintiffs’ brief.  Plaintiffs’ first three arguments are that the FHA’s text unambiguously prohibits only intentional discrimination, the FHA’s history confirms that it does not permit disparate impact claims, and construing the FHA to permit disparate impact claims would raise constitutional equal protection problems. 

On February 3, HUD filed a motion to dismiss, or in the alternative, for summary judgment.  HUD argues that the plaintiffs’ claim is not properly before the court because the plaintiffs have failed to demonstrate that their members suffer any concrete and imminent injury as a result of the HUD rule.  HUD also argues that the plaintiffs’ claim fails on the merits because the FHA does permit disparate impact claims and HUD’s interpretation is entitled to Chevron deference. 

So far, only one amicus brief has been filed in the case.  That brief was filed on December 30 by Judicial Watch, Inc. and the Allied Educational Foundation in support of the plaintiffs’ summary judgment motion.  The brief urges the court to reject HUD’s interpretation that the FHA permits disparate impact claims.

As anticipated, HUD recently issued its proposed rule defining a qualified mortgage (QM) for HUD insured and guaranteed single family mortgages.  Under the proposed rule, published in the Federal Register on Monday, Title II single family mortgages that do not meet the points and fees requirement under the CFPB’s general QM definition will not be eligible for insurance under the National Housing Act (not including HECMs).

Keeping in line with the CFPB’s QM definition, HUD’s proposed rule defines both a safe harbor QM and a rebuttable presumption QM.  Further, as stated above, HUD’s QM definition also adopts the points and fees limitation scale from the CFPB’s final rule. 

The significant departure from the CFPB’s definition is the way in which HUD differentiates the APR dividing line between safe harbor and rebuttable presumption QMs.  Under HUD’s proposed rule, for a Title II single family loan to be a safe harbor QM, the loan must have an APR that does not exceed the average prime offer rate (APOR) for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium (MIP) and 115 basis points for a first-lien mortgage.  QM loans with higher APRs would qualify for the rebuttable presumption.  In contrast, under the CFPB’s approach to QMs, a first-lien loan must have an APR that is lower than 1.5 percentage points over the APOR to fall within the safe harbor.  By basing the APR cap for safe harbor loans on a combination of basis points plus annual MIP, the proposed rule alleviates concerns over the premiums kicking APR for many loans above the safe harbor cap under the CFPB’s approach to QMs. 

Apparently HUD believes that on average the annual MIP will add approximately 135 basis points to the APR.  Effectively, the proposal would permit on average an FHA loan with an APR no more than 2.5 percentage points above the APOR to fall within the safe harbor.  However, based on complexities associated with calculating the safe harbor based on a combination of basis points plus the annual MIP, the industry may well request HUD to adopt a simpler approach that uses a single percentage point amount, such as 2.5 percentage points, and not a combination of basis points and the annual MIP.

The proposed rule also designates Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans, covered by the rulemaking, to be safe harbor qualified mortgages. 

Please note that HUD has provided a short, 30-day comment period for the proposed rule.  Comments are due on or before October 30th.