Fair Lending Developments: Back to the First Step?

Introduction

During the past year, the lower courts continued to address the issues created by the U.S. Supreme Court’s decisions that limit damage claims allegedly arising from racial and ethnic discrimination to the first step in the causal chain. The municipal government plaintiffs in two cases stumbled over the first step when the courts found that their causal chains were too long. Fair lending cases filed by non-governmental organizations were more successful, resulting in large monetary recoveries. Several federal enforcement actions were filed for redlining and other discriminatory acts that also resulted in large settlements and civil money penalties. The Consumer Financial Protection Bureau (“CFPB”) also continued the process for promulgating a rule that would extend protections against discrimination to small business borrowers.

Municipal Fair Lending Litigation

The cases filed by city and county governments for the indirect damages that they allegedly suffered stemming from mortgage lending discrimination in their communities have been chronicled in the Annual Survey for several years. This includes reports on two U.S. Supreme Court cases. In Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc., the Court dealt with whether the disparate impact claims that are typically filed by local governments are actionable under the Fair Housing Act (“FHA”). In Bank of America Corp. v. City of Miami, the Court dealt with the issue of under what circumstances the governments have Article III standing to sue for such claims.

The discussion of the proximate causation issue in the City of Miami decision has had a profound effect on municipal fair lending cases. It took the Eleventh Circuit two years to issue its remand opinion to flesh out what was required to plead and prove a sufficiently direct causal connection between alleged discrimination by mortgage lenders and a municipal government’s claimed injuries. Then, when the defendant banks filed petitions for certiorari to bring matters back to the Supreme Court for further review, Miami voluntarily dismissed its complaints in the district court and filed suggestions of mootness in the Supreme Court, bringing years of litigation to an abrupt end. This was followed by an en banc decision from the Ninth Circuit in City of Oakland v. Wells Fargo & Co. holding that all of Oakland’s claims went beyond the first step of causation, the limit set by the Supreme Court in City of Miami, and therefore that none of the claims could be sustained. Two other long-pending cases in the Ninth and Eleventh Circuits were also brought to an end by a stipulation to dismiss and a voluntary dismissal.

This trend continued during the past year. In County of Cook v. Bank of America Corp., the court granted summary judgment dismissing all claims against the defendants after eight years of litigation that involved substantial motion practice and successive amendments to the complaint. The county’s final theory was that the defendants pursued “an equity-stripping scheme and discriminatory servicing and foreclosure practices” that caused “skyrocketing foreclosure rates” in the county from 2004 to 2008. The court found that the county had produced no evidence to support its claim that the defendants, who had competed with each other for most of that period before Bank of America acquired the Countrywide business, “engaged in a coordinated scheme to provoke defaults and foreclosures by minority borrowers by locking them into loans they could not afford,” which the county’s expert conceded made no economic sense. There accordingly was no causal link between the alleged equity skimming and injury to the county, which was sufficient by itself to grant summary judgment.

The Cook County court further found that there was no evidence to support the county’s claim of disparate treatment. For example, the court observed that the defendants’ “data mining” to identify minority populations for marketing purposes was not an intentional FHA violation, positing that a failure to market to minority borrowers while using that technique to market to white borrowers could constitute an FHA violation. Other evidence concerning statistical disparities in issuing high-interest loans, financial incentives to loan originators, and underwriting practices also fell short. The opinions of the county’s principal expert also failed to establish that borrowers’ race and ethnicity played any role in servicing and loan modification decisions.

On the county’s disparate impact claims, the Cook County court found that the methodology of the county’s principal expert failed the Daubert test of reliability and was therefore inadmissible. It was found to be “untested and unheard-of by others in the field” as well as “substantively unsound” for a variety of reasons. The opinions of the county’s statistical expert also failed the Daubert test because of the failure to identify anyone in the field that used or endorsed the expert’s unique “aggregated methodology” that allowed him to consider that the defendants “discriminated in the origination of loans that they did not originate or in the foreclosure of loans they did not foreclose.”

The county’s damages evidence also failed to present a triable issue of fact. The Cook County court had previously narrowed the city’s damage claims to its increased out-of-pocket expenses for the alleged surge in processing discriminatory foreclosures and had “expressed skepticism that these losses were worth the cost of pursuing the County’s far-reaching claims.” The county’s own former chief financial officer, testifying as a defense expert, stated that there were no such increased expenses that could be causally connected to the claimed foreclosure increase and there was no evidence to rebut this.

A partial summary judgment was entered in favor of the same defendants on statute of limitations grounds in Cobb County v. Bank of America Corp., a case in which the three plaintiff counties made much the same claims as Cook County did. The defendants requested that the court apply the FHA’s two-year limitations statute to any claims that arose more than two years prior to the filing of the case in November 2015. The court first rejected their argument that the decision in DeKalb County v. HSBC North American Holdings, Inc., a case filed by the same three counties, should have a collateral estoppel effect barring the plaintiffs’ claims on grounds of untimeliness because “the law at the time was unsettled” and other factors.

