The U.S. Department of Justice (DOJ) recently settled a fair lending lawsuit against Texas Champion Bank. This means that, once again, a DOJ attempt to use disparate impact evidence to establish that a lender engaged in a “pattern or practice” of intentional discrimination will not be tested in court.

The complaint alleged that there was a “statistically significant” disparity between the interest rates charged to Hispanic and non-Hispanic borrowers on unsecured consumer loans. In addition, the DOJ alleged that the higher rates charged to Hispanic borrowers stemmed from the bank’s policy of giving its loan officers “broad subjective discretion” to set rates. According to the complaint, each loan applicant’s national origin “was available and known to” the loan officers who personally handled the loans at the bank’s branch offices.

In the complaint, the DOJ asserted various theories for its claim that the bank had discriminated against borrowers on the basis of national origin, violating the Equal Credit Opportunity Act (ECOA). The complaint charged that the bank’s policy had a “disparate detrimental impact on Hispanic borrowers.” It also charged that such policy constituted “a pattern or practice of resistance to the full enjoyment of rights secured by ECOA” and that the bank’s “pattern or practice of discrimination has been intentional, willful, and implemented with reckless disregard for the rights of Hispanic borrowers.” Although it did not directly say so in the complaint, the DOJ presumably based its allegation of intentional discrimination on a loan officer’s alleged knowledge of an applicant’s national origin.

The settlement, which is subject to approval by a Texas federal district court, requires the bank to pay $700,000 to approximately 2,000 Hispanic borrowers. It also requires the bank to implement uniform pricing policies that include a uniform pricing matrix or matrices setting forth objective, non-discriminatory standards for setting interest rates. Under the settlement, if there is a discretionary element in the bank’s loan pricing, such standards must include various items such as:

  • Limits on how much a borrower’s rate can deviate from the rate determined by the  matrix or matrices
  • The factors a loan officer may consider in exercising such discretion
  • A requirement for loan officers to give borrowers, before setting a rate, written notice that the rate is determined by various factors and may be negotiable within the limits of the bank’s loan policies

The bank must also monitor its loans for interest rate disparities and provide ECOA training to its employees.

The action against Texas Champion appears to be part of a DOJ trend to conflate disparate impact and disparate treatment theories of ECOA liability. Last year, the DOJ took a similar approach in a fair lending case filed against a mortgage company in a New York federal district court; the DOJ also settled that case. The DOJ’s decision not to rely exclusively on disparate impact to frame its fair lending cases could reflect its concern over the continued survival of the disparate impact theory.

The U.S. Supreme Court could soon decide whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. A decision disallowing the use of disparate impact claims under the FHA would likely be the death knell for such claims under the ECOA.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend agaist the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance. The group includes the firm's Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

For more information, please contact Consumer Financial Services Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, Fair Lending Task Force Leader Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.