As we reported recently, the Government Accountability Office has determined that CFPB Bulletin 2013-02 on dealer pricing in indirect auto finance (“Dealer Pricing Bulletin” or “Bulletin”) is a “rule” subject to review under the Congressional Review Act (“CRA”).  We noted that, if Congress chose to disapprove the guidance, it would severely undermine the basis for any future enforcement or supervisory action based on the legal and factual theories set forth in the Bulletin.

Our friend Professor Adam Levitin at Georgetown Law Center sent one of us the following message on Twitter a few days ago, questioning whether such an override would have any impact at all:

@AlanKaplinsky Trying to puzzle through this.  It’s pretty weird. GAO’s determined that the IAL [indirect auto lending] guidance is subject to CRA. But as far as I can tell, the GAO decision has no force of law, and I don’t see how it could, as the CRA says it’s not subject to judicial review.  If it isn’t actually a “rule,” then a CRA disapproval resolution would have no effect.  But there’s no judicial review allowed to determine this.  And even if it is a rule, what would it mean to void non-binding guidance?  It doesn’t void or change the CFPB’s position or undercut any ECOA or UDAAP suit the CFPB might bring.  All it does it void the guidance communicating the CFPB’s position.  IAC, does it really matter?  Perhaps the CFPB will stop enforcement actions for a while, but the IAL consent decrees presumably have forward looking provisions, and there’s also state AG enforcement risk.  I can’t imagine compliance at most IALs letting them revert to old form.  And given the 5-year SOL on ECOA, even if a Trump confirmed CFPB Director had no interest in bringing ECOA actions, any reversion to old behavior will quickly become chargeable by the AG in the next administration or the CFPB Director after a Trump-confirmed one.  It’s possible that that AG and CFPB Director won’t be interested in pursuing ECOA actions, but if they are, a[n] IAL that reverted to allowing unpoliced markups would be in a most uncomfortable position.  A lot of risk for a few years of allowing unpoliced markups. (emphasis added).

There is much that can (and ultimately may) be said in response to each of these assertions, but given the likelihood of a joint resolution of disapproval being introduced shortly, we wanted to focus today on the suggestion that the enactment of a disapproval measure would be inconsequential.  More specifically, we wanted to take the opportunity to explain why, as suggested in our blog post, we believe an override of the Dealer Pricing Bulletin should put a permanent end to this theory of assignee liability for so-called dealer “markup” disparities and make it impossible for the CFPB to pursue supervisory or enforcement actions based upon it.

Let’s begin by remembering that the legal and factual theories on which the CFPB’s indirect auto fair lending cases were based are very shaky, to say the least.  We wrote a blog post about this a couple of years ago, but just to refresh your recollection:

  • There is a significant question, especially after Inclusive Communities, about whether disparate impact claims are cognizable under the Equal Credit Opportunity Act in the first place (see “The ECOA Discrimination and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” 61 Business Lawyer 829 (2006));
  • The Supreme Court decision in Dukes v. Wal-Mart stands for the proposition that a policy of “allowing discretion” is not a specific, identifiable policy subject to disparate impact analysis (seeAuto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions);
  • The Regulation B multiple creditor liability rule (12 C.F.R. § 1002.2(l)) provides that an assignee (i.e., an “indirect auto finance company” in the parlance of the Bureau) is not liable for an ECOA violation by the original creditor unless the assignee knew or had reasonable notice of the act, policy or practice constituting the violation before becoming involved in the credit transaction – meaning in our view that the government should need to prove that the assignee knew or had reasonable notice of disparate treatment by a dealership prior to purchasing a retail installment sale contract (“RISC”);
  • The legal theory on which the discrimination claim ultimately is based – that discretionary pricing by dealerships has a discriminatory effect due to disparate treatment by dealerships – would require a dealer-level analysis rather than a portfolio-wide one;
  • The use of a portfolio-wide analysis manufactures statistical evidence of discrimination that does not exist by aggregating the RISCs of different dealerships to the assignee level, thereby comparing different auto dealers to one another; and
  • The use of a continuous-regression model over BISG proxy results creates the appearance of disparities when none exist, and inflates any that may exist.

