On January 1, 2004, revisions to the Federal Reserve Board’s Regulation C—which implements the Home Mortgage Disclosure Act ("HMDA")—began to require that mortgage lenders report on their "loan application registers" or "LARs" data relating to certain high-cost mortgage loans, including HOEPA loans. In particular, lenders are now required to identify the geographic location of high-cost loans and the interest rates on certain of those loans—which will facilitate comparing the market areas in which high-cost loans are originated with markets in which prime loans are predominantly made.
We are very concerned that, when results of these changes are published by the federal government in 2005, private parties and governmental agencies will bring fair lending lawsuits against the mortgage banking community. Whereas in the past, readily available data did not exist to support discrimination claims against mortgage lenders based upon the theories of disparate treatment or disparate impact, the revisions to Regulation C arguably may make statistical data available to plaintiffs or to the government to support mortgage-lending discrimination claims.
While the reliability of the new HMDA data is highly suspect, the reality of today’s litigious environment is that fair lending lawsuits will likely be brought based upon the new data—regardless of the merits.
To assist our clients in addressing this emerging litigation threat, Reed Smith’s Fair Lending Team is available to advise clients regarding possible fair lending concerns, including lending pattern analysis. In particular, we wish to point out several significant legal exposures that relate to possible fair lending litigation. First, because practically any fair lending analysis conducted by a mortgage lender is subject to the self-testing rules of the Equal Credit Opportunity Act and the Fair Housing Act, any such self-evaluation must be protected against involuntary disclosure by the prudent use of the attorney-client privilege. (While the selftesting rules create a limited privilege from disclosure, the numerous exceptions to the self-testing privilege make the privilege of little value.) Second, because of the recent series of court decisions limiting the availability of the attorney-client privilege when employed by in-house counsel, the sensitivity of a company’s internal fair lending analysis argues strongly for the use of experienced outside counsel to conduct and direct the process in order to maintain the confidentiality of the analysis.
Third, while in the past few years both the federal and state governmental agencies have not engaged in many fair lending administrative enforcement actions, it is very possible that the publicity generated by the publication of the revised Regulation C data will result in both private litigation and governmental investigations. Among other things, this means having counsel experienced in defending not only complex civil litigation, but in responding to governmental subpoenas and investigations as well.
Finally, we wish to point out that there is a practical difficulty in assembling statistical data and other related materials to refute potential fair lending allegations. If history is any guide, if discrimination claims are raised mortgage lenders may be subjected to reputational risk—including very adverse publicity—should a lender be accused of discriminatory lending practices. Stated another way—it may be a practical impossibility to assemble in a short period of time relevant data to be provided to the media and to governmental authorities that demonstrates compliance with the fair lending laws.
As noted above, our Fair Lending Team is prepared to assist your company’s lending staff to analyze and evaluate potential fair lending exposure. Among other things, the Fair Lending Team will assist in conducting an analysis of mortgage lending patterns, including policies and procedures and marketing programs, and will recommend possible remedial action should an analysis identify possible fair lending exposure. (Moreover, because the Regulation C data may be so potentially inflammatory, prudence may dictate a review at this time, as well as assembling supporting materials to be supplied to the government and to the media following the release of the revised Regulation C data in 2005.)
This article is presented for informational purposes only and is not intended to constitute legal advice.
