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No paper tiger.

HUD is getting a growing number of complaints under the Fair Housing Act. Knowing the terms of that act, and the legal steps for dealing with complaints, is helpful to lenders, because the law has real teeth.

Mortgage bankers often offer a very reasonable defense to charges that they discriminate in making mortgage loans. They simply say that the only way they get paid is to make loans, so why would they turn down perfectly good business.

And because that really is the case, there isn't much logic in turning down legitimate loans because of a borrower's skin color. But even so, the number of applicants filing grievances with HUD has been on the rise. These would-be borrowers believe that despite the fact that lenders gain nothing by turning down makable loans, somehow the applicants' minority status worked against them in the process.

There is no debating the fact that mortgage lenders are finding themselves the targets of record numbers of discrimination complaints filed with HUD, the agency that enforces the Fair Housing Act.

Because of this surge of complaints, it is helpful for all lenders to understand the ins and outs of the complaint process. What is the Fair Housing Act complaint process? What should you expect if you are investigated? What are the "defenses" to complaints? Are there ways to avoid being the subject of a discriminatory complaint? The answers to these questions will be the focus of this article.

Fair Housing Act

Discrimination in housing and real estate-related transactions based upon race, national origin, religion, sex, familial status or handicap is prohibited by the Fair Housing Act (42 U.S.C. 3601 et seq., as amended |1988~). The 1988 amendments not only broadened the scope of the act, but also strengthened HUD's enforcement power.

The act makes it illegal for any lender to discriminate in making or setting terms or conditions for "residential real estate-related transactions." Residential real estate-related transactions include both the making and purchasing of mortgage loans. That casts a pretty wide net--retail lenders that originate and process loans, as well as wholesale investors that purchase and service these loans may find themselves facing a fair housing complaint.

The Clinton administration has indicated that it intends to actively use the Fair Housing Act to fight discrimination, particularly in mortgage lending. Both Secretary Henry Cisneros and Assistant Secretary Roberta Achtenberg have expressed their intent to step up monitoring and prosecution of mortgage lending offenses. This is no paper tiger; HUD has already awarded substantial sums to private housing groups to test for lending bias.

Types of complaints

Some forms of discrimination are overt and obvious--the flat-out refusal to make loans to applicants because of their race or ethnicity. Most complaints involve applicants who have been denied a loan. Borrowers, in these instances, claim that it is because of their race, and the lender insists it's because of their bad credit record or failure to meet objective secondary market underwriting guidelines. Traditionally, this is the type of discrimination that has formed the basis for fair housing complaints.

Other forms of discrimination are more subtle; although not intended to discriminate, lenders' policies may have a discriminatory impact on "protected classes" (e.g., minorities, elderly, handicapped and other individuals protected by the Fair Housing Act). Do lenders have an obligation to make loans in all parts of town? Do lenders that require minimum loan amounts or engage in tiered pricing engage in a kind of discrimination? In the coming months, more and more lenders may be subject to fair housing complaints based on policies having a disparate impact on protected classes.

Here are a list of practices that may have discriminatory effects:

* Having a set of property standards based on lot size, minimum value, age or location (standards, for instance, drawn only from suburban homes);

* Redlining by selective prescreening to discourage minorities from formally submitting loan applications and/or pursuing marketing strategies that exclude minority areas and signal to real estate brokers that loans from minority areas are unwelcome;

* Offering variations in credit terms as to length of amortization period, interest rate, discount points and fees, depending on loan size and property value;

* Following rigid credit standards. A hard-and-fast "two years on the job" rule, for example, or requiring established credit, may discriminate against those "last hired, first fired" or those who pay their debts in cash instead of with credit cards or loans;

* Having a record of uneven application of underwriting exceptions. Applying rigid debt-to-income ratios in the case of minority applicants, but finding compensating factors for nonminority applicants may be the basis of a complaint. An example of this might be lenders that assist non-minority applicants through the processing maze, but don't do the same for minority applicants;

* Following certain loan origination practices. Loan officers have been known to discourage submission of formal applications or to steer minority applicants toward minority neighborhoods. Such selective pre-screening is a green light for complaints; and

* Following certain appraisal practices, such as making major adjustments in value tied solely to the age of the home or selecting inappropriate comparables in order to reject a file. These are sure-fire ways to trigger a HUD investigation.

