Recent Development in Fair Lending

8/14/2019 Recent Development in Fair Lending

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Recent Developments in Fair Lending:

The Dawn of a New Litigation Era?

By John L. Ropiequet and L. Jean Noonan1

Introduction

The authors have reported on trends in fair lending litigation in four preceding Annual

Surveys.2 These articles chronicled a wave of class actions under the Equal Credit Opportunity

Act (ECOA)3 in which it was alleged that sales of credit contracts to various auto finance

companies had a disparate discriminatory impact on protected racial minorities. These class

actions were inspired by an earlier series of U.S. Department of Justice (DOJ) consent decrees

with mortgage lenders where it was alleged that their lending practices had a disparate impact on

minorities in violation of the ECOA.4 As with the DOJ consent decrees against mortgage

lenders, the class actions against auto finance companies resulted in a series of settlements which

left numerous legal questions unresolved concerning what conduct actually violates the ECOA

1John L. Ropiequet is a partner in the law firm of Arnstein & Lehr LLP in its Chicago office and

is a member of the Illinois Bar. He is Pro Bono Liaison of the Committee on ConsumerFinancial Services of the American Bar Associations Section of Business Law. L. Jean Noonanis a partner at Hudson Cook, LLP, where she manages the firms Washington, D.C. office. Sheis a member of the Washington D.C. Bar.2 Nicole F. Munro, L. Jean Noonan & R. Elizabeth Topoluk, Recent Developments in FairLending and the ECOA: A Look at Housing Finance and Motor Vehicle Dealer Participation , 60Bus. Law. 627 (2005) (Fair Lending 2005); Kenneth J. Rojc & Sarah B. Robertson, Dealer

Rate Participation Class Action Settlements: Impact on Auto Financing, 61 Bus. Law. 819(2006) (Fair Lending 2006); John L. Ropiequet and Nathan O. Lundby, Dealer RateParticipation Class Actions under the ECOA: Have We Reached the End of the Road? , 62 Bus.Law. 663 (2007) (Fair Lending 2007); John L. Ropiequet, Nathan O. Lundby, Kenneth J. Rojc& Sarah B. Lubezny, Update on ECOA and Fair Lending Developments, 63 Bus. Law. 663(2008) (Fair Lending 2008).3 Pub. L. No. 90-321, 88 Stat. 146 (codified at 15 U.S.C. 1691-91f (2000)).4See Fair Lending 2008 at 665.


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and what creditors can do to avoid discriminating against members of protected minorities. 5

As suggested in a previousAnnual Survey,6

the pendulum appears to be swinging back to

the housing finance arena with the filing of several new cases, including class actions, asserting

racial discrimination under both the ECOA and the Fair Housing Act (FHA).7 Notably,

considering current concerns about predatory lending practices, some of the new cases combine

allegations of mortgage fraud with racial discrimination claims, pursuing several different

theories of liability, a feature that was absent in the previous auto finance class action litigation

and the DOJ mortgage practices cases.

In addition, the DOJ has entered into consent decrees with auto dealers based on alleged

racial discrimination. Although the now-concluded class actions against auto finance companies

were based on alleged discriminatory conduct by the dealers who sold credit contracts to them,

none of the cases involved dealers as parties defendant. The DOJ actions thus break new ground.

RACIAL DISCRIMINATION IN HOUSING FINANCE

Martinez v. Freedom Mortgage Team, Inc.

Martinez v. Freedom Mortgage Team, Inc.8 was the first of several decisions in the U.S.

District Court for the Northern District of Illinois which considered motions to dismiss

complaints of racial discrimination in violation of the FHA and the ECOA. The plaintiff in

Martinez pleaded both mortgage fraud and racial discrimination. He alleged that the defendant

mortgage broker submitted false information about his credit status to the defendant mortgage

5See Fair Lending 2007at 671-73; John L. Ropiequet and Nathan O. Lundby,APR Split Class

Actions Under the Equal Credit Opportunity Act: The End of History?, 61 Consumer Fin. L.Q.Rep. 49, 57-58 (2007).6See Fair Lending 2007at 663.7 Pub. L. No. 90-284, 82 Stat. 81 (codified at 42 U.S.C. 3601-19 (2000)).8 527 F. Supp. 2d 827 (N.D. Ill. 2007).


