Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees
On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.
According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.
FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”
District Court dismisses time-barred mortgage discrimination claims
On March 17, the U.S. District Court for the Northern District of Georgia agreed that claims against a group of mortgage lenders for conduct arising prior to November 2013 were barred under the two-year statute of limitations of the Fair Housing Act (FHA). Plaintiffs Cobb County, DeKalb County, and Fulton County, Georgia (collectively, “Counties”) alleged that the defendants “engaged in, and continue to engage in, discriminatory schemes that expose borrowers to unreasonable levels of risk; needlessly inflate interest rates, penalties, and fees; generate unauthorized and inflated charges for default related services; and lead to higher foreclosure rates among minority borrowers.” According to the Counties, these alleged practices have caused them to incur financial injury, including foreclosure-related costs, loss of property tax revenue, increased segregation, and organizational harm to County departments and authorities due to the forced reallocation of funds to address harms caused by the defendants’ actions. The Counties filed a complaint on November 20, 2015, asserting three counts related to disparate impact and disparate treatment theories under the FHA. Defendants moved for partial summary judgment on statute-of-limitations grounds, arguing that the Counties’ allegations are time-barred because they are based on allegedly discriminatory conduct occurring before November 20, 2013. Defendants further contended that the Counties could not “allege a ‘continuing violation’ that tolls the statute of limitations for each allegedly discriminatory act until the continuing violation ends because [a plaintiff’s] knowledge of a claim, or reason to have knowledge of a claim, cuts off equitable tolling of the statute of limitations for claims based on a continuing violation, and the Counties knew or should have known of their FHA claims at least as of May 2011.”
The court agreed with the defendants, pointing out that, among other things, there is “copious circumstantial evidence” that the Counties knew or should have known of their claims prior to May 2011, including well publicized allegations against the same defendants for similar conduct, and their retention of outside counsel in 2010 to investigate potential discrimination claims. According to the court, while a reasonable jury could find that the Counties themselves did not know of their claims, the record left no doubt that the outside counsel “knew of the claims prior to the statutory period, or would have known of the claims if he conducted himself with reasonable prudence.” Because the outside counsel’s “knowledge is imputed to his clients, no reasonable jury could find in the Counties’ favor on the statute-of-limitations issue.”
Special Alert: CFPB revises UDAAP manual to include discriminatory practices
On March 16, the Consumer Financial Protection Bureau announced significant revisions to its Unfair, Deceptive, or Abusive Acts or Practices exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. Congress has enacted several statutes that outlaw discrimination on specified prohibited bases, including the Equal Credit Opportunity Act (ECOA), which generally makes it unlawful to discriminate on a prohibited basis when extending credit and which the CFPB is authorized to enforce. With this announcement, the Bureau made clear its view that any type of discrimination in connection with a consumer financial product or service could be an “unfair” practice — and therefore the CFPB can bring discrimination claims related to non-credit financial products (and other agencies that have UDAP authority may follow in the CFPB’s lead).
FTC provides 2021 ECOA summary to CFPB
On February 23, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- The FTC filed a joint amicus curiae brief with the CFPB, DOJ, and Federal Reserve Board in the U.S. Court of Appeals for the Seventh Circuit last December asserting that the term “applicant,” as used in ECOA and its implementing rule, Regulation B, includes both those currently seeking credit as well as persons who have sought and have received credit (i.e., current borrowers). (Covered by InfoBytes here.)
- Last October, the FTC released a staff report, Serving Communities of Color, that discusses the Commission’s enforcement and outreach efforts related to the impact of fraud on majority Black and Latino communities. One of the studies examined disparities related to payment methods received from consumers who live in communities of color compared to consumers who live in majority White communities. (Covered by InfoBytes here.)
- The FTC’s Military Task Force continued to work on military consumer protection issues, including military consumers’ “rights to various types of notifications as applicants for credit, including for adverse action, and information about the anti-discrimination provisions, in the ECOA and Regulation B.”
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA, among others.”
The summary also highlighted FTC ECOA enforcement actions, business and consumer education efforts on fair lending issues, as well as blog posts discussing discrimination and potential bias affecting protected classes and the risks of using artificial intelligence in automated decision-making.
HUD proposes restoring 2013 discriminatory effects rule
On June 25, HUD published a notice of proposed rulemaking (NPRM) that would rescind the agency’s 2020 disparate impact regulation (2020 Rule) and reinstate the agency’s 2013 rule (2013 Rule). The 2020 Rule (covered by a Buckley Special Alert) was intended to align its disparate impact regulation, adopted in 2013, with the U.S. Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. The 2020 Rule included, among other things, a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. Prior to the effective date of the 2020 Rule, the U.S. District Court for the District of Massachusetts issued a preliminary injunction staying HUD’s implementation and enforcement of the 2020 Rule.
After a period of reconsideration, “HUD is proposing to recodify its previously promulgated rule titled, ‘Implementation of the Fair Housing Act’s Discriminatory Effects Standard’, which, as of the date of publication of this [NPRM], remains in effect due to the preliminary injunction,” the NPRM stated, adding that HUD “believes the 2013 Rule better states Fair Housing Act jurisprudence and is more consistent with the Fair Housing Act's remedial purposes.” HUD emphasized that the 2013 Rule codified longstanding judicial and agency consensus concerning discriminatory effects law. “Under the 2013 rule, the discriminatory effects framework was straightforward: a policy that had a discriminatory effect on a protected class was unlawful if it did not serve a substantial, legitimate, nondiscriminatory interest or if a less discriminatory alternative could also serve that interest,” HUD said in its press release. “The 2020 rule complicated that analysis by adding new pleading requirements, new proof requirements, and new defenses, all of which made it harder to establish that a policy violates the Fair Housing Act. HUD now proposes to return to the 2013 rule’s straightforward analysis.” Comments on the NPRM are due August 24.
