Don’t write off disparate impact just yet.
Sorry to say it, but that’s where I am on the issue. After the then Consumer Financial Protection Bureau (now Bureau of Consumer Financial Protection) announced in December 2016 that it would be turning its attention from disparate impact claims in auto finance, the auto-world rejoiced.
The joy ran the gamut from measured to exuberant, with some finance companies vowing to continue their fair lending monitoring and remediation programs as they had for the past several years, and others looking to go back to the good old days.
Of course, it was a question of risk appetite, and some were less hungry than others. The joy was reinforced more recently when Congress invalidated the BCFP’s fair lending guidance for the auto industry. Strains of “Ding Dong! The Witch is Dead!” could be heard far and wide, and there was a lengthy sign-up sheet to dance on her grave.
Still more rejoiced when the BCFP announced its intention to defang the Office of Fair Lending and when it announced plans to revisit its position on disparate impact claims under the Equal Credit Opportunity Act. The BCFP’s Acting Director Mick Mulvaney had exceeded expectations with all these new developments.
As is often the case, the reality of things is far less rosy than described, or to paraphrase Mark Twain, reports of disparate impact’s death are greatly exaggerated. Just last month, Mulvaney was quoted as saying the BCFP continues to enforce fair lending laws. While it’s true that the Office of Fair Lending has lost its enforcement authority, we have it on good authority that both Supervision and Enforcement have teams ready to address fair lending violations going forward. What happened?
Were I Alan Greenspan, I might say a case of irrational exuberance, though I can understand why folks might reach the conclusions they did. After all, the administration was dismantling many things, from national monuments and clean air regulation to Obamacare and banking regulations. Why not throw disparate impact on the ash heap of history, too?
Funny thing, statutes. Only Congress and the courts can make them go away — Congress by majority vote and the signature of the president, and the courts on constitutional grounds. Many folks mistakenly believe that Congress outlawed disparate impact claims when it invalidated the BCFP’s fair lending guidance. It didn’t. All it said was that the guidance was really a rule (that failed to follow appropriate notice and comment rulemaking procedures) and that the BCFP couldn’t write a rule about the topic without the express authorization of Congress at some later date.
The BCFP and Justice Department were enforcing disparate impact violations long before the BCFP issued its now-defunct guidance. How? By way of their enforcement policies. Invalidating the guidance only meant that the agencies go back to relying on internal enforcement policies rather than on a written rule. Of course, it’s highly unlikely that either Mulvaney or Kathleen Kraninger (should she be confirmed as the new BCFP director) — or the current Justice Department — would choose to greenlight a disparate impact investigation in the auto finance world just as a matter of political priority. But that doesn’t mean we shouldn’t be worried.
I said many times in the past several years — since the Inclusive Communities case in the Supreme Court — that the only way we determine whether disparate impact is a viable cause of action is to litigate the question. Of course, the outcome of such litigation doesn’t look so good for the government after Inclusive Communities. Justice Anthony Kennedy set a high bar with the proscription on relying solely on statistical analysis without a robust causation analysis.
Meaning, litigators need statistics tending to show discrimination and a further analysis tending to show that the policy at issue in the litigation is the actual cause of the discrimination. It’s a high bar, and one the government may not be eager to attempt to scale. Finance companies tend to shy away from litigation for fear of reputational risk.
An understandable position with something as highly charged as potential racial discrimination to be sure, but perhaps not as big a concern as one might think. If you recall, one finance company agreed to fines and remediation in the amount of $98 million but refused to change its business model then went on to have a fantastic year of profitability.
I’m not sure there were any instances of folks telling the dealer that they didn’t want to do business with that finance company — they just want the best deal. That, my friends, is market-driven, not perception-driven. Further, several companies settled fair lending claims in the early 2000s but seemed to suffer little in terms of business loss.
Finally, if one follows Supreme Court precedent, it’s hard to see how disparate impact survives. The case law as of today just isn’t very friendly. But we should not be cavalier. One day — sooner or later — our politics will be more aligned with those who believe that rate disparities in a portfolio of randomly purchased contracts originated by thousands of unconnected and unrelated dealers across the country is an actionable harm, and those of us who were defending the industry will be back at it. It’s just a matter of time.