CFPB and DOJ Announce Redlining Settlement

Consistent with recent indications from CFPB and Department of Justice officials that more redlining cases would soon be coming, the CFPB and DOJ have announced a proposed consent order with Hudson City Savings Bank to settle allegations that the bank had engaged in a pattern or practice of redlining predominantly black and Hispanic neighborhoods in its residential mortgage lending.

The joint complaint filed by the CFPB and DOJ in federal district court in New Jersey states that the action resulted from a joint investigation by the agencies of the bank’s lending practices following the CFPB’s referral of the bank to the DOJ pursuant to the ECOA. The referral was triggered by a CFPB examination of the bank. In the complaint, the agencies alleged that from at least 2009 to 2013 (the “relevant time period”), the bank violated the ECOA and FHA by locating branches and loan officers, selecting mortgage brokers, and marketing loan products to avoid and thereby discourage prospective borrowers in predominantly black and Hispanic neighborhoods in at least three Metropolitan Statistical Areas (MSAs) that generated the vast majority of its residential mortgage applications. Those MSAs were the New York City-Northern New Jersey-Long Island MSA (the NY/NJ MSA), the Philadelphia, Pennsylvania-Camden, New Jersey–Wilmington, Delaware MSA (the Camden MSA), and the Bridgeport-Stamford-Norwalk, Connecticut MSA.

According to the complaint, the bank’s unlawful redlining practices included the following:

  • In carrying out a program to expand the bank’s branches outside of New Jersey from 2004 through 2010, the bank’s management focused on markets in areas of New York and Connecticut that “form a semicircle around the four counties in New York with the highest proportions of majority-black-and-Hispanic neighborhoods.” The complaint alleged that based on 2000 and 2010 census data, more than 90 percent of the branches opened or acquired as a result of this expansion effort were outside of majority-black-and-Hispanic neighborhoods. It also alleged that during the relevant time period, the bank did not accept first lien mortgage loan applications at all of its branches and referred applicants to one of seven retail loan officers working at branches outside of and not in proximity to majority-black-and-Hispanic areas.
  • The bank generated approximately 80 percent of its mortgage applications through mortgage brokers who were heavily concentrated outside of majority-black-and-Hispanic areas.
  • The bank engaged in limited marketing outside of its branch network that focused on neighborhoods with relatively few black and Hispanic residents and therefore “failed to advertise meaningfully in majority-black-and-Hispanic neighborhoods.”
  • In delineating its assessment area under the Community Reinvestment Act (CRA), the bank excluded most of the majority-black-and-Hispanic neighborhoods in the NY/NJ and Camden MSAs.
  • During the relevant period, the bank failed to exercise adequate oversight or hire sufficient staff to ensure fair lending compliance and had no written policies or procedures to monitor for compliance.

The proposed consent order requires the bank to pay a $5.5 million civil money penalty to the CFPB. In addition, the bank must:

  • Invest $25 million in a loan subsidy program to increase the amount of credit the bank extends in majority-black-and-Hispanic neighborhoods in the affected MSAs. The program will offer residents in such neighborhoods home mortgage loans “on a more affordable basis than otherwise available from [the bank].” To make the loans “more affordable,” the bank must offer specified subsidies (such as interest rate reductions, closing cost assistance, or down payment assistance) for mortgage loans made to “qualified applicants” as defined by the consent order.
  • Spend at least $200,000 annually (for at least five years) on a targeted advertising and outreach campaign that advertises the loan subsidy program and is targeted to generate mortgage loan applications from qualified residents in majority-black-and-Hispanic neighborhoods in the affected MSAs.
  • Spend at least $750,000 on partnerships with community-based or governmental organizations that provide financial or other assistance to residents in majority-black-and-Hispanic neighborhoods in the affected MSAs.
  • Spend at least $100,000 annually (for at least five years) to sponsor at least 12 annual financial education events offered by community and governmental organizations, with the events to cover credit counseling, financial literacy, and other related educational programs “to help identify and develop” qualified loan applicants from majority-black-and-Hispanic neighborhoods in the affected MSAs. (The amount the bank must spend cannot include salaries or other compensation paid to bank personnel participating in the events.)
  • Open or acquire two new full-service branches within majority-black-and-Hispanic neighborhoods in the affected MSAs, with the branches to be located in “retail-oriented spaces in visible locations accessible to concentrations of owner-occupied residential properties in the majority-black-and-Hispanic neighborhoods in the affected MSAs” and that “will provide the complete range of services typically offered at [the bank’s] full-service branches and will accept first-lien mortgage applications.”
  • Revise its CRA assessment areas to include all of Bronx, Kings, Queens, and New York counties in New York; the city of Camden; and the city of Philadelphia.
  • Hire a third-party consultant to assess the credit needs of the majority-black-and-Hispanic communities within the affected MSAs and, based on the consultant’s written report, submit a remedial plan to the CFPB and DOJ that details the actions the bank plans to take to comply with the requirements of the consent order “to best achieve the [order’s] remedial goals.”
  • Hire a third-party consultant to assess the bank’s redlining compliance management system and, based on the consultant’s written report, submit a written ECOA/FHA compliance plan to the CFPB and DOJ that includes various elements such as policies and procedures for the selection and oversight of brokers to address redlining risks and monitoring for redlining. The bank must also conduct fair lending training for its employees and hire a full-time director of community development whose responsibilities include overseeing the bank’s continued lending in majority-black-and-Hispanic neighborhoods within the affected MSAs consistent with the remedial plan and building relationships with community organizations.

