We’ve been reporting for almost two years now on federal regulators’ attempts to use an effects-based test for discrimination – disparate impact – to fundamentally alter the auto sales and finance industries, and how those efforts have consistently gained steam from late 2013 through to more recent times.  We’ve also reported on challenges to disparate impact, most recently here. But all lenders must be mindful of the continued viability of intent-based discrimination claims and especially, the risk those claims present from a vendor management perspective.

As we previously reported here, on February 10, the U.S. Department of Justice, the North Carolina Attorney General, two defendant corporations, and one of their main principals entered into a consent decree settling claims that the defendants used tactics known as “reverse redlining” to intentionally target African-American customers and then imposed disproportionately onerous credit terms upon them.

The Complaint filed by the DOJ and the North Carolina AG in January 2014, spells out why regulators believed an effects-based proxy for evidence of intentional discrimination was unnecessary.  It alleged that the defendants intentionally targeted African-American customers by establishing dealerships in close proximity to one another in predominately African-American areas in and around Charlotte.  The owner of the dealerships also was alleged to have made statements reflecting racial prejudice, which included the use of racial slurs.  One sales agent allegedly was hired specifically because he was adept at getting African-Americans to purchase vehicles.

Because the defendant dealerships were “buy here, pay here,” they did not have to submit verification to an indirect lender, and thus allegedly negotiated credit terms with African-American customers without regard to income, assets, or any other objective criteria for judging credit.  These deals allegedly resulted in customers paying more than suggested retail prices, making disproportionately high down payments, and being charged disproportionately high interest rates.

While the “buy here, pay here” nature of the defendants’ operation allowed them to engage in the alleged discrimination, lenders need to remain vigilant of the risks posed by intent-based discrimination claims.  Overt displays of racial animus such as those alleged in the Complaint fortunately are rarer today than they were a generation ago, but regulators and private litigants continue to press “reverse redlining” claims based on geographic location of lenders’ offices, advertising targeted at protected groups, or loan programs disproportionately offered to protected groups.  Lenders also should review their vendor management policies to ensure that their supervision of third party business associates is such that a regulator would not be concerned that the lender may be turning a blind eye to a vendor’s discriminatory behavior.