Earlier this month, Attorney General Jeff Sessions issued a memorandum in which he prohibited DOJ attorneys from entering into settlement agreements on behalf of the United States that require a payment or loan to any non-governmental person or entity that is not a party to the dispute.  The AG’s press release explained that the directive was intended to end the use of settlement funds to “to bankroll third party special interest groups or the political friends of whoever is in power.”

Last week, Senator Charles E. Grassley, who chairs the Senate Judiciary Committee, sent a letter to the AG in which he asked Mr. Sessions to explain whether any payments made by settling defendants to non-governmental third parties during the Obama Administration at the DOJ’s direction “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”  Mr. Grassley also asked Mr. Sessions to explain when the DOJ will begin to seek the rescission or re-direction of settlement payments “[i]f such a procedure is consistent with law and the Department’s authority.”

Mr. Grassley’s letter includes a request for a “complete list of all settlement agreements reached during the Obama administration that involved payments to non-governmental third parties” and related information for each of the settlements, including a full accounting of what payments have been made to non-governmental third parties to date.



We previously reported on the Executive Order 13772 titled “Core Principles for Regulating the United States Financial System,” which is a high-level policy statement consisting of a series of Core Principles that are designed to inform the manner in which the Administration regulates the financial system.  The Executive Order directs the Secretary of the Treasury to identify, in a report to the President, any laws, regulations, guidance and other Government policies “that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

The American Bankers Association (“ABA”) has submitted a white paper that identifies areas of concern with respect to various fair lending topics.  In this white paper, the ABA “offers its views” in relation to the directive that the Secretary has received pursuant to the Executive Order:

  • Under the Fair Housing Act (“FHA”), federal agencies should apply the disparate impact theory of liability consistent with the framework outlined by the Supreme Court in Inclusive Communities.
  • Disparate impact claims are not cognizable under the Equal Credit Opportunity Act.
  • Redlining should be assessed consistent with the Community Reinvestment Act (“CRA”), and purchased loans should be recognized as promoting access to credit.
  • The focus of the CFPB should remain on consumers, not business.

Inclusive Communities Framework: The ABA comment concerning FHA disparate impact claims arises from industry concerns that federal agencies have largely disregarded the safeguards against abusive disparate impact claims that were a centerpiece of the Supreme Court decision in Inclusive Communities.  In the aftermath of the Supreme Court decision in Inclusive Communities, the ABA sent a letter to the federal bank regulatory agencies, the CFPB, HUD and the DOJ requesting confirmation “in interagency guidance, updated exam procedures, and where appropriate amended regulations that the Agencies’ consideration of disparate impact claims in both the supervisory and enforcement context will be governed by standards consistent with the . . . framework in” Inclusive Communities.

The white paper asserts, however, that “[t]here has been nothing” of the sort by these agencies in response to Inclusive Communities and that “examples where a federal agency has taken action to apply the Court’s framework for consideration of disparate impact are hard to find.”  After observing that some defendants have succeeded in fair lending litigation by asserting the [Inclusive Communities] safeguards against abusive disparate impact claims, the ABA notes that “[a] win in court comes after much time and expense and public reputational damage.”  The concern expressed therefore is that “the menace of supervisory assertion of disparate impact claims without appropriate controls can exalt leverage over law.”

Rejection of ECOA Disparate Impact Claims: The comment regarding the ECOA is premised on the rationale of the Supreme Court decision in Inclusive Communities, which highlighted key differences between the FHA and the ECOA that support the view that disparate impact claims are not cognizable under the ECOA.  It thus is consistent with observations expressed in our article regarding the Supreme Court decision, as well as those expressed more recently in the Majority Staff Report of the House Financial Services Committee titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This issue is discussed in greater detail in a Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact– Interpreting the Meaning of the Words That Actually Are There,” 61 Bus. Law. 829 (2006).  The recommendations of the ABA include a request that “[t]he Agencies should acknowledge in writing that disparate impact claims are not recognized under the ECOA.”

