Introduction
During the past year, the U.S. Department of Justice (“DOJ”) redoubled its fair lending enforcement activity, especially in the area of redlining claims. Municipal government cases based on disparate impact and disparate treatment claims against mortgage lenders continued their long fade into dismissal as courts continued to apply the Supreme Court’s demanding evidentiary requirements for such cases, although other fair lending litigation fared better. Both the U.S. Department of Housing and Urban Affairs (“HUD”) and the Consumer Financial Protection Bureau (“CFPB”) engaged in significant rulemaking in which they, respectively, resurrected an earlier version of the Discriminatory Effects Rule and attempted to promulgate a wholly new Small Business Lending Rule (“SBL Rule”) that was immediately challenged in court.
Governmental Fair Lending Actions
Redlining
The DOJ announced what it called the largest redlining settlement in its history in January 2023 when it made public a $31 million settlement with City National Bank. In its complaint, the DOJ alleged that the bank violated the Fair Housing Act (“FHA”) and the Equal Credit Opportunity Act (“ECOA”) by avoiding providing home loans and other mortgage services in majority-Black and Hispanic neighborhoods in Los Angeles County. It claimed that City National generated disproportionately low numbers of loan applications and home loans from majority-Black and Hispanic neighborhoods in Los Angeles County compared to similarly situated lenders. Only three of its thirty-seven branches were located in majority-minority neighborhoods, although over half the residents of Los Angeles County were Black or Hispanic. The DOJ also claimed that the bank exercised inadequate internal fair-lending oversight, and the bank’s failure to act on internal reports that indicated the existence of fair lending and redlining risk contributed to its low level of applications from and loans to Blacks and Hispanics. Despite its capacity to hold affordable loan products in its portfolio, the bank did not develop or offer any affordable loan products.
The consent order filed with the complaint required the bank to invest at least $29.5 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods in Los Angeles County; invest $750,000 for development of community partnerships to provide services that increase access to residential mortgage credit in those neighborhoods; invest $500,000 for advertising and outreach in those neighborhoods; and invest $500,000 for consumer financial education. The bank was also required to open one new branch in a majority-Black and Hispanic neighborhood and evaluate future opportunities for expansion within Los Angeles County; to ensure that at least four mortgage loan officers are dedicated to serving majority-Black and Hispanic neighborhoods; and to employ a full-time community lending manager to oversee the continued development of lending in majority-Black and Hispanic neighborhoods.
The City National settlement was filed fifteen months after Attorney General Merrick B. Garland announced the DOJ’s Combatting Redlining Initiative with the goal of making “fair access to credit a reality in underserved neighborhoods across our country.” At the time of the City National settlement, the DOJ said that its initiative had resulted in a combined $75 million in relief for communities that have been the victims of lending discrimination.
Subsequently, in United States v. ESSA Bank & Trust, the DOJ alleged that the bank violated the ECOA and the FHA by engaging in unlawful redlining in the Philadelphia Metropolitan Statistical Area by avoiding providing mortgage services to majority-Black and Hispanic neighborhoods and discouraging prospective applicants from those neighborhoods from applying for credit. The complaint alleged that ESSA failed to respond to third-party reports that its insufficient marketing efforts in minority areas created redlining risk. The consent order required the bank to: invest at least $2.92 million in a loan subsidy fund to increase access to credit in majority-Black and Hispanic neighborhoods; spend an additional $125,000 on community partnerships and $250,000 on advertising, outreach, consumer financial education, and credit counseling in majority-Black and Hispanic communities; hire two new mortgage loan officers to serve its existing branches in West Philadelphia; and conduct a research-based market study to help identify the needs for financial services in communities of color.
The court entered a consent order in United States v. Park National Bank in March 2023 that resolved redlining allegations in predominantly Black and Hispanic neighborhoods within the Columbus, Ohio metropolitan area. The complaint claimed the bank originated disproportionately low numbers of mortgages in majority-Black and Hispanic neighborhoods compared to its peer lenders due to its failure to compensate for having no branches in a majority-Black or Hispanic area and inadequate internal fair lending oversight. According to the complaint, the bank’s conduct and practices were intended to deny, and had the effect of denying, equal access to home loans to those residing in, or seeking credit for properties located in, majority-Black and Hispanic neighborhoods, and otherwise discouraged these individuals from applying for mortgage loans, in violation of the FHA and the ECOA.
