CFPB to Enforce Fair Lending Laws – Disparate Impact as an Enforcement Tool
The Consumer Financial Protection Bureau (CFPB) has recently announced it will enforce fair lending laws that it inherited under Dodd-Frank. The CFPB is responsible for enforcing the Equal Credit Opportunity Act (ECOA), which provides that a creditor may not discriminate on the basis of race, color, religion, national origin, sex, marital status, or age. The CFPB’s Office of Fair Lending and Equal Opportunity will focus on enforcement in this area.
The CFPB emphasized in a formal bulletin on its ECOA enforcement that “the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.” For reference, violations of fair lending law are generally established in one of three ways:
• Overt evidence of discrimination;
• Evidence of disparate treatment; and
• Evidence of disparate impact.
Discriminatory impact analysis, which is also known as the “effects test,” is a theory of liability that prohibits a lender from using a facially neutral practice that has an unjustified adverse impact on members of a protected class. In explaining discriminatory impact in its bulletin, the CFPB quoted Regulation B:
The act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.
Discriminatory impact claims recently have been used by state Attorneys General to challenge home mortgage lending practices, including a currently pending lawsuit by the Illinois Attorney General against against a top five mortgage lender.
The CFPB’s bulletin on ECOA and its enforcement authority is available on their website.