Lenders seeking judicial relief from the Consumer Financial Protection Bureau’s heightened enforcement of the Equal Credit Opportunity Act were left disappointed by the settlement of Mt. Holly v. Mt. Holly Gardens Citizens in Action Inc. just three weeks prior to that case being heard by the Supreme Court on Dec. 4, 2013. The Supreme Court was to rule on whether intentional discrimination, an element needed to prove a violation of the act, could be shown using a disparate impact analysis, also referred to as the “effects test.” Unfortunately, the settlement prevents this review.

Under the act, it is unlawful for a creditor to discriminate against any protected class on the basis of race, color, religion, national origin, sex or marital status, age or source of income. The disparate impact theory enables enforcement agencies to prove lender discrimination via a regression analysis of statistical variations in loan terms between borrowers as evidence that a lender illegally facially discriminated against a protected class, even without a showing of discriminatory underwriting criteria. For this reason, disparate impact has been a hotly contested issue in appellate courts for nearly 40 years. The court’s missed opportunity to provide guidance on the viability of the disparate impact theory means that lenders continue to be at risk for unknowingly discriminating against certain groups, and thus remain exposed to fair lending violations.

Originally Published In Bank News - February 2014.