Hot Topics in Fair Lending

Transcription

1 Hot Topics in Fair Lending Andrea J. Shaw, Counsel, TD Bank James Cohen, Partner, Verrill Dana, LLP 1 April 2012

2 Fair Lending: Basic to How Banks Offer Mortgages to Public Issue: Whether a lender is improperly discriminating against a protected class. Whether or not a lender issues credit Whether a lender is properly serving a population On what terms is credit issued 2 How a lender documents issuance of credit to particular populations.

3 Why you should be taking notes today. New DOJ enforcement effort HUD s Proposed Rule Gallagher v. Magner Once and future US Supreme Court case Other recent cases 3

4 New Federal Enforcement Focus Obama Administration DOJ developed a Fair Lending Unit in attorneys, economists and a statistician. As of June 1, open matters and more than 15 ongoing investigations! 4

5 What is the disparate impact theory of discrimination? Facially neutral policy or practice that has a disparate impact on a protected class; and No reasonable business purpose for the policy or practice. Intent not matter. 5

6 HUD s Proposed Rule Published November 16, FR Comment due date: January 17, HUD has long interpreted the Fair Housing Act to prohibit housing practices with a discriminatory effect even where there was no intent to discriminate.

7 HUD s Proposed Rule (cont.) Many courts have reviewed this issue and reached the same conclusion. Rule is proposed because there is variation in the application of the discriminatory effects standard, and rule aims to establish a uniform standard regarding discriminatory effect violations of the FHA. 7

8 HUD s Proposed Rule (cont.) FHA protected classes: race, color, religion, gender, disability, familial status, receipt of public assistance, or national origin. The tests HUD: three-step burden shifting test Used by three circuits. 8 Federal courts: Some use the HUD test. Others use a multi-factor balancing test. And still others: use a hybrid of the HUD test and the multifactor balancing test.

9 HUD: three-step burden shifting test Step 1 Plaintiff establishes a prima facie showing of either disparate impact or perpetuation of segregation. If successful, the burden shifts to the Defendant. 9

10 HUD: three-step test (cont.) Step 2 The Defendant must justify its actions showing that the challenged practice has a necessary and manifest relationship to one of its legitimate, non-discriminatory interests. 10 If successful, the burden shifts BACK to the Plaintiff.

11 HUD: three-step burden shifting test (cont.) Step 3 Plaintiff must show that there was/is an alternative course of action with a less discriminatory outcome. 11

12 HUD s Proposed Rule the tests Court Multifactor Balancing Test Four-factor balancing test. Used by four circuits. 12

13 HUD s Proposed Rule the tests Court Hybrid Test Three factor balancing test incorporated into burden shifting framework to weigh Defendant s justification. Used by two circuits. OR 13 A balancing test incorporated as elements of proof after the second step of the burden shifting framework.

14 Why the 3-Step Balancing Test? It is consistent with the standards approved by Congress in 1991 in looking at Title VII (employment) violations. Title VII issues are often looked to for guidance in interpreting discrimination under the FHA. The test mirrors the standard under the Equal Credit Opportunities Act ( ECOA ). By shifting the burdens, neither party is ever forced to prove a negative. 14

15 HUD s Proposed Rule the Text 24 CFR Secs , Prohibits discrimination against a protected class: By providing different, limited, or no governmental services such as water, sewer, or garbage collection that has a disparate impact or creates/perpetuates or increases segregated housing patterns; 15 By using land-use rules, policies or procedures that restrict or deny housing opportunities in a way that has a disparate impact or perpetuates/increases segregated housing on a prohibited basis.

16 HUD s Proposed Rule the Text 24 CFR Prohibits failing or refusing to provide to any person in connection with a residential real estate related transaction information regarding the availability of loans or other financial assistance on a prohibited basis. Providing loans in a manner that results in disparities in their cost, rate of denial or terms or that have the effect of denying or discouraging the loans on a prohibited basis. 16

17 HUD s Proposed Rule the Text Subpart G Prohibiting Discriminatory Effects, 24 CFR 100 Clarifies that a violation of the FHA may occur regardless of whether the practice was adopted for a discriminatory purpose. Discriminatory effect defined, 24 CFR (a) Occurs where a facially neutral housing practice actually or predictably results: 17 in a discriminatory effect on a group of persons (disparate impact); or on the community as a whole (perpetuation of segregation).

