disparate impact fair lending

Reg. SUBSCRIBE to Compliance Action to get access today! Fair Lending Software Vs. Fair Lending Monitoring. not, and such actions ultimately will not survive judi- 8. In effect, this result chills FHA requires a showing of intent to discriminate to innovation and reduces the breadth of credit available to establish claims of discrimination.4 Rather, these courts qualified borrowers, causing lenders to retreat from offering focused on cases decided under other laws and what the lending products and services that could increase vulnerability courts viewed as the broad purpose of the FHA. On the other hand, Disparate Impact occurs when a policy or practice is applied equally to all applicants but has a disproportionate, adverse impact on applicants from a protected group. Through the PFD Loan Program, the Canadian Red Cross aims to prevent drowning by increasing the availability of PFDs/life jackets and educating the public on how to use them. Raytheon Co. v. Hernandez, 540 US 44, 53 (2003) (emphasis and Hartmann, supra, n.40, 838 (2006). 10-1042, 2012 WL 1868063, 44. If a lender doesn't have any discretion - meaning that all applications from the financial institution are . previously, however, this legislative history post-dates the enactment of ECOA and cannot change the plain Unintended Consequences meaning of the statutory text. Accordingly, these concerned that they undertook great efforts to persuade efforts to support disparate impact are contrary to con- the City of St. Paul to withdraw its appeal.56 trolling law. 33. 39. 42. For terms and use, please refer to our Terms and Conditions Adam has written five e-books that he never published, hit a grizzly bear while driving in a National Park, and is an award winning photographer and musician (though he no longer takes photos nor plays any instruments). White shoppers and Black/African American shoppers were given similar credentials (the black/African American shopper actually had a better financial profile). 73. 2007); Hallmark Developers, Inc. v. Fulton County, 466 it applies to lending discrimination are under development .). In 2005, the on cases in which disparate treatment could be proven. The interagency fair lending examination procedures explain that there are essentially two types of fair lending violations recognized by the courts: Disparate impact and disparate treatment. Disparate impact occurs when you apply your policy neutrally (everyone gets treated the same); yet by virtue of your policy you cause a Disparate impact on a prohibited basis in your market. For more information on any topic discussed on this site, seek legal counsel. The impact of such a market change in census tracts with greater minority populations, like would be felt most substantially by high-risk consumers urban areas, which increases lender exposure to accusa- who rely on nontraditional products for access to credit. to the purposes of the enabling statute, [W]e would expand considerably the discretion and power of agen- Stifled Marketplace cies were we to interpret reasonably related to permit The mortgage-lending market is sustained and agencies to proscribe conduct Congress did not intend advanced through innovation and growth. Fair Lending Litigation and the Impact of Wal-Mart Stores, Inc. v. Dukes, 66 Consumer Fin. This content is for Premium Subscribers only. If you haven't done so already, make sure you check out our Compliance Clips - free 3-5 minute training videos on all topics of regulatory compliance. Thus, well-intentioned but misguided efforts to prevent Economic Instability discrimination may in effect increase minority borrowers Application of the disparate impact theory in fair exposure to predatory lending practices. Alexander, supra, n.67 at 286 n.6 (2001) (quoting with approval Development, No. Outright discrimination is one thing, but when discrimination is indirect, it is more difficult to recognize and measure. Fair Lending: The Impact of Disparate Impact . The use of disparate impact analysis by enforcement agencies is being questioned by the industry. Did one come from an easy real estate agent to deal with and one from a high maintenance real estate agent? Although the text of the Fair Housing Act (FHA) does not create liability for facially neutral activities with unequal The Theory effects, lower court decisions over the years have relied on The disparate impact theory of discrimination allows jurisprudence focused on other statutes with different lan- a party to establish discrimination based solely on the guage, agency guidance, and selective readings of legislative results of a neutral policy. 2018 American Bar Association I, Comment 6(a)-2. Part 202, Commentary 202.6 at 6(a)-2 (recodified at agency guidance cannot prohibit what Congress has 12 C.F.R. at 18269 (9th Cir. However, Disparate Treatment that is done on a prohibited basis is another story and may occur in patterns of treatment to certain types of customers. Outright discrimination is one thing, but when discrimination is indirect, it is more difficult to recognize and measure. After a period of time passes, such as ten years, this minimum loan amount policy may show to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live. In addition to a minimum loan amount, disparate impact can occur from other policies. 