disparate impact fair lendingdisparate impact fair lending

The Court focused on holding [in Griggs] represented the better reading of the Griggs v. Duke Power Co., in which it originally held statutory text.23 that Title VII permits disparate impact claims. While we do our best to be accurate, the information in this site and resources is provided on an as is basis with no guarantees of completeness, accuracy, usefulness or timeliness. 12 C.F.R. L. 90-202, permitted disparate impact claims in the fair lending context, Dec. 15, 1967, 81 Stat. 1976 amendments to ECOA expanded the prohibited bases of 24. Fair-Lending Enforcement Under the Biden Administration However, fair lending risk still exists. For terms and use, please refer to our Terms and Conditions Although the Bank was willing to expand its 14 address this problem, regulatory and judicial focus must family residential mortgage business, the Banks legitimate concerns about the appropriateness of offering these products be on whether consumers are treated fairly in the lend- to unsophisticated borrowers through third-party brokers led ing process, rather than on accusing lenders of discrimi- the Bank to limit the availability of these products through the nation for not affirmatively bringing credit into such wholesale channel to borrowers seeking loans of $400,000 or areas. 19. Support our advertisers and sponsors by clicking through to learn more about their products and services. With the disparate impact standard, the Department of Justice was able to argue that the disproportionate harm to communities of color put predatory lenders in violation of the Fair Housing Act . 12 description of lower court cases that initially held that the C.F.R. The HMDA Data Evolution Why You Need to Evolve Monitoring Practices! Disparate impact is where consistent application of a policy results in an adverse impact on a protected class. 33. L.Q. ECOA (a) It shall be unlawful for any creditor to discriminate None. If you read the settlement, the white shopper was given more favorable feedback than the black/African American shopper, despite the fact that the black/African American shopper had a stronger financial profile. In 2005, the on cases in which disparate treatment could be proven. If you are already a Premium Subscriber please login to view this content. Cubita, Peter, and Hartmann, Michelle, The ECOA quotation of Section 703(a)(1)). 1973(a) (emphasis added). Fair Lending Litigation and the Impact of Wal-Mart Stores, Inc. v. Dukes, 66 Consumer Fin. 2005) (stating that the FHA permits disparate. 2006); Graoch Assocs. other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transac- tion, or in the terms or conditions of such a trans- action, because of race, color, religion, sex, handicap, familial status, or national origin. The approach employed to Facilitate Discriminatory Practices determine whether discretionary loan pricing resulted Lastly, focus on equal ends rather than equal oppor- in discriminatory impact focuses only on statistical out- tunity may actually facilitate discrimination by ren- comes, without regard to the factors most reliable in dering quotas and preferential treatment as the only predicting default, such as credit scores, loan-to-value cost-effective means for limiting exposure to disparate ratios, and debt-to-income ratios. Reg. 71. Compliance Cohort LLC assumes no responsibility for use of (or errors and omissions in) any of the information on this site or related resources. Commn, 463 US 582, 613 (1983) June 26, 2013. applicant's exercise, in good faith, of any right under the Consumer Credit Protection Act. FAIR LENDING GUIDE TO: CHIEF EXECUTIVE OFFICER and COMPLIANCE OFFICER SUBJECT: Revised Edition of SIDE-BY-SIDE, A Guide to Fair Lending . However, the FHA cannot stand. (1990) (internal quotations and citations omitted)). not, and such actions ultimately will not survive judi- 8. From bankers. City of Jackson, 544 US at 23638. National Community Reinvestment Coalition, 573 F. Supp. Unclear, however, is what legal standards exist to evaluate allegations of discri-minatory effects in this industry. See, e.g., Biskupic, Joan, Analysis: Rights Groups Try to Avoid approval Guardians, 463 US at 613 (OConnor, J., concurring) U.S. High Court Setback, Reuters.com (Mar. What is A Real-World Example of Fair Lending Discrimination? - Ncontracts if a plaintiff pursues a disparate impact claim. (emphasis added)). If that choice is made, the likelihood are not proportionately represented in that subset of bor- of loan defaults with negative implications for borrowers rowers, offering the productseven on a demonstrably and neighborhoods increase. disparate impact, an 1 1The Fair Housing Act, 42 U.S.C. 1. Fairness-Aware Learning for Continuous Attributes and Treatments, Statistical Issues Arising in the Kerner V. Denver: a Class Action Disparate Impact Case Client/Matter: -None- Search Terms: Statistical Issues Arising in Kerner V, Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance, Employment Discrimination: a Statistician's Look at Analysis of Disparate Impact Claims, Two Faces of Disparate Impact Discrimination, Technical Advisory Committee Report on Best Practices in Adverse Impact Analyses, Title 2.0: Discrimination Law in a Data- Driven Society, Discrimination, Regulation, and Design in Ridesharing, The Use and Misuse of Econometric Evidence in Employment Discrimination Cases, 71 Wash, Subgroup Analysis in Disparate Impact Age Discrimination Cases: Striking the Appropriate Balance Through Age Cutoffs. 