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Special Alert: Disparate Impact Under the Equal Credit Opportunity Act After Inclusive Communities
On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.
Applicability to ECOA
When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA.
But just as the federal officials had stated that they would continue to assert disparate impact under ECOA if Inclusive Communities invalidated disparate impact under the FHA, lenders still have a number of arguments that the Inclusive Communities Court’s analysis does not apply to ECOA, given the material differences between the text and history of the FHA and ECOA. First, the Court principally based its textual arguments on the use of “otherwise make unavailable” in Section 804 of the FHA—a section that applies to the sale and rental of housing but not to lending. The Court stated that this effects-based language “is of central importance” to its analysis. Although the Court also stated that it had construed statutory language similar to FHA Section 805—which applies to lending—the discussion of Section 805 is so brief as to suggest it was merely an afterthought. The Court repeatedly states its textual analysis focused on the text “otherwise make unavailable.” But ECOA contains no similar effects-based language.
Second, the Court’s analysis of the FHA’s amendment history is inapplicable to ECOA. The Court focused principally on three provisions which it characterized as “exemptions” from disparate-impact liability, and concluded that such exemptions made sense only if Congress were acknowledging the validity of disparate impact claims. But ECOA contains no similar “exemptions” from disparate-impact liability that might otherwise lead to the conclusion disparate impact is cognizable under ECOA.
Finally, while the Court also notes that disparate-impact claims are “consistent with the FHA’s central purpose,” this justification appears merely to support the Court’s textual and historical arguments. The Court has repeatedly cautioned that a statute’s purpose does not trump its text. Whatever similarities may exist between the purpose of the FHA and ECOA, the material textual and historical differences weigh heavily against treating the two statutes the same for disparate-impact purposes.
Burden Shifting Framework
Even if the Inclusive Communities analysis could apply to ECOA, the Court’s emphasis on rigorous application of the three-step burden-shifting framework to analyze disparate impact claims—and protect against “abusive disparate-impact claims” —is likely to impose significant burdens on regulators and plaintiffs seeking to bring disparate impact claims under ECOA. The Court’s articulation of the steps in the burden-shifting framework are materially different—and more friendly to lenders—than those applied by federal agencies (e.g., in HUD’s disparate impact rule). While it is possible that the government and private plaintiffs will argue that the burden shifting framework outlined in Inclusive Communities applies only to the FHA, the Court’s reasoning supports applying the same framework to other civil rights laws—including ECOA.
First, the Court has reaffirmed the significant burden plaintiffs must bear in satisfying the first step of the burden-shifting framework: establishing a prima facie case. The Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect[] defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.” This, when taken together with the Court’s decision in Wal-Mart Stores, Inc. v. Dukes, may make maintaining a disparate impact claim under ECOA particularly difficult when addressing such practices as discretionary pricing (e.g., dealer markup in the auto finance context).
Second, with respect to the second step of the framework, the Court explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court noted that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.” Specifically, the Court endorsed the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system” in determining whether a company’s policy is supported by a legitimate business justification. The Court further explained that “entrepreneurs must be given latitude to consider market factors,” as well as other “objective” and “subjective” factors.
Third, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, and in contrast to previous interpretations by federal agencies, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.
The Court cautioned that a rigorous application of the burden-shifting framework is necessary to prevent disparate-impact liability from supplanting nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).
CFPB and DOJ Settle With Mortgage Lender for Alleged Discriminatory Mortgage Pricing
On May 28, the CFPB, along with the DOJ, filed a joint complaint against a California-based mortgage lender alleging that the lender violated the Equal Credit Opportunity Act by engaging in a pattern or practice of discrimination from 2006 to 2011 that increased loan prices for African-American and Hispanic borrowers. The DOJ also alleges that the lender violated the Fair Housing Act. According to the complaint, the lender’s mortgage broker compensation policy, which incented discretionary interest rate and fee increases to borrowers, resulted in approximately 14,000 African-American and Hispanic borrowers being charged higher total broker fees on wholesale mortgage loans than non-Hispanic white borrowers. The complaint alleges that the higher fees were not based on the borrowers’ credit risk profile, but rather on the basis of race or national origin. The parties separately filed a proposed consent order which would require the mortgage lender to, among other things, pay $9 million in consumer relief to affected borrowers to resolve the allegations. The proposed consent order is currently pending court approval.
CFPB Reminds Mortgage Lenders to Include Section 8 Income
On May 11, the CFPB issued Bulletin 2015-02, reminding creditors to include income from the Section 8 Housing Choice Voucher (HCV) Homeownership Program when underwriting mortgage loans. Within the Bulletin, the Bureau noted that it “has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes,” further mentioning that “some institutions have restricted the use of Section 8 HCV Homeownership Program vouchers to only certain home mortgage loan products or delivery channels.” The Bulletin warns that disparate treatment prohibited under ECOA and Reg. B may exist when a creditor does not consider Section 8 as a source of income and provides guidance on how lenders can mitigate their fair lending risk. In conjunction with the guidance, the CFPB also published a blog post, providing an overview of the Section 8 HCV Program and detailed how consumers can submit complaints if they believe they have been discriminated against.
