Legal Alert

Mortgage Banking Update - March 2, 2018

March 2, 2018

Modern Day Redlining: Reveal's Investigation of Potential Racial Discrimination in Mortgage Lending Leads to Government Inquiries

The Pennsylvania attorney general and state treasurer each announced separate inquiries last week into potential mortgage-lending redlining in Philadelphia. These inquiries come on the heels of a series of investigative reports from Reveal, the online news outlet for the Center for Investigative Reporting. Reveal has reported it found significant racial disparities in the number of conventional mortgage loans obtained from lenders and mortgage brokers in several U.S. cities.

Reveal analyzed public data available under the Home Mortgage Disclosure Act (HMDA) and concluded that black applicants were denied conventional mortgage loans at significantly higher rates than white applicants in 48 cities, including Philadelphia. Reveal also found that Latinos, Asians, and Native Americans were similarly less likely to obtain a conventional mortgage loan than whites in certain cities. Reveal concluded that "African Americans and Latinos continue to be routinely denied conventional mortgage loans at rates far higher than their white counterparts. This modern-day redlining persisted in 61 metro areas even when controlling for applicants’ income, loan amount and neighborhood . . . ." Reveal determined that in Philadelphia, "although black and white residents make up similar proportions of the area's population, white applicants received 10 times as many conventional mortgage loans in 2015 and 2016."

The Reveal reporting has ignited the interest of governmental officials who want to investigate this so-called modern redlining. Pennsylvania Treasurer Joe Torsella and Pennsylvania Attorney General Josh Shapiro each opened an official inquiry into mortgage lending practices in Philadelphia in response to the Reveal reporting. The Philly Voice reported that Shapiro said he opened the investigation in conjunction with the U.S. Bureau of Consumer Protection, adding, "We are chasing this down and we take this seriously." The Philadelphia City Council also passed a resolution to hold hearings regarding mortgage lending practices in Philadelphia.

While Reveal focused mostly on Philadelphia, news organizations across the country have picked up on the reporting, including the Detroit Free Press, the St. Louis Post-Dispatch, and PBS, which produced a two-part piece for PBS News Hour in conjunction with Reveal that aired earlier this month. The Reveal reporting has spurred dialog among politicians and civil rights activists regarding what can be done to address potential racial discrimination in mortgage lending practices. This increased awareness and discussion could lead to additional fair lending inquiries in other states and more focused action in this area by the OCC and CFPB.

But the Reveal reporting is not without criticism. For its methodology, Reveal reported that it analyzed nine economic and social factors, including "an applicant's income, the amount of the loan, the ratio of the size of the loan to the applicant's income, and the racial makeup and median income of the neighborhood where the person wanted to buy property." Reveal did not analyze borrower credit score information because that information is not publicly available and is not reported under the HMDA.

Because Reveal did not consider credit scores and other factors that lenders use in making lending decisions, lender groups have criticized Reveal's methodology as "defective" and "deeply flawed." The American Bankers Association issued a statement responding to Reveal's analysis, stating it "was missing critical ingredients needed for an accurate assessment of fair lending practices" and "the HDMA numbers alone do not reveal a bank's fair lending performance." Rather, "the most important factors in the decision to lend are a borrower's credit score and history, their income and DTI ratio, and the LTV ratio. By its own admission, Reveal only looked at income on that list."

The Mortgage Bankers Association and its President and CEO David H. Stevens also issued responses to the Reveal analysis, echoing many of the same criticisms the ABA identified, and pointing out that the Reveal analysis focuses only on conventional loans, "ignoring government lending, particularly FHA." Government programs are "widely available, allow smaller downpayments, and in some ways are more flexible with respect to credit history than conventional programs."

While the verdict may be out on the reliability of Reveal's conclusions, its reporting has garnered considerable attention in the industry and may lead to increased scrutiny of fair lending policies within institutions and greater fair lending enforcement in 2018.