66. See, e.g., Perez, Thomas E., Speech to 15th Annual Community Naiman, Jeffrey P., The Fair Housing Act, Disparate Impact Reinvestment Act and Fair Lending Colloquium (Nov. 7, 2011), Claims, and Magner v. Gallagher: An Opportunity to Return to available at http://www.justice.gov/crt/opa/pr/speeches/2011/crt- the Primacy of the Statutory Text, 129 Banking L. J. A lender otherwise If fear of liability discourages lenders from creating and interested in growing its lending operations in an urban offering products suitable for such borrowers, a large seg- area with pronounced credit needs may thus choose not ment of consumers could be effectively denied access to to do so because of the significant risk, effectively depriv- responsible loan products. Nonetheless, these Supreme Court cases have not addressed the use of disparate Application of Doctrine in FHA Actions impact under the FHA directly, and federal regulatory and The notion that the Fair Housing Act (FHA) per- enforcement agencies with fair lending enforcement authority mits disparate impact claims originated in three lower seeking to achieve broad policy objectives increasingly seek court decisions in the 1970sUnited States v. City of to rely on disparate impact claims to advance their agenda. effects language to ECOA or otherwise change the basic dis- criminate against because of structure of the statute. Thanks for reading this article. Disparate impact occurs when you apply your policy "neutrally" (everyone gets treated the same); yet by virtue of your policy you cause a Disparate impact on a prohibited basis in your market. A traditional ity borrowers qualify for the product. An official website of the United States government. 1974). 1:13-cv-00966-RJL, Compl. Adam has taught hundreds of seminars and training sessions to thousands of bankers throughout the United States and teaches on all areas of regulatory compliance. To which the examiner asks what data do you have to substantiate that theory? The Policy parate impact claims.11 The final rule (HUD Rule) Statement addressed many aspects of the governments ostensibly authorizes private and governmental plain- fair lending expectations of banks and other entities tiffs to assert discrimination under the FHA based on engaged in lending activity. otherwise alter the discriminate against . the fair lending principles outlined in Regulation B. Fair lending laws also contain provisions to address predatory lending practices. I, Comment 6(a)-2. Example: Your investors allow for a 620 credit score. Jackson v. Birmingham Bd. When an Agency finds that a lenders policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by business necessity. The justification must be manifest and may not be hypothetical or speculative. For mortgage bankers, that means the MSAs you serve. 94-589, at 45 (1976); H.R. ity and to disregard legitimate risk-related factors, Luckily, a third case that raises issues substantially simi- thereby forcing insurers to provide and price insur- lar to those presented in Magner and Mount Holly may ance in a manner that is wholly inconsistent with be headed to the Supreme Court. See Graoch Assocs #33, L.P. v. Louisville/ Jefferson County Metro Human Relations, Commn, 508 F.3d at 34. For instance, you may get two emails from two separate prospects and decide to contact one of them that night versus both of them. 202.6(a) n.2. 2d 70, 77-79 (D.D.C. Rep. No. Advertisers and sponsors are not responsible for site content. E.g., Presley v. Etowah Cnty. Now many of you will jump to the defense and swear that you dont treat any client differently than the other. For a more detailed Staff Commentary into its commentary to Regulation B. 4. For terms and use, please refer to our Terms and Conditions V, 503, ECOA 701(a), 88 Stat. (emphasis in original)). As originally enacted, ECOA contained an antidiscrimination 27. 32. The 23. Type in your E-mail and we will keep you current! Freeman v. Quicken Loans, Inc. No. For example, certain loan products may be, 7 Banking & Financial Services Policy Report Volume 33 Number 2 February 2014 optimal for a limited subset of borrowers. City of Jackson, 544 US at 234 (quoting Griggs, 401 U.S. at 432 (emphasis in original)). The Supreme Court has explained treatment provisions of Title VII and the ADEA that when Congress uses the same language in two which the Supreme Court has clarified require a show- statutes having similar purposes, particularly when one ing of intent to discriminate. Lower to claims of discrimination based only on statistical outcomes courts subsequently followed these original three of objective and neutrally applied lending criteria. In other words, a specific policy of your financial institution can not inadvertently discriminate. April 8, 2019 in Compliance Reading Time: 2 mins read 0 Since the Consumer Financial Protection Bureau 's 2013 indirect automobile guidance was repealed last year, there have been no new public indirect automobile fair lending cases alleging disparate impact. In the justice system, the Supreme Court has just affirmed disparate impact as a basis for housing discrimination claims, regardless of explicit intent. Charleston Hous. This policy might exclude a high number of applicants who have lower income levels or lower home values than the rest of the applicant pool. 2005) (stating that the FHA permits disparate. Some examples follow: The OCC took the lead among the federal bank regulatory agencies in developing an approach to address unfair and deceptive marketing practices. For example, a lender may have a policy of not making single family home loans for less than $60,000. City of Jackson, 544 US at 23638. If you are going to add an overlay to pricing or underwriting perform proper due diligence: Moral to the Story: If you have any overlay, you must back it up with a business justification and reams of empirical data. The Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) protect consumers by prohibiting unfair and discriminatory practices. HUD reminded HUD, however, that its interpretations are bases its position on the holdings by federal courts of not entitled to deference when its interpretation goes appeals that the FHA permits disparate impact claims.59 beyond the meaning that the statute can bear.71 The Similarly, DOJin the interagency Policy Statement Court has previously explained that regulations that on Discrimination in Lendingbases its position on would proscribe conduct by the recipient having only a the holdings by federal courts of appeal prior to City discriminatory effect do not simply further the pur- of Jackson,60 despite the fact that City of Jackson now pose of [the statute]; they go well beyond that purpose shows that these lower court decisions are incorrect and are not entitled to deference.72 This analysis would and inconsistent with the language of the statute. In fact, the plaintiffs bar has erally not appropriate when the language of the under- argued that disparate impact liability can be found even lying statute is clear. So the examiners begin to look at your policies and practices and notice the credit score overlay. Critically, Section 703(a)(1) does 1. 