One wonders whether the CFPB and DOJ consulted with the OCC, the bank’s prudential regulator, about the terms of the proposed consent order.

- Barbara S. Mishkin


Supreme Court Hears Arguments to Decide if Loan Guarantors are “Applicants” Under ECOA

The U.S. Supreme Court heard oral arguments on Monday in the case of Hawkins v. Community Bank of Raymore, the result of which will determine whether a spousal guarantor is an “applicant” under the Equal Credit Opportunity Act (ECOA). As discussed in our previous legal alert, the Court is expected to resolve a circuit split created by the Eighth Circuit’s decision in Hawkins, which conflicted with the ruling by the Sixth Circuit in RL BB Acquisition LLC v. Bridgemill Commons Development Group LLC.

At its core, Hawkins is a case about statutory interpretation, the key issue being whether a spouse-guarantor is an “applicant” under the ECOA.

The petitioners argued that Community Bank of Raymore engaged in marital status discrimination in violation of the ECOA when the bank required them to serve as loan guarantors on business loans made to their respective husbands to fund a failed real estate venture in Missouri. When the husbands’ company failed to make payments, Community declared the loans to be in default and demanded payment from both the company and from the petitioners as guarantors. In response, the petitioners brought a marital status discrimination claim under ECOA, seeking damages and an order declaring their personal guarantees void and unenforceable.

The Eighth Circuit had concluded that ECOA did not provide a cause of action to the petitioners, declining to grant deference to an interpretation of “applicant” that would include a spouse-guarantor. The ECOA defines an “applicant” as one who “applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” However, Regulation B, which implements the ECOA, expands on this definition, interpreting ECOA’s definition of “applicant” as including a spouse-guarantor. The Federal Reserve Board added this interpretation to Regulation B in 1985; prior to that addition, the Regulation had specifically excluded guarantors.

At oral argument on October 5, 2015, the justices were not hesitant to ask questions of both sides, and the questions appeared to reflect differing positions by the justices on the Court. Attention centered around the meaning of the word “applicant,” and whether this term should be understood as including a person who is not directly applying for a loan.

Attempting to predict the outcome of such a case based on the questions and remarks of the justices at oral argument is generally a fool’s errand. That said, Chief Justice Roberts, along with Justices Alito and Justice Scalia, appeared skeptical of the argument advanced by the petitioners, focusing on the plain meaning of the term “applicant.” Justice Scalia offered the analogy of writing a letter of recommendation on behalf of a student applying to law school, asking whether he would be a law school “applicant” under petitioners’ argument. Justice Breyer, on the other hand, gave the counterexample of a parent applying for private school admission on behalf of his or her child, suggesting that the meaning of “applicant” depends on context.

Justice Kennedy voiced concern as to whether treating guarantors as applicants could have the effect of allowing guarantors to have a loan declared unenforceable, and Justice Kagan similarly asked about whether petitioners’ proposed reading of the ECOA could “create liability on a scale that Congress wouldn't have expected.”

