DOJ Settles Fair Lending Claims Based on Bank’s Mortgage Pricing System

The U.S. Department of Justice (DOJ) has announced a proposed consent order with Sage Bank to settle charges that the bank violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by discriminating on the basis of race and national origin in connection with its residential mortgage lending.

The DOJ claimed that the bank’s pricing system resulted in African-American and Hispanic borrowers paying higher prices for mortgage loans than similarly qualified white borrowers. The DOJ said that the action originated from a referral by the Federal Deposit Insurance Corporation.

According to the DOJ’s complaint filed in Massachusetts federal district court, the bank used a “Minimum Base Pricing” (MBP) system to price mortgage loans sold to investors on the secondary market. The MBP represented the net revenue target that a loan officer was expected to achieve on each loan he or she originated through the interest rate and fees.

The complaint alleged that the pricing system resulted in African-American and Hispanic borrowers paying more for loans than white borrowers and the higher prices could not be “fully explained by factors unrelated to race or national origin.” The DOJ claimed that a contributor to this disparity was that African-American and Hispanic applicants were served disproportionately by loan officers with MBPs that were higher than the MBPs of loan officers serving predominately white applicants. The higher MBPs “were not justified by individual characteristics of [such minority applicants].” Another contributor was that loan officers allegedly marked up loans to African-American and Hispanic borrowers above their MBPs to a greater extent than they marked up loans to white borrowers.

According to the DOJ, the bank gave loan officers discretion to price loans above their MBPs without any requirement to obtain management approval or document or provide reasons for such higher pricing. The DOJ claimed that such discretion “resulted in loan prices that were higher than what the objective credit characteristics of the borrowers dictated” and “exacerbated the risk that similarly qualified borrowers would receive differently priced loans.”

In the complaint, the DOJ asserted various theories for its FHA and ECOA claims. The complaint alleged that the bank’s pricing system created a “foreseeable disparate impact.” (The complaint’s focus on the bank’s pricing system might be intended to address the U.S. Supreme Court’s admonition in Inclusive Communities that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.”)

The DOJ also charged that the bank “engaged in a pattern or practice of discrimination and denial of rights under the FHA and ECOA” and that its “policies and practices were intentional, willful, or implemented with reckless disregard for the rights of African-American and Hispanic applicants and borrowers.” Although the DOJ did not directly say so in the complaint, its allegation of intentional discrimination was presumably based on the bank’s alleged knowledge of borrowers’ race or national origin and the primarily minority composition of the population served by loan officers with higher MBPs.

The consent order, which is subject to court approval, requires the bank to pay $1.175 million into a settlement fund to compensate aggrieved borrowers. It also requires the bank to establish a loan pricing policy “that shall minimize fair lending risk and mandate documentation of loan officer decision-making and managerial approval,” and a monitoring program to assess pricing disparities on at least a semi-annual basis. In addition, the bank must establish a loan officer compensation policy that ensures compliance with the Truth in Lending Act/Regulation Z provision that generally prohibits loan officers from receiving compensation based on any loan term other than the amount.

The DOJ’s action demonstrates that there are risks when loan officers have different pricing or are permitted to deviate from standard pricing. Lenders that have different pricing for loan officers and/or permit loan officers to deviate from standard pricing should conduct an analysis to assess if there are potential trends that could be viewed as presenting a fair lending concern to regulators.

- Barbara S. Mishkin and Richard J. Andreano, Jr.

House Passes Bill to Curb QM requirements

The U.S. House of Representatives passed a bill that would provide a safe harbor exception for depository institutions from certain provisions of the Truth in Lending Act and Regulation Z, and for mortgage originators from the steering prohibition of the loan originator compensation requirements under Regulation Z (LO Comp Rule).

By a vote of 255 to 174, the House passed the “Portfolio Lending and Mortgage Access Act” (H.R. 1210) on November 18, 2015. The text of the bill can be found here. The bill, which would take effect immediately, would expressly exempt depository institutions from suit for violation of the Truth in Lending Act’s general ability to repay requirements and certain related requirements with respect to a loan that, since origination, the creditor has held on their balance sheet, while the loan also complies with the prepayment penalty restrictions imposed by Dodd-Frank on qualified mortgage loans. Such a loan could qualify for the safe harbor even if it provided for a balloon payment.

