Mortgage Loans

1/09/2014

NMLS Mortgage Laws

NMLS Testing

Mortgage Banker Mortgage Broker Laws and Regulations

Corrective action is required “…when the self-test shows that it is more likely than not that a violation occurred, even though no violation has been formally adjudicated” (12 C.F.R. §1002.15(c)(1)). In order to secure the privilege that comes with self-testing and corrective action, the corrective action must be “appropriate.”

Regulation B provides guidelines for determining whether a creditor’s response to potential ECOA violations is appropriate. First, the corrective action must be “…reasonably likely to remedy the cause and effect of a likely violation…” (12 C.F.R. §1002.15(c)(2)).

regulations state that corrective action is reasonably likely to remedy the cause and effect of a violation if it:

Identifies “…the policies and practices that are the likely cause of the violation…” and
Assesses the “…extent and scope of any violation…”

(12 C.F.R. §1002.15(c)(2))

If self-testing reveals evidence of an actual or potential compliance failure, the creditor must determine whether it is necessary to provide remedial relief. If the self-test involved the use of testers, and one of the testers received discriminatory treatment, the creditor is not required to provide remedial relief to the tester (12 C.F.R. §1002.15(c)(3)(i)).

However, if the self-test shows that a credit applicant’s rights “…were more likely than not violated,” then the creditor is required to provide remedial relief to that applicant, unless the statute of limitations on an action available to the applicant has expired (12 C.F.R. §1002.15(c)(3)(ii-iii)).

In 2009, the DOJ, the Department of Housing and Urban Development (HUD), and the federal banking regulatory agencies wrote a Statement of Policy to address concerns regarding evidence of discriminatory treatment experienced by prospective homebuyers and borrowers. This Statement includes answers to questions asked by financial institutions, including answers to inquiries regarding what a lender should do if self-testing shows evidence that lending discrimination exists.

Statement included some very useful and practical suggestions, which include:

· Determining whether the discriminatory act or practice was the result of faulty lending policies, poor implementation of lending policies, or an isolated incident

· Correcting policies or practices that may have led to a discriminatory act or practice

· Disciplining and training employees involved

· Considering the use of a new marketing strategy that may reach out to underserved minorities in the lender’s market

· Improving oversight and internal auditing programs [1]

[1] Department of Housing and Urban Development and Department of Justice, et al. “Policy Statement on Discrimination in Lending.” 3 Dec. 2009. Question 6. http://www.fdic.gov/regulations/laws/rules/5000-3860.html

action, noting that while it does not “expunge or extinguish legal liability for violations of the law,” proactive measures that include self-testing and corrective action “…will be considered as a substantial mitigating factor by the primary regulatory agencies when contemplating possible enforcement actions.” [1] The Statement also notes that self-testing and self-correction are regarded as a “substantial mitigating factor” when the DOJ and HUD determine whether to seek penalties in an action for ECOA violations.

Regulation B includes a recordkeeping requirement that applies specifically to records generated during a self-test. This provision requires creditors to “retain all written or recorded information about the self-test” for a period of 25 months (12 C.F.R. §1002.12(b)(6)). A creditor must retain records longer than 25 months if it has received notice that it is under investigation for a potential violation of ECOA or if it has been served with a summons for a civil action. If the creditor is subject to an investigation or a party to a lawsuit, it must keep the related records until the action with a regulator or court is resolved.

if the creditor has taken the corrective action necessary to protect these records as privileged and has not lost the privilege, neither government agencies nor credit applicants can use this information in administrative or judicial proceedings. There is a limited exception if a violation of ECOA or Regulation B is admitted by the creditor or proven. After admission or proof of a violation has occurred, information from a self-test may be used “to determine a penalty or remedy” (12 C.F.R. §1002.15(d)(3)).

The record retention requirement under ECOA is:

	24 months
	25 months
	12 months
	36 months

Creditors must be careful not to take actions that may result in losing the right to protect information generated during a self-test. A loss of privilege will occur if a creditor:

Voluntarily discloses information from a self-test to a government agency, credit applicant, or to the public
Discloses information from a self-test as a defense to charges that the creditor has violated ECOA or Regulation B
Fails to produce information from a self-test or fails to comply with recordkeeping requirements and cannot, therefore, produce the information in order to determine if the information is privileged

(12 C.F.R. §1002.15(d)(2))

but which of the following actions by a creditor may lead to the loss of the right to protect information from a self-test as privileged?

	Presenting information from a self-test to defend charges of ECOA violations
	Voluntarily sharing the information with the public
	Voluntarily sharing the information with a government agency
	Publishing the information in a report that is shared only with the creditor’s Board of Directors in a closed meeting

may preempt or override state laws against credit discrimination if the state laws are inconsistent with the federal laws. The most important information to remember about state laws that are inconsistent with federal laws is:

A state law is not inconsistent if it is more protective of credit applicants than the federal law
A state law is inconsistent with the federal law if it:

Requires or permits a practice prohibited by ECOA
“Prohibits the individual extension of consumer credit to both parties to a marriage if each spouse individually and voluntarily applies for such credit”
Prohibits the collection of data necessary for complying with ECOA
Prohibits asking about age “…in an empirically derived, demonstrably and statistically sound credit scoring system to determine a pertinent element of creditworthiness, or to favor an elderly applicant”
Prohibits inquiries necessary to extend credit through a special purpose program

States may apply for exemption from the requirements of ECOA “for any class of credit transactions within the state.” This exemption may be granted when:

The state law requirements are “substantially similar” to those in ECOA and Regulation B or provide greater protection than that provided under federal law, and
There is sufficient provision for state enforcement

(12 C.F.R. §1002.11(e))

Although exemptions may be granted for some provisions of ECOA and Regulation B, they cannot extend to the civil liability and enforcement provisions, meaning that creditors will continue to be subject to federal enforcement and liability under ECOA, even if state law requirements apply to their practices.

