Bank Lawyer's Blog

Disparate Impact's Bump In The Road

In today's American Banker (paid subsciption required), Rachel Witkowski riases some good points about the potential impact of the recent decision of federal district court judge Richard Leon's recent decision that HUD's use of disparate impact violates the Fair Housing Act. For one thing, it throws a monkey wrench in HUD's use of the questionable theory, even though other ideologically-driven regulators like the CFPB and the US Justice Department may not be deterred from continuing to use it as cudgel with which to beat lenders senseless.

It is unlikely to stop other regulators, including the Consumer Financial Protection Bureau, from their own use of the theory in other circumstances, but sources said it will slow down what HUD can do under disparate impact until the Supreme Court issues a ruling on a similar case before it.

As another observer notes, it also boosts the morale of lenders, trade groups, and others that have been fighting the theory over the past few years. While HUD will likely appeal the decision, the fact that the same issue is before the SCOTUS and that arguments on that case are likely to be heard early next year means that HUD's pursuit of the appeal, and use of the theory in other instances, may be deterred.

Judge Leon's opinion was, to say the least, unvarnished.

As is typical for Leon — who often issues strongly worded opinions — the judge blasted the use of disparate impact, saying the Fair Housing Act "only" prohibits disparate "treatment," or intentional discrimination. Responding to an argument by the government that his court was precluded from weighing in on the use of disparate impact, Leon replied, "Please!"

"The expansion of FHA to include disparate-impact liability would not only have wide-ranging disruptive effect on the pricing and provision of homeowner's insurance, but would also require insurers to collect and analyze certain types of race-based data on their clients and prospective clients," Leon said in the final opinion.

He added that the case was "another example of an administrative agency trying desperately to write into law that which Congress never intended to sanction."

That has been the story of the life of the banking industry since January 2009.

Witkowski also points out that Judge Leon's decision, and the case pending before the Supreme Court, involve the Fair Housing Act. The CFPB has been using disparate impact to push claims under the Equal Credit Opportunity Act. Therefore, a decision against disparate impact under the Fair Housing Act doesn't necessarily apply to actions by the CFPB under ECOA. However, what such a ruling would likely do is encourage victims of CFPB's overreach to fight back, with the legitimate hope that they will ultimately prevail. Personally, I would love to see the CFPB continue to paint a bulls-eye on the forehead given the change in contol of Congress effected yesterday. The more examples of stained theories used to push ideological social engineering goals, the more reason for concerted action by Congress to put actual oversight on The Adjustment Bureau, and the more likelihood that wing-clipping will occur, even if it has to wait for a change in the White House in January 2017.

Culture wars aren't won overnight. Banks are in it for the long haul.

CFPB Delenda Est!

CFPB Doing An End-Around Dodd-Frank

The Wall Street Journal on Friday discussed the continuing efforts of the CFPB to circumvent to clear intent of the Dodd-Frank Act, which does not permit the CFPB to regulate the credit practice of automobile dealers. It's doing in the same way it (and other financial institution regulators at the federal level) regulates retail merchants, tribal online payday lenders, and other "unsavory" sellers of goods and services that people desire: by pressuring the banks that service them to act as the CFPB's deputy sheriffs.

Big banks, responding to demands from the U.S. consumer finance regulator, are turning up pressure on auto dealers to prove that they aren't unfairly marking up the cost of car loans to women and minorities.

The scrutiny is setting off a bigger battle in Washington over the role of the U.S. Consumer Financial Protection Bureau, which was prohibited from policing car dealers at its creation in 2010.

[...]

The CFPB does oversee banks and other lenders, and in March the agency warned them they had to ensure that car loans complied with fair-lending laws. The move has banks actively confronting dealers about their lending practices, raising the ire of dealers who say the regulator hasn't provided evidence that a problem exists.

Of course a problem exists! Automobile dealers are making money! That simply can't be right.

According to letters from banks to dealers that were reviewed by the WSJ, banks are apparently using the flavor of the moment of the Obama administration: disparate impact. If the bank performs a statistical analysis and determines that, for example (as did our favorite champion of consumer rights, Bank of America), of all loans sent by a dealer to the bank, female borrowers were charged a dealer discount (markup) of one-third of one percent more than were male borrowers, then that must be evidence of discriminatory lending on a prohibited basis. It's the same theory that consumer advocates at the US Justice Department and HUD have been pushing the past few years and that they will continue to push until the Supreme Court tells them to knock it off.

