Settlement of Michigan Lending Discrimination Lawsuit Underscores Regulatory Focus on Equal Access to Credit

The U.S. Department of Justice (DOJ) has reached a settlement with Community Bank of St. Charles, Michigan, in a federal lending discrimination lawsuit filed by DOJ against the bank. The settlement, announced on January 15, 2013, serves as a reminder that the Consumer Financial Protection Bureau and other regulators view the concept of "fair lending" as not only prohibiting discrimination, but also ensuring equal access to credit.

The DOJ had alleged in its lawsuit that the bank violated the Fair Housing Act and the Equal Credit Opportunity Act, which prohibit lending practices that discriminate against consumers on the basis of race. DOJ alleged that the bank served the credit needs of residents of predominantly white neighborhoods in the Saginaw and Flint metropolitan areas, but ignored the needs of African-American neighborhoods in those same areas. The DOJ's lawsuit, filed in the U.S. District Court for the Eastern District of Michigan, originated from a referral by the Federal Deposit Insurance Corporation, Community State Bank's prudential regulator.

Under the terms of the settlement, detailed in a DOJ press release, Community State Bank agreed to invest:

• $75,000 in special financing programs aimed at increasing the amount of credit the bank extends to predominantly African-American neighborhoods in and around Saginaw 
• $75,000 in partnerships with organizations that provide credit, financial, homeownership, and/or foreclosure prevention services to residents of these same neighborhoods 
• $15,000 in outreach programs that promote the bank's products and services to potential customers in these neighborhoods

The bank also agreed to open a loan production office in a predominantly African-American neighborhood in Saginaw and to conduct fair lending training for its employees. The agreement prohibits the bank from discriminating on the basis of race in any credit transaction.

Although the settlement is not the first of its kind, it is significant because it reflects a regulatory view that effectively blends fair lending protections with those provided by the Community Reinvestment Act (CRA) in such a way that lenders should evaluate whether they are taking any actions that may result in their products not being equally available to consumers from diverse backgrounds. Accordingly, when assessing fair lending compliance, lenders must examine the markets they serve, how they define and serve those markets, and how they may increase diversity in the loan applications they receive.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

- Stefanie H. Jackman

Industry Employers Should Prepare Now for Health Care Reform

Beginning January 1, 2014, the Patient Protection and Affordable Care Act (health care reform) will impose new obligations on individuals and employers throughout the United States. For the first time, larger employers will be subject to "pay-or-play" penalties if they do not provide health coverage for full-time employees. Every employer, including those in the mortgage banking industry, should be thinking right now about the costs and opportunities health care reform presents. Actions taken by employers in 2013 can affect whether they will pay an Affordable Care Act penalty in 2014. Employers can avoid or minimize penalties by changing their workforces this year.

Ballard Spahr's Health Care Reform Dashboard, launched in January 2013, is the only website of its kind where employers can access information and guidance about how the Affordable Care Act will affect employers.

Every employer should be taking steps in 2013 to determine how it will be affected by the Affordable Care Act. Consider the following—if a company employs 500 full-time employees, but fails to provide health benefits to just 26 of those employees, the employer will face an annual penalty of nearly $1 million!

Specifically, every employer should:

• Determine whether it is a "large" employer subject to the pay-or-play penalties.
• Determine which affiliated entities need to be combined with the employer for penalty purposes.
• Analyze whether specific classes of employees (e.g., seasonal, temporary, part-time, variable hour employees) could generate a penalty for the employer.
• If the employer retains employees through a temporary/leasing agency, analyze whether those employees could subject the organization to a penalty.
• If the workforce consists of independent contractors, assess the risk that those individuals may be counted as employees for penalty purposes.
• Identify employment law implications of converting full-time employees to part-time employees.
• Determine whether the employer's health plan coverage is both adequate and affordable to avoid penalties.
• Conduct a cost-benefit analysis as to whether the employer should continue to provide a health plan going forward, and if so, consider what alternative arrangements might be practical.
• Amend its health plan documents to reflect the new limit on health flexible spending account contributions and other required changes to cafeteria plans.
• Amend health plan and cafeteria plan documents to reflect required Affordable Care Act changes.
• Review the design of wellness programs to ensure compliance with the health care reform rules and other applicable law.
• Understand all other aspects of health care reform as it may apply to the employer.

Ballard Spahr's Health Care Reform team can help employers in the mortgage banking industry prepare for the impact Affordable Care Act. We will be covering many of the recent Affordable Care Act developments in our February 13 webinar, Health Care Reform Update: The Employer Mandate and Other Considerations for 2013. 
 

- Brian M. Pinheiro

Title Insurers Not Liable for Agent's Negligence

Title insurance companies can enforce exculpatory provisions in title insurance policies that exclude liability for tort claims based on a negligent title search performed by an agent, Maryland's highest court has ruled.