In subsequent blogs posts, we discussed reports prepared by the House Financial Services Committee Majority Staff titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending” and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  We also reported previously on the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market,”an Executive Summary of which is available here.  In short, the subject of alleged assignee liability for asserted dealer “mark-up” disparities has been highly controversial and a lightning rod for Congressional, media and industry criticism of the Bureau.

Now let’s assume for the moment that Congress enacts a joint resolution disapproving the Dealer Pricing Bulletin articulating the Bureau’s theories of assignee liability for so-called dealer “markup” disparities, and the President of the United States signs it into law.  In that event, we believe that it should become impossible for a federal governmental agency to pursue the theory of liability in enforcement and, therefore, anywhere else.  We further believe that such a Congressional override would cause the federal judiciary to be even more hostile to the CFPB’s theory of liability than Supreme Court decisions like Wal-Mart and Inclusive Communities would require.  Here’s why.

The salient question is, “what would be the import of the enactment of a joint resolution of disapproval?”  A Congressional override of the guidance would not represent, as Professor Levitin suggests, merely a disapproval of the agency’s statement of its position.  It is, rather, a disapproval of the position itself pursuant to a law enacted by the democratically-elected representatives of the People of the United States declaring that “such rule shall have no force and effect.”  The “position” is embodied in the “statement” and cannot be disassociated from it; they are indivisible.

The end result of the legislative process thus would be a Public Law effectively branding this theory of liability as, in the parlance of Inclusive Communities, a disparate impact claim that is “abusive” of sales finance companies and banks engaged in the automobile sales finance business.  (Inclusive Communities emphasized the importance of safeguards against disparate impact claims that are abusive of defendants, such as the requirement to identify a specific policy or practice of the defendant causing asserted statistical disparities, and directed district courts to enforce this “robust causality requirement” promptly by “examin[ing] with care whether a plaintiff has made out a prima facie case of disparate impact” by “alleg[ing] facts at the pleading stage or produc[ing] evidencing demonstrat[ing] a causal connection” between the alleged policy and the disparity.)

Pursuant to the CRA, the enactment of a disapproval measure would preclude the CFPB from subsequently reissuing the rule or adopting a new rule that is substantially the same as the disapproved rule unless “the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”

If the CFPB’s “rule,” as expressed in its Dealer Pricing Bulletin, is invalid, and the CFPB cannot issue a similar rule in the future, how can it possibly turn around and apply the disapproved “rule” in supervision and enforcement?  We don’t believe it can because doing so would disregard the clear import of an act of Congress.  Rather, we are confident that a Court would conclude that the Congressional override is an expression of disapproval of the legal and factual theories of liability expressed in the Bulletin.

By Professor Levitin’s logic, even though Congress nullified the CFPB arbitration agreements rule, the CFPB would be free to commence UDAAP enforcement actions or administrative proceedings against companies simply for using arbitration agreements with class action waivers, even though the rule prohibiting them was invalidated.  We think this result not only would defy the Canon of Common Sense, but it also would fail to give effect to the will of the People as reflected in an act of Congress that was approved by the President of the United States.

In Professor’s Levitin’s formulation, an administrative agency can continue to apply, in the enforcement (and apparently in the supervisory) contexts, the substance of a “rule” that has been disapproved by an act of Congress.  We respectfully disagree.  This being a representative Democracy in which the government is subordinated to the will of the People as expressed in laws enacted by their elected representatives, we think it makes common sense to answer the salient question in the manner we suggest, rather than in a manner that leaves an agency free to do as it pleases, insulated from the clear import of what Congress (and derivatively the People) have instructed by enacting a disapproval measure into law.  We thus urge Congress to disapprove CFPB Bulletin 2013-02, because we believe that congressional disapproval should have a permanent preclusive effect on the ability of federal regulators to pursue this deeply flawed theory of liability.

We do not appear to be alone in this view.  Professor Levitin himself, in testimony submitted to the House Financial Services Committee in 2015, noted that a provision of the Financial CHOICE Act that would repeal the Dealer Pricing Bulletin would “shield discriminatory lenders from legal repercussions.”  Although we would eliminate the word “discriminatory” from that sentence, we believe that a CRA override of the Dealer Pricing Bulletin would have that effect.  Suggesting that the CFPB could pursue these cases against “indirect auto lenders” after a Congressional override of the Bulletin strikes us as wishful thinking.

