On November 24, Republicans on the House Committee on Financial Services issued a report regarding the CFPB’s approach for determining discrimination in the auto lending industry. The report questions the CFPB’s proxy methodology and its authority to bring claims against banks involved in indirect auto lending under the Equal Credit Opportunity Act’s (ECOA) disparate impact theory. According to the report, disparate impact “is a controversial legal theory of liability in discrimination cases.” The report further states that, even if it assumes that the ECOA permits disparate impact claims, the CFPB is nonetheless required to identify the following to establish a prima facie case: (i) a specific policy or practice adopted by the creditor; (ii) disparate impact on a prohibited basis; and (iii) a causal relationship between the challenged practice and the alleged disparate impact. Read more…
On January 20, Republicans on the House Committee on Financial Services issued a report alleging that the CFPB removed a number of safeguards from the claims process after it secured its first settlement with an auto finance company and the company’s subsidiary bank in 2013. The Committee’s most recent report follows a November 2015 report in which the Republican staff (i) criticized the CFPB’s approach for determining discrimination in the auto lending industry; and (ii) questioned the CFPB’s authority to bring claims against banks involved in indirect auto lending under ECOA on a disparate impact theory. According to the more recently published report, the CFPB failed to confirm that funds from the 2013 settlement would be distributed to eligible recipients. Read more…
On September 2, U.S. Attorney General Loretta Lynch delivered remarks at HUD’s Fair Housing Policy Conference. In her remarks, Lynch stressed the importance of fair housing as being a primary driver “to access to employment, to education, to credit, to transportation, to safety and to a whole range of institutions and opportunities.” Lynch stated that she is “more determined than ever to vigorously enforce the Fair Housing Act (FHA).” Among other things, Lynch provided an overview on how the DOJ is implementing new programs, technology, and research to conduct electronic testing, allowing the DOJ to expand the reach of its Fair Housing Testing Program. The Attorney General also expressed her support of HUD’s recently issued “Affirmatively Furthering Fair Housing” rule, and signaled that the DOJ intends to “vigorously enforce” the FHA using every available tool, including the disparate impact theory, which the Supreme Court ruled recently as a valid enforcement tool to challenge unfair mortgage lending practices.
District Court Applies Supreme Court’s Inclusive Communities Decision in Rejecting Disparate Impact Claim
On July 17, the U.S. District Court for the Central District of California granted summary judgment for Wells Fargo in a Fair Housing Act (FHA) case brought by the City of Los Angeles. City of Los Angeles v. Wells Fargo & Co., No. 2:13-cv-09007-ODW (RZx) (C.D. Cal. July 17, 2015). The City alleged that the bank engaged in mortgage lending practices that had a disparate impact on minority borrowers. In rejecting the City’s claims, the court’s opinion heavily relied on the Supreme Court’s recent decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which imposed limitations on the disparate impact theory of liability under the FHA, despite holding that the theory remains cognizable. 135 S. Ct. 2507 (2015). Citing Inclusive Communities, the district court warned that disparate impact claims may only seek to “remove policies that are artificial, arbitrary, and unnecessary barriers and not valid governmental and private priorities.” The court further held that the City failed to point to a specific defendant policy that caused the disparate impact and failed to show “robust causality” between any of defendant’s policies and the alleged statistical disparity, as Inclusive Communities requires. The court also rejected the notion that disparate impact claims could be used to impose new policies on lenders, and said that the City’s argument that lenders should adopt policies to avoid disproportionate lending was a “roundabout way of arguing for a racial quota,” which Inclusive Communities also warns against. Finally, the court was sharply critical of the City’s argument that Federal Housing Administration loans are harmful to minority borrowers, and that, in any event, any disparate impact from these loans would be a result of the federal government’s policies, not the defendant’s policies.
On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.
Applicability to ECOA
When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA. Read more…
Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims
Today, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”
The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . .” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.” Read more…
On June 3, the U.S. House of Representatives passed an amendment to H.R. 2578, the Fiscal Year 2016 Commerce, Justice, and Science Appropriations Act. The amendment, passed in a 232-196 vote, would prohibit the DOJ from using funds to prosecute and obtain legal settlements from lenders, landlords, and insurers in discrimination suits based on the disparate impact legal theory. This legislative development comes as the U.S. Supreme Court is expected to rule later this summer in Texas Dept. of Housing v. Inclusive Communities Project, which challenges the disparate impact theory in mortgage lending under the Fair Housing Act
Southern District of New York Denies Class Certification in Fair Lending Suit Against Global Investment Bank
On May 14, the District Court for the Southern District of New York denied class certification status in a fair lending suit brought by the ACLU and NCLC against a global investment bank. Adkins v. Morgan Stanley, No. 12-CV-7667 (VEC) (S.D.N.Y. May 14, 2015). The Plaintiffs had alleged that the bank, as a significant purchaser of subprime residential mortgage loans, had caused a disparate impact on African-American borrowers in Detroit in violation of the Fair Housing Act and the Equal Credit Opportunity Act. In an exhaustive 50-page opinion, the court denied class certification on multiple grounds, including the variation in loan types and the role of broker discretion. BuckleySandler anticipates the ruling will be widely cited in future fair lending class actions.
