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Financial Services Law Insights and Observations


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  • Ninth Circuit Reverses Denial Of Class Certification In Disparate Impact Case


    On April 24, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s denial of class certification in a disparate impact age discrimination case, holding that the court erred in considering merits issues when determining class certification. Stockwell v. San Francisco, No. 12-15070, 2014 WL 1623736 (9th Cir. Apr. 24, 2014). The case involves claims brought by a group of police officers on behalf of a putative class alleging workplace age discrimination in violation of the California Fair Employment and Housing Act. The class representatives allege that the city’s promotion policy had a disparate impact on employees over the age of 40. The district court denied the named plaintiffs’ motion to certify the class, holding that the claims failed to satisfy Rule 23(a)(2)’s commonality requirement because the named plaintiffs’ statistical analysis did not establish a general policy of discrimination under Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and failed to demonstrate that the policy caused any resulting disparate impact. On appeal, the court determined that in considering the statistical analysis, the district court improperly relied on merits issues to reach its conclusion rather than focusing on whether the questions presented were common to the members of the putative class. The Ninth Circuit held that “the officers have identified a single, well-enunciated, uniform policy that, allegedly, generated all the disparate impact of which they complain,” and that “whatever the failings of the class’s statistical analysis, they affect every class member’s claims uniformly.” Further, the court held whether the policy caused the disparate impact is a single significant question of fact common to all class members. The court reversed the district court’s holding on commonality, and remanded for consideration of other class certification prerequisites, including predominance.

    Class Action Fair Lending Disparate Impact Discrimination

  • House Financial Services Chairman Presses CFPB On Auto Finance Enforcement

    Consumer Finance

    House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter today to CFPB Director Richard Cordray once again pressing the CFPB for information about its March 2013 auto finance guidance and its actions since that time to pursue allegedly discriminatory practices by auto finance companies. That guidance, which the CFPB has characterized as a restatement of existing law, sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for the alleged effects of facially neutral pricing policies.

    The letter recounts numerous exchanges between members of Congress—including both Democratic and Republican members of the Committee—and the CFPB on this issue to demonstrate what the Chairman characterizes as “a pattern of obfuscation” by the Bureau. Mr. Hensarling explains that through a series of written requests—see, e.g. here, here, and here—as well as in-person exchanges, lawmakers have sought detailed information about the CFPB’s application of the so-called disparate impact theory of discrimination to impose liability on auto finance companies. The letter states that the CFPB has repeatedly refused to provide certain key information used in applying that theory through compliance examinations and enforcement actions, including information about regression analyses, analytical controls, and numerical thresholds employed by the Bureau.

    According to the letter, the CFPB has informed inquiring members that the CFPB’s fair lending tools and assessments are dependent upon a particular lender’s policies, practices, and procedures. Following the Bureau’s first auto finance fair lending action, announced in December 2013, the Chairman sought more specific information from the CFPB about how it applied its fair lending analysis in that case. The Chairman asserts the CFPB refused to provide the statistical analyses conducted in that case and CFPB staff who briefed committee staff were unwilling to respond to certain questions about the action, including “potential explanatory variables” and business justifications offered by the finance company.

    Seeking once more to obtain additional details about the CFPB’s fair auto finance theories and their application, the letter restates numerous previous requests and demands that the Bureau respond by March 13, 2014. Specifically, the letter once again seeks the methods the Bureau uses to determine disparate impact, including, among others, (i) the factors it holds constant to ensure pricing differences are attributable to the consumer’s background; (ii) the controls applied to ensure sure that the consumers who are being compared are “similarly situated”; (iii) the basis point thresholds at which the Bureau determines a prohibited pricing disparity exists; (iv) the process used to determine the background of consumer credit applicants; (v) the potential explanatory variables offered by respondents in the December 2013 enforcement action, and for each variable offered, the Bureau’s reasons for asserting that the respondents failed to provide adequate evidence that additional variables appropriately reflected legitimate business needs; and (vi) the regression analysis used in the investigation that led to the December 2013 action.

    Absent a sufficient response, the “Committee will have no choice but to consider involving its compulsory process.” The Committee’s rules allow it or its subcommittees to issue with a majority vote subpoenas “in the conduct of any investigation or series of investigations or activities.”