One dealer complained "There is no way to know why the bureau believes there is a problem in this area—or what standards it is using to measure lender compliance with the law." The bottom line standard is that the Bureau knows it when it sees it, pal. It then will perform a perfectly unbiased regression analysis to back up a claim of disparate impact. Where's there's smoke, there's fire, even if the fire, and the smaoke, are caused by the CFPB rubbing a bank and a dealer together until sparks fly. In the case of automobile dealers, it can't do this directly, so it expects the banks that it supervises to do the job for it.

Although the article notes that a couple of senators are making noises about why the CFPB isn't giving the public a chance to comment on these standards, I wouldn't hold your breath that Congress will take any action. Even Democrats who recognize the inherent end-run the CFPB is doing around the partisan Dodd-Frank Act determination that automobile dealers were off limits, there's no public relations upside to taking the side of a business that consumer advocates are painting as just another profit-hungry leech, sucking the blood from the proletariat. That's something only "Repthuglicans" would do.

I think we'll have to await the SCOTUS ruling in Township of Mount Holly v. Mt. Holly Gardens Citizens. K&L Gates partner Melanie Brodie told an audience last month in Dallas, if the Supreme Court strikes down the use of disparate impact under the Fair Housing Act, it's likely to have a "crossover effect" on the ability of the CFPB to use the same theory under the Equal Credit Housing Act. One way or another, let's hope we get some "certainty" in this area, soon.

I'm attending the Harland Financial Solutions Network of State & Federal Counsel 2013 Conference this week, and speaking on a panel with Rick Eckman of Pepper Hamilton LLP and Keith Rabenold, Deputy GC of Harland Financial Soultions, on technology service agreements and third party relationship issues. Therefore, I'll be "off-blog" until next week.

Disparate Impact On Ex-Cons A No-No

Credit Union consultant and pundit Marvin Umholz has been hammering on the Obama administration's use of "disparate impact" theory in not only the fair lending context, but in the equal opportunity employment context, as well (previously discussed here). In his latest email newsletter "CU Strategic Hot Topics" (you can email Marvin at [email protected] to be added to the circulation list), Marvin discusses the use of disparate impact to undermine the use of by financial institutions of background checks on prospective employees. The following is the section of the newsletter that focuses on this problem.

The new U.S. Department of Housing and Urban Development (HUD) rule entitled, “Implementation of the Fair Housing Act – Disparate Impact Rule (FR 5508) was posted in the Federal Register February 15^th www.federalregister.gov/articles/2013/02/15/2013-03375/implementation-of-the-fair-housing-acts-discriminatory-effects-standard?utm_medium=section_news&utm_source=homepage.  However, HUD’s use of the disparate impact doctrine to statistically prove discrimination regardless of intent represents just the latest in the executive branch’s efforts to utilize the controversial effects test to enforce the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), and other laws.  In addition to HUD, the CFPB, the U.S. Department of Justice www.justice.gov, and the Equal Employment Opportunity Commission (EEOC) http://www1.eeoc.gov//eeoc/newsroom/wysk/arrest_conviction_records.cfm are using the statistical disparate impact discrimination effects test in their regulatory enforcement actions.

A February 15^th opinion essay in The Wall Street Journal reminded this correspondent that the EEOC

http://online.wsj.com/article/SB10001424127887323701904578276491630786614.html?KEYWORDS=perform+criminal+background+checks+at+your+peril is also a disparate impact activist in the extreme.  The op-ed began, “Should it be a federal crime for businesses to refuse to hire ex-convicts?  Yes, according to the Equal Credit Opportunity Commission, which recently released 20,000 convoluted words of regulatory ‘guidance’ to direct businesses to hire more felons and other ex-offenders…Last April, the agency unveiled its ‘Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions,’ declaring that ‘criminal record exclusions have a disparate impact based on race and national origin’…These statistical disparities inspired the EEOC to rewrite the corporate hiring handbook to level the playing field between ‘protected groups’ and the rest of the workforce…Most businesses perform criminal background checks on job applicants, but the EEOC guidance frowns on such checks and creates new legal tripwires that could spark federal lawsuits…If a background check discloses a criminal offense, the EEOC expects a company to do an intricate ‘individualized assessment’ that will somehow prove that it has a ‘business necessity’ not to hire the ex-offender (or that his offense disqualifies him for a specific job).”  Ex-offenders were disproportionately represented in the “protected groups” setting the stage for the EEOC’s statistical disparate impact effects test to the hiring process.

