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DOJ investigative subpoenas issued

National Mortgage Professional
Mar 24, 2014

DOJ investigative subpoenas issuedMortgagePress.comDepartment of Justice,HMDA,ECOA,FHA

This text is presented for informational purposes and is not intended to constitute legal advice.

Just before the Thanksgiving holiday, the U.S. Department of Justice (DOJ) issued numerous subpoenas to mortgage lenders seeking a host of materials relating not only to the 2004 HMDA results, but also to mortgage loans originated as far back as 2001.

As many lenders are aware, when the Federal Reserve Board (FRB) completed its analysis of the 2004 HMDA data, its economists identified approximately 500 lenders whose raw 2004 HMDA data identified possible lending disparities between racial and ethnic groups. From that group of 500 lenders, the FRB further refined its list by performing an HMDA regression that applied many of the publicly reported variables that lenders included in their loan application registers, which resulted in a list of approximately 200 mortgage lenders. (The FRB has refused to release its list of targeted lenders, but has agreed to provide us with the methodology it employed, which we will share with clients to assist in their future internal analyses.)

The FRB sent that list of 200 lenders to the DOJ and the other agencies responsible for HMDA enforcement for further review. (Although the list of 200 lenders is small when compared to the almost 8,000 lenders that reported 2004 HMDA data, the FRB indicated that the list of 200 lenders includes lenders who originated a disproportionately large percentage of loans in 2004.)

In another disconcerting twist, the subpoenas were sent to the CEOs of the targeted lenders, which resulted in considerable intracorporate concern upon their receipt. Our review of the subpoenas indicates that in most instances, they are form documents requesting numerous data elements that will require the devotion of extensive resources in order to comply. Although the subpoenas will arguably be negotiable both in respect to content and timing for the delivery of documents and data, several significant issues are now presented.

First, the subpoenas were issued by the DOJ pursuant to the Equal Credit Opportunity Act and the Fair Housing Act--both of which provide authority for private parties to obtain the subpoenaed materials for use in subsequent litigation. This means that, among other things, plaintiffs' attorneys may be able to leverage off a DOJ investigation to obtain data necessary to bring lawsuits following the commencement of a formal enforcement action or settlement.

Second, care must be exercised in regard to the degree of cooperation that a lender determines is appropriate as part of its initial response and negotiations with the DOJ. For example, because many lenders have prepared sophisticated regression analyses justifying their racially neutral lending operations, providing that data may make the material subject available to third parties (e.g., the confidential nature of such studies may be severely diminished or lost).

Finally, as is fairly typical in the political issues between regulatory agencies, the determination by the DOJ to initiate investigations may result in other state and federal agencies feeling compelled to follow suit.

2005 HMDA data
In a related development, at a recent national forum that was chaired by one of Reed Smith's partners specializing in fair lending, several economists speaking on the significance of the 2004 HMDA data made an observation regarding the 2005 HMDA results that bears mentioning.

Specifically, it was pointed out that while the 2004 HMDA data surprisingly indicated that over 50 percent of sub-prime loans were under the high-cost loan reportable thresholds (i.e., APRs and other data elements were not reported), the movement in the interest rate yield curve in 2005 will likely result in a much higher percentage of non-prime loans being included as reportable loans. Moreover, speakers indicated that this greater universe of reported loans will provide a more usable base from which to evaluate potential discriminatory lending patterns within the sub-prime mortgage industry.

In light of what appears to be the initiation of governmental inquiries discussed above, we recommend that lenders consider commencing an internal review of their 2005 HMDA results and analyze their lending results over the expanded universe of data. (Of course, the same degree of care previously exercised regarding confidentiality when analyzing the 2004 HMDA data should be observed.)

For more information, contact Joseph T. Lynyak III at (213) 457-8054 or e-mail [email protected]; Mark S. Melodia at (609) 520-6015 or e-mail [email protected]; Nina M. Faber at (412) 288-3626 or e-mail [email protected]; or Kenneth D. Greenwald at (212) 549-0254 or e-mail [email protected].

Mar 24, 2014