‘Disparate impact’ theory must wait for day in court

Jim Henry is a special correspondent for Automotive News.

Opponents of the “disparate impact” theory, which the Consumer Financial Protection Bureau is employing to prove discrimination in auto finance, were hoping the theory would get its day in court next month before the U.S. Supreme Court -- and lose.

But the town council of Mount Holly, N.J., voted last week to settle a housing discrimination lawsuit that would have tested the disparate impact theory, and specifically whether discrimination has to be intentional to be actionable.

The CFPB is applying the disparate impact theory to support its belief that auto lenders shouldn’t let dealerships set their own level of dealer reserve. The dealer reserve, also called dealer markup, is the profit dealerships make from adding a small amount of interest to finance contracts negotiated at the dealership.

The CFPB says dealer discretion in setting the customer’s interest rate can lead to a disparate impact on legally protected classes such as minorities. That is, the legally protected groups pay more.

CFPB Director Richard Cordray has stressed that a disparate impact qualifies as discrimination even if it’s unintentional. Opponents of the disparate impact theory disagree, including the American Financial Services Association, which filed a brief in the New Jersey case in September.

In the late 1990s and early 2000s, auto lenders settled class-action lawsuits that relied on the disparate impact theory to support discrimination claims. The settlements included voluntary caps on dealer reserve. The CFPB says those caps are no longer adequate to eliminate discrimination.

Until the next test case comes along, legal experts say it appears there’s nothing stopping the CFPB from pursuing the disparate impact theory.

You can reach Jim Henry at autonews@crain.com

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