Congress may have now have the opportunity to disapprove by a simple majority vote the CFPB’s disparate impact theory of assignee liability for so-called dealer “markup” disparities as a result of a determination by the General Accountability Office (GAO) that the CFPB’s Bulletin describing its legal theory is a “rule” subject to override under the Congressional Review Act (CRA).

We previously blogged about press reports that the GAO had accepted a request from Senator Patrick Toomey to determine whether CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (the “Bulletin”), is a “rule” within the scope of the CRA.  (“Indirect auto lenders” is the term used by the Bureau to refer to persons, such as banks and sales finance companies, that are engaged in the business of accepting assignments of automobile retail installment sale contracts from dealerships.)  We subsequently suggested that a recent GAO determination that the interagency leveraged lending guidance is a “rule” subject to the CRA foreshadowed a similar determination for the CFPB indirect auto finance guidance reflected in the Bulletin.

As it turns out, we were right.  The GAO issued its decision on December 5, 2017, concluding that the Bulletin is a “rule” subject to the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The Bulletin is an official guidance document issued by the Bureau on March 21, 2013.  It effectively previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (RISCs), setting forth the views of the CFPB concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the annual percentage rate under a retail installment sale contract by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish its enforcement and supervisory approach with respect to the subject practice was unmistakably clear not only from its text but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”

Before responding to Senator’s Toomey’s request, in accordance with its standard procedure for responding to requests of this nature, the GAO solicited and obtained the CFPB’s views.  The Bureau responded to the GAO by letter dated July 7, 2017.

The legal analysis reflected in the GAO opinion is straightforward.  Subject to exceptions not relevant, the CRA adopts the Administrative Procedure Act definition of a “rule,” which states, in relevant part, that a rule is “”the whole or a part of an agency statement of general . . . applicability and future effect designed to implement, interpret, or prescribe law or policy . . ..”  The GAO framed the question presented as “whether a nonbinding general statement of policy, which provides guidance on how [the] CFPB will exercise its discretionary enforcement powers, is a rule under [the] CRA.”  It agreed with the CFPB’s assertion that the Bulletin “is a non-binding guidance document” that “identifies potential risk areas and provides general suggestions for compliance” with the ECOA.

The GAO rejected, however, the CFPB’s argument that the CRA does not apply to the Bulletin because the Bulletin has no legal effect on regulated entities.  Specifically, the Bureau had argued “taken as a whole the CRA can logically apply only to agency documents that have [binding] legal effect.”  The GAO concluded that “CRA requirements apply to general statements of policy, which, by definition, are not legally binding.”

The GAO letter explains that, “to strengthen congressional oversight of agency rulemaking,” the CRA requires all federal agencies, including independent regulatory agencies, to submit a report on each new rule to both Houses of Congress and to the Comptroller General before it can take effect.” (emphasis added)  The CFPB acknowledged that it had not complied with this formal reporting requirement because it did not believe the Bulletin was a “rule” subject to the CRA reporting requirement.  In response to the GAO decision, Senator Toomey issued a press release stating that “I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

As explained in prior blog posts, the CRA establishes a streamlined procedure pursuant to which Congress may enact, by simple majority vote, a joint resolution disapproving a “rule.”  A joint resolution of disapproval passed by Congress is presented to the President for executive action.  If approved by the President, the joint resolution is enacted into law and assigned a Public Law number.  If a joint resolution of disapproval is enacted into law, the disapproved rule “may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”  Thus, the enactment of a joint resolution of disapproval has a preclusive effect on future regulatory action.

According to a Congressional Research Service report, in prior instances where the GAO determined that the agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”  If a joint resolution of disapproval is introduced, it therefore would appear that the CRA clock may start to run for expedited consideration by the Senate once the GAO opinion is published in the Congressional Record.

So, what does all of this mean for the automobile sales finance industry?  We think there are several important implications.  First, the GAO’s decision strengthens the argument that the CFPB’s effort to regulate dealer pricing of RISCs should have been pursued through a rulemaking proceeding, rather than through “guidance” and enforcement actions.

