MBA s Legal Issues and Regulatory Compliance Conference: Chicago, May 4, 2009

1. MBA�s Legal Issues and Regulatory Compliance Conference: Chicago, May 4, 2009 Regulatory Panel 2: FCRA and FACTA Fair Lending and HMDA, Data Security and Other Legal and Regulatory Compliance Issues Paul F. Hancock K&L Gates LLP (305) 539-3378 paul.hancock@klgates.com

2. Outline New Trigger for HMDA Reporting of Higher-Priced Loans Types of Fair Lending Cases Investigated by Regulators and Enforcement Agencies Fair Lending Pricing Analyses and Theories of Liability Class Action Litigation Fair Lending Compliance Requirements of Servicers Under HMP

3. New HMDA Trigger for Higher Priced Loans Until recently, HMDA required a lender to report certain �rate spread loans� For first lien loans, must report a loan if the difference between the loan�s APR and the yield on Treasury securities having comparable periods of maturity is equal to or greater than 3 percentage points For second lien loans, the threshold is a difference of 5 percentage points

4. New HMDA Trigger for Higher Priced Loans On October 20, 2008, the Federal Reserve Board amended Regulation C to revise the HMDA rate spread reporting threshold to correspond with Regulation Z�s recently adopted definition of �higher priced mortgage loans� Effective October 1, 2009: New rule compares a loan�s APR to the applicable �average prime offer rate� � a calculated APR derived from market surveys intended to reflect the total cost of a �prime� mortgage loan 1.5% above the average prime offer rate for first lien loans 3.5% above the average prime offer rate for second lien loans

5. New HMDA Trigger for Higher Priced Loans What does the new rule mean for lenders? Develop and implement reporting procedures Update compliance systems Train employees Potential for data to result in heightened scrutiny for compliance with fair lending and anti-predatory lending requirements

6. Types of Fair Lending Cases Investigated by Regulators and Enforcement Agencies Loan Pricing Underwriting Redlining

7. Methods for Analyzing Possible Discrimination in Loan Pricing Two commonly accepted methods for analyzing possible discrimination in loan pricing APR analysis Reflects the total cost of the loan to the borrower over time, as a percentage Discretionary pricing analysis Seeks to isolate the discretionary portion of the price charged to the borrower Both are valid methodologies

8. Methods for Analyzing Possible Discrimination in Loan Pricing FRB economists: Fair lending analysis seeks to measure disparities between similarly situated minority and non-minority applicants seeking �the same loan product . . . in the same market.� An APR and discretionary pricing analysis can show only that an observed disparity is being caused by �something� Even a �large number of standard deviations tells us nothing about what that �something� is.� Carpenter v. Boeing, 456 F.3d 1183, 1202 (10th Cir. 2006). Not necessarily race or national origin

9. Theories of Liability Disparate Treatment vs. Disparate Impact Disparate Treatment: Occurs when a lender treats applicants differently based on a prohibited factor such as race or national origin There does not need to be evidence that the difference in treatment was motivated by prejudice or a conscious intent to discriminate

10. Theories of Liability Disparate Impact: Occurs when a lender applies a neutral policy or practice uniformly to all borrowers but the policy or practice has a discriminatory effect on a prohibited basis and is not justified by a business consideration Plaintiff can still win if an alternative policy or practice can satisfy the lender�s business justification with a less discriminatory impact

11. Theories of Liability Government fair lending lawsuits to date have been based on disparate treatment, not disparate impact But a number of agencies now voicing disparate impact theories Current federal agency guidance on the application of disparate impact to the lending industry says that the theory is proper only if the policy in question is �neutral on its face� AND �applied equally� to borrowers. Policy Statement on Discrimination in Lending, Interagency Task Force on Fair Lending (1994).

12. Theories of Liability Recent private actions allege lenders� policies or practices have a discriminatory effect on minority borrowers Legal standard in discretionary pricing case should be disparate treatment but many now are calling it disparate impact

13. Fair Lending Class Action Litigation United States District Court for the Central District of California Garcia v. Countrywide Fin. Corp., et al., No. 5:07-cv-01161-VAP NAACP v. Ameriquest Mortgage Co., et al., No. SACV 07-0794 AG (ANX) NAACP v. Wells Fargo Bank, et al., No. 2:09-cv-01758 NAACP v. HSBC Mortgage Corp, et al., No. 2:09-cv-01759 Payares v. J.P. Morgan Chase & Co., et al., No. 2:07-cv-05440-ABC-SH Sanchez v. Argent Mortgage Co. LLC, No. 8:07-cv-00984-CJC-RNB Sanchez v. Washington Mutual, Inc., No. 2:07-05442-CAS-E Toruno v. HSBC Finance Corp., et al., No. 2:07-cv-05998-AG-ANx Ulloa v. Indymac Bank, F.S.B., No. cv08-1312 SVW (CWz)

