- Federal Efforts to Reform Auto Lending Based on "Disparate Impact" Theory Gain Steam
- November 21, 2013 | Authors: David N. Anthony; Paige S. Fitzgerald; Nicholas R. Klaiber; John C. Lynch; Alan D. Wingfield
- Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Virginia Beach Office ; Troutman Sanders LLP - Richmond Office
Few U.S. Supreme Court consumer protection cases over the past year were as closely watched and anxiously anticipated as Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. Scheduled for oral argument on December 4, with a decision anticipated sometime in mid-2014, the housing discrimination case drew attention from cautious onlookers from many different industries. Squarely at issue in Mount Holly was whether unintentional discrimination is prohibited by federal consumer protection laws. This week, however, news broke that the parties had settled the case, ensuring that the Supreme Court will lose this chance to weigh in on the viability of disparate impact theory, which also serves as a cornerstone of recent efforts to regulate the financial industry. Also this week, a key federal regulator, Richard Cordray, director of the Consumer Financial Protection Bureau (“CFPB”), reaffirmed the CFPB’s “serious concern” of disparate impacts on “communities of color” caused by common practices in the indirect auto lending industry and the CFPB’s “resolve” to reform the industry. Combined, these developments may mark a watershed of sorts in federal fair lending regulation.
The Mount Holly case settles.
In Mount Holly, the Court would have considered whether a New Jersey township’s plan to demolish lower-income housing and replace it with new units violated the Fair Housing Act due to “disparate impact” on low income minorities, which made up roughly 75% of those affected by the plan. Under disparate impact analysis, there need be no direct showing of discriminatory intent. In essence, such intent is presumed where the negative impact of a policy (many times demonstrated through statistical analysis) is disproportionately visited upon a protected class.
While a decision either blessing or striking down disparate impact would be significant enough in the Fair Housing context alone, courts and federal regulators have applied the same analysis to fair lending claims and regulatory investigations, including claims that indirect auto lenders and mortgage lenders’ discretionary lending terms violate the Equal Credit Opportunity Act (“ECOA”). We have previously reported on the Consumer Financial Protection Bureau’s attempts to use its interpretation of disparate impact to effectively end discretionary pricing, also known as dealer participation. Thus, along with its effects in the Fair Housing context, the Court’s decision in Mount Holly could have enshrined a key element of fair lending regulation, or could have done away with it entirely.
Prior to the parties settling the case this week, thirty amicus briefs had been filed in support of one of the two sides, not including the four amici who weighed in during the petition stage. The amici range from constituencies concerned with housing to consumer financial industry groups.
The settlement would permit a group of residents affected by the township’s plan to receive new homes in a different development, or a payment if they choose to move elsewhere. The announcement of a settlement was not terribly surprising, given that attorneys for the parties had made public statements regarding settlement discussions back in June. Moreover, a previous disparate impact case that made its way to the Supreme Court, Magner vs. Gallagher, settled prior to oral argument shortly after the Department of Justice intervened. Many commentators have suggested in the months leading up to the settlement in Mount Holly that the Obama administration could play a role in attempting to resolve the case in order to forestall a negative decision on disparate impact.
CFPB remarks demonstrate continued resolve.
After some conciliatory comments to Congress early in the week, at a roundtable event on November 14 the CFPB’s director, Richard Cordray, declared the Bureau’s “resolve” to enforce fair lending laws in the indirect lending industry, including continued use of disparate impact analysis. Cordray emphasized the CFPB’s “serious concern” that use of discretionary pricing in the indirect auto lending market leads to unlawful discrimination against “communities of color.” Cordray also stressed that under disparate impact, it does not matter that the discrimination is unintentional, as the impact and harm is the same, and policies that lead to disparate impact are unlawful under ECOA. Regulators from the Federal Reserve and the Justice Department reinforced Cordray’s comments.
Cordray also repeatedly referenced that lack of disclosure and transparency in the market helps cause disparate impact, because consumers are not aware they have qualified for a lower rate. Cordray suggested that possible solutions include implementation of robust Compliance Management Systems by lending institutions, or a compensation structure that does not involve discretionary pricing.
The subtext of Cordray’s comments, as confirmed by later CFPB speakers at the roundtable, was that discretionary pricing in indirect auto lending will continue to be viewed as inherently suspect, and that the CFPB will push for “non-discretionary compensation systems” for dealers in indirect lending arrangements.