U.S. Supreme Court Rules Disparate Impact Claims Are Allowed Under Fair Housing Act

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The U.S. Supreme Court ruled on Thursday by a 5-4 vote in the case of Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. that disparate impact claims can legally be brought about under the Fair Housing Act of 1968.

Justice Anthony Kennedy, who often has the swing vote in Supreme Court cases that are divided between the Court’s four liberal and four conservative justices, wrote the court’s opinion on behalf of the majority. Justices Ginsburg, Breyer, Sotomayor, and Kagan joined in the majority opinion of the court. Justices Alito, Roberts, Scalia, and Thomas filed dissenting opinions. To read the complete opinion of the Court, click here.

While the Court ruled that disparate impact claims are cognizable under the Fair Housing Act, that ruling came with a caveat.

“So the Court holds that there is a disparate impact claim under the FHA as a matter of statutory interpretation, but the Court cautions that remedial orders in disparate impact cases that impose racial targets or quotas could be unconstitutional,” Attorney Kevin Russell said on the SCOTUS blog. “. . .The Court emphasizes, however, that disparate impact liability should be impose cautiously. To avoid constitutional problems, statistical disparity is not enough.”

HUD Secretary Julián Castro praised the Supreme Court’s decision via Twitter on Thursday morning, tweeting that “Today’s SCOTUS opinion upholding disparate impact analysis under Fair Housing Act is a strong victory for equal opportunity in our country.” Castro issued an official statement on Thursday saying, “Today is another important step in the long march toward fulfilling one of our nation’s founding ideals: equal opportunity for all Americans. The Supreme Court has made it clear that HUD can continue to use this critical tool to eliminate the unfair barriers that have deferred and derailed too many dreams. Working with our partners on the ground, we will continue to do all we can to build a housing market that treats all Americans with basic dignity and respect.”

The Office of the White House Press Secretary issued the following statement: “Too many Americans are victims of more subtle forms of discrimination, such as predatory lending, exclusionary zoning, and development policies that limit affordable housing. This decision reflects the reality that discrimination often operates not just out in the open, but in more hidden forms. And, it preserves a longstanding and important method for challenging and eliminating those practices and continuing the work to end discrimination in housing.”

Congresswoman Maxine Waters (D-California), Ranking Member on the House Financial Services Committee, stated on the SCOTUS ruling: “I’m pleased that in their decision, the justices recognized the importance of disparate impact liability in uncovering discriminatory intent, and noted that appropriate safeguards in the use of disparate impact already exist, such as requiring plaintiffs to demonstrate causality between the defendant’s practices and its adverse effects. The disparate impact standard is absolutely essential to providing for fair housing throughout our nation. Its decades-long use to weed out discriminatory practices that create barriers to housing is critically important for minority individuals and communities. But our work is not finished. In Congress, we must continue to fight strongly to protect disparate impact, as Republicans have consistently sought to undermine law enforcement’s ability to combat discrimination in our housing and lending markets.”

Senator Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee, said: “Today’s decision is a major victory for civil rights and equal opportunity in America. As recent events have shown, our country continues to struggle with a legacy of racial injustice and inequality. The court’s ruling preserves one of the most important tools we have to fight discrimination and ensure that all Americans have fair access to housing and economic opportunity. We need to continue efforts to combat discriminatory practices, not just in housing but in all consumer financial markets.”

Not all lawmakers were thrilled with the Supreme Court’s ruling, however.

“America is based on equal opportunity, not equal results,” said Jeb Hensarling (R-Texas), Chairman of the House Committee on Financial Services. “The dubious legal theory of disparate impact and the Supreme Court’s ruling pervert this founding principle. Discrimination in housing and lending on the basis of race, sex, or other prohibited factors is morally repugnant and against the law. Our government must continue to combat discrimination in housing and lending and punish those responsible. Inventing discrimination through a disparate impact theory, however, is not a helpful tool in fighting actual discrimination.

