In 2010, as part of the Dodd Frank Wall Street Reform and Consumer Protection Act, Congress created the Consumer Financial Protection Bureau (CFPB), and charged the CFPB with responsibility for regulating consumer financial products and services for those financial services providers covered by Dodd Frank. Initially, the CFPB focused its enforcement activities on credit card companies and its rule-making authority on mortgage and student loan lenders and service providers. More recently, the CFPB signaled its intention to expand its focus to include practices in the auto financing industry. Last month, the CFPB Director, Richard Cordray, announced that the CFPB will broaden its focus to include an examination of auto lending practices and, as reported in the financial press, within the past two weeks the CFPB has sent letters to at least four banks informing them that it may initiate litigation over auto loan marketing and interest-rate markup practices that, according to the CFPB, appear discriminatory under the Equal Credit Opportunity Act (ECOA). The letters, which apparently incorporate civil investigative demands (CIDs), require the production of information related to the acts or practices under investigation.
The CFPB’s foray into auto lending discrimination follows its April 2012 declaration that the Bureau recognizes the concept of disparate impact under the ECOA. Disparate impact occurs when a lender employs facially neutral policies and procedures that have an adverse impact on a protected class. The policy or procedures are considered unlawful unless the lender can show that the policy or procedures meet a legitimate business need that cannot reasonably be achieved by means that cause a less discriminatory effect. Unlike Title VII, the ECOA does not employ language authorizing the disparate impact theory and, for that reason, some have challenged its application to the ECOA. Nevertheless, since 1994, ten other federal agencies, including the Department of Justice, have recognized evidence of disparate impact as a method of proving discrimination under the ECOA.
In his remarks at the Consumer Advisory Board meeting on February 20, 2013, Richard Cordray made it very clear that the CFPB intends to actively address discrimination in consumer financial markets based on disparate impact theories, as well as on intentional violations. He announced that, “from the perspective of the consumer disadvantaged by policies that have a discriminatory effect, it makes no difference whether a lender consciously intended to discriminate.” According to the CFPB, the financial products that raise disparate impact concerns include financing packages in which brokers or loan officers have financial incentives to negotiate higher rates. According to Cordray, these products too frequently result in African-American and Hispanic borrowers paying more for mortgages and auto loans.
In light of the recent CFPB interest in the auto finance industry, Edwards Wildman recommends that clients analyze their existing loan portfolio and review their auto financing products and marketing procedures to ensure that they do not disparately impact African American and Hispanic communities. Companies should also be sensitive to adopting conservative lending policies that inadvertently result in a loan portfolio that might invite a fair lending investigation by the CFPB based on a disparate impact theory.