On May 28, 2015, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) (together, the Agencies) filed a joint complaint against Provident Funding Associates, L.P., a nonbank wholesale mortgage lender (Provident), for violations of the Equal Credit Opportunity Act, the Fair Housing Act (FHA), and their implementing regulations (collectively, the Fair Lending Laws) arising from alleged discriminatory mortgage pricing. Provident and the Agencies agreed to a proposed consent order that, subject to court approval, would require Provident to pay US$9 million in damages to affected minority borrowers and improve its fair lending training and broker monitoring programs. This joint action is the latest demonstration of federal regulators' coordination to penalize lenders exercising pricing discretion in violation of the Fair Lending Laws.
The Agencies' action is the culmination of an investigation commenced by the Federal Trade Commission in 2009, which was referred to the DOJ in 2011, and joined by the CFPB in 2012. The Agencies' complaint focuses on Provident's policies and practices for pricing mortgage loans and compensating brokers, alleging that, during the period of the investigation, Provident established a risk-based "par interest rate" for each loan applicant based on specified, objective credit characteristics. However, Provident then provided its brokers the discretion to establish a higher interest rate and set the amount of fees based on "subjective, unguided" criteria unrelated to the applicant's objective risk-based criteria or the terms of the proposed loan agreement. The complaint also alleges that Provident did not require its brokers to document their rationale for setting interest rates in excess of the par rate, nor did it monitor the assessment of broker fees, to determine whether such rates and fees were justified or varied significantly based on unlawful factors, such as race or national origin.
The complaint states that the Agencies' investigation revealed statistically significant disparities between the total broker fees (referring here to the combination of an excess interest rate, if applicable, and higher direct fees) charged to African-American and Hispanic borrowers relative to those charged to white borrowers.1 The complaint states that the higher interest rates and direct fees charged to minority borrowers "cannot be fully explained" based on creditworthiness or other objective factors related to borrower risk, and have not been justified by "the necessity to achieve one or more substantial, legitimate, nondiscriminatory business interests or a legitimate business need." Moreover, the Agencies alleged that Provident's policies and practices, in effect, led to discrimination against protected classes of persons and constituted violations under the Fair Lending Laws.
Although the precise theory of discrimination is not revealed in documents available to the public, it is likely that the Agencies' relied on the theory of "disparate impact." Under disparate impact theory, the government is required to demonstrate only that a lender's policy or practice has a disproportionate adverse impact on a class of persons protected by the Fair Lending Laws. Although various federal banking and consumer agencies have reaffirmed the use of disparate impact theory to bring claims of discrimination under the Fair Lending Laws, the continued viability of this theory in the fair lending context is uncertain.
Use of disparate impact theory under the Fair Lending Laws has been challenged in federal court on numerous occasions, most recently in the District Court for the District of Columbia, where the court vacated the Department of Housing and Urban Development's 2013 disparate impact rule (the Disparate Impact Rule), which formalized recognition of discriminatory effects liability under the FHA. The court held that the FHA allows only for disparate treatment liability (i.e., intentional discrimination), not disparate impact liability (i.e., facially neutral practices with discriminatory effects), and that the Disparate Impact Rule was "yet another example of an Administrative Agency trying to desperately write into law that which Congress never intended to sanction." In addition, a decision by the U S Supreme Court on the use of disparate impact theory under the FHA is pending and could further limit its use as a tool for the enforcement of the Fair Lending Laws.
As the financial services industry awaits the Supreme Court's decision, financial institutions and mortgage lenders should critically review their lending policies and procedures to determine whether discretionary, and potentially discriminatory, pricing is allowed. The Agencies, along with the federal banking agencies, have consistently demonstrated that financial institutions that allow for discretionary pricing without adequate, written justifications are ripe for remedial enforcement action.
*Anthony Raglani also contributed to this advisory. He is a graduate of The George Washington University School of Law employed at Arnold & Porter LLP. Mr. Raglani is not admitted to the bar.