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lender after he provided accurate information;9 that the broker misrepresented the terms that

would be made available to him when he conducted discussions exclusively in Spanish, but

provided loan documentation exclusively in English without a translation;10 that the broker

conspired with an appraiser to inflate the appraisal for the property;11 that the lender was aware

of and approved the inflated appraisal;12 and that this caused the broker to be paid a higher yield

spread premium13 and the lender higher interest.14 The higher yield spread premium and interest

resulting from an oversize loan was alleged to be part of a pattern and practice on loans made to

minority borrowers, in violation of the FHA and the ECOA.15

In support of their motion to dismiss, the defendants argued that both the FHA and the

ECOA racial discrimination claims should be dismissed because the plaintiffs were not denied

credit for discriminatory reasons. The court held that neither statute contained such a

requirement. Since the FHA prohibited discrimination against any person in the terms or

conditions of such a transaction, because of race,16 it was clearly possible to engage in the

setting of discriminatory terms and conditions in granting as well as in withholding credit.17

Likewise, the court found that the ECOAs requirement that a creditor may not discriminate

9 Complaint at 15, 22, Martinez v. Freedom Mortgage Team, Inc., No. 07 C 3442 (N.D. Ill.Jun. 19, 2007).10Id. at 18-20.11Id. at 23.12Id. at 24.

13 A yield spread premium is compensation paid to a mortgage broker by a funding source inaddition to any fees which the borrower may pay to the broker. See Eugene J. Kelley, Jr., JohnL. Ropiequet, and Jason M. Rosenthal, Recent Developments in Yield Spread PremiumLitigation, 54 Consumer Fin. L.Q. Rep. 33, 34 (2000).14Id. at 26.15Id. at 27, 35, 40.16 42 U.S.C. 3605(a).17 527 F. Supp. 2d at 834.


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against any applicant, with respect to any aspect of a credit transactionon the basis of race18

was an even clearer prohibition of discrimination in both granting credit and denying credit.19

The court further found that the allegation that the lender paid and the broker accepted

higher yield spread premiums on loans made to minority borrowers correlates with those

borrowers having received loans on less favorable terms than their counterparts, and was

accordingly also prohibited discrimination.20 The court observed that while creditors always

want to extend credit at as high an interest rate as possible, nevertheless discrimination can

creep into that otherwise permissible equation if the broker makes disproportionate attempts to

pressure racial minorities into accepting interest rates above their par rates (or rates

disproportionately higher than their par rates).21 While the lender may have used race-neutral

factors in determining what amount of yield spread premium was paid to the broker, the

plaintiffs allegation that the lender knew that offering the yield spread premium caused brokers

to act in a discriminatory manner and that the lender targeted minorities for higher cost loans

by purposefully utilizing brokers who served minority communities was sufficient to state a

claim for racial discrimination because:

While knowingly reaping the benefits of anothers discriminationmay not necessarily connote a discriminatory intent on the part ofthe reaper, a discriminatory effect (even absent any discriminatoryintent) can constitute a violation of the Housing Act.22

18 15 U.S.C. 1691(a)(1).19 527 F. Supp. 2d at 834.20Id. at 834-35.21Id.22Id. at 835, citing Gomez v. Chody, 867 F.2d 395, 402 (7th Cir. 1989).


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Thus, the court concluded that targeting racial minorities for higher cost loans sets out a

discrimination-based theory of recovery under both the Housing Act and the Credit Opportunity

Act.23

The court went on to find that the plaintiff also properly alleged claims under the Illinois

Consumer Fraud and Deceptive Business Practices Act (ICFA)24 against the defendants for

failure to obtain a signed consent form to enable the broker to act as his interpreter and for his

misrepresentations in the loan documentation.25

Finally, the court found that a claim was stated

under the Credit Repair Organizations Act (CROA)26 even though none of the defendants was

a credit repair organization, since the statute prohibited any person, not just credit repair

organizations from engaging in prohibited activity in connection with overstating the plaintiffs

income on his loan application.27

Tribett v. BNC Mortgage, Inc.

