June 15, 2018

CFPB Re-Examination of Disparate Impact and ECOA

Catherine Brennan, Latif Zaman

The Consumer Financial Protection Bureau's (“CFPB”) Acting Director, Mick Mulvaney, recently announced that the CFPB will re-examine its position on disparate impact liability under the Equal Credit Opportunity Act (“ECOA”). Based on recent federal developments that reflect a trend of repudiating Obama-era financial reform and limiting the regulatory discretion of the CFPB, the end of disparate impact enforcement by the CFPB seems likely. 

The disparate impact doctrine establishes liability for a facially neutral policy or practice that results in a discriminatory effect, even absent a discriminatory intent. Since the inception of the agency, the CFPB has relied heavily on the disparate impact doctrine in its fair lending enforcement. In an April 2012 Bulletin entitled “Lending Discrimination,” the CFPB “reaffirm[ed that] the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with ECOA and Regulation B.” A March 2013 Bulletin entitled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” reiterated that the CFPB would apply a disparate impact analysis and provided guidance on how indirect motor vehicle lenders could avoid disparate impact violations of ECOA and Regulation B. 

These actions were not without controversy. In December 2017, the Government Accountability Office (“GAO”) concluded that, although the 2013 CFPB Bulletin was not a formal regulation, it still was a “rule” subject to the Congressional Review Act of 1996 (“CRA”). This determination greatly increased congressional oversight of the CFPB, as the CRA allows Congress to effectively veto rules issued by federal agencies. Agencies must submit rules subject to the CRA to Congress after they have been finalized but before they take effect. After submission, Congress has 60 legislative days to approve or veto the rule.  The GAO’s conclusion effectively prohibited the CFPB from unilaterally issuing guidance that serves as de facto regulation for anyone subject to CFPB supervision or enforcement.

On May 21, 2018, Congress officially repealed the CFPB’s March 2013 Bulletin through a CRA resolution signed by the President. In a contemporaneous press release, Acting Director Mick Mulvaney stated that the CFPB also will re-examine its use of disparate impact for ECOA enforcement. Mulvaney thanked the President and Congress for “reaffirming that the Bureau lacks the power to act outside of federal statutes” and noted that “[a]s an executive agency, we are bound to enforce the law as written, not as we may wish it to be.” Mulvaney indicated that the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project influenced the decision to re-examine the CFPB’s position on disparate impact. Mulvaney’s announcement followed the Department of Housing and Urban Development’s decision to seek public comment on whether its Disparate Impact Regulation, which it applies to the Fair Housing Act (“FHA”), is consistent with the Inclusive Communities decision.

In Inclusive Communities, the Court held in a 5-4 decision that the FHA recognizes a disparate-impact theory. However, the Court did not extend the application of the disparate impact doctrine to ECOA, and the Court’s analysis strongly suggests that disparate impact would not apply to ECOA. It is likely that the CFPB will look towards the analysis in Inclusive Communities to determine if it will apply disparate impact to ECOA.

The Court’s decision in Inclusive Communities relied heavily on specific language in the FHA that the court found imputed disparate impact liability. The Court noted that, in addition to the FHA, Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act (ADEA) recognize the disparate-impact doctrine. The Court found that Title VII, the ADEA, and the FHA all have “operative text” that looks at results of a policy or practice, as opposed to the intent.  ECOA does not seem to have equivalent language. 

The Court also noted that from the time the FHA was enacted to when it was amended, “all nine Courts of Appeals to have addressed the question had concluded the Fair Housing Act encompassed disparate-impact claims.” The Court found the fact that Congress amended the FHA, but still retained the relevant statutory text, indicated that Congress intended for disparate impact to apply. The Court also found that exemptions to liability under FHA, which address the role of property appraisals, drug convictions, and occupancy restrictions, arguably presupposed the application of disparate impact under the FHA. There is likely no similar evidence of legislative intent to apply disparate impact to ECOA.

The Court also found that disparate impact liability was consistent with the “statutory purpose” of the FHA. There is a strong possibility that a court would find that disparate-impact liability was consistent with the statutory purpose of ECOA, an anti-discrimination law. However, it is unlikely that the general intent of the law would be dispositive over statutory language and, arguably, evidenced legislative intent.

Based on Inclusive Communities and policy goals of this presidential administration, it seems likely that the days of CFPB using the disparate impact doctrine to enforce ECOA may be over.

Catherine Brennan

Partner; Hudson Cook, LLP

Catherine is a partner in Hudson Cook, LLP’s Hanover, Maryland office. She assists national and state banks, investment banks, consumer and commercial finance companies, mortgage bankers, installment lenders and other licensed lenders in the development and maintenance of nationwide consumer and commercial lending programs. Cathy engages in credit due diligence on behalf of investors in Fintech firms, bank partnership platforms, small business lenders, merchant cash advance companies, consumer finance companies, title loan companies and payday lenders.

Latif Zaman

Associate; Hudson Cook, LLP

Latif is an associate in Hudson Cook, LLP’s Hanover, Maryland office.  Latif assists consumer financial services clients on various federal and state regulatory compliance matters. On behalf of investor clients, Latif assists with due diligence of consumer and commercial credit programs. Latif advises licensed lenders on choice of law issues. Latif also advises clients on licensing requirements related to bank partnerships and litigation funding programs.