“The Supreme Court’s extension of disparate impact theory to the Fair Housing Act will hurt precisely those minority groups that our federal civil rights statutes set out to protect. In fact, disparate impact will have predictable, negative consequences for all Americans who will experience a less competitive and more expensive market for housing and credit—all without providing any meaningful support for the fight against actual discrimination.”

The disparate impact issue has become a heated one in housing in the last few years, especially since the Obama Administration passed a rule allowing disparate impact claims – which are allegations made based on neutral practices that may have a discriminatory effect – under the Fair Housing Act in February 2013.

The Texas Department of Housing and Community Affairs v. Inclusive Communities Project Case centers on allegations that low-income tax credits were awarded to real estate developers who own property in low-income minority dominated neighborhoods and denied to developers who own property in predominantly white neighborhoods. A district court originally ruled that the manner in which the Texas Department of Housing allocated the tax credits, though neutral, had a disparate impact on the basis of race. In March 2014, the Fifth Circuit Court of Appeals upheld the district court’s ruling. The Supreme Court heard arguments for the case back in January.

“The judgment of the Court of Appeals for the Fifth Circuit is affirmed, and the case is remanded for further proceedings consistent with this opinion,” Kennedy wrote in Thursday’s opinion.

U.S. District Judge Richard Leon struck down the rule in November 2014, saying that only claims of intentional discrimination could be made under the Fair Housing Act. At the time of his ruling, Leon said the belief of those in the Administration who interpret the Fair Housing Act to allow disparate impact claims “appears to be nothing more than wishful thinking on steroids.”

The issue as to whether disparate impact claims are allowed under the Fair Housing Act was previously slated to go before the U.S. Supreme Court twice, but both cases settled before it reached that point.

In early June, the House of Representatives passed the Fiscal Year 2016 Commerce, Justice, and Science Appropriations Act, which included an amendment added by Scott Garrett (R-New Jersey) that prohibited the Department of Justice from funding disparate impact claims.

CFPB Publishes Nearly 8,000 Consumer Complaint Narratives For the First Time

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For the first time, more than 7,700 consumer complaints about problems they are facing with financial companies concerning mortgages, bank accounts, credit cards, and debt collection, among others, were released today by the Consumer Financial Protection Bureau (CFPB) on their Consumer Complaint Database, according to a press release. The Bureau is also requesting input on how to engage the public in this influx of information so that consumers can understand the information and make comparisons.

“The Bureau’s work improves as we hear directly from consumers,” said Richard Cordray. CFPB director. “Every complaint tells us what people are facing in the financial marketplace. Publishing these consumer stories today is a historic milestone that we believe will lead to better outcomes for everyone.”

The CFPB’s Dodd-Frank Wall Street Reform and Consumer Protection Act highlights consumer complaints as an important part of their work, according to the release. As soon as the CFPB was established in July 2011, they began accepting complaints from consumers, and in June 2012, the CFPB launched the Consumer Complaint Database.

The database includes basic, anonymous, individual-level information about the complaints received, including the date of submission, the consumer’s zip code, the relevant company, the product type, the issue the consumer is complaining about, and how the company handled the complaint, the Bureau says.

In March 2015, the Bureau finalized a policy that would allow consumers to public share their narratives when submitting claims to the Bureau. Since this feature was launched, over half of consumers’ complaints were shared publicly.  Beginning today, consumer narratives will be added to the complaint database on a daily basis, without revealing personal information.

The Bureau reported that as of June 1, 2015, it has handled more than 627,000 complaints. Mortgages and debt collection are the most popular topics mentioned in the database. The Bureau noted that the complaint process has helped consumers obtain hundreds of thousands of responses from companies and millions of dollars in monetary relief.

The narratives provided by consumers give firsthand accounts of their experience, the CFPB said. These narratives help consumers make good decisions and also push companies toward improving the quality of their products and services.

