HUD Issues Final Disparate Impact Rule
The Department of Housing and Urban Development has issued the final disparate impact rule (“Disparate Impact Rule”) under the Fair Housing Act, authorizing so-called “disparate impact” or “effects test” claims under the Fair Housing Act. This rule is effective March 18, 2013.
The Disparate Impact Rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a disparate impact on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit a practice to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.
HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. The new final rule states that the plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. Second, the respondent or defendant would have the burden of showing that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. Finally, if the respondent or defendant satisfies this burden, then the plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.
CFPB Issues Final Mortgage Escrow Account Rule
The Consumer Financial Protection Bureau (“CFPB”) has issued the final mortgage escrow account rule (“Escrow Rule”) under Regulation Z of the Truth in Lending Act (“TILA”). The Escrow Rule lengthens the time that mandatory escrow accounts must be maintained on higher-priced mortgage loans from one year to five years and exempts certain transactions from the escrow requirement. This new rule is effective June 1, 2013.
Under the Escrow Rule, a creditor may not extend a higher-priced mortgage loan secured by a principal dwelling unless an escrow account is established before consummation for the payment of property taxes and premiums for mortgage-related insurance required by the creditor. A “higher-priced” mortgage is defined as a closed-end loan secured by a principal dwelling with an annual percentage rate (“APR”) that exceeds the average prime offer rate (“APOR”) for a comparable transaction as of the date the interest rate is set by 1) 1.5 or more percentage points for loans secured by first lien transactions; 2) 2.5 or more percentage points for “jumbo” transactions; or 3) 3.5 or more percentage points for subordinate liens. The CFPB publishes and updates the APOR weekly.
There are several exemptions from this rule, including a transaction secured by shares in a cooperative, a transaction to finance the initial construction of a dwelling, a temporary or “bridge” loan with a term of twelve (12) months or less, or a reverse mortgage transaction subject to 12 C.F.R. §1026.33(c). Also exempt from escrow are insurance premiums for loans secured by dwellings in condominiums, planned unit developments, or other common interest communities which require participation in a governing association which is obligated to maintain a master policy insuring all dwellings.
Small creditors operating primarily in rural or underserved areas are exempt from the Escrow Rule. To be eligible for this exemption, a creditor must: 1) make more than half of its first-lien mortgages in rural or underserved areas; 2) together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; 3) as of the end of the preceding year, have an asset size of less than $2 billion; and 4) together with its affiliates, not escrow for any mortgages it or its affiliates currently services, except for escrow accounts established for first-lien higher-priced mortgage loans on or after April 1, 2012, and before June 1, 2013 or escrow accounts established after consummation as an accommodation to consumers to assist in avoiding default or foreclosure. These exempt creditors are not required to establish escrow accounts for mortgages intended at consummation to be held in portfolio; however, they are required to establish accounts at consummation for mortgages that are subject to a forward commitment to be purchased by an investor that does not qualify for the exemption.
A creditor or a servicer may not cancel escrow accounts required under the Escrow Rule except upon either the termination of the loan or receipt of a consumer’s request to cancel the escrow account no earlier than five years after consummation. The account may only be cancelled if the principal balance is less than 80% of the security property’s original value and the consumer is not delinquent or in default on the loan at the time of the request.