Redlining and Purchased Loans: The CRA-related comments concerning redlining and purchased loans are premised on the ABA’s assertion that agencies have “invent[ed] redlining [claims] by ignoring intent, CRA performance or purchased loans.”  Significantly, the ABA notes that, “[i]n recent enforcement actions, Agencies have disregarded a bank’s CRA assessment area” and, instead “have overlaid their own creation, a ‘reasonably expected market area’ (REMA) or a ‘Proper Assessment Area’ – an area Agencies assert that the bank should serve.”  The redlining case against Klein Bank would be an example of this phenomenon.  The ABA asserts that this approach has resulted in “the curious anomaly of banks that received high CRA marks over an extended period of time facing regulatory assertions of redlining.”  Finally, the white paper notes that “in some enforcement actions Agencies have been unwilling to consider purchased loans, despite the fact that under CRA banks are encouraged to purchase loans.”

CFPB Focus: The comment that the focus of the Bureau should remain on consumer credit culminates in the following specific recommendations: (i) repeal of Section 1071 of the Dodd-Frank Act relating to the collection and reporting of data concerning lending to “women-owned, minority-owned and small business”; (ii) reassigning the implementation of Section 1071 to the Small Business Administration as an interim measure; and (iii) eliminating “any vestige of Bureau regulatory, supervisory, or enforcement authority over commercial credit or other commercial account and financial services” by means of a series of specific amendments to the Dodd-Frank Act.  (The Financial CHOICE Act bill passed by the House of Representatives last week includes a repeal of Section 1071.)

Late yesterday the U.S. Department of the Treasury issued the first in a series of reports to the President pursuant to Executive Order 13772 regarding “Core Principles for Regulating the United States Financial System.”  We will be reviewing this report, and the subsequent reports that the Treasury Department press release indicates will be issued “over the coming months.”

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”).  We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The latest report discusses two subjects.

The “Vitiated Legal Case”

The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.”  As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”).   The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis.  The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA.  By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”

The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs.  Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims.  Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”

The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.”  We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”

The Auto Finance Larger Participant Rule

The press release issued by the Republican members of the Committee highlights the final subject covered by the report.   Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”).  Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the definition of a “larger participant” is “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”

According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.

The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the list of the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity.  Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.

The D.C. district court recently granted two industry trade associations whose members sell homeowners insurance leave to file an amended complaint in their lawsuit challenging the Fair Housing Act (FHA) disparate impact rule (Rule) adopted by the U.S. Department of Housing and Urban Development (HUD).  In their amended complaint, the trade associations allege that the Rule is inconsistent with the U.S. Supreme Court decision last June in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc.  Should the district court reach the merits of the trade associations’ claims, its decision could provide helpful precedent for creditors in challenges to the CFPB’s or DOJ’s use of a disparate impact theory of liability under the Equal Credit Opportunity Act (ECOA).

The trade associations originally filed their complaint in American Insurance Association and National Association of Mutual Insurance Companies v. U.S. Department of Housing and Urban Development in June 2013.  The original complaint alleged that, in promulgating the Rule, HUD exceeded its authority under the Administrative Procedure Act because the FHA prohibited only disparate treatment.  Agreeing with the trade associations, the district court issued a decision in November 2014 vacating the Rule.  HUD appealed the decision and the D.C. Circuit, at the request of HUD, agreed to hold the case in abeyance pending the Supreme Court decision in Inclusive Communities.  The D.C. Circuit subsequently granted the trade associations’ motion requesting that the District Court decision be vacated and the case be remanded for consideration in light of Inclusive Communities.  Notwithstanding HUD’s opposition, the district court granted the trade associations’ motion to amend.

In Inclusive Communities, the Supreme Court held that disparate impact claims are cognizable under the FHA but discussed at length limitations on disparate impact liability that “are necessary to protect potential defendants against abusive disparate impact claims.”  In their amended complaint, the trade associations allege that these limitations provide four grounds for vacating the Rule as unlawful under Inclusive Communities to the extent it applies to the underwriting and ratemaking decisions of insurers.  As described in more detail in our legal alert, these grounds include the Supreme Court’s admonition that, without adequate causality safeguards at the prima facie stage, disparate impact liability “might cause race to be used and considered in a pervasive way;” the Court’s emphatic statement that the “robust causality requirement” is necessary to ensure that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create;” and the Court’s statements that disparate impact liability does not mandate the displacement of valid governmental or private policies, only the removal of “artificial, arbitrary, and unnecessary barriers.”

