The Consumer Financial Protection Bureau (CFPB) and other agencies that apply disparate impact tests under the Equal Credit Opportunity Act (ECOA) appear to have dodged another bullet. The background, recent events, and unsettled future are briefly outlined below.
In April 2012, the CFPB released a Compliance Bulletin confirming its intent to recognize disparate impact as a cognizable claim under ECOA. This was consistent with the position adopted by ten federal agencies in 1994, when they collectively released a Policy Statement on Discrimination in Lending also recognizing disparate impact as a method of proving lending discrimination under ECOA.
ECOA does not explicitly provide for a disparate impact test. The CFPB and the other agencies rely on the legislative history of ECOA as the authority to implement an “effects test” to determine discrimination.
Questions have been raised about the legitimacy of the CFPB’s authority to enforce ECOA on disparate impact grounds, largely due to disputes in connection with a similar “effects test” under the Federal Housing Act (FHA). As under ECOA, under the FHA disparate impact isn’t explicitly cognizable but is instead derived from the legislative history of the Act.
A few cases have raised this fundamental point in connection with FHA claims. Litigants that oppose disparate impact argue that Congress did not intend to impose liability for non-discriminatory actions.
The Supreme Court has accepted certiorari in connection with two disparate impact cases. The first case, Magner v. Gallagher, ended in settlement a few weeks before oral argument in 2012. The most recent case, Mount Holly v. Mount Holly Gardens Citizens in Action (Mt. Holly), was to be decided during the Supreme Court’s current term.
Recent Events and the Unsettled Future
Any hope for a decision by the final arbiters on this issue, which might have had sweeping implications for the interpretation of ECOA, was eclipsed last week, on November 13, by a settlement between the parties just three weeks before oral arguments scheduled for December 4.
The Supreme Court’s decision to grant review of this question in two separate cases in recent years suggests that they may be so inclined if another one comes along. Notwithstanding the buzz around Mt. Holly, the federal appeals courts have established precedent of allowing such claims under ECOA and the CFPB has most recently communicated its intention to use the disparate impact doctrine in connection with enforcement of ECOA in the auto lending industry.
Thus, disparate impact risk remains relevant for many lenders. Meantime, the search, and wait, continue for a case that the Supremes can use to provide clarity.