The U.S. Supreme Court recently ruled that cities have the right to sue banks over discriminatory mortgage lending practices under the Fair Housing Act, provided that they can successfully prove that a lender’s actions led to economic losses through lower tax revenues and increased demand for city services.
The court also ruled that the losses must have already occurred – in others words, a complaint can’t be based on the potential for future losses. As such, cities have a pretty high bar in bringing such cases, in that they have to link foreclosures, vacant housing and blight directly to a lender’s violations of the Fair Housing Act.
It appears that the first court case related to the Supreme Court’s decision is about to commence, as the City of Philadelphia announced that it is suing Wells Fargo for alleged discriminatory lending practices against minority borrowers.
Philadelphia’s announcement specifically cites the recent Supreme Court decision, which stems from a lawsuit brought by the City of Miami against Bank of America, Citigroup and Wells Fargo in 2013.
In that case, the City of Miami sued the banks in federal court, arguing that they intentionally targeted minority borrowers with riskier loans and then caused a wave of defaults by failing to extend refinancing and loan modifications on fair terms. This led to increased foreclosures and abandoned properties that, in turn, diminished the city’s tax base and increased reliance on fire and police services.
More importantly, the City of Miami suit alleged that the banks were at fault for these foreclosures because they had steered minority borrowers into riskier loan products – including “lender credit” loans, in which a lender pays a borrower’s closing costs in exchange for receiving a loan with a higher interest rate. The city alleged that most of the minority borrowers who were steered into these loans did not realize at the time that the higher interest rate applied to the life of the loan. The city also alleged that the banks had engaged in discrimination because they had sold a disproportionately higher number of higher-cost and higher-risk loans to minorities than they had to non-minorities.
The banks fought Miami’s suit, arguing that the city does not fall within the Fair Housing Act’s “zone of interest” and “aggrieved persons” provisions. The banks also argued that the city could not definitively prove that its losses were related to the alleged Fair Housing Act violations. Initially, a U.S. District Court found in favor of the banks, dismissing the lawsuit. However, on appeal, the U.S. Court of Appeals reversed and found in favor of the city, and the lawsuit was allowed to proceed.
The U.S. Supreme Court previously held that Miami is an “aggrieved person” in the case and authorized that it could bring suit under the Fair Housing Act.
Philadelphia filed its complaint, which alleges that from 2004 through today, Wells Fargo violated the Fair Housing Act by “steering African-American and Latino borrowers towards high-cost or high-risk loans, even where those borrowers’ credit permitted them to obtain more advantageous loans.” The city further alleges that Wells Fargo was “aware and, in fact, incentivized the marketing of the high-cost or high-risk loans to minorities.”
The suit says that a recent analysis uncovered that 23.3% of loans Wells Fargo made to minorities in Philadelphia were higher-cost and higher-risk, while only 7.6% of loans made to white customers fell in that category.
“The practices of Wells Fargo disproportionately affected minority borrowers here in Philadelphia, and because many of these loans resulted in foreclosures, all neighborhoods throughout the city suffered the harm,” Philadelphia Mayor Jim Kenney says in a statement.
Wells Fargo says it intends to fight the charges.
68% of Loan Defects in 2016 Were Related to TRID
More than 68% of loan defects reported in 2016 were related to the TILA-RESPA Integrated Disclosures (TRID) rule, data from mortgage software firm ACES Risk Management (ARMCO) shows.
The firm’s Mortgage QC Industry Trends Report for the fourth quarter of 2016 and calendar year 2016 shows that the benchmark Critical Defect Rate increased slightly, from 1.27% in the third quarter of 2016 to 1.50% in the fourth quarter of 2016.
In the fourth quarter, purchase transactions among the subject group comprised 51% of the benchmark data, up from 48% in the previous quarter
“The data suggests lenders are getting more adept at complying with critical TRID-related issues,” says Phil McCall, chief operating officer for ARMCO. “However, new areas of concern are beginning to spring up and an early correlation can be linked to a more purchase-focused market.