Max and his wife have recently divorced. Max’s ex-wife earns a significantly greater income than Max earns, and the home that they shared was purchased based on her creditworthiness. Max is living in the home until he succeeds in selling it. In the meantime, he is hoping to restart his life by starting his own business repairing personal computers. In order to start his business endeavor, Max goes to the bank to withdraw some funds from a home equity line of credit that he and his ex-wife opened while they were married. He learns that although the account was never used, the credit line has been reduced substantially. The bank manager cites Max’s low credit score as a factor that contributed to the change in terms. When Max asks his lawyer if the bank can legally reduce the line of credit, he learns that:

	ECOA permits a reduction in credit when the credit plan was based on the income of the spouse, and the creditor has information indicating that the account holder’s income may not support the credit available
	Creditors are prohibited from changing the terms of an open-end credit plan due to a change in marital status of a co-account holder
	Creditors are allowed to terminate or change the terms of an open-end credit plan when co-account holders separate or divorce
	The creditor could not legally change the terms of the credit line as long as Max was the lawful owner of the home

Violations of ECOA can result in actual and punitive damages. Liability for punitive damages is limited to:

Non-governmental entities
$10,000 in individual actions
$500,000 or 1% of the creditor’s net worth in class actions

(12 C.F.R. §1002.16(b))

Punitive damages are awards of money to a plaintiff above and beyond the actual amount lost as a result of discrimination. Courts do not award punitive damages capriciously, however, and will require the plaintiff to show intentional, malicious or willful conduct on the part of the defendant.

Punitive damages awards are discretionary, meaning the judge is not required to award them even after a showing of malicious conduct. However, the ECOA only requires a finding of intentional conduct (as opposed to accidental or negligent conduct) for an award of punitive damages to be proper. Opinions have surmised this lower standard to be an attempt by lawmakers to increase the incentive for credit compliance. Most federal and state statutes do not allow punitive damages for mere intentional conduct absent a showing of malice or wanton disregard.

Liability for punitive damages under the ECOA is limited to all of the following, except:

	$100,000 in individual actions
	1% of the creditor’s net worth in class actions
	Non-governmental entities
	$500,000 in class actions

statute of limitations for a civil action for a violation of ECOA is five years, and the five-year period is measured from the date the violation occurred (12 C.F.R. §1002.16(b)(2)). However, if the Attorney General or a governmental agency, such as the CFPB or FTC, brings an action for an ECOA violation, an applicant who has been subject to discrimination must bring his/her action no later than one year after the commencement of the Attorney General or agency action (15 U.S.C. §1691E(f)((2)).

Waiver in Litigation

As previously explained, there are a number of federal agencies responsible for enforcing the provisions of the ECOA. There are times when an agency will commence an action against a lender or creditor on behalf of a group of plaintiffs claiming discrimination. When this happens, the agency will attempt to join as many affected plaintiffs as possible in the litigation to ensure that everyone facing discrimination receives their day in court. If a plaintiff wishes to join a class action with a federal agency, the statute of limitations is extended an additional year. For example, if a plaintiff is discriminated against by Bank A in June 2009, the Attorney General has until June 2011 to commence a lawsuit against Bank A. Thereafter, the plaintiff has until June 2012 to join in the lawsuit, giving him/her an additional year to bring a claim.

The statute of limitations for violations of ECOA is:

	Three years from the date of occurrence
	Four years from the date of occurrence
	One year from the date of occurrence
	Five years from the date of occurrence

Tolling is a concept that refers to a “stopping of the clock” with regard to the ECOA’s statute of limitations. If the statute is “tolled,” this means that the tolling period does not count toward the two- or three-year statutory limit. Certain situations affecting the plaintiff’s ability to file a claim will toll the statute. Also, circumstances out of the plaintiff’s control may work to toll the statute.

Equitable tolling refers to a situation in which the plaintiff was unknowingly ignorant to the filing deadline due to trickery or deception on the part of the adversary. In these cases, the defendant leads the plaintiff to believe that the statutory period has passed and it is too late to file. The courts look favorably upon plaintiffs in this situation and will usually grant an extension, provided the evidence supports a finding that the plaintiff made attempts to preserve his/her rights and was not willfully ignorant to filing deadlines.

Under general principles of law, a statute of limitations is also tolled during periods of incapacity

This is a concept that refers to “stopping the clock” with regard to ECOA’s statute of limitations.

	Tolling
	Liability
	Waiver in litigation
	Adverse action

Another issue surrounding the ECOA involves the use of binding arbitration clauses found within loan agreements between lenders and borrowers. Under typical circumstances, a party to a loan agreement is free to file a potential claim in state or federal courts for relief and possible money damages. This is known as litigation and is not uncommon in the lending industry. What is becoming common practice by lending institutions is the contractual requirement that all parties with a claim against the lender must submit to binding arbitration in front of a non-judicial arbiter.