Acting comptroller discusses bias in appraisals
On June 15, OCC acting Comptroller Michael J. Hsu delivered remarks during the CFPB’s Virtual Home Appraisal Bias Event to raise awareness on the importance of reducing bias in real estate appraisals. The event included discussions with civil rights organizations, housing policy experts, and other federal agencies on how bias can occur in real estate appraisals and automated valuation models. Biased appraisals, Hsu noted, have a large impact on lending and contribute to inequity in housing values. He pointed to data from studies showing that homes in Black neighborhoods are valued at approximately half the price as homes in neighborhoods with few or no Black residents. This difference has created a $156 billion cumulative loss in value across the country for majority-Black neighborhoods, Hsu stated. He further emphasized that “[w]hile appraisers and the appraisal process are not often seen as parts of the banking system, there are clear intersections. Banking regulations require appraisals on certain transactions, and banks rely on third-party appraisals in their underwriting and overall risk management practices. Regulators, including the OCC, expect banks to ensure their vendors treat customers fairly and do not discriminate, and we are seeing banks held accountable for discrimination in appraisals they use.” Hsu added that holding banks accountable, while necessary, is not enough to solve the problem of biased appraisals, and that a solution will require collaboration between all stakeholders, including the attendees participating in the Bureau’s event.
District Court allows county’s FHA claims to proceed
On June 1, the U.S. District Court for the Northern District of Illinois denied a national bank’s motion to dismiss claims that its allegedly discriminatory mortgage lending practices violated the Fair Housing Act. According to a complaint filed by the County of Cook in Illinois (County), the increase in foreclosures during the relevant time period were proximately caused by the bank’s mortgage practices, and caused the County to incur financial injury, including foreclosure-related and judicial proceeding costs and municipal expenses due to an increase in vacant properties. The bank filed a motion to dismiss, arguing that that the County did not have standing to sue because “the judicial proceedings and other activities associated with the additional foreclosures” actually “yielded a net benefit to the County.” The court disagreed, ruling that all the County had to do was show a reasonable argument that the bank’s lending practices resulted in foreclosures. The bank “does not dispute that the County has properly alleged in its complaint a financial injury sufficient, at least at the pleading stage, to support standing,” the court wrote.
Biden administration to reinstate fair housing rules
On April 12, the Office of Management and Budget posted notices pending regulatory review related to two HUD fair housing rules rescinded under the Trump administration. The first notice announces a pending proposed rule to reinstate HUD’s Discriminatory Effects Standard related to a September 2020 final rule issued by the agency, which amended its interpretation of the Fair Housing Act’s 2013 disparate impact standard. As previously covered by a Buckley Special Alert, the final rule was intended to align HUD’s 2013 Rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs et al. v. Inclusive Communities Project, Inc. The final rule included, among other things, a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. Earlier in January, President Biden directed HUD to examine the effects of the final rule, emphasizing that HUD has a “statutory duty to ensure compliance with the Fair Housing Act.” (Covered by InfoBytes here.)
The second notice relates to a pending interim final rule: Affirmatively Furthering Fair Housing; Restoring Statutory Definitions and Certifications. As previously covered by InfoBytes, last July HUD announced plans to terminate the 2015 version of the Affirmatively Furthering Fair Housing (AFFH) rule, and proposed a new final rule titled “Preserving Community and Neighborhood Choice.” At the time, HUD stated that the AFFH rule was, among other things, overly burdensome, costly, and ineffective.
NYDFS finds credit card underwriting showed no evidence of wrongdoing
In March, NYDFS released a report detailing the findings of an investigation into whether a global technology company and a New York state-chartered bank allegedly discriminated against women when making underwriting decisions for a co-branded credit card. According to the report, in 2019, allegations were made that the bank offered lower credit limits to women applicants and unfairly denied women accounts. NYDFS launched a fair lending investigation into the allegations and reviewed underwriting data for nearly 400,000 New Yorker residents, but ultimately found no evidence of unlawful disparate treatment or disparate impact. Among other things, the report noted that the bank “had a fair lending program in place for ensuring its lending policy—and underlying statistical model—did not consider prohibited characteristics of applicants and would not produce disparate impacts.” The bank also identified the factors it used when making the credit decisions, including credit scores, indebtedness, income, credit utilization, missed payments, and other credit history elements, all of which, NYDFS stated, appeared to be consistent with its credit policy.
Biden directs HUD to examine disparate impact rule
On January 26, President Biden issued an Executive Order (E.O.) directing the secretary of HUD to examine the effects of the September 2020 final rule amending the agency’s interpretation of the Fair Housing Act’s 2013 disparate impact standard (2013 Rule). As previously covered by a Buckley Special Alert, the final rule is intended to align its 2013 Rule with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs et al. v. Inclusive Communities Project, Inc. and among other things, includes a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims. The E.O. emphasizes HUD’s “statutory duty to ensure compliance with the Fair Housing Act,” and requires the HUD secretary to take any necessary steps, “to implement the Fair Housing Act’s requirements that HUD administer its programs in a manner that affirmatively furthers fair housing and HUD’s overall duty to administer the Act (42 U.S.C. 3608(a)) including by preventing practices with an unjustified discriminatory effect.”
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit