By Paul Hancock & Olivia Kelman
The Obama administration prioritized an aggressive, and at times novel, approach to enforcement of the federal fair lending laws—an approach that relied heavily, and at times solely, on statistics to establish liability for lending discrimination. Nowhere was this emphasis more prevalent than in matters advanced under a disparate-impact legal theory and in the redlining context. Mortgage industry participants have long recognized the importance of developing and implementing robust programs to monitor fair lending, but compliance officials frequently found their institutions already behind the eight-ball with the prior administration’s application of new theories in supervisory exchanges. What changes to fair lending enforcement would accompany the Trump administration’s transition into office?
April 30, 2017, marks the 100th day of the Trump administration and provides at least an initial benchmark for consideration of developments in fair lending enforcement. Significantly, however, the new administration has not yet filled critical positions with considerable responsibility for establishing enforcement policy, including the Department of Justice (DOJ) Assistant Attorney General for Civil Rights, Department of Housing and Urban Development (HUD) Assistant Secretary for Fair Housing and Equal Opportunity, and HUD General Counsel. Given these notable vacancies in key political positions, it is difficult to estimate how the approach to fair lending might shift, but initial signals have presented a mixed view.
In contrast to the flurry of fair lending lawsuits at the tail-end of the Obama administration, the DOJ under the new administration has not yet initiated a fair lending case. While many observers expected the new administration to retreat from HUD’s rule for establishing disparate-impact liability under the Fair Housing Act, initial court filings seem to call into question whether that will occur. With respect to claims of “redlining,” another high-priority area for fair lending compliance, the new administration is expected to announce its position in a litigation filed by the prior administration only days before the transition.
A close look at the Trump administration’s approach to disparate impact and redlining over the past 100 days provides some clues regarding the future of fair lending enforcement, but a definitive and coherent approach awaits the appointment and confirmation of many key officials. In the meantime, businesses should continue to direct their compliance programs pursuant to previously-established government enforcement policies to reduce legal risk.
The HUD Disparate-Impact Rule
Disparate-impact claims challenge policies that, while facially neutral, are nonetheless alleged to have a discriminatory effect on members of statutorily defined groups. Recent developments in two longstanding legal challenges to HUD and its Fair Housing Act disparate-impact rule raise significant questions about the new administration’s approach to disparate impact and position on the rule—issues with broad fair lending implications for mortgage lending industry participants.
HUD finalized the rule under the prior administration in 2013, thereby establishing a framework for legal compliance and a three-step burden-shifting approach for proving disparate-impact liability under the Fair Housing Act. Later that year, two groups of insurance-industry trade associations separately filed lawsuits challenging the application of the HUD rule in federal courts. Given the far-reaching effect of the HUD rule on the mortgage lending industry and affected sectors of the national economy, several major banking and lending trade associations participated in both lawsuits as amici curiae.
The U.S. Supreme Court’s intervening decision in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project not only shifted the trajectory of the HUD rule legal challenges, but also the Fair Housing Act compliance paradigm. While holding the Fair Housing Act recognizes the disparate-impact legal theory, the court imposed significant limitations on disparate-impact claims, including that such claims cannot be based on a statistical disparity alone. Following Inclusive Communities, significant portions of the HUD rule stand in tension with the law of the land announced by the court.
The challenge in the District Court for the District of Columbia was refocused to assert that HUD exceeded its authority under the Administrative Procedure Act by issuing a rule in conflict with binding Supreme Court precedent. Prior to the election, AIA and HUD filed cross motions for summary judgment, with DOJ staunchly defending all aspects of the rule. The highly-anticipated oral argument was scheduled for only several days after the confirmation of Jeff Sessions as the Attorney General for the Trump administration, with litigants and industry participants anxiously awaiting a public announcement of the new government’s position on the vital fair lending issue. But immediately before the transition DOJ requested a continuance of oral argument “to permit new leadership at the Department of Housing and Urban Development an opportunity to become familiar with the issues” and argument has been postponed until May 16, 2017. This suggests that the new administration may be rethinking the approach to the rule.