Second, the GAO determination means that Congress could override the Bulletin by means of a joint resolution of disapproval, with a majority vote that could not be avoided by a Senate filibuster.  Given the Republican opposition to the CFPB’s pursuit of this issue, and the Democratic support for auto dealers as well (expressed in letters from members of Congress to the CFPB), there seems to be a fair chance of a CRA disapproval resolution passing.  Indeed, as Senator Toomey noted in his press release, the House of Representatives passed the Reforming CFPB Indirect Auto Financing Guidance Act in November 2015 by a bipartisan vote of 332-96.

What would the enactment of a joint resolution of disapproval mean?  Obviously, it would mean the Bulletin would be null and void.  But since the Bulletin was non-binding anyway and the CFPB did not comply with the CRA reporting requirement, what difference would it make?

Opponents of the CFPB’s disparate impact theory of liability would argue that the override of the guidance is, by definition, a Congressional repudiation of its content – the legal and factual theories of liability contained in the Bulletin. The corollary of this compelling argument is that the override would preclude not only another similar “rule,” but also that which is inherent in the existence of such a “rule” – its application to regulated entities in supervisory activities or enforcement actions. This repudiation would be permanent (unless altered by a subsequent Congressional enactment), and might therefore offer a lasting end to the CFPB’s efforts to regulate dealer pricing through banks and sales finance companies, rather than the potentially temporary hiatus that could be brought about by new leadership at the CFPB.

We hope that Congress will override the Bulletin under the CRA, and possibly put a final end to this highly questionable legal and factual ECOA theory.

The FRB recently hosted a fair lending “hot topics” webinar in conjunction the DOJ, HUD, CFPB, FDIC, OCC, and NCUA. The seven agencies discussed fair lending developments, including the revised HMDA reporting requirements, compliance management for consumer loans, and various issues related to fair lending complaints, investigations, and enforcement.

HMDA and Revised Regulation C:

Eric Wang, Deputy Fair Lending Director of the CFPB’s Office of Fair Lending and Equal Opportunity, emphasized that the CFPB is currently updating its HMDA exam procedures and that the industry should be “on the lookout” for the revised “Getting it Right” guide. He noted that the new HMDA requirements expand reporting to include 48 data elements (from 23, of which 14 have been modified), and 110 data fields (from 39). Addressing industry outcry, Wang confirmed that file resubmission will not be required based upon overall error rates. Instead, resubmission will be required where the error rates of individual fields exceed applicable thresholds. The new data resubmission guidelines also include error tolerances for certain data fields.

Wang stated that the Bureau’s 2018 examinations will prioritize whether entities have made “good faith efforts” to comply with revised Regulation C. Good faith may be shown by the creation of an implementation plan or updates to policies and procedures. Wang reiterated that after the revised rule takes effect, the Bureau’s role will be “diagnostic and corrective, not punitive;” however, he refused to confirm whether the CFPB will use all HMDA data fields in its examinations. He stated that the CFPB has not prioritized “key fields” because it “would like to maintain the flexibility to examine all HMDA data fields [for] accuracy.” Vonda Eanes, Director for CRA and Fair Lending Policy at the OCC, confirmed that all agencies will have access to all HMDA data and, despite the OCC, FDIC and FRB joint guidance prioritizing 37 “key fields,” the OCC “expects to leverage all the additional HMDA data fields” in its fair lending risk analysis.

Notably, the panel failed to clarify the impact of Regulation C’s changes upon lenders’ CRA obligations. Although cautioning that no final decision has been made, Eanes confirmed that the OCC, FRB, and FDIC are considering the issuance of interagency guidance that recognizes the expanded mandatory reporting in revised Regulation C. In particular, for lenders with a sufficient number of originations, the reporting of open end lines of credit is no longer optional. Additionally, the definitions of dwelling, reverse mortgage, and manufactured home have changed. Reporting under the new HMDA data elements is required for applications on which final action is taken on or after January 1, 2018, except that for applicant demographic data the institution has the option to report under the requirements in effect at the time of application or under the 2018 rule requirements regardless of when the application was taken.