The CFPB Consumer Complaint Database is designed to allow users to:

  • Search for specific product names or features.
  • Highlight specific company practices and problems.
  • Break down information by state.

In April, the Five Star Institute (FSI) and Black Knight Financial Services (BKFS) released a report titled “Analysis and Study of CFPB Consumer Complaint Data Related to Mortgage Servicing Activities,” that addressed the concern that the complaints do not provide a full picture of the mortgage servicing industry.

The FSI and BKFS report aimed to provide context and insight to complaints received by the CFPB by comparing the Bureau’s two predominant mortgage complaint categories, servicing and default, with loan trends. The report also included publicly available data from both the CFPB and mortgage servicers, as reported from the CFPB database.

According to the report, mortgage-related complaints received by the CFPB are on the decline after an initial ramp-up period. Delinquent loans and foreclosures have also decreased. The report seeks to address of the question of whether these two stats are falling at the same rate and if there is a correlation between the two.

“The information contained in this report plays an important role in measuring the scope of volume related to CFPB inquiries made, in juxtaposition to the total number of mortgage holders in the U.S. market,” said Ed Delgado, Five Star president and CEO.  “Through the data lens, we can clearly examine operational efficiency and defect while measuring progress in providing quality service to homeowners.”

Click here to view the CFPB’s Consumer Complaint Narrative Policy.

Click here to view the CFPB’s Request for Information.

Mortgage Performance Improves Across the Board For Eight National Banks

loan modification, approvedApproximately 94.2 percent of first-lien mortgages serviced by eight national banks were current and performing at the end of the first quarter, an improvement of more than a full percentage point from a year earlier, according to the Office of the Comptroller of the Currency’s Q1 2015 Quarterly Mortgage Metrics Report released Thursday.

The eight national banks covered in the OCC’s report are (alphabetically) Bank of America, JPMorgan Chase, Citibank, HSBC, OneWest Bank, PNC, U.S. Bank, and Wells Fargo. The mortgages covered in the OCC’s report comprised 43.9 percent of all outstanding residential mortgages in the country, which total 22.7 million loans and approximately $3.8 trillion in unpaid principal balance.

Mortgage performance improved across the board for the eight national banks in Q1. The share of performing first-lien mortgages improved from 93.1 percent up to 94.2 percent, the share of mortgages that were 30 to 59 days overdue declined by 7 percent year-over-year in Q1 down to 1.9 percent, and seriously delinquent mortgages (60 or more days overdue or held by bankrupt borrowers who are more than 30 days past due on their payments) made up 2.6 percent of the portfolio in Q1, a year-over-year decline by 16.4 percent, according to OCC.

Foreclosure activity declined substantially year-over-year in Q1. The number of properties in the process of foreclosure as of the end of the quarter dropped down to 299,424, a decline of 30.8 percent from the same quarter a year earlier. The nearly 300,000 loans in the process of foreclosure during Q1 comprised about 1.3 percent of the loans in the portfolio. Foreclosure starts declined year-over-year by 8.6 percent in Q1, down to 83,058, while foreclosure completions dropped by 31.5 percent year-over-year down to 38,509. The OCC cites improved economic conditions and foreclosure prevention actions as the reason for the substantial decline in foreclosure activity during Q1.

Home retention actions such as modifications, trial-period plans, and shorter-term payment plans totaled 188,816 in Q1, a decline of 20.6 from the same quarter a year earlier. More than 89 percent of loan modifications reduced monthly principal and interest payments, and more than 55 percent of modifications reduced monthly payments by 20 percent or more. Borrowers saved an average of $271 per month on mortgage payments with modifications in Q1, according to OCC. Meanwhile, home forfeiture actions such as completed foreclosures, short sales, and deeds-in-lieu of foreclosure totaled 47,430 during the quarter.

