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On October 17, the Bureau released its Fall 2018 Rulemaking Agenda, but it included a surprise for those interested in fair lending.  Under the section of the associated blog post entitled “Future Planning” appears the following statement:

“The Bureau is considering future [rulemaking] activity with regard to specific areas of consumer financial law of significant public interest.  For example, the Bureau announced in May 2018 that it is reexamining the requirements of the Equal Credit Opportunity Act (ECOA) concerning the disparate impact doctrine in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”

This is a very interesting development, because it suggests that the Bureau’s “reexamination” of disparate impact may not merely be a matter of informal interpretation or enforcement/supervision priorities, but may become enshrined in a rule (presumably an amendment to Regulation B).  If this happens, its effects would likely be more permanent and widespread than a more informal statement of position relating to disparate impact.  A rule, once finalized, would presumably:

  • remain in effect indefinitely, until altered by another notice-and-comment rulemaking;
  • be binding on other federal agencies (like the Department of Justice) and on courts, as an authoritative interpretation of ECOA;
  • survive any leadership change at the Bureau, again subject to the rulemaking process being restarted; and
  • prevent the Bureau from applying any different standard for disparate impact retroactively upon a change in leadership at the agency.

So, a disparate impact rulemaking could be very significant over the long term.  But what direction might such a rulemaking take?

One possibility would be to remove the “effects test” language from Regulation B (§ 1002.6(a)) and state affirmatively that there is no disparate impact theory of liability under ECOA.  There is certainly support in the statutory language, and the reasoning of Inclusive Communities, for that result.  Indeed, this conclusion was the one highlighted in the House Financial Services Committee’s Unsafe at Any Bureaucracy report, including a chart that shows the distinctions between ECOA and other federal statutes illustrating that there is no language in ECOA to support a disparate impact theory of liability.

Another idea might be to follow the path of the HUD disparate impact rulemaking under the Fair Housing Act, to carefully define the elements of a disparate impact claim in a way that limits application of the theory to more well-settled situations and which gives appropriate deference to reasonable business justifications.  We blogged about the HUD rulemaking most recently here.

A third potential would be to flesh out the “robust causality” requirement discussed in Inclusive Communities to require significant proof beyond statistical analysis for any disparate impact claim, which again could serve to curb what the Supreme Court labeled “abusive” claims of disparate impact.

We don’t know what the Bureau may do in this regard, or whether the foreshadowing of an ECOA rulemaking will actually be carried through to completion, but if it is, it could be a very significant, long-term development for fair lending law.

 

During Richard Cordray’s tenure as CFPB director, it began to look like we were heading toward an era of much more aggressive application of the Equal Credit Opportunity Act to small business lending.  The biggest potential development was the anticipated small-business lending data collection rule, which would have imposed HMDA-like reporting requirements for small business lending, which in turn would have generated the statistical information that could have been used in fair lending examinations and enforcement with respect to small business lending.

The data collection rule was not completed by the time Richard Cordray resigned last November, but it still appears as an active matter on the CFPB’s regulatory agenda.  However, last week, Politico published a story, suggesting that the rule is not likely to be pursued by the CFPB in the near future.

Around the same time, the CFPB released an edition of Supervisory Highlights that included a section on small business fair lending considerations.  My read of the discussion is that the CFPB was encouraging measures taken by small business lenders to drive consistency in underwriting decisions, but there was no suggestion of any sort of proxy-based statistical analysis or other more difficult compliance steps recommended in the recent Highlights discussion.

So where does this leave us with respect to potential regulatory application of the Equal Credit Opportunity Act to small business lending?  It appears to me that the CFPB is likely to push small business lenders to adopt consistency measures similar to those described in Supervisory Highlights, but there does not appear to be any move toward bringing disparate impact cases in this area, either based on a proxy methodology or based on a data collection rule that doesn’t seem to be forthcoming in the near future.  So, the concern that had developed during Richard Cordray’s tenure about aggressive disparate impact cases in the small business lending world appears to be retreating, if not disappearing entirely, for the time being.  Small business lenders should still do their best to make their underwriting decisions as objective and consistent as possible, but we believe the regulatory input to this process will be encouraging measures of this nature, rather than anything more forceful.