While the AIA case presently remains in a holding pattern, the new administration may have tipped its hand regarding a contrary position on the HUD rule in the case brought by PCIAA in the District Court for the Northern District of Illinois. In March 2017 PCIAA sought permission of the district court to amend its complaint to assert that the HUD rule fails to comport with the Inclusive Communities safeguards for disparate-impact claims. On April 21, 2017, HUD and DOJ made clear that—at least in connection with this particular matter—the new administration is not backing away from the rule, and instead continue to maintain that “nothing in Inclusive Communities casts any doubt on the validity of the Rule.”
Mortgage industry officials responsible for Fair Housing Act compliance should not read too much into these signals from the new administration. A coherent approach to disparate impact may not be forthcoming until key positions responsible for policy development begin to be filled. In the interim, Fair lending compliance programs monitoring for possible disparate impacts on protected groups should continue to be implemented pursuant to the HUD rule as these challenges play out in court.
Examinations, investigations, and lawsuits concerning “redlining” of minority communities represented a major fair lending focus of the DOJ and federal financial institutions regulators during the prior administration. While the new administration has not yet provided definitive public statements regarding an approach to redlining claims, the question has been squarely teed up for an answer in the near future and regulatory agencies have continued to identify redlining as an area of priority.
Historically, redlining referred to the practice of drawing red lines on maps to indicate neighborhoods in which companies would refuse to do business because of the racial or ethnic makeups of those areas. Under the prior administration, the theory was applied much more broadly to challenge banks simply because they did not distribute loans between minority and nonminority neighborhoods in the same proportion as the aggregate of all other lenders. As late as mid-January 2017, the prior administration filed a redlining lawsuit against an FDIC-regulated community bank operating in Minnesota and Wisconsin. Prior targets of DOJ redlining suits have readily agreed to consent orders settling the claims, but the liability of this target appears posed to play out in court. With this last challenge having been launched only just before the new administration took power, the DOJ has not yet been required to defend the redlining allegations (although the complaint has not been dismissed or otherwise modified). The court’s litigation schedule will soon bring the case to a head, with the litigation scheduling demanding that the new administration take a position in publicly-filed documents no later than June 2017.
Importantly, HUD and the DOJ represent only part of the fair lending enforcement landscape as independent regulatory agencies have authority to advance their own interpretations. For instance, the Consumer Financial Protection Bureau (CFPB) has already reiterated that redlining remains an important fair lending focus. In its April 2017 Fair Lending Report to Congress, the CFPB affirmed that “mortgage lending continues to be a key priority” and that the agency will continue to “focus in particular on redlining risk, evaluating whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.”
To ensure proper compliance monitoring in this environment, lenders should be aware of a significant shift in the approach taken by some regulators toward evaluating redlining claims. The issue concerns the appropriate geographic area for assessing redlining risk and measuring an institution’s performance in serving minority communities. Traditionally, such analyses designed to monitor minority-area lending activity were performed within a bank’s delineated CRA assessment area, provided that the boundaries met the legal requirements of Regulation BB and were determined not to reflect illegal discrimination. While analyzing performance in minority communities within the CRA assessment area remains essential to an evaluation of redlining risk, toward the end of the prior administration, federal agencies emphasized conducting redlining analyses within a geography termed the reasonably expected market area (REMA). An institution’s REMA is determined by its regulator, and may represent a geographic area that is significantly broader than the institution’s CRA assessment area. Particularly for community-based banks and lenders, a focus on a REMA can yield differing statistical results regarding minority-area lending performance as compared with other institutions operating in the identified REMA.
In sum, the new administration’s approach to redlining remains unclear, but the issue continues to require careful monitoring—at institutions both large and small—to ensure proper fair lending compliance. Compliance officials should be aware of the REMA-based approach, and may consider whether a REMA-based analysis should be incorporated into existing compliance programs that monitor redlining risk. Actions taken after the new administration appoints and confirms new officials to fill critical political positions will provide more sound insight regarding the overall approach to fair lending enforcement.