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The Business Lawyer

Spring 2022 | Volume 77, Issue 2

Fair Lending Developments: A Death Knell for Municipal Fair Lending Cases?

John L Ropiequet


  • This survey reports on fair lending litigation in the federal courts during the past year and federal enforcement actions by the CFPB and other agencies.
Fair Lending Developments: A Death Knell for Municipal Fair Lending Cases?

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During the past year, the Ninth Circuit may have sounded the death knell for fair lending claims by municipal governments through an en banc decision that held that such claims go beyond the first step of proximate causation and are therefore too remote to be recovered. Other fair lending cases by both municipal governments and other plaintiffs continued to be enmeshed in motion practice and discovery, and the effects of the Ninth Circuit’s decision will play out during the coming year. The U.S. Department of Housing and Urban Renewal (“HUD”) issued a new disparate impact rule in 2020 that was promptly stayed by a district court prior to the change in Administration. The new Administration dismissed an appeal of the stay order and began a rulemaking process to reinstate the 2013 disparate impact rule that the 2020 rule had supplanted. The Consumer Financial Protection Bureau (“CFPB”) began a rulemaking process under Regulation B to regulate, for the first time, the collection of data on non-consumer loans to women-owned, minority-owned, and small businesses.

Municipal Fair Lending Litigation

Several fair lending cases filed by city and county governments between 2014 and 2018 continued to make their way through the courts during the past year with minimal progress toward resolution, except in one case. The Ninth Circuit’s decision in City of Oakland v. Wells Fargo & Co., reported in the previous Annual Survey, was reheard en banc and the full court unanimously found against Oakland’s claims for reduced property tax revenues and increased municipal expenses due to alleged mortgage lending discrimination, and for injunctive and declaratory relief related to those claims, in all respects in September 2021, ordering the case to be dismissed.

The City of Oakland court started its analysis with a close examination of the U.S. Supreme Court’s ruling in Bank of America Corp. v. City of Miami on the direct causal relationship required for violations of the Fair Housing Act (“FHA”), in which “the Supreme Court considered allegations almost identical to those made here.” Taking particular note of the Court’s remark about “‘[t]he general tendency . . . not to go beyond the first step’” in determining whether such a relationship exists, the Ninth Circuit considered how that principle applied to Oakland’s claims for reduced tax revenue stemming from allegedly discriminatory mortgage lending practices. It found that “[t]here is no question that Oakland’s theory of harm goes beyond the first step—the harm to minority borrowers who receive predatory loans.”

The question then became whether Oakland’s claims would fit if the first step could be expanded or extended under City of Miami, which stated two considerations for doing so: “the nature of the statutory cause of action and an assessment of what is administratively possible and convenient.” Under the first consideration, the Ninth Circuit could find nothing in the nature of the FHA that encompassed harm beyond the first step, unlike other statutes for which the Supreme Court had allowed such an extension.

The City of Oakland court’s analysis of the administrability factors cited by the City of Miami Court “reinforce[s] our view that Oakland has not met the directness requirement of the proximate-cause standard.” The court found that Oakland alleged a “long and winding causal chain” rather than damages that were “surely attributable” to Wells Fargo’s alleged predatory loans. Furthermore, there was no need for Oakland to act as a private attorney general to vindicate the law because “directly harmed borrowers can sue individually” or as a class. The court noted that Oakland alleged that the U.S. Department of Justice (“DOJ”) had recovered $175 million from Wells Fargo for discriminatory mortgage lending practices in one suit and $1.2 billion in another suit. Thus, the court held that “Oakland’s claimed harm of reduced tax revenue is too remote from the cause of action” and that “nothing counsels going ‘beyond the first step’ of proximate causation.”

The Ninth Circuit affirmed the district court’s dismissal of Oakland’s claim for increased municipal expenses. However, it reversed the district court’s holding that Oakland’s claims for declaratory and injunctive relief did not have to meet the same proximate causation standard as its claims for monetary relief, stating that the Supreme Court “did not distinguish between claims for damages and those for injunctive relief.”

In June 2021, the court in County of Cook v. Wells Fargo & Co. dealt with a follow-up issue to an earlier decision in 2018 that allowed some claims of damages to proceed but dismissed others that failed to meet the Supreme Court’s directness requirements. After taking discovery, Wells Fargo moved to dismiss the remaining claims for lack of subject matter jurisdiction. The bank argued that the evidence demonstrated that the county actually earned a net profit from the judicial activities generated by the foreclosure boom and accordingly suffered no injury. Wells Fargo did however concede that Cook County, the county police, and the county’s court system had all initially incurred costs for serving foreclosure notices and evicting homeowners. The court held that this was sufficient to show standing, regardless of what might be proven on the merits of the case about mitigation of the county’s losses and denied the motion to dismiss.