The Cobb County court then addressed the continuing violation issue, noting its prior ruling that the limitations period for alleged violations that occurred prior to November 2013 “may be considered timely only under the continuing-violation doctrine” as a counter to the defendants’ statute of limitations affirmative defense. It held that the doctrine is limited “to situations in which a reasonably prudent plaintiff would have been unable to determine that a violation had occurred.” After considering the evidence of what the counties knew and when they knew it in light of much prior history, including “settlement overtures” between one of the counties’ attorneys and the defendants in 2011 and a large nationwide settlement between the defendants and the U.S. Department of Justice in 2011, the court found that a reasonable jury could nevertheless find “that the Counties themselves did not have actual knowledge of their claims against Defendants before January 3, 2014.”

However, the court further found that there was “copious circumstantial evidence” that the attorney, whose knowledge was imputed to them, had “actual or constructive knowledge of the Counties’ claims prior to the limitations period.” As a result, the Cobb County court held that “this is one of those rare cases where no reasonable jury could find in the plaintiffs’ favor on the statute-of-limitations issue,” so that the defendants were entitled to summary judgment.

The Cobb County case was based on a database of 67,387 mortgage loans in the three counties “originated, funded, purchased or otherwise acquired” by the defendants between 2000 and 2013. The partial summary judgment ruling leaves only a tiny one-and-a-half month slice of those loans within the limitations period, so it is likely that the case will ultimately reach an unfavorable result for the plaintiff counties, given that all of the issues decided by the Cook County court remain to be addressed.

Other Litigation

Two cases filed by the National Fair Housing Alliance (“NFHA”) that were discussed in the previous two Annual Surveys were settled during the past year. The NFHA’s complaint against Redfin Corporation, a nationwide real estate brokerage firm, resulted in a settlement that provided $4 million in monetary relief to the plaintiff organizations and significant changes to Redfin’s business operations. Redfin agreed to eliminate the minimum home listing prices that allegedly caused redlining for a period of five years. It agreed to set up a threshold price monitoring system for referrals to its employee agents to ensure that the system does not discriminate and to take corrective action as needed. It also agreed to restrictions on creating new service regions and to conduct outreach for new agents to increase diversity. Changes to Redfin’s advertising plan to promote racial diversity were also required.

The NFHA’s complaint against the Federal National Mortgage Association (“Fannie Mae”) for alleged discrimination in maintaining foreclosed properties also resulted in a substantial settlement. Fannie Mae agreed to pay the twenty-one plaintiff organizations $53 million, $35.4 million of which would be used in communities of color to address their needs, including home ownership, access to credit, and property rehabilitation, to be distributed in the organizations’ discretion.

Apparently in recognition of the Supreme Court’s “first step” requirement for a causal connection, several class action cases that alleged discrimination by mortgage lenders were filed during the past year on behalf of individual plaintiffs rather than by municipal governments or community organizations. For example, the complaint in Ebo v. Wells Fargo Bank, N.A. alleged that the mortgage applications of a class of Black plaintiffs were denied, not completed, or granted on an unfavorable basis as part of “a larger pattern and practice of racial discrimination against Black Americans.” After being dismissed and refiled in the Northern District of California, the Ebo case was deemed related to three other class action cases pending there. A similar class action complaint was filed in the Northern District of Illinois against Wintrust Financial Corporation and one of its banks.

A provision of Regulation B, the implementing regulation for the Equal Credit Opportunity Act (“ECOA”), was successfully challenged in Fralish v. Bank of America, N.A. The plaintiff filed suit under the ECOA alleging that the defendant bank violated the act when it closed his credit card account without providing him with an adverse action notice as the ECOA requires. The bank moved to dismiss on the ground that the plaintiff lacked standing to sue because he was not an “applicant” for credit “within the plain meaning of the statute.” In response, the plaintiff argued that Regulation B, which was entitled to Chevron deference, defined “applicant” as “any person who has requested or received an extension of credit from a creditor,” a definition that would include him as the holder of a credit card.

After remarking that a regulatory definition is entitled to Chevron deference “only if the statute is ambiguous or silent on the issue presented” and the regulation “is based on a permissible construction of the statute,” the Fralish court reviewed the case law on the question. It concluded that “[t]he vast majority of courts that have addressed the issue have found that the statutory definition of ‘applicant’ is not ambiguous” and that mere accountholders like the plaintiff who were not applying for an extension, renewal, or continuation of existing credit were not “applicants” within the meaning of the ECOA. The plaintiff therefore lacked standing to sue despite the language of the definition in Regulation B.