Given that non-mortgage creditors, like insurers, do not collect data on an applicant’s race, a district court ruling that addresses when disparate impact liability would be deemed to inject race pervasively into otherwise “race blind” underwriting and pricing practices could have positive implications for non-mortgage creditors facing ECOA disparate impact claims.  A district court ruling elaborating upon the robust causality requirement also could assist creditors in defending against ECOA claims.

Additionally, a finding by the district court that the Rule’s burden shifting framework impermissibly allows plaintiffs to second guess which of two reasonable approaches a defendant should follow could similarly be helpful precedent in ECOA cases.  Such a finding would also serve as a rebuttal to comments about Inclusive Communities made last October by Patrice Ficklin, Director of the CFPB Office of Fair Lending, at the American Bar Association’s Consumer Financial Services Institute.  In response to a question from my colleague Mark Furletti, Ms. Ficklin stated that, while some had interpreted language in Inclusive Communities to be helpful to defendants with respect to the burden shifting that takes place under a disparate impact analysis, any such language was mere “dicta” and the decision did not lighten or change a defendant’s burden.

We will continue to follow the case, with the next significant development likely to be HUD’s decision whether to answer or move to dismiss the amended complaint.



I am proud to report that Ballard attorneys Peter N. Cubita and Christopher J. Willis have been selected to receive a 2016 Distinguished Legal Writing Award from The Burton Awards, which recognize outstanding legal writing.  They are being honored for their article entitled “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” which was published in the May 1, 2015, edition of the Consumer Financial Services Law Report.  This article argues that seminal class certification decisions rendered in employment and mortgage discrimination cases undercut the disparate impact theory of liability used to allege “discretionary pricing” rate spread claims against assignees, whether brought as private class actions or as governmental enforcement actions.

Run in association with the Library of Congress and co-sponsored by the American Bar Association, The Burton Awards is a non-profit, academic effort devoted to recognizing and rewarding excellence in the legal profession.  Law firm nominations for its Distinguished Legal Writing Awards are submitted annually for articles published during the prior year.  The nominated articles are reviewed by an Academic Board that includes law school professors and a former Chair of the White House Plain Language Committee.  Only 35 articles are selected each year from nominations submitted by many of the nation’s 1,000 largest law firms.

The 17th annual Burton Awards ceremony will be held at The Library of Congress in Washington, D.C., on May 23, 2016. U.S. Supreme Court Justice Stephen Breyer will be the featured speaker, and Justice Ruth Bader Ginsburg will memorialize Justice Antonin Scalia during the program.

As becomes readily apparent to those who have the pleasure of working with them, Peter and Chris have a talent for explaining complex subjects in a clear, concise and illuminating manner.  It does not surprise me that their article was selected as one of the 35 best articles published by law firm writers last year.

In their article, Peter and Chris discuss the substantive implications that class certification appellate decisions may have for disparate impact retail pricing claims alleged against assignees of motor vehicle retail installment sale contracts.  Peter previously received a 2007 Burton Award for Legal Achievement for his Business Lawyer article entitled, “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There.”  In that ground-breaking article, Peter discussed the threshold issue of whether disparate impact claims should be cognizable under the Equal Credit Opportunity Act.  Peter’s Business Lawyer article was cited in a November 2015 report, prepared by the Republican Staff of the House Financial Services Committee, entitled “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”


Much of Director Cordray’s testimony in his appearance before the Senate Banking Committee yesterday consisted of his predictable defense of various CFPB positions.  While the hearing was much less contentious than last month’s hearing of the House Financial Services Committee at which Director Cordray appeared, the questions raised by Republican Senators focused on many of the same areas of concern as those of Republican House members.

In response to criticism of the CFPB’s enforcement actions against auto finance companies, Director Cordray continued to defend the CFPB’s reliance on disparate impact liability.  As he did in the House hearing, Director Cordray pointed to the U.S. Supreme Court’s Inclusive Communities decision as vindicating the CFPB’s position despite the fact that the decision did not address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act.  According to Director Cordray, the Supreme Court had “resoundingly reaffirmed” the validity of using disparate impact to prove discrimination.  He also defended the CFPB’s methodology for establishing disparate impact as well as its method for identifying consumers entitled to relief under the auto finance company settlements.

