Thoughts on the Fair Housing Complaint Approach by The Diligence Group, LLC

I hope this small article better explains the Fair Housing approach the Diligence Group uses every week to help borrowers who were taken advantage of, and otherwise ignored by the state judicial system. The Fair Housing Complaint first and foremost is not a "Bad Loan Complaint"- please commit this to memory. During the first few conversations HUD will have with the borrower, the HUD Investigator will ask why the Fair Housing Complaint was filed. Any untrained consumer, and more often attorney, will go into a diatribe about how Predatory the loan is, how it caused financial harm and how the granting of the loan broke several state lending laws. This is the fastest way to get the complaint rejected, much to the attorney's surprise. Granted, the loan must have caused harm to the client, but it must not be the reason the complaint was filed. The Fair Housing Complaint process is born from the Civil Rights Act of 1968, also known as the Fair Housing Act (FHA), so the complaint must be filed because the consumer feels they were discriminated against because of their protected basis, not because they are a victim of a bad loan. As long as the consumer can establish they are a protected class member under the FHA, the most recent discriminatory Act occurred within the past 12 months, and they feel discrimination occurred because of their protected basis, then the elements for filing a successful complaint are satisfied for the most part. Think of it this way: the real estate transaction was merely the means to cause harm, and discrimination was the motive. Timeliness is key to filing a valid complaint. The FHA provides a consumer 12 months from the date of the most recent discriminatory Act in a real estate related transaction to file a Fair Housing Complaint. Most of the loans in question were originated from 2002 through 2008, so how do we bring them into purview? Easy- provide The Diligence Group with a Loan Denial dated within the past 12 months. Denying one a loan on the basis of discrimination, or denying one the right to apply for a loan, is considered a discriminatory Act under the FHA. What is a loan Denial? Loan denials come in 4 different forms, all of which are considered an Act of discrimination under the FHA. If your client has any of the four varieties of loan denials literally dated within the past 365 days, the submitted complaint will be deemed timely. Here are the four different loan denials we look for: 1. Modification Denial: A paper copy sent from the Lender or Servicer stating, for any reason, they cannot, will not, or are incapable of helping the consumer with refinancing, or modifying their loan. Again, the reason they supply is irrelevant, as long as the consumer did in fact Apply for the refinancing or modification. Most denials are also

FHA violations because they are not compliant Adverse Action letters according to ECOA. 2. Application Ignored: The consumer applied for the refinancing/modification and they have yet to hear back from the Lender, or the Lender is delaying the loan process and dragging their feet. One could have applied in person, online, or submitted paperwork. A good rule is to wait 30 days for proper processing time and a response on the loan. Quite Literally: Whether the modification is denied or not does not matter, as long as one has applied, a new 12 month clock has started! 3. Modification Granted: This one is a favorite and better supports a discriminatory pattern of practice. The Modifications granted to consumers with predatory loans are almost always just as predatory, if not more so. It is often very easy to prove the Modification offered is one the borrower is not qualified to repay, and is therefore another Discriminatory Act. Stretching a loan to forty years and adding a balloon does not financially benefit the consumer, even if the monthly payments are lower. 4. Phone Denial: When a consumer calls the Lender, discloses their loan number and asks to "apply for a loan modification" and receives a rejection, the consumer should record the date, time, and the name of the representative they spoke with, in addition to ask them to deliver a paper copy of why they do not qualify for a loan modification. The Lender will usually not comply. Any of the above preferred "denials" will pull the complaint into timely purview. Despite all that I have said above, the real fact remains that whether the modification is denied or granted does not matter, a new 12 month clock has started the date the consumer has Applied for the loan! The modification denial is perpetuating the last Discriminatory Act which was origination, and is another act because it is an application for a new loan. Once the consumer has established they are part of a Protected Class, and can show the most recent Act occurred within the past 12 months, the next step is to build a Discriminatory Pattern of Practice. The question to keep in mind is: "What did the Lender DO or SAY to lead the borrower to believe they were discriminated against, or preyed upon, because of their protected basis?" Here's the basic layout of the Strategy: The First discriminatory Act is the granting of the original Predatory loan, and the final Discriminatory Act was the most recent loan denial. In between there may be other discriminatory actions which may contribute to an overall discriminatory "pattern of