According to OCC, out of the nearly 3.7 million modifications implemented from a seven-year period from January 1, 2008 through December 31, 2014, approximately 53 percent of them were active as of the end of Q1 2015 while 47 percent of them had exited the portfolio through either payment in full of the mortgage, involuntary liquidation, or a transfer to a servicer that was not part of the portfolio. Out of those 53 percent of active modifications at the end of Q1, totaling approximately 1.97 million mortgages, 72.2 percent of them were current and performing, 22.4 percent of the loans were delinquent, and 5.5 percent of them were in the process of foreclosure, the OCC reported.

Home Value Forecast Examines Criteria for Institutional Investor Purchases

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The June 2015 Home Value Forecast (HVF) released by ProTeck Valuation Home Services on Thursday examines whether investing in single-family homes as rental properties is still a worthwhile investment as well as the criteria investors should consider.

ProTeck points out the flood of institutional investors who bought large quantities of single-family REO homes at a discount in the aftermath of the housing crash and subsequently made health profits by renting these properties. The single-family REO-to-rental market is being consolidated seven years after the crash as some investors are still looking to profit, while others are taking advantage of economies of scale. ProTeck concluded there will always be a need for rental properties, and there will always be a need for investors to purchase those properties.

Different investors use different criteria when analyzing markets to determine where to purchase their properties, according to ProTeck.

“Desirability of location, employment trends, rental yield, home appreciation and other factors should be used in some combination depending on risk tolerance, goal, and timeline,” said Tom O’Grady, CEO of Pro Teck Valuation Services.  “For example – an investor that is looking to sell a rental property after a few years would use different criteria than one looking for a long-term investment.”

A few of the criteria investors use to make decisions on where to buy include price-to-rent ratio and rental yield, as well as a combination of rental appreciation, rental yield, and home appreciation data, according to a recent report by Deutsche Bank. That report found that the best markets for a single-family investor to turn a profit were those in which rental price appreciation was greater than home price appreciation. The top three markets based on that criterion were Providence, Newark, and Baltimore.

Citing data from smartasset.com, ProTeck examined three of the most expensive cities in the U.S. to live – San Francisco, Honolulu, and New York City – and found that home prices keep many people renting in these cities, which results in a large, stable rental market. Honolulu might be an especially attractive market to long-term investors due to low vacancy, high rent, and high appreciation, ProTeck found.

“Price-to-rent ratios, rental yields, and/or a combination of all including home price appreciation are all important criteria,” O’Grady said. “Also, investors looking at five-year returns or different ten-year windows dramatically change the results, this is why all criteria must be analyzed to make informed investment decisions.”

The decision on where to purchase properties in order to make the largest profits comes down to three criteria, according to ProTeck – investment goals, time frame, and risk.

Democratic Senators Call For Investigation of Possible Discrimination in REO Maintenance

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A group of Democratic Senators led by Bob Menendez (D- New Jersey) has written a letter to the leaders of several government agencies calling for an investigation to determine if banks and lenders violated the Fair Housing Act by neglecting maintenance of foreclosed and REO homes in minority-dominated neighborhoods.

The Senators cited a recent report by the National Fair Housing Alliance (NFHA) which alleged that REO properties in minority-dominated neighborhoods were more than twice as likely to have deficiencies such significant amounts of trash and debris, and unsecured, broken, or damaged doors than REO properties in predominantly white neighborhoods. The report covered more than 2,400 REO properties in 29 metro areas, owned or managed by 11 lenders.

“We strongly urge you—as regulators of the entities responsible for ensuring these properties are maintained, marketed, and sold to qualified buyers—to investigate this issue,” the Senators wrote in their letter. “As we are sure you agree, stabilization for our country’s communities most impacted by the foreclosure crisis will require financial institutions to properly maintain and market REO homes regardless of the color of the skin or nation of origin of the other homeowners who live on the block.”