Director Cordray also gave no ground on the CFPB’s reliance on enforcement in place of rulemaking.  Indeed, he appeared to embrace the phrase “regulation by enforcement” used by industry to criticize the CFPB’s approach.  Director Cordray cited to his remarks last month to the Consumer Bankers Association in which he called it “compliance malpractice” for companies not to look at CFPB consent orders with others to assess their own compliance.

In addition to his continued defense of CFPB positions, Director Cordray did provide some noteworthy information in response to Senators’ questions:

  • In response to a question regarding the CFPB’s activities related to small business lending, Director Cordray appeared to acknowledge that the CFPB’s role is limited to its enforcement of the Equal Credit Opportunity Act and implementation of the expanded small business lending data collection requirements of Dodd-Frank Act Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.)  As we previously reported, the CFPB has been seeking to hire a new “Assistant Director, Small Business Lending,” who will be charged with leading its Section 1071 team.  Based on Director Cordray’s comment that he would welcome recommendations from Senators of candidates for the position, it appears that the position has not yet been filled.
  • In response to a question asking how consumers will be able to access small dollar loans in the wake of anticipated CFPB restrictions on payday loans, Director Cordray indicated that he envisions three categories of outlets: a “reformed” payday loan industry, community banks and credit unions, and Fintech companies.  With regard to Fintech, Director Cordray indicated that he envisions “real opportunities” for online lending but commented that small-dollar lending is “tricky” for Fintech companies.  He also commented that the CFPB will be “mindful” and “watchful” of the need for Fintech innovations “to be consumer friendly.”  He indicated that while Fintech companies should not have an advantage in the marketplace over banks because they are not complying with same rules, the CFPB would seek to enforce the laws without stifling innovation.
  • When questioned about the criticism directed at the CFPB’s policy on no-action letters for its restrictiveness, Director Cordray acknowledged that legitimate questions have been raised about the policy.  He indicated that he was “not satisfied” with the policy and that further thought would be given to it (while also noting that the CFPB was “leery” of the burden that would result from a high volume of requests for no-action letters).

The CFPB and Department of Justice (the “Agencies”) announced recently that they have entered into a settlement with Toyota Motor Credit Corporation (TMCC) to resolve charges that TMCC engaged in unlawful discrimination in violation of the Equal Credit Opportunity Act (ECOA).  The settlement includes TMCC’s agreement to change its so-called “dealer compensation policy” and pay up to $21.9 million in remediation to affected consumers.  According to the CFPB press release, the CFPB did not assess a civil penalty “because of the proactive steps the company is taking that directly address fair lending by substantially reducing or eliminating discretionary pricing and compensation systems.”

The DOJ consent order includes a statement by TMCC in which it asserts that “it has treated all of its customers fairly and without regard to impermissible factors such as race or national origin” and entered into the settlement “solely for the purpose of avoiding contested litigation with the [DOJ] and instead to devote its resources to providing fair and industry-leading services to its customers.”  In another statement issued after the settlement was announced, TMCC stated that it “respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory.”

The settlement arises out of a joint CFPB and DOJ investigation that, as described in the CFPB consent order targeted TMCC’s alleged “policy and practice that allows dealers to mark up a consumer’s [contract] rate above [TMCC’s] established buy rate” and then compensate dealers “from the increased [finance charge] revenue to be derived from the dealer markup.”  The CFPB claimed that the so-called dealer “markups” were “based on dealer discretion” and “separate from, and not controlled by, the adjustments to creditworthiness and other objective criteria related to [buyer] risk in setting the buy rate.”

