Where’s the line in lending discrimination? Banks and city argue

By Richard A. Roth, J.D.

The attorney arguing a Fair Housing Act suit in the Supreme Court on behalf of Bank of America and Wells Fargo conceded that cities sometimes can sue mortgage lenders for discrimination, but went on to say that Miami’s suit went too far. The two banks are attempting to convince the Court that Miami’s interests were not within the zone of interests to be protected by the FHA and that the city’s claimed injuries would not have been proximately caused by the banks’ lending practices. The Justices’ questions in the Nov. 8, 2016, argument appeared to suggest that they were receptive to the city’s suit but were concerned over how to set a limit on liability.

As described by the Eleventh Circuit’s two opinions—City of Miami v. Bank of America Corp. and City of Miami v. Wells Fargo & Co.—Miami asserts that the banks engaged both in redlining—refusing to make loans to minority borrowers on the same terms that were available to nonminority borrowers—and reverse redlining—making loans to minority borrowers on exploitative terms. The banks refused to make loans to minority borrowers on terms similar to those available to white borrowers with comparable credit qualifications, offered minority borrowers loans only on predatory terms, and refused to extend refinancing loans to minority borrowers on terms similar to those available to white borrowers, Miami claims.

Violations and injuries. The banks’ lending practices violated the FHA in two ways, the city said. First, they amounted to intentional discrimination against black and Hispanic borrowers. Second, they had a disparate impact on those borrowers, resulting in a disproportionate number of foreclosures on their properties and a disproportionate number of predatory loans in their neighborhoods.

Miami claimed several types of damages from the violations. Properties that the banks foreclosed on lost value, and the foreclosures also reduced the value of surrounding properties, the city said. This resulted in reduced property tax revenues. Also, the city had to pay higher police, fire protection, and garbage collection costs to deal with problems presented by properties that often remained vacant after foreclosures.

Zone of interests. The banks’ position, as laid out by Neal Katyal, is that Miami’s complaint failed in two ways. First, because the injuries the city described were unrelated to the FHA’s purpose, the city was not within the zone of interests to be protected by the act. Second, the injuries were six steps remote from the lending practices, which was too indirect to satisfy proximate cause requirements. Katyal conceded that Miami might be able to bring an FHA suit that cleared both hurdles, but he said this was not that suit.

According to Katyal, the city was attempting to borrow homeowners’ discrimination claims and "cut and paste" them into a suit intended to seek a remedy for the city’s economic injuries. The FHA was intended to redress discrimination injuries. Miami might be able to recover for injuries it suffered that directly resulted from segregation, but not for the various extra costs it was describing, he said.

Katyal agreed that "if the complaint were written to say that it was about segregation causing blight, we would have no problem with it." That could put Miami within the FHA’s zone of interests. Even damages caused indirectly from that injury could be recoverable.

However, Justice Kagan, at least, had difficulty with the argument that the city was not describing "a segregation harm." She also questioned Katyal on the import of 1988 FHA amendments that apparently accepted that a city’s interests would be within the zone of interests the act was to protect.

Proximate cause. Even if Miami could satisfy the zone of interests requirement, it could not show proximate cause, Katyal then told the Court. The city’s ultimate claimed injury was a reduction of its tax base. However, to go from discriminatory loans to a reduced tax base involved intermediate steps of loan defaults, leading to foreclosures, resulting in more vacancies. Proximate cause generally is restricted to only one step from a wrongful act to an injury, he asserted.

Congress could write a law that allowed damages for less direct injuries, but the FHA maintained the traditional requirement of a "direct, close, one-to-one relationship" between the act and the injury, according to Katyal.

Justice Kagan did not accept that argument fully, either. She reminded Katyal that proximate cause is about whether an injury is foreseeable, not whether it is direct.

The city replies. Miami makes significant efforts to encourage fair housing, to the extent of having a department responsible for it, according to Robert Peck, who argued for the city. That meant it satisfied the zone of interests requirements. The city’s injuries were discrimination injuries.