On September 5, 2018 a group of 14 state Attorneys General and the AG for the District of Columbia sent a comment letter to CFPB Acting Director Mick Mulvaney, urging him to refrain from “reexamining the requirements” of the Equal Credit Opportunity Act (“ECOA”). The AGs seek to preserve the interpretation that the ECOA provides for disparate impact liability.

This letter was written in response to the statement issued by the CFPB on May 21, 2018, responding to the enactment of S.J. Res. 57, disapproving of the CFPB’s Bulletin 2013-2 regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” Through this joint resolution, Congress rejected the disparate impact theory underlying enforcement actions brought by the CFPB under the ECOA, related to auto dealer finance charge participation.  Although this enactment would appear to mark the demise of such enforcement actions, recent announcements from the New York Department of Financial Services have called that conclusion into question.

In its May 21, 2018 statement, the CFPB indicated that it “will be reexamining the requirements of the ECOA” in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”  (The statement presumably refers to the Supreme Court’s Inclusive Communities decision.)

Referencing the language in Regulation B and Regulation B Commentary regarding the “effects test,” the AGs argue in their letter that the regulations implementing the ECOA have continuously interpreted the statute as providing for disparate impact liability.  They assert that action by the CFPB in derogation of those regulations would violate the Administrative Procedure Act.

The AGs further argue that because their states have enacted statutes modeled on the ECOA, responsibility for enforcing the statutory protections is shared among the states and the federal government, such that the CFPB cannot overturn the Supreme Court’s 2015 ruling in Inclusive Communities.  The AGs state that the holding of Inclusive Communities, “dictates” that the ECOA provides for disparate impact liability, because the FHA and the ECOA contain identical language stating that it “shall be unlawful for any person . . . to discriminate against any person . . . because of race, color, religion, sex, handicap, familial status, or national origin.”

As we have observed previously, however, the Supreme Court’s conclusion in Inclusive Communities, that disparate impact liability is cognizable under the FHA, was largely based upon, “its results-oriented language, [and] the Court’s interpretation of similar language in Title VII and the [Age Discrimination in Employment Act (ADEA)].”  We commented that the Court’s analysis highlights material differences between the FHA and the ECOA; namely the lack of comparable “results oriented language” in the ECOA.

The states whose AGs signed the comment letter are North Carolina, California, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia.  The same group of state AGs, with the addition of the Attorneys General for Iowa and Pennsylvania, recently sent a letter to HUD urging it not to make changes to its 2013 Disparate Impact Rule in light of the holding in Inclusive Communities.

As the Supreme Court aptly recognized in Inclusive Communities, limitations on disparate impact liability are necessary to protect potential defendants from abusive disparate impact claims.  The requirement of a “robust” causality requirement helps to safeguard potential defendants from claims that, in effect, seek to hold them “liable for racial disparities they did not create.”  These considerations, along with the materially different language in the two statutes, raises substantial questions as to how persuasive the CFPB will find the arguments presented by the state AGs.

The U.S. Department of Housing and Urban Development (HUD) has issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Disparate Impact Rule (Rule) should be revised in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. 

On July 19, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “HUD’s Reconsideration of its Disparate Impact Rule: Background, Analysis and Potential Implications.”  Click here to register.

The ANPR provides an important opportunity for the mortgage industry and other interested parties to address whether the Rule reflects the limitations outlined by the Supreme Court in Inclusive Communities and other concerns with the Rule.  Comments on the ANPR must be filed by August 20, 2018.

The Rule provides that liability may be established under the Fair Housing Act (FHA) based on a practice’s discriminatory effect (i.e., disparate impact) even if the practice was not motivated by a discriminatory intent, and that a challenged practice may still be lawful if supported by a legally sufficient justification.  Under the Rule, a practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.  The Rule also addresses what constitutes a legally sufficient justification for a practice, and the burdens of proof of the parties in a case asserting that a practice has a discriminatory effect under the FHA.

While the Supreme Court held in Inclusive Communities that disparate impact claims may be brought under the FHA, it also set forth limitations on such claims that “are necessary to protect potential defendants against abusive disparate impact claims.”  In particular, the Supreme Court indicated that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity” and that a “robust causality requirement” ensures 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.”  Significantly, while Inclusive Communities held that liability may be established under the FHA based on disparate impact, the district court subsequently dismissed the disparate impact claim against the Texas Department of Housing and Community Affairs based on the limitations on such claims prescribed by the Supreme Court in its opinion.