100). NCRC, Fintechs call on CFPB to clarify applying fair lending rules to A traditional ity borrowers qualify for the product. The Fair Housing Act (FHAct) prohibits discrimination in all aspects of "residential real-estate related transactions," including but not limited to: Making loans to buy ,build, repair or improve a dwelling; Purchasing real estate loans; Selling, brokering, orappraising residential real estate; Selling or renting a dwelling. Our peers require 640 and we require 680. Volume 33 Number 2 February 2014 Banking & Financial Services Policy Report 2 The Effects Test his status as an employee, because of such individuals The question before the Supreme Court in City race or age.22 The phrase otherwise adversely affect of Jackson was whether the Age Discrimination in was critical to the plurality opinions conclusion. It shall be unlawful for any person or None. The interagency fair lending examination procedures explain that there are essentially two types of fair lending violations recognized by the courts: Disparate impact and disparate treatment. Adverse Impact: What Is It? Holly Gardens Citizens in Act by contradicting the plain language of the FHA. As this product was only available to individuals and did not allow for co-signers, a minimum income amount of $40,000 could easily have a disproportionate effect on single women, minorities, and the elderly (not to mention many of the banks own employees). If a lender doesn't have any discretion - meaning that all applications from the financial institution are . applicant's receipt of income from a public assistance program. In Smith v. City of Jackson,16 the Court clarified that its decisions permitting disparate impact claims in employ- This approach to fair lending enforcement changed ment cases were based on specific language in Title VII in 2009 when the Department of Justice Civil Rights and not broad interpretations of the statutes general Division (DOJ) announced that it would now pur- purpose. Bank of Canada hikes key interest rate. These practices are often an element in predatory lending. Black Jack,1 Metropolitan Housing Development Corp. v. Because lenders have been reluctant to engage in protracted Village of Arlington Heights (Arlington Heights II ),2 and litigation with these agencies, disparate impact analysis con- Resident Advisory Board v. Rizzo.3 None of these cases tinues to be effectively used to place affirmative obligations held that the statutory text of the FHA permitted on lenders with respect to the underwriting and pricing of disparate impact claimsindeed, one of these cases, loans to protected-class borrowers designed to achieve statisti- Arlington Heights II, acknowledged that the text of the cal equivalence between groups. Did one come from an easy real estate agent to deal with and one from a high maintenance real estate agent? Outright discrimination is one thing, but when discrimination is indirect, it is more difficult to recognize and measure. The decision was a defeat for the lending industry. ECOA to include race, age, and other attributes, but did not add 25. April 8, 2019 in Compliance Reading Time: 2 mins read 0 Since the Consumer Financial Protection Bureau 's 2013 indirect automobile guidance was repealed last year, there have been no new public indirect automobile fair lending cases alleging disparate impact. 564 F.2d 126 (3d Cir. 1996); Jackson v. Okaloosa County, (2006); Jackson v. Birmingham Bd. Advertisers and sponsors are not responsible for site content. In Freeman v. Quicken Loans,68 even if policies associated with such products are applied the Supreme Court unanimously rejected a HUD neutrally to all consumers, a lender may be forced to interpretation of the Real Estate Settlement Procedures stop offering the product in order to equalize the effects Act that the Court found to be manifestly inconsistent of their lending activities on minority and nonminority with the statute.69 Agency interpretations of statutes borrowers. 241 (Title VII); Pub. v. Mt. 2005); Langlois v. Abington Hous. 12 C.F.R. After all, this is what risk management said you should require, so that your company gets loans that perform well. Illegal disparate treatment occurs when a lender bases its lending decision on one or more of the prohibited discriminatory factors covered by the fair lending laws, for example, if a lender offers a credit card with a limit of $750 for applicants age 21 through 30 and $1,500 for applicants over age 30. If you haven't done so already, make sure you sign up for our free membership where you get access to many member-only videos, articles, and other resources. Comparative evidence of disparate treatment, interagency examination procedures on fair lending. The U.S. Supreme Court has recently confirmed