Governmental Fair Lending Actions

In Bureau of Consumer Financial Protection v. Townstone Financial, Inc., another case that was discussed in a previous Annual Survey, the defendants filed a motion to dismiss the CFPB’s amended complaint that challenged the “discouragement” provision of Regulation B that prohibited actions that discouraged potential applicants for credit from making applications and raised constitutional issues. While the motion was pending before the district judge as discovery proceeded, the defendants pursued settlement negotiations and even notified the magistrate judge supervising discovery that a settlement in principle had been reached. However, no settlement was reached and discovery resumed in advance of a 2023 trial date. The magistrate judge remarked that “now that settlement is not in the offing, the parties have opted for the litigation train, and it is moving, and it will pick up speed.” No decision on the motion to dismiss had been issued by the district judge as of this writing.

The U.S. Department of Justice (“DOJ”) settled an FHA claim involving Meta Platforms, Inc., formerly known as Facebook, on a referral by the U.S. Department of Housing and Urban Development (“HUD”). In 2018, HUD initiated an administrative complaint against Meta based on targeting options and delivery processes for housing advertisements. It issued a charge of discrimination in 2019, which Meta elected to have decided in federal district court. Pursuant to a tolling agreement, a settlement was reached and filed in court in 2022. The DOJ’s complaint alleged that Meta’s housing advertising system discriminated against Facebook users based on their race, color, religion, sex, disability, familial status, and national origin, in violation of the FHA. The complaint alleged, among other things, that Meta uses algorithms in determining which Facebook users receive housing ads and that those algorithms rely, in part, on characteristics protected under the FHA.

Under the settlement, Meta will stop using an advertising tool for housing ads (known as the “Special Ad Audience” tool) and will develop a new system to address racial and other disparities caused by its use of personalization algorithms in its ad delivery system for housing ads. Under the terms of the settlement, Meta will not provide any ad targeting options for housing advertisers that directly describe or relate to FHA-protected characteristics or that are “semantically or conceptually related to” persons in an FHA-protected class. The settlement also requires Meta to pay a civil penalty of $115,054.

The CFPB and the DOJ sued Trident Mortgage Company under the ECOA and the FHA for discrimination against minority mortgage applicants on the basis of race and national origin. The enforcement action arose from a referral to the DOJ by the CFPB in 2020. The agencies alleged that Trident engaged in discrimination against applicants and prospective applicants from at least 2015 through 2019 by redlining majority-minority neighborhoods in the Philadelphia Metropolitan Statistical Area (“MSA”), an area from which Trident received about 80 percent of its application volume. The challenged practices included locating and maintaining nearly all its offices and loan officers in realtors’ offices in majority-minority areas, as well as concentrating its outreach, advertising, and marketing in majority-white neighborhoods and avoiding marketing in majority-minority areas. The agencies alleged that Trident’s conduct and practices were intended to deny, and had the effect of denying, equal access to home loans for those residing in, or seeking credit for properties located in, majority-minority neighborhoods. During this period, the agencies alleged that Trident did not take actions that would compensate for its lack of offices in majority-minority areas, such as incentivizing its almost exclusively white loan officers to lend in majority-minority areas. In addition, it was alleged that Trident’s marketing practices, including the use of direct mail to majority-white areas and using images exclusively of white-appearing models or loan officers, discouraged applicants or prospective applicants in majority-minority neighborhoods from seeking credit from Trident.

The complaint further alleged that Trident loan officers sent and received emails via their Trident accounts containing racial slurs and racist content, including references to properties in majority-minority areas as being in the “ghetto.” Trident lending staff circulated a photo via email showing Trident’s Senior Vice President and General Sales Manager, whose responsibilities included hiring and overseeing loan officers, posing with others in front of a Confederate flag, but Trident took no disciplinary action about it.

The agencies alleged that Home Mortgage Disclosure Act data confirmed that Trident avoided serving majority-minority neighborhoods in the Philadelphia MSA and that it underperformed its peer lenders both in receiving applications and in making loans. Furthermore, most of the applicants and borrowers from majority-minority census tracts were white. Even when Trident received reports from third-party vendors consistently informing it that its performance relative to the overall population and its peers created fair lending risk, the company took no meaningful corrective action.

Under the consent order, Trident agreed to establish an $18.4 million loan subsidy program. It also agreed to establish a credit needs assessment program, training, advertising and outreach; to set up a consumer financial education program; to establish at least four new branch offices in the Philadelphia MSA in majority-minority neighborhoods; to hire a full-time Manager of Community Lending; and to assign at least four mortgage loan officers to solicit applications primarily from majority-minority neighborhoods in the Philadelphia MSA. Trident’s total monetary investment under the consent order was over $20 million, prompting the DOJ to announce that this was the second largest redlining case in its history. Trident also paid a $4 million dollar civil penalty to the CFPB. Because Trident no longer operates a lending business, it was required to contract with another lender to provide loan subsidies and services to the redlined communities. The states of Delaware, New Jersey, and Pennsylvania entered into concurrent assurances of voluntary compliance with Trident.