In the ANPR, HUD notes that in response to a notice it published in the Federal Register in May 2017 inviting comments to assist HUD’s identification of outdated, ineffective, or excessively burdensome regulations, it received numerous comments both critical and supportive of the Rule and taking opposing positions on whether the Rule is inconsistent with Inclusive Communities.  HUD also notes that in a report issued in October 2017, the Treasury Department recommended that HUD reconsider applications of the Rule, particularly in the context of the insurance industry.  (We have previously reported on a challenge to the Rule by the American Insurance Association and National Association of Mutual Insurance Companies in D.C. federal district court.)

The ANPR contains a list of 6 questions of particular interest to HUD.   Issues addressed in the questions include the Rule’s: burden of proof standard and burden-shifting framework; the definition of “discriminatory effect” as it relates to the burden of proof for stating a prima facie case; and the causality standard for stating a prima facie case.

Although Inclusive Communities did not resolve the question of whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA), HUD’s approach to the Rule could have significance for ECOA disparate impact claims.  Recent comments by CFPB Acting Director Mick Mulvaney that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities suggest that the CFPB might review references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary.  In doing so, the CFPB might consider not only whether such references should be eliminated but also, if they are retained, what safeguards should apply.  As a result, changes to the Rule made by the FHA could impact the CFPB’s approach to ECOA liability.

 

 

 

 

Although the CFPB’s leadership transition rightfully remains top of mind for many of our readers, we wanted to recap two developments related to serving consumers who are Limited English Proficient (LEP). In the days before Director Cordray’s resignation, the CFPB officially approved Fannie Mae and Freddie Mac’s final redesigned Uniform Residential Loan Application (URLA), which added a question about mortgage applicants’ language preference. The CFPB also released a report entitled “Spotlight on serving limited English proficiency consumers.” The report discusses how financial institutions can support access to financial products and services and promote financial literacy for LEP consumers.

Official approval of URLA under Regulation B

The Federal Housing Finance Agency recently directed Fannie Mae and Freddie Mac to add a question about mortgage applicants’ language preference to the URLA. The CFPB has issued an official approval of the final redesigned URLA under Regulation B of the Equal Credit Opportunity Act. It determined that the use of the URLA will not expose creditors to civil liability under the provisions of Regulation B that limit creditors’ inquiries about applicants’ race, color, religion, national origin, or sex. (Although the notice states that the CFPB focused on national origin in reviewing the language preference question, its technical determination covers these other types of information as well.) You can read about the CFPB’s initial approval of the redesigned URLA in September 2016 here.

Report on serving LEP consumers

The CFPB’s report primarily summarizes five practices for serving LEP consumers based on interviews with representatives from “several” financial institutions of various sizes and trade associations as well as the CFPB’s “broader understanding of the market.”

  1. Assessment of language needs based on Census Bureau demographic data or customer-provided language elections (such as on the URLA) and use of such information to build out capabilities to serve Spanish-speaking consumers or other LEP consumers in an institution’s footprint by, for example, branch hiring or in-language servicing for particular product lines.
  2. A centralized point of contact for internal technical assistance to employees at larger institutions. The point of contact may annually review processes and procedures for using non-English languages; evaluate which areas of business would most benefit from LEP services; develop quality control mechanisms; and establish translation and interpretation policies.
  3. Translation and interpretation systems at larger institutions that help ensure consistency and accuracy, including third-party interpreters. Institutions reported that they translate for meaning (rather than word-for-word), use back-translation (involving taking a translated document and having another party translate it back to English) and use bilingual glossaries.
  4. Human capital investments in foreign language fluency and cultural competency, including through hiring and training. Institutions that rely on contractors for translation services often retain some language experts on staff for quality control purposes.
  5. Interactions with LEP consumers in their preferred language take the form of verbal interpretations via phone and the ability to select a language setting for digital services like ATMs, websites and mobile applications, as well as other communications. Most institutions told the CFPB that their written contracts were available only in English, although some institutions provide translations of certain documents, including monthly statements and privacy notices.