practice"- the loan's rate adjusting upwards when the borrower's income doesn't support the rate change, and the additional loan denials are great examples. The Diligence Group can actually prove the first Discriminatory Act occurred at Origination when the Lender purposely granted the borrower a loan the Lender knew the borrower did not have the capacity to repay, and did so because of their protect basis. Naturally we would want to add anything the Lender may have said to support the discrimination. If the Lender understood the borrower's earnings potential and then took measures to grant the borrower a loan beyond their ability to repay, then the Lender chose to prey upon the borrower. The lender often inflated income, reduced the amount of debt on the Application, and qualified the borrower based upon a lower teaser rate instead of the fully amortized rate in an ARM- all of these demonstrate the Lender knew how to grant the loan to the "unqualified" borrower. As I hinted above, the Loan Product Type does play a role in the discrimination. The more complicated and less understood loan products are often over simplified by the mortgage broker in the sales process to appeal to an unsuspecting borrower. Many of these complicated loan products also have misleading and basic names so the consumer can readily 'relate' their specific needs with that of a mortgage product. The following loan features are the usual suspects in most of the Fair Housing Complaints: 1) 2) 3) 4) 5) 6) 7) 8) Adjustable Rate Arms Any "No-Doc" or No Verification Loan Pay Option Arms Loans with Interest Only Periods Loans granted upon a low "Teaser Rate" Loans with large Balloons Loans with Negative Amortization Features Loans with Prepayment Penalties

Most of those preyed upon because of their protected basis have loans with a combination of the features listed above. Many Borrowers, for example, were told their "no doc loan program doesn't require income at all" or were told they could "pay only $900 per month to afford a million dollar loan" but failed to tell them their payments, based upon a teaser rate, fell very short of covering the true interest and principal payments. The Diligence Group will reunderwrite the borrower's entire loan using the FNMA and Agency standards of the origination year and rely upon the borrower's tax returns prior to the loan to

determine ability to repay- this is the Gold Standard. The Diligence Group will cite every major FNMA, FHLMC, GNMA, FDIC, FTC, SEC, ECOA, FHA & Dodd Frank violation to support the predatory allegations and package it into an Analysis the Attorney can use judicially, while it serves as evidence in the filing of a Fair Housing Complaint by the Diligence Group. This "Dual Tracking Method" of applying judicial, and federal non-judicial pressures is the most effective way of attacking the Lender. By the way, it is no surprise other Federal Agencies choose to get involved when we file the Analysis with HUD- we purposely write the Analysis so HUD will readily refer the complaint to other agencies, especially the FDIC, OCC, and FFIEC. The Analysis will show what the Lender "Did" was discriminatory, but did the Lender "Say" anything to bolster our allegations? Verbal discrimination is rarely overt these days but it certainly exists. Rarely does the consumer recognize the discriminatory statements made during the sales process, and more often they can be recovered during a very thoughtful interview with the consumer. For brevity's sake, I can generally say most discriminatory remarks made by the lender actually encouraged the borrower to trust the lender and move forward with the loan. The Diligence Group will conduct a formal interview with the borrower to uncover anything the Lender may have said during the entire sales process to coerce, intimidate, or otherwise wrongly steer the borrower into a predatory loan. The most difficult feat is to pen a complaint written in the language HUD can clearly understand- we do not leave anything to mutual mystification, and use our inside understanding of what HUD is looking for to paint HUD into a rhetorical corner so that they must accept the complaint. If written improperly, a HUD complaint will readily be expelledclearly this does not reflect the spirit of the Fair Housing Act, but HUD has established a set of secret elements it wishes to not advertise, market, or share with the public. Given our position in the industry, and relationships within many authorities, we are privy to those requirements, and see to it each complaint is penned to satisfy those requirements. The leverage for the borrower really begins once the Fair Housing Complaint is "Accepted", which means HUD sees the prima facie elements for discrimination have been satisfied and they are interested in investigating the allegations and the named respondents. No financial institution wishes to be examined by HUD who has Federal powers to investigate the case at hand, and if HUD sees a wider 'systemic issue', they will investigate the general lending practices of the institution bringing other powerful agencies like the FDIC, OCC and FFIEC into play. Furthermore the state regulatory agency which monitors lending in that respective state will suspend, or even revoke, the lending license of any lending institution which has not fully resolved these Federal issues; in fact the Lender must report each Federal complaint to that regulatory agency. Suddenly, the complaint of just a few borrowers could amount to the

suspension of business in that state in addition to penalties levied by any of the Federal Agencies involved. Once the complaint is Accepted, both the Borrower and the Lender are delivered an Acceptance letter, however the Lender is also asked to satisfy a number of document requests and is often contacted for questioning by HUD. Once an Acceptance letter is in hand, it is important for the Attorney to contact HUD immediately and ask to have a Conciliatory meeting arranged with the Respondent Lender as soon as possible- by law when HUD accepts a complaint, they are required to resolve it. The typical resolution urged by HUD, either through a Conciliatory meeting, or through a private negotiation can always be described as "reasonable". HUD is not in the business of granting large settlements without warrant. The key to a settlement is always some combination of Principal and Interest Rate Reductions, and the recasting of a loan to which the borrower would have the capacity to repay- we would aim for a back debt ratio consistent with current FNMA guidelines. Most of the time one can expect any penalties or interest due on the overdue balance to be wiped away as well. Damages are often discussed, and can also include, but not limited to: Interest the borrower paid on the Note Attorney fees Expert Fees Does not include Punitive damages however the Note can be extinguished in some extreme cases