Indirect Auto Finance:

Matthew Nixon, Program Director of the NCUA’s Office of Consumer Financial Protection and Access, refused to state whether the NCUA will focus on any “hot topic” fair lending issues in 2018, but noted that it anticipates examinations will reflect the agency’s current focal points—45% related to specific concerns noted by district examiners or regional offices, 20% related to pricing disparities, 30% related to HMDA data integrity, and 5% related to follow-on work from the previous year. When prompted during the question and answer segment, NCUA noted that examinations are risk focused and indirect auto lending programs are reviewed on a case-by-case basis according to the entity’s risk profile (which includes compensation structure, complaints received, input from the district examiner, and oversight and monitoring practices). The NCUA noted that virtually all exams included cursory review of indirect auto lending programs, but only about 10% resulted in more intensive review.

Compliance Management for Consumer Loans:

Katrina Blodgett, Counsel in the FRB’s Fair Lending Enforcement Section of the Division of Consumer and Community Affairs, noted that the FRB engages in risk-focused supervision and expects that an entity’s CMS provide oversight commensurate with the level of pricing discretion provided by each consumer loan program. The FRB expects that an entity clearly communicate the basis for any exceptions offered to its loan officers, including waiving, reducing, or increasing fees. Blodgett encouraged the use of rate sheets to track all exception variables and advised that rate sheets should be reviewed as part of monthly compliance meetings. Moreover, loan officer training should include the proper use of rate sheets. Tara Oxley, Chief of Fair Lending and CRA Examinations at the FDIC, emphasized that fair lending monitoring programs should be conducted portfolio-wide and only limited to a branch-specific analysis where policies and procedures differ across branches. According to Oxley, an entity’s review must include an analysis of its lending data and its pricing exceptions and overrides, regardless of entity size or complexity.

Investigations and Enforcement:

Jacy Gaige, HUD’s Director of the Office of Systemic Investigations, reviewed the agency’s roughly 1,000 fair lending complaints in 2016. Gaige noted that the most common policy-related complaints involved requiring cosigners or unnecessary documentation for applicants with disability income, such as a doctor’s note that a disability is likely to continue. Gaige emphasized that lenders may face FHA liability where unclear policies and procedures create confusion or delay regarding application requirements or where extra help (friendlier service and quicker callback times) are provided for some individuals as compared with protected classes.

With parental leave, HUD has found that lenders have been impermissibly requiring a parent to return to work before income may be counted or impermissibly requiring a letter that an employer expects the employee to return to work. Lenders have also made statements that applicants may change their mind about returning to work or that many people do not return to work after having a baby. Gaige noted that in these situations, elevated damages may be available on account of the emotional distress associated with an early return to work.

Common complaints also included allegations that lender policies allow investor loans for small rental properties but not for group homes (which often include persons with disabilities), prohibit lending on Native American reservations, prohibit lending to those persons with less than $500,000 or more in collateral, or prohibit lending in a specific community based on the false perception of the prevalence of fraud. Novel complaints include lenders’ use of social media to target specific geographic areas or individuals (including use of a network’s parent/non-parent designation).

Marta Campos of the DOJ Civil Rights Division provided no indication of what new direction, if any, the DOJ will take in 2018. Her comments were limited to the BancorpSouth Bank joint investigation with the CFPB, which settled in June 2016. In response to a public question highlighting the dated settlement, Campos stated that there “may be” similar cases coming down the pike. She noted that lenders’ CMS programs should be able to detect similar redlining and underwriting red flags identified in Bancorp.

The CFPB has filed an amicus brief in Regions Bank v. Legal Outsource PA, a case on appeal to the Eleventh Circuit that involves two important issues under the Equal Credit Opportunity Act (ECOA): whether the ECOA provides a cause of action to loan guarantors and whether a business entity can assert a marital status discrimination claim under the ECOA.

The ECOA defines an “applicant” as someone who “applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  In 1985, the Federal Reserve Board amended the Regulation B definition of “applicant” to include a guarantor “[f]or purposes of section 202.7(d)” (as adopted by the CFPB, now Section 1002.7(d)).  Section 1002.7(d) of Regulation B specifies when a creditor may require the signature of a spouse or other person (Additional Signature Rule).