Several organizations have come out in support of the Senators’ letter, including (alphabetically) the American Civil Liberties Union, Americans for Financial Reform, Center for Responsible Lending, Lawyers’ Committee for Civil Rights Under Law, Leadership Conference on Civil and Human Rights, National Association for the Advancement of Colored People, National Coalition for Asian Pacific American Community Development, National Council of La Raza, National Fair Housing Alliance, National Low Income Housing Coalition, PolicyLink, and Poverty and Race Research Action Council, according to Menendez’s website.

“Foreclosed properties remain in neighborhoods across the country, but we must do all that we can to make sure they are equally well-taken care of to get them in the hands of homeowners,” said Shanna L. Smith, President and CEO of the National Fair Housing Alliance. “We know that poorly maintained properties have a higher likelihood of selling to absentee investors, deflate neighborhood property values and contribute to negative health outcomes for residents who live near these eyesores. The federal financial and housing regulators have an opportunity and obligation to ensure that foreclosed homes are used as agents of community stabilization, not to further depress property values and the local tax base.”

Click here to view a copy of the Senators’ letter. Co-signers of the letter were Sherrod Brown (D-Ohio), Elizabeth Warren (D-Massachusetts), Barbara Boxer (D-California), Kirsten Gillibrand (D-New York), Mazie Hirono (D-Hawaii), Cory Booker (D-New Jersey), Martin Heinrich (D-New Mexico), Ben Cardin (D-Maryland), Tammy Baldwin (D-Wisconsin), Dick Durbin (D-Illinois), Richard Blumenthal (D-Connecticut), Chuck Schumer (D-New York), and Tim Kaine (D-Virginia).  Mendendez, Brown, Warren, and Schumer are members of the Senate Banking Committee, and Menendez is the Ranking Member of the Senate Subcommittee on Housing, Transportation, and Community Development.

The letter was addressed to HUD Secretary Julián Castro, Fed Chair Janet Yellen, Comptroller of the Currency Thomas Curry, FDIC Chair Martin Gruenberg, CFPB Director Richard Cordray, NCUA Chair Debbie Matz, and FHFA Director Melvin Watt.

Ocwen To Use Money From MSR Sales to Pay Part of Senior Secured Term Loan

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Today, Ocwen Financial Corporation announced that it will use payments connected with previous mortgage servicing rights (MSRs) sales to pay down $53.2 million of its senior secured term loan, according to the company’s recent 8-K filing with the Securities and Exchange Commission (SEC). As of now, Ocwen still has approximately $939.4 million left outstanding under its senior secured term loan.

Embarking on the journey to transfer its MSRs at the end of last year, Ocwen has been busy selling and paying off the MSRs. The companyannounced in February that it sold the MSR on a portfolio of about 81,000 performing residential loans owned by Freddie Mac with an unpaid principal balance (UPB) of about $9.8 billion to Nationstar. One month later, Ocwen announced that they were selling another MSR portfolio with $25 billion in UPB to Nationstar Mortgage. Together, the two MSR deals between Ocwen and Nationstar included about 223,000 residential mortgage loans with $34.8 billion in UPB.

“This transaction, on top of the one announced in February between Ocwen and Nationstar, furthers our announced corporate strategy and demonstrates the strong working relationship we have developed with Nationstar,” said Ron Faris, CEO of Ocwen.

Ocwen’s ratings were recently upgraded by Moody’s Investor Service and president and CEO of Ocwen, Ron Faris commented on those ratings in a press release on Friday expressing his excitement with the results.

“We are pleased to see that the strategy we have deployed is working and achieving its objectives,” Faris said. “Execution on sales of a portion of our Fannie Mae and Freddie Mac servicing portfolios has resulted in increased liquidity, reduced corporate leverage and a simplified operating structure. We are pleased that Moody’s has upgraded our Corporate Family Rating, Senior Secured Bank Credit Facility rating, and Senior Unsecured Debt rating. We are also pleased to see that Moody’s has changed its outlook for all of these ratings to stable.”

Faris also addressed the CreditWatch announcement by Standard and Poor’s Ratings Services (S&P) in the press release on Ocwen’s servicer rankings.