According to Peck, Miami’s injuries were a direct result of the banks’ discriminatory lending. This led Chief Justice Roberts to probe where Peck would draw the line. If reduced property taxes are a direct injury, what about reduced sales taxes because a business in a blighted area closes? What about reduced revenue from tourism?

Peck attempted to distinguish between property taxes and other city revenues by saying that property taxes were tied specifically to property values; sales taxes and tourism revenues were not. The city should be able to recover damages for injuries that affected property. Moreover, less direct injuries might not be foreseeable, meaning there would be no proximate cause.

Government’s argument. The U.S. government, arguing as a friend of the court, agreed with the city that reduced tax revenues due to reduced property values constituted an injury the FHA was intended to redress. Assistant to the Solicitor General Curtis Gannon told the Court that the FHA was intended to provide a remedy when someone was injured by housing discrimination. Refuting Katyal’s argument, the FHA did allow the city to cut and paste homeowners’ injuries into its own claim, he maintained. The city could seek a remedy for its injuries even if the injuries resulted from a violation of someone else’s rights.

Any limit on who could sue should be found in the proximate cause analysis, not the zone of interest analysis, Gannon said. The injuries that Miami described would have been proximately caused by the banks’ practices, he added.

Agreeing with Peck, Gannon said proximate cause would be showed by a link to property value. The city’s injury that resulted from falling property values would be proximately caused by—that is, reasonably foreseeable from—the bank’s lending discrimination.

Pushed by the Chief Justice, Gannon claimed that the city could sue a lender based on a single instance of lending discrimination, as long as there was a decline in property value.

The cases are No. 15-1111 and No. 15-1112.



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CFPB highlights supervisory efforts, unveils new guidance, exam procedures

By Katalina M. Bianco, J.D.

Recent Consumer Financial Protection Bureau supervisory actions in the areas of deposits, mortgage servicing, and credit cards returned $11.3 million to more than 225,000 consumers in the period between May and August 2016, according to the bureau’s latest Supervisory Highlights (edition 13). Additionally, CFPB’s supervisory activities have either led to or supported two recent public enforcement actions, resulting in over $28 million in consumer remediation and an additional $8 million in civil money penalties. The report also reveals violations the CFPB has uncovered in student loan servicing, auto loan origination and servicing, debt collection, and mortgage origination.

 

"Our examiners continue to find sloppy or callous practices among some student loan servicers and other financial institutions that violate the law and put consumers at risk," said CFPB Director Richard Cordray. "If their practices hurt consumers, they need to rethink and change their practices in light of the actions and observations found in this report."

 

The CFPB report provides information on compliance with bureau rules and regulations, a discussion on redlining, new exam policies, and best practices for better communication with non-English-speaking consumers. In conjunction with this edition of Supervisory Highlights, the bureau issued revised exam procedures for student lending and servicing, updated guidance on compliance for service providers, and new exam procedures for reverse mortgages.

 

Compliance management systems. The CFPB indicates in the report, "Worthy of note are the beneficial practices centered on good compliance management systems" in the areas of automobile loan origination, debt collection, and mortgage origination. The report covers both CMS strengths and deficiencies.

 

Issues uncovered. The report details specific issues discovered during examinations in the areas covered during the period. Key findings include the following:

• Student loan servicers unfairly denied or failed to approve qualified students’ affordable payment plans despite the fact that eligible borrowers with federal student loans have a legal right to affordable payments based on their monthly income. 
• One or moreauto loan servicers refused to return personal belongings from a borrower’s repossessed car unless the borrower paid a storage fee. 
• Debt collectors charged illegal payment processing fees and made misleading collection calls about consumers’ credit scores or reports.

 

Fair lending. The report includes information on fair lending. The Dodd-Frank Act, Equal Credit Opportunity Act, and Reg. B mandate that the bureau’s Office of Fair Lending and Equal "ensure the fair, equitable, and nondiscriminatory access to credit" and "promote the availability of credit." Specific fair lending topics include:

• the provision of language services to limited English proficient consumers;
• Home Mortgage Disclosure Act data collection and reporting reminders for 2017; and
• redlining—a lender provides unequal access to credit or credit terms because of the race, color, national origin, or other prohibited characteristic of those in the area where the credit seeker resides or will reside, or the location of the residential property to be mortgaged.