Only a few U.S. Courts of Appeal have addressed whether the ECOA provides a cause of action to guarantors.  The Seventh Circuit, in a 2007 decision, interpreted the ECOA’s plain language in a straightforward manner and found that there was “nothing ambiguous about ‘applicant’ and no way to confuse an applicant with a guarantor.”  The court went on to explain that interpreting the term “applicant” to include guarantors would “open[] vistas of liability that the Congress that enacted [the ECOA] would have been unlikely to accept.”

In mid-2014, two other circuits ruled on the same issue.  The Sixth Circuit, rejecting the Seventh Circuit’s reasoning, found that the ECOA’S  definition of “applicant” was ambiguous and that the Federal Reserve Board’s definition of the same term in Regulation B–modified to expressly include guarantors–was entitled to Chevron deference.  Shortly thereafter, the Eighth Circuit, in Hawkins v. Community Bank of Raymore, came to precisely the same result as the Seventh Circuit.  The Eighth Circuit found it patently clear that “assuming a secondary, contingent liability does not amount to a request for credit,” and thus concluded that guarantors are not “applicants” within the plain meaning of the statutory definition provided in the ECOA.”

Last year, an equally divided U.S. Supreme Court affirmed the Eighth Circuit’s decision in Hawkinsthereby upholding the Eighth Circuit’s ruling that the ECOA does not provide a cause of action to loan guarantors.  The affirmance by a 4-4 vote meant that the Eighth Circuit’s ruling had no precedential effect in any other circuit.  (The CFPB, jointly with the Solicitor General, filed an amicus brief in the Supreme Court supporting the plaintiffs’ position in Hawkins.)

In the Regions Bank case, the Bank made a loan to Legal Outsource, a company owned by Charles Phoenix.  It subsequently made a loan to Periwinkle Partners, a company indirectly owned by Lisa Phoenix, the wife of Charles Phoenix.  Legal Outsource, Charles Phoenix, and Lisa Phoenix guaranteed the loan to Periwinkle Partners.  After Legal Outsource defaulted on its loan, the Bank declared a default on its loan to Periwinkle Partners because, under the terms of that loan, a default on the Bank’s loan to Legal Outsource constituted an event of default on its loan to Periwinkle Partners.

Additional defaults occurred over the the course of more than a year prior to the Bank’s decision to commence suit, including the obligors’ failure to pay ad valorem taxes due on the collateral or provide required financial reports and the transfer of equity interests in Periwinkle Partners to third parties without the Bank’s knowledge or consent.  While under no obligation to do so, the Bank spent over a year attempting to negotiate an out-of-court resolution with the borrower and guarantors, to no avail.

The Bank thereafter sued Periwinkle Partners, Legal Outsource, and Lisa and Charles Phoenix in a Florida federal district court to foreclose on collateral securing its loan to Periwinkle Partners.  All of the defendants asserted counterclaims alleging that the Bank had violated the ECOA’s prohibition against discrimination on the basis of marital status and the Additional Signature Rule.  According to the defendants, the Bank required Charles Phoenix to guarantee the loan to Periwinkle Partners solely because he was married to Lisa Phoenix.

The district court dismissed the counterclaims of Legal Outsource and Lisa and Charles Phoenix “to the extent that defendants are asserting their counterclaims for violation of the ECOA in their capacities as guarantors.”  In dismissing the counterclaims, the district court relied on the Eighth Circuit’s Hawkins decision in which the Eighth Circuit concluded that ”the plain language of the ECOA unmistakably provides that a person is an applicant only if she requests credit.  But a person does not, by executing a guaranty, request credit.”  The Eighth Circuit also ruled that Regulation B’s definition of ”applicant” was not entitled to Chevron deference because the definition contradicted the text’s unambiguous statutory definition.

In a subsequent decision, the district court dismissed the ECOA counterclaim asserted by Periwinkle Partners on the grounds that, although it was an “applicant,” it could not assert an ECOA claim for discrimination based on marital status.  According to the district court, “Periwinkle Partners cannot avail itself of the protections of the Act because it is a company, not an individual, and it cannot have a marital status.”