“We were surprised by the S&P announcement and specifically their reasons because we believe that we have made significant progress in resolving past regulatory concerns, strengthened our financial condition, and, over the past couple of years, continually invested in the quality and capacity of our risk, compliance, and internal audit functions,” Faris said. “As previously reported, we are not aware of any unresolved issues with state agencies that would have a material financial impact on the Company.”

Ocwen further noted in the release that downgrades in its servicer ratings or rankings could affect the company’s terms of or its ability to sell or fund servicing advances in the future, the release says. Negative action ratings or rankings could also affect the terms and availability of debt financing facilities that it may seek in the future and could impair its ability to consummate future servicing transactions or adversely affect its dealings with lenders, other contractual counterparties, and regulators. This would include its ability to maintain its status as an approved servicer by Fannie Mae and Freddie Mac.

In an effort to monitor the Ocwen’s loan servicing operations, the state of California’s Department of Business OversightCommissioner Jan Lynn Owen announced today in a press release that out of 31 candidates, it has named Fidelity Information Services (FIS) as the independent, third-party auditor that will review the California mortgage servicing operations of Ocwen Loan Servicing, LLC. FIS will be responsible for assessing servicing practices and compliance with consumer protection laws.

“The DBO has a duty to ensure its licensees fully comply with laws and regulations designed to protect California homeowners,” said Owen. “FIS will help us fulfill that duty with respect to Ocwen.”

FHFA To Host Sixth HARP Outreach Event in Phoenix June 12

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The Federal Housing Finance Agency (FHFA) will host its first Home Affordable Refinance Program (HARP) outreach event since extending the program until the end of 2016 on Friday, June 12, in Phoenix, Arizona.

The Phoenix event will the the sixth HARP outreach event; the previous five were in Newark, Miami, Detroit, Atlanta, and Chicago. The purpose of the Phoenix outreach event will be to encourage more than 10,000 HARP-eligible residents of the area (and more than 18,000 in Arizona altogether) to enroll in the program and save on their mortgage. FHFA estimates there are more than 600,000 HARP-eligible borrowers nationwide.

The FHFA stated in its first quarter refinance report that more than 31,000 borrowers nationwide refinanced through HARP in Q1, bringing the total number of borrowers who have refinanced through HARP up to more than 3.3 million since it was introduced in 2009 as part of the Making Home Affordable program.

“There are more than 10,000 homeowners in the Phoenix area, and even more statewide who could save, on average, more than $2,400 per year by refinancing through HARP,” FHFA Director Mel Watt said. “Our goal is to join forces with community leaders and other trusted sources so that borrowers who are current on their mortgage, but have little equity in their homes, know they have refinancing options and can still join the 3.3 million Americans who have saved money by refinancing through HARP.”

Megan Moore, a special adviser to Watt, will moderate a panel discussion at the Phoenix event. Representatives from the Department of Treasury, Fannie Mae, Freddie Mac, and the Arizona Department of Housing will be on the panel.

Borrowers are eligible for a HARP loan if they meet the following requirements: Their loan must be owned or guaranteed by Fannie Mae or Freddie Mac; the loan must have been originated on or before May 31, 2009; LTV ratio must be greater than 80 percent; and they borrower must be current on mortgage payments. They must not have had a late payment in the previous six months or more than one late payment in the previous 12 months. Borrowers who could benefit from HARP are referred to as “in the money” borrowers; they are “in the money” if they meet all the HARP eligibility requirements, have a remaining balance on their loan of greater than $50,000 with more than 10 years left on their term, and have an interest rate of more than 1.5 percent more than current market rates.

The FHFA said borrowers will typically benefit financially from HARP if they meet the aforementioned criteria and have a remaining balance of more than $50,000 on their mortgage, have more than 10 years left on their term, and have an interest rate of at least 1.5 percent higher than the current market rates. FHFA estimates borrowers can save an average of about $200 per month on their mortgage payments with a HARP refinance.