The Supreme Court’s decision to endorse a broad interpretation of a legal theory used to fight housing discrimination provides ammunition for groups at odds over the CFPB’s power to pursue discrimination in auto lending.
The legal theory -- disparate impact -- holds that a policy or practice can be deemed discriminatory and illegal if it has a disproportionate adverse effect on minorities or other protected classes, even if the discrimination was unintentional.
The Consumer Financial Protection Bureau has used disparate impact to attempt to prove illegal discrimination in auto finance.
The court’s ruling affirming that disparate impact claims are permissible under federal housing law could actually work in auto lenders’ favor, one dealer lawyer said.
Len Bellavia, of Bellavia Blatt & Crossett in New York, pointed to a provision in the ruling that could be positive news for auto lenders. It endorses having clear proof of disparate impact, he said.
According to the court’s ruling, issued last week, “a disparate-impact claim relying on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity. A robust causality requirement is important in ensuring that defendants do not resort to the use of racial quotas.”
That language could prove useful to the auto lending industry because it holds that a plaintiff must prove his or her case with reliable data, Bellavia said.
“The court laid out requirements that you can’t assume a disparate impact case is valid. You need to rely on data that makes the case,” Bellavia said. “That actually helps lenders that are fighting the CFPB because it validates their defense.
“That’s the language that auto lenders and the NADA will be very intrigued by in defending CFPB initiatives,” he added.
The case, Texas Dept. of Housing and Community Affairs vs. The Inclusive Communities Project, alleges that Texas violated the 1968 Fair Housing Act in the way it allocated low-income housing tax credits in Dallas. It claims the Texas department of housing reinforced residential segregation by consistently allocating the credits in black neighborhoods instead of distributing them across all housing communities, thus promoting integration.
According to the CFPB, auto lenders’ practice of allowing dealerships to set their own amounts of dealer reserve -- the share of a car buyer’s interest rate that the dealership earns for arranging the loan -- results in minorities and other legally protected groups paying higher interest rates than other borrowers with similar credit profiles. That disparate impact amounts to illegal discrimination, the CFPB says.
The National Automobile Dealers Association said in a statement that the Supreme Court decision does not address the relationship between disparate impact and the Equal Credit Opportunity Act, which auto lenders are subject to.
“Still, NADA and its members do not believe there is any place for discrimination in the marketplace, so we will continue to encourage the adoption of the NADA Fair Credit Compliance Policy and Program because it is the most-effective way of minimizing the potential for fair credit risk under ECOA,” the statement said.
NADA’s Fair Credit Compliance Policy and Program calls for capping dealer reserve at a set percentage, say, 2 percent, and documenting the reason for any instance when a dealership reduces the amount, say, to meet a competitors’ offering.
‘Embolden the regulators’
Auto finance attorney David Gemperle of Nisen & Elliott law firm in Chicago, believes Thursday's ruling could give the CFPB even more confidence to use the disparate impact standard in auto finance.
“It will embolden the regulators and could lead to some parties that were hoping for ECOA going to the Supreme Court to give up on pursuing that,” he said.
The Supreme Court is “willing to find that disparate impact claims are permissible regardless of the exact language of the anti-discrimination statutes,” he said.
For its part, the CFPB is not backing off from its anti-discrimination mission.
Director Richard Cordray, in a statement, said the agency is “responsible for enforcing the Equal Credit Opportunity Act.”
“We will continue our own work to ensure nondiscriminatory access to credit for all Americans,” he said.