Supreme Court Agrees Again To Decide Critical Disparate Impact Questions under the Fair Housing Act

The question of whether plaintiffs suing under the Fair Housing Act may bring disparate impact claims is back on the U.S. Supreme Court's docket as a result of the Court's decision last week to grant certiorari in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc.

The justices were poised to decide the question last year in Magner v. Gallagher, but the case disappeared from the Court's docket just a few weeks before its scheduled oral argument on February 29, 2012, when the City of Saint Paul dismissed its appeal. 

Mount Holly concerns a New Jersey township's plan to redevelop a blighted residential area occupied predominantly by low- and moderate-income minority households. Certain residents sought to prevent the redevelopment. After litigating unsuccessfully for several years in state court, the residents filed suit in federal court, alleging that the redevelopment plan had a disparate impact on minorities and therefore violated the Fair Housing Act.

The suit alleged that a disproportionate number of minorities would be affected by the relocation required by the plan and would be unable to afford the new housing proposed under the plan. The district court dismissed the case on summary judgment after concluding the plaintiffs had failed to establish a disparate impact claim. The U.S. Court of Appeals for the Third Circuit reversed, however, and found that plaintiffs had established a prima facie case of disparate impact under the Fair Housing Act.

Ballard Spahr is representing one of the defendants in the case. The Act makes it unlawful to "refuse to sell or rent after the making of a bona fide offer … or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin." Despite the lack of textual support for disparate impact claims in the Fair Housing Act, the Third Circuit and other federal appeals courts have permitted such claims to proceed.

The Supreme Court has agreed to decide whether disparate impact claims are permissible under the Fair Housing Act.

The viability of disparate impact claims under the Fair Housing Act is an issue that could have both direct and indirect effects on consumer finance litigation. It is not uncommon for fair lending litigation brought against mortgage lenders to involve claims under the Fair Housing Act. If the Supreme Court holds that disparate impact claims cannot be pursued, that legal avenue will no longer be available to private and governmental litigants.

A Supreme Court ruling that disparate impact claims are not available under the Fair Housing Act because of a lack of plain-language support would carry serious implications for disparate impact claims under the Equal Credit Opportunity Act (ECOA). Like the Fair Housing Act, ECOA does not explicitly permit disparate impact claims, but there is a long-standing administrative interpretation in Regulation B (which implements ECOA) that asserts that disparate impact claims can be brought under ECOA.

The Supreme Court's decision could also affect regulatory compliance and examinations. The Consumer Financial Protection Bureau has expressly incorporated both disparate treatment and disparate impact testing into its examination procedures, and the Supreme Court's decision in Mount Holly may either remove disparate impact analysis from the picture altogether, or may change how both the CFPB and examined institutions look at testing for disparate impact.

Barbara S. Mishkin and Burt M. Rublin


Texas Supreme Court: Discount Points are Subject to Fee Cap for Home Equity Loans and Lines of Credit

In a decision that likely will have a dampening effect on the home equity lending market in Texas, the Texas Supreme Court ruled on June 21, 2013, that lenders are prohibited from treating discount points and lender fees as interest not subject to the 3 percent cap on fees on home equity loans and lines of credit secured by a homestead.

The ruling in Finance Commission of Texas v. Norwood came after nine years of legal wrangling over what fees could be excluded from the cap, which is part of the home equity loan provisions outlined in Article XVI, Section 50, of the Texas Constitution.

Those provisions generally state that a lender may only foreclose on a homestead for failure to repay a home equity loan if the loan meets the requirements of Section 50. One of those requirements is that all fees, exclusive of interest, are capped at 3 percent. The Texas Finance Commission is tasked with interpreting the home equity provisions and issuing guidance.

In its final interpretations of Section 50, effective January 2004, the Commission adopted a definition of "interest" as it is defined in Chapter 301 of the Texas Finance Code. Under that definition, interest includes discount points and fees paid to the lender. The Commission's interpretation echoed a 2002 Court of Appeals decision in Tarver v. Sebring Capital, which held that discount points are interest and can be excluded from the 3 percent fee cap. Relying on both the Commission's interpretations and the court's decision in Sebring, lenders in Texas excluded discount points and lender fees from the 3 percent fee cap when making home equity loans.

Three weeks after the Commission issued the regulations, several homeowners challenged them, arguing that the interpretations of the constitutional amendment were incorrect. The trial court agreed with the homeowners and disagreed with the regulators' rule that allowed items other than the amount of principal times an interest rate to be included as interest.

On appeal, the Texas Supreme Court affirmed the trial court's decision and invalidated the Commission's interpretation of the definition of interest, finding that tying the meaning to a statute "utterly defeats the clear purpose of constitutionalizing it, which was to place the limitation beyond the Legislature's power to change without ratification by the voters."

The Court also found that, for the purpose of the home equity lending provisions, the term "interest" should be construed as it is generally understood: the amount of the loan principal multiplied by the interest rate. The court reasoned that this definition was consistent with the history, purpose, and text of Section 50 of the home equity amendment. According to the ruling, this narrower definition of interest does not limit the amount a lender can charge for a loan. Instead, it limits "only what part of the total charge can be paid in front-end fees rather than interest paid over time."