In a Cook County case against Bank of America in which the county sought to certify an appeal of an earlier adverse ruling on its damages claims, the district court denied certification. The court commented that the issue had not been raised in the earlier motion, there had been substantial motion practice over the past six years, discovery was nearing a close, and “[i]t is time to move on.”

In Prince George’s County v. Wells Fargo & Co., the district court dealt with a motion to dismiss the plaintiff counties’ amended complaint filed after the court’s earlier ruling dismissing some of their damage claims. Informed by the Ninth Circuit’s panel decision in City of Oakland, the Prince George’s County court held that the counties’ claims for injury to its tax base caused by the bank’s alleged discriminatory lending practices were actionable. The court rejected the bank’s argument that under the collateral source rule, the plaintiff counties could adjust their tax rates to compensate for such losses, holding that “a tort award should not be offset by compensation that a plaintiff receives from another source.” It found that the Supreme Court had expressly allowed recovery of losses for tax base diminution under the Fair Housing Act (“FHA”), remarking that “[s]etting the millage rate is not the equivalent of waving a magic wand to grow the county treasury.” Like the City of Oakland district court, the Prince George’s County court was persuaded that the plaintiffs’ proffered hedonic regression analysis could plausibly calculate the amount of tax revenue loss. However, the court dismissed their claims for loss of franchise tax and utility revenue as “a bridge too far” on the chain of causation.

In the companion Maryland case of Montgomery County v. Bank of America Corp., the court denied the bank’s motion to dismiss the amended complaint by a short letter order in February 2021 a year after the motion was filed but it allowed further briefing. The bank referred the court to the Ninth Circuit’s en banc decision in City of Oakland in the most recent addition to the briefing, as of this writing, one day after it was issued. The court’s next ruling may indicate how influential the en banc decision will be in courts outside of the Ninth Circuit.

Other Fair Lending Litigation

As the cases brought by the National Fair Housing Alliance (“NFHA”) alleging discriminatory practices by lenders in their handling of foreclosed Real Estate Owned (“REO”) properties mostly marked time during the past year, it filed a novel redlining complaint in October 2020 against Redfin Corporation, a real estate brokerage firm that offers discounted services online on a nationwide basis. The alleged redlining practices consisted of “setting minimum home listing prices in each housing market on its website under which it will not offer any real estate brokerage services to buyers or sellers.” This allegedly led to “buyers and sellers in non-white areas [being] far less likely to be offered Redfin’s services and discounts than buyers and sellers in white areas.” As a result, it was alleged that “[b]y disproportionately withholding its services to homebuyers and sellers” in communities of color, “Redfin disincentivizes homebuying, reduces housing demand and value, and perpetuates residential segregation.” Redfin did not challenge these allegations with a motion to dismiss but instead entered into settlement negotiations. As of this writing, the court extended the time to plead to the complaint for the fifth time to January 2022 as the parties continued to negotiate.

HUD Disparate Impact Rule

As reported in the previous Annual Survey, HUD issued a final disparate impact rule in September 2020 (“2020 Rule”) to regulate the evidentiary standards for proving claims under the FHA for claims of discrimination that have a disparate impact on protected minorities. The rule had a long history, having been proposed a year earlier to replace HUD’s 2013 final disparate impact rule in light of the standards required by the Supreme Court in its decision in Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc. in 2015, as well as to resolve challenges to the 2013 Rule by insurance industry groups that the 2020 Rule attempted to address.

The 2020 Rule was challenged immediately in three federal district court cases filed by consumer advocacy groups in Massachusetts, California, and Connecticut. The Massachusetts case quickly resulted in an injunction staying the rule less than a month after the case was filed while the other cases remained dormant. After it compared the changes in the 2020 Rule with the analogous provisions in the 2013 Rule, the court concluded that the 2020 Rule “weakens” disparate impact liability “by introducing new, onerous pleading requirements on plaintiffs, and significantly altering the burden-shifting framework by easing the burden on defendants justifying a policy with discriminatory effect while at the same time rendering it more difficult for plaintiffs to rebut that justification.” Furthermore, it found that “the 2020 Rule arms defendants with broad new defenses which appear to make it easier for offending defendants to dodge liability and more difficult for plaintiffs to succeed.”

