By Toby Graham, Compli
To understand what’s ahead for the Consumer Financial Protection Bureau, you need to understand where it’s already been. Before you continue, make sure to read our recent articles about disparate impact and fair lending in the Trump Era for background information.
All caught up? Good. Let’s pick up where we left off: with the CFPB frustrated by settlements with multiple auto finance companies, and moments before a Supreme Court decision that clarified the theory of disparate impact. (Again, we would like to thank Michael Benoit for providing the material used to create this article.)
The Supreme Court’s disparate impact challenge
The aforementioned Supreme Court case, Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc. [PDF], did not deal with the Equal Credit Opportunity Act, but the Fair Housing Act, which has similar but not identical anti-discrimination language. Even though the case centered on a different set of laws and market conditions, it nonetheless touched on disparate impact, and the series of events it set in motion propelled the CFPB to take a different approach to regulation auto financing.
The dispute started when Inclusive Communities objected to the way the Texas agency distributed tax credits to developers, feeling that it the way it was done disparately impacted minority classes in the areas that didn’t receive credits. Thus, the Court had to determine whether there was a cognizable claim for disparate impact under the Fair Housing Act.
Ultimately, the majority opinion written by Justice Kennedy asserted that the Fair Housing Act supported a disparate impact claim based on “results-oriented language” in the statute. This was great news for the CFPB and consumer advocates, but Kennedy was careful to word his opinion in a way that discouraged future litigants from abusing the claim:
- First, he wrote, a claimant would need to identify a specific policy causing the discrimination.
- Second, an argument cannot be based on statistical evidence alone, since data can be easily manipulated and re-contextualized.
- Third, the claim must demonstrate causality, not merely correlation, between the policy and the alleged discriminatory effect.
- Lastly, Kennedy wrote that any plaintiff in a disparate impact case needs that a less discriminatory way to meet the legitimate goal of the policy exists.
The effect on the CFPB
Think back to the Ally Bank, Fifth Third Bank, Toyota, and Honda cases—all focused on the evidence of discrimination, but none took into account point #4 above: the legitimate business goal. Neither the CFPB or the entities it fined questioned whether there was another way of doing business that didn’t cause disparate impact.
And that’s not all. The Supreme Court sent Inclusive Communities back to the District Court, where it was eventually dismissed on the basis of #2: the prima facie case was nothing more than statistical evidence.
So, while Inclusive Communities initially looked like a victory for those fighting against disparate impact, the legal test it established placed a heavier burden on the CFPB during Equal Credit Opportunity Act litigation. Essentially, the agency was more likely to lose. This, combined with Trump’s election, dissuaded the CFPB from pursuing fair lending enforcement against indirect finance companies, and led the agency to shift its focus to supervisory action instead.
Does this mean auto dealers are off the hook?
Short answer: no. The Supreme Court’s clarification of disparate impact is not a license to discriminate, and the CFPB’s new focus does not forgo enforcement against auto lenders entirely.
Dealers should continue to monitor their fair lending programs, as the risks are too great to ignore: Owners could be liable individually for disparate treatment claims against a customer or class of consumers. Plus, finance companies and banks will likely continue to monitor dealers for fair lending violations, and any sign of non-compliance could lead to the loss of critical relationships and operating capital for your business.
Simultaneously, expect at least a few states (such as California, New York, and Illinois) to pick up the CFPB’s slack and escalate enforcement against lenders.
Regardless of what the future holds, disparate impact and even the CFPB itself represent legal apparatuses, not the regulatory system in its entirety. Other cases, arguments, and agencies will come along, and just because you happen to be in compliance today does not ensure your business’s well-being tomorrow. Ongoing fair lending compliance is part of any robust compliance management solution.
From policy and procedure management to training and e-signatures, Compli’s automated CMS allows dealers to address every area essential to your compliance program. A singled system that manages all of these tools with automated workflows is critical to staying nimble in this type of dynamic regulatory atmosphere. Our solution also to ensures that you can track and measure all customer complaints on all your channels, so you can generate proof of compliance for both CFPB examiners and your capital resources.
Complí provides a cloud-based solution that manages compliance activities across your workforce. This makes compliance hassle-free, saves you time and money, and protects your business.