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 February 2, the CFPB and the DOJ announced a joint enforcement action against an indirect auto lender for alleged violations of the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. In April 2013, the CFPB and the DOJ began an investigation into the indirect auto lender’s compliance with the ECOA and found that its policies allowed for dealers to mark up a consumer’s interest rate on the retail installment contract above the established risk-based buy rate, known as “dealer markup.” The dealers received greater compensation from the indirect auto lender on loans with a higher interest rate. The DOJ and the CFPB determined that the respondent’s practice of allowing pricing discretion resulted in qualified African-American/Pacific Islander borrowers paying more than qualified white borrowers. To resolve the DOJ and the CFPB’s allegations, the respondent agreed to (i) reduce the amount by which loans can be marked up to only 1.25% above the established buy rate for auto loans with terms of five years or less, and 1% for loans with longer terms; (ii) pay at least $19.9 million in redress to borrowers affected by its finance practices from January 2011 to February 2, 2016, and up to $2 million more from the date of the action until it implements a new pricing and compensation structure, which must be in place by August 2016; and (iii) hire a settlement administrator to ensure that affected borrowers receive compensation.
These enforcement actions are the fourth in a series of joint CFPB and DOJ actions addressing fair lending risks in the indirect auto lending industry.
On January 6, the FTC published a report titled, “Big Data: A Tool for Inclusion or Exclusion? Understanding the Issues.” The report, which draws from information from a September 2014 FTC workshop, as well as public comments and research, primarily focuses on the final stage in the life cycle of big data use by addressing the commercial use of consumer data and its effect on low-income and underserved populations. According to the report, participants in the 2014 workshop expressed concern that potential inaccuracies and biases from big data may lead companies to “exclude low-income and underserved communities from credit and employment opportunities.” For example, the report states that, “if big data analytics incorrectly predicts that particular consumers are not good candidates for prime credit offers, educational opportunities, or certain lucrative jobs, such educational opportunities, employment, and credit may never be offered to these consumers.” In order to minimize legal and ethical risks, and to avoid possible exclusion and/or discrimination, the report suggests that companies should obtain an understanding of various laws that may apply to their big data practices, including the FCRA, equal opportunity laws, and the FTC Act. Read more…
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 November 30, the DOJ announced the filing of a complaint and proposed consent order against a Massachusetts-based bank alleged to have violated the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) by charging African-American and Hispanic borrowers higher prices for home loans than similarly situated white borrowers. From 2011 until at least 2014, the bank allegedly used a “target pricing” mortgage origination policy, assigning loan officers with a Minimum Base Price (MBP) they were expected to achieve on each home loan without regard to the borrower’s creditworthiness. According to the DOJ’s complaint, “African-American and Hispanic borrowers were served disproportionately by loan officers with higher MBPs than the loan officers serving white borrowers.” The complaint further alleges that, from April 2011 through December 2013, the bank authorized loan officers to price a loan higher than their assigned MBP, without documenting the reasons for doing so. Pending court approval, the DOJ’s proposed consent order will require the bank to (i) pay $1,175,000 as compensation to borrowers affected by its practices; (ii) establish a new loan pricing policy and a new loan officer compensation policy; (iii) provide fair lending and fair housing training to loan officers and bank employees; and (iv) establish a monitoring program designed to, at a minimum, assess loan pricing disparities.
In May 2013, the FDIC conducted a consumer compliance examination of the bank and found reason to believe that its lending practices violated the FHA and ECOA, prompting the agency to refer the matter to the DOJ on February 7, 2014.
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…
On May 28, the CFPB, along with the DOJ, filed a joint complaint against a California-based mortgage lender alleging that the lender violated the Equal Credit Opportunity Act by engaging in a pattern or practice of discrimination from 2006 to 2011 that increased loan prices for African-American and Hispanic borrowers. The DOJ also alleges that the lender violated the Fair Housing Act. According to the complaint, the lender’s mortgage broker compensation policy, which incented discretionary interest rate and fee increases to borrowers, resulted in approximately 14,000 African-American and Hispanic borrowers being charged higher total broker fees on wholesale mortgage loans than non-Hispanic white borrowers. The complaint alleges that the higher fees were not based on the borrowers’ credit risk profile, but rather on the basis of race or national origin. The parties separately filed a proposed consent order which would require the mortgage lender to, among other things, pay $9 million in consumer relief to affected borrowers to resolve the allegations. The proposed consent order is currently pending court approval.
On May 11, the CFPB issued Bulletin 2015-02, reminding creditors to include income from the Section 8 Housing Choice Voucher (HCV) Homeownership Program when underwriting mortgage loans. Within the Bulletin, the Bureau noted that it “has become aware of one or more institutions excluding or refusing to consider income derived from the Section 8 HCV Homeownership Program during mortgage loan application and underwriting processes,” further mentioning that “some institutions have restricted the use of Section 8 HCV Homeownership Program vouchers to only certain home mortgage loan products or delivery channels.” The Bulletin warns that disparate treatment prohibited under ECOA and Reg. B may exist when a creditor does not consider Section 8 as a source of income and provides guidance on how lenders can mitigate their fair lending risk. In conjunction with the guidance, the CFPB also published a blog post, providing an overview of the Section 8 HCV Program and detailed how consumers can submit complaints if they believe they have been discriminated against.