Blog post. The CFPB posted information on redlining and the ECOA on its blog to help consumers understand how the ECOA can help them. The bureau urged consumers to contact the CFPB to submit complaints or share their stories. A follow-up post on the ECOA lists warning signs of discrimination for consumers.

 

Revised exam procedures for student lending and servicing. The CFPB’s revised education loan exam procedures address servicing practices affecting borrowers, from payment processing and routine communications to the handling of requests for payment relief by distressed borrowers. The procedures explain how examiners assess risks to consumers and review student loan servicers’ compliance with federal consumer financial law.

 

Updated CFPB guidance on compliance for service providers. The bureau released Compliance Bulletin and Policy Guidance; 2016-02, Service Providers to clarify that the depth and formality of the risk management program for service providers may vary depending upon the service being performed—its size, scope, complexity, importance and potential for consumer harm—and the performance of the service provider in carrying out its activities in compliance with federal consumer financial laws and regulations. According to the CFPB, this amendment is needed to clarify that supervised entities have flexibility and to allow appropriate risk management. The bulletin replaces Compliance Bulletin 2012-03.

 

Reverse mortgage servicing. The CFPB describes a reverse mortgage as a special type of loan that allows older homeowners to borrow against the equity in their homes. Instead of making payments to the servicer, the borrower receives funds from the lender. The borrower may elect to receive the funds as monthly payments, a lump sum, or by accessing a line of credit. These funds, plus the interest charged on the loan, and any fees such as insurance premiums or servicing fees, increase the balance of the loan each month. Over time, the loan amount grows, and must be re-paid when the borrower dies or a default event occurs.

 

New examination procedures that apply to reverse mortgage servicing are "a stand-alone resource to complete a reverse mortgage servicing review." The exam procedures consist of eight modules. According to the bureau, depending on the scope, in conjunction with the compliance management system and consumer complaint response review procedures, each reverse mortgage servicing examination will include one or more of the modules.
 

For more information about Supervisory Highlights and CFPB compliance guidance, subscribe to the Banking and Finance Law Daily.

Court hears arguments on Fannie Mae’s ‘sue and be sued’ powers

By J. Preston Carter, J.D., LL.M.


In Nov. 8, 2016, oral arguments, the U.S. Supreme Court questioned the parties to a case that may well set the boundaries for subject matter jurisdiction for lawsuits to which Fannie Mae is a party.

The case in question, Lightfoot v. Cendant Mortgage Corp., involved a lawsuit by homeowners against Fannie Mae after a home mortgage foreclosure. The homeowners had unsuccessfully sued in federal court and in California state court, raising only claims under state law. However, Fannie Mae removed the suit to federal district court, asserting that the "sue and be sued" language in 12 U.S.C. §1723a(a) established federal jurisdiction. The district court judge agreed with Fannie Mae’s jurisdictional argument, and she later dismissed the homeowners’ suit. The homeowners appealed, claiming that the federal district court could not dismiss their suit because it had no jurisdiction.

Subject matter jurisdiction. The U.S. Court of Appeals for the Ninth Circuit ruled that Congress conferred jurisdiction on the federal courts when it provided that Fannie Mae had the power "to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal." According to the Ninth Circuit, a "sue and be sued" clause in a federal statute confers federal jurisdiction if it specifically mentions federal court, as decided in American National Red Cross v. S.G., 505 U.S. 247 (1992). The law creating Fannie Mae specifically says "State or Federal." The appellate court rejected the position of a dissenting opinion in Red Cross that argued a "sue and be sued" clause creates only a corporate capacity to litigate. Under that reasoning, subject matter jurisdiction would have to be derived from another provision of federal law.

"Court of competent jurisdiction." During oral arguments before the Court, E. Joshua Rosenkranz, representing the petitioners/homeowners stated, "There is only one natural way to read the language at issue here. A ‘court of competent jurisdiction’ is a court that has an independent source of subject-matter jurisdiction. That is what this Court has held five times those words mean." He added, "And the only way to find out whether a court is a ‘court of competent jurisdiction’ is to examine the statutes creating that court and granting it jurisdiction."