In its amicus brief filed in support of the defendants, the CFPB argues that:

  • Under the plain text of the ECOA and Regulation B, a company can be an “applicant” protected against discrimination “on the basis…of marital status” because the ECOA does not require the alleged discrimination to “be on the basis of the applicant’s marital status.” (emphasis provided).
  • Under the Regulation B commentary, the ECOA prohibits discrimination based on the characteristics of corporate officers and of “individuals with whom an applicant is affiliated or with whom the applicant associates.”  Because the owner of a company is an officer, affiliate, or associate of the company, an applicant company can bring an ECOA claim “if it suffers discrimination on the basis of its owner’s marital status.”
  • The Regulation B definition of ”applicant” is a reasonable interpretation of the ECOA’s text that is entitled to Chevron deference.

 

The Department of Justice’s Civil Rights Division has issued its annual report to Congress regarding its activities to enforce the ECOA, FHA and SCRA.  The report covers 2016 activities that would have taken place under the Obama Administration.  As a result, although it concludes by noting the role of the DOJ’s “vigorous enforcement of fair lending laws” in expanding credit access, it is unclear how the DOJ will carry out that role under the leadership of Attorney General Jeff Sessions.

The report states that the DOJ opened 18 fair lending investigations in 2016, filed seven fair lending lawsuits of which it settled six, obtaining nearly $37 million in relief.  The six settled cases, which are described in the report, include cases involving alleged mortgage redlining (one from June 2016 and the other from December 2016), alleged discrimination on the basis of national origin in connection with vehicle-secured loans, alleged discrimination on the basis of familial status or disability and source of income, and alleged predatory targeting of minority homeowners.

The report indicates that at the end of 2016, the DOJ had 33 open fair lending investigations, including seven redlining investigations.  It also indicates that in 2016, the DOJ “continued to build its working relationships with the federal banking agencies, [HUD] and the [FTC] to strengthen our individual and collective capabilities to enforce fair lending laws,” and that the DOJ also continues “to seek opportunities to work in partnership with various state attorneys general.”  (We note that the CFPB is not specifically mentioned as one of the agencies with which the DOJ is working to improve collaboration.)

One section of the report is devoted to ECOA and FHA referrals made to the DOJ by other federal agencies.  According to the report, the DOJ received 22 ECOA and FHA referrals in 2016: eight from the CFPB, four from the FDIC, seven from the Fed, one from the OCC, and two from HUD.  The report indicates that the DOJ opened eight investigations based on the 22 referrals and returned 12 to the referring agency for administrative enforcement without opening an investigation.  It also indicates that all but one of the fair lending lawsuits filed by the DOJ in 2016 were based in part on referrals.

The report reviews the factors considered by the DOJ when evaluating referrals, listing the characteristics of a referral that will generally result in its return and those that generally will result in its retention by the DOJ.  According to the report, the same factors apply when the DOJ has conducted an investigation and is deciding whether a lawsuit is warranted.

The report also includes descriptions of four settlements involving alleged SCRA violations.

The Department of Justice has filed an amicus brief in a case pending before the U.S. Court of Appeals for the Second Circuit that presents the question of whether the prohibition on employment discrimination on the basis of sex in Title VII of the Civil Rights Act includes discrimination based on sexual orientation.  In the brief, the DOJ argues that based on Title VII’s plain text and precedent, the prohibition does not encompass sexual orientation discrimination “as a matter of law” and observes that “whether it should do so as matter of policy remains a question for Congress to decide.”

Since at least 2015, the CFPB has signaled that discrimination on the basis of gender identity and sexual orientation might be a focus of fair lending supervision and enforcement.  In a 2016 letter to the organization SAGE (Services & Advocacy for GLBT Elders), Director Cordray described how, in the CFPB’s view, current law provided strong support for the position that the Equal Credit Opportunity Act’s prohibition against discrimination on the basis of “sex” includes discrimination based on gender identity and sexual orientation.  More specifically, Director Cordray referenced Title VII cases and noted that Title VII precedents traditionally guide judicial interpretation of ECOA and Regulation B.

He also discussed Equal Employment Opportunity Commission decisions involving alleged employment-related discrimination on the basis of gender identity and sexual orientation in which “the EEOC has laid out its reasoning about how discrimination on these bases necessarily involves sex-based considerations.”  He deemed the EEOC’s views of what constitutes sex-based discrimination under Title VII “highly relevant to the similar statutory analysis of what it means to discriminate based on ‘sex’ under ECOA.”