The plaintiffs in Tribett v. BNC Mortgage, Inc.28likewise alleged that there was mortgage

fraud in their transaction in addition to racial discrimination, on behalf of classes consisting of all

Hispanic and African-American customers of the mortgage broker and the mortgage lender

where the broker received a specified level of compensation, including a yield spread premium

from the lender.29 The plaintiffs sold their old home, put their household goods in storage and

23 527 F. Supp. 2d at 835.24 815 ILCS 501/1 et seq.

25 527 F. Supp. 2d at 836-38.26 15 U.S.C. 1679 et seq.27

527 F. Supp. 2d at 840.28 No. 07 C 2809, 2008 U.S. Dist. Lexis 3573 (N.D. Ill. Jan. 17, 2008).29 Complaint at 33-34, 45-56, Tribett v. BNC Mortgage, Inc., No. 07 C 2809 (N.D. Ill. May

18, 2007).


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applied for financing with the broker prior to purchasing a new home.30 The broker made certain

representations about the terms and conditions of the mortgage but failed to make required

disclosures or even to identify the lender.31 The plaintiffs learned for the first time at closing that

the lender decided to make two separate loans rather than a single loan and at substantially

higher interest rates and fees than they expected.32 They also discovered that the broker had

inflated the sale price of their previous home by nearly 100% to justify both larger loan amounts

and an inflated and unreasonable yield spread premium.33

The plaintiffs nevertheless proceeded

to close the loans because they were in a vulnerable position and could not afford to cancel the

transaction.

34

The broker received an allegedly inflated yield spread premium as a result of the high

interest rate, which was alleged to disproportionately impact minority borrowers like the

plaintiffs.35 The plaintiffs further alleged that they were induced to sign loan documents for a

loan that was unnecessarily expensive and made on less favorable terms than those for

Caucasians.36 They alleged that these practices were either intended to discriminate or had the

effect of discriminating against Hispanic and African-American borrowers.37

The court agreed with the defendants that the actual allegations of the complaint were too

vague to establish a plausible entitlement to relief under the FHA or the ECOA, 38 but it

granted the plaintiffs leave to amend their complaint in light of the arguments they made in their

30Id. at 9-10.31Id. at 11-12.

32Id. at 13-15.33Id. at 16-19, 25.34

Id. at 21.35Id. at 26.36Id. at 27.37Id. at 36, 48.38 2008 U.S. Dist. Lexis 3573 at *5, citing Bell Atlantic Corp. v. Twombly, __ U.S. __, 127 S.Ct. 1955, 1974, 167 L. Ed. 2d 929 (2007).


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brief. The plaintiffs contended that the defendant broker and others like it were more successful

in persuading African-American and Latino credit applicants to accept unnecessarily higher rates

and that the lender designed and established a financial incentive structure that encourages

brokers to engage in discretionary loan pricing.39 They also argued that the lender and its

brokers disproportionately targeted minority communities for loans and that the lender paid yield

spread premiums despite its knowledge through trade journals or other studies of pricing

disparities in subprime loans that have occurred as a result of race.40

The court held that if the

plaintiffs could make such allegations based on the facts which they had alleged, they were

entitled to amend.

41

The plaintiffs also brought a class claim under the ICFA for racial discrimination.

However, their class claim was dismissed because they conceded that it was barred by section

1691d(e) of the ECOA,42 which prohibits a double recovery under state law when claimants elect

to pursue federal remedies under the FHA and the ECOA.43 The court also dismissed their

individual ICFA claim against the lender since the plaintiffs admitted that the broker, not the

lender, committed the deceptive acts and the mere payment of a yield spread premium by the

lender was insufficient to establish that it was liable under the ICFA because the broker was its

agent.44

39Id. at *9.40

Id.41Id.42 15 U.S.C. 1691d(e).43 2008 U.S. Dist. Lexis 3573 at *10.44Id. at *12.


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Ware v. Indymac Bank, F.S.B.