14. Fair Lending Class Action Litigation United States District Court for the Northern District of California Jeffries v. Wells Fargo Bank, NA, et al., No. 3:07-cv-03880-MJJ Ramirez v. Greenpoint Mortgage Funding, C 08-369 Zamora v. Wachovia Corporation, et al., No. 3:07-cv-04603-JSW

15. Fair Lending Class Action Litigation United States District Court for the Northern District of Illinois Chavers v. Approved Financial, et al., No. 1:07-cv-04916 Leaks v. Illinois Mortgage Funding Corp., et al., No. 08 C 1395 Martinez v. Freedom Mortgage Team, Inc., No. 07 C 3443 Newman v. Apex Financial Group, Inc., et al., No. 07 C 4475 Pena v. Freedom Mortgage Team, Inc., et al., No. 07 C 552 Tribett, et al. v. BNC Mortgage, Inc., et al., 07 C 2809 Ware, et al. v. Indymac Bank FSB, et al., No. 1:07-cv-01982 Zamudio v. HSBC North America Holdings, Inc., No. 1:07-cv-04315

16. Fair Lending Class Action Litigation United States District Court for the District of Massachusetts Allen v. Decision One Mortgage Company LLC, et al., No. 1:07-cv-11669-GAO Alleyne v. Flagstar Bank, FSB, et al., No. 1:07-cv-12128-RWZ Barrett, et al. v. Option One Mortgage Corp., et al., No. 08-10157 Jones v. Long Beach Mortgage Company, No. 1:07-cv-11372-NMG Lopez, et al. v. Long Beach Mortgage Company, et al., No. 08-10279 Miller, et al. v. Countrywide Bank, N.A. et al., No. 1:07-cv-11275-RGS Puello v. Citifinancial Services Inc., et al., No. 08-10417

17. Fair Lending Class Action Litigation United States District Court for the Southern District of New York Rivas v. Lehman Brothers Bank, FSB and BNC Mortgage, No. 08 CV 3685 MUNICIPAL FAIR LENDING CASES: United States District Court for the District of Maryland Mayor and City Council of Baltimore v. Wells Fargo, et al., 1:08-cv-00062-BEL United States District Court for the Northern District of Ohio City of Cleveland v. Deutsche Bank Trust Company, et al., No. 1:08-cv-00139

18. Fair Lending Compliance Requirements of Servicers Under HMP On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan to help borrowers restructure or refinance their mortgages to avoid foreclosure On March 4, 2009, the Treasury issued uniform guidance for loan modifications and additional guidance to servicers for adoption and implementation of the Home Affordable Modification program (�HMP�) for Non-GSE mortgages

19. Fair Lending Compliance Requirements of Servicers Under HMP Under UMP, a servicer will use a uniform loan modification process to provide a borrower with sustainable monthly payments In order to participate in the HMP, a servicer must execute a Servicer Participation Agreement, on or before December 31, 2009, with Fannie Mae in its capacity as financial agent for the United States

20. Fair Lending Compliance Requirements of Servicers Under HMP Servicer Participation Agreement Requires Servicer to agree to representations, warranties and covenants re: fair lending compliance Expressly requires Servicer to monitor compliance with fair lending laws on a quarterly basis Note that fair lending laws apply to all servicing � not just HMP participants Federal bank regulators examining for fair lending compliance in servicing Attorney General Holder recently stated DOJ would enforce fair lending laws against servicers, particularly regarding modification opportunities, and the applicable terms and fees State AGs investigating servicers for fair lending compliance

21. Fair Lending Compliance Requirements of Servicers Under HMP Avoiding Claims of Discrimination (Treatment and/or Impact) Identify areas where employees exercise discretion Consider documenting reasons for significant discretionary decisions. Capturing information electronically may help alleviate risk Training in basic fair lending principles Evaluate whether policy or practice has discriminatory impact and be prepared to demonstrate business justification and no less discriminatory alternative

22. Fair Lending Compliance Requirements of Servicers Under HMP Servicer Participation Agreement requires monitoring, but does not include detail Servicers are developing monitoring systems to satisfy regulators and mitigate risk Monitoring can include loan level reviews of customer service and decision making Complaint tracking and monitoring can help identify serious/systemic problems

23. Fair Lending Compliance Requirements of Servicers Under HMP Monitoring will include statistical analyses evaluating: whether loss mitigation efforts are applied consistently across borrower groups (i.e., are minority borrowers maintaining their homes at the same rate as non-minority borrowers) whether minority borrowers are receiving less desirable modification terms than non-minority borrowers success/sustainability of modified terms across groups

24. Conclusion Coming year should bring increased fair lending actions from both private parties and the government