On January 21, the U.S. Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). In their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions of the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether the Court should defer to HUD’s disparate impact rule. The Court is expected to issue its ruling by the end of June. For more information on the oral argument, please refer to our previously issued Special Alert.
This morning, the Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.
As described further below, in their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.
On November 3, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (Emphasis in original.)
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulated a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3). In vacating HUD’s Disparate Impact Rule, the court reviewed the text of the FHA and concluded that “the FHA unambiguously prohibits only intentional discrimination.” (Emphasis in original.) The court explained that the FHA lacks the “effects-based language” that makes disparate impact claims cognizable under other anti-discrimination statutes. The court reasoned that this lack of effects-based language created “an insurmountable obstacle to [HUD’s] position regarding the plain meaning of the Fair Housing Act.” The court further reasoned that this textual reading is consistent with the FHA’s statutory scheme and, in the case of insurance products, required by the McCarran-Ferguson Act.
Today, the United States District Court for the District of Columbia vacated HUD’s Disparate Impact Rule under the Fair Housing Act (FHA). The court, in American Insurance Association v. United States Department of Housing and Urban Development, held that “the FHA prohibits disparate treatment only,” and therefore HUD, in promulgating the Disparate Impact Rule, “exceeded [its] authority under the [Administrative Procedures Act].” (emphasis in original).
In the Disparate Impact Rule, HUD provided that “[l]iability may be established under the Fair Housing Act based on a practice’s discriminatory effect . . . even if the practice was not motivated by a discriminatory intent.” 24 C.F.R. § 100.500. It then articulates a burden shifting framework for such claims. Id. § 100.500(c)(1)-(3).
On October 2, the U.S. Supreme Court granted certiorari in Texas Department of Housing and Community Affairs, et al. v. The Inclusive Communities Project, Inc., No. 13-1371, a case in which the Fifth Circuit became the first federal Circuit Court of Appeals to apply the Department of Housing and Urban Development’s (HUD) “effects test” rule (see The Inclusive Communities Project, Inc., v. Texas Department of Housing and Community Affairs, et al., Nos. 12-11211, 13-10306 (747 F.3d 275, March 24, 2014)), which authorizes so-called “disparate impact” or “effects test” claims under the Fair Housing Act (FHA). In granting cert., the Supreme Court accepted one of the two questions presented by the petitioners, which was, “Are disparate-impact claims cognizable under the [FHA]?” It did not accept the second question: “If disparate-impact claims are cognizable under the [FHA], what are the standards and burdens of proof that should apply?” The Supreme Court’s partial grant of the petition represents the third recent matter in which the Court has taken up the issue of whether disparate impact claims may be brought under the FHA. The first opportunity ended in February, 2012 when petitioners in Magner, et al. v Gallagher, et al., No. 10-1032, stipulated to dismissal due to concerns that “a victory could substantially undermine important civil rights enforcement throughout the nation.” The Court’s second opportunity, Township of Mount Holly, New Jersey, et al., v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, was dismissed in November 2013, just prior to oral argument after a settlement was reached by the parties.
On September 17, the CFPB released new information about its plans to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. As it indicated it would earlier this year, the CFPB released a proposed rule that would allow it to supervise certain nonbank auto finance companies. Also as previously promised, the CFPB published a white paper on its method to proxy for race and national origin in auto finance transactions. Finally, the CFPB published its most recent Supervisory Highlights report, which is dedicated to its supervisory findings at depository institutions with auto finance operations.
The CFPB released the materials in connection with its September 18th field hearing on auto finance issues. These actions come roughly 18 months after the CFPB first provided guidance to auto finance companies regarding its expectations related to dealer “reserve” (or “participation”) and fair lending. Read more…
On June 9, the U.S. District Court for the Central District of California denied a mortgage lender’s motion to dismiss the City of Los Angeles’s Fair Housing Act suit, the second such denial by the same judge in recent weeks. Los Angeles v. Citigroup, Inc., No. 13-9009, 2014 WL 2571558 (C.D. Cal. Jun. 9, 2014). The case is one of several the city has filed alleging that certain mortgage lenders engaged in predatory lending in minority communities, the allegedly predatory loans were more likely to result in foreclosure, and that foreclosures allegedly caused by those practices diminished the city’s property tax base and increased the costs of providing municipal services. The instant order adopts the court’s prior holdings on all of the overlapping arguments presented by the lenders in the two cases. In addition, the court rejected the additional argument that the city’s suit was time barred because the city was on notice of its claims as early as November 2011 when it invited a law firm to “present proposed FHA litigation against ‘several large banking institutions.’”