Fair-Lending Enforcement in 2022, Part 2: Codifying Discriminatory-Effects Standards and Enforcing CRA Data-Collection Standards
The degree of enforcement of the fair lending laws by the regulators can vary depending on which administration is in office, and the Biden administration is no exception. The Biden administration is just a year old, so there has not been time for much new litigation, but policymakers appointed by President Biden have issued pronouncements signaling what the banking industry can expect, specifically including changes from the Trump administration.
This two-part series of articles explores some of the Biden administration’s more high-profile initiatives. The first article examines the renewed focus on combatting the practice of redlining and the expanded oversight role of the Consumer Financial Protection Bureau. This second article looks at efforts to recodify the discriminatory-effects standards of the Fair Housing Act (FHA or Act) and to enforce the Office of the Comptroller of the Currency’s (OCC) December 14, 202 final rule regarding Community Reinvestment Act (CRA) data-collection requirements.
Recodifying HUD’s Discriminatory-Effects Standard
The FHA is contained in Title VIII of the Civil Rights Act of 1968 and prohibits discrimination in the sale, rental, or financing of dwellings and other housing-related activities because of race, color, religion, sex, disability, familial status, or national origin. The Act gives the Department of Housing and Urban Development (HUD) the authority to administer and enforce the Act, including with respect to enforcement actions and rulemaking.
Housing discrimination can be proven under discriminatory (or disparate) treatment or disparate impact/discriminatory effects theories. Discriminatory treatment occurs when the plaintiff is subjected to discrimination because of his or her membership in one of the protected classifications; claims based on this theory require proof of intent. But no intent is required under a theory of disparate impact/discriminatory effects. This standard applies when a facially neutral policy is applied universally but has the effect of discrimination against members of the protected classes, even if no discriminatory effect was intended.
In 2013, HUD promulgated a rule that contained no new interpretation of the law but codified the long-standing judicial agency consensus regarding discriminatory effects law. In 2015, the US Supreme Court confirmed that the FHA provides for discriminatory effects liability (see Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2523 (2015)). On September 24, 2020, however, HUD published a rule that removed the definition of discriminatory effects, added pleading elements that made it far more difficult to initiate a case, altered the burden-shifting framework, created new defenses, and limited available remedies in disparate impact claims. The 2020 rule also limited remedies in disparate effects cases.
Following the publication of the 2020 rule, HUD was sued by plaintiffs seeking to enjoin the implementation of the rule. The plaintiffs in these three separate federal court actions claimed that the 2020 rule was inconsistent with the Act and had violated the Administrative Procedure Act as well. Prior to the effective date of the 2020 rule, the US District Court for the District of Massachusetts in Massachusetts Fair Housing CTR v. HUD found that the 2020 rule in significant respects was not supported by inclusive communities or other court decisions and issued a preliminary injunction staying implementation and postponing the effective date of the 2020 rule.
On January 26, 2021 — less than a week after his inauguration — President Biden ordered the department to “take all steps necessary to examine the effects of the [2020 rule], including the effect that amending the [2013 rule] has had on HUD statutory duty to ensure compliance with the Fair Housing Act” and “take any necessary steps … to implement the Fair Housing Act requirement that HUD administer its programs in a manner that … furthers … HUD’s overall duty to administer the Act including by preventing practices with an unjustified discriminatory effect.” Accordingly, HUD has now proposed that the 2013 rule be recodified (amending Sections 100.5 and 100.500) to expressly recognize the 2013 rule’s discriminatory-effect standards.
Enforcing CRA 2021 Final Rule
On December 14, 2021, the OCC issued a final rule (Final Rule) that rescinded the 2020 rule and took effect on January 1, 2022. The purpose of the Final Rule is to:
Create consistent and transparent CRA rules for banks.
Limit CRA-related burdens on banks, banks’ communities, and examiners.
Ensure that the OCC continues to encourage banks to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods, consistent with safe and sound operations.
Specifically, the Final Rule provides an assessment method for (1) small banks that will streamline and emphasize lending performance; (2) intermediate small banks that will consider lending and community development activities; (3) large retail banks that focus on lending, investment, and service performance; and (4) wholesale and limited-purpose banks that will be based on community development activities. This new rule will place greater emphasis on where the banks have sizable deposits and less on where the branches are located.
Additionally, the Final Rule requires large banks to collect, maintain, and report certain data related to the proposed performance tests and standards. The OCC will make this data available through individual and aggregate disclosure statements. In addition, banks will make this CRA-related information available in their public files and will post CRA notices in specified locations.
Moreover, the Final Rule reinstates requirements regarding the content and location of the public file and public notices that were revised or eliminated in the June 2020 rule. The Final Rule also reinstates separate rules for national banks and savings associations that the June 2020 rule integrated.
With respect to enforcement, the Final Rule states:
The OCC has the authority to prescribe these regulations for national banks, federal savings associations, and state savings associations and has the authority to enforce these regulations for national banks and federal savings associations.
The FDIC has the authority to enforce these regulations for state savings associations.
Although the Final Rule includes few (if any) changes regarding the enforcement of the CRA, it does appear that there will be more oversight and regulation due to the increased data collection and new assessment methods.
To summarize the two articles in this series, it is important to recognize that political winds will always blow and, over time, will do so from many directions. However, the general position of the US public against systemic discrimination, supported by increasing demographic diversity, means that for the next three years of the Biden administration — and possibly longer — banks and other participants in the financial-services industry will face growing pressure to ensure fairness in lending, community reinvestment, and other economic policies and programs.