Legal Issues and Regulatory Compliance Conference 2011 Origination Litigation Panel Benjamin B.

Klubes BuckleySandler LLP September 25, 2011

Overview
Fair Lending and Discrimination Litigation Municipal Suits Relating to Originations Regulatory and Enforcement Developments

2 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Dukes v. Walmart is the latest Supreme Court decision relating to class certification and may impact fair lending litigation in several ways. Prior to Dukes, some classes in fair lending, price discrimination, and discretionary pricing class action lawsuits were being certified
Ramirez Barrett

3 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Walmart Stores, Inc. v. Dukes (S. Ct. 2011)
In Dukes Plaintiffs sought certification of a class comprising all women employed at any Wal-Mart . . . who have been or may be subjected to Wal-Marts [allegedly discriminatory practices]. The U.S. Supreme Court denied class certification after finding a lack of commonality among the plaintiffs in the proposed class. Commonality, the Court held, requires the plaintiff to demonstrate that the class members have suffered the same injury. Quoting a 2009 law review article, the Court explained that [w]hat matters to class certification . . . is not the raising of common questions even in droves but rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. (Internal quotation marks omitted)
4 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Walmart Stores, Inc. v. Dukes (continued)
The Court found commonality lacking in Dukes because plaintiffs could not bridge the gap between two propositions, namely that (a) an individual has been discriminated against pursuant to a policy giving decision-makers significant discretion, and (b) that a class of persons has suffered the same injury. Relying on its earlier Falcon decision, the Court noted two ways that this gap could be bridged:
First, Plaintiffs can show that the Defendants used a biased test to evaluate all applicants giving rise to a class consisting of all persons injured by that test. Second, Plaintiffs can put forth substantial evidence that Defendants operated under a general policy of discrimination.

5 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Dukes has already impacted fair lending class action litigation.
In re Wells Fargo Mortgage Litig. (N.D. Cal. 2008):
The court found lack of commonality among plaintiffs alleging that Wells Fargos loan officers exercised discretion in a way that resulted in minorities being charged higher interest rates on mortgage loans. Citing Dukes the court found that Wells Fargos policy of giving loan officers discretion in making loans and setting fees and interest rates coupled with disparate impact evidence could not give rise to a finding of commonality. It accordingly denied class certification.

Rodriguez v. National City Bank (E.D. Pa. 2008)

In a similar case, following the Courts reasoning in Dukes, the E.D. Pa. declined to certify a class and approve a class settlement after finding a lack of commonality.
6 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Ramirez v. GreenPoint (N.D.Cal. 2008)
Class cert. granted based on GreenPoints discretionary pricing policy, despite potential differences in policy application to and effect on borrowers by different brokers Allegations:
GreenPoint authorized wholesale brokers to price wholesale loans in a discretionary manner via loan origination and processing fees African-American and Hispanic borrowers were charged disproportionately more than white borrowers

Disparate impact theory under ECOA and FHA

In denying GreenPoints Motion to Dismiss, the Court stated that disparate impact claims were cognizable under both ECOA and FHA

The District Court approved a class settlement in April 2011

7 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Barrett v. H&R Block, Inc. and Option One Mortgage Corp. (D. Mass. 2011)
Class cert. granted based on Option Ones discretionary pricing policy Allegations:
Option One violated ECOA and the FHA by charging African-American borrowers higher APRs on wholesale loans than similarly-situated white borrowers through discretionary pricing at the broker level Higher interest rates, loan origination and loan processing fees

Disparate impact theory under ECOA and FHA

In denying Option Ones motion to Dismiss, the Court stated that disparate impact claims were cognizable under both ECOA and FHA

8 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Notable Fair Lending Litigation Developments

Manger v. Gallagher (S. Ct. 2010)
The City of St. Pauls cert. petition to the U.S. Supreme Court is still pending In its petition, the City asks the Court to determine whether the FHA permits disparate impact claims and if so, which test should apply, i.e., burden shifting, balancing of factors, or a hybrid of both Smith v. City of Jackson (S.Ct. 2005)
Disparate impact theory cognizable under ADEA based on identical text in Title VII and ADEA This language is NOT part of the FHA

The City argues that the en banc dissent below noted this as well as the language similarities between the FHA and Title VI which does not allow disparate impact claims It argues that the FHA does not permit disparate impact claims, despite that most, if not all, circuits have permitted such claims
No textual support Would prevent code enforcement in minority neighborhoods
9 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Organizational Fair Lending Litigation Developments