These arbitration provisions are often buried in the loan documents, and many borrowers unknowingly agree to waive their right to resolve disputes before a state or federal judge. The problem with arbitration is that the parties are responsible for paying exorbitant costs to a private arbiter, and corporations will purposely choose an arbitration site that requires extensive travel for the borrower plaintiff. These provisions are calculated to dissuade borrowers from pursuing relief from lending institutions despite their rights under the ECOA.

This practice has been challenged in a number of cases, and plaintiffs have relied upon the prohibition against mandatory arbitration provisions found under the Truth-in-Lending Act (TILA) as ammunition to invalidate binding arbitration agreements. In one case, the plaintiff signed a loan agreement for a small personal loan. Attached to the loan agreement was a document titled “ARBITRATION AGREEMENT,” which the plaintiff signed and effectively waived his right to resolve disputes in a judicial arena. The agreement specifically stated that “it applies to ‘all claims and disputes arising out of, in connection with, or relating to’ ... any claim or dispute based on a federal or state statute.”[1]

[1] Bowen v. First Family Financial Services, Inc., 233 F.3d 1331 (11^th Cir. 2000).

When a dispute arose, the plaintiff drew a connection between § 1691(a)(3) of the ECOA (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction….because the applicant has in good faith exercised any right under this chapter”) and language in the TILA purporting to protect a consumer’s right to litigate a claim before a judge, as opposed to submitting to mandatory arbitration. The court disagreed with the plaintiff’s assertions to conclude that, by studying Congress’s intent in enacting TILA, creditors are not precluded from requiring consumers to submit to arbitration, and it is lawful under the ECOA to require a waiver of judicial remedies.

Another case examined the high costs of arbitration and the corporate incentive to use arbitration agreements as a way to dissuade consumers from raising a dispute. In this case, the U.S. Supreme Court, split 5-4, reasoned that a binding arbitration agreement between a consumer and his/her lender was not unenforceable because it did not disclose the costs associated with submitting to arbitration. While it may be true that the costs of arbitration, which are much higher than the filing fees in a state or federal courthouse, may preclude a consumer from seeking redress, that fact alone does not invalidate binding arbitration clauses.

Despite the Supreme Court’s ruling that a lack of information about fees and costs associated with arbitration will not render a contract unenforceable, state legislatures are free to require this disclosure if public policy supports such a law. States are not permitted to ban binding arbitration clauses all together, but can support consumers by limiting these clauses and ensuring consumers are fully informed that they are waiving their right to judicial review. [1]

[1] Green Tree Financial Corp. – ALA v. Randolph, 531 U.S. 79 (2000).

history of the inception of the Fair Housing Act is long and sordid, beginning much before its passage on April 11, 1968. More than 100 years before the enactment of the Fair Housing Act, the Civil Rights Act of 1866 was the first federal housing law and provided that all citizens should have equal rights “without distinction of race or color, or previous condition of slavery or involuntary servitude.”[1] In 1968, the United States Supreme Court interpreted the Civil Rights Act to apply to all real estate transactions, thereby greatly expanding the legal remedies available to victims of housing discrimination.

Never before had Americans been protected from the sinister and malevolent effects of discrimination in housing and it was not until the passage of the Fair Housing Act that minority groups began to enjoy fair and equal access to safe and affordable housing.

[1] PBS. “The 1866 Civil Rights Act.” http://www.pbs.org/wgbh/amex/reconstruction/activism/ps_1866.html

purpose of the Fair Housing Act is “…to provide, within constitutional limitations, for fair housing throughout the United States” (42 U.S.C. Section 3601). Congress adopted the Fair Housing Act during the Civil Rights Movement. The Fair Housing Act is located in Title VIII of the Civil Rights Act of 1968. The Fair Housing Act was actually the first law that Congress enacted to address redlining and other issues related to fair housing and nondiscriminatory mortgage lending practices. Congressional efforts to pass the law failed in 1966 and 1967, and its ultimate passage rose from the tragic death of Dr. Martin Luther King, Jr.

protected classes, or those individuals or groups of individuals who will receive protection under the Fair Housing Act are not identical to those established under ECOA. Under the Fair Housing Act, the protected classes include:

Race or color
National origin
Religion (there is case law that supports findings that this protected class includes atheists and agnostics)
Sex
Familial status
Handicap

Any housing or lending decisions that discriminate against members of a protected class are in violation of the law.

In addition to the protected classes listed above, there have been efforts in Congress to pass a bill that would amend the Fair Housing Act to add “marital status” and “source of income” as prohibited bases for housing discrimination, and to add sexual orientation and gender identity as protected classes.

class that ECOA expressly names as a protected class and that the Fair Housing Act does not expressly name as a protected class is:

	Marital status
	National origin
	Race
	Religion

1999 case, a minority group challenged the building of a new highway bypass under the Fair Housing Act. The plaintiffs alleged that African American residents did not receive individual notice that the highway was in the works or that public meetings were being held, even though similarly-situated white residents did.

They further claimed that the Environmental Impact Statements were based on inaccurate data, ignored socioeconomic impacts, and failed to adequately compare alternative locations for the highway. Plaintiffs further contended that the highway would have a disparate adverse impact on their African American community because the highway will serve as the northern boundary to their community, closing off expansion in that direction and locking African Americans into what is allegedly the only neighborhood open to them.[1]

[1] Jersey Heights Neighborhood Assoc. v. Glendening, 174 F.3d 180 (4^th Cir. 1999).