The op-ed continued, “Former EEOC General Counsel Donald Livingston, in testimony in December to the U.S. Commission on Civil Rights, warned that employers could be considered guilty of ‘race discrimination if they choose law abiding applicants over applicants with criminal convictions’ unless they conduct a comprehensive analysis of the ex-offender’s recent life history.  It is difficult to overstate the EEOC’s zealotry on this issue.  The agency is demanding that one of Mr. Livingston’s clients – the Freeman Companies, a convention and corporate events planner – pay compensation to rejected job applicants who lied about their criminal records…The EEOC is confident that its guidance will boost minority hiring, but studies published in the University of Chicago Legal Forum and the Journal of Law and Economics have found that businesses are much less likely to hire minority applicants when background checks are banned.  As the majority of black and Hispanic job applicants have clean legal records, the new EEOC mandate may harm the very groups it purports to help…The EEOC’s new regulatory regime is likely to chill hiring across the board and decrease opportunities for minority applicants.”  Did the EEOC run a cost-benefit analysis on this dangerous legal contortionism before it dove into these ideologically-questionable waters?  Does the EEOC consider its mission as being to inhibit job creation by exacerbating workplace uncertainty?

As recently as February 20^th CFPB Director Richard Cordray reminded everyone that the CFPB is committed to the disparate impact doctrine in executing its rulemaking and enforcement mission www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-at-a-consumer-advisory-board-meeting.  In his prepared remarks for delivery to the CFPB’s Consumer Advisory Board, Director Cordray said, “A final and consistent problem that can hijack consumers on the pathway to opportunity is the evil of discrimination.  For some people, the greatest challenges they face do not come from deceptive materials, debt traps, or market structures, but rather are rooted in something much more basic – unequal, invidious treatment based on characteristics such as race or gender or other bases prohibited by law.  The statistics show very clearly that communities of color were hit especially hard during the financial crisis.  All Americans saw drops in their household wealth, but African-Americans and Hispanics experienced the steepest drops.  This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals…We made it clear last year that – like other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations.  From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate.  Every consumer, regardless of race, gender, or other characteristics protected by federal law, should have equal access to credit and an equal chance to pursue the pathway to opportunity.”  The disparate impact doctrine is unconstitutional at best and a collection of counter-productive left-wing class warfare victimization claptrap at worst.

It was quite obvious from his remarks that CFPB Director Cordray believed that the United States was a nation statistically overflowing with victims and some were more victimized than others.  That is a distorted concept of what a level playing field should be.  The zealous application of the disparate impact effects test is unlikely to assure anyone access to increased prosperity and instead could bring the financial services marketplace to a screeching halt – and subsequently trigger widespread non-discriminatory austerity as a result.  Would that be consistent with the disparate impact doctrine?  Talk of social responsibility needs to be realistic.  It is more dangerous to promise too much than too little.  Despite the real social and economic advancement that has been made by ethnic minorities and other “protected groups” in this country, the federal government is still stuck in the 1960s.  Hopefully contemporary Americans believe in equal opportunity, not statistically-driven equality-mongering.  When it comes to the disparate impact doctrine, one can certainly hope that the U.S. Supreme Court Justices are true believers in equal opportunity rather than statistical quotas.

This is scary stuff. A number of my financial institution clients deem it a matter of safety and soundness to include within their contracts with vendors a provision that requires the vendor to perform background checks on employees who will perform services for the institution, especially if the employees will be involved in the handling of funds or sensitive information. Does that contractual requirement provide the vendor a legitimate business reason for performing the checks notwithstanding the potential disparate impact upon members of a protected class that contains a high number of ex-cons? On the other hand, is the financial institution subjecting itself to potential liability by imposing such a requirement and, if so, is it inserting itself between the rock of disparate impact and the hard place of unsafe and unsound practices?

The ideologues that are running the funny farm are forcing all of us to jump through the looking glass, head first.

Catch 22

Beating up Bank of America has become a national sport (one which this bolgger occasionally plays). However, every banker's blood boils vicariously when he or she reads about the latest Fair Lending Act lawsuit (with a pinch of alleged ECOA violations thrown into the soup for flavor) filed by the ironically named "Justice Department" against B of A. The Justice Department alleged that violations occurred because the bank required home loan applicants who relied on Social Security disability payments to meet "extra burdens," including providing letters from doctors that documented that income.

 

"Loan aplicants with disabilities should not be subjected to invasive requests for medical information from a doctor when they applying for credit," said Thomas Perez, assistant attorney general in the Justice Department's civil rights unit.