On May 7, the DOJ announced a consent order with an Illinois-based lender to settle allegations that the state-chartered bank engaged in a pattern of discriminatory lending, violating the Equal Credit Opportunity Act (ECOA). According to the complaint, from at least January 1, 2011 to March 9, 2014, approximately 1,500 Hispanic borrowers and 700 African-American borrowers paid higher interest rates for their motorcycle loans than white borrowers. The average victim of the bank’s discretionary dealer markup system paid over $200 more during the loan term, allegedly because of their national origin and not because of their creditworthiness. Until March 2014, the lender’s business practice was such that the motorcycle dealers submitted loan applications to the lender, allowing the dealers “subjective and unguided discretion to vary a loan’s interest rate from the price [the lender] initially set.” In March 2014, the lender adopted a new policy that compensated dealers “based on a percentage of the loan principal amount that does not vary based on the loan’s interest rate;” since the implementation of the new policy, no discrimination has been found in the loans analyzed by the United States. Neither admitting nor denying the allegations, the lender voluntarily entered into a consent order with the U.S., agreeing to provide $395,000 in monetary relief to victims of the lender’s alleged practices.
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 April 13, the DOJ released its 2014 Annual Equal Credit Opportunity Act (ECOA) Report highlighting its activities to address credit discrimination. The twenty-page report highlights discrimination lawsuits and settlements in the automobile lending and credit card industry, as well as a consent order resulting from alleged discrimination on the basis of disability and the receipt of public assistance. It also includes information on the DOJ’s work under other federal fair lending laws including the Fair Housing Act (FHA) and the Servicemember Civil Relief Act (SCRA). According to Vanita Gupta, Acting Assistant AG for the Civil Rights Division, in the five years since the Fair Lending Unit was established, the Civil Rights Division has filed or resolved 37 lending matters under the ECOA, FHA, and SCRA. Total settlements in these matters, including enforcement actions from 2014, have resulted in over $1.2 billion in monetary relief for affected borrowers and communities.
On March 2, the U.S. Supreme Court agreed to hear arguments to resolve claims as to whether spousal guarantors could assert ECOA as a defense against a bank’s collection efforts requiring them to guarantee their spouse’s loans. In the case at bar, two men borrowed more than $2 million to fund a real estate development company, and their wives guaranteed the loan. Subsequently, the husbands were unable to make payments and the bank declared default and ordered payment both from the company and the wives as guarantors. Later, the wives filed suit against the bank claiming the bank’s requirement that they guarantee the loans as a condition of the credit constituted discrimination on the basis of marital status. The lower court granted summary judgment in favor of the bank, and the Eighth Circuit affirmed, finding the wives were not “applicants” for credit under ECOA. Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) cert. granted, No. 14-520, 2015 WL 852422 (U.S. Mar. 2, 2015)
On February 10, the DOJ, along with the U.S. Attorney’s Office for the Western District of North Carolina and the North Carolina AG, announced the settlement of the federal government’s discrimination suit involving two “buy here, pay here” auto dealerships. According to the DOJ, this is the federal government’s first-ever settlement involving discrimination in auto lending. Filed in January 2014, the settlement resolves a lawsuit alleging that two North Carolina-based auto dealerships violated the federal Equal Credit Opportunity Act by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.” The North Carolina AG further alleges that the auto dealerships’ lending practices violated the state’s Unfair and Deceptive Trade Practices Act. The terms of the settlement require the two dealerships to revise the terms of their loans and repossession practices to ensure that “reverse redlining” ceases to exist; required amendments include: (i) setting the maximum projected monthly payments to 25% of the borrower’s income; (ii) omitting hidden fees from required down payment; (iii) prohibiting repossession until the borrower has missed at least two consecutive payments; and (iii) providing better-quality disclosure notices at the time of the sale. Also required by the settlement agreement, the two auto dealerships must establish a fund of $225,000 “to compensate victims of their past discriminatory and predatory lending.”
On November 19, the CFPB issued a press release highlighting the publication of its compliance bulletin, “Social Security Disability Income Verification.” The compliance bulletin reminds lenders that requiring consumers receiving social security disability income to provide burdensome or unnecessary documentation may raise fair lending issues. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discrimination against “an applicant because some or all of the applicant’s income is from a public assistance program, which includes Social Security disability income,” and the Bureau’s bulletin highlights standards and guidelines intended to help lenders comply with the requirements of ECOA and its implementing regulation, Regulation B.
On August 5, the U.S. Court of Appeals for the Eighth Circuit held that ECOA clearly provides that a person does not qualify as an applicant under the statute solely by virtue of executing a guaranty to secure the debt of another. Hawkins v. Comm. Bank of Raymmore, No. 13-3065, 2014 WL 3826820 (8th Cir. Aug. 5, 2014). In this case, two individuals executed personal guaranties to secure several loans made to a residential development company owned by their husbands. After the company defaulted on the loans, the bank accelerated the loans and demanded payment from the company and the two individual guarantors. The guarantors, in turn, sued the bank, seeking damages and an order declaring their guaranties void and unenforceable, alleging that the bank required them to execute the guaranties securing the company’s loans solely because they are married to their respective husbands—the owners of the company. The guarantors asserted that such a requirement constituted discrimination against them on the basis of their marital status, in violation of ECOA. The court held that “the plain language of ECOA unmistakably provides that a person is an applicant only if she requests credit,” and that “a person does not, by executing a guaranty, request credit.” In doing so the court rejected the Federal Reserve Board’s implementing regulation that interpreted the term applicant to include guarantors. The court’s holding also creates a split with the Sixth Circuit, which recently “came to the contrary conclusion, finding it to be ambiguous whether a guarantor qualifies as an applicant under the ECOA.”