When the U.S. Supreme Court issued its 5-4 decision in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project Inc., it affirmed that a disparate impact cause of action exists under the Fair Housing Act (FHA). Does this mean a disparate impact cause of action exists for auto financing under the Equal Credit Opportunity Act (ECOA)? Not exactly.
The Supreme Court based its decision on a section of the FHA that is not similar to the section of the FHA which is like ECOA. The Court specifically cited a provision of the FHA that prohibits a creditor to “otherwise make unavailable” housing to protected classes of persons which the Court described as words that “look to consequences, not intent.” Comparing the FHA to Title VII of the Civil Rights Act and the Age Discrimination in Employment Act, the Supreme Court held “all three statutes use the word “otherwise” to introduce the results-oriented phrase. “Otherwise” means “in a different way or manner,” thus signaling a shift in emphasis from the actor’s intent to the consequences of his actions.”
The Court also cited the actions of the Congress in 1988 in rejecting proposed exceptions from FHA disparate impact liability for certain zoning decisions. This was used as evidence that the Congress must have intended disparate impact liability to exist, given that nine federal appellate level courts had ruled a disparate impact cause of action exists under the FHA. It is significant to note that no federal appellate court has ever directly ruled that a disparate impact cause of action exists under ECOA. The Court also cited the fact that Congress in 1988 amended the FHA to provide three exemptions from liability that assumed the existence of disparate impact liability. “In short, the 1988 amendments signal that Congress ratified disparate impact liability.”
The language of ECOA contains no results-oriented phrase. It prohibits creditors only “to discriminate against any applicant, with respect to any aspect of a credit transaction” on a prohibited basis. No “otherwise make credit unavailable.” No “otherwise adversely affect.” No disparate impact. Since the Supreme Court said its decision was based on the FHA’s “result-oriented language,” and Congress’ implied ratification of disparate impact against the backdrop of nine federal appellate court rulings, the absence of those facts and factors in ECOA strongly suggest that no disparate impact liability case exists under ECOA.
The Supreme Court warned that “disparate impact liability has always been properly limited in key respects that avoid the serious constitutional questions that might arise under the FHA, for instance, if such liability were imposed based solely on a showing of a statistical disparity.” It stated that “Entrepreneurs must be given latitude to consider market factors. In a similar vein, a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity. A robust causality requirement ensures that racial imbalance does not, without more, establish a prima facie case of disparate impact” and thus protects defendants from being held liable for racial disparities they did not create.” Otherwise it would lead to quotas and other Constitutional questions that could arise.
Even assuming a disparate impact claim could somehow be made under ECOA, consider the CFPB’s position on auto finance disparate impact – in light of the prior paragraph. The CFPB cannot allege facts or produce statistical evidence demonstrating a causal connection between dealers’ ability to mark up buy rates and racial discrimination. The Charles River Study of the CFPB’s BISG proxy showed how it was flawed statistically and substantively in that it over counted minorities and ignored those who lived in nonminority neighborhoods and may have received better credit terms. The Supreme Court has imposed a high burden for causality. If the CFPB can’t show a causal connection—and they can’t–that should result in the dismissal of any case at the outset. As the Supreme Court said, “Courts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every decision,” and warned that the limitations on disparate impact liability “are also necessary to protect potential defendants against abusive disparate-impact claims.”
The Supreme Court ruled on different words and history of a different law (the FHA) and, in doing so, broadened the burden of proof for any disparate impact case. The ECOA does not fall within the holding of this case and the CFPB, armed with only pseudo-statistics that have shown to be unreliable and based on fallacious assumptions (as all auto dealers know, the only color they care about is green), should not read this case as supporting its auto finance credit discrimination initiatives in any way. Neither should dealers or lenders take this case as contrary to their position that no disparate impact right of action exists under ECOA. In fact, quite the contrary. Coming over strong dissents of four Supreme Court justices, this case should push the CFPB farther away from its already unsupportable claims and legitimize the NADA/DOJ fair lending programs as the best way to document legitimate business reasons that support pricing differential and negate disparate impact. I think that is the only credible way to read this decision.
Randy Henrick is Associate General Counsel and lead Compliance Counsel for Dealertrack Technologies Inc. This article is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations from a knowledgeable attorney or compliance professional licensed to practice in your state.