Litigation Concerns for the Compliance Professional,

Including Fair Lending and Other Claims

Regulatory Compliance Conference 2011
September 26, 2011 1:30 pm Paul F. Hancock
K&L Gates LLP 200 S. Biscayne Boulevard, 39th floor Miami, Florida 33131 (305) 539-3378 paul.hancock@klgates.com

Overview

Key Issues:
State AG initiatives Fair lending enforcement by state and federal

agencies
Recent trends Future after Wal-Mart v. Dukes

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Major Issues
State Attorneys General
Multi-State Investigation of Loan Servicing: Led by Iowa AG October 13, 2010 - Joint Statement of the Mortgage Foreclosure Multistate Group All 50 states plus banking commissioners Executive Committee:
- Arizona - California - Colorado - Connecticut - Florida - Illinois - Iowa - New York - North Carolina - Ohio - Texas - Washington - Bank regulators of: Maryland New York Pennsylvania

Major Issues
Multi-State Investigation of Loan Servicing (cont.)

Actions of Multi-State Group

Meetings with loan servicers Meetings with advocacy groups Coordination with federal agencies Involvement of Department of Justice Role of regulators Role of CFPB

Authority For Action?

States CFPB Federal agencies OCC and other regulators
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Major Issues
Fair Lending - Enforcement Department of Justice HUD FTC State Attorneys General

Other State Agencies

Private Litigants

Major Issues
Fair Lending - Major Issues Steering

Retail Pricing
Wholesale (Broker) Pricing Redlining

Reverse Redlining
Underwriting Disability / Maternity

Marketing
Servicing
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Major Issues
State AG fair lending enforcement Enforcement conducted by state attorneys general, banking departments and state agencies Source of state fair lending enforcement authority
State antidiscrimination statutes State mortgage banking statutes with antidiscrimination provisions

Recent enforcement:
Litigation by Illinois AG under disparate impact theory
Lawsuit against Bank of America (June 29, 2010) alleging company steered African-American and Hispanic borrowers into subprime mortgages and charged them higher prices Lawsuit against Wells Fargo (July 31, 2009) alleging company put African-American and Hispanic borrowers into high-cost subprime loans while whites received lower-cost loans.
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Major Issues
Federal Enforcement Department of Justice

Fair lending is a priority Fair lending is stated priority of Assistant Attorney General for Civil Rights Tom Perez Fair Lending Task Force established January 2010 60+ open investigations in 2010
Referrals from regulatory agencies Majority are from FDIC FRB, OCC and OTS also make referrals DOJ returned 28 of 49 referrals in 2010 and early 2011
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Major Issues
Federal Enforcement
DOJ Settlement with AIG (March 4, 2010) Issue: Are lenders liable for the discriminatory conduct of brokers? Allegations: Higher total broker fees to minorities were a result of the policy and practice of allowing unsupervised and subjective discretion by brokers in the setting of direct fees and cannot be fully explained by factors unrelated to race or justified by business needs.

Major Issues
DOJ Settlement with AIG (March 4, 2010) (cont.)
Settlement is Controversial Confirms agency belief that lenders should be liable for broker conduct, absent any statutory or common law precedent Disregards Meyer v. Holley vicarious liability standard

Lender expected to pay restitution to borrowers for fees charged and retained by third parties

Lenders monitoring wholesale price differences across borrower groups find it difficult or impossible to prevent disparities
Disparities can arise solely because of brokers differing pricing policies

Holds one creditor liable for actions of another creditor despite ECOA provision
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Major Issues
More recent federal enforcement Pricing DOJ Auto Lending Case, U.S. v. Nara Bank
Dismissed for failure to state a claim of discrimination against non-Asians based on statistical analysis (May 28, 2010)

DOJ Settlement with PrimeLending (December 8, 2010)

Resolved allegations of pricing discrimination against African-Americans

FTC Settlement with Golden Empire Mortgage (Sept. 20, 2010)

Resolved allegations of pricing discrimination against Hispanics

DOJ Settlement with Nixon State Bank (June 17, 2011)

