On Wednesday, March 16, 2016, the House Financial Services Committee hosted the Consumer Financial Protection Bureau’s (“CFPB”) Director Richard Cordray for a hearing on “The Semi-Annual Report of the Bureau of Consumer Financial Protection.” The purpose of the hearing was to review the CFPB’s eighth semi-annual report to the President and Congress, covering its activities from April 1, 2015. through September 30, 2015.
During the hearing, Director Cordray defended the CFPB’s enforcement actions against auto lenders under the Equal Credit Opportunity Act (“ECOA”) for discrimination based on the theory of disparate impact. The theory of disparate impact holds that lending practices may be considered discriminatory and illegal if they have a disproportionate “adverse impact” on persons in a protected class. Disparate impact contrasts with disparate treatment, where an individual of a protected class is shown to have been singled out and treated less favorably on the basis of his or her protected class than others similarly situated. Disparate impact is seen as unintentional, whereas disparate treatment is an intentional discrimination.
In 2012, the CFPB announced in CFPB Bulletin 2012-14 (Fair Lending) that, “[c]onsistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable . . . to enforce compliance with the ECOA and Regulation B.” In auto lending, the CFPB has concluded that a dealership’s practice of taking a dealer reserve on loans can result in higher interest rates among minority borrowers, thus having a disparate impact and thereby violating the ECOA. The CFPB has issues several enforcement actions and consent orders against auto lenders for violations of the ECOA under the theory of disparate impact.
Last June in the landmark case, Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., the U.S. Supreme Court recognized disparate impact claims under the Fair Housing Act (“FHA”). The Court explained that the FHA’s statutory language reflected the language of two other anti-discrimination statutes prohibiting disparate impact—Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act (“ADEA”)—and analogizing phrases in the FHA to phrases certain sections of Title VII and the ADEA.
However, the Supreme Court has not ruled on the issue of whether disparate impact claims are legally cognizable under the ECOA. Since the Inclusive Communities decision, the CFPB issued a consent order against American Honda Finance Corporation for discriminatory auto loan pricing. At the Wednesday hearing, Director Cordray explained that while the Inclusive Communities decision applied to the FHA and not the ECOA, he continues to believe the theory of disparate impact applies under the ECOA. The CFPB will more than likely continue to use this theory to prove discrimination by finance companies.
The CFPB’s use of the disparate impact theory has proved to be controversial, and many of the Representatives in attendance at the hearing questioned the CFPB’s series of settlements with major auto lenders, suggesting instead that the CFPB use its rulemaking authority to address the discriminatory practices it sees in the auto lending market. Director Cordray responded by explaining that he believes the language in the ECOA is also analogous to the language in the FHA.