DOJ Settles with Illinois-Based Lender over Allegations of Discriminatory Lending
On May 7, the DOJ announced a consent order with an Illinois-based lender to settle allegations that the state-chartered bank engaged in a pattern of discriminatory lending, violating the Equal Credit Opportunity Act (ECOA). According to the complaint, from at least January 1, 2011 to March 9, 2014, approximately 1,500 Hispanic borrowers and 700 African-American borrowers paid higher interest rates for their motorcycle loans than white borrowers. The average victim of the bank’s discretionary dealer markup system paid over $200 more during the loan term, allegedly because of their national origin and not because of their creditworthiness. Until March 2014, the lender’s business practice was such that the motorcycle dealers submitted loan applications to the lender, allowing the dealers “subjective and unguided discretion to vary a loan’s interest rate from the price [the lender] initially set.” In March 2014, the lender adopted a new policy that compensated dealers “based on a percentage of the loan principal amount that does not vary based on the loan’s interest rate;” since the implementation of the new policy, no discrimination has been found in the loans analyzed by the United States. Neither admitting nor denying the allegations, the lender voluntarily entered into a consent order with the U.S., agreeing to provide $395,000 in monetary relief to victims of the lender’s alleged practices.
Southern District of New York Denies Class Certification in Fair Lending Suit Against Global Investment Bank
On May 14, the District Court for the Southern District of New York denied class certification status in a fair lending suit brought by the ACLU and NCLC against a global investment bank. Adkins v. Morgan Stanley, No. 12-CV-7667 (VEC) (S.D.N.Y. May 14, 2015). The Plaintiffs had alleged that the bank, as a significant purchaser of subprime residential mortgage loans, had caused a disparate impact on African-American borrowers in Detroit in violation of the Fair Housing Act and the Equal Credit Opportunity Act. In an exhaustive 50-page opinion, the court denied class certification on multiple grounds, including the variation in loan types and the role of broker discretion. BuckleySandler anticipates the ruling will be widely cited in future fair lending class actions.
DOJ Submits 2014 Equal Credit Opportunity Act Annual Report to Congress
On April 13, the DOJ released its 2014 Annual Equal Credit Opportunity Act (ECOA) Report highlighting its activities to address credit discrimination. The twenty-page report highlights discrimination lawsuits and settlements in the automobile lending and credit card industry, as well as a consent order resulting from alleged discrimination on the basis of disability and the receipt of public assistance. It also includes information on the DOJ’s work under other federal fair lending laws including the Fair Housing Act (FHA) and the Servicemember Civil Relief Act (SCRA). According to Vanita Gupta, Acting Assistant AG for the Civil Rights Division, in the five years since the Fair Lending Unit was established, the Civil Rights Division has filed or resolved 37 lending matters under the ECOA, FHA, and SCRA. Total settlements in these matters, including enforcement actions from 2014, have resulted in over $1.2 billion in monetary relief for affected borrowers and communities.
U.S. Supreme Court To Hear Arguments Involving Guarantor-Spouse's Eligibility for ECOA Protection
On March 2, the U.S. Supreme Court agreed to hear arguments to resolve claims as to whether spousal guarantors could assert ECOA as a defense against a bank’s collection efforts requiring them to guarantee their spouse’s loans. In the case at bar, two men borrowed more than $2 million to fund a real estate development company, and their wives guaranteed the loan. Subsequently, the husbands were unable to make payments and the bank declared default and ordered payment both from the company and the wives as guarantors. Later, the wives filed suit against the bank claiming the bank’s requirement that they guarantee the loans as a condition of the credit constituted discrimination on the basis of marital status. The lower court granted summary judgment in favor of the bank, and the Eighth Circuit affirmed, finding the wives were not “applicants” for credit under ECOA. Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) cert. granted, No. 14-520, 2015 WL 852422 (U.S. Mar. 2, 2015)
The Sixth Circuit recently disagreed, however, finding ambiguity as to whether a guarantor is afforded the protections of ECOA as an applicant for credit. RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir.2014).
DOJ and North Carolina AG Settle First-Ever Federal Discrimination Suit Involving Auto Lending
On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending."
CFPB Issues Guidance to Help Lenders Avoid Fair Lending Risk
On November 19, the CFPB issued a press release highlighting the publication of its compliance bulletin, “Social Security Disability Income Verification.” The compliance bulletin reminds lenders that requiring consumers receiving social security disability income to provide burdensome or unnecessary documentation may raise fair lending issues. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discrimination against “an applicant because some or all of the applicant’s income is from a public assistance program, which includes Social Security disability income,” and the Bureau’s bulletin highlights standards and guidelines intended to help lenders comply with the requirements of ECOA and its implementing regulation, Regulation B.
Eighth Circuit Holds Loan Guarantors Are Not Applicants Under ECOA
On August 5, the U.S. Court of Appeals for the Eighth Circuit held that ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another. Hawkins v. Comm. Bank of Raymmore, No. 13-3065, 2014 WL 3826820 (8th Cir. Aug. 5, 2014). In this case, two individuals executed personal guaranties to secure several loans made to a residential development company owned by their husbands. After the company defaulted on the loans, the bank accelerated the loans and demanded payment from the company and the two individual guarantors. The guarantors, in turn, sued the bank, seeking damages and an order declaring their guaranties void and unenforceable, alleging that the bank required them to execute the guaranties securing the company’s loans solely because they are married to their respective husbands—the owners of the company. The guarantors asserted that such a requirement constituted discrimination against them on the basis of their marital status, in violation of ECOA. The court held that “the plain language of ECOA unmistakably provides that a person is an applicant only if she requests credit,” and that “a person does not, by executing a guaranty, request credit.” In doing so the court rejected the Federal Reserve Board’s implementing regulation that interpreted the term applicant to include guarantors. The court’s holding also creates a split with the Sixth Circuit, which recently “came to the contrary conclusion, finding it to be ambiguous whether a guarantor qualifies as an applicant under the ECOA.”