2006); Graoch Assocs. This publication is a guide to the new Interagency Fair Lending Examination Procedures. F.3d 366, 371 (6th Cir. 2023 Compliance Cohort LLC. Policy Statement on Discrimination in Lending, April 15, 1994. cial scrutiny. lending matters also threatens to undermine traditional underwriting practices. Volume 33 Number 2 February 2014 Banking & Financial Services Policy Report 2 The Effects Test his status as an employee, because of such individuals The question before the Supreme Court in City race or age.22 The phrase otherwise adversely affect of Jackson was whether the Age Discrimination in was critical to the plurality opinions conclusion. Disparate Impact White Paper with Bonus Readiness Checklist! . Acree v. Republic of Iraq, 370 F.3d 41, 61 (D.C. Cir. Disparate Impact, Fair Lending and the CFPB-Part Four-Pricing Policies! Example of this are: Minimum loan amounts that exclude an area. 100). *Age is a prohibited factor provided the applicant has the capacity to enter into a contract. No court has ever decided a fair lending case under a theory of disparate impact on its merits. Title VII 703(a), 42 U.S.C. the text of the statute. L.Q. Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B. The Court focused on holding [in Griggs] represented the better reading of the Griggs v. Duke Power Co., in which it originally held statutory text.23 that Title VII permits disparate impact claims. It provides an overview of the new risk-based approach that examiners will use when assessing a Lender's compliance with the Equal Credit Opportunity Act (Regulation B) and the Fair Housing Act (FHAct). formulation found in Section 703(a)(1) of Title VII and Section 29. CFPB Bulletin 2012-04 (Fair Lending) (Apr. And even this may not help if your peers are able to do business in underserved areas without that overlay! Rep. 158 (2012). Disparate Impact Discrimination: American Oddity Or Internationally Accepted Concept? The Supreme Court has clarified protection cases to support its conclusion that the FHA per- that Wards Cove continues to apply to civil rights laws other mits disparate impact claims. These Although 11 of the 12 federal courts of appeal held district court decisions cannot be squared with the prior to City of Jackson that the FHA and ECOA permit Supreme Courts holding in City of Jackson and other disparate impact claims,45 decisions since 2005 have cases. 4. Implementation of the Fair Housing Acts Discriminatory statute. As at 24 C.F.R. Id., at *5. the City). How can lenders not only make good on their intent to operate fairly, but also demonstrate their compliance in a way that wards off fines and reputational damage? Freeman v. Quicken Loans, Inc. No. ABA has written to the federal agencies asking that they stop using disparate impact analysis in fair lending cases. Faced with the mortgage is not a realistic option for a large segment possibility of accusations of discriminatory lending, many of consumers. How Do You Calculate It? See, e.g., Random House Unabridged Dictionary, Discriminate 83 F.3d 1546, 1555 (5th Cir. Among the guidance mortgage-lending practices that have a disparate impact provided was a statement that liability for violations on a protected class of individuals or that otherwise of both the FHA and the Equal Credit Opportunity create, increase, reinforce, or perpetuate segregated Act (ECOA) could be based on evidence of disparate housing patterns, even if the practice is facially neutral impact.6 At the same time, the Federal Reserve Board and there is no evidence of discriminatory motivation.12 (FRB) amended its commentary to Regulation B Subsequent to HUD issuing its proposed rule on dispa- implementing ECOA to note that use of the disparate rate impact, the Consumer Financial Protection Bureau impact theory is appropriate.7 However, these state- (CFPB) also took the position, relying on Regulation B, ments were made in the context of a broad Policy that ECOA permits disparate impact claims.13 The DOJ Statement, which expressly recognized that factors such has similarly reaffirmed its position that both the FHA as borrowers income, continuity of income, adequacy and ECOA permit disparate impact claims.14 of collateral, and availability of funds to close objective considerations that often effect the decision Recent Supreme Court Jurisprudence on whether to make and how to price a loanremain Establishing Primacy of the Statutory Text relevant to credit decisions.8 Given the continued This relatively new reliance by the DOJ and other commitment to the notion that these objective factors government agencies on the disparate impact theory appropriately might effect the lending decision, gov- analysis is directly inconsistent with recent Supreme ernmental fair lending enforcement activity from 1994 Court jurisprudence setting forth the appropriate lim- until 2008 continued to be focused almost exclusively its in use of the disparate impact theory. With nearly 400,000 members, the ABA provides law school accreditation, continuing legal education, information about the law, programs to assist lawyers and judges in their work, and initiatives to improve the legal system for the public. Measuring and proving allegations of discrimination is not easy. Implementation of the Fair Housing Acts Discriminatory narrow view of the phrase [because of race] in the statute Effects Standard, 78 Fed.

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