    CFPB Auto Finance Fair Lending ECOA Disparate Impact

  • Report Criticizes Auto Dealer Compensation, Add-On Product Practices

    Consumer Finance

    On January 23, the Center for Responsible Lending (CRL) released a report titled “Non-Negotiable: Negotiation Doesn’t Help African-Americans and Latinos on Dealer-Financed Car Loans.” The report provides the results of CRL’s investigation of whether racial disparities occur in auto financing, “considering the consumer’s attempt to negotiate their interest rates and comparison-shop at other institutions.” The CRL also examined “other aspects of car buying by race and ethnicity, including the purchase of ancillary ‘add-on’ products and the accuracy of information provided by the dealer to the customer during the buying experience.” CRL states that its research “supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.” Specifically, the CRL states its investigation revealed (i) African-American and Latino consumers attempt to negotiate pricing on car dealer loans just as much as white consumers, if not more, and their levels of comparison shopping are similar to those of white buyers; (ii) more borrowers of color reported receiving misleading information about their loans from car dealers, which served to negate the impact of negotiations or comparison shopping; and (iii) African Americans and Latinos are nearly twice as likely to be sold multiple add-on products as white consumers. The CRL recommends that policymakers (i) prohibit dealer compensation that varies based on the interest rate or other material, other than the loan’s principal balance; (ii) require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products; and (iii) prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.

    CFPB Auto Finance Disparate Impact Ancillary Products

  • CFPB, DOJ Announce First Joint Fair Lending Action Against Indirect Auto Finance Company

    Consumer Finance

    This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.

    Investigation and Claims

    As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.

    Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers.

    The CFPB and the DOJ did not claim that the finance company intentionally discriminated against any borrowers. Instead the federal agencies alleged that the finance company’s facially neutral pricing policy allowed auto dealers to price in such a manner that resulted in certain minority groups, on average, paying more for credit than non-Hispanic white borrowers. The federal authorities employed disparate impact theory of discrimination, which allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate).  When announcing the settlement, CFPB Director Cordray stated that “[w]hether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so. Yet the outcome, and the harm to consumers, is the very same here.”


    The investigation and potential enforcement action were disclosed by the finance company earlier this year. The final terms, formalized in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan, require the finance company to pay an $18 million penalty and provide $80 million for a settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The CFPB and the DOJ will identify borrowers to be compensated and the amount to be paid to each identified borrower using an undisclosed methodology, and the payments will be administered by a third party administrator paid for by the finance company.

    In addition, the finance company is required to adopt and implement a compliance plan pursuant to which the finance company must: (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate to no more than the spread currently permitted; (ii) provide regular notices to dealers explaining ECOA and dealer pricing obligations; (iii) establish quarterly and annual portfolio-wide analysis of markups based on the CFPB and the DOJ statistical methodologies; (iv) take prompt corrective action with respect to dealers identified in such quarterly analysis that culminates in prohibiting a dealer’s ability to mark up the rate or termination of the dealer relationship; and, (v) providing remuneration for affected customers.

    While the settlements do not bar discretionary dealer compensation, they provide an incentive for the finance company to eliminate the practice. The agreements permit the finance company to develop a non-discretionary compensation plan for approval by the CFPB and the DOJ, subsequent to which the finance company no longer is required to implement the majority of the compliance plan.

    Looking Ahead

    Dealer compensation practices have been targeted by the CFPB for the past year, including in guidance issued earlier this year, which the CFPB recently defended at a public forum. We expect the CFPB’s scrutiny of dealer compensation and auto finance companies more generally to continue into next year. Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Auto Finance or CFPB practices, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB Auto Finance Fair Lending ECOA DOJ Enforcement Disparate Impact

  • Tentative Settlement Reached In SCOTUS Disparate Impact Case


    On October 31, the Philadelphia Inquirer and national media outlets reported that a tentative agreement has been reached to resolve the underlying claims at issue in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act. Briefing before the Supreme Court has been ongoing—over the past week respondents filed their brief, as did numerous supporting parties, including a group of state attorneys general—and argument is scheduled for December 4. If the settlement holds, this will be the second time in recent years that a case involving these issues pending before the Court has settled before the Court had an opportunity to hear the case. Attention likely now will turn to litigation pending in the U.S. District Court for the District of Columbia over a HUD rule finalized earlier this year. That rule specifically authorized disparate impact or “effects test” claims under the Fair Housing Act. The case has been stayed by agreement of the parties pending the outcome in Mt. Holly.

    U.S. Supreme Court HUD Fair Housing Disparate Impact

  • Petitioners File Supreme Court Opening Brief in Fair Housing Act Case


    On August 26, the petitioners in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. et al., No. 11-1507, filed their opening merits brief in the U.S. Supreme Court on the issue of whether disparate impact claims are cognizable under the Fair Housing Act (FHA). The petitioners argue that (i) under the ordinary meaning of the relevant FHA provision, intentional discrimination—and not a mere disparate impact—is required to establish a violation of Section 804(a) of the FHA, and (ii) because the HUD rule authorizing such claims “cannot be reconciled” with the plain language of the statute, it cannot be allowed Chevron doctrine deference and must be struck down. The respondents’ brief is due October 21.