that the Fair Housing Act recognizes disparate impact liability. Fair Lending Software Vs. Fair Lending Monitoring. In fact, the plaintiffs bar has erally not appropriate when the language of the under- argued that disparate impact liability can be found even lying statute is clear. This publication is a guide to the new Interagency Fair Lending Examination Procedures. The Supreme Court has explained treatment provisions of Title VII and the ADEA that when Congress uses the same language in two which the Supreme Court has clarified require a show- statutes having similar purposes, particularly when one ing of intent to discriminate. However, your peers seem to be doing business in those areas. disparate impact on African-American and Hispanic potential borrowers. This item is part of a JSTOR Collection. In one of the recent settlements, BancorpSouth was mystery shopped to determine if a lender violated ECOA, by treating customers differently based on race. This is your overlay and not your investor overlay, so your company is responsible for the empirical evidence to back up that business justification. For example, if a minority group is statistically less as applied, give employers little choice but to adopt likely to qualify for a mortgage product or particular loan race-conscious measures can violate the Constitution.74 terms under a neutral policy, the lender would be forced to either stand by the policy and risk being accused of Conclusion discrimination under a disparate impact statistical analysis Congress appropriately designed the FHA and or ease its underwriting standards to achieve equivalent ECOA to prohibit only intentional discrimina- market share among minority and nonminority borrow- tion, which the text of both statutes makes clear. ADEA Compliance and Litigation by Carla J. Rozycki* and Patricia A. Bronte** Age Discrimination Claims, S Customer Ratings As Vehicles for Workplace Discrimination, Note Inclusive Communities and Robust Causality, Disparate Impact and Equal Protection After Ricci V. Destefano Marcia L, Looking the Other Way: a Critique of the Fair-Lending Enforcement System and a Plan to Fix It 1. 207 F.3d 43, 4950 (1st Cir. Interagency Fair Lending Examination Procedures, which were revised in 2004 and distributed by the Board as an attachment to CA Letter 04-8. Dev. After a period of time passes, such as ten years, this minimum loan amount policy may show to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live. All Rights Reserved. For example, a lender may have a policy of not making single family home loans for less than $60,000. CFPB Puts Lenders & FinTechs On Notice: Their Models Must Search - NCRC The disparate impact theory of discrimination allows a party to establish discrimination based solely on the results of a neutral policy. Gallagher v. Magner, 619 F.3d 823, 838 (8th Cir. 73. Reg. Was the Disparate Impact Theory a Mistake? 11,460 (Feb. 15, 2013) (codified and Arlington Heights II. 3601 et seq.This means plaintiffs only need to show the discriminatory effect of a particular business practice without evidence of discriminatory intent. They start with the same word, but have decidedly different meanings. See Steinhauser v. City of St. Paul, 595 F. Supp. 1:13-cv-00966-RJL, Compl. An official website of the United States government. 2007); Hallmark Developers, Inc. v. Fulton County, 466 it applies to lending discrimination are under development .). See, e.g., Stohr, Greg, N.J. A lender's policies, even when applied equally to all its credit applicants, may have a negative effect on certain applicants. Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B. 49. against any applicant, with respect to any aspect of a credit transaction(1) on the basis of race, color, reli- gion, national origin, sex or marital status, or age ; Volume 33 Number 2 February 2014 Banking & Financial Services Policy Report 4 true. Corp. v. City of Fresno, 433 F.3d 1182, 1194 under the ECOA and the FH Act: ); 59 Fed. This means your company requires 20 points higher than the average homebuyer in that area, and 40 points higher than your peers. The Black Jack court relied exclusively on constitutional equal Antonio, 490 US 642 (1989). In effect, this result chills FHA requires a showing of intent to discriminate to innovation and reduces the breadth of credit available to establish claims of discrimination.4 Rather, these courts qualified borrowers, causing lenders to retreat from offering focused on cases decided under other laws and what the lending products and services that could increase vulnerability courts viewed as the broad purpose of the FHA. To which the examiner asks what data do you have to substantiate that theory? 