From the outside, the Supreme Court’s ruling last month upholding disparate impact claims in housing discrimination lawsuits may look like a headache for auto dealers, but a provision in the decision could give the Consumer Financial Protection Bureau a hurdle that could work in dealers’ favor.
The disparate impact theory says that a policy can be considered discriminatory if it has a disproportionately adverse effect on minorities, even if no discrimination was intended. The CFPB has used the theory to attempt to show discrimination in auto lending.
The CFPB uses statistics to show that when auto lenders allow dealerships to set their own amounts of dealer reserve -- the share of a car buyer’s interest rate that the dealership makes for arranging the loan -- minorities end up paying higher interest rates than others borrowers with similar credit. The CFPB says that disparate impact, whether intentional or not, amounts to illegal discrimination.
But last month’s court ruling in a housing case says a disparate-impact claim that relies on a statistical disparity must point to a specific policy that caused the disparity.
The CFPB may be hard-pressed to do that because dealer reserve is not a policy “but rather a compensation method,” according to Paul Metrey, chief regulatory counsel for the National Automobile Dealers Association.
The ruling also implies that the disparity be shown using reliable data, another hurdle for the CFPB.
The information that the CFPB relies on to show disparate impact doesn’t clearly show race or ethnicity. The bureau uses the Bayesian Improved Surname Geocoding (BISG) method to infer race and ethnicity based on applicants’ addresses, names and census information.
The CFPB, along with the U.S. Department of Justice, used the disparate impact theory in late 2013 to show that Ally Financial’s use of dealer reserve enabled discrimination. Ally agreed to pay a $98 million settlement, although it vigorously denies allowing discrimination and still offers dealer reserve.
Now it seems the CFPB realizes the reliability of using the BISG method is questionable. The agency announced that the settlement administrator in the Ally case will begin reaching out to potentially affected customers. Customers who receive information on how to obtain their settlement funds must now prove that they are part of a minority group and therefore eligible to receive a payment.
If the Supreme Court’s housing decision translates to auto lending, a disparate-impact claim must count on reliable data and show a specific policy that caused the disparity. Without those two important pieces, there shouldn’t be a case.