    Disparate Impact FHA

  • HUD Defendants Enter Unopposed Motion to Stay Challenge to Disparate Impact Rule


    On August 15, the defendants to an action initiated by two insurance trade groups challenging the HUD rule authorizing “disparate impact” or “effects test” claims under the Fair Housing Act entered an unopposed motion for a stay of proceedings pending the outcome of the U.S. Supreme Court’s decision in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507. In requesting the stay, the defendants argue that the Mt. Holly appeal turns on the “same issues of statutory interpretation” presented by the trade groups’ challenge to the HUD rule; that is, whether a disparate impact theory of liability is cognizable under the Fair Housing Act.

    Disparate Impact FHA

  • New York Federal District Court Holds FHA Disparate Impact Claims Against Mortgage Securitizer Timely, ECOA Claims Time-Barred


    On July 25, the U.S. District Court for the Southern District of New York held that a putative class of African-American borrowers can pursue claims against a financial institution alleged to have financed and purchased so-called predatory subprime mortgage loans to be included in mortgage backed securities. Adkins v. Morgan Stanley, No. 12-7667, slip op. (S.D.N.Y. Jul. 25, 2013). The borrowers allege that the institution implemented policies and procedures that supported the subprime lending of a mortgage originator in the Detroit area so that the institution could purchase, pool, and securitize those loans. The borrowers claim those policies violated the FHA and the ECOA because they disproportionately impacted minority borrowers who were more likely to receive subprime loans, putting those borrowers at higher risk of default and foreclosure.

    In resolving the financial institution’s motion to dismiss, the court held that the borrowers sufficiently alleged a disparate impact under the FHA and, although the lawsuit was filed more than five years after the originator stopped originating mortgages, the two-year statute of limitations on their FHA claims is tolled by the discovery rule. The court explained that the disparate impact of a facially neutral policy may not become immediately apparent, and “[g]iving full effect to the FHA’s language and the policy behind the language requires a discovery rule recognizing that [the borrowers’] claim here did not accrue until they knew or had reason to know” that the policies were discriminatory. The court left open the possibility that the institution may prove at a later stage that public knowledge of the facts underlying the suit may be imputed to the borrowers to render their claims "discovered" at an earlier time and therefore time-barred.

    The court held that the borrowers’ ECOA claims were not similarly timely because ECOA contains specific exceptions to its statute of limitations, and to apply a general discovery rule to ECOA claims would render those exceptions meaningless. Further, the court held that the ECOA claims are not timely pursuant to a continuing violations theory or equitable tolling.

    The court granted the motion to dismiss the ECOA claims and a state law claim, and denied the motion to dismiss the FHA claims.

    Fair Housing ECOA Disparate Impact

  • Insurance Trades Challenge HUD Disparate Impact Rule


    On June 26, two insurance associations filed a lawsuit challenging a rule promulgated earlier this year by HUD that authorizes so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The rule provides support to private or governmental plaintiffs challenging housing or mortgage lending practices that have a “disparate impact” on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also permits practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns. The insurance associations allege that the rule violates the Administrative Procedures Act because it contradicts the plain language of the relevant portion of the Fair Housing Act, which prohibits only intentional discrimination. The complaint also alleges that the rule, if applied to homeowners’ insurance, would require insurers “to consider characteristics such as race and ethnicity and to disregard legitimate risk-related factors,” thereby forcing insurers “to provide and price insurance in a manner that is wholly inconsistent with well-established principles of actuarial practice and applicable state insurance law.”

    HUD Fair Housing Disparate Impact

  • New Study Claims Mortgage Lenders Discriminate against Women


    On March 12, the Chicago-based Woodstock Institute released research claiming that mortgage lenders discriminate against female applicants. The research is presented in a “fact sheet” and previews a longer report the group plans to publish later this year. The study reviewed 2010 HMDA data on first lien single-family home purchase and refinance mortgage applications in the Chicago area and purports to show that (i) female-headed joint applications are much less likely to be originated than male-headed joint applications and (ii) this disparity holds true across all racial categories and is most pronounced for African American women. The Woodstock Institute further claims that these disparities are more pronounced for refinance loans. Based on its conclusions, the group urges federal regulators and enforcement authorities to conduct further investigation, including through enforcement of HUD’s recently finalized disparate impact rule. It also recommends that the CFPB prioritize enhancing the HMDA rules to make public more information to better identify discriminatory lending practices.

    HUD Fair Housing Fair Lending Disparate Impact HMDA


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