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Supreme Court Upholds Disparate Impact

The CFPB won’t lose a key weapon in its auto-lending crackdown, but the court’s 5-4 decision does open the door to challenges in auto finance.

July 2015, F&I and Showroom - Feature

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The Supreme Court upheld in late June the use of disparate impact in a Texas housing case, dashing the automotive retail industry’s hopes that a ruling against the controversial legal theory would remove a key weapon in the Consumer Financial Protection Bureau (CFPB)’s crackdown on auto lending. But one trade group said the decision wasn’t a total loss for the auto finance industry.

The case, Texas Department of Housing and Community Affairs vs. The Inclusive Communities Project, alleged that the Texas housing department caused segregated housing by allocating too many low-income housing tax credits to black inner-city neighborhoods and too few to predominantly white neighborhoods. The suit, filed in 2008, claimed that the department’s policies had a disproportionately adverse effect on minorities. Under the disparate impact legal theory, those policies could be in violation of the Fair Housing Act, even if their effects were unintentional.

In its 5-4 ruling, the Supreme Court held that disparate impact claims “are cognizable under the Fair Housing Act (FHA),” according to the court opinion written by Justice Anthony Kennedy, along with Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan.

“A disparate-impact claim relying on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity,” Justice Kennedy noted. “Courts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision. These limitations are also necessary to protect defendants against abusive disparate-impact claims.”

The auto finance industry has been closely following the Texas housing case in hopes that it might put the validity of disparate impact in question. The CFPB has been using the legal theory to allege that auto lenders like Ally Financial — which the bureau ordered to pay $98 million in fines and restitution in December 2013 — are engaging in patterns of discrimination. At issue are policies that allow dealers to mark up interest rates on retail installment sales contracts as compensation for arranging a customer’s vehicle financing.

Chris Stinebert, president and CEO of the American Financial Services Association (AFSA), told F&I and Showroom that although the Supreme Court upheld the use of disparate impact in the Texas housing case, it did significantly narrow how the legal theory can be used. “While important for the housing market, the ruling does not extend to other areas of consumer lending such as vehicle finance,” he said.

“Several important distinctions exist between the [FHA] and the Equal Credit Opportunity Act (ECOA), the statute under which the [CFPB] has authority to oversee auto lenders. Specifically, the ECOA does not contain ‘effects’ language contained in other anti-discrimination statutes,” Stinebert added. “The Supreme Court determined that the language contained in the FHA is equivalent to language found in other civil statutes that recognize disparate impact.”

Under the FHA, it is unlawful to “refuse to sell or rent … or otherwise make available or deny, a dwelling to a person because of race.” The ECOA, however, doesn’t include the phrase “otherwise make available,” which, according to Justice Kennedy, refers to the consequences of an action rather than an individual’s intent. What that could mean is the high court would have to go beyond its decision on the Texas housing case and find a new textual foundation for allowing disparate impact claims under the ECOA.

The Supreme Court handed down its ruling the same week the CFPB announced that consumers allegedly harmed by Ally’s dealer markup policies will begin receiving reimbursement. Those consumers have been identified via the CFPB’s much-disputed Bayesian Improved Surname Geocoding (BISG) proxy methodology, which it uses to determine disparate impact to legally protected groups.

“The Settlement Administrator will send packages to certain Ally auto finance customers with an auto contract dated between April 2011 and December 2013 who were identified by the CFPB and [the Department of Justice] as likely to be African American, Hispanic, Asian or Pacific Islander according to the BISG methodology,” said Ally in a statement issued to F&I and Showroom. “Many customers will first be asked to confirm that they are part of the affected groups since the CFPB’s BISG methodology often yields inaccurate results.”

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