Justices Sotomayor and Ginsburg, occasionally joined by Justices Breyer and Kagan, directed a number of questions at counsel for the respondents. Justice Sotomayor in particular appeared open to accepting the understanding of “applicant” set forth in Regulation B. Additionally, Justice Ginsburg mentioned multiple times the fact that the Federal Reserve Board had previously excluded guarantors from the definition of “applicant,” implying she did not think that a “plain language” reading of the term “applicant” should be controlling.

Notably, the United States filed a brief in the case as amicus curiae, asserting that Regulation B “permissibly interprets ECOA to protect guarantors from discrimination” and is entitled to deference. The CFPB—the agency now charged with overseeing the ECOA and promulgating implementing regulations—joined in the brief.  Additionally, Assistant to the Solicitor General Brian Fletcher argued on behalf of the United States in support of the petitioners.

- Jeremy C. Sairsingh and John L. Culhane, Jr.

 


CFPB to Consumer Financial Services Companies: Prepare to Wave Goodbye to Class Action Waivers

The Consumer Financial Protection Bureau (CFPB) is considering proposing rules that would prohibit consumer financial services companies from using class action waivers in consumer arbitration clauses, the CFPB announced October 7, 2015, at a field hearing in Denver, Colorado.

The CFPB has published an outline of its proposals in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders. This is the first step in the process of a potential rulemaking on this issue. The proposals would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. This would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. 

The proposals would not ban arbitration clauses in their entirety. However, for companies still willing to offer arbitration for individual cases, the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until class certification is denied by the court or the class claims are dismissed in court. Companies would be permitted to give the consumer a choice of bringing a class proceeding in arbitration or in court. However, the CFPB acknowledged that that many if not most companies would not include this option since an industry trade group has characterized class arbitration as “a worst-of-all-worlds Frankenstein’s monster.”

The proposals would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued so that the CFPB can monitor the fairness of the process. The CFPB is also considering publishing the claims and awards on its website so that the public can monitor them.

Alan S. Kaplinsky, practice leader of Ballard Spahr’s Consumer Financial Services Group, was invited by the CFPB to attend the field hearing to present the financial services industry’s position on the proposed rules. Also attending were Jean Sternlight, Professor of Law at the University of Nevada, Las Vegas; Jose Vasquez of Colorado Legal Services; Ira Rheingold of the National Association of Consumer Advocates; John Ruby of Bellco Credit Union; and Stephen J. Ware, Professor of Law at the University of Kansas. Kaplinsky testified at the hearing:

“Although the CFPB’s proposal reflects an inclination not to outright prohibit the use of arbitration, let’s make it perfectly clear. By requiring companies to insert in their arbitration provisions language excepting class actions from arbitration, the Bureau is in reality proposing an outright ban. If this proposal becomes a final regulation, most companies will simply abandon arbitration altogether. That’s because the cost-benefit analysis of using arbitration will shift dramatically.

“While companies’ dispute resolution costs will soar, consumers will be the real losers here since they will no longer have available to them arbitration, which is a faster, cheaper and more effective forum than courts for resolving disputes. You don’t need to take my word for it. The data in the CFPB’s own study vividly demonstrates that the only people who benefit from class actions are the plaintiffs’ class action lawyers and, to a lesser extent, the lawyers who defend those lawsuits.

“And there is no doubt that the increased costs resolving disputes will be passed along to customers in the form of higher prices or reduced services. That is simple economics.

“By electing not to ban arbitration of individual disputes when there is no class action involved, even the CFPB has implicitly conceded that there is nothing wrong with arbitration. What they have done here is exalt the class action process, which has been discredited by courts and commentators for decades. Despite the results of the CFPB’s own study showing that consumers don’t really benefit from class actions, the CFPB concludes, in my view illogically, that class actions need to be preserved regardless of the adverse consequences to consumers, the very group it is charged with protecting.”

The CFPB confirmed that “no providers of consumer financial services or products will be required to comply with new regulatory requirements before a proposed rule is published, public comment is received and reviewed by the Bureau, a final rule is issued, and 180 days passes from the effective date of the regulation, as required by Dodd-Frank section 1028(d).” It added that the CFPB contemplates setting an effective date of 30 days after the rule is published. It therefore anticipates that the rule would not apply to arbitration agreements entered into before 210 days after a rule is published by the CFPB. 