The consent order required Park National to invest at least $7.75 million in a loan subsidy fund to increase access to credit in majority-Black and Hispanic neighborhoods in the Columbus area; $750,000 in outreach, advertising, consumer financial education, and credit counseling initiatives; and $500,000 in developing community partnerships to provide services that expand access to residential mortgage credit. Park National was required to open a new branch and a new loan production office in majority-Black and Hispanic neighborhoods and to ensure that a minimum of four mortgage lenders, at least one of whom is Spanish-speaking, are assigned to serve these areas.
The DOJ resolved another redlining case involving allegations that Lakeland Bank engaged in a pattern or practice of lending discrimination in the Newark metropolitan area, including neighborhoods in Essex, Somerset, and Union counties in New Jersey. The complaint alleged that the bank discriminated against Blacks and Hispanics in violation of the FHA and ECOA by avoiding providing home loans and other mortgage services, thereby discriminating against applicants and prospective applicants living in, or seeking credit to purchase properties in, majority-Black and Hispanic neighborhoods. Lakeland also allegedly discouraged applicants and prospective applicants living in, or seeking credit to purchase properties in, these neighborhoods from seeking or applying for credit from Lakeland. The DOJ alleged that Lakeland’s redlining practices included locating and maintaining all of its branches in the Newark metropolitan area outside of majority-Black and Hispanic neighborhoods, creating an assessment area that excluded the majority-Black and Hispanic neighborhoods in Essex, Somerset, and Union counties, and largely excluding majority-Black and Hispanic neighborhoods from its marketing and outreach efforts.
In the consent order, Lakeland agreed to invest at least $12 million in a loan subsidy fund for residents of Black and Hispanic neighborhoods in the Newark area; $750,000 for advertising, outreach, and consumer education; and $400,000 for development of community partnerships to provide services that increase access to residential mortgage credit. Lakeland also agreed to open two new branches in neighborhoods of color, including at least one in the City of Newark; and ensure at least four mortgage loan officers are dedicated to serving all neighborhoods in and around Newark; and employ a full-time Community Development Officer who will oversee the continued development of lending in neighborhoods of color in the Newark lending area defined as including five counties.
Loan Modifications
In September 2022, the DOJ brought a complaint against Louis Liberty & Associates, PLC, and two individuals alleging that the defendants discriminated on the basis of national origin in violation of the FHA by targeting Hispanics for predatory loan modification services. HUD had received homeowner complaints, conducted an investigation, and issued a charge of discrimination when conciliation efforts did not succeed. The case was referred to the DOJ when one defendant elected to have his liability resolved in federal court. The court entered two consent orders in April 2023 to resolve claims against all defendants. The settlements required the defendants to make payments totaling $7,000 to the four homeowners who filed complaints with HUD in addition to restitution that defendant Louis A. Liberty had paid to clients as a result of complaints made to the State Bar of California. The defendants are relieved of obligations to conduct fair lending training and develop fair lending policies unless they become involved in providing any mortgage relief assistance services or in any real estate–related activities during the term of the consent orders.
Discretionary Mortgage Pricing
In a matter referred by the Federal Reserve Board, the DOJ alleged that Evolve Bank and Trust discriminated on the basis of race, national origin, and sex in violation of the FHA and ECOA. The complaint stated that the bank’s loan pricing practices resulted in Black, Hispanic, and female borrowers paying more in the discretionary pricing components of home loans than white or male borrowers for reasons unrelated to their creditworthiness. In what the complaint called an “unusual” practice, the bank allegedly allowed loan officers broad discretion to quote an initial rate over the risk-based par rate and then offer concessions or discounts, without requiring documentation of the reasons for the concessions. Evolve’s pricing system resulted in Black and Hispanic borrowers paying more for home loans than their white counterparts, and individual female borrowers paying more for home loans than their male counterparts. The consent order required Evolve to amend its pricing policies, employ a fair lending officer, and have employees undergo fair lending training. The consent order also includes a $1.3 million settlement fund to remediate borrowers harmed by this pricing discrimination and a $50,000 civil penalty.