In 100 Investment LP v. Columbia Town Title, decided January 29, 2013, the Court of Appeals of Maryland ruled that a title insurance underwriter, Chicago Title Insurance Company, could not be held liable in tort for a negligent title search conducted by its alleged agent.

The Maryland court held that an exclusionary provision in the title insurance policy limited Chicago Title's liability to the terms of the policy. The trial court had ruled that Chicago Title could be held liable under the doctrine of respondeat superior for its agent's failure to discover a title defect.

The Court of Appeals, affirming the intermediate appellate court on this issue, ruled that the plain terms of the title insurance policy explicitly excluded a claim in negligence. Therefore, the insured property owner was limited to its contractual remedies under the policy.

However, the outcome was different for the title agent that conducted the search. The Court of Appeals ruled that a title agent could be held liable for negligence in conducting a title search, despite the existence of a contractual relationship.

The court found that imposing a tort duty on a title agent conducting a title search was appropriate because the title agent knew that the purchaser would rely on the results of the search when it acquired the property. This created an "intimate nexus" between the parties that justified the imposition of a tort duty in addition to any contractual obligations the agent owed to the insured. 

- Robert A. Scott

D.C. Circuit NLRB Decision Casts Doubt on Validity of Cordray Appointment

The validity of President Obama's January 2012 recess appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau is now under a dark cloud as a result of the decision by the U.S. Court of Appeals for the D.C. Circuit holding that the President's contemporaneous recess appointments of three National Labor Relations Board members violated the U.S. Constitution's Recess Appointments Clause (RAC).

In Noel Canning v. NLRB, the court ruled that the NLRB order under review was void for lack of a quorum, as three of the five NLRB members were never validly appointed. The significance of this decision cannot be overstated. It directly calls into question not just the NLRB order at issue, but every NLRB rule and order in which the three recess appointees participated since their appointments. Indirectly, the decision raises a host of questions about the potential impact of a judicial ruling that Mr. Cordray's recess appointment was similarly invalid.

The RAC authorizes the president to fill vacancies "that may happen during the Recess of the Senate" through appointments that expire at the end of the next session. The D.C. Circuit found two constitutional problems with the NLRB recess appointments.

First, the court held that the words "the Recess" referred only to an intersession recess of Congress, and not to an intrasession recess (more properly described by the Founders as an "adjournment").

Because the second session of this past Congress began on January 3, 2012, and the appointments were made on January 4, they were not made during a "recess" within the meaning of the RAC. (The court also scrutinized the Congressional Record to determine that the Senate had not been in recess, contrary to the contention of the President and the Office of Legal Counsel (OLC). In January 2012, the OLC had opined that the NLRB and CFPB appointments were valid.)

Second, the court held that to qualify for a recess appointment under the RAC, the vacancy must "happen" during the intersession recess. Vacancies that precede a recess do not qualify, as they could be filled by the default nomination "advise and consent" process.

The same deficiencies the D.C. Circuit found with the NLRB appointments would apply to Mr. Cordray's appointment. In addition, Mr. Cordray's appointment could be challenged on the ground that, in contrast to the NLRB, the CFPB is a new agency that never had a Director. As a result, a recess appointment would arguably have been unavailable under the RAC because there was technically no "vacancy" to fill.

Given the importance of the issues raised, the government can be expected to petition for rehearing and rehearing en banc and, if unsuccessful, to seek review by the U.S. Supreme Court. The government has 45 days to petition for the former and 90 days from the denial of a rehearing petition to petition for the latter.

In our view, the probability of success is higher for a certiorari petition, not only because of the importance of the separation of powers issue the decision raises, but also because of the circuit split Canning creates. The D.C. Circuit's interpretation of the RAC disagrees with that of the 11th Circuit's 2004 ruling in Evans v. Stephens.

A host of questions would be raised should Mr. Cordray's appointment be found invalid. For example:

• Would CFPB regulations and orders involving the authority transferred to the CFPB from other federal agencies be valid? (e.g., the CFPB's remittance transfer regulation under the Electronic Fund Transfer Act and its mortgage-related regulations under the Truth in Lending Act and the Real Estate Settlement Procedures Act)
• Could the CFPB continue to exercise the authority that was newly created by the Dodd-Frank Act, and would any CFPB actions stemming from that authority be valid? (most notably, the CFPB's supervisory and enforcement authority over nonbank entities, such as payday lenders; private student lenders; debt collectors and debt buyers; companies providing credit reporting services; and mortgage brokers, lenders, and servicers)
• What would be the impact on investigations conducted, settlements reached, and consent orders issued during the past year?
• Would the "de facto officer" doctrine preserve any of the above against invalidation?