Ware v. Indymac Bank, F.S.B.45

also combined allegations of mortgage fraud and racial

discrimination. On behalf of classes defined like those in Tribett,46 the plaintiffs alleged

violations of the FHA and the ECOA against a mortgage broker and a mortgage lender as well as

ICFA, TILA and CROA claims. The plaintiffs refinanced their mortgage for a third time in a

year and a half with the same mortgage broker after the broker solicited them.47 The refinance

proceeded on a no documentation basis, with the broker making oral requests for information

about employment, income and assets.48 The broker allegedly intentionally falsified this

information on the loan applications to qualify them for a higher loan amount and to increase its

commission.49 The broker also provided an inflated appraisal for the property.50 Contrary to

their expectation of a single refinanced loan, the refinance took the form of two loans, one with a

prepayment penalty and the other with a balloon payment.51 The plaintiffs also were not

provided with copies of a TILA disclosure statement or a notice of right to cancel at the time of

closing.52 And, the lender paid the broker a yield spread premium based on how much the

interest rate exceeded the base or par rate.53

The plaintiffs alleged that the defendants yield spread premium arrangement

disproportionately impacted minority borrowers such as themselves, a result which was either

45 534 F. Supp. 2d 835(N.D. 2008).46 Complaint at 50-51, 62-63, Ware v. Indymac Bank, F.S.B., No. 07 C 1982 (N.D. Ill. Apr.

10, 2007).47Id. at 11-14.48

Id. at 15.49Id. at 26-29.50Id. at 29-30.51Id. at 16.52Id. at 19.53Id. at 35.


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intended to discriminate or had a discriminatory effect.54 Accordingly, they allegedly were

induced to take out a loan that was unnecessarily expensive and that was made on less

favorable terms than loans defendants brokered or made to Caucasian individuals.55

The court held that the plaintiffs sufficiently stated a claim for racial discrimination since

they alleged that the lender paid and the broker received higher yield spread premiums on loans

made to minority borrowers, which necessarily impacted the rates charged to them, something

the defendants knew or intended.56

The defendants argued that the plaintiffs failed to show how

the yield spread premium was discriminatorily applied in violation of the FHA and that only bare

legal conclusions were stated. However, the court found that they had stated a right to relief

that is more than speculative because they have alleged sufficient facts to allege the possibility

that the defendants had discriminated against minority borrowers.57

The court also held that the ECOA claim for racial discrimination was adequately

pleaded for the same reasons, and that the making of an unnecessarily costly loan, not just the

denial of a loan, was a proper basis for an ECOA claim.58 Like the Tribettcourt, the Ware court

found that the plaintiffs election to seek a recovery under the FHA and the ECOA precluded an

ICFA class claim for discriminatory conduct pursuant to section 1691d(e) of the ECOA.59

Looking at the mortgage fraud aspects of the complaint, the court found that the plaintiffs

had properly alleged an individual ICFA claim against both the broker that dealt with them

directly and the lender that did not because they alleged that the lenders internal review of the

54Id. at 53, 65.55

534 F. Supp. 2d at 40.56Id.57Id.58Id.59Id. at 841, citing Tribett v. BNC Mortgage, Inc., 2008 U.S. Dist. Lexis 3573 at *3 (N.D. Ill.Jan. 17, 2008).


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automated underwriting and credit scoring systems, which allegedly had a discriminatory impact

on minority applicants.67

This was claimed to violate both the FHA and the ECOA.68

The defendants argued that the plaintiff failed to identify any specific discriminatory

policy or practice and therefore did not give them fair notice of his claims, as required under the

standard of Bell Atlantic Corp. v. Twombly.69 The plaintiff argued that there were racially

discriminatory assumptions embedded in the statistical formulas the defendants used and the

only way he could state more detail would be through taking discovery. The court accepted the

plaintiffs argument and found without further discussion that it is well established that a

disparate-impact claim is available under both the ECOA and FHA.

70

The defendants further argued that the Supreme Courts decision in Smith v. City of

Jackson71 barred a disparate impact claim, but the court rejected this. It found that Smith merely

held that the scope of a disparate impact claim was narrower under the Age Discrimination in

Employment Act72 than it was under Title VII of the Civil Rights Act of 1964,73 based on their

statutory history.74 It held that Smith does not reach so far as to prohibit disparate-impact

claims under other statutes that do not contain the same language; nor does it set forth a new test

for determining whether a statute supports disparate-impact claims.75

67Id. at 10-13(1st).68Id. at 24, 30.69 __ U.S. __, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).