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HUD’s new policy to protect members of the LGBT community in housing and lending transactions is:

	Reflective of a trend in over 20 states to adopt laws to end discriminatory practices against LGBT individuals
	The first such rule in the country
	A rule that HUD had to adopt to reflect amendments to the Fair Housing Act
	Only applicable to transactions involving Section 8 housing

court disagreed with the assertion that the Fair Housing Act applied to the plaintiffs and reasoned that the highway did not make housing unavailable, and the group was free to settle and live wherever they chose. In other words, the erection of the highway system did not constitute a “housing decision” for purposes of the statute. Despite the plaintiff’s assertion that the highway would disparately affect housing for racial minorities, the causal connection between the roadway and any adverse effects was too thin to warrant a finding that the plaintiffs were discriminated against in terms of their housing.

Other cases have tested the bounds of the Fair Housing Act, purporting to stretch the causal connection beyond that of renting and sale of property decisions. The Fair Housing Act and HUD’s Fair Housing regulations include exemptions that excuse compliance with the law in specific circumstances. These exemptions address the sale and rental of housing and are unlikely to be relevant to mortgage lending transactions, but as professionals who are involved in the multi-step process of helping consumers to purchase homes, the general knowledge of lenders, mortgage brokers, and loan originators should include an awareness of these exemptions. The Fair Housing Act does not apply to:

· Religious Organizations:Religious organizations are allowed to limit the sale, rental, or occupancy of housing that they own and operate for non-commercial purposes to persons of the same religion, unless membership in the religion is restricted on the basis of race, color, or national origin

· Private Clubs: Private clubs are allowed to limit access to lodging that they own and operate for non-commercial purposes to their members

(24 C.F.R. Section 100.10 (a))

Limit the applicability of reasonable local, State or Federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling (commonly found in zoning ordinances)
Prohibit conduct against a person because the person was convicted of the illegal manufacture or distribution of drugs
Limit the sale or rental of a single-family home by an owner provided:

The owner does not own or have any interest in more than three single family homes at one time
The house is sold or rented without the use of a real estate broker, agent or salesperson or the facilities of any person in the business of selling or renting dwellings. If the owner selling the house does not reside in it at the time of the sale or was not the most recent resident of the house prior to such sale, the exemption in this paragraph (c)(1) of this section applies to only one such sale in any 24-month period.

(24 C.F.R. Section 100.10 (a-c))

are circumstances in which liability cannot arise as a result of the disparate impact of a policy or practice. If the policy or practice is driven by “business necessity,” and “…there is no less discriminatory alternative, a violation of the Fair Housing Act or the ECOA will not exist.” [1] It can be very difficult to demonstrate business necessity.

Federal courts have developed a three-step analysis to determine the presence of disparate impact. First, the plaintiff must establish through the introduction of evidence “that the objected-to action[s] result in ... a disparate impact upon protected classes compared to a relevant population.” Stated another way, the first part of the analysis requires a finding that a facially-neutral policy had the effect of imposing a substantially adverse impact on members of a protected group. There is no requirement that the plaintiff must prove the defendant intended to discriminate.

[1]HUD, DOJ, and the Federal Banking Agencies. “Policy Statement on Discrimination in Lending.” 15 Apr. 1994. http://www.fdic.gov/regulations/laws/rules/5000-3860.html

part of the analysis, it is then up to the defendant to prove that its policy or conduct had a “manifest relationship to a legitimate, non-discriminatory policy objective and was necessary to the attainment of that objective.”

If the defendant is able to prove the second part of the analysis, the burden of proof shifts back to the plaintiff to prove “a viable alternative means was available to achieve the legitimate policy objective without discriminatory effects.”

Ways to meet the first prong of the analysis include evidence of a shortage of housing among minority groups, members of a protected class make up a disproportionate amount of low-income household or homeless populations, increased costs for renters that lead to low-income tenants and other evidence of burdens on minority groups.

Which of the following discriminatory lending practices is an illustration of disparate impact?

	A loan purchaser only purchases mortgages secured by free-standing homes
	A lender refuses to originate mortgage loans for Native Americans
	A lender offers unmarried and childless home loan applicants more favorable interest rates than it offers to equally creditworthy applicants who are married and have children
	A loan purchaser refuses to purchase mortgages secured by homes in neighborhoods where the residents are predominantly African American

The rules that implement the prohibitions established under the Fair Housing Act are called:

	The HUD Fair Housing Rules
	The Fair Housing Code
	Regulation Z
	Regulation B

Fair Housing Act prohibits any person or business engaged in real estate-related transactions from discriminating “…because of race, color, religion, sex, handicap, familial status, or national origin…” (42 U.S.C. Section 3605 (a)). Discrimination includes offering lending terms or conditions to a member of a protected class that are less favorable than those offered to borrowers who are not in a protected class. HUD’s rules define “real estate-related transactions” as “…the making or purchasing of loans or providing other financial assistance…” (24 C.F.R. §100.115 (a)). Therefore, the prohibition against discriminatory practices in residential real estate-related transactions clearly applies to mortgage professionals. prohibitions during the home loan application process include:

Discriminating on the basis of race, color, religion, sex, handicap, familial status, or national origin
Failing or refusing to provide information on the availability of loans and on application requirements and procedures
Providing inaccurate information or information that is different from that provided to others because of race, color, religion, sex, handicap, familial status, or national origin

(24 C.F.R. Section 100.120)

Specific prohibitions during the underwriting of a home loan include:

Using different policies, practices, or procedures in evaluating the credit worthiness of a loan applicant due to race, color, religion, sex, handicap, familial status, or national origin
Determining the type of loan that an applicant may have “…or fixing the amount, interest rate, duration or other terms for a loan…” based on race, color, religion, sex, handicap, familial status, or national origin

(24 C.F.R. Section 100.130 (b)(2))

Specific prohibitions against discrimination in the appraisal of real estate include:

Discriminating on the basis of race, color, religion, sex, handicap, familial status, or national origin when appraising residential real property
Using an appraisal of residential real property in connection with a lending transaction if the person using it “knows or reasonably should know that the appraisal improperly takes into consideration race, color, religion, sex, handicap, familial status, or national origin”

(24 C.F.R. Section 100.135 (d))

Prohibitions Against Discriminatory Servicing Practices

In February 2013, HUD added a provision to its rules that addresses loan servicing. This new provision in the regulations states that unlawful conduct under the Fair Housing Act includes servicing loans that are secured by real estate in a manner or with the use of terms and conditions “…that discriminate, because of race, color, religion, sex, handicap, familial status, or national origin” (24 C.F.R. §100.130(b)(3)).

Martin is a loan originator with a mortgage broker in Juneau. He is trying to help a Native American family secure a home equity line of credit to make improvements on their home. A staff member in his office orders an appraisal of the home, and when Martin receives it, he believes the appraisal to be too low based on his knowledge of the values in his client’s neighborhood. When he reads the signature on the appraisal, he recognizes the name of a local independent appraiser who often drinks too much and publicly states his dislike of Native Americans. Since the surname of Martin’s client’s is Lightfeather and the home is decorated with Native American art and artifacts, Martin realizes that the appraiser would have known the racial background of the homeowner. Does Martin have any legal obligations under the Fair Housing Act?

The Fair Housing Act does not apply to transactions involving home equity lines of credit and does not, therefore, raise any compliance concerns for Martin

He is prohibited from using the appraisal since he reasonably knows that the appraisal improperly takes race into account

He is only prohibited from using the appraisal if he knows by a preponderance of the evidence that the appraisal has improperly taken race into account

Martin has no obligations since he did not order the appraisal himself

Bear Brothers is an investment firm that creates private-label mortgage-backed securities from residential home loans. Bear Brothers pools and rates the risk of its securities based on loan term, interest rate, loan amount, and the racial and ethnic characteristics of the borrowers whose loans it has purchased. The investment firm’s criteria for pooling and rating its mortgage-backed securities are:

	Illegal, since ECOA prohibits investors from imposing different terms and conditions on the pooling, packaging, and marketing of mortgage loans based on characteristics such as race and color
	Legal, because criteria for rating mortgage-backed securities are stricter than they were prior to the collapse of the mortgage market and allow investors to consider any relevant information on loans used to create the securities
	Illegal, since the Fair Housing Act prohibits investors from imposing different terms and conditions on the pooling, packaging, and marketing of mortgage loans based on characteristics such as race and color
	Legal, unless there is evidence that Bear Brothers considered the racial and ethnic characteristics of the borrowers when deciding whether or not to purchase the loans

March 5, 2012 was the effective date for HUD’s final rule on “Equal Access to Housing in HUD Programs Regardless of Sexual Orientation or Gender Identity.” HUD wrote this rule in response to “…evidence suggesting that lesbian, gay, bisexual, and transgender (LGBT) individuals and families are being arbitrarily excluded from housing opportunities in the private sector.” [1] Although the rule only applies to HUD-assisted and HUD-insured housing and not to loans originated outside of HUD programs, HUD determined that “It is important not only that HUD ensure that its own programs do not involve discrimination…but that its policies and programs serve as models for equal housing opportunity.” [2]

[1] 77 Fed. Reg. at 5662

[2] Ibid.

Gender Identity Part 2

These new rules are important for all mortgage professionals to understand because they directly impact lending practices during the origination of FHA loans. Since 1965, when the Federal Housing Administration became a part of HUD’s Office of Housing, HUD has been the federal agency that is responsible for writing and enforcing the rules that regulate FHA lending. In the current lending market, conventional loans are difficult to secure and FHA loans, which have more lenient underwriting requirements, have become very popular. Originally intended as products for low- to middle-income borrowers, FHA loans are currently available to a wide range of borrowers as a result of Congressional acts to raise the FHA loan limits. For all of these reasons, mortgage lenders, brokers, and originators need to understand these new fair lending rules that apply to FHA loans.

Gender Identity: “Actual or perceived gender-related characteristics”
Sexual Orientation: “Homosexuality, heterosexuality, or bisexuality.” The inclusion of heterosexuality in this definition is important since it means that protection from discrimination is available to all individuals. In its Webinar on the new rules, HUD offers an example of a situation in which a heterosexual individual might face discrimination. In HUD’s example, a landlord refuses to rent an apartment to a heterosexual male because he has a policy of renting properties only to gay men based on his stereotypical assumption that they are especially neat.

New HUD rules effective in 2012 added which of the following definitions to HUD regulations?

	Gender Identity, Sexual Orientation
	Gender Identity, Sexual Orientation, Marital Status
	Marital Status, Childbearing, Sexual Orientation
	Gender Identity, Childbearing

Although it is not referenced in the title of HUD’s new rule, an additional goal of the rule is to ensure that “…HUD’s rental housing and homeownership programs remain open to all eligible persons regardless of …marital status.” [1] HUD has not previously defined the term “marital status,” and it responded to comments suggesting a definition of this term by stating: “…HUD does not find that the focus of this rule calls for a definition of ‘marital status.’” [2]

The new rule seeks to ensure that HUD housing and lending programs are available to all applicants regardless of sexual orientation, gender identity, or marital status by stating that these and other personal characteristics are not a legal consideration for eligibility.

