The consent order contained the customary components of a redlining settlement. It required the bank to invest $7.5 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods in the Jacksonville assessment area; $900,000 for advertising, outreach, and consumer education; and $600,000 in community partnerships to provide services that increase access to residential mortgage credit. The bank was also required to open one new full-service branch in a majority-minority area of the Jacksonville assessment area within two years, maintain at least three mortgage bankers to solicit mortgage applications primarily in majority-Black and Hispanic census tracts in Ameris Bank’s Jacksonville assessment area, and employ a full-time director of community lending to oversee the development of lending in majority-Black and Hispanic census tracts in the Jacksonville assessment area.
The DOJ brought its next redlining action against Patriot Bank in Tennessee on a referral from the Federal Reserve Board. The complaint alleged that the bank violated the ECOA and the FHA by avoiding providing home loans and other mortgage services in majority-Black and Hispanic areas in its Memphis assessment area. The complaint alleged that Patriot Bank’s redlining practices included locating nearly all of its branches and loan production offices and all of its mortgage loan officers in majority-white neighborhoods in the Memphis assessment area; concentrating its outreach, advertising, and marketing in majority-white neighborhoods; and failing to take meaningful steps to address its known redlining risk. The bank generated disproportionately low numbers of loan applications and home loans each year from majority-Black and Hispanic neighborhoods in and around the Memphis assessment area compared to its peer lenders, whose applications from majority-Black and Hispanic areas were three-and-a-half times the rate of Patriot, and over 60 percent of those applicants from majority-minority areas were white.
The DOJ’s consent order with Patriot Bank required an investment of $1.9 million, which included $1.3 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods; $375,000 for advertising, outreach, consumer financial education, and credit counseling focused on majority-Black and Hispanic neighborhoods; and $225,000 on community partnerships to provide services that increase residential mortgage credit access for residents of those neighborhoods. The settlement required the bank to maintain its existing three branches located in majority-minority census tracts in the Memphis assessment area, maintain at least two mortgage loan officers among these branches, and employ a full-time director of community lending to oversee the development of lending in majority-Black and Hispanic census tracts in the Memphis assessment area.
In February 2024, shortly after the settlement with Patriot Bank, the DOJ and North Carolina filed a redlining complaint and consent decree with First National Bank of Pennsylvania (“FNB”). The complaint alleged that FNB violated the ECOA, the FHA, and the North Carolina Unfair and Deceptive Practices Act by avoiding providing home loans and other mortgage services in majority-Black and Hispanic neighborhoods in the Charlotte and Winston-Salem, North Carolina, markets. The agencies alleged that FNB located and maintained nearly all of its branches and mortgage loan officers outside of majority-Black and Hispanic neighborhoods from 2017 through 2021, relied on mortgage loan officers in majority-white areas as the primary source for generating loan applications, and maintained inadequate fair lending policies and procedures. The bank had disproportionately low numbers of loan applications and home loans from majority-Black and Hispanic neighborhoods in its assessment areas in the Charlotte and Winston-Salem markets compared to its similarly situated lenders.
FNB was required to pay $13.5 million to settle these claims in two substantially similar consent orders. Together the consent orders required $11.75 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods in the Charlotte and Winston-Salem areas; $1 million for community partnerships to provide services related to credit, consumer education, home ownership, and foreclosure prevention for residents of predominantly Black and Hispanic neighborhoods in those service areas; and $750,000 for advertising, outreach, consumer financial education, and credit counseling focused on majority-Black and Hispanic neighborhoods in those service areas. The settlement required the FNB to open three new branches in predominantly Black and Hispanic neighborhoods in the two areas, with at least one mortgage banker assigned to each branch, and hire a full-time director of community lending to oversee the development of lending in majority-Black and Hispanic neighborhoods.
The DOJ and HUD joined forces to settle redlining charges involving OceanFirst Bank, N.A., on a referral from the Office of the Comptroller of the Currency (“OCC”). The DOJ complaint alleged that the bank avoided providing home loans in majority-Black, Hispanic, and Asian neighborhoods in three counties in its New Brunswick, New Jersey, lending area from 2018 through at least 2022. The alleged redlining practices included concentrating its physical locations in majority-white areas and closing its few locations in majority-minority census tracts, largely excluding majority-minority neighborhoods from its Community Reinvestment Act assessment area and from its marking and outreach efforts, and failing to implement adequate fair lending policies and procedures. As a result, the DOJ alleged that OceanFirst significantly underperformed its peer lenders in generating home loan applications and loan originations from majority-minority communities.