The report also identifies a number of challenges financial institutions face in serving LEP consumers, such as the limited number of certified financial interpreters and translators (particularly for languages other than Spanish), the inconsistent translation of terms across the financial services industry, and preparing written materials at a reading level accessible to the average U.S. adult.

Importantly, the report notes that its purpose is to raise awareness about the issues that LEP consumers face in accessing financial products and services and share information about how financial institutions interact with LEP consumers. The report states that the practices described are not intended to be comprehensive or representative of the industry as a whole, nor does it constitute an endorsement of specific practices by the CFPB. (The CFPB also provided some guidance on serving LEP consumers in its Fall 2016 Supervisory Highlights, which we blogged about here.) Given that the report was issued prior to Director Cordray’s resignation, it remains to be seen how the “new” CFPB will approach issues of financial access and literacy among the LEP population.

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 Hawkins, thereby 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.

 

On September 14, 2017, the CFPB issued a no-action letter – the first one ever issued by the agency – to a marketplace lender, stating that the agency had no present intention to take enforcement or supervisory action against the lender under the Equal Credit Opportunity Act (ECOA) relating to the lender’s underwriting model, and especially its use of certain alternative data fields.  The letter expires after three years, by its own terms.

As detailed in the lender’s request for a no-action letter, it uses a variety of common credit-bureau-based data fields in underwriting, but also uses other, “alternative data” that seemed to the be focus of the CFPB’s issuance of the letter.  We saw several significant aspects to the underwriting model detailed in the no-action letter request:

  • The requester excludes all residents of West Virginia from its underwriting process. This exclusion apparently did not raise any redlining concerns for the CFPB.
  • The underwriting process also requires that the applicant have a valid email account. We sometimes have been concerned that such a requirement could have a disparate impact (possibly on the basis of age) because it makes the credit product unavailable to those customers who are not digitally engaged, but the CFPB made no comment on this requirement, apparently not finding fault with it.
  • The underwriting process also uses the identity of the college attended by the applicant. This strikes us as very strange and in tension with the CFPB’s repeated attacks on the use of cohort default rate and other school-specific variables in student loan underwriting.
  • The lender also stated that it uses public records (liens and judgments) as part of its underwriting process, which is notable given the removal of such information from credit reports offered by the three large credit bureaus (although this data continues to be separately available). We blogged about this change in the credit bureaus’ inclusion of public records here.

The letter (and the CFPB’s press release) makes the point that the use of this information is being used to expand access to credit to individuals, particularly younger ones, without sufficient credit experience to have a credit score.  We have known for some time that the CFPB has indicated that it will be more understanding about the use of alternative data when it is used to expand access to credit for consumers who do not have sufficient credit bureau history, but it’s unclear how that inclination will be weighed against particular data elements that have been criticized by the CFPB (like, for example, school-specific variables).

Nevertheless, we view the no-action letter as confirmation of our view that the CFPB wishes to encourage the use of alternative data to expand access to credit to “thin file” or “no file” consumers.  The problem is that there are so many limitations in the letter – and so many factual questions that are not addressed by the CFPB at all – that it serves to provide essentially no reliable guidance to the industry.  Moreover, as we detailed on this blog when the NAL process was finalized, a no-action letter does not bind the CFPB, any other federal or state governmental agency, or private litigants, and is not entitled to any deference from courts.  Our criticism of the Bureau’s no-action letter policy was followed by similar comments in the Treasury Report released earlier this year, which noted the “stringent standards that must be met before the agency will even consider a regulated party’s request” and criticized the inaccessibility of the process to industry participants.

For these reasons, the no-action letter still leaves a great deal of uncertainty surrounding other types of alternative data that may be used in underwriting models.  The CFPB could promote access to credit in a much more significant way if it provided guidance on the use of a more expansive set of alternative data than the handful of attributes noted in the no-action letter.  Unless and until that happens, lenders will need to make a judgment about the use of alternative data and equip themselves with empirical data to show the predictive power of the data, and that it is being used to expand access to credit.  That is the focus we have been concentrating on with our lender clients who make extensive use of alternative data in their underwriting models.

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.

 

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.”