NAACP
In 2007, the NAACP filed pricing discrimination lawsuits against more than a dozen financial institutions alleging FHA, ECOA, and Civil Rights Act violations In April 2010, it settled with at least one major bank
The bank agreed to help develop programs to improve African Americans access to high-quality loans and protect minorities against predatory loans, including opening a financial literacy center in Washington, D.C. The defendant also agreed to donate $2.5 million annually for the next five years to fund the NAACP Financial Freedom Center in the District and similar initiatives

The case is still pending before the C.D. Cal, although certain defendants have already settled.
10 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Organizational Fair Lending Litigation Developments

NCRC
The NCRC filed Complaints against 22 lenders for failing to have policies in place to make loans to individuals with credit scores as low as 580 even though the FHA permits such loans to be made. The NCRC alleges that this failure disproportionally denies credit to African American and Latino borrowers They claim that this practice violates federal law including the FHA, the ECOA, and the CRA

11 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Municipality Fair Lending Litigation Developments

Municipalities have sued mortgage originators and secondary market participants for alleged foreclosure-related losses
Reverse Redlining Cases
These plaintiffs allege that lenders have steered minority borrowers into subprime loans, causing foreclosures which decreased tax revenues and increased demand for municipal services
Birmingham: dismissed August 2009 Baltimore: dismissed January 2010, September 2010; case allowed to proceed April 2011 with limited discovery Memphis: motion to dismiss denied April 2011

Nuisance Cases
Nuisance plaintiffs allege that subprime lending generally caused an uptick in foreclosures, decreasing tax revenues and increasing demand for municipal services
Buffalo: pending Cleveland: dismissed summer 2009; affirmed on appeal July 2010; Supreme Court denied cert.

12 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Enforcement and Regulatory Developments Relating to Origination

Recent Department of Justice Fair Lending Cases
Midwest BankCentre: On June 28, 2011, the DOJ settled a case with Midwest relating to its redlining of certain neighborhoods in St. Louis. The Bank agreed to:
Provide $900,000 in special financing to the formerly redlined neighborhoods, Spend $300,000 on consumer education and credit repair programs in those neighborhoods, and Spend $250,000 for outreach to potential customers.

Citizens Republic Bancorp: On June 23, 2011, the DOJ settled a Detroit redlining case with Citizens in which the Bank agreed to:
Provide $1.5 million in special financing to the formerly redlined neighborhoods, Spend $1.6 million in grants to help homeowners improve their homes exteriors, and Spend $500,000 on consumer financial education programs.

13 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP

Enforcement and Regulatory Developments Relating to Origination

Recent Department of Justice Fair Lending Cases
USAA Preemption Case: In a recent memorandum opinion following a DOJ-filed statement of interest, the E.D. Pa. held that the Pennsylvania Human Rights Commission was not preempted from enforcing state antidiscrimination laws and investigating a federally chartered financial institution pursuant to the FHA which allows HUD to refer discrimination claims to HUD-approved state agencies.
USAA argued that HUD could not refer discrimination cases to state agencies where those agencies would be enforcing state, as opposed to federal antidiscrimination laws. The court disagreed, finding that because the Pennsylvania antidiscrimination law was not directed specifically at federally chartered financial institutions and had only an incidental effect on such institutions, that the law was not preempted by the FHA or OTS regulations.
14 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Enforcement and Regulatory Developments Relating to Origination

Department of Justice Fair Lending Enforcement Will Likely Remain Vigorous in the Coming Years
In September 2011, a debate played out on the editorial pages of the Wall Street Journal between WSJ editorial writer Mary Kissel and Asst. U.S. Atty. General Thomas Perez. Kissel accused Perez and the DOJ of unfairly enforcing fair lending laws and coercing banks to lend to un-creditworthy minority borrowers. Perez responded that All qualified home buyers should have access to sustainable credit without being subject to illegal discrimination. The Justice Department will unapologetically continue to ensure that they can do so.

Perez also discussed his fair lending strategy in a Sept. 2011 Statement to the Senate Judiciary Committee
15 Litigation Involving Mortgage Lending
Benjamin B. Klubes, BuckleySandler LLP

Contact Information

Benjamin B. Klubes

Co-Managing Partner
BuckleySandler LLP 1250 24th Street, NW, Suite 700 Washington, DC 20037 202.349.8002 t 202.349.8080 f bklubes@buckleysandler.com

16 Litigation Involving Mortgage Lending

Benjamin B. Klubes, BuckleySandler LLP