The court held that the plaintiffs established a substantial likelihood of success on the merits because the 2020 Rule’s changes to the 2013 Rule were arbitrary and capricious despite HUD’s argument that the changes merely brought the rule “into alignment with the Supreme Court’s decision in Inclusive Communities.” It also held that “the 2020 Rule’s massive changes pose a real and substantial threat of imminent harm” to the plaintiffs’ mission and that there was no harm to the government or the public interest from issuing a preliminary injunction, “given the existence of the 2013 Rule, which has been and can continue to be workable.” The court accordingly stayed implementation of the 2020 Rule and enjoined HUD from implementing it.

HUD appealed the order to the First Circuit, but the appeal was dismissed in February 2021 after the change in Administration. Because the 2020 Rule supplanted the 2013 Rule upon its promulgation as a final rule, this left no rule in effect on the critical burden-shifting framework. In response to an executive order from President Biden in January 2021, HUD announced in June 2021 that it would publish a notice of proposed rulemaking to rescind the 2020 Rule and restore the 2013 Rule. No timetable for issuing the proposed rule has been published as of this writing and it is not known what HUD will do to contend with the issues that led to the 2013 Rule being vacated by two courts because of its impact on the insurance business. The 2020 Rule was designed to avoid such problems by providing as part of the burden-shifting framework that “[n]othing in this section is intended to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.”

Dodd-Frank Act Section 1071 Rulemaking

One of the many mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2020 (“Dodd-Frank Act”) involving the CFPB was the direction in section 1071 of the Act to “prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data pursuant to” an amendment to the Equal Credit Opportunity Act (“ECOA”) that required financial institutions to gather and report data to it about credit applications by women-owned, minority-owned, and small businesses. The definition of “applicant” was also amended to include corporations, partnerships, and other entities besides natural persons. The ECOA’s prohibition against discrimination on the basis of race, color, religion, national origin, sex, and other listed factors thus was expanded from consumers to non-consumers for the first time.

One of the CFPB’s first official acts after it was formed pursuant to the Dodd-Frank Act was to put compliance with section 1071 on hold. CFPB General Counsel Leonard J. Kennedy issued a letter in April 2011, before the transfer of regulatory authority to the agency in July, to the chief executive officers of all financial institutions stating that their obligations under section 1071 “do not go into effect until the Bureau issues necessary implementing regulations.” He advised them that the CFPB “will act expeditiously to develop such rules” in a rulemaking process. He noted that “Congress intends section 1071 to produce reliable and consistent data . . . to facilitate enforcement of the fair lending laws and identify business and community development needs,” the twin purposes of section 1071.

In the crush of regulatory work that the CFPB was required to perform by the Dodd-Frank Act, the mandate of section 1071 was, to put it mildly, placed on the back burner. No action at all was taken to start the rulemaking process until May 2017, when the agency held a field hearing in Los Angeles on small business lending. No further steps were taken after that until a California coalition of over three hundred community-based organizations and public agencies sued the CFPB in May 2019 to force it to take the action that section 1071 required. After the plaintiffs and the CFPB filed cross-motions for summary judgment, the CFPB entered into a settlement agreement and an agreed court order in February 2020 that set a timetable for it to take a series of actions to complete a section 1071 rulemaking process under the aegis of the district court.

Under the timetable, the CFPB issued an Outline of Proposals to be considered by a Small Business Regulatory Enforcement Act (“SBREFA”) panel in September 2020. The final report of the SBREFA panel was issued in December 2020. After the change in Administration, the parties agreed that the CFPB would release a Notice of Proposed Rulemaking by the end of September 2021, which was put into a court order in July. The CFPB then issued a proposed rule on September 1, 2020.

The proposed rule provides that “covered applicants” subject to its reporting requirements only include applicants for credit and exclude extensions or renewals of existing credit accounts. The rule would apply only to financial institutions that originate more than twenty-five small business transactions in each of the two preceding years. The definition of “small business” excludes businesses with gross annual revenue of $5 million or more. The rule contains a lengthy provision that details the requirements for data formatting and itemization, augmented by lengthy Official Interpretations.

The proposed rule also creates a “firewall” to prohibit unauthorized access to the collected data. The data is to be reported to the CFPB by June 1 of the year following its collection. The CFPB will make the data publicly available subject to deletions for privacy reasons, and it may do so in aggregate form. Financial institutions would be required to keep the data for at least three years after deleting personally identifiable data. The enforcement provisions of the proposed rule establish a bona fide error rule under which errors that are “unintentional and occurred despite the maintenance of procedures reasonably adapted to avoid such an error” do not violate Regulation B. Certain safe harbors are created for incorrect data entry under certain specified circumstances.