Thus, it is likely that any final rule would not take effect until late 2016 or early 2017, at the earliest. In the meantime, companies who do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before a rule becomes effective are grandfathered under existing law which is favorable to class action waivers. In AT&T Mobility v. Concepcion, the U.S. Supreme Court held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements.

- Mark J. Levin


Director Corday Testifies before House Committee on Financial Services

CFPB Director Richard Cordray appeared before the House Committee on Financial Services to answer questions regarding the Bureau’s activities since March.

Cordray used his introductory remarks on September 29, 2015 to highlight the expansion of the marketplace for consumer credit over the last year. He specifically noted increases in home mortgage lending, auto loan origination and new consumer credit card accounts, with consumer loan delinquencies falling to an eight-year low. He also outlined recent Bureau enforcement actions, rulemakings and educational tools.

Members of Congress questioned Cordray on a range of issues reflecting recent Bureau actions. There were several noteworthy topics addressed which I have discussed below.

  • The extent of Bureau regulation of auto finance and its impact on dealerships: Several members of Congress expressed concern at the CFPB’s fair lending initiatives in the auto finance market. Members, such as Republican Congressman Roger Williams of Texas, inquired as to whether the Bureau would be attempting to limit or eliminate the “dealer reserve,” or dealer markups on interest rates offered by auto finance companies that purchase motor vehicle installment sale contracts. Cordray expressed skepticism at this arrangement and acknowledged the possibility of curtailing the reserve or limiting it to a flat fee. He noted that “if you set up a lending program where you’re going to allow people to mark up rates and be financially incentivized to do so and the consumer is none-the-wiser, we believe it creates great risk of discrimination.” When asked if the CFPB had asked dealerships how best to mitigate these risks, he noted that the Bureau has not communicated with auto dealers since they are not subject to Bureau jurisdiction under Dodd-Frank.
  • Referencing a recent article in the American Banker, a number of congressmen questioned Cordray on the methodology for assessing racial discrimination in the auto finance market. Notably, Democratic Congressman David Scott of Georgia challenged Cordray on the use of last names as a proxy for race and expressed concern that this would result in large overestimates of the size of the affected population. Cordray defended the Bureau’s methodology in making these calculations as being based on the best efforts of Bureau officials to determine the most accurate means of assessing disparate impact discrimination.
  • Delayed enforcement for TILA-RESPA Integrated Disclosure (TRID) rule: Cordray fielded several questions about the possibility of delaying enforcement of the new TRID rules. Republican Congressman Robert Hurt of Virginia asked if “the CFPB has rejected the request by industry to grant a grace period of the implementation of [the rule] for the next six months . . .” He went on to ask if the CFPB would pledge not to take enforcement action against those institutions attempting, in good faith, to comply with the new rules. Cordray described the Bureau’s approach for the immediate future as “diagnostic-corrective,” emphasizing that the Bureau would avoid direct enforcement action and attempt to assist industry to comply with the new rules, although he was vague as to how this would look in practice.
  • Rulemaking regarding payday loans and small dollar, short-term lending: Members of Congress on both sides of the aisle emphasized the need for a rule that allows for small dollar lending to continue in some form. The Florida congressional delegation, in particular, expressed concern that the Bureau’s payday lending rule would preempt recent state action to create a functioning market for small dollar lenders. Cordray acknowledged the need to balance consumer protection concerns against the need for access to small dollar credit, but appeared to remain committed towards taking a hard stance against the industry.
  • Forthcoming rulemaking based on the Bureau’s arbitration study: Republican Congressman Randy Neugebauer of Missouri questioned Cordray as to the desirability of prohibiting arbitration clauses based on some of the findings of the Bureau’s arbitration study. Referring to the report, the congressman noted that “customers who prevailed in arbitration recovered on average more than $5,300 compared to $32.35 obtained by the average class action member in class action settlements.” Cordray noted that the Military Lending Act and Dodd-Frank had previously prohibited arbitration in certain contexts and that the study found that arbitration was often not pursued by individual consumers because of the small amount of money at stake, relative to the aggregate costs of certain industry practices. As we recently noted in another blog, a field hearing will be held on October 7 in Denver to consider the imminent rule making that the Bureau is considering in the aftermath of the release of its arbitration study.