Every case is examined on its own- there are no 'blanket' settlements nor is there a 'cookie cutter' approach regarding all HUD settlements. In some examples HUD will step up to the plate and also fine the respondents to support the public interest. Any such fines levied by HUD become public document- this is also why most cases are settled outside of HUD in a negotiated manner between attorneys. Banks do not want the negative publicity, nor do they wish to suffer financially. On a Strategic note if HUD notices a discriminatory pattern or practice of a 'real estate' or 'lending professional' in a noted geographic area, they will view the acts collectively as being part of an overall concerted effort- a 'systemic issue', and HUD will likely act swiftly and with a heavy hand. The Diligence Group can help a competent attorney construct a 'systemic issue' case by gathering at least 5 complaints which may share one of the following: 1. Mortgage Broker

2. 3. 4. 5.

Lender Loan Officer Appraiser Any Professional Agent or Officer

HUD will typically accelerate the review process if there's a Systemic Issue and the pressure on the Respondent is therefore much greater. The Diligence Group will approach any 'systemic issue' with a customized complaint strategy to link all 5 complaints and deliver them to HUD as one organized and well evidence case. The benefits of leveraging the Fair Housing Complaint process is readily obvious, especially to those attorneys struggling to represent the harmed borrower in the courtroom. The most obvious advantages are as follows: Non-Judicial: The Judge is entirely removed from any part of the decision making process. In no way does the judicial process affect how a Fair Housing Complaint is processed, decided upon, or even settled. Attorneys can therefore 'dual track' their approach against the respondents to pressure the Lender. Federal Agency Power: A Fair Housing Complaint is a discrimination complaint under the Civil Rights Act of 1968 and is not to be interpreted by the states' laws. Therefore, any precedent which the Lenders have relied upon in state courts are irrelevant. Furthermore, Federal Agencies are much more threatening to the Lenders, since these agencies govern and regulate the lending and banking industry. Additionally, since this is not a State Judicial Matter, state lines do not matter- anyone can file a Fair Housing Complaint and attorneys are not limited to their own territory. Cost of Time & Money: The financial Cost to effectively pen, evidence, and file a successful Fair Housing Complaint is considerably less than costs associated with battling the well funded and court supported Lender. One must also consider the cost of time- a Fair Housing Complaint could yield a positive result for the borrower measured in weeks, versus months or potentially years tied up in the judicial system without yielding a positive result. Leverage: An effectively filed Federal complaint can attract the attention of multiple agencies if the complaint is penned, evidence and filed properly. Agencies like HUD, CFPB, the FDIC, OCC, and the FFIEC are most likely to get involved and can bring heavy pressure upon the Lender to come to an arrangement which, at that point, would benefit the Lender to settle or face suffering larger business issues. Attorneys employing the Fair Housing Complaint will

enjoy a greater success than those relying upon the courts and the more traditional methods of seeking a remedy for the borrower. Competitive Business Advantage: There are millions of borrowers who were preyed upon by a multitude of mortgage brokers, lenders, Servicers and Appraisers, and many of these borrowers have the ammunition to file a Fair Housing Complaint but are unaware of the process, and unaware of their eligibility. An Attorney who has the resources to successfully file a Fair Housing Complaint will have an unequivocal advantage over the attorneys who are still pursuing more traditional avenues. Furthermore, since the issue is Discrimination based, one can market their business differently to seek out those whom feel they were preyed upon, taken advantage of, or treated differently because of their protected basis. Unresolved Cases are Revived: Attorneys will realize many of their current clients who are in 'dead end' situations are protected under the Fair Housing Act and are eligible to file a complaint. This is perhaps the most immediate and recognizable benefit to the borrower and the attorney who wants to yield a positive result for those whom cannot find a solution in the courtroom. Attorneys who add the Fair Housing Complaint to their firm's arsenal will accumulate more leverage against the Lender, be able to expand their business even beyond their territory, build a reputation of being an ethical attorney and thought leader in their community, possibly accelerate any negotiations, and more importantly better serve those borrowers who were taken advantage of because of their protected basis.

Patrick M Coleman Partner, The Diligence Group 305.814.4831 www.diligencegroupllc.net