Is the CFPB Making it Easier for Financial Institutions to Discriminate in Lending?

by Jeff Sovern

Allison blogged earlier about Kate Berry's American Banker article, CFPB signals pullback on discrimination cases. I wanted to say a bit more about this area.

Depending on how you count, there are basically three ways to prove credit discrimination cases. One, that is theoretically possible, but that you virtually never see in practice, is what I call the smoking gun type of case, when, for example, the lender says it discriminates.  A rare example is Moore v. United States Dep't of Agric., 55 F.3d 991 (5th Cir. 1995) (no whites can qualify).  Because that kind of case is so unusual, some people don't count it and say there are only two ways to prove credit discrimination. The second way to prove discrimination is called disparate treatment. That requires the plaintiff to show that the defendant discriminated deliberately.  As you might imagine, it is difficult to show such deliberate discrimination, so successful disparate treatment cases are also rare.  On top of that, the Seventh Circuit bars its use in credit discrimination cases. See Latimore v. Citibank Federal Savings Bank, 151 F.3d 712 (1998).

That leaves the disparate effects test, also called the disparate impact test.  That test doesn't require the plaintiff to show that the defendant intentionally discriminated, but only that the lender's credit practices have a discriminatory effect, in the sense that they affect some groups more than others. Even if the plaintiff succeeds in showing that, the lender can still continue with its practice if it can show that the challenged practice is legitimate.  It is this disparate effects type of proof that the CFPB is reconsidering. Berry reports that HUD is also reconsidering use of the disparate effects test in its own enforcement actions. As Berry notes, the Supreme Court has upheld the use of disparate impact analysis in at least some circumstances in FHA cases.  Lenders are obviously hoping that Mulvaney will limit the disparate impact test as much as possible.

Problems already exist with use of the disparate effects test. For one thing, its use typically entails expensive statistical analysis, and anything that increases the cost of consumer litigation makes such litigation less likely. That's one reason why it's important that public agencies like the CFPB bring such cases, because they have the resources to do so.  Another problem is that the Supreme Court, in the Twombly and Iqbal cases, has made it harder to get past the motion to dismiss stage and on to discovery than was once the case.  It is a challenge for plaintiffs to satisfy the Twiqbal standards in disparate impact cases before they get access to the defendant's files, and yet they can't see those files until they satisfy the standard. It's like a catch-22: you can't get discovery until you can show the defendant's conduct had a discriminatory effect, and you can't show the defendant's conduct had a discriminatory effect until you can see their files.  

So all in all, it will be easier for lenders to discriminate and get away with it.  


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