OceanFirst settled the FHA and the ECOA charges with the DOJ by agreeing to invest at least $14 million in a loan subsidy fund to increase home purchase and refinance loans and home improvement loans for residents of majority-Black, Hispanic, and Asian areas; to spend at least $700,000 on advertising, outreach, and consumer financial education; to spend at least $400,000 to develop community partnerships; and to open a loan production office and maintain its recently opened full service branch in majority-minority neighborhoods. The settlement with OceanFirst brought the total relief obtained under the DOJ’s Combating Redlining Initiative to over $137 million.
Predatory Lending
The DOJ and the CFPB teamed up to sue a Houston-area real estate developer and a loan originator for predatory lending practices in selling and financing undeveloped lots. The joint complaint alleged that Colony Ridge Development, LLC, Colony Ridge BV, LLC, an affiliated mortgage company, Colony Ridge Land, LLC, and another mortgage company, Loan Originator Services, LLC (“LOS”), used predatory seller financing to lure Hispanic customers into buying residential lots based on false and misleading statements such as that the lots have the infrastructure to connect water, sewer, and electrical utilities when they do not. The complaint alleged that neither LOS, which originates the loans, nor Colony Ridge Land, LLC, which services them, assesses borrowers’ ability to repay, verifies stated income, or requires a down payment. Buyers default on their loans at high rates, losing their investment, and allowing Colony Ridge to foreclose and sell the property again. The CFPB and the DOJ alleged violations of the ECOA and the FHA by discriminating against Hispanics. The complaint explained the allegations of discrimination as “discriminatory targeting (also called ‘reverse redlining or targeted predatory lending’),” further explaining that “[d]iscriminatory targeting is the unlawful act of targeting applicants on a prohibited basis, most commonly communities of color, for predatory credit products or practices. Discriminatory targeting may be proven through, inter alia, evidence of intentional targeting on a prohibited basis.”
The Colony Ridge defendants and LOS filed separate motions to dismiss the complaint. LOS asserted that “the discriminatory acts that Plaintiffs allege in the Complaint are not attributed to LOS.” The district court noted that while neither the Supreme Court nor the Fifth Circuit had ever recognized the targeting or reverse redlining claims made by the DOJ and the CFPB as actionable under the ECOA or the FHA, some district courts had done so. It held that, assuming that such claims were “a form of discrimination,” the complaint failed to plausibly allege that LOS “intentionally targeted Hispanic applicants with predatory seller financing” because all it did was prepare English-language documents, review them, and sign off on them without verifying the applicants’ financial obligations. The court therefore dismissed the counts against LOS, granting the agencies leave to amend to address their pleading deficiencies. It had no difficulty finding that the complaint plausibly alleged an ECOA or an FHA reverse redlining claim against the Colony Ridge defendants. However, it found that the claimed violation of FHA section 3604(a) had to be dismissed because the section related to refusals to sell or rent property, which was “not the case here.”
HUD Fair Housing Act Enforcement
In addition to the HUD conciliation agreement with OceanFirst, HUD issued a charge of discrimination on behalf of a Black complainant against Rocket Mortgage and its appraisers, alleging violations of the FHA for providing an inaccurately low appraisal because of the borrower’s race. HUD charged that Rocket’s appraisers valued her residential property at an “insupportably low” value based on the use of comparable properties from areas with higher concentrations of Black residents rather than closer properties in areas having higher proportions of white residents, and they also valued it lower than recent appraisals of her property performed by other appraisers and without correcting factual inaccuracies in her property description. It also charged that when she told Rocket that she suspected appraisal bias, a Rocket employee said she could either close the loan with the challenged appraisal or terminate her application and file a discrimination complaint. When the complainant said she would prefer to keep the application active while she pursues her discrimination concern, Rocket told her that she did not have that option. Rocket canceled her mortgage application and said it was “unable to offer” her “financing at this time.” Rocket allegedly canceled her application in retaliation against her for reporting a discriminatory housing practice. HUD charged the respondents with engaging in illegal housing practices in violation of the FHA and sought declaratory and injunctive relief, retroactive and prospective corrective action, damages, and a civil penalty against each respondent for each discriminatory housing practice. HUD’s administrative complaint is pending as of this writing.