The aggrieved party and HUD have an array of enforcement procedures available to prohibit and punish discrimination. Aggrieved individuals may proceed directly to federal district court under a private right of action, or they may choose to file an administrative complaint with HUD. The HUD secretary can act without waiting for a complaint; the HUD secretary may initiate his own investigations as warranted.

Most Fair Housing Act cases, however, begin with the filing of a complaint. What should you expect if your company is accused of discrimination in lending?


Most complaints filed against lenders involve instances where an applicant whose loan has been denied claims the rejection was racially motivated. HUD and state and local fair housing agencies received 9,461 fair housing complaints during fiscal year (FY) 1992. Fair housing complaints received by HUD were up 11 percent from the previous year.

The most startling statistic, however, was the 46 percent rise in allegations of discriminatory financing filed with HUD. Heightened media sensitivity, including greater coverage of Home Mortgage Disclosure Act (HMDA) and Community Reinvestment Act (CRA) findings, along with the availability of the HUD telephone hot line and the recent settlement of a discrimination suit against a financial institution, may account for this increase.

Complaints can be filed in person, in writing or by phone with any of HUD's 10 regional offices or with selected field offices. It is not necessary to plead a prima facie case in a complaint. However, the filing must occur within one year of the alleged discriminatory incident or the cessation of a discriminatory practice.

If the complaint or a preliminary investigation reveals a situation that requires immediate intervention to prevent irreparable harm, HUD may authorize the attorney general to seek preliminary relief in court. This is a last resort--having been requested only four times during FY 1992--with the attorney general being awarded such relief only twice.

HUD is required to notify the lender within 10 days of the filing of the complaint. The lender has 10 days to acknowledge receipt and file an answer. HUD regional offices will grant extensions if additional time is needed to gather information and conduct a preliminary review.


Once a complaint has been filed and the lender notified, HUD is under a legal obligation to begin the conciliation process "to the extent feasible." Routinely, a HUD investigator makes several efforts to bring the parties together, particularly at the opening and closing of the investigation. HUD dispenses with conciliation at the conclusion of its investigation, but settlement is permitted up until litigation begins. In fact, many cases are settled late in the complaint process.

The HUD regional office field investigator generally acts as the conciliator. The role of the conciliator varies. When an investigation is conducted at HUD's Washington, D.C. headquarters, the role of the conciliator is generally limited to that of a messenger, conveying settlement offers between the parties. Many regional offices, however, take a more active role.

Remedies for injured parties

The conciliation process offers a variety of remedies. The regulations specify that injunctive or other equitable relief; monetary damages, including compensation for embarrassment, humiliation and emotional distress; and attorney's fees are all available through conciliation. Punitive damages may also be appropriate. In addition to remedies for the aggrieved party, HUD may demand solutions that are in the public interest; (e.g., establishing affirmative action plans or requiring that employees attend fair housing training).

HUD must approve any conciliation agreement, thus making the agency a party to the settlement. As such, HUD is able to enforce the agreement against either party.

On the whole, the conciliation process has shown that it works. In fiscal year 1992, HUD successfully conciliated 2,065 of the 6,702 cases closed that year. The high percentage of success is largely attributable to the emphasis HUD officials place on conciliation, in order to reduce the agency's heavy caseload. About a third of those filing complaints received housing relief. Monetary awards to individuals filing complaints averaged less than $2,000 per case.


If conciliation fails, HUD begins the investigation process. The law gives HUD 100 days from the time the complaint is filed to conduct an investigation and issue a finding on the merits of the complaint. HUD almost never meets this deadline. The agency asserts that inadequate staffing makes the deadline impossible to meet. The majority of courts have concurred, holding that an aggrieved party is not adversely affected by a slipped deadline.

Investigators first review a lender's HMDA data, CRA reports and underwriting guidelines. Roughly 10 percent of the previous year's originations are reviewed to determine if they are in compliance with insurer, guarantor, investor and company requirements. Recently rejected loan files are randomly sampled.

Lenders should be aware that compliance with investigatory requests can be time consuming and expensive. Loans are reunderwritten to see if lenders evaluate credit in the way they claim. Rejected and approved loan applicants may be interviewed, along with the lender's staff. Investigations usually include interviews with loan officers, processors, underwriters and local real estate agents. Lenders often must provide detailed information about their lending practices.