Appraisals
The DOJ and the CFPB filed a statement of interest to explain the application of the FHA and the ECOA to lenders relying on discriminatory home appraisals in Connolly v. Lanham, a lawsuit in which the plaintiffs alleged that an appraiser and a lender violated the FHA and the ECOA by lowering the valuation of a home because the owners were Black and by denying a mortgage refinancing application based on that appraisal. The defendants moved to dismiss the case, and the plaintiffs opposed the defendants’ motions. The statement of interest addressed the pleading standard in a disparate treatment claim under the FHA and the ECOA, arguing that it is illegal for a lender to rely on an appraisal that it knows or should know to be discriminatory, and explained that a violation of section 3617 of the FHA does not require an underlying violation of another provision of the FHA. After considering the statement, the court denied the motion to dismiss with respect to the claim under section 3617.
Rent-To-Buy as Credit
The DOJ filed a statement of interest in Fair Housing Center of Central Indiana v. Rainbow Realty Group in September 2022. The plaintiffs challenged the defendants’ “rent-to-buy” program in Indianapolis, Indiana, alleging that it exploited consumers in predominantly Black and Hispanic neighborhoods by selling properties in poor condition at inflated prices through contracts that are designed to fail. The statement of interest aimed to assist the court in evaluating the plaintiffs’ ECOA claims. The court dismissed the ECOA claims on summary judgment, reasoning that the ECOA could not apply to the agreement because the contract was a residential lease under Indiana state law for at least the initial two-year period. It also held that Rainbow could not be a “creditor” under the ECOA because it was the landlord during the first two years of the agreements, when they were residential leases, and Rainbow’s involvement in the transactions ended at the conclusion of that two-year period. The plaintiffs filed a motion for reconsideration. The statement argued that a contract can both be a lease and also be an “aspect of a credit transaction” for purposes of the ECOA. The brief analyzed the record using the definitions in the ECOA, concluding that there is sufficient evidence to find that the rent-to-buy agreement used by defendants may extend “credit” as defined by the ECOA, and that defendants may fall within the ECOA’s definition of “creditor.” However, the court declined to consider the statement.
Federal Regulatory Developments
Discriminatory Effects Rule
Two final rules were promulgated during the past year that affect fair lending questions. HUD reinstated its 2013 Discriminatory Effects Rule (“2013 Rule”) after a long, tortuous history that culminated in the issuance of a new Discriminatory Effects Rule (“2023 Rule”). The 2013 Rule was intended to formalize HUD’s “long-held recognition of discriminatory effects liability” under the FHA and to provide a nationally consistent three-step burden-shifting approach for “determining whether a given practice has an unjustified discriminatory effect” that violates the FHA in light of varying formulations in cases from U.S. courts of appeals.
In 2015, the U.S. Supreme Court confirmed that the FHA provides for disparate effects liability in disparate impact claims in Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc., but it expanded on the evidentiary requirements for such claims in order to “avoid serious constitutional questions that might arise [such as] if such liability were imposed based solely on a showing of statistical disparities.” The Court also stressed that there must be “a robust causality” between the conduct complained of and the disparate effects on protected minorities to prevent “defendants from being held liable for racial disparities they did not create.”
In 2019, the new Administration proposed revisions to the 2013 Rule that would incorporate the Supreme Court’s requirements in Inclusive Communities. The proposed rule drew 45,000 comments, “most of which opposed the proposed changes and many of which raised significant legal and policy concerns.” HUD promulgated a final Disparate Impact Standard Rule in 2020 (“2020 Rule”) that “removed the definition of discriminatory effect, added demanding pleading elements that made it far more difficult to initiate a case, altered the burden-shifting framework, created new defenses, and limited available remedies in disparate impact claims.” The 2020 Rule was promptly challenged in three federal court cases in which it was contended that the rule was inconsistent with the FHA and was therefore invalid. This led to a preliminary injunction staying the effective date of the 2020 Rule, which as a result never went into effect.