Based on a portfolio-level analysis of the dealer “markups” on “non-subvented” retail installment contracts (i.e., contracts not subsidized by the auto manufacturer) purchased by TMCC in 2011 to 2013, using the “Bayesian Improved Surname Geocoding” proxy methodology, the Agencies claimed that African-American and Asian and/or Pacific Islander buyers were charged higher dealer “markups” than similarly-situated white buyers.  According to the Agencies, TMCC’s dealer compensation policy violated the ECOA because it had a disparate impact on African American and Asian and/or Pacific Islander buyers.  In its complaint filed in the United States District Court for the Central District of California, the DOJ alleged that TMCC’s “policy“ was “not justified by legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact on” such minority buyers.

Under the terms of the substantially similar DOJ and CFPB consent orders, TMCC must implement one of three dealer compensation policies: Option One provides substantially lower limits on dealer discretion in setting the contract rate; Option Two provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits) with downward deviations pursuant to authorized exceptions; and Option Three allows no dealer discretion in setting contract rates.  The settlement includes additional requirements regarding TMCC’s maintenance of general compliance management systems, sending annual notices to dealers regarding ECOA compliance, monitoring of dealers for compliance with the limits on dealer discretion in setting the contract rate, and submission of portfolio-level data to the Agencies.

The settlement also includes monetary relief consisting of a $19.9 million settlement fund to provide redress for affected consumers who allegedly were “overcharged” when they entered into retail installment sale contracts from January 1, 2011 through the Effective Date.  (The Effective Date is the date on which the CFPB Consent Order is issued or on which the DOJ Consent Order is approved and entered by the district court.).  TMCC can be required, however, to deposit up to an additional $2 million into the settlement fund based upon a determination by the Agencies as to need for additional redress attributable to the period from the Effective Date until the date by which TMCC has fully implemented its new dealer compensation policy.  This additional redress apparently relates to affected consumers who enter into contracts during the pre-implementation window period after the Effective Date.

While the TMCC settlement closely tracks the terms of the Agencies’ two most recent settlements of this nature, there are some differences. Two of these differences are particularly noteworthy.

First, although it is not provided for in either the TMCC consent orders, the CFPB’s and DOJ’s press releases issued by each of the Agencies stated that TMCC “has further committed that it will not fund any additional nondiscretionary component of dealer compensation by increasing its posted risk-based buy rates.”

Second, as in prior consent orders and subject to certain compliance with documentation requirements, a footnote in the TMCC consent orders provides that TMCC is not precluded from using a “competitive modifier” to reduce its risk-based buy rate “based on competitive offers (e.g., a valid, dealer documented, competitive offer from another financing source) when it is necessary to retain the customer’s transaction.”  Prior consent orders have required, however, that the respondents’ policies relating to a “competitive modifier” of a risk-based buy rate shall “eliminate Dealer Discretion in the transaction.”  Instead of imposing a prohibition of this nature, the relevant footnote in the TMCC consent orders concludes with the following sentence: “Respondent’s dealer compensation policies shall not vary when Respondent reduces a risk-based buy rate; dealers may retain the discretion to mark up the modified buy rate, subject to the caps set forth in subparagraph (a) of this Option, ¶ 25(a).”

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, which chronicles in detail the controversial automotive ECOA enforcement initiative of the CFPB with respect to what it characterizes as “dealer markup.”  The highly critical nature of the report is encapsulated by its title, which is “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”  The report was announced in a press release which is titled “Internal Documents Reveal Weakness of CFPB’s ‘Disparate Impact’ Claims Against Vehicle Finance Business.”

Notwithstanding its scathing title, the report itself is a captivating read with a scholarly tone to it.  Moreover, some of its more newsworthy assertions are substantiated with citations to, and quotations from, internal CFPB documents that are posted on the website of the House Financial Services Committee.  The report, and the supporting documents, provide the reader with an inside glimpse into the formulation and execution of the Bureau’s enforcement strategies with respect to dealer finance income under motor vehicle retail installment sale contracts.  According to the report, some of these internal documents acknowledge areas of potential vulnerability in the event of contested litigation.  The areas of litigation risk to the CFPB include several dispositive legal issues, as well as questions relating to the statistical methodology employed by the Bureau.

