Mortgage Banking Update - June 21, 2018
The U.S. Department of Housing and Urban Development (HUD) has issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Disparate Impact Rule (Rule) should be revised in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.
On July 19, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, "HUD's Reconsideration of its Disparate Impact Rule: Background, Analysis and Potential Implications." Click here to register.
The ANPR provides an important opportunity for the mortgage industry and other interested parties to address whether the Rule reflects the limitations outlined by the Supreme Court in Inclusive Communities and other concerns with the Rule. Comments on the ANPR must be filed by August 20, 2018.
The Rule provides that liability may be established under the Fair Housing Act (FHA) based on a practice's discriminatory effect (i.e., disparate impact) even if the practice was not motivated by a discriminatory intent—and that a challenged practice may still be lawful if supported by a legally sufficient justification. Under the Rule, a practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons—or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin. The Rule also addresses what constitutes a legally sufficient justification for a practice, and the burdens of proof of the parties in a case asserting that a practice has a discriminatory effect under the FHA.
While the Supreme Court held in Inclusive Communities that disparate impact claims may be brought under the FHA, it also set forth limitations on such claims that "are necessary to protect potential defendants against abusive disparate impact claims." In particular, the Supreme Court indicated 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" and that a "robust causality requirement" ensures that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants "from being held liable for racial disparities they did not create." Significantly, while Inclusive Communities held that liability may be established under the FHA based on disparate impact, the district court subsequently dismissed the disparate impact claim against the Texas Department of Housing and Community Affairs based on the limitations on such claims prescribed by the Supreme Court in its opinion.
In the ANPR, HUD notes that in response to a notice it published in the Federal Register in May 2017 inviting comments to assist its identification of outdated, ineffective, or excessively burdensome regulations, it received numerous comments both critical and supportive of the Rule, and comments that took opposing positions on whether the Rule is inconsistent with Inclusive Communities. HUD also notes that in a report issued in October 2017, the Treasury Department recommended that HUD reconsider applications of the Rule, particularly in the context of the insurance industry. (We have previously reported on a challenge to the Rule by the American Insurance Association and National Association of Mutual Insurance Companies in the U.S. District Court for the District of Columbia.)
The ANPR contains a list of six questions of particular interest to HUD. Issues addressed in the questions include the Rule's: burden of proof standard and burden-shifting framework; the definition of "discriminatory effect" as it relates to the burden of proof for stating a prima facie case; and the causality standard for stating a prima facie case.
Although Inclusive Communities did not resolve the question of whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA), HUD's approach to the Rule could have significance for ECOA disparate impact claims. Recent comments by CFPB Acting Director Mick Mulvaney that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities suggest that the CFPB might review references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary. In doing so, the CFPB might consider not only whether such references should be eliminated but also, if they are retained, what safeguards should apply. As a result, changes to the Rule made by the FHA could impact the CFPB's approach to ECOA liability.
The order states that on January 31, 2018, the U.S. Court of Appeals for the District of Columbia Circuit issued its en banc PHH decision reinstating the RESPA-related portions of the D.C. Circuit's panel decision. The panel had held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. The order states that "it is now the law of this case that PHH did not violate RESPA if it charged no more than the reasonable market value for the reinsurance it required the mortgage insurers to purchase, even if the reinsurance was a quid pro quo for referrals."
PHH issued a press release about the dismissal in which it commented that the CFPB's order "is consistent with our long-held view that we complied with RESPA and other laws applicable to our former mortgage reinsurance activities in all respects."
In the latter half of last year, a Connecticut law went into effect enabling the Banking Commissioner to provide certain legally required notices to licensees by email. The Commissioner may electronically send both compliance letters (which are prerequisite to commencement of an administrative action to revoke or refuse to renew a license under the Administrative Procedures Act), and notices commencing administrative actions under title 36A of the Banking Law to cease and desist, to impose a civil penalty, and to revoke or refuse to renew a license. For company licensees, electronic notices constitute valid notice when sent by the agency to the individuals designated as primary contacts in the contact employee fields on the NMLS. For individual licensees, electronic notices constitute valid notice when sent to the email address identified by said individual on the system. Notices are deemed received on the earlier of the date of actual receipt by any individual to whom such notice was sent, or seven days after sending. As all consumer credit industries utilize the NMLS in Connecticut for licensure, it is imperative that licensees: (1) keep relevant email addresses up to date on the NMLS; and (2) ensure that such emails are monitored regularly.
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