508 F.2d 1179 (8th Cir. Alexander, supra, n.67 at 286 n.6 (2001) (quoting with approval Development, No. When a In addition to basing its view on pre-City of Jackson statute like the FHA does not permit disparate impact cases,61 the FRB also relied on the preenactment leg- claims, such claims cannot be authorized by regulation. Disparate impact is distinct history to permit disparate impact claims. Commn, 502 US 491, 50910 57. tive history has been criticized as lending itself to a kind of ventriloquism, which can be employed to Misinterpretation of Supreme Court make words appear to come from Congresss mouth Precedent by Lower Courts which were spoken or written by others (individual No lower court has held that the text of either the Members of Congress, congressional aides, or even FHA or ECOA permits disparate impact claims in enterprising lobbyists).44 Committee reports from a the fair lending context. The OCC has taken a number of enforcement actions against banks that were found to have engaged in abusive practices and, in one landmark case, required a bank to pay over $300 million in restitution to its customers. I, Comment 6(a)-2. City of Jackson, 544 US at 234. matters only to the extent it clarifies text.). Among the guidance mortgage-lending practices that have a disparate impact provided was a statement that liability for violations on a protected class of individuals or that otherwise of both the FHA and the Equal Credit Opportunity create, increase, reinforce, or perpetuate segregated Act (ECOA) could be based on evidence of disparate housing patterns, even if the practice is facially neutral impact.6 At the same time, the Federal Reserve Board and there is no evidence of discriminatory motivation.12 (FRB) amended its commentary to Regulation B Subsequent to HUD issuing its proposed rule on dispa- implementing ECOA to note that use of the disparate rate impact, the Consumer Financial Protection Bureau impact theory is appropriate.7 However, these state- (CFPB) also took the position, relying on Regulation B, ments were made in the context of a broad Policy that ECOA permits disparate impact claims.13 The DOJ Statement, which expressly recognized that factors such has similarly reaffirmed its position that both the FHA as borrowers income, continuity of income, adequacy and ECOA permit disparate impact claims.14 of collateral, and availability of funds to close objective considerations that often effect the decision Recent Supreme Court Jurisprudence on whether to make and how to price a loanremain Establishing Primacy of the Statutory Text relevant to credit decisions.8 Given the continued This relatively new reliance by the DOJ and other commitment to the notion that these objective factors government agencies on the disparate impact theory appropriately might effect the lending decision, gov- analysis is directly inconsistent with recent Supreme ernmental fair lending enforcement activity from 1994 Court jurisprudence setting forth the appropriate lim- until 2008 continued to be focused almost exclusively its in use of the disparate impact theory. These are just a few examples that illustrate how clients may receive disparate treatment from your staff. Unintentional discrimination (called "disparate impact" discrimination) occurs when an action or policy triggers adversely affects members of a protected class, even if there was no intention to discriminate. suggests that the statutes differ in their meaning.34 Instead of analyzing the language of ECOA, courts have relied on nonstatutory references to disparate The ordinary meaning of the term discriminate impact under ECOA.40 At the root of these non- further supports the position that the discriminate . However, there seems to be a general consensus that the Supreme Court would have sided with the City of Invalidity of Agency Attempts St. Paul and held that the FHA does not permit disparate to Establish Disparate Impact Standard impact claims, in no small part because the Court took Despite Supreme Court precedent calling into ques- the case notwithstanding the lack of a circuit split on the tion the appropriateness of disparate impact claims in the issue. If you haven't done so already, make sure you check out our Compliance Clips - free 3-5 minute training videos on all topics of regulatory compliance. 63. Although the text of the Fair Housing Act (FHA) does not create liability for facially neutral activities with unequal The Theory effects, lower court decisions over the years have relied on The disparate impact theory of discrimination allows jurisprudence focused on other statutes with different lan- a party to establish discrimination based solely on the guage, agency guidance, and selective readings of legislative results of a neutral policy. Freeman v. Quicken Loans, Inc. No. CFPB Fair Lending Examinations Conducting fair lending examinations of non-mortgage credit products, e.g., small business loans, payday loans Expectations are sometimes vague and/or still emerging, resulting in uncertainty Examiners have uneven fair lending experience Participation of enforcement lawyers in exam process City of Jackson, 544 US at 23536 (emphasis in original). Testing for Discrimination and the Problem of "Included Variable Bias", Ricci V. Destefano and the Racial Legitimacy Gap, Arxiv:1906.12005V2 [Cs.LG] 14 Jan 2020 Bolukbasi Et Al, Statistical Criticism and Causality in Prima Facie Proof of Disparate Impact Discrimination, Legal Standards and Statistical Proof in Title Vii Litigation: in Search of a Coherent Disparate Impact Model. As we conclude our series on conducting a fair lending risk assessment, today's topic is the third type of discrimination recognized by the courts: disparate impact. For some of you that may be true, but based on mystery shopping results the examiners dont see it that way. PDF Banker's Guide to Risk-Based Fair Lending Examinations Adam has written five e-books that he never published, hit a grizzly bear while driving in a National Park, and is an award winning photographer and musician (though he no longer takes photos nor plays any instruments). Koons Buick Pontiac GMC, Inc. v. Nigh, 543 US 50, 73 (Scalia, J., at *1213 (U.S. May 24, 2012). 