With the next change of Administration in 2021, HUD no longer defended the 2020 Rule in court and instead began to reconsider it. Upon reconsideration, HUD concluded that “the 2013 Rule set a more appropriate balanced standard for pleading, proving, and defending a fair housing case alleging that a policy or practice has a discriminatory effect.” It also concluded that “many of the points made by commentators” and by the district court that issued the preliminary injunction were well taken. Moreover, it concluded that the 2013 Rule was more consistent with case law, including Inclusive Communities, than the 2020 Rule, which in fact was inconsistent with the Supreme Court’s holdings. After considering 10,113 comments to its proposal to reinstate the 2013 Rule, “HUD has decided to recodify the 2013 Rule,” which was “consistent with and implicitly endorsed by Inclusive Communities.” Because the 2020 Rule did not take effect, HUD’s position is that the 2013 Rule “remained in effect.” As a recodification of the 2013 Rule, the 2023 Rule, which “rescinds the 2020 Rule” with one exception that adds “additional illustrations of prohibited activities” from the 2020 Rule, presumably became effective upon issuance.
The 2023 Rule was approved in National Association of Mutual Insurance Cos. v. United States Department of Housing & Urban Renewal in September 2023. The long-running case had originally been filed in 2013 to challenge the effects of the 2013 Rule on insurance companies, including a challenge to the rule’s treatment of disparate effects claims. The court ruled in 2014 that the rule was valid in advance of the Supreme Court’s ruling in 2015 to the same effect. The case continued to pend in the district court as the 2013 Rule was supplanted by the 2020 Rule, which was supplanted in turn by the 2023 Rule. Cross-motions for summary judgment were filed after the 2023 Rule was promulgated. The court held that the 2023 Rule complied with the requirements for disparate effects claims set forth by the Supreme Court and granted summary judgment to HUD.
Small Business Lending Rule
Another final rule that has had a tortuous history is the CFPB’s SBL Rule. As discussed in a previous Annual Survey, the CFPB took no action to begin the rulemaking process until it was sued by numerous community-based organizations and public agencies and was ordered by a court to start the process. This left the directive in section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the last one for the CFPB to tackle. The rule recites the history of the rulemaking beginning in 2017 but omits any mention of the court orders that it was proceeding under.
The directive in the statute, which amended the ECOA to cover non-consumer credit transactions as well as consumer transactions for the first time, is “to prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data” about credit applications by women-owned, minority-owned, and small businesses. The SBL Rule notes that although it does not require collecting data for businesses that are not small, nearly all women-owned and minority-owned businesses will be covered because they fit the definition of “small business” with annual revenues of $5 million or less. The broad definition of “covered financial institutions” means that any depository or non-depository entity that lends money to a small business will be subject to the rule’s data gathering and reporting requirements. The definition of “covered transactions” is similarly broad, as is the definition of “covered applications” for credit. The list of data points to be collected and reported includes those enumerated in the ECOA plus data points supplied by the applicant, such as race, ethnicity, and sex, with no obligation to report such data points unless the applicant provides them. Applicant data is required to be protected from underwriters and others involved in credit decisions by a “firewall” that prohibits access to protected demographic data unless a notice is given to the applicant that the data will be accessed.
The collected data is to be reported to the CFPB each year by June 1. The SBL Rule has a tiered set of effective dates. There is an effective date of October 1, 2024, for financial institutions with a large volume of small business loans, defined as 2500 transactions or more per year in 2022 and 2023; an effective date of April 1, 2025, for institutions with a moderate volume of at least 500 transactions; and an effective date of January 1, 2026, for institutions with a volume of at least 100 transactions.