Trustmark National Bank resolved a complaint alleging redlining against Black and Hispanic consumers brought by the DOJ and the CFPB, on a referral by the Comptroller of the Currency. The agencies alleged that, from 2014 through 2018, Trustmark avoided providing home loans and other mortgage services and discouraged applications for credit for properties located in majority-Black and Hispanic neighborhoods in the Memphis MSA, in violation of the ECOA and the FHA. Trustmark’s redlining practices included locating and maintaining nearly all its branch locations and mortgage loan officers in majority-white neighborhoods. The agencies also claimed that the bank had inadequate fair lending policies, did not conduct a fair lending review, and did not incorporate fair lending considerations in its branching services during the relevant period. Like Trident, Trustmark allegedly underperformed its peer lenders both in generating applications and in originating mortgages in majority-minority areas.

The consent order contained standard provisions, such as injunctions, a required compliance plan, training, a community needs assessment in minority census tracts, opening a new loan production office in a minority area, and establishing a $3.85 million loan subsidy fund to increase real estate lending in minority census tracts in the Memphis MSA. The order also required Trustmark to establish a community development partnership program, increase advertising and outreach in minority communities in Memphis, and develop a consumer financial education and credit counseling program. Trustmark was required to pay a $5 million civil penalty to the CFPB, which remitted $4 million of that amount to the OCC.

The DOJ filed a statement of interest in Austin v. Miller, a private suit in which a Black couple alleged violations of the FHA against an appraiser, claiming that their low appraisal value for their home was based on their race. The DOJ argued that the statutory text of the FHA and case law made clear that the FHA applies to appraisers and appraisals. It also argued that the defendants misstated the plaintiffs’ burden to survive dismissal because they only needed to plausibly allege that they have been subject to an act that is unlawful under the FHA. No decision on the defendants’ motion to dismiss had been issued as of this writing.

The CFPB proposed its long-awaited rule that would require creditors to collect and report demographic information about their small business credit applicants on September 1, 2021. The rule was mandated by section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended the ECOA. The ninety-day comment period ended on January 6, 2022, and generated over 2,100 comments. The proposed rule would require covered financial institutions to collect and report over twenty data points regarding applications from small businesses for covered credit transactions. These data include: information generated or supplied by the financial institution; information provided by the applicant, the application, or third parties, such as credit reporting agencies; and demographic information about the applicant’s principal owners or ownership status. As of this writing, the CFPB predicts that it will publish a final rule on March 2023.

On March 16, 2022, the CFPB Director announced changes to its examination manual and supervisory operations to protect consumers from discrimination, especially in situations that federal law does not expressly address, such as deposit accounts and other non-credit transactions. The revised examination manual notes that discrimination may meet the criteria for “unfairness” by causing substantial harm to consumers that they cannot reasonably avoid, where that harm is not outweighed by countervailing benefits to consumers or competition, including conduct that is not intentional.

Four national industry associations submitted a white paper to the CFPB in June 2022 calling on the agency to rescind the revised examination manual. This was followed by a suit challenging the CFPB’s revised examination manual that was filed by three of the associations, the Chamber of Commerce of the United States of America, the American Bankers Association, the Consumer Bankers Association, and three Texas trade associations in September 2022. The plaintiffs sought equitable relief, claiming that the CFPB’s revisions relating to unfair and deceptive acts and practices (“UDAAP”) violate its statutory authority and the Administrative Procedures Act (“APA”) in three main ways.

First, the plaintiffs alleged that the CFPB was exceeding its statutory authority by attempting to regulate discrimination under its UDAAP authority. They claimed that Congress declined to give the CFPB authority to enforce anti-discrimination principles except in specified circumstances, which do not include the use of UDAAP powers. Second, the complaint alleged that the CFPB’s action is arbitrary and capricious. The plaintiffs asserted that the Dodd-Frank Act, the CFPB’s enabling act, is not an anti-discrimination statute and objected to the CFPB’s belief that it can use its enabling statute to regulate discrimination under a disparate impact theory. Third, the plaintiffs alleged that the revised examination manual is a legislative rule and violates the APA’s procedural requirements because it did not go through notice-and-comment rulemaking. In addition, the complaint challenged the CFPB’s funding structure as a violation of the Appropriations Clause. The complaint asked for injunctions setting aside the examination manual’s revisions, preventing the CFPB from pursuing any examinations or enforcement actions based on the interpretation of its UDAAP authority, and ordering the agency to quit accepting funds in violation of the Appropriations Clause.