 

Perez is the same guy who's been pushing the envelope on "disperate impact" claims. At least, he's been pushing them until they reach the US Supreme Court, at which point he backs off, and urges others with similar claims to back off, because he understands that the SCOTUS is likely to blast him out of the water. It's much easier to bring these cases with no SCOTUS precedent, so you can use the prospect of paying millions of dollars to defense lawyers as a cudgel to extract ransom from financial institutions who would rather settle than fight a protracted battle with an unaccountable enemy. That's what Bank of America apparently decided.

An especially irksome aspect of this latest case is raised by the bank.

 

"The government's position has been inconsistent regarding whether a doctor's note should be requested," the bank said in a statement. "HUD determined this policy is in compliance for its loans, yet suggests it somehow violates the Fair Lending Act for non-HUDS loans. Same statute, same alleged conduct, different result. We're being accused of wrongdoing by the government for following a policy the government approved."

 

Welcome to 1984.

Clarity

I'm in the midst of a road trip this week in the service of the Dark Side of The Force, but before I "go dark" until next week, I'd like to give my "props" to the two NAFCU compliance officers who've taken over postings at the NAFCU Compliance Blog from Anthony Demangone (who was kicked upstairs to the COO's job). Last week, Sarah Loats Zimmerman had a useful clarification about the upcoming changes to the FCRA Adverse Action model forms. As Sarah points out, Dodd-Frank mandated a change to the FCRA form, not the Regulation B form, but since many lenders combine the notices where appropriate, the FRB issued a proposed combined model form. The effective date for the new form is July 21, 2011, so a final form should be issued shortly. If your bank has been confused about this issue, Sarah's post should help clear up that confusion.

On Friday, Steve Van Beek wrote his second post of the week (and revised an earlier post) regarding the second notice that must be given regarding noninterest-bearing transaction accounts. While Steve discusses some other notices that are required in regulations that apply to credit unions, the discussion should be useful to banks and other financial institutions, which have similar regulations. It's another fine instance of compliance officers clarifying less-than-clear regulations inflicted upon financioal institutions by lawyers. For that, you have to give both Steve and Sarah a hat tip.

Slow Learners

I have nothing personal against the State of Alabama nor the city of Birmingham. Nevertheless, I did wonder in exactly what country Compass Bank might be doing business, since it apparently hasn't caught onto the Equal Credit Opportunity Act, which has been in effect in the United States since 1975.

The Justice Department launched an investigation into Compass' automobile lending practices after the Federal Reserve Board, in a routine 2003 examination, found "reason to believe that Compass Bank's loan pricing procedures and directives constituted a pattern or practice of discrimination," according to a news release Friday.

In its complaint, the Justice Department alleged the Birmingham-based bank had violated the Equal Credit Opportunity Act by charging car loan co-applicants who were not married to one another higher rates than married couples.

In a consent order filed in federal district court in Birmingham, Compass has agreed to pay as much as $1.75 million plus interest to unmarried co-applicants who were charged higher rates. It also will beef up its equal credit opportunity training for employees who set car loan rates. The bank also is required to maintain changes to its lending procedures already in place that explicitly ban distinctions based on marital status.

I suspect that what really set the feds off was the 10% discount given to married cousins (25% to brother/sister couples).

After 32 years, you'd think you'd be able to get the hang of it, wouldn't you?

On the other hand, 30 years ago, when I was a young sprout toiling as an in-house counsel at a large (and long-since acquired) financial institution in the Rocky Mountain West, the bank's executive vice president thought that it would be a great idea for me to sit on the bank's residential loan committee, obviously believing (correctly, I think) that "real world" experience would bring me up to speed faster than sitting in my ivory tower in the legal department. On my first day with the loan committee, the very first loan application considered was that of an unemployed, unmarried, African-American mother with no income, no assets and no third party guarantor or co-borrower to offer, who had applied for a loan to buy a home. It was a testament to the loan officer's desperate need for income that he'd even submitted such a hopeless case.

A senior vice president looked across the conference table at me, curled his lip, and sneered, "I suppose that ECOA law means that there's no way we can deny this application." I waited a few beats to see if he was joking, but everybody stared at me with brows furrowed, and it was quickly apparent that he, and the rest of the committee, were completely serious.

I asked, "If I had filed that application, and the only thing that was different on it was that I was a married white man rather than a single black woman, would you make the loan to me?"

"Hell, no," he responded.

"There you go," I grinned.

"Unless you were in medical school, that is," I added helpfully. "Everybody knows those doctors are good for it." Everyone else nodded in agreement.

That was a day when it became clear to me that a man would have be pretty damn stupid not to be able to make a living in the banking business.

It's nice to see that over the decades, some things change little, if at all.