The SBL Rule is intended to “enable stakeholders of all kinds in the small business lending market to gain insight into trends in small business lending” and “insight into the interaction of supply and demand for small business credit over time.” For the purpose of fair lending enforcement, “interested government agencies and other stakeholders will be able to use data collected and reported . . . to identify possible fair lending risks using statistical methods.” The CFPB “believes that small business lending data will come to play an important role for the small business lending market, as HMDA [Home Mortgage Disclosure Act] data have done for the mortgage market.”
The SBL Rule was challenged by a small bank in Texas, the Texas Bankers Association, and the American Bankers Association in a suit filed in the Southern District of Texas. The plaintiffs sought a nationwide preliminary injunction to stay the effective date of the rule until the U.S. Supreme Court resolved the constitutionality of the CFPB’s funding mechanism, which the Fifth Circuit had found unconstitutional in a case that stayed the implementation of another CFPB final rule. The district court found that all of the requirements for issuing a preliminary injunction were met in view of the potential costs to comply with the SBL Rule, and that the costs were shown to be imminent, substantial, and unrecoverable. However, the court exercised its discretion to limit the stay to the bank and the members of the two associations. This caused a similar case to be filed in the Eastern District of Kentucky. The court issued a preliminary injunction that prohibited the CFPB from enforcing the rule “until the Supreme Court issues an opinion ruling that the funding structure of the CFPB is constitutional” without limiting the effect of the injunction to the plaintiffs in the case, thus making it applicable nationwide, after finding that the plaintiffs would be harmed by having to prepare to comply with the rule while the CFPB would suffer no harm from being enjoined. Subsequently, in light of the Kentucky court’s order and the filing of requests for relief by several intervenors, the Texas court broadened its preliminary injunction order to enjoin the CFPB from enforcing the SBL Rule against “all covered financial institutions.”
Municipal Fair Lending Litigation
As reported most recently in the previous Annual Survey, litigation brought by city and county governments seeking to recover damages allegedly due to discrimination by mortgage lenders in their communities has been part of a long-running cycle. While such governmental claims based on either a disparate impact theory, a disparate treatment theory, or both have survived motions to dismiss, none of them has survived the U.S. Supreme Court’s exacting evidentiary standards for such claims at the summary judgment stage. Three decisions rendered during the past year continued this trend.
In a brief opinion, the Seventh Circuit affirmed a summary judgment that dismissed all remaining claims in County of Cook v. Bank of America Corp. The court observed that the county’s claims for damages allegedly caused by the defendant banks’ targeting of “potential minority borrowers” for mortgage loans they could not afford to pay was “not novel,” being the subject of the Supreme Court’s ruling in Bank of America Corp. v. City of Miami that such damage claims generally cannot be recovered beyond the “first step” of causation. The court rejected the county’s argument that the banks’ alleged “integrated equity-skimming scheme” provided an exception to the first step limit because the Eleventh Circuit’s remand decision in City of Miami on which the argument relied was vacated as moot by the Supreme Court and had no value as precedent. Instead, the Seventh Circuit followed the Ninth Circuit’s unanimous en banc decision in City of Oakland v. Wells Fargo & Co. that did not allow recovery to a “tertiary loser” whose injury derived from directly injured borrowers and secondarily injured lenders who all lost money in foreclosures. The court pointedly observed that the fact that “a single phrase [like integrated equity-skimming scheme] can be devised does not justify suit by remotely injured parties.”
The Seventh Circuit’s ruling will likely be applied to County of Cook v. Wells Fargo & Co., in which the district court granted the summary judgment motion of the defendant bank and related entities (“Wells Fargo”) after denying successive motions to dismiss for failure to state a claim and for lack of standing to sue. As in Cook County’s case against Bank of America, the decision turned largely on the court’s exclusion of the county’s expert witness testimony, which left the county with no admissible evidence to support its claims.
The county alleged that Wells Fargo targeted minority populations in the Chicago metropolitan area for mortgage loans with “higher interest rates and less favorable loan terms, such as prepayment penalties and balloon payments.” Its predatory and discriminatory practices allegedly continued after “a loan’s origination into its servicing, including the discriminatory denial of loan modification requests, leading to disproportionately high rates of default and foreclosure for minority borrowers.” The county asserted that these practices caused it to incur increased expenditures for foreclosure-related services.