Justice Breyer noted that of the five cases cited as precedent, three were against the petitioners’ position; two supported their position; and the fifth case was "weaker" for the petitioners. He added that one page of legislative history cited by the petitioners "explicitly [says], you’re right."

Ann O’Connell, Assistant to the Solicitor General, argued as amicus curiae, in support of the petitioners. O’Connell stated, "The government’s view is that the rule of Red Cross should not be extended to a statute that authorizes a federally chartered corporation to sue or be sued in a ‘court of competent jurisdiction.’" She added, "The best reading of that phrase in Fannie Mae’s charter is that it authorizes the corporation to sue and be sued in a Federal or State court that is vested with jurisdiction through some other provision of law."

Representing the respondent mortgage company, Brian P. Brooks stated, "The Red Cross decision reaffirmed a strong and long-standing rule . . . which sets a baseline for Congress to follow when it chooses to pursue Federal policy through the corporate form." He added, "But adding the words "competent jurisdiction" is pretty weak tea as a solution for abolishing jurisdiction that otherwise existed, particularly given the history of what was going on."

Justice Ginsberg questioned Brooks asking, "Well, your—your position then is competent jurisdiction—as long as you have the word ‘Federal’—‘State’ or ‘Federal,’ you’re home free. So it doesn’t the words ‘of competent jurisdiction’ doesn’t mean anything. They don’t—it’s the use of the word ‘Federal’ that gets you into Federal court. And ‘of competent jurisdiction,’ they just tagged along those words, and they don’t mean anything."

During Brooks’ argument, Chief Justice John Roberts expressed concern that 60,000 state-law foreclosure actions were headed to the federal courts. Brooks, using Freddie Mac’s federal subject jurisdiction as an analogy, noted that "Freddie Mac has almost as many foreclosures as Fannie Mae has" and "[t]here has been no race to the Federal courthouse."

For more information about banking and finance petitions and cases pending before the Supreme Court, subscribe to the Banking and Finance Law Daily.

CFPB’s disclosure proposal has ‘free speech’ problems, ACLU notes

By Thomas G. Wolfe, J.D.

 

Recently, the American Civil Liberties Union commented on the Consumer Financial Protection Bureau’s proposed amendments to its rule governing the disclosure of records and information. While the ACLU expressed its appreciation for “the importance of the Bureau’s investigative work,” the ACLU asserted that the CFPB’s proposal “presents serious First Amendment problems.”

  

More specifically, in its Oct. 20, 2016, comment letter to the CFPB, the ACLU maintains that certain proposed amendments would operate as “a prior restraint on speech” for recipients of civil investigative demands (CIDs) or “notice and opportunity to respond and advise” (NORA) letters from the CFPB. According to the ACLU, recipients of CIDs or NORA letters would be restrained—at least initially—from voluntarily disclosing either the receipt or the content of the CIDs or NORA letters in violation of the First Amendment.

 

In August 2016, the CFPB proposed amendments to the procedures used by the public to obtain information from the Bureau under the Freedom of Information Act, under the Privacy Act of 1974, and in legal proceedings. In addition, the CFPB proposed modifications to its rule covering the confidential treatment of information obtained from persons in connection with the exercise of its authorities under federal consumer financial law.

 

Thorny problems. While commending the CFPB for its investigative work, “particularly in the area of Equal Credit Opportunity Act enforcement,” the comment letter underscores the ACLU’s concerns about the proposal’s restrictions on free speech. Among other things, in urging the CFPB to reconsider its proposal, the letter notes that:

• the ACLU understands and agrees with the CFPB’s restrictions on its own disclosure of CID and NORA information;
• while a CID or NORA letter recipient would be allowed to disclose certain information to specified individuals under specified circumstances, the disclosure to others, however, would only be permitted “with the prior written approval of the [CFPB’s] Associate Director for Supervision, Enforcement, and Fair Lending;”
• this “prior written approval” requirement imposes a prior restraint on speech for those CID and NORA letter recipients who prefer not to remain silent and instead wish to disclose information about the receipt or the content of these CFPB requests;
• other federal regulatory agencies do not use this type of “gag rule;” and
• it is inconsistent for the CFPB to post petitions to set aside CIDs on the Bureau’s website for “transparency” purposes while simultaneously prohibiting a party from posting information on its own website about a CID it has received from the CFPB.

