Every change in presidential administration results in shifts to agencies’ policy priorities and enforcement efforts. In a Biden Administration, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”), in particular, is expected to undergo significant changes. Headlines will focus on potential replacements of the CFPB Director, an issue which has been controversial in the past and may take months to address through the nomination and confirmation process in 2021.[i] But equally important will be a shifting enforcement focus: we anticipate that, under President-Elect Biden, the CFPB will revive the “disparate impact doctrine” (the “Doctrine”) as a means for curtailing business practices that result in racial disparities, whether intended or not. Although there has been significant debate about the Doctrine’s validity as applied to the Equal Credit Opportunity Act of 1974 (“ECOA”), codified at 15 U.S.C. §1691, the CFPB under President Obama applied the doctrine aggressively. We expect that Biden’s CFPB will rely upon the Doctrine as a key piece of its ECOA enforcement agenda, and if matters are litigated, the Doctrine’s validity may be resolved in court. Lenders and creditors should therefore carefully review their programs and products to assess whether availability, terms and/or conditions are consistently and evenly applied across demographic groups.
During his presidential campaign, President-Elect Biden made clear that, in his Administration, part of the mission of the CFPB would be to address systemic racism. In a July 9, 2020 speech addressing the topic of economic recovery, Biden discussed the “cost of systemic racism” and “the need for a comprehensive agenda for racial equality.”[ii] Biden’s campaign platform included a promise to “create a new public credit reporting and scoring division within the [CFPB] to provide consumers with a government option that seeks to minimize racial disparities[.]”[iii] In carrying out Biden’s vision, the CFPB will likely lean heavily on the Doctrine.[iv] The Doctrine, which lay dormant from an enforcement perspective under President Trump, may be used to render facially-neutral lending practices that have a disparate impact on protected classes a violation of ECOA.
Given the breadth of the CFPB’s authority to investigate companies providing consumer financial products and services and to enforce violations of ECOA, the revival of the Doctrine could be consequential. Companies in the auto-lending, student-lending and mortgage industries, in particular, should anticipate enhanced scrutiny. Statements by Vice President-Elect Kamala Harris suggest the CFPB may specifically investigate whether lenders’ use of educational attainment data disproportionally impacts minorities in terms of the availability of loans or the loan terms received.
I. OVERVIEW OF THE ECOA AND REGULATION B
ECOA, in relevant part, prohibits creditors (or “lenders”) from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance income.[v] Together, these groups are referred to as the “protected classes.”
“Regulation B,” 12 C.F.R. Part 1002, is the regulation promulgated by the CFPB that “provide[s] the substantive and procedural framework for fair lending.”[vi] Pursuant to Section 6(a) of Regulation B, a lender evaluating an applicant’s creditworthiness cannot consider any information that is “used to discriminate against an applicant on a prohibited basis.”[vii] Regulation B explicitly references legislative history “indicat[ing] that the Congress intended an ‘effects test’ concept… to be applicable to a creditor's determination of creditworthiness.”[viii] According to the CFPB’s Official Interpretation of Section 6(a), under the “effects test,” a creditor can be liable for a practice or policy “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.”[ix] Such policies and practices are impermissible unless they meet “a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.”[x]
The CFPB has broad statutory authority to investigate companies that offer or provide consumer financial products or services for potential ECOA violations, and to bring enforcement actions in federal court. Companies that may be investigated and sued by the CFPB include, but are not limited to, those providing mortgage loans, other loans secured by real estate,[xi] private student loans,[xii] payday loans,[xiii] or financial products such as debit cards. For depository institutions, the CFPB has primary enforcement jurisdiction over larger banks and credit unions with more than $10 billion in assets.[xiv] The CFPB has authority to investigate smaller banks and credit unions for ECOA and Regulation B violations but, for enforcement purposes, must refer the matter to the bank’s prudential regulator.[xv]