The bill would also provide a safe harbor for loan originators from the LO Comp Rule’s prohibition on steering a consumer from a mortgage loan for which the consumer is qualified and that is a qualified mortgage loan to a non-qualified mortgage loan, when the originator and the consumer receive a statement of intent from the creditor indicating that the creditor intends to hold the loan on their balance sheet for the life of the loan and that creditor is a depository institution.

Proponents of the bill state that under current requirements, customers are forced to fit into certain prefabricated financial products, thus limiting access to credit for some demographic groups. Opponents of the bill claim the safe harbor would create a sense of déjà vu for the types of financial products that led to the 2009 financial crisis. The bill now heads to the Senate where its prospects remain uncertain. Per the White House, the President has threatened to veto the bill.

- Richard J. Andreano, Jr., and Matthew R. Smith

CFPB Issues Eighth Semi-Annual Report

The CFPB has issued its eighth Semi-Annual Report to the President and Congress covering the period from April 1, 2015, through September 30, 2015. The 190-page report recycles information from previously-issued CFPB reports and reviews ongoing and past developments, which we have covered in previous blog posts.

By way of aggregate statistics, the report indicates that in the six-month period it covers, CFPB supervisory actions resulted in financial institutions providing more than $95 million in redress to more than 177,000 consumers. It also indicates that during that period, the CFPB obtained orders in enforcement actions providing for approximately $5.8 billion in total relief for consumers and more than $153 million in civil penalties.

The $5.8 billion in consumer relief obtained by the CFPB appears to represent an all-time high. By way of comparison, in its last Semi-Annual Report covering the period October 1, 2014, through March 31, 2015, the CFPB reported it obtained orders in enforcement actions providing more than $19 million in consumer relief.

We expect the issuance of the new report to be followed by the scheduling of hearings on the report by the House Financial Services and Senate Banking Committees at which Director Richard Cordray will appear as a witness.

- Barbara S. Mishkin

CFPB Makes No Change to Exemption Thresholds for Appraisal Requirement, Regs Z, M

The CFPB has published notices in the Federal Register announcing that it is making no change to three exemption thresholds that are subject to annual inflation adjustments. Effective January 1, 2016, through December 31, 2016, these exemption thresholds remain as follows:

  • Smaller loans exempt from the appraisal requirement for “higher priced mortgage loans,” $25,500
  • Consumer credit transactions exempt from Truth in Lending Act/Regulation Z, $54,600 (but loans secured by real property or personal property used or expected to be used as a consumer’s principal dwelling and private education loans are covered regardless of amount)
  • Consumer leases exempt from Consumer Leasing Act/Regulation M, $54,600

- Barbara S. Mishkin

Colorado Adopts Uniform State Test

The Colorado Division of Real Estate adopted the Uniform State Test (UST) for state-licensed mortgage loan originators (MLOs), becoming the 51st state agency to do so. MLOs seeking licensure will be required to also complete two hours of Colorado-specific education requirements. See more information about the UST here.

The adoption of the UST will be effective as of March 1, 2016.

Florida Amends Mortgage Brokerage Provisions

Florida’s Department of Financial Services has made several amendments to its mortgage loan originator, mortgage lender, and mortgage brokerage rules.

The amendments accomplish the following:

  • Update form titles to conform with NMLS titles; update Florida Department of Law Enforcement’s Livescan website link
  • Update fee payment amounts renewals (reduced from $195.25 to $176 for loan originator license renewals)
  • Clarify procedure for renewals and reactivations
  • Remove criminal background check fee requirement for control people for license renewals (previously $25.25 for mortgage broker and mortgage lender licenses); and correct grammatical errors

For a full list of amendments, see the notices of the proposed and final rules here. The amendments became effective on November 9, 2015. 

- Wendy Tran

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