The DOJ’s position in the amicus brief is clearly at odds with Director Cordray’s attempt to use Title VII cases to support the CFPB’s position on the scope of the ECOA’s prohibition against discrimination based on sex. The brief also suggests that once the CFPB is under the leadership of a Director appointed by President Trump, it may retreat from any efforts to extend ECOA protections to sexual orientation.  A similar retreat by the EEOC could occur once the majority of EEOC commissioners are Republican appointees.  (Although the EEOC’s Acting Chair was appointed by President Trump, a majority of EEOC commissioners are Democratic appointees. In the Second Circuit case, the EEOC filed an amicus brief on behalf of the employee.  In its amicus brief, the DOJ observed that the “EEOC is not speaking for the United States and its position about the scope of Title VII is entitled to no deference beyond its powers to persuade.”)

Regardless of the CFPB’s position, companies should be mindful of the fact that numerous state laws already prohibit discrimination in credit transactions on the basis of sexual orientation and gender identity.  As a result, companies should continue to consider revising their policies, procedures and fair lending analyses to incorporate discrimination based on sexual orientation.

 

Congressman Emanuel Cleaver, II announced last week that he had launched an investigation into small business financial technology (fintech) lending by sending a letter to the CEOs of several fintech small business lenders.  The letter includes 10 questions and asks for responses to be provided by no later than August 10, 2017.

In the letter, Mr. Cleaver expressed concern that “some FinTech lenders may be trapping small business owners in cycles of debt or charging higher rates to entrepreneurs of color.”  He noted that he is “particularly interested in payday loans for small businesses, also known as ‘merchant cash advance.'”  He observed that “current law does not provide certain protections for small business loans, compared to other consumer laws,” and cited Truth in Lending disclosures given to consumers as an example of such difference.  He also observed that fintech lenders are not subject to the same level of scrutiny as small community banks and credit unions which are subject to supervision for compliance with anti-discrimination laws.

The questions set forth in Mr. Cleaver’s letter include inquiries about a lender’s small business products and originations, approach to protecting borrowers belonging to protected classes, percentage of “loan and advances [that] are originated to borrowers of color [and] [w]omen,” “the typical rate charged to borrowers of color as compared to [the lender’s] overall borrower population,” typical fee schedule for small business lending products, and use of mandatory arbitration agreements.  In his announcement about the letter, Mr. Cleaver listed the lenders to whom his letter was sent.  We understand that most of such lenders do not make small business loans.

This past March, Mr. Cleaver sent a letter to the CFPB in which he asked the agency to investigate whether fintech companies were complying with anti-discrimination laws, including the Equal Credit Opportunity Act.  Mr. Cleaver also asked the CFPB to respond to a series of questions that included when the CFPB anticipated finalizing regulations to implement Dodd-Frank 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. The Financial CHOICE Act passed this month by the House includes a repeal of Section 1071 and the Treasury report issued this month recommended that Section 1071 be repealed.

 

 

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.”

On June 7, 2017, Attorney General Jeff Sessions issued a memorandum directing that “Department attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges . . . that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” In a press release, he explained that “settlement funds should go first to the victims and then to the American people—not to bankroll third party special interest groups or the political friends of whoever is in power.”

The DOJ and CFPB frequently include such provisions in consent orders settling fair lending claims. For example, in BancorpSouth Bank’s consent order with the CFPB and DOJ, the bank agreed to spend $500,000 on “partnerships” with “one or more community-based organizations or governmental organizations that provide credit, financial education, homeownership counseling, credit repair, and/or foreclosure prevention services to the residents of majority–minority neighborhoods . . . .” Other banks in other fair lending cases have been required to contribute $750,000 to similar organizations.

Each of the fair lending settlements involved substantially more money than the funds directed at community organizations. Nevertheless, the sums that the defendants were required to spend on these organizations were not insubstantial. Under the DOJ’s new policy, these components of the settlements would be prohibited. Given that the DOJ and CFPB do not always see eye to eye under the new administration, it is unclear how the Attorney General’s new policy will impact future fair lending settlements involving both federal agencies. We will, of course, continue to monitor these cases and keep you posted.