We believe Canning's political reverberations will extend beyond the fight over President Obama's renomination of Mr. Cordray to include the revival of proposed legislation to convert the CFPB's leadership from a single director to a board or commission. The legislation also calls for the Financial Stability Oversight Council to oversee CFPB regulations and would subject the CFPB to the Congressional appropriations process.

Despite the serious questions Canning raises, it is important to note that, as yet, no court has invalidated Mr. Cordray's appointment or any of the CFPB's subsequent actions. As a result, all CFPB regulations and orders remain presumptively legal and valid for now.

-Keith R Fisher and  Barbara S. Mishkin

Post-Election Housing Outlook with Chris Estes

A Ballard Spahr conference call on February 7, 2013

Now that the election season has ended, lawmakers and administration officials are back at work on the important issues facing our nation, including how to address the current housing crisis. How will the recent election affect housing policy in the near future? What are the most critical housing issues Washington will address? Who will play key roles in determining the inevitable changes to housing policy?

Please join Ballard Spahr's Housing Group by conference call as we discuss the issues with Chris Estes, President and CEO of the National Housing Conference. Mr. Estes leads NHC's policy and advocacy work, both in Washington and throughout the country. He also works closely with NHC's research affiliate, the Center for Housing Policy, to make the case for affordable housing and develop effective housing policy solutions.

Click here for more information and to register for the conference call.

Date and Time

Thursday, February 7, 2013
11:45 AM - 1:00 PM ET

Speakers

Sharon Wilson Géno, Ballard Spahr

Chris Estes, National Housing Conference

FFIEC Asks for Feedback on Social Media Proposed Guidance

The Federal Financial Institutions Examination Council (FFIEC) is seeking feedback on proposed guidance to help financial institutions manage the risks of interacting with consumers through social media. The FFIEC, which comprises several financial regulatory agencies, published a notice in the Federal Register on January 23, 2013, seeking comments within 60 days.

One of the trickiest aspects of providing social media guidance is making sure that the definition of "social media" is broad enough to encompass the variety of ways in which consumers interact, but limited enough to not include e-mails, texts, or other types of communication. The FFIEC explained that social media is a "form of interactive online communication in which users can generate and share content through text, images, audio, and/or video" and that "[s]ocial media can be distinguished from other online media in that the communication tends to be more interactive." The FFIEC mentioned several examples of social media, including Facebook, Yelp, and LinkedIn, as well as virtual worlds such as Second Life and social games such as FarmVille.

The FFIEC said its proposal is needed to assist financial institutions in controlling risks presented by social media, specifically those resulting from interactions that are informal and occur in a less secure environment, as well as the risks of social media campaigns that may not receive the care and attention of a traditional advertising campaign. In addition, the FFIEC acknowledged that financial institutions using social media have the potential to improve market efficiency due to the broader distribution of information among consumers.

In designing an adequate risk management program for social media, the FFIEC noted that the program needs the involvement of several departments of an institution—compliance, technology, information security, legal, human resources, and marketing (as well as public relations, not mentioned by the FFIEC). Specifically, the risk management program should include:

• Having governance that incorporates individuals from each department who have enough seniority to be able to ensure social media aligns with the financial institution's strategic goals
• Developing or updating policies and procedures to address social media, especially concerning consumer protection laws, regulations, and guidance
• Establishing due diligence processes for managing third-party providers of social media programs
• Training employees in appropriate use of social media, on and off the job
• Monitoring of information posted to proprietary social media sites
• Protecting against reputational harm
• Incorporating social media into regular compliance and audit protocols as well as in reports to the board of directors or senior management

The proposed guidance discusses several consumer financial regulations and highlights sections of the regulations that require special consideration in the context of social media. For more details on specific regulatory language that applies, please refer to this chart. The basic rule of thumb, however, is that social media use by financial institutions should comply with all of the same requirements—disclosures, timing of responses, privacy, etc.—that the financial institution applies to any advertising, consumer application, or transaction it allows online.

- Mercedes Kelley Tunstall and Amy S. Mushahwar

Virginia Exempts Loan Processors and Underwriters from Licensing

Virginia has explicitly exempted third-party loan processors and underwriters from mortgage broker licensure requirements. Effective January 28, 2013, anyone who receives, collects, distributes, or analyzes information common for the processing or underwriting of a residential mortgage loan is exempt.

Additionally, communicating with a consumer to obtain information necessary for the processing and underwriting of a mortgage loan does not require licensure. A license is still required, however, when communicating with a consumer about a mortgage loan before the consumer submits a loan application, taking an application for or offering or negotiating the terms of a mortgage loan, or counseling consumers about mortgage loan terms.

The amendments also explicitly allow for a licensed broker or lender to outsource loan processing or underwriting activities to a third party under a written agreement, provided certain requirements are met.

- Matthew Saunig 

http://ballardspahr.com/alertspublications/legalalerts/2013-02-06%20mortgage%20banking%20update.aspx