HUD reached a settlement with Rocket Mortgage, LLC, in a separate matter resolving allegations of race discrimination by two consumers who applied for a home purchase loan located on the Flathead Indian Reservation in Saint Ignatius, Montana. The loan applicants alleged that Rocket denied their application because the home they sought to finance was on tribal land. Rocket denied the factual allegations and entered into the Conciliation Agreement to obtain closure of the matter. Under the agreement, Rocket paid the complainants $65,000, agreed to maintain and abide by its existing fair lending policies that enable it to make loans secured by real property held in fee simple and located on a Native American reservation, and agreed to continue its fair lending training program. Rocket agreed to spend at least $30,000 on support for programs intended to improve housing conditions, financial literacy, or homeownership education or counseling for Native Americans located in and around reservations.
National Origin Discrimination in Credit Card Underwriting
The CFPB resolved allegations of discrimination by Citibank, N.A. against credit card applicants of Armenian ancestry based on national origin, in violation of the ECOA, in an administrative consent order. The CFPB alleged that from at least 2015 through 2021, Citibank engaged in a pattern or practice of discrimination against certain applicants based on Armenian national origin. Bank employees suspected applicants with Armenian surnames were more likely to commit fraud by intentionally defaulting on a large credit card balance, especially if the applicant’s address was in or around Glendale, California, where it believed a credit card fraud ring was operating. Bank employees allegedly subjected such applicants to extra scrutiny and denied them, or approved them on less favorable terms based on Armenian national origin.
To settle the claims of illegal discrimination, the CFPB’s order enjoined Citibank from unlawfully discriminating against an applicant for a credit card and failing to give specific reasons for adverse action taken on a credit card application; required the bank to conduct portfolio-wide statistical analyses of judgmentally reviewed credit card applications to detect illegal discrimination; required it to take appropriate remedial action to remedy potential ECOA violations; required it to establish a consumer redress fund of $1.4 million; and imposed a civil money penalty of $24.5 million.
FTC Enforcement Actions
As discussed in a previous Annual Survey, the CFPB announced changes to its examination manual to require supervised institutions to test for and eliminate discriminatory practices, including actions that do not violate the ECOA. The agency said that such conduct could trigger liability under its unfairness authority. The U.S. Chamber of Commerce and bank trade associations sued the CFPB, arguing that the agency exceeded its authority under its statutory unfairness powers and violated the Administrative Procedure Act. The court entered a final judgment for the plaintiffs in September 2023, enjoining the CFPB from taking any examination, supervision, or enforcement action against members of the plaintiff associations based on its interpretation that discrimination is an unfair practice. The CFPB’s appeal is pending as of this writing.
Not long after the CFPB’s action, the FTC applied the novel doctrine of “unfair discrimination” in a settled ECOA case, which elicited dissents from two of the five commissioners. Despite the legal challenge to the CFPB’s use of the discrimination-is-unfair theory, the FTC has continued to allege it in settled cases. In an action against Coulter Motor Group, the FTC alleged that the dealer group charged Latino customers higher interest rate markups than non-Latino white customers paid. The FTC claimed that Coulter’s discriminatory practices constituted unfair acts or practices in violation of section 5 of the FTC Act, as well as violations of the ECOA and Regulation B. Once again, two of the three commissioners chided the majority for employing this controversial theory. One of the commissioners also noted pointedly that the FTC did not include an unfairness claim in a very similar suit that was litigated rather than settled.
Despite this split in opinion among the commissioners, the FTC has continued to allege that discrimination is unfair under section 5. The FTC alleged that FloatMe Corp. and two co-founders and officers violated the ECOA by discriminating against recipients of public assistance payments. FloatMe offers consumers small-dollar cash advances from its mobile application for a monthly subscription fee. The FTC alleged that FloatMe did not consider a consumer’s income from several sources, including public assistance payments, in violation of the ECOA and Regulation B. The complaint also alleged that this practice constituted “unfair discrimination,” in violation of the FTC Act. FloatMe settled these charges and other allegations of unfair acts in a stipulated order that enjoined it from violating any provision of the ECOA or Regulation B, required it to establish a fair lending program, and imposed a monetary payment of $3 million to be used for consumer redress. The FTC announced that it was sending more than $2.6 million in refunds to almost 450,000 consumers harmed by FloatMe’s conduct, including false promises of “free money.”