[1] 77 Fed. Reg. at 5662

[2] 77 Fed. Reg. at 5666

on eligibility requirements states:

A determination of eligibility for housing that is assisted by HUD or subject toa mortgage insured by the Federal Housing Administration shall be made in accordance with the eligibility requirements provided for such program by HUD, and such housing shall be made available without regard to actual or perceived sexual orientation, gender identity, or marital status.

(24 C.F.R. §5.105(a)(2)(i))

The new rules also create a prohibition on inquiries about sexual orientation and gender identity when an individual seeks HUD housing or a HUD-insured mortgage loan to purchase a dwelling.

marital status, it is important to remember that:

ECOA permits inquiries about marital status if the transaction involves secured credit, such as a transaction for a mortgage loan
Although ECOA permits inquiries regarding marital status in mortgage transactions, ECOA prohibits creditors from evaluating married and unmarried applicants differently, and when evaluating joint applicants, creditors are prohibited from treating them differently “…based on the existence, absence, or likelihood of a marital relationship between the parties”

(12 C.F.R. Section 1002.6 (b)(8))

With regard to inquiries about sexual orientation and gender in lending transactions that do not involve FHA loans, the Fair Housing Act has established sex as a protected class, and the protection of this class arguably extends to individuals that manifest any type of sexual orientation or identity.

is a loan originator for a small mortgage company that serves an urban neighborhood in Boston. This neighborhood is largely populated by gay men. When a married man and woman enter the office to ask about financing to purchase a condo that they like in the neighborhood, David quotes rates that are higher than those that he offers to his usual clients. David’s actions are:

	Not discriminatory since protected class members like David have the right to create neighborhoods where they will not experience discrimination
	Discriminatory since the new LGBT rule prohibits discrimination on the basis of sexual orientation
	Not discriminatory since he is a member of a protected class and is not subject to the Fair Housing Act or its regulations
	Discriminatory but not a violation of the Fair Housing Act since it does not protect heterosexuals

1994, the federal courts took a look at a phenomenon known as “racial steering,” which is a practice by which real estate brokers and agents preserve and encourage patterns of racial segregation in available housing by steering members of racial and ethnic groups to buildings occupied primarily by members of those racial and ethnic groups and away from buildings and neighborhoods inhabited primarily by members of other races or groups. In this case, a non-profit housing agency sent four sets of “testers” to a real estate brokerage firm known for discriminatory practices.

This is a practice by which real estate agents and brokers encourage and preserve patterns of segregation in housing by encouraging members of the same racial and ethnic groups to inhabit buildings and neighborhoods primarily occupied by people of the same group.

	Racial steering
	Redlining
	Reverse redlining
	Grouping

Harassment is considered a form of discrimination under the Fair Housing Act and is actionable provided a court can find a causal connection between the harassment and a resulting housing change or decision. For instance, one case, decided in 1997, presented a factual scenario in which a landlord agreed to a $100 per month reduction in rent in exchange for the chance to “fool around” with the tenant. The tenant refused his request, and the landlord became increasingly persistent, causing her to move out of the apartment. The tenant filed a complaint against the landlord, and the court awarded her damages for emotional distress. The court noted that in harassment cases, the more inherently degrading or humiliating the defendant's action is, the more reasonable it is to infer that a person would suffer humiliation or distress from that action.[1]

[1] Krueger v. Cuomo, 115 F.3d 487 (7^th Cir. 1997)

Which of the following statements is incorrect regarding conciliation agreements?

	Conciliation agreements must be approved and signed by the HUD's Assistant Secretary
	Conciliation agreements are punitive in nature
	Conciliation agreements must be in writing
	Conciliation agreements seek remedial solutions

parties must agree to the relief extended to the aggrieved person, and this relief may include:

Monetary relief, including damages for humiliation and embarrassment, and attorney’s fees
Equitable relief such as access to the dwelling at issue or to a comparable dwelling (in the context of mortgage lending, the equitable relief could include the offer of a loan with rates and terms that are comparable to the one that was unfairly denied)
Injunctive relief to immediately terminate any discriminatory practices that are taking place

(24 C.F.R. Section 103.315 (a))

All aggrieved parties are “…satisfied with the relief provided to protect their interests”
provisions of the conciliation agreement will “adequately vindicate the public interest.” Examples of provisions in a conciliation agreement that will “adequately vindicate” the public interest include those that:

Eliminate discriminatory housing practices
Prevent future discriminatory practices
Propose remedial activities to overcome discriminatory practices
Impose reporting requirements
Require monitoring and enforcement activities

(24 C.F.R. Section 103.320)

If the parties to a complaint do not execute a conciliation that is approved by HUD’s Assistant Secretary, then HUD’s General Counsel may issue a charge. The issuance of a charge is the first step in an adjudicative process that culminates with a hearing before one of HUD’s administrative judges (24 C.F.R. Section 103.310 (2)).