Resolved allegations of pricing discrimination of unsecured consumer 11 loans on the basis of national origin

Major Issues
More recent federal enforcement Redlining DOJ Lawsuit Against Citizens Bank (May 5, 2011) Allegations of redlining in Detroit area Record of servicing African-American neighborhoods of Flint and Saginaw DOJ focused on applications, not originations Deceptive allegations as to branches Misapplication of Regulation BB DOJs proposed settlement rejected by Court as extortion Led to out of court settlement, no injunction
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Major Issues
More recent federal enforcement Redlining

DOJ Lawsuit Against Midwest BankCentre (June 28, 2011) Allegations of redlining in St. Louis area $1.45 million settlement Required to open a branch in a majority-black census tract in St. Louis county Required to conduct a credit needs assessment, including an evaluation of the need for alternative credit products for borrowers whose credit may have been damaged by the subprime lending practices.
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Major Issues
More recent federal enforcement Redlining

DOJ Investigations Continued focus on alleged redlining What is the proper method of analysis? Forced expansion of CRA assessment areas Predetermined racial/ethnic quotas Use of statistics and disparate impact, despite intentional nature of redlining Targeting lender with greatest success in lending to minority areas Potential focus on private mortgage companies 14

Major Issues
Significant Decisions Supreme Court decision Wal-Mart v. Dukes (June 20, 2011)
Most significant civil rights decision in many years Sexual discrimination in employment based on disparate impact Challenge to discretionary decision-making under authority of Watson
In Watson, a plurality opinion, the Supreme Court held that a disparate impact analysis may be applied to allegedly discriminatory subjective or discretionary employment practices Also noted that statistics could be used to establish disparities

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Major Issues
Significant Decisions Supreme Court decision Wal-Mart v. Dukes (June 20, 2011)
Court found commonality lacking and denied class certification
No policy identified The only corporate policy that the plaintiffs evidence convincingly establishes is Wal-Marts policy of allowing discretion by local supervisors over employment matters. On its face, of course, that is just the opposite of a uniform employment practice . . . it is a policy against having uniform employment practices. This is a very common and presumptively reasonable way of doing business one that [] should itself raise no inference of discriminatory conduct. Plaintiffs failed to answer the crucial question, Why was I disfavored? Statistical regression analysis insufficient Merely proving that the discretionary system has produced a racial or sexual disparity is not enough.
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Whats left of Watson?

Major Issues
Significant Decisions Applying Wal-Mart v. Dukes (June 20, 2011) to fair lending

Should have major impact on types of cases being presented by private litigants and government agencies
In Re Wells Fargo Residential Mortgage Lending Discrimination Litigation, (N.D. Cal. Sept. 6, 2011).
Plaintiffs claimed that discretionary pricing policy allowing broker discretion had disparate impact on minorities. Plaintiffs relied on statistical regression to show impact but did not prove common mode of exercising discretion.

Relying on Dukes, court denied class certification: Where persons who are afforded discretion exercise that discretion differently, commonality is not established.

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Major Issues
Significant Decisions
Impact of Wal-Mart v. Dukes (June 20, 2011) on fair lending Broader application than just class certification analysis
According to Supreme Court, proof of commonality necessarily overlaps withmerits contention that [defendant] engages in a pattern or practice of discrimination.

Questions the use of statistics as sole proof of pattern or practice of discrimination, based on a discretionary pricing policy where persons exercise discretion differently

Actions brought pre-Dukes might not survive today

Private litigation based on the impact of a Discretionary Pricing Policy (e.g., Garcia v. Countrywide (C.D. Cal.), Ramirez v. GreenPoint Mortgage (N.D. Cal.) Federal enforcement pattern or practice of discrimination actions relying on statistical regressions to prove disparity Could the government have prevailed against AIG in light of Wal-Mart? 18

Conclusion Reasonable to expect continued aggressive enforcement Greater challenge to lenders when proposed lawsuits do not properly reflect facts or proper legal standard More contested litigation More pushback from trade groups and Congress Lenders should continue to make compliance a top priority And simply hope that you are not targeted

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