Servicemembers Civil Relief Act Enforcement
The DOJ remained active during this period in its enforcement of the Servicemembers Civil Relief Act (“SCRA”). Most actions involved municipalities and towing companies, as creditors have increasingly developed effective compliance management systems to avoid SCRA violations. A notable exception involved a settlement with Hyundai Capital America, which involved claims that this captive auto finance subsidiary of Hyundai Motor America violated the SCRA by repossessing twenty-six motor vehicles owned or leased by SCRA-covered servicemembers without first obtaining required court orders. The consent order required Hyundai Capital to pay each servicemember-owner whose rights were violated $10,000 plus any lost equity based on the vehicle’s retail value and accrued interest on the lost equity from the date of repossession, and to deposit a fund of $272,000 to cover such recoveries. Hyundai Capital was required to instruct consumer reporting agencies to delete the trade lines of these servicemembers and to pay a civil penalty of $74,941 to vindicate the public interest. Finally, the consent order contained the customary reporting and recordkeeping requirements.
In United States v. Todisco Services, Inc., the DOJ alleged that a towing company in Salem, Massachusetts, violated the SCRA by illegally auctioning off a vehicle belonging to a U.S. Air Force Staff Sergeant who was deployed to Qatar. The complaint alleged that the towing company sold the vehicle without obtaining a court order, although the servicemember called the company multiple times attempting to pay the fees to recover his automobile. The complaint also alleged that the towing company had no policies or procedures in place to prevent it from selling servicemembers’ vehicles and personal property without court orders. The consent order required the towing company to pay $5,000 to the servicemember, adopt new SCRA policies, implement training requirements, and pay a civil penalty of $1,000.
Another case illustrated that even obtaining a court order allowing the sale may not prevent a charge of violating the SCRA. The DOJ sued an individual owner of a towing company in North Carolina, doing business as Goines Towing & Recovery, alleging that it towed a vehicle owned by a servicemember who was deployed to Japan. When he learned of the impoundment and Goines’ intention to sell it, the servicemember called the company and stated that he was an active-duty Marine deployed to Japan, but he was told he must pay off the lien of almost $6,000 in cash for towing and storage fees, and no other form of payment was acceptable. Goines filed a civil action seeking a court order allowing it to sell the vehicle. Goines’ agent filed a military affidavit stating that she was unable to determine whether the owner was a covered servicemember because she did not have his Social Security number. The court issued a default judgment allowing the sale. The DOJ alleged that Goines did not make a good-faith effort to learn whether the owner was in military service and described other instances of filing military affidavits that did not include any facts showing efforts Goines made to determine the vehicle owner's military service status, and that it had done the same for other servicemembers. The consent order required Goines to pay up to $36,805 to eight identified servicemembers, adopt new SCRA policies, implement training requirements, waive all claims against twenty-nine other servicemembers, and pay a civil penalty of $30,000.
The DOJ resolved another SCRA complaint after well over a year of litigation. The DOJ sued the city of El Paso and two of its towing contractors after investigating a complaint from an Army Lieutenant Colonel that the city had impounded and sold a truck she owned with her husband while she was deployed to Afghanistan. During her deployment, her husband was in an accident with the truck, and the El Paso police department impounded it and had it towed to a city-owned impound lot. Two months later, when the towing and storage fees remained unpaid, the city’s contractor sold the truck at a public auction without obtaining a court order. The DOJ’s investigation found that El Paso and its two contractors had auctioned off or disposed of at least 176 vehicles without a court order belonging to protected servicemembers during a five-year period.
After failing to reach a resolution with El Paso and its contractors, the DOJ sued them in February 2023 for violating the SCRA. The complaint alleged that the city and one contractor, Rod Robertson Enterprises, Inc. (“RRE”), had no written SCRA policies. Although the second contractor, United Road Towing, Inc. (“URT”), had a written policy stating that it would determine whether an impounded car was owned by active-duty servicemembers, the DOJ alleged that it never determined whether the owners of any car it auctioned were SCRA-protected servicemembers.
In May 2024, the DOJ reached a settlement with URT that required it to deposit $57,935 into a settlement fund to compensate affected servicemembers, pay a civil penalty of $24,980, develop SCRA compliance policies, and train its employees. In August 2024, eighteen months after bringing the lawsuit, the DOJ reached a settlement with RRE that required it to deposit $140,000 into a settlement fund to compensate 122 servicemembers and to pay a $20,000 civil penalty. The same day, the DOJ settled with the City of El Paso, requiring it to develop new policies and procedures to ensure that its contractors that are responsible for auctioning or otherwise disposing of impounded vehicles, to comply with the SCRA in the future, and to pay a $20,000 civil penalty.
