Tag Archive | "disparate impact"

Disparate Impact 2.0


There is a knock on your favorite dealer’s door. He opens it to find a representative from his primary indirect lender, who announces they are going to do an unannounced deal-jacket audit to check for ECOA compliance. This could turn out to be a very long day, depending on the compliance program the dealer has in place.

Are your dealers ready for the next knock on the door? They should be, because federal regulators are putting immense pressure on banks and finance companies, and dealers are feeling it. Let’s discuss what auditors are looking for and how a clear understanding of the theory of “disparate impact” can help you prepare your dealers for any inquest.

Just a Theory

By way of refresher, the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) use disparate impact to go after indirect automotive lenders under ECOA, which is shorthand for the Equal Credit Opportunity Act. The ECOA generally makes it illegal to discriminate based upon race, gender, age, national origin, religion and other factors. Many car buyers are considered members of one or more protected classes under the law.

Under the disparate impact theory, an analysis is needed to determine if members of protected classes are being treated fairly compared to similarly situated individuals who are not in a protected class. To determine whether protected class members were involved in automobile loan transactions, the CFPB uses something called the Bayesian Improved Surname Geocoding (BISG) methodology.

The BISG theory is based on census data, and census data, in turn, is based on citizens making their own (unverified) report of their own ethnic background and providing their last name. BISG takes a portion of a ZIP code and list of surnames and concludes (arbitrarily) that if 80% or more of the census group were in a protected class, then 100% of their neighbors are deemed to be in the protected class as well.

The assumption here is that 80% somehow equals 100%. The further assumption is, for instance, that if a certain percentage of members of a protected class have a certain surname, then that percentage is present in the ZIP code being analyzed.

This whole process is sometimes referred to as using a “proxy,” since indirect automobile lenders cannot directly collect this information. Quite understandably, this use of BISG/proxies has been referred to as “junk science” by no less than the House of Representatives’ Financial Services Committee. In fact, the chairman of that committee, Rep. Jeb Hensarling (R-Texas), has gone so far as to refer to the CFPB as a “dangerously out of control agency” and said the CFPB is essentially “inventing” discrimination by using these methods.

While the withering criticism of the CFPB’s use of shaky theories to establish a disparate impact case is encouraging, it does not eliminate this practice, and disparate impact claims continue to exist in 2016. … Or do they?

Reason for Hope

Last June, the U.S. Supreme Court issued a decision in the Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc. The issue at hand was whether disparate impact theories can be used in a case arising out of the Fair Housing Act (FHA). Proponents of disparate impact theories and detractors of disparate impact theories both thought that the case may finally lay to rest any doubts about the validity of this theory.

In a 5-4 decision, the Supreme Court found that Congress intended to include disparate impact in the FHA. The CFPB might have claimed a total victory if the justices hadn’t gone on to say that mere statistical evidence is not enough to sustain a disparate impact claim. On the contrary, the Supreme Court imposed what they called a “robust causality requirement,” demanding proof that a particular policy caused the statistical disparity regarding the protected class.

This causation requirement gave renewed optimism to those seeking to eliminate the disparate impact theory from the CFPB’s arsenal. The Supreme Court also described a “valid interests” defense: If the underlying policies or policy was necessary to achieve a “valid interest,” then the disparate impact claim could be defeated. Keep in mind that the Inclusive Communities case was decided under the auspices of the FHA and not the ECOA, as applied to indirect automotive lenders.

So what is the final takeaway? Disparate impact claims appear to have survived the FHA case, although defenders of these claims have gained some insight into valid defenses, too. Neither side can claim complete victory. That leaves you, the agent, with two key questions to ask of all your dealer clients:

  • Does your dealership have written policies and procedures regarding your credit policy?
  • Does your dealership maintain written documentation of valid business reasons for deviating from your written credit policy?

If your dealers consistently apply and document their credit policies as part of a comprehensive compliance management system, their next unannounced audit visit from an indirect lender will go much more smoothly.

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CFPB Accused of Using ‘Junk Science’ to Regulate Auto Lending


WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB)’s Richard Cordray was met with hostility Tuesday as House Financial Services Committee Chairman Jeb Hensarling (R-Texas) attacked the “junk science” he said the bureau is using to impose regulations on indirect auto lending. The hearing occurred a day before the committee passed two bills aimed at reforming the bureau.

The CFPB has been pressuring auto lenders — most recently Fifth Third Bank — to cap the amount their dealer partners can mark up the interest rate on retail installment sales contracts as compensation for arranging a car buyer’s financing. The bureau alleges such practices result in minority car buyers paying higher rates for auto loans. But during the CFPB’s semi-annual report to Congress Tuesday, lawmakers repeatedly pointed to studies that show the CFPB’s method of determining the presence of discrimination in auto lending has high error rates.

Earlier this month, American Banker reported that internal CFPB documents acquired by the news source — including a memo from assistant director of the bureau’s Office of Fair Lending, Patrice Ficklin — indicate that bureau officials are aware that the agency’s methodology overestimates disparities.

“I believe I am roughly familiar with various memos I have seen,” Cordray said when asked about Ficklin’s memo during Tuesday’s hearing.

The director went on to say that “‘Accurate’ is in the eye of the beholder,” and that the regulator is working to find the most reliable method possible. Those methods, however, do not include taking the creditworthiness of car buyers into account.

“I don’t think it’s fair to say that credit scores can explain the disparities,” Cordray told Rep. Hensarling.

In its joint enforcement action with the Department of Justice Monday, the CFPB claimed that Fifth Third Bank’s dealer markup policy resulted in African American and Hispanic car buyers paying, on average, $200 more for car loans than similarly situated Caucasian customers.