Two of the Commission's other interpretations were also at issue for the Court: that a borrower can mail the required consent and attend closing through an attorney-in-fact, and that there is a rebuttable presumption that a required notice is received three days after it is mailed. The Court invalidated the interpretation allowing a borrower to mail the required consent and attend closing through an attorney-in-fact, finding that it violates Section 50(a)(6)(N) (a loan may be "closed only at the office of the lender, an attorney at law, or a title company"). In contrast, the Court upheld the interpretation under the notice requirements of Section 50(g) giving lenders a rebuttable presumption that notice is received three days after it is mailed.

As a result of this decision, home equity lenders in Texas must include all lender charges, including any discount points, within the 3 percent cap. Additionally, lenders must now ensure that home equity loans are not closed unless the borrower can attend the closing in person at the office of a lender, an attorney at law, or a title company.

Anthony C. Kaye


South Carolina Supreme Court: Lenders Modifying Loans Do Not Engage in Unauthorized Law Practice

The South Carolina Supreme Court recently ruled that lender loan modifications do not constitute the unauthorized practice of law. The issue before the court in Crawford v. Central Mortgage Company and Warrington v. The Bank of South Carolina, which had been consolidated on appeal, was whether lenders engage in the unauthorized practice of law by preparing and mailing loan modification documents to borrowers and recording the executed documents without a licensed attorney's participation.

The court observed that the practice of law goes beyond litigation and applies to activities in other areas involving specialized legal knowledge. Further, protecting the public is the driving force behind jurisprudence concerning the unauthorized practice of law. Determining whether an activity constitutes the practice of law is, therefore, flexible and fact-specific.

The unauthorized practice of law in other real estate transactions has previously been addressed by the court, which ruled that attorney supervision is required in residential purchases and refinances. That precedent was set in 2003 in State v. Buyers Service Co., Inc., and Doe v. McMaster. In those cases, the court divided the residential real estate purchase into four steps requiring attorney supervision: conducting a title search; preparing loan documents; the closing; and recording title and the mortgage.

The court distinguished the present case, however, finding that unlike a refinance transaction, which involves the creation of a new loan agreement, a loan modification merely adjusts the existing loan to accommodate borrowers in default.

In addition, the court found that public policy considerations requiring attorney supervision in home purchases and refinance transactions do not apply in the context of a loan modification because requiring attorneys to supervise loan modifications would impose an undue burden on borrowers. Further, borrowers negotiating loan modifications are protected by a "robust regulatory regime and competent non-attorney professionals."

Anthony C. Kaye and Shane Jasmine Young


The Impact of Dual Tracking Restrictions on Foreclosure Rates in California

Foreclosure rates are declining in California. Many tout an improving economy as a reason for this trend. The impact of new legislation that restricts lenders and mortgage servicers from foreclosing on residential mortgages in a timely and efficient manner has also played a significant role. Among the new legislation that has influenced the decline in foreclosure rates in California is the "dual tracking" restriction, which prevents lenders and mortgage servicers from initiating nonjudicial foreclosure proceedings while a completed loan modification application is pending review.

Dual tracking restrictions arose out of the Multistate/National Mortgage Settlement. California's version is contained in the newly enacted California Homeowners Bill of Rights, which took effect in January 2013. The Consumer Financial Protection Bureau also has promulgated new rules restricting dual tracking; the rules go into effect in January 2014.

A nonjudicial residential foreclosure in California generally takes approximately four months to complete. Under the new statute, if the borrower timely submits a completed loan modification application, the time it takes to nonjudicially foreclose is extended by several months, if not more. Section 2923.6 of the California Code of Civil Procedure requires that if a residential borrower submits a complete application for a first lien loan modification, a foreclosure may not proceed until the mortgage servicer makes a written determination that the borrower is not eligible for a first lien loan modification and any appeal period for such decision has expired.

Accordingly, under Section 2923.6, even when a loan modification application is denied, the foreclosure must be delayed at least 31 days after the borrower is notified in writing of the denial. If the borrower unsuccessfully appeals the application denial, the nonjudicial foreclosure is further delayed at least 15 days after denial of the appeal.

Making things even more difficult for a mortgage servicer are the remedies that the newly enacted California statute provides to borrowers. Before the enactment of the California Homeowner Bill of Rights, a borrower in default was generally required to tender the amount due to successfully obtain an injunction that would prevent or delay a nonjudicial foreclosure. Under the new statute, if a foreclosure proceeds while a completed loan modification application is pending review, a borrower may obtain injunctive relief to prevent or delay the foreclosure along with actual economic damages. A prevailing borrower may also seek the recovery of attorneys' fees and costs. To make matters worse, if the court finds that a material violation of the statute was intentional or reckless, or resulted from willful misconduct, the court may award the borrower the greater of triple actual damages or statutory damages of $50,000.

The impact of the new legislation on California foreclosures is palpable. There were twice as many foreclosures initiated in December, before the California Homeowner Bill of Rights came into effect, as there were in April of this year. For good reason, given the new remedies provided to borrowers, California servicers are being more cautious in exercising their right to foreclose. While foreclosure rates may be declining, the new remedies will likely fuel an increase in litigation by borrowers.