In August 2024, the DOJ sued another towing company for towing an active-duty Navy lieutenant’s car while he was at sea. After holding the car in storage for two months, Tony’s Auto Center enforced its lien by selling the car at auction without obtaining a court order. The case was pending as of this writing.
Federal Regulatory Developments
As discussed in the previous Annual Survey, when the CFPB promulgated a final Small Business Lending Rule (“SBL Rule”) pursuant to the directive of section 1071 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act in 2023 to cover non-consumer credit transactions, it was promptly challenged in court by the banking industry. The effective date of the rule was stayed until the Supreme Court ruled on the constitutionality of the CFPB’s funding mechanism. The Court found that the mechanism was constitutional in May 2024.
Two months after the Supreme Court’s ruling, the district court in Texas Bankers Ass’n v. Consumer Financial Protection Bureau issued its own ruling on the parties’ cross-motions for summary judgment. With the constitutionality issue removed from the case, the court turned to the merits of the plaintiffs’ claims that the CFPB had violated the provisions of the Administrative Procedure Act (“APA”) when it promulgated the SBL Rule. The court sorted out what their claims boiled down to and dealt with each argument in turn after it observed that the remaining three counts had “instances where a count asserts multiple distinct arguments and vice versa, when multiple counts assert the same argument.”
The Texas Bankers court first found no merit to the plaintiffs’ argument that the SBL Rule was not a “lawful extension of the statute” in violation of section 706(2)(C) of the APA because the plaintiffs were conflating “the inquiry into statutory authority . . . with an inquiry into the rule’s effectiveness.” It held that “[t]he Final Rule was promulgated in accordance with the CFPB’s authority to do so, and the agency enacted the rule with the intent of furthering the purposes of Section 1071,” which was “the end of the matter.”
The plaintiffs asserted that the data collection points that the CFPB added to the thirteen points specified in section 1071 exceeded its statutory authority because “the agency cannot require reporting data that financial institutions would not otherwise collect as part of the loan application process.” The court found that all of the nine extra data collection fields were at least implicitly required by section 1071 in order to obtain the information needed to meet all of the statute’s reporting requirements and therefore were appropriate.
With respect to the plaintiffs’ arguments that the SBL Rule violated section 706(2)(A) of the APA because it was arbitrary and capricious, the Texas Bankers court found that they grossly exaggerated the number of additional data points when they claimed that there were eighty-one points instead of the twenty-two points that were actually in the rule, and that they even exaggerated the number of pages in the rule. Moreover, the court found that, contrary to their arguments, the CFPB had given sufficient consideration to each of the issues that they raised about the rule’s costs and benefits. The court accordingly held that “the Bureau has satisfied its obligation ‘to examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.’”
Municipal Fair Lending Litigation
For the past ten years, the Annual Survey has reported on a series of cases filed by city and county governments, referred to collectively as municipal governments, that alleged that major mortgage lenders discriminated against their residents and that they suffered damages as a result. This cycle of municipal fair lending litigation came to an abrupt end in 2023. The lenders took a firm stand against the municipal claims, challenging them on motions to dismiss and on summary judgment, usually accompanied by voluminous discovery and contentious discovery disputes. Only one case, by Philadelphia against Wells Fargo, had a publicly reported settlement, a $10 million package of benefits to the community that resolved the city’s lawsuit in 2019.
Questions about municipal governments’ standing to sue and causation requirements for such claims reached the U.S. Supreme Court in 2017. In Bank of America Corp. v. City of Miami, with claims by Miami against two banks, the Court ruled that the city’s allegations met both prongs of the requirements for standing to sue. It found that statutory standing for claims under the FHA was as broad as Article III of the Constitution permitted, and that the city therefore came within the group of persons protected by the FHA. It also found that the city’s claims of economic damages fell within the zone of interests that the FHA protected.
On the proximate causation question, the Court ruled that the foreseeability standard applied by the Eleventh Circuit “does not ensure the close connection that proximate cause requires.” However, it declined to “draw the precise boundaries of proximate cause under the FHA” despite the parties’ requests that it do so, and instead remanded the case to the Eleventh Circuit for further proceedings.