70 2008 U.S. Dist. Lexis at *4, citing Latimore v. Citibank, F.S.B., 979 F. Supp. 662, 664 n.7(N.D. Ill. 1997); Metropolitan Housing Development Corp. v. Village of Arlington Heights,558 F.2d 1283, 1288-90 (7

thCir. 1977).

71 544 U.S. 228 (2005).72 Pub. L. No. 90-202, 81 Stat. 602 (codified at 29 U.S.C. 621-34 (2000)).73 Pub. L. No. 88-352, 78 Stat. 253 (codified at 42 U.S.C. 2000e-2000e-17 (2000)).74 2008 U.S. Dist. Lexis 13952 at *5 citing Smith, 544 U.S. at 240.75Id. at *5-6.


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Ramirez v. GreenPoint Mortgage Funding, Inc.

The plaintiffs in Ramirez v. GreenPoint Mortgage Funding,76 like those in Zamudio,

based their complaint solely on allegations of racial and ethnic discrimination. On behalf of

themselves and similarly situated black and Hispanic borrowers,77 the plaintiffs claimed that

GreenPoints Discretionary Pricing Policy had the effect of subjecting minority mortgage

borrowers to greater non-risk-related charges than paid by similarly situated white borrowers.78

They claimed that minorities were more likely to obtain GreenPoint mortgages through brokers,

as they did, than through GreenPoints retail channel due to the locations of GreenPoints

branches.

79

The plaintiffs claimed they did not know that a portion of their interest rate was

based on non-risk-related charges, and loans obtained through brokers were, on average, more

expensive than loans obtained directly from GreenPoint.80

GreenPoints Discretionary Pricing Policy allegedly had an adverse impact on minority

borrowers because they paid higher fees and rates than white borrowers who posed similar credit

risks.81 GreenPoint was alleged to have chosen to use a commission-driven, subjective pricing

policy that it knows or should have known has a significant and pervasive impact on minority

borrowers.82

The plaintiffs further alleged that [t]he disparities between the terms of

GREENPOINTs transactions involving minority homeowners and the terms involving white

homeowners cannot be a product of chance and cannot be explained by factors unrelated to race,

76 No. C08-0369 TEH, 2008 WL 20510018 (N.D. Cal. May 13, 2008).77

First Amended Complaint at 77.78Id. at 48.79Id, at 32.80Id, at 45.81Id, at 50.82Id, at 54.


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but, instead, are the direct causal result of the use of the discriminatory Discretionary Pricing

Policy.83

These claims formed the basis for alleged violations of the ECOA and the FHA.84

GreenPoint moved to dismiss the complaint on the grounds that the ECOA and the FHA

did not permit disparate impact claims and, moreover, the plaintiffs had not adequately alleged a

disparate impact claim. GreenPoint also argued that the plaintiffs complaint was time-barred.

The U.S. District Court for the Northern District of California rejected these arguments.

Like the Zamudio court, the court in Ramirez rejected the claim that Smith v. City of

Jackson nullified precedents allowing disparate impact claims under the ECOA and the FHA.

GreenPoint reads Smith too broadly, and no court has applied Smith to find that disparate impact

claims are not cognizable under the FHA or ECOA, the court wrote.85 Having found that a

disparate impact theory was available to the plaintiffs, the court next considered what was

necessary to state a claim under this theory.

GreenPoint argued, first, that the plaintiffs failed to identify a specific policy or practice

and, instead, are simply attacking the cumulative effects of pricing by thousands of independent

brokers.86 The court disagreed, holding that identifying the defendants Discretionary Pricing

Policy was sufficient to state a disparate impact claim.87

GreenPoint next argued that the

plaintiffs failed to allege that its minority borrowers received less favorable terms than its

similarly situated white borrowers. The court noted that the complaint relied heavily on Home

Mortgage Finance Act (HMDA)88 data pertaining to GreenPoint and other mortgage lenders to

support the plaintiffs claim that minority borrowers paid discretionary charges greater in both

83Id, at 52.

84Id. at 98-99, 105-106.85 2008 WL 20510018 at *3 (N.D. Cal. May 13, 2008).86Id. at *4.87Id. at *5.88 Pub. L. No. 94-200, 89