- Alan S. Petlak


Chicago Ordinance Creates New Obligations for Owners of Foreclosed Rental Property

A new Chicago ordinance requires mortgagees who acquire residential rental property through a foreclosure or deed in lieu of foreclosure to either provide an option to renew the lease or offer relocation assistance to a "qualified tenant." The ordinance could face legal challenges.

The ordinance was passed by Chicago's City Council on June 5, 2013, and becomes effective 90 days thereafter. It applies to "foreclosed rental property." Such property is defined as a building containing one or more dwelling units used as rental units, including a single-family home, or a dwelling unit used as a rental unit and subject to the Illinois Condominium Property Act or the Illinois Common Interest Community Association Act if:

  • The legal or equitable interests in the building or unit were terminated by a foreclosure under Illinois' Mortgage Foreclosure Law
  • One or more of the rental units were occupied when the mortgagee became the owner

A "qualified tenant" entitled to the ordinance's protections is a tenant in a foreclosed rental property on the day the mortgagee became an owner with a "bona fide rental agreement" to occupy the rental unit as the tenant's principal residence. To be "bona fide," a rental agreement must be the result of an arm's length transaction, provide for rent in an amount that is not substantially less than fair market value, and not be with the mortgagor's child, spouse, or parent.

The ordinance requires the owner of a foreclosed rental property to offer a qualified tenant a one-time relocation assistance fee of $10,600 or the option to renew or extend the tenant's current rental agreement. The renewed or extended agreement must have an annual rental rate that for the first 12 months is not more than 102 percent of the tenant's current rate, and for any subsequent 12-month period is not more than 102 percent of the immediate prior year's annual rental rate.

Within 21 days of becoming the owner of a foreclosed rental property, a mortgagee is required to identify all tenants of the rental units and provide a written notice of their potential rights to relocation assistance or a lease renewal or extension. Within 10 days of becoming the owner, the mortgagee must register the property with the Chicago Buildings Commissioner.

Certain protections for residential tenants in foreclosed properties are provided by the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA). The PTFA was originally scheduled to expire in 2012 but was extended until the end of 2014 by the Dodd-Frank Act. While the PTFA permits state or local laws that give "other additional protections for tenants," it does not directly address preemption under the National Bank Act or the Home Owners Loan Act. The new ordinance could also be vulnerable to potential constitutional challenges.

- Barbara S. Mishkin


Missed a Webinar? View the Recording

Missed a webinar? Don't worry, almost all of Ballard Spahr's recent webinars are available to download and watch. For a link to the recording or slides from a past webinar, e-mail Lisa Prickril at prickrill@ballardspahr.com specifying the webinar(s) for which you would like the materials. (Please note: We generally limit distribution of webinar recordings and slides to clients and members of the financial services industry.)


Mortgage Banking Group Continues Western Growth by Adding New Denver Attorneys


Ballard Spahr's Mortgage Banking Group has significantly enhanced our litigation capabilities in the West with the addition of a team of commercial litigators in Denver. Our new colleagues, who joined us from Featherstone Petrie DeSisto LLP, have extensive courtroom experience across the country. They include:

  • Partner Andrew J. "Drew" Petrie, a highly regarded trial lawyer with more than 30 years of experience in complex commercial litigation. He handles creditors' rights cases, including banking, real estate, structured finance, leasing, and UCC transactions and the representation of creditors in bankruptcy proceedings.
  • Partner Sarah B. Wallace, who focuses on commercial litigation and appeals, including trade secret, breach of contract, insurance coverage, and employment litigation. She has represented manufacturers, software development companies, and financial institutions in state and federal proceedings, arbitrations, and mediations.
  • Of Counsel Lisa A. Lee, who represents corporate and individual clients in commercial litigation, arbitration, and appeals. She has represented financial institutions in cases arising from commercial, residential, and consumer loans, and in cases against other financial institutions involving loan guarantees and/or the purchase and sale of loan portfolios.


Two More Agencies Adopt the Uniform State Test 


Two more state agencies have announced that they will be adopting the new national MLO test with the Uniform State Content. The New Jersey Department of Banking and Insurance will adopt the test effective July 1, 2013, and the Mississippi Department of Banking and Consumer Finance will adopt the test effective October 1, 2013. With these announcements, a total of 34 state agencies have adopted the new test and will, therefore, no longer require a separate state-specific test component as a prerequisite for MLO licensure.

Maine Adds MLO Exemptions


Maine recently amended its mortgage loan originator licensing statute to provide for several more exemptions from licensure. The amendment exempts individuals who act as MLOs in providing financing for the sale of a property they own so long as they do not "habitually or repeatedly" engage in such activity. Also exempt are individuals who otherwise meet the definition of mortgage loan originator, but do not provide mortgage financing or perform other mortgage loan origination activities habitually or repeatedly. Employees of a government entity who act as MLOs pursuant to their official duties also are exempt from licensure. These new exemptions are effective September 24, 2013.

- Matthew Saunig


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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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