To aid the investigation, the HUD secretary may issue subpoenas, order discovery and provide witness fees, much like a civil trial. Yet, in practice, formal procedures are not used in an investigation, with the HUD field investigator instead asking both sides to identify witnesses and documents relevant to the dispute.

Field investigators also use administrative and judicial opinions as guideposts as to what evidence is needed to establish discrimination. Once the investigative process is complete, the HUD investigators issue a written report to the regional office about their findings but draw no conclusions.


Ultimately, the investigation determines whether a complaint is dismissed or proceeds to a judicial or an administrative resolution. If the regional director makes a determination of "no cause," the complaint is dismissed. There is no appeal procedure within HUD for a no-cause determination in either the statute or regulation. The person filing the complaint, however, can pursue a private remedy in federal district court. The statute of limitations for a private suit is two years, but that time does not run during the administrative process.

If the regional director decides the complaint has merit, it is sent to the Office of Fair Housing and Equal Opportunity (FHEO) in Washington, D.C. If FHEO finds discrimination, the complaint is forwarded to HUD's Office of General Counsel for further review, and then goes back to regional counsel.

Regardless of the determination, HUD must notify both the aggrieved person and the lender of the decision and issue a short statement of facts. If evidence of discrimination is found, HUD issues a formal charge and the complaint moves to the next stage.

Forum selection

If HUD's general counsel or regional counsel makes a final determination of cause, the parties may elect to file suit in federal district court. HUD, the lender or the party on whose behalf the complaint is filed has 20 days from the time the determination is made to decide to file. One of the parties must take an affirmative step to move the case from an administrative proceeding to a judicial one. Otherwise, the case is heard before an administrative law judge (ALJ). The election option preserves the complaining party's right to a jury trial.

If any of the parties elects to proceed to federal court, HUD forwards the complaint to the Department of Justice. The attorney general then has 30 days to file suit in the district court where the alleged discrimination occurred.

In most cases, election is made to proceed to federal court, where punitive damages and greater monetary relief are more likely. The average monetary award in discrimination cases handled by the Department of Justice in 1991 was $16,000, compared with an average award of around $5,800 in administrative hearings. (However, most of these disputes involved rental housing rather than mortgage financing transactions.) Parties should recognize, however, that resolution through the federal courts can be a slow process.

Administrative hearing

If the administrative hearing option is chosen, the ALJ must begin a hearing within 120 days of the charge being filed. This deadline is generally met.

The procedural aspects of the administrative hearing are very similar to those of a civil trial. Discovery, including depositions, responding to written questionnaires, requests for document production and requests for admissions, are the same as under the federal rules of civil procedure, although the process is not governed by the federal rules.

In the administrative hearing, HUD (rather than the aggrieved person) is the complainant. A private individual must intervene in order to protect his or her personal interests, should they diverge from those of HUD. Absent intervention, the role of the aggrieved party is that of complaining witness. The office of general counsel serves as counsel to the complainant.

The substantive aspects of the administrative hearing mirror the standards established in federal court. Because fair housing law is less developed than other areas of civil rights law, the general practice is to follow the framework developed for employment discrimination under Title VII of the Civil Rights Act (42 U.S.C. 2000 et seq.).

Types of discrimination

Three types of discrimination are potentially covered by the Fair Housing Act. The first is through direct evidence of a discriminatory motive and is often referred to as "disparate treatment." The second is called "mixed motive." The third, dealing with discriminatory effect rather than discriminatory motive, is called "disparate impact."

To prove a case of disparate treatment, the complainant has the burden of presenting a prima facie case. To do so, the party filing the complaint must create a presumption of discrimination by producing evidence that shows the applicant is a member of a protected class; the applicant applied and was qualified for a mortgage loan; the loan was rejected; and the lender continued to approve loans for applicants with qualifications similar to those of the complainant's.

If evidence is introduced to support each of these elements, a presumption of discrimination would be created that the lender would then have to rebut by showing a legitimate reason for rejecting the loan (e.g., the applicant's debt-to-income ratios were excessive or the credit report showed numerous collections actions).

If the lender cannot establish a legitimate reason for rejecting the loan, the complainant would prevail. Assuming the lender can make its case, however, the burden to prove actual discrimination falls on the complainant.

