As you may recall, the Consumer Financial Protection Bureau (CFPB) has been making quite a fuss about racial equality in the realm of auto finance over the past year or so. Specifically, the CFPB contends that women and minority members may be paying more for credit than white males. When this is the result of actual prejudice, it is called “disparate treatment,” and is certainly illegal. But when it is the result of colorblind policies and arm’s-length negotiation, it is called “disparate impact.”
The viability of that theory to compel dealerships to ensure equality of outcome (as opposed to equality of opportunity) has been thrown into doubt by the U.S. District Court for the District of Columbia in its decision in American Insurance Association v. U.S. Department of Housing and Urban Development, handed down on November 3, 2014. And while that case discussed disparate impact in the context of the Fair Housing Act, the underlying principles apply to the Equal Credit Opportunity Act — the law the CFPB is using to justify its actions in the auto retail industry.
A Little Background
In 2013, the Department of Housing and Urban Development (HUD) issued a new regulation it called the Disparate-Impact Rule. This rule created liability based on disparate impact under the aforementioned Fair Housing Act. The American Insurance Association alleged that HUD exceeded its statutory authority when it expanded the scope of the FHA to recognize not only disparate-treatment claims but disparate-impact claims as well.
On cross-motions for summary judgment (meaning there were no issues of fact to be decided at trial, so the judge could skip a trial and rule based on the law alone), District Court Judge Richard Leon agreed with the plaintiffs: He ruled that the FHA prohibits disparate treatment only, and therefore HUD exceeded its authority by adding a cause of action under the FHA for disparate impact.
[A side note on Judge Leon: while nominated by former president George W. Bush, he can’t be fairly called a right-wing activist jurist. In 2009, he ordered five detainees released from the U.S. prison at Guantanamo Bay, Cuba, for insufficient evidence. In 2013, he ordered a memo inadvertently released by the Palestinian Authority in a murder case returned or destroyed. That memo allegedly demonstrated the PA’s involvement in the murder of two American teenagers and one Israeli teen. Those decisions — and others — attracted much conservative wrath.]
Sixteen pages into his written decision, Judge Leon finally cut to the chase: “Because the issue before me is whether disparate-impact claims are cognizable under the Fair Housing Act, I must, in the final analysis, determine whether the text of the FHA unambiguously evidences Congress’s intent for such claims to be cognizable under the Act. Plaintiffs argue, in essence, that only disparate treatment (intentional discrimination) claims are unambiguously cognizable under the plain text of the FHA. Unfortunately for the defendants, I agree.
“Under controlling precedent, judicial review of agency interpretations of a statute it administers must follow a two-step test. First, if the intent of Congress is clear, that is the end of the matter. The court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.
“If the court determines, however, that the statute is silent or ambiguous with respect to the specific issue, the court must determine whether the agency’s action is based on a reasonable interpretation of the statute.” And here Judge Leon expressly stated that the second step of the analysis is unnecessary: “I agree with the plaintiffs that the FHA unambiguously prohibits only intentional discrimination. Accordingly, the Disparate-Impact Rule exceeds HUD’s ‘statutory jurisdiction, authority or limitations,’ and thereby violates the [Administrative Procedures Act].”
Disparate Impact and the Supremes
That a district court opinion could generate so much attention is due to the fact the Supreme Court has not yet settled the matter. Other cases addressing this exact issue have climbed the judicial ladder to the Supreme Court, only to be settled before actually being heard. The manner in which those cases resolved could give a cynic reason to believe that some don’t want the legal issue definitively settled. To quote Judge Leon:
“Since 2011, the Supreme Court has granted certiorari three times on the issue of whether disparate-impact liability is cognizable under the FHA, most recently last month in Texas Department of Housing and Community Affairs v. Inclusive Communities Project [citation omitted] (Texas Department of Housing); Twp. Of Mt. Holly v. Mt. Holly Gardens Citizens in Action, Inc. (Mt. Holly) [citation omitted]; and Magner v. Gallagher [citation omitted]. While Texas Department of Housing is currently before the Court, and likely to be decided this term, both Mt. Holly and Magner were settled before the Court could decide the issue. The circumstances behind the Magner settlement, however, are particularly troubling. Indeed, a Congressional Joint Staff Report found that — in negotiating a quid pro quo deal that facilitated Magner’s settlement — then-Assistant Attorney General Thomas Perez “exert[ed] arbitrary authority” to settle the case and “placed ideology over objectivity and politics over the rule of law… Rather than allowing the Supreme Court to freely and impartially adjudicate an appeal that the Court had affirmatively chosen to hear, [Perez] openly worked to get the appeal off the Court’s docket.”
With both the Mt. Holly and Magner cases out of the way, it is up to the Texas Department of Housing case to settle this issue once and for all. Oral argument is scheduled for January 21, 2015, and should have occurred by the time you read this. If arguments actually go forward, a decision should be issued sometime this summer.
Impact for Auto Dealers
Car dealers don’t typically deal with the requirements of the Fair Housing Act, so why does the American Insurance Association case matter? The CFPB is using the same disparate impact theory to justify its de facto requirement for dealers to have in place a fair credit policy that ensures equality of outcome rather than equality of opportunity. If the Supreme Court, when ruling on Texas Department of Housing, agrees with Judge Leon in American Insurance Association, the CFPB loses the ground on which it stands.
However, if the Texas Department of Housing case strikes down disparate-impact claims in the housing industry, do not assume the CFPB will roll over and cry “Uncle.” Even though the analysis is the same when considering the Fair Housing Act and the Equal Credit Opportunity Act, one may safely assume the CFPB will not surrender its position until the Supreme Court has specifically applied it to ECOA. And that may take another four years or more. But the clock will certainly be ticking, and time will be running out on disparate impact theory as applied to automotive finance.
All dealers should have a fair credit policy that absolutely prohibits discrimination in the realm of automotive purchase and finance. But Congress has never required a policy of equality of outcome in this industry, so dealers may want to take that into account when they draft, modify or implement their policies. Just don’t cite this article for the actions you take — always talk to your own attorney first!
James S. Ganther Esq. is the co-founder and CEO of Mosaic Dealer Services. He is a legal and compliance expert and a prolific writer and speaker [email protected]