- Rachel R. Mentz and Sarah B. Wallace

CFPB Announces Feb. 28 and March 13 Meetings of Consumer Advisory Board Subcommittees

The CFPB has published a notice in the Federal Register announcing two public subcommittee meetings of its Consumer Advisory Board (CAB) conducted by conference call.

The Consumer Lending subcommittee meeting took place Wednesday. The Mortgages and Small Business Lending Markets subcommittee meeting will take place on March 13, 2018, from 1:00 p.m. to 2:30 p.m. EST. The notice indicates that the upcoming meeting is open to the public and that members of the public will receive the agenda and dial-in information when they RSVP. (RSVP directions are provided in the notice.)

The Consumer Lending subcommittee focuses on policy issues related to small-dollar lending, debt collection, debt relief, auto lending, consumer reporting, and alternative data. The Mortgages and Small Business Markets Lending subcommittee focuses on policy issues related to mortgage origination, mortgage securitization and servicing, marketing service agreements, subprime lending, reverse mortgages, the Home Mortgage Disclosure Act, mortgage insurance, risk monitoring, and small business lending.

- Barbara S. Mishkin

New HMDA Guide Issued by the FFIEC

The Federal Financial Institutions Examination Council (FFIEC) has just issued an updated version of The Guide to HMDA Reporting: Getting It Right!

The Guide reflects the extensive changes to the Home Mortgage Disclosure Act rules that were adopted in October 2015 and became effective January 1, 2018. Until now, the most recent version of the Guide was the April 2013 edition.

As previously reported, in December 2017 the CFPB announced that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules, such as the institutions that are subject to the rules, including the related transactional coverage tests, and the discretionary data points that were added to the statutory data points by the CFPB. Any HMDA rule changes may require revisions to the Guide.

- Richard J. Andreano, Jr.

House Passes Bill to Amend TRID Rule Disclosures

On February 14, 2018, the U.S. House of Representatives passed the TRID Improvement Act of 2017, H.R. 3978, by a vote of 245 to 171. The bill would amend the manner in which title insurance premiums are disclosed under the TILA/RESPA Integrated Disclosure (TRID) rule.

Under title insurance price structures in many states, when a consumer purchases an owner's title insurance policy and lender's title insurance policy at the same time, a discount is offered on the price of the lender's title insurance policy. Nevertheless, when the consumer will purchase both an owner's title insurance policy and lender’s title insurance policy, the TRID rule requires that the amounts disclosed for the owner's title insurance policy premium and lender’s title insurance policy premium be determined as follows:

Lender's Title Insurance Premium: The premium for the lender's policy based on the full premium rate (i.e., without regard to any discount offered by the title insurer).

Owner's Title Insurance Premium: The result of adding the full owner's title insurance premium and discounted premium for the lender's policy, and subtracting the premium for the lender's policy based on the full premium rate.

Industry members have objected to the required disclosure approach because it deviates from the manner in which the actual premium amounts are charged.

The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of "all actual charges" and not just the itemization of "all charges." The bill also would amend RESPA to require that "Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by state regulation or the title company rate filings.". Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Forty-three Democrats joined Republicans in passing the bill.

- Richard J. Andreano, Jr.


NMLS 2.0 Launch Date Reset for the Second Quarter 2019

The Conference of State Bank Supervisors has announced that the launch of NMLS 2.0 originally scheduled for September 2018 has been pushed to the second quarter of 2019. This delay also impacts the launch of the State Examination System, which will be adjusted based on the new NMLS 2.0 timeline.

NMLS Policy Guidebook Updated

The NMLS Policy Guidebook has been updated effective February 1, 2018, replacing the version issued on July 23, 2012. The announcement accompanying publication of the Guidebook notes that the updates are intended to align the Guidebook with current system functionality and reflect newly adopted policies, including updates to reflect enhancements to the Money Services Business Call Report and electronic surety bonds, among others. The Guidebook is available here.

- John D. Socknat

Copyright © 2018 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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