The legal issues discussed in the report include: (1) whether disparate impact claims are cognizable under the ECOA; (2) whether the asserted assignee “policy” of “allowing” dealerships the discretion to “mark up” wholesale buy rates when negotiating contract APRs with their customers is a “specific policy or practice” within the meaning of Supreme Court disparate impact jurisprudence; (3) whether a potential assignee is a “creditor” under the ECOA with respect to retail installment sale contracts (“RISCs”) entered into on a “spot delivery” basis before the decision of a prospective assignee has been communicated to the dealership; (4) whether the assignee “portfolio imbalance” theory of liability, and the statistical analytical approach employed by the Bureau, would enable it to state a prima facie disparate impact claim under the “robust causality” requirement recently emphasized by the Supreme Court in Inclusive Communities; and (5) the business justification for the asserted “policy” given that “dealers will not assign RISCs to finance companies that don’t make competitive offers, and finance companies that attempt to impose terms and conditions (including costly, impractical compliance procedures) even slightly more burdensome than its rivals can lose most of their business.”

The “portfolio imbalance” theory of liability refers to the approach of analyzing all of the RISCs acquired by an assignee without differentiating among the assignor dealerships.  The report says that, “[i]n conducting its fair lending analysis, the Bureau examines a[n assignee’s] entire portfolio rather than on a dealer-by-dealer basis.”  As a result, “racial disparities within [an assignee’s] portfolio can be caused by the composition of the portfolio itself.”  This analytical flaw was noted in the AFSA report prepared by Charles River Associates, which concluded that “[a]ggregating contracts originated by individual dealers to the [assignee] portfolio level may create the appearance of differential pricing on a prohibited basis where none exists.”  Even if each dealership prices its RISCs in a manner that is neutral with respect to race and ethnicity, pricing differences among dealerships may create an appearance of disparities at the portfolio level when the RISCs of different dealerships are aggregated to the portfolio of the assignee.

The report is as fascinating a read as its provocative title suggests it will be.  It concludes by saying that “[t]he information and documents accompanying this report should help auto dealers, finance companies, and consumers better understand the Bureau’s flawed approach to indirect auto financing and compliance with [the] ECOA.”  According to the New York Times, “a bureau spokeswoman said the report showed that the agency engaged in careful deliberation.”

Various issues and items addressed in the report have been discussed in prior Ballard legal alerts and CFPB Monitor blog posts, including the following:  “The CFPB Stretches ECOA Past the Breaking Point with Auto Finance”; “Auto finance: can we really call disparate impact ‘discrimination’?”; “CFPB Releases Report on Fair Credit Exams and White Paper on Proxy Methodology”; “Auto Finance Company Agrees to Change Dealer Compensation Policy to Settle CFPB and DOJ Fair Lending Claims”; and “Ballard attorneys author article on auto finance and disparate impact.”  Our article concerning the substantive implications that class certification appellate decisions may have for disparate impact pricing claims alleged against assignees of motor vehicle RISCs is available here.

Yesterday, by a vote of 332-96, the House of Representatives passed H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act,” which would nullify the CFPB’s indirect auto finance guidance issued in March 2013 and require the CFPB to provide for a notice and comment period before issuing any new guidance on indirect auto finance.  (The CFPB’s 2013 guidance targeted the practice of “dealer markups” and indicated that the CFPB intended to use a disparate impact theory to establish an indirect auto finance company’s ECOA liability for pricing disparities on a prohibited basis.)

The bill also includes requirements for the CFPB when proposing and issuing such guidance to (1) make publicly available “all studies, data, methodologies, analyses, and other information” it relied on, (2) consult with the Fed, FTC and DOJ, and (3) conduct a study of the guidance’s impact on consumers and “women-owned, minority-owned, and small businesses.”

Earlier this week, the White House issued a statement indicating that it strongly opposed passage of H.R. 1737.  Nevertheless, the House vote indicates that the bill had bipartisan support.


Earlier this week the Supreme Court heard oral arguments in the case of Hawkins v. Community Bank of Raymore. We have issued an E-alert discussing this important case, which we expect will resolve whether a spouse-guarantor is an “applicant” under the ECOA. Notably, the CFPB joined in an amicus brief filed by the United States in support of Regulation B’s definition of “applicant,” which includes guarantors. The outcome of this case will likely turn on whether the Court agrees that the CFPB’s view is a permissible interpretation of the ECOA.