For more information about challenges to proposals by the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Register for "Will CFPB be the Same at Age 6?" webinar

On Wednesday, Nov. 16, 2016, the experts at Wolters Kluwer are presenting a complimentary 30-minute webinar, After turning 5, will the CFPB be the same at 6?.

Katalina M. Bianco, J.D. and John M. Pachkowski, J.D. will recap the CFPB’s activities since its inception and take a look at what lies ahead for the bureau. Highlights include:

• the implications of the general election on the bureau’s mission;
• a recent court decision holding that the CFPB’s single-director structure is unconstitutional;
• if legislation introduced in 2016 could change the structure and funding of the bureau; and
• key CFPB enforcement activity and rulemaking proposals to date and what we may expect moving forward.

The webinar will be presented on Nov. 16, 2016, at 9:00a.m. CST. 

Register here.

Treasury officials pitch access and affordability for housing reform

By Andrew A. Turner, J.D.

The need for comprehensive housing finance reform to address the need for access to affordable housing was emphasized by Counselor to the Secretary of the Treasury Antonio Weiss and Assistant Secretary for Economic Policy Karen Dynan, in the first in a series of issue briefs that will focus largely on government-sponsored enterprises. Key features supporting access to mortgages and affordable rental housing, the authors said, involve:

• incentivizing affordable credit pricing;

• implementing “duty to serve” provisions for underserved markets;

• establishing national loss mitigation standards to bolster borrower protections through the cycle; and

• providing funds dedicated to affordable housing construction and preservation.

Affordable credit pricing. A mandate to provide credit to all creditworthy borrowers through economic cycles should be a condition for being able to issue mortgage-backed securities with a government guarantee, the issue brief asserts. “To further promote broadly affordable pricing of credit, an independent regulator could be invested with specific authorities, including, but not limited to, the review and approval of guarantee fees.”

Neglected market segments. A duty to serve underserved housing markets should be paired with appropriate incentives and enforcement measures, according to Weiss and Dynan.

National loss mitigation standards. Housing finance reform legislation, in the view of the Treasury officials, “should invest the housing regulatory agency responsible for overseeing any regulated guarantor with the authority to set and oversee loss mitigation standards for government guaranteed and private mortgages.”

Multifamily affordable rental housing. To address a shortage in affordable rental housing, Weiss and Dynan also see a need for housing finance reform that provides financing that expands access for renters.

Coming next. Future commentaries in the series will address the need for a system to support the housing market in both good and bad economic times, create a level playing field for financial institutions and consumers, and provide regulatory oversight.

For more information about housing finance reform, subscribe to the Banking and Finance Law Daily.

OCC’s responsible innovation framework paving way for new charter?

By John M. Pachkowski, J.D.

As it moves closer to the possible granting of a “special purpose” national bank charter to a financial technology (fintech) company, the Office of the Comptroller of the Currency has established an Office of Innovation as part of its efforts to improve the agency’s ability to identify, understand, and respond to financial innovation affecting the federal banking system. 

The Office of Innovation is part of the OCC’s “Recommendations and Decisions for Implementing a Responsible Innovation Framework,” which will be the blueprint that the agency will use to support the ability of national banks and federal savings associations to fulfill their role of providing financial services to consumers, businesses, and their communities through responsible innovation that is safe and sound, consistent with applicable law, and protective of consumer rights. Commenting on the Office of Innovation, Comptroller of the Currency Thomas Curry noted, “By establishing an Office of Innovation, we are ensuring that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it.”

Besides the establishment of the Office of Innovation, the framework also provided that the OCC should:

• establish an outreach and technical assistance program;
• conduct awareness and training activities;
• encourage coordination and facilitation;
• establish an innovation research function; and
• promote interagency collaboration.

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