The regulations also give HUD authority to “…terminate its efforts to conciliate the complaint…” and may opt to do so when:

The respondent fails or refuses to confer with HUD
Either the aggrieved person or the respondent fails to make a good faith effort to resolve the dispute
The aggrieved party has filed an action in court
HUD finds that a voluntary agreement is unlikely

(24 C.F.R. Section 103.325)

HUD may review compliance with conciliation agreements. Violations of conciliation agreements are very serious matters that can lead to the referral of the matter to the Department of Justice. The regulations mandate that “Whenever HUD has reasonable cause to believe that a respondent has breached a conciliation agreement…” it must refer the case to the DOJ with a recommendation for resolution of the matter through a civil action in federal court (24 C.F.R. Section 103.335).

HUD provides online access to the conciliation agreements that it facilitates and approves.

The regulations ensure public access to this information, stating that “Conciliation agreements shall be made public, unless the aggrieved person and respondent request nondisclosure and the Assistant Secretary determines that disclosure is not required…” (24 C.F.R. Section 103.330 (b)).

Despite the fact that conciliation agreements may be disclosed to the public, HUD regulations protect information disclosed during conciliation. Without an affected party’s written consent, certain information will not be:

Made public
Used as evidence in later administrative hearings
Used in civil actions

(24 C.F.R. Section 103.330 (a))

Meeting the conditions required to earn HUD’s approval of the agreement by providing:

Monetary relief for the aggrieved party and others “similarly situated”
Satisfactory resolution for all aggrieved parties by establishing a compensation fund that could provide monetary relief for losses incurred
Adequate vindication of the public interest by requiring employee training, monitoring, and reporting to eliminate future discriminatory practices

The conciliation agreement allowed HUD to achieve the goals that it must "attempt to achieve" through the conciliation process by:

Achieving an agreement with the lender/respondent which ensured that alleged violation of the rights of the aggrieved party were addressed
Achieving an agreement with the lender/respondent which could eliminate future discriminatory practices with requirements for training, monitoring, reporting, and a re-evaluation of its underwriting guidelines for loan applicants who are pregnant or on maternity leave

These lending guidelines reflect those of Fannie Mae and Freddie Mac, and HUD is currently working with these agencies to determine if their guidelines comply with fair housing laws. While lenders await new or revised guidelines, HUD’s own guidelines for its FHA-approved lenders may offer some guidance. HUD does not allow FHA–approved lenders to make inquiries about an applicant’s intentions regarding the possibility of future maternity leave. However, if an applicant is on maternity leave or short-term disability leave when a loan closes, FHA-approved lenders must document:

The borrower’s intent to return to work
The borrower’s right to return to work
The ability of the borrower to qualify for the loan, while taking into account any reduction in income due to a maternity leave [1]

[1] Goodloe, Shantae. HUD No. 11-108. “HUD Acts Against Pregnancy Discrimination in Home Mortgages.” HUD.GOV. 1 June 2011. http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-108

Mortgage Bank (MMB) and HUD have entered a conciliation agreement. The agreement arose from complaints that HUD received from numerous women who alleged that MMB either denied their loan applications or refused to process their loan applications due to the fact that they were on maternity leave from full-time employment. As a part of the conciliation agreement, MMB has allowed HUD to monitor its lending practices. If HUD’s monitoring shows that MMB is still denying or delaying the processing of the loan applications of women who are on maternity leave or who are planning a maternity leave, HUD would be required, by provisions in its own regulations, to:

	File a civil action in the federal court in the jurisdiction where the discriminatory actions are taking place
	Refer the matter to the CFPB with a recommendation that the Bureau pursue action in federal court
	File a charge and initiate an action before one of HUD’s administrative law judges
	Refer the matter to the Department of Justice with a recommendation to pursue action in court

Fair Housing Act includes provisions for both civil and criminal penalties. The purpose of the law’s civil penalty provisions is “…to vindicate public interest…” (42 U.S.C. Section 3612(g)(3)). These penalties may be imposed by an administration law judge after evidence submitted in a hearing allows him/her to find that “…a respondent has engaged or is about to engage in a discriminatory housing practice…” (42 U.S.C. Section 3612(g)(3)). Penalty amounts depend on a respondent’s history of noncompliance. Penalties are:

An amount not to exceed $16,000 if the respondent has not committed prior discriminatory practices
An amount not to exceed $37,500 if the respondent “has been adjudged” to have committed one other discriminatory housing practice during the five-year period that preceded the filing of the charge
An amount not to exceed $65,000 if the respondent “has been adjudged” to have committed two or more discriminatory housing practices during the seven-year period that preceded the filing of the charge

(24 C.F.R. Section 180.671(a))

If it is determined that a respondent has committed four discriminatory housing practices in the past two years, what is the maximum civil penalty the respondent will be forced to pay?

	$37,500
	$16,000
	$37,000
	$65,000

Has been adjudged” means that the respondent’s violations of the law were the subject of an administrative hearing or a proceeding in court where he/she/it was found to have violated the law.

It is important to note that the total amount of penalties can exceed those outlined above, because “…a separate civil penalty may be assessed against the respondent for each separate and distinct discriminatory housing practice” (24 C.F.R. Section 180.671(e)). It should also be noted that if the discriminatory acts that are the subject of a new charge were committed by the same individual who was previously found in a hearing to have committed discriminatory acts, then the administrative law judge may impose penalties without regard to the time period within which the discriminatory acts occurred (42 U.S.C. Section 3612(g)(3)(A-C)).

