The U.S. Department of Justice (DOJ) recently settled a fair lending lawsuit against Union Auto Sales, Inc., a California automobile dealer. 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 amended complaint alleged that there was a “statistically significant” disparity between the dealer markups charged to Asian and non-Asian borrowers; many of the non-Asian borrowers were Hispanic. In addition, the DOJ alleged that the higher rates charged to non-Asian borrowers stemmed from Union Auto’s practice of giving its employees “discretion to engage in subjective decision-making and set overages within broad parameters.” According to the complaint, the employees’ discretion “was exercised in a manner that discriminated against non-Asian borrowers.” “Markups” or “overages” are nonrisk-related finance charges added by auto dealers to the lender’s interest rate.
In the complaint, the DOJ asserted various theories for its claim that Union Auto had discriminated against borrowers on the basis of race or national origin, violating the Equal Credit Opportunity Act (ECOA). The complaint charged that Union Auto “engaged in a pattern or practice of discrimination on the basis of race or national origin.” It also charged that “the discriminatory policies and practices. . . were intentional, willful, and were implemented with reckless disregard for the rights of non-Asian and Hispanic customers.” Although the DOJ did not directly say so in the complaint, the agency presumably based its allegation of intentional discrimination on employees’ alleged knowledge of customers’ race or national origin.
The settlement requires Union Auto to pay $125,000 to compensate certain former customers and cover administrative costs. Union Auto exited the auto sales business in 2007. The consent order imposes limits on Union Auto and its principal shareholder should they re-enter the auto sales business within two years, including:
Pre-approval of a dealer loan pricing policy
Annual review of pricing decisions for ECOA compliance
ECOA training for owners, officers, employees, and agents who participate in pricing loans
This action appears to be part of a DOJ trend to conflate disparate impact and disparate treatment theories of ECOA liability. 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. This term, the U.S. Supreme Court will decide whether disparate impact claims are available under the Fair Housing Act 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 call into question the availability of such claims under the ECOA.
In March, the Consumer Financial Protection Bureau (CFPB) issued guidance on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act. The guidance targets dealer markups. The CFPB’s focus on indirect auto lenders is likely to generate increased referrals to the DOJ of alleged fair lending violations by both lenders and auto dealers.
The case against Union Auto was referred to the DOJ by the Federal Reserve following its fair lending examination of Nara Bank. The Federal Reserve found evidence that Nara Bank’s indirect automobile lending program discriminated against non-Asian borrowers. Union Auto originated 21 percent of the loans in Nara Bank’s indirect automobile lending program. The DOJ settled with Nara Bank in 2009.
To help consumer credit providers prepare for examinations and to prevent, manage, and defend against 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 CFPB 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.