II. DISPARATE TREATMENT OF THE DISPARATE IMPACT DOCTRINE
While the ECOA does not expressly state that violations may be premised on unintentional conduct, under the Obama Administration, the CFPB repeatedly asserted that ECOA allowed for liability premised on disparate impact. In 2012, the CFPB issued a bulletin on Lending Discrimination to “reaffirm[] that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with ECOA and Regulation B.”[xvi] In support of its commitment to the Doctrine, Bulletin 2012-04 cited a 1994 Policy Statement by the Interagency Task Force on Fair Lending recognizing “[e]vidence of disparate impact” – also known as the ‘effects test’ – as a method of proving lending discrimination.[xvii] The following year, the CFPB issued another bulletin, Bulletin 2013-02, affirming the Doctrine and applying it specifically to the indirect automobile lending market.[xviii]
During the Obama Administration, while under the leadership of Richard Cordray, the CFPB brought at least six ECOA enforcement actions premised on disparate impact. In December 2012, the CFPB and U.S. Department of Justice (“DOJ”) entered into a Memo of Understanding providing for coordination between the agencies on fair lending enforcement efforts for, among other things, ECOA violations.[xix] Over the next four years (2013-2016), the CFPB and DOJ brought a series of joint enforcement actions against indirect automobile lenders for permitting dealers to impose a discretionary mark-up of the lender’s interest rate, regardless of consumers’ creditworthiness.[xx] The practice allegedly resulted in minority buyers receiving less favorable interest rates by up to 2.5 percent, a disparate impact that violated ECOA and Regulation B.[xxi]
In the same time period, the CFPB also applied the Doctrine to mortgages. In 2013 and 2015, the CFPB and DOJ brought enforcement actions against companies for giving mortgage brokers the discretion to charge higher mortgage fees regardless of the applicants’ creditworthiness or the terms of the loan.[xxii]
During the Trump Administration, in contrast, the CFPB did not bring any enforcement actions premised on disparate impact,[xxiii] and questioned the Doctrine’s validity as applied to ECOA.[xxiv] It rescinded Bulletin 2013-02 (which had applied the Doctrine to the indirect automobile lending market),[xxv] and cast doubt on the doctrine’s future enforcement by “reexamining the requirements of the ECOA” in light of a Supreme Court ruling applying the Doctrine under a different statute.[xxvi] In addition, a Congressional Resolution disapproving Bulletin 2013-02 purported to prevent the CFPB “from ever reissuing a substantially similar rule unless specifically authorized to do so by law.”[xxvii]
III. EXPECTATIONS FOR THE DISPARATE IMPACT DOCTRINE UNDER A BIDEN ADMINISTRATION
a. Likely Swing Back in Support of Disparate Impact Doctrine
Based upon public statements made by Biden during the campaign, the CFPB will almost certainly seek to revive the Doctrine and make it a central piece of its efforts to address racial economic inequality. The Biden Campaign’s economic equity platform makes clear that he favors application of the doctrine in the ECOA and Regulation B contexts and holding creditors accountable for facially neutral policies that disparately impact racial minorities – marking a return to the CFPB’s approach during the Obama Administration.[xxviii]
Two individuals who may wield significant influence over the CFPB –Vice President-Elect Harris and Senator Elizabeth Warren – have repeatedly urged application of the Doctrine in the ECOA and Regulation B contexts.[xxix] Earlier this year, then-Senator Harris, Senator Warren and Senator Sherrod Brown co-authored a letter (the “Harris-Warren Letter”) to CFPB Director Kathy Kraninger relating to fair lending and, in particular, use of educational attainment data in credit decisions.[xxx] The Harris-Warren Letter urged the CFPB to take action “to address potential violations of [ECOA] and Regulation B due to lenders’ use of educational data to make credit decisions, which the letter explained, “can result in unfair discrimination against minority borrowers.”[xxxi] The letter expressed concern that one of the lenders failed to “conduct any testing to determine whether its underwriting practices have a disparate impact on applicants based on a protected class.”[xxxii]
b. Legal Challenges to Use of the Doctrine
As the CFPB seeks to revive the Doctrine, it will need to grapple with legal challenges that respondents may raise (and critics of the Doctrine have, in fact, raised) following the Supreme Court’s ruling in Texas Department of Housing v. Inclusive Communities, 576 U.S. 519 (2015). In that case, the Court upheld use of the Doctrine as applied to provisions of the Fair...