“The CFPB have done some good things, but this business with the auto dealers is a bad thing,” said Rep. David Scott (D-Ga.) at Tuesday’s hearing. “… You based that on a report that was shamefully flawed, it was inaccurate, and to tell you the truth, it was downright insulting to African Americans because you just assumed our last name was Johnson or Williams or Robinson or maybe even Scott.”

The hearing preceded the House Financial Services Committee’s approval of two bills, H.R. 957 and H.R. 1266, that aim to restructure the CFPB to provide more transparency and oversight.

Sponsored by Rep. Steve Stivers (R-Ohio), H.R. 957 would create an independent inspector general for the bureau. That individual would be nominated by the president and confirmed by the senate. It passed the committee by a 56-3 vote.

H.R. 1266, which the committee passed by slimmer 35-24 vote, would remove the CFPB from within the Federal Reserve System and reestablish it as a standalone agency governed by a five-member, bipartisan commission. All powers of the CFPB would remain unchanged.

“Consumers are understandably concerned about our economy. We remain stuck in the worst recovery of the last 70 years,” said Hensarling after the committee’s approval of both bills. “At the same time, they’re concerned that Washington is taking away their choices and raising many of their costs. Our committee has the privilege — and responsibility — to fight for them.”

Testifying before the House Financial Service Committee, Cordray offered auto finance data countering the belief that the bureau’s activities have stunted market growth. In the first half of 2015, he noted, more than 14 million consumers obtained new auto loans, an 8% increase from a year ago.

“For auto loans, this marks a 45% increase since 2011 (when the bureau began operations) and a nine-year high,” he noted, with Rep. Maxine Water backing the bureau’s work during her opening statements at the hearing.

“It is unfortunate, however, that rather than working to encourage good behavior in our markets and support American consumers, opponents on this committee continue to promote measures to eliminate or weaken the bureau,” the lawmaker said. “They perpetuated false narratives of an agency that is unaccountable and lacks transparency despite the record number of times [Cordray has made himself] available to Congress and the many checks and balances contained in Dodd-Frank.

“So what we’re seeing now that the CPFB has celebrated its fourth birthday is that the dire predictions that the Republicans on this committee have made have not come true.”

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House Action on Disparate Impact Not Affecting CFPB; Remains Dealer Concern


CRYSTAL LAKE, Ill. – Contrary to news reports, the U.S. House of Representatives’ vote to eliminate the Department of Justice’s use of disparate impact does not negate the Consumer Financial Protection Bureau’s (CFPB) use of the legal theory in auto finance cases even if the bill passes the Senate and is not vetoed by the President, said Automotive Compliance Consultants.

Unfortunately, an article appearing June 4 stated the House of Representatives passed an amendment to H.R. 2578, the Fiscal Year 2016 Commerce, Justice, and Science Appropriations Act, that would bar the Department of Justice from using funds for litigation in which the regulator seeks to apply the disparate impact theory.

The article went on to discuss the significance of the amendment to the use of disparate impact by the Consumer Financial Protection Bureau to support actions in automobile finance.

“The amendment to H.R. 2578 will have no effect on the CFPB’s use of the legal theory in auto finance,” said David R. Missimer, general counsel for Automotive Compliance Consultants. “The reason for this is the amendment is limited, and only bars the use of appropriated funds by the Department of Justice to bring Fair Housing Act enforcement actions that rely on an allegation of liability under the HUD Disparate Impact Rule.”

The amendment voted on states: None of the funds made available in this Act may be used by the Department of Justice to enforce the Fair Housing Act in a manner that relies upon an allegation of liability under section 100.500 of title 24, Code of Federal Regulations (Rule prohibiting discriminatory effect).

“The Act if passed will not preclude the Department of Justice from continuing to use disparate impact in Equal Credit Opportunity Act cases,” Missimer noted. “Thus, disparate impact very much remains an issue for dealers and finance companies.”

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7 Financial Organizations Back Disparate Impact Amendment


Washington, D.C. — Seven financial organizations issued a letter to the U.S. House of Representatives on May 29 in support of an amendment to the Commerce, Justice, Science and Related Agencies Appropriations Act for Fiscal Year 2015. The amendment would prohibit funds made available by the act from being used for litigation that relies on the “disparate impact” theory to prove discrimination.

The Consumer Financial Protection Bureau and the U.S. Department of Justice have used the legal theory in recent months to penalize auto lenders. In December, the agencies reached a $98 million settlement with Ally Financial and Ally Bank over allegations that it discriminated against minority borrowers in its auto lending program.

Under the disparate theory, lenders can be held responsible for discriminatory practices — even if the discrimination was not intentional.

“…even when a lender takes every step to prevent discrimination and treats all consumers fairly and equally, a neutral policy can serve as a basis for very serious and harmful claims in the absence of intentional discrimination,” the letter read, in part. “Smaller lenders, in particular, will find it difficult to manage this type of litigation risk.

“Left unchecked, disparate impact enforcement could increase the cost and undermine the availability of credit throughout the economy.”

The American Bankers Association, the American Financial Services Association, the Consumer Mortgage Coalition, the Credit Union National Association, the Independent Community Bankers of America, the Mortgage Bankers Association, and the National Association of Federal Credit Unions asked that members of the House of Representatives vote in favor of Rep. Scott Garrett’s (R-N.J.) amendment to H.R. 4660. It passed the House on May 30 by a 216-to-190 vote.

The appropriations bill funds the Department of Commerce, the Department of Justice, the National Aeronautics and Space Administration, the National Science Foundation, and other related agencies.

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