Factors that an administrative law judge can consider in assessing penalties include:

Previous adjudications for unlawful discriminatory acts
Financial resources
The nature and circumstances of the violation
Degree of culpability
Goal of deterrence

(24 C.F.R. Section 180.671 (c))

The Fair Housing Act imposes stiff criminal penalties for using force or threat of force to willfully intimidate or interfere with an individual’s purchasing, renting, financing or occupying of a dwelling on the basis of race, color, religion, sex, handicap, familial status, or national origin. Penalties may include fines of up to $100,000 or one year of imprisonment, or both a fine and imprisonment (42 U.S.C. Section 3611 (c)).

The law also imposes criminal penalties of $100,000 or one year of imprisonment or both for willful failures to attend and testify at hearings related to Fair Housing Act violations. This penalty provision also applies to those who:

Make false statements in a hearing
Willfully neglect or fail to make correct entries in reports, account, and records
Mutilate or falsify documentary evidence

(42 U.S.C. Section 3611 (c))

Metropolitan Mortgage was the respondent in a hearing before an administrative law judge in 2012 for discriminatory lending practices, and a judgment was entered against it. In 2014, Metropolitan Mortgage was once again named as a respondent in a charge for violations of the Fair Housing Act. If the administrative law judge enters a judgment against Metropolitan Mortgage, the penalty is likely to be:

	$37,500
	$25,000
	$65,000
	$16,000

its final version of the rule, HUD states that its new rule “…formalizes the longstanding interpretation of the Fair Housing Act to include discriminatory effects liability and establishes a uniform standard of liability for facially neutral housing practices that have a discriminatory effect.”[1] Under this standard, a complainant, who is referred to in the rules as the “charging party,” has the burden of proving that the practice that he/she is challenging has a discriminatory effect. As HUD states in the Preamble to the rule, “Whether a particular practice results in a discriminatory effect is a fact-specific inquiry.”[2] If a charging party meets this burden, the respondent must prove that the practice is necessary to one of its nondiscriminatory interests. If the respondent makes such a showing, then the complainant must show that the challenged practice may be replaced by one with a less discriminatory effect.

Ann Marie applied for a home loan at the same time that one of her co-workers also applied for a loan. Both hold similar jobs with similar salaries, have similar educational backgrounds, and are seeking to purchase similar residences with financing from the same lender. Ann Marie is Latino, and she suspected discrimination when her loan offer was more expensive than the offer that the lender extended to her Caucasian co-worker. Ann Marie reported her lending transaction to HUD, and it launched an investigation. HUD may launch an investigation because these facts show evidence of:

	A violation of the new HUD fair housing regulations
	Overt discrimination
	Disparate impact
	Disparate treatment

[1] “Implementation of the Fair Housing Act’s Discriminatory Effects Standard.” 78 Fed. Reg. 11460-11482. 15 Feb. 2013, Page11479

[2] Id. at 11468

Arrest records that are more than seven years old, unless the statute of limitations has not expired, at which point the arrest may be reported until the statute of limitations expires
Tax liens that are more than seven years old
Accounts placed for collection (or charged off) that are more than seven years old
Any other adverse information that is more than seven years old, other than conviction of a crime (conviction of a crime can always be reported, no matter how old);
The name, address, and telephone number of any medical information provider unless either:

That information does not convey information on the nature of the services (the name of a psychiatric center, for example, would not qualify because it conveys information that the consumer has mental health problems), or
The report is being provided to an insurance company for purposes related to an insurance matter not involving property and casualty insurance

(15 U.S.C. §1681c(a))

FCRA also contains a list of situations in which the rules about what can be contained in a consumer report do not apply. The rules do not apply in the following situations:

A credit transaction involving, or which may reasonably be expected to involve, a principal amount of at least $150,000
The underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of at least $150,000
An employment situation in which the employee is expected to receive an annual salary of at least $75,000

(15 U.S.C. §1681c(b))

The Fair Credit Reporting Act provides that a consumer report may not contain any of the following, except?

	A tax lien that is eight years old
	A bankruptcy case that is eight years old
	An arrest record that is eight years old
	A civil lawsuit that is eight years old

The 90-day fraud alert is referred to as a one-call fraud alert. FCRA also permits an extended alert, which is triggered when a consumer submits an identity theft report to a consumer reporting agency. Once the agency receives an identity theft report, the agency must take the following steps:

For seven years, include a fraud alert in the file, unless the consumer requests that the alert be removed before the end of the seven years
For five years, exclude the consumer from any list of consumers provided to a third party offering credit or insurance as part of a transaction not initiated by the consumer, unless the consumer requests that the alert be removed before the end of the five years

Identity Theft Prevention

Notify other consumer reporting agencies of the fraud alert
Tell the consumer that he or she is entitled to two free copies of the file during the next 12 months
If the consumer requests a free copy, provide the consumer with all disclosures required to be made (see Consumer Disclosures below) no later than three business days after the request

a fraud alert is placed in a consumer’s file as a result of a phone call, what step can be taken to extend the time the fraud alert is in effect?

	Establishing to the consumer reporting agency’s satisfaction that at least one transaction in the file was the result of identity theft
	Making a second phone call to at least two consumer reporting agencies
	Filing an identity theft report with a consumer reporting agency
	Reporting the theft to the FBI

Consumer reporting agencies are also required to block the reporting of any information in a file that has been alleged to result from identity theft (15 U.S.C. §1681c-2). The block must occur no later than four business days after the agency has received the following:

Proof of the consumer’s identity
A copy of the identity theft report
The identification of such information by the consumer
The consumer’s statement that the information is not related to any transaction in which he or she was involved

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