The Eleventh Circuit issued its lengthy remand decision two years later, but this did not lead to any adjudication on the merits of Miami’s claims. As the remand decision began the case’s journey to a second Supreme Court hearing on petitions for certiorari, the city voluntarily dismissed both of its cases in the district court and filed suggestions of mootness with the Court. The Court accepted the suggestions over the banks’ objections in 2020, ending litigation that had begun seven years earlier.
Municipal fair lending litigation continued to pend in several other parts of the country outside of the Eleventh Circuit, but the cases were dismissed on summary judgment or settled on an undisclosed basis until only a small handful was left. After the Ninth Circuit affirmed a summary judgment in favor of the bank for failure to establish proximate causation in a unanimous en banc decision in City of Oakland v. Wells Fargo & Co. in 2021, the Seventh Circuit followed that decision when it affirmed a summary judgment for the bank in County of Cook v. Bank of America Corp. in August 2023. This led to the dismissal of all remaining municipal cases in short order.
The defendants filed a bill of costs in the amount of $271,897.83, primarily for expert witness and transcript fees, after summary judgment was granted to the bank in County of Cook v. Wells Fargo & Co. in December 2022. The plaintiff county then moved to alter or amend the judgment. The motion was denied in September 2023 as the district court found that the Seventh Circuit’s alternate ground for affirming summary judgment in the county’s case against Bank of America, lack of proximate causation, definitively disposed of its case against Wells Fargo. The bank then filed a stipulation to withdraw its bill of costs in November, ending the litigation after nine years.
At the same time, the four remaining cases in district court were ended with stipulations to dismiss that noted prominently that “the dismissal is not the result of any settlement.” Even the Cook County case against Bank of America was officially ended with a stipulation filed in the Seventh Circuit stating that it was “not the result of any settlement.” Given that it has not been established in any municipal fair lending case that the plaintiff local government has proven proximate causation as the Supreme Court required in City of Miami, it is unlikely that any similar case will be filed in the future.
Other Litigation
As discussed in the previous Annual Survey, a district court in Illinois held in Consumer Financial Protection Bureau v. Townstone Financial, Inc. that the provision of Regulation B that extends the protections of the ECOA to “prospective applicants” for credit as well as to those who actually apply for credit was invalid because it was clear that the express and unambiguous language of the ECOA “only prohibits discrimination against applicants” and it “does not apply to prospective applicants.” The court relied on this holding to dismiss the CFPB’s complaint against Townstone in which it alleged that the company, a mortgage broker and lender in Chicago, violated the ECOA because it discouraged African-Americans from applying for mortgage loans by making disparaging remarks about them in its half-hour infomercial, radio shows, and podcasts.
On appeal, the Seventh Circuit took “a different view” of the statute. The court noted that Congress had vested the Federal Reserve Board (“FRB”) and its successor, the CFPB, with “broad regulatory authority” in the ECOA, just as it had under the Truth in Lending Act. It also noted that the ECOA was amended in 1991 “to require its enforcing regulatory agencies to refer suspected pattern and practice cases” under the Act to the Attorney General “wherever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit.” This language arose from congressional concern that the regulatory agencies “were not taking appropriate action to resolve issues of credit discrimination.”
The Seventh Circuit emphasized that the statutory interpretation question before it required it to “read a statute as a whole, rather than as a series of unrelated and isolated provisions.” Doing so made it clear that “the text prohibits not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit.” This fit with the FRB’s and the CFPB’s authority to issue “necessary and proper” regulations to effectuate the Act and “to prevent circumvention or evasion thereof.” The court therefore concluded that “the prohibition against discouragement must include discouragement of prospective applicants” rather than reading the term applicant ‘in a crabbed fashion.’” Because Townstone’s argument that Regulation B violated its First Amendment rights had not been adjudicated in the court below, the Seventh Circuit left the issue for the district court to consider on remand.
Two cases during the past year illustrated how difficult it can be for private litigants to plead, much less prove, a claim for discrimination under the ECOA and other federal antidiscrimination laws. In Oliver v. Navy Federal Credit Union, nine individual plaintiffs filed a putative class action against the defendant credit union, the largest in the country with 13 million members and a mortgage loan portfolio worth over $84 billion, that provides financial services to active military members, veterans, and their families, asserting that its mortgage lending practices were discriminatory. The complaint relied on three reports that analyzed Navy Federal’s publicly available data submitted pursuant to the Home Mortgage Disclosure Act (“HMDA”). One report was made by an investigative journalism organization, one by the National Credit Union Administration, and one by news broadcaster CNN. The plaintiffs alleged that the analyses provided statistical data that showed significant disparities between Navy Federal’s treatment of white and Black or Latino mortgage applicants.
