Pay attention! The bear of fair loans is waking up from its slumber | Hudson Cook, LLP
The Equal Credit Opportunity Act and its Implementing Regulation B (collectively, âECOAâ) prohibit discrimination against protected classes (eg, race, national origin, sex, age, etc.) in credit transactions. The ECOA has been the center of attention since the publication of the Consumer Financial Protection Bureau’s auto finance discrimination guidelines in 2013, and the CFPB has started a wave of very public enforcement activity against major players in the industry. auto finance sector for policies that he said had a disparate impact on the protected classes. .
According to the guidelines, creditors offering indirect financing through car dealerships have been held liable for the discriminatory mark-ups alleged by the dealership under the so-called “disparate impact” theory, which allows claims of discrimination when policies, practices, rules or other systems appear to be neutral and have a disproportionately negative impact on a protected category of consumers. While the concessionaire mark-up was not expressly prohibited by the ECOA or any other federal law, the guidelines were the framework within which the CFPB sought to eliminate it through law enforcement. This orientation was then canceled in 2018 by a joint resolution of the Congress.
CFPB’s oversight of ECOA compliance began in 2011 with its Office of Fair Lending and Equal Opportunity (âFair Lending Officeâ), which was part of the Oversight, Enforcement and Compliance Division. The Bureau’s Loan Equity (âSEFLâ). This placement gave the Fair Lending Office a significant capacity for supervision and execution outside the ordinary channels of supervision and execution of the CFPB. However, in 2015 the Supreme Court ruled on a case of disparate impact under the Fair Housing Act (Inclusive communities) which questioned the viability of the theory of disparate impacts under the ECOA. Then, in 2018, CFPB Acting Director Mick Mulvaney transferred SEFL’s Equitable Loans office to the Director’s office, making it more of an advisory body. After these events, the number of disparate impact theory referrals to the Department of Justice declined dramatically. And, just like that, the once ferocious ECOA grizzly bear settled in for a long winter nap.
But for how long?
In June 2020, the Supreme Court rendered its decision in Bostock v. Clayton County, Georgia, finding that the prohibition of sex discrimination under Title VII of the Civil Rights Act 1964 includes discrimination based on sexual orientation and discrimination based on gender identity. The following month, the CFPB, under the leadership of then-director Kathleen Kraninger, issued an RFI seeking comment and information to identify opportunities to further prevent credit discrimination under the CEOA. One of the questions the CFPB asked for answers was whether the Bostock The decision is expected to have an impact on how the CFPB interprets the COEO.
The information gathering triggered two events. First, Kraninger’s CFPB issued an advisory opinion in December 2020 to clarify the requirements for special purpose credit programs authorized under the ECOA. And, in March 2021, CFPB Acting Director Dave Uejio issued an interpretive rule clarifying this, per the Supreme Court. Bostock ruling, the prohibition of sex discrimination under the ECOA includes discrimination based on sexual orientation and gender identity.
With the current political emphasis on racial equity issues, it is possible that the CFPB will resume its more aggressive stance on the application of the ECOA. A quick and potentially attractive way for the CFPB to proceed would be to liberally exercise its greatest weapon of fair lending – the disparate impact theory – despite remaining questions about its viability afterwards. Inclusive communities. These issues may act as a deterrent to the CFPB’s willingness to pursue such claims as banks and finance companies are more likely to view litigation with the CFPB as a viable alternative to settlement. Either way, it seems likely that future director Rohit Chopra will transfer the Equitable Loans Office to SEFL, improving its ability to undertake its equitable loan monitoring and enforcement efforts.
Wherever the Equitable Loans Office is located, it is reasonable to expect that Equitable Loans will again be the focus of reviews, increasing the likelihood of more loan investigations and actions. fair, including referrals to the Department of Justice for possible fines and other penalties. In fact, when the CFPB recently released its 2020 Equitable Lending Report to Congress, it said that in 2021 and beyond, the Bureau will place more emphasis on equitable lending and efforts to address equity. racial equity for underserved communities and will report on these efforts in 2022.
With the change in federal administration and attention to racial equity, states can also legislate their own anti-discrimination laws similar to the ECOA or others. So be warned, the long cold winter is over, and the irritable and ravenous bear has woken up.
What should you think about? Make sure you have an updated fair loan component in your compliance management system. And, of course, now is definitely a good time to put an end to your fair loan monitoring program.