One of the most controversial and significant federal regulatory initiatives in consumer finance is the view of the Consumer Financial Protection Bureau that credit discrimination can be proven by statistical disparities.

We previously reported here on the U.S. Supreme Court’s decision to hear a disparate impact case in Texas Department of Housing & Community Affairs v. Inclusive Communities.  We also recently reported here on an analysis from the consulting firm Charles River Associates, which concluded that the CFPB’s proxy analysis was an unreliable method for demonstrating so-called disparate impact.  These developments come in the context of bi-partisan questions from Congress challenging the theory, methodology, and transparency of the CFPB.

Am. Ins. Ass’n v. HUD

There is also, however, recent evidence that challenges to disparate impact have gained some traction in the lower courts as well.  Last month, in Am. Ins. Ass’n v. HUD, 2014 U.S. Dist. LEXIS 155383 (D.D.C. Nov. 3, 2014), Judge Leon of the Federal District Court for Washington, D.C. struck down a HUD regulation applying a disparate impact theory to Fair Housing Act claims, and indicated that such claims instead must rely upon discriminatory intent.  Although the case did not address liability under the Equal Credit Opportunity Act, upon which the CFPB and other regulators have sought to impose disparate impact on lenders, the language in that statute is similar to the Fair Housing Act.

Judge Leon rejected the defendants’ argument that the Fair Housing Act demonstrates Congress’s intent to recognize disparate impact, holding that Congress included no “effects-based” language specifically focusing on the result of a policy.  According to Judge Leon, Congress intentionally included statutory language to provide for disparate-impact liability under the Americans With Disabilities Act, among other statutes, but did not do so with the Fair Housing Act.  At times, Judge Leon’s opinion expressed a certain level of frustration at disparate impact theory, noting that the language of the Fair Housing Act left the Court

with no doubt that Congress intended the FHA to prohibit intentional discrimination only.  Put simply, Congress knows full well how to provide for disparate-impact liability, … and has made its intent to do so known in the past by including clear effects-based language when it so chooses … .  The fact that this type of effects-based language appears nowhere in the text of the FHA is, to say the least, an insurmountable obstacle to the defendants’ position regarding the plain meaning of the Fair Housing Act.

Id. at *31 (internal citations omitted).  Moreover, the Court explained how, ironically, disparate impact claims would reshape underwriting for homeowners’ insurance from race-neutral to race-based decision making, which would violate other laws prohibiting such decisions:

In order to ensure that their facially neutral underwriting practices do not result in any disparate outcomes amongst protected groups, insurers would be required to turn a blind eye to established actuarial principles in favor of race-based insurance decisions. …  Indeed, insurers would have to use the newly-acquired data to adjust outcomes for individual insureds based solely on this data—i.e. adjusting (upward or downward) the premium charged to achieve parity of impact. …  To the contrary, it is utterly incomprehensible that Congress would intentionally provide for disparate-impact liability against insurers in the FHA, where doing so would require those same insurers to collect and evaluate race-based data, thereby engaging in conduct expressly proscribed by state law.

Id. at *39-40 (internal quotation marks and citations omitted).

In reaching these conclusions, the Court in Am. Ins. Ass’n relied heavily upon the Supreme Court’s 2005 decision in Smith v. City of Jackson, 544 U.S. 228 (2005), which the Court explained “represents a sea change in approach to the analysis of statutory provisions with respect to disparate-impact liability,” by, for the first time, holding that “an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.”  Id. at *42-43.  The Court used Smith to distinguish decisions from eleven Circuit Courts of Appeals that permitted disparate impact claims under the Fair Housing Act.  The Court concluded its opinion with a stern rebuke of HUD for pursuing disparate-impact based rulemaking under the Fair Housing Act:

This is … yet another example of an Administrative Agency trying desperately to write into law that which Congress never intended to sanction.  While doing so might have been more understandable—and less troubling—prior to the Supreme Court’s decision in Smith, in its aftermath it is nothing less than an artful misinterpretation of Congress’s intent that is, frankly, too clever by half.

Id. at *44.     

Christian v. Generation Mortgage Co. 

Earlier this year, another federal district court in Illinois rejected class certification of a disparate impact claim under different circumstances.  In Christian v. Generation Mortgage Co., 2014 U.S. Dist. LEXIS 127767 (N.D. Ill. Sept. 12, 2014), the Court concluded that a statistical regression analysis would be irrelevant to a disparate impact claim based on pricing disparities under a discretionary pricing policy, because proof of a disparity could not prove the cause of the disparity.  Like the Court in Am. Ins. Ass’n, the Christian Court relied upon recent Supreme Court precedent – this time from Wal-Mart Stores, Inc. v. Dukes, ___ U.S. ___, 131 S. Ct. 2541 (2011).  The Court explained specifically:

A policy of discretion affords brokers the opportunity to exercise their pricing discretion in a multitude of ways that are purely subjective.  Perhaps the broker deems one borrower to be a better source of future referrals and so extends a slightly better deal.  Another borrower may be a better negotiator, having obtained pre-loan counseling that is recommended by the FDIC.  Another borrower may have options available, such as selling his home, that make him more price sensitive.  Further, … factors that have nothing at all to do with the borrower may influence the exercise of the broker’s pricing discretion.  One broker’s economic situation may dictate an approach to pricing that is more, or less, aggressive; another’s pricing calculus may factor in the intrinsic rewards of helping people stay in their homes while others may be in it only for the money.  The potential distinctions in how individual brokers exercise their pricing discretion are endless, which explains why a regression analysis cannot control for them.  These sorts of factors cannot be ruled out as a factor in a pricing decision that is the product of individual discretion, so even if statistics prove that purely objective factors do not account for a disparate impact, it cannot be said that all such pricing decisions are the product of a common exercise of discretion by the brokers.

Id. at *24-26 (emphasis added).


Meanwhile, however, while challenges to the disparate impact theories appear to be gaining ground, there is no evidence that the CFPB is backing off its expansive view of disparate impact.  In response to Congressional pressure, the CFPB issued guidance documents, reported by us here, reaffirming its view that mere statistical disparities are sufficient to establish credit discrimination.

While two decisions do not add up to a defined trend, they are well-reasoned and may provide assistance to opponents of disparate impact liability as the Texas Department of Housing & Community Affairs case works its way towards a possible decision.