18 HUD s Proposed Rule the Text Legally sufficient justification, 24 CFR (b) Has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests of the respondent; and Those interests cannot be served by another practice that has a less discriminatory effect. Burdens of proof, 24 CFR (c) Adopts the HUD Test discussed previously. 18

19 Gallagher v. Magner & City of St. Paul The Facts: Numerous current or former owners of rental properties in St. Paul, MN allege the city s aggressive enforcement of the housing code had a discriminatory impact on minorities. The 8 th Circuit Court of Appeals applying the burden shifting test found that a disparity in racial impact sufficient to meet the legal standards F. 3d 823 (8 th Cir. 2010)

20 Gallagher v. Magner & City of St. Paul (cont.) Facts of the case (cont.): Defendants asked the Supreme Court to determine whether disparate impact theory is available under the FHA and what test should be used to analyze these claims. The Lower Court used the burden shifting test; however the case used to support that test (McDonnell Douglas) is NOT cited in HUD s proposed rule. 20

21 HUD s Proposed Rule Timing is Everything HUD s Proposed Rule and the Supreme Court Case Supreme Court agreed to review the Magner case on November 7, HUD issued its proposed rules on November 16. HUD likely cognizant of this Court review. Courts defer to agency interpretations. 21 Magner case withdrawn by parties in February.

22 Other recent cases First United, (S.D. Ala, Nov. 18, 2009) Higher interest rates for African-American borrowers DOJ claim: lenders had excessive discretion; bank engaged in redlining its branches and marketing; excluded minority areas from CRA assessment area Consent Order: open new branch in minority area; market to minority areas; fund to pay damages to injured borrowers. 22

23 Other Recent Cases AIG Federal Savings Bank (D. Del.,March 4, 2010) Allegation that black borrowers charged higher rates than white borrowers in 19 areas. DOJ claimed that excessive discretion to lenders was a factor. 23 Consent Order: AIG must develop broker fees to limit risk of unlawful discrimination; document broker fees in each loan file and submitted with each application; brokers must disclose their compensation and whether negotiable; monitor broker fees and detect whether differences based on race.

24 HUD s Proposed Rule: What it Means to Fair Lending Disparate impact theories of discrimination under the FHA are alive and well! Make sure all policies/procedures are facially neutral. Give due consideration as to the IMPACT and unintended consequences of the policy/procedure prior to implementation. Proper documentation 24

25 HUD s Proposed Rule: What it Means to Fair Lending Remember: If a policy is (or is likely) to have a greater negative effect on a protected class the Bank must show there is a necessary and manifest relationship to a legitimate business purpose and it is the option that does the least harm NOT RECOMMENDED. This is a HIGH (if not impossible) standard to meet. 25

26 Enforcement of Fair Lending Laws CFPB has authority to enforce consumer financial laws, including fair lending. Can sue a bank with prior notice to bank regulator. State can enforce state fair lending laws. Can sue affiliates and subs of banks with federal charter; may enforce against NA and FSB if specific federal authority. Private rights of action. 26

27 A Word About Matched-Pair Testing In matched pair testing, individuals or couples of different ethnicity, race, or sex pose as mortgage loan applicants, visit lenders at different times, and meet with loan officers. The testers, or mystery shoppers, usually present comparable financial backgrounds in terms of assets, income, debt, and credit history, and are asked to request information about similar loan products. This can also be done as a paper file review.

28 Hypothetical: Hard Luck Savings & Loan State-chartered mutual savings bank in southern Maine. Five branches. In 2009, the bank was concerned about mortgage defaults, so it developed new underwriting criteria: Higher loan to value ratio on multi-family homes. Gave loan officers discretion to tighten standards if they perceived a credit risk. Limited loans to properties within 800 feet of industrial zones. Gave less weight to spousal income derived from public assistance programs due to concerns about continued eligibility. Did not provide mortgage lending officers in the bank s urban branch. Focused its mortgage advertising in the area s weekly business journal. 28 In 2012, the bank was sued under the new HUD regulations by a group of African- American borrowers claiming that they were unfairly denied access to credit.

29 Other Fair Lending Issues HUD New Rule Prohibiting Discrimination Based on Sexual Orientation 24 CFR 5.105; Eff. March 5, 2012 Revised definitions of family, gender identity, and sexual orientation Revised to provide that eligibility for housing assisted by HUD or subject to an FHA-insured mortgage shall be determined without regard to actual or perceived sexual orientation.

30 Other Fair Lending Issues Mortgage Loan Originator Compensation Anti-Steering Rules Prohibit compensation based on terms and conditions Policy Updates UDAAP Annual Review

31 31 QUESTIONS?