Cook County relied on opinion testimony from two experts to create a triable issue of fact. The first expert used a “delimiter” methodology to establish that Wells Fargo’s loan origination and servicing practices “caused minority borrowers to receive riskier and higher priced loan products” and for them “to experience default and foreclosure at rates higher than those received and experienced by white borrowers.” Delimiters were defined as “‘red flags’ that raise questions about a loan’s reasonableness.” The expert relied on others to perform a statistical analysis on the delimiters that he identified since he lacked the expertise to do the analysis himself.
The Cook County court found that this was not permissible under Federal Rule of Evidence 702 because the expert could not confirm that his statisticians were using “an appropriate method of analysis” in comparing the prevalence of his delimiters “without controlling for any confounding factors.” The expert’s other observations about what “a mountain of evidentiary material” showed were also excluded because they merely weighed the evidence and usurped the function of the jury.
The testimony of Cook County’s other expert, a statistician, was excluded for the same reason that it was excluded several months earlier in County of Cook v. Bank of America Corp. The expert’s analysis of “a jumbled set of loan data” aggregated mortgage loans that Wells Fargo originated and serviced with loans that other financial institutions originated and sold to Wells Fargo for servicing as well as aggregating loans that Wells Fargo originated but sold to others for servicing. The Cook County court found that the “amalgamation of different categories of loans” in this fashion made the reliability of the expert’s analysis dubious and unreliable, in particular because the county did not contest the fact that such a methodology was not generally accepted.
The Cook County court also found the expert’s testimony unreliable because the aggregation of Wells Fargo–originated loans with loans originated by others would amount to evaluating the conduct of both Wells Fargo and the other entities. This would fail to reliably connect discriminatory conduct to Wells Fargo, a failure that caused the expert’s testimony to be excluded in Cook County’s other case. The court also rejected the argument that Wells Fargo could be held responsible for other entities’ discriminatory conduct on a successor liability theory or on an aiding and abetting theory. The exclusion of all of Cook County’s expert witness testimony about statistical disparities left it with no evidence to support its disparate treatment and disparate impact claims.
In Fulton County v. Wells Fargo & Co., Wells Fargo faced similar claims concerning “predatory and discriminatory lending, servicing, and foreclosure practices” brought by three counties in metropolitan Atlanta. The case was dismissed on statute of limitations grounds a year earlier because the plaintiffs failed to allege that any of the foreclosures that occurred within the two-year statute of limitations in the FHA “actually involved the predatory, discriminatory scheme alleged.” The defendants moved to dismiss the amended complaint on the ground that none of the thirty identified mortgage loans was alleged to have been originated or serviced within the limitations period, only ten of them had been foreclosed within the period, and the ten foreclosures were due to improper interest rates at origination and therefore fell outside of the limitations period.
The Fulton County court held that because the plaintiffs’ discrimination claims were for “lending, servicing, and foreclosure over the life of a mortgage,” the plaintiffs had alleged that a violative act, a foreclosure, occurred within the limitations period so it denied the motion. However, it cautioned that “[t]o move past summary judgment on the merits, Plaintiffs will have to present evidence” of the plaintiffs’ alleged “overarching scheme.”
The defendants also sought a partial summary judgment on the limitations issue. They argued, and the court agreed, that the plaintiff counties were aware of their claims more than six years before they filed suit in 2021. The Fulton County court nevertheless held that the language of the FHA did not support the defendants’ argument that prior knowledge of a violation would defeat a continuing violation claim based on the provision that the FHA’s statute of limitations “does not begin to run until ‘termination’ of the defendant’s ‘alleged[ly] discriminatory housing practice.” The court rejected two unpublished Eleventh Circuit cases holding that prior knowledge bars a continuing violation claim and it also disagreed with two other municipal fair lending decisions involving the same counties that so held.