Last Friday in New Orleans, the ABA Business Law Section Consumer Financial Services Committee hosted a fascinating program about CFPB enforcement at the Section’s 2017 Spring Meeting.  The program was entitled:  “Too Much or Too Little?  Is the CFPB Exercising its Enforcement Power with Appropriate Restraint?”  As might  be expected, the two industry representatives on the panel criticized certain of the CFPB’s enforcement initiatives, including, among others, the PHH case and the use of disparate impact analysis in connection with  discretionary dealer pricing to assess Equal Credit Opportunity Act (“ECOA”) compliance by auto finance companies.  The industry representatives’ principal complaint was that the CFPB routinely eschews rulemaking in favor of using consent orders, a practice which has been pejoratively referred to as “regulation by enforcement.”

Professor Chris Peterson of the University of Utah School of Law defended the CFPB’s enforcement initiatives by updating certain statistics contained in his law review article “Consumer Financial Protection Bureau Law Enforcement: An Empirical Review,” 90 Tulane Law Review 1057 (2016).  According to Professor Peterson:

  • The CFPB wins the vast majority of the cases that it initiates, 146 out of 150 cases.
  • Over 95% of all consumer relief was awarded in cases in which the CFPB uncovered evidence of deceptive conduct.
  • Over 95% of all consumer relief was awarded in cases in which the CFPB collaborated with other state or federal law enforcement agencies.
  • No bank has contested a public CFPB enforcement action.

Professor Peterson opined that the greatest risk today is that a change in the CFPB’s governance, such as replacing the current single director with a multi-member commission as has been proposed, will bring the CFPB “to heel” and result in industry capture.  Jeffrey Langer, formerly Assistant Director of Installment and Liquidity Lending Markets in the CFPB’s Research, Markets, and Regulations Division, observed that the CFPB has been (and still is) “significantly understaffed” in its Research, Markets and Regulations Division.  (It was suggested that the CFPB’s emphasis on enforcement has contributed to the understaffing by reducing interest among CFPB staff in working in the Regulations Division.)

Professor Peterson agreed with Jeff’s observation, adding that “rulemaking is very labor intensive” and that the Regulations Division does not have the “bandwidth” needed to engage in more robust rulemaking.  He further noted that CFPB regulations run the risk of being “thrown out” by Congress under the Congressional Review Act.  Professor Peterson made the obvious point that regulations only operate prospectively and “don’t return money” to consumers.

Patrice Ficklin, the Assistant Director of Fair Lending and Equal Opportunity of the CFPB’s Office of Supervision, Enforcement and Fair Lending, viewed the program as an audience member.  Speaking from the audience, she made several comments in defense of the CFPB’s use of disparate impact analysis to determine whether banks and non-banks that purchase motor vehicle installment sales contracts from auto dealers are violating the ECOA by enabling the dealers to use discretionary pricing.  Ms. Ficklin made the following points:

  • The CFPB was not the first federal law enforcement agency to deploy disparate impact analysis. She described the CFPB as having received a “hand-off” of disparate impact analysis from “sister agencies,” including DOJ, that were already using that analysis.
  • In using disparate impact analysis, the CFPB is not “clarifying the law” because the “law is clear.” Ms. Ficklin was, of course, basing her claim on language in Regulation B that purports to legitimize the use of disparate impact analysis.

Unfortunately for the CFPB, however, the law is anything but clear, particularly in the aftermath of the U.S. Supreme Court’s Inclusive Communities decision.  While language in Regulation B does purport to authorize the use of disparate impact analysis, there are powerful arguments supporting the proposition that such language is contrary to the ECOA’s express language.

Peggy Twohig, Assistant Director of Supervision Policy of the Office of Supervision, Enforcement and Fair Lending, was also an audience member.  Ms. Twohig had previously spent 17 years with the Federal Trade Commission where she was the Associate Director of the FTC’s Division of Financial Practices.  Speaking from the audience, she observed that many years ago the FTC was “put down” for what Congress considered to be overly aggressive rulemaking.  Ms. Twohig was, of course, referring to the Magnusson-Moss standards enacted in 1980 which made it virtually impossible for the FTC to engage in rulemaking for more than 30 years.  Ms. Twohig seemed to imply that, if history is any guide, the CFPB should be cautious in using its rulemaking authority.