The hearing did not provide other significant newsworthy discussion, despite covering a broad range of topics, including student loans, consumer complaints, CFPB enforcement settlements, and several other issues.

- Tristram Q. Wolf


Montana Adds Independent Contract Entity License to NMLS

The Montana Division of Banking and Financial Institutions started accepting new applications for an independent contractor entity license through the Nationwide Mortgage Licensing System and Registry (NMLS) on October 1, 2015. A third-party underwriter or loan processor must be licensed as either a mortgage broker or alternatively, as an independent contractor entity. The main difference between the two licenses is that the mortgage broker license requires a designated manager for each business location that has three years of experience, whereas the independent contractor entity license requires only one and one-half years of experience.

Utah Amends Provisions Regarding Residential Mortgage Practices and Licensing Rules

Utah made several changes to existing laws regarding entity registration, instructor registration, licensee conduct, and administrative proceedings under the Utah Residential Practices Act. The following requirements have been added and/or amended:

  • A registering entity must list all business and trade names used.
  • To become an approved instructor of continuing education courses, certain certifications must be made regarding the applicant’s competency, expertise in the subject, and teaching experience.
  • An individual licensee must report a change in residential address in the nationwide database.
  • A lending manager must take corrective action for problems identified through the underwriting process.
  • An entity whose sponsored licensees engage in unprofessional conduct are vicariously liable for such conduct.
  • The record retention requirement includes initial and final 1003 loan application forms and pre-qualification and pre-approval letters.

The provisions were effective on September 4, 2015.

California Issues Advisory Regarding Mortgage Loan Disclosure Statement

The California Bureau of Real Estate (BRE) issued an advisory in September 2015, regarding the effects of the new TILA-RESPA Integrated Disclosure (TRID) rule that went into effect on October 3, 2015, on the Mortgage Loan Disclosure Statement (MLDS). The MLDS must be provided from a mortgage broker to a borrower disclosing the maximum costs and expenses associated with obtaining a loan on any type of real property. The BRE advises that a loan estimate that meets the requirements of the TRID rule will also meet California state requirements, as long as borrowers sign the loan estimate and are provided with a separate disclosure as well.

- Wendy Tran


Did you know?

Montana Adds Independent Contract Entity License to NMLS

by Wendy Tran

The Montana Division of Banking and Financial Institutions started accepting new applications for an independent contractor entity license through the Nationwide Mortgage Licensing System and Registry (NMLS) on October 1, 2015. A third-party underwriter or loan processor must be licensed as either a mortgage broker or alternatively, as an independent contractor entity. The main difference between the two licenses is that the mortgage broker license requires a designated manager for each business location that has three years of experience, whereas the independent contractor entity license require only one and one-half years of experience.

Utah Amends Provisions Regarding Residential Mortgage Practices and Licensing Rules

Utah made several changes to existing laws regarding entity registration, instructor registration, licensee conduct, and administrative proceedings under the Utah Residential Practices Act. The following requirements have been added and/or amended:

  • A registering entity must list all business and trade names used.
  • To become an approved instructor of continuing education courses, certain certifications must be made regarding the applicant's competency, expertise in the subject, and teaching experience.
  • An individual licensee must report a change in residential address in the nationwide database.
  • A lending manager must take corrective action for problems identified through the underwriting process.
  • An entity whose sponsored licensees engage in unprofessional conduct are vicariously liable for such conduct.
  • The cord retention requirement includes initial and final 1003 loan application forms and pre-qualification and pre-approval letters.

The provisions were effective on September 4, 2015. 

California Issues Advisory Regarding Mortgage Loan Disclosure Statement

The California Bureau of Real Estate (BRE) issued an advisory in September 2015, regarding the effects of the new TILA-RESPA Integrated Disclosure (TRID) rule that went into effect on October 3, 2015, on the Mortgage Loan Disclosure Statement (MLDS). The MLDS must be provided from a mortgage broker to a borrower disclosing the maximum costs and expenses associated with obtaining a loan on any type of real property. The BRE advises that a loan estimate that meets the requirements of the TRID rule will also meet California state requirements, as long as borrowers sign the loan estimate and are provided with a separate disclosure as well.


Copyright © 2015 by Ballard Spahr LLP.
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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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