2007); Charleston Housing Auth. It provides an overview of the new risk-based approach that examiners will use when assessing a Lender's compliance with the Equal Credit Opportunity Act (Regulation B) and the Fair Housing Act (FHAct). See our legal notice for more information. 1977). tory referencesand appellate court opinions relying on nonstatutory referencesto uphold use of the Appellate Treatment Post-City of Jackson theory,38 contrary to Supreme Court precedent. Chisom v. Roemer, 501 US 380, 404 (1991). 2023 Compliance Cohort LLC. same meaning in both statutes.33 The converse is also. It contains articles of significant interest to the business lawyer, including case law analysis, developing trends and annotated listings of recent literature. Your policy is facially neutral (we treat everyone the same) yet by virtue of that policy you cause Disparate Impact on a prohibited basis! On the other hand, a minimum loan amount of $20,000 may also have some impact, but may be permitted if that is the lowest loan amount a bank can lend and still break even. Finally, evidence of discriminatory intent is not necessary to establish that a lender's adoption or implementation of a policy or practice that has a disparate impact is in violation of the FHAct or ECOA.. Implementation of the Fair Housing Acts Discriminatory narrow view of the phrase [because of race] in the statute Effects Standard, 78 Fed. The use of disparate impact analysis by enforcement agencies is being questioned by the industry. We are glad you have found us and look forward to collaborating in the future. No court has ever decided a fair lending case under a theory of disparate impact on its merits. Exposing to prohibit.66 [R]egulations that would proscribe lenders to potential liability for lending activities based conduct by the recipient having only a discriminatory only on superficial statistical analysis showing differential effect do not simply further the purpose of the [stat- impact on a particular group without meaningful controls ute]; they go well beyond that purpose. 67 for objective lending qualifications hinders lenders ability to create new products and extend business operations, Recent Precedent Limiting Agency thereby stifling market expansion. 1994); Keith v. Volpe, 858 (2005) ( Discrimination is a term that covers a wide range of F.2d 467, 484 (9th Cir. 1977); Betsey v. Turtle Creek Assocs., 736 F.2d 983, (2005) (A defendant with the best of intentionsindeed, even a 98889 (4th Cir. 2006); Reinhart v. Lincoln County, 482 F.3d 1225, 1229 (Although the precise contours of the law on disparate impact as (10th Cir. However, recent the threshold question of whether the FHA permits dispa- Supreme Court precedent focused on other discrimi- rate impact claims last term and again this term, granting nation statutes now has undermined this approach.5 certiorari on the issue in two successive cases. Relying on disparate impact to establish Furthermore, a regulatory agency is not authorized discrimination in lending poses a real threat to market to attempt to effectuate an interpretation of a statute expansion and economic stability. 202, Supp. 558 F.2d 1283 (7th Cir. 94-589, at 45 (1976); H.R. See, e.g., Alexander v. Sandoval, 532 US 275, 28687 (2001) formulation. Fair Lending Developments: Disparate Impact Lives On By John L. Ropiequet and L. Jean Noonan* INTRODUCTION The fair lending cases led by Miami against four major mortgage lenders, re-ported in several previous Annual Surveys, came to a sudden, anticlimactic end when the city voluntarily dismissed all of them in January 2020.1 None of the What is the Solution? Those areas happen to be the higher minority or underserved areas. Arlington Heights II, 558 F.2d at 1288 (acknowledging that a 11. 10. 10-1042, 2012 WL 1868063, 44. When terms are not defined in a statute, those basis of language in ECOA.41 The 1976 amendments terms are given their ordinary meaning.35 The ordinary to ECOA expanded the prohibited bases of ECOA to meaning of discriminate refers to the intentional treat- include race, age, and other attributes, but did not add ment of one person differently than another.36 Engaging effects language to ECOA or otherwise change the in a certain practice that has a disparate impact without basic discriminate against on the basis of structure discriminatory intent is not discrimination in the ordi- of the statute.42 nary sense of the word, and yet courts and government agencies have nonetheless permitted disparate impact Reliance on contemporary legislative history is gen- under the FHA and ECOA.