The nine plaintiffs applied for different mortgage products, including first-lien purchase mortgages, Veterans Administration backed loans, and refinancing. Eight of them had their loan applications denied while one application was granted but at a higher interest rate. None of them disclosed the reasons for denial of their applications that Navy Federal gave to them. Based on the HMDA data and the three reports that analyzed it, claims were made for disparate treatment and disparate impact in violation of the ECOA and other federal and state laws.
The Oliver court first examined the disparate treatment claim, for which the plaintiffs were required to show that the defendant acted with a discriminatory intent or motive or that the facts support an inference of intent. The plaintiffs argued that the disparate outcomes shown by the statistical evidence in the reports were enough to support an inference of discriminatory intent, while Navy Federal argued that “statistical disparities are rarely sufficient to raise an inference of intentional discrimination.” The court’s review of the cases relied on by the plaintiffs showed that the courts generally require more than statistics alone, like examples of how the plaintiffs were treated differently from white persons. It found that the plaintiffs failed to deal with the argument that “the reports lacked crucial metrics relating to credit scores and debt-to-income ratios,” thus failing to “make out a plausible claim of intentional discrimination.” The plaintiffs also failed to allege facts to show that they qualified for the credit products they sought or that non-minority applicants received more favorable treatment.
On the disparate impact claim, the Oliver court held that the plaintiffs’ allegations that Navy Federal used a “semi-automatic” underwriting process with a “proprietary algorithm that considers a host of variables that can be proxies for race” for all of the types of loan products they applied for and that produced disparate outcomes was sufficient to plead a claim for disparate impact. However, the court cautioned that it might revisit the issue on summary judgment “[i]f during discovery plaintiffs are unable to link the described ‘secret’ underwriting process to the precise disparities and adverse consequences experienced by the borrowers.” The court dismissed all of the disparate treatment claims under federal and state law and struck the class allegations “[b]ecause the circumstances of each plaintiff ’s loan application process are so varied.”
The result in Bankhead v. Wintrust Financial Corp. was much the same. A borrower sued Wintrust and a subsidiary bank that had given her a mortgage loan on behalf of a putative class of African-Americans for racial discrimination in violation of the ECOA and other federal antidiscrimination laws. She alleged that Wintrust had proprietary policies and practices that allowed mortgage loan officers discretion to set interest rates, costs, and fees, and that its HMDA data showed statistically significant differences between white and African-American borrowers for loan application acceptance rates and mortgage costs. She alleged both disparate treatment and disparate impact claims.
The Bankhead court first dealt with the disparate treatment claims. It noted that “pleading intentional discrimination is often straightforward,” such as when a bank employee denies a loan on the basis of race, but more is required if the theory is more complex. The plaintiff ’s theory was more complex since it was based on the bank having “a set of uniform, discriminatory mortgage loan origination and underwriting policies” and engaging in “a pattern or practice of systemic race discrimination” but without “any factual allegations suggesting racial animus—or suggesting any intent at all.” While the plaintiff ’s statistics demonstrated “a disparity in outcome,” the plaintiff did not provide “any factual basis to connect that disparity to the Defendants’ intent,” so the disparate treatment claims were dismissed.
The court observed that a disparate impact claim must allege the existence of a statistical disparity, a specific policy of the defendant, and that the policy caused the disparity. The plaintiff offered neither enough details about Wintrust’s policies “sufficient to render a disparate impact claim plausible” nor statistics “showing that disparities remain, after controlling for differences in objective criteria.” Lacking such details, the court found that the plaintiff ’s “broad brush” complaint remained in “the realm of ‘sheer possibility’ and failed to cross the Iqbal plausibility threshold,” so those claims were also dismissed.
Another obstacle that disparate impact class claims that are based on a discretionary pricing policy and HMDA data showing racial differences, like the allegations in Oliver and Bankhead, may ultimately face is the aftermath of the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, in which the Court held that providing store managers with discretion to make employment decisions was “just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices.” This ruling was promptly applied to deny or decertify plaintiff fair lending classes that were based on mortgage lenders’ alleged discretionary pricing policies that gave loan officers the discretion to set loan terms. The discretionary pricing theory then disappeared until its recent re-emergence.