“Lenders need to learn from their own defects if they want to protect themselves against compliance-related issues, but they also need to stay apprised of changing trends if they want to mitigate the increased risk of fraudulent activity that is inherent with a purchase-driven market,” McCall adds.
Clayton Offering Enhanced Internal Audit Services Program
Clayton Holdings says it has developed an enhanced internal audit services program designed to help bank and lender clients develop, manage and enhance their internal risks and controls programs, as well as comply with new government-sponsored enterprise (GSE) and Consumer Financial Protection Bureau (CFPB) requirements.
The new internal audit program leverages Clayton’s in-depth industry knowledge and combines it with seasoned professionals to deliver operational efficiencies, the company says in a release.
The provider of loan due diligence, surveillance, real estate owned management, consulting, valuation, title and settlement services says this new audit program will help lenders strengthen their internal audit activities in several areas, including risk assessment design/performance; turnkey development of internal audit functions; internal audit process reviews/enhancement; and remediation of gaps in existing audit programs.
“The GSEs, investors, corporate boards and regulators are all focusing on the importance of managing internal risks and controls,” says Jeff Tennyson, president of Clayton. “Fannie Mae now requires seller/servicers to have internal audit and management control processes, and the CFPB is mandating and examining for compliance management systems. Our new offering helps clients identify gaps and inadequacies in existing functions before GSE and regulatory reviews and to design and build stronger processes. Depending on the client’s need, our role can range from reviews to training and from problem remediation to turnkey audit process development.”
Optimal Blue Adds Third-Party Oversight
Optimal Blue, offering mortgage pricing and hedging software, has acquired mortgage compliance software firm Comergence Compliance, thus significantly expanding its offerings.
Founded in 2008, Comergence provides an array of third-party originator, appraiser and social media risk management solutions that verify third-party compliance in real time. The company is well known for its offerings in due diligence automation and surveillance services.
“We are thrilled to welcome Comergence to the Optimal Blue family, and we are looking forward to extending their network management platform to our customers,” says Scott Happ, CEO of Optimal Blue, in a release. “Comergence solutions help build trust and confidence among marketplace participants by verifying third-party compliance in real time – a capability unmatched in the industry.”
Happ adds that the companies are “well-aligned” in that they share a “principal mission of facilitating transactions between buyers and sellers of loans.”
Terms of the deal were not divulged.
Optimal Blue says it will be retaining the Comergence team “as we execute our shared growth plans.”
DocMagic Tech is Ready for Both Phases of UCD Implementation
DocMagic Inc., a provider of document production, automated compliance and e-mortgage services, says its technologies are now capable of supporting both phases of the upcoming Uniform Closing Dataset (UCD) requirement.
The company’s technology solutions, which have been certified by Fannie Mae and Freddie Mac for both phases of the UCD file delivery mandate, enable lenders to start immediate testing of full UCD delivery.
“Phase one addresses the XML file for the borrower CD and associated data, but the GSEs have definitively recommended that lenders complete everything before the phase one Sept. 25, 2017, deadline,” explains Tim Anderson, director of e-services at DocMagic. “We find that lenders that are serious about sustained profitability and growth tend to follow GSE recommendations and take action ahead of time. Now with DocMagic, all of our lender clients have that option.”
On Sept. 25, the GSEs will require lenders to deliver borrower data and the Closing Disclosure in the UCD file. Later, in 2018, the second phase of the mandate will require seller data to be included as well.
DocMagic’s technology solutions allow lenders to fulfill the GSEs’ recommendation by generating and compliantly delivering UCD files that include both borrower and seller data to the GSEs. DocMagic can also accept UCD XML data from third parties and deliver it to the GSEs. In addition, the company offers an API for direct, seamless connection to the GSEs’ technologies.
To assist lender clients in preparing to meet the entire UCD mandate, DocMagic recently launched its ‘UCD Control Center,’ a one-stop, go-to resource for everything lenders need to know about the UCD requirement. It offers the ability for lenders to test for the entire UCD mandate ahead of the complete 2018 deadline.