Proving mixed-motive discrimination

Mixed-motive discrimination is another form of intentional discrimination, where both legal and illegal reasons exist for not making the loan. For example, if the lender rejected the loan because it was not supported by the appraisal (legal) and because the applicants were Hispanic (illegal), a case could be made for mixed-motive discrimination. The burden of proof is similar to that in disparate-treatment cases. The difference, however, is that the complainant must also prove that the discriminatory reason was a "motivating factor" (although other factors may have influenced the decision). If the lender can show that the same decision would have been made even without the discriminatory reasons, a violation would be likely, but the award of damages would be reduced.

Proving disparate impact

The third method uses an effects test or disparate-impact standard in which evidence is presented indicating that a particular policy, that on its face is neutral, operates in such a way as to discriminate against a protected class of people. For example, a policy of not making loans in the inner city but only in the suburbs could be the basis for a disparate-impact claim if it could be proven that this policy disproportionately affected minorities.

In a discrimination claim using the disparate-impact test, the complainant would bear the initial burden of proof to show discrimination. The complainant might use statistics to show that the particular practice had an adverse impact on protected classes of people.

The burden then shifts to the lender to demonstrate that the practice was justified, notwithstanding the disparate impact. The standard used in employment cases, and increasingly being used in fair housing cases, is that the practice must be justified by showing a "business necessity" for the policy.

If the lender meets this business-necessity standard, it remains to show that some "less drastic alternative" could have accomplished the same business objective. HUD has not yet clarified whether it believes this last burden of proof rests with the complainant or the lender.

If this burden ultimately rests with the lender, it will be a difficult one to meet. The lender would be required to prove not only that its practice was a legitimate business necessity, but also that no less drastic means were available to accomplish the same objective. If this becomes HUD policy, the complainant's position will be strengthened considerably.


The ALJ has 60 days after the hearing to issue findings of facts and conclusions of law. If the ALJ finds discriminatory conduct or a discriminatory effect, he or she must issue "such relief as may be appropriate." Available relief includes compensatory damages, injunctive or equitable relief and civil penalties to vindicate the public interest. Final decisions of the ALJ may be appealed to the U.S. Court of Appeals.

The range of civil penalties is dependent on whether or not the defendant has previously committed a discriminatory housing practice. The penalty is capped at $10,000 for a first offense; $25,000 for a second offense within five years, and $50,000 for more than two offenses within a seven-year period. The time limits do not apply if the offenses are committed by an individual as opposed to a corporation.

The first case heard by an ALJ under the 1988 amendments resulted in the issuance of the maximum civil penalty; awards since then have been significantly less. The average total amount of damages awarded in administrative proceedings for 1991 was approximately $5,800.


No lender is immune from a discrimination complaint, whether warranted or not. But you do have some options that reduce your chances of being the subject of a HUD investigation.

* Give your company a thorough fair-lending checkup. Analyze HMDA reports to determine rejection rates for minorities and the reasons for those rejections. Review your underwriting and appraisal standards to ensure that no bias exists against protected classes of people.

* Aggressively market in minority areas. Establish relationships with minority Realtors and others serving minority areas. Target minority markets by advertising in publications and media that reach your intended audience.

* Establish a committee of senior management. Review waivers and exceptions to make sure they are being applied evenhandedly in accordance with uniform criteria. If a standard has an adverse impact on individuals protected by the Fair Housing Act, make sure that a business necessity exists for the standard and that less drastic alternatives are not available to accomplish the same business objectives.

* Use your quality-control department to monitor fair-lending practices. Monthly reviews should examine the practices of loan officers and underwriters in your company in order to identify potential problems and find a solution.

* Sensitize your staff to the importance of fair lending. Training may be in order--especially for loan officers who represent the company to local communities. Employ minority and bilingual employees. Create an equal opportunity lending policy statement; have all your employees sign it. Staff always take their lead from senior management. If you make fair lending a high priority, so will they. Discriminatory lending practices still occur. These practices have an adverse impact on minority borrowers. Lenders must be sensitive to these conditions--and their consequences. They must act, not just react--not because it is the law, but because equal opportunity lending is good business.

Phillip L. Schulman is a principal with the Washington, D.C., law firm of Brownstein Zeidman and Lore, a professional corporation, where he specializes in regulatory compliance and enforcement matters affecting the mortgage banking industry. Kara Hagstrom also contributed to this article.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:discrimination in mortgages; Fair Housing Act
Author:Schulman, Phillip L.
Publication:Mortgage Banking
Date:Oct 1, 1993
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