Other Litigation
The language in Regulation B that extends the protections given to applicants for credit to “prospective applicants” was found to be invalid in Bureau of Consumer Financial Protection v. Townstone Financial, Inc. after attempts to settle the case failed. Defendant Townstone was a mortgage broker and lender operating in Chicago that marketed its services for several years on a radio show and podcast as a “long-form commercial advertisement” in which the hosts of the show discussed mortgage-related issues and took questions from prospective credit applicants. Its personnel allegedly made disparaging statements about majority-minority African-American areas on the shows and comments that discouraged African-Americans in the Chicago area from applying for mortgage loans from it. Townstone also never targeted its marketing efforts to African-Americans and it drew a very small number of applications for loans from majority-minority African-American areas.
The CFPB alleged that Townstone violated the ECOA and its implementing Regulation B by discouraging prospective African-American applicants for credit from seeking mortgage loans from it. Townstone moved to dismiss the CFPB’s complaint on the ground that the prohibition of discouragement “to applicants and prospective applicants” in Regulation B “improperly attempts to expand the ECOA’s reach beyond the express and unambiguous language of the statute.”
The Townstone court proceeded to review the language of the regulation under the Supreme Court’s two-step process in Chevron, USA, Inc. v. Natural Resources Defense Council, Inc. On the first step, “whether Congress has directly spoken to the precise question at issue,” the court found that Congress did so and that the ECOA’s express language “only prohibits discrimination against applicants.” The court found no need to go to the second step of determining whether the agency’s interpretation in Regulation B was reasonable because Congress had addressed the issue unambiguously in the ECOA, leaving no basis for the regulation to also cover prospective applicants, relying on the Seventh Circuit’s holding in Moran Foods, Inc. v. Mid-Atlantic Market Development Co., LLC that the ECOA’s definition of “applicant” was unambiguous. It also found that decisions cited by the CFPB from two other circuits supported its conclusion that the language in the ECOA was unambiguous and that there was no need to go beyond the first step of the Chevron analysis.
The CFPB argued in the alternative that the court need not conduct a Chevron analysis under the Supreme Court’s pre-Chevron holding in Mourning v. Family Publications Service, Inc. that a challenged provision of Regulation Z could be upheld if it was necessary to render the enabling Truth in Lending Act effective. The CFPB’s argument was that if the anti-discouragement provision in Regulation B that extended its protection to prospective applicants was “reasonably related to the ECOA’s objectives,” it was valid. However, the Townstone court rejected the argument because the Supreme Court mandated use of its two-step process in Chevron, observing that “numerous courts have rejected similar agency attempts to eschew Chevron in favor of Mourning.” Because Chevron “requires the court to begin its analysis with the plain language of the ECOA” and that language “unambiguously prohibits discrimination of ‘applicants’ and not ‘prospective applicants,’” and even though “[t]he practice of limiting credit to individuals based on criteria other than creditworthiness is as odious as it is offensive,” the “prospective applicant” language of Regulation B “does not survive Chevron step one.”
Motions for summary judgment by the defendant bank and its servicer were denied in National Fair Housing Alliance v. Bank of America, N.A., a case in which the plaintiff coalition of fair housing advocacy organizations alleged that after the 2008 financial crisis, the defendants maintained and marketed bank-owned (“REO”) foreclosed houses in a racially discriminatory manner in thirty-seven cities between 2011 and 2018. The court examined the alleged flaws in the plaintiffs’ investigative methodology and the opinions of its four expert witnesses as criticized by the defendants’ four experts to determine whether questions of material fact were presented that required a jury trial.
On the plaintiffs’ disparate impact claim, the Bank of America court found that despite the defendants’ numerous criticisms of their work, the plaintiffs’ experts had presented admissible evidence of a significant statistical disparity between the maintenance of white and non-white REO properties that was sufficient to establish a prima facie claim. It also found that the second disparate impact element, identification of a specific policy that caused the disparity, was satisfied by showing “an overarching policy of undue delegation and failure to supervise,” a policy that other courts had accepted for this element in similar cases. Finally, the court found that the plaintiffs’ experts’ reports sufficiently demonstrated a robust causation between the policy and the statistical disparity, the third element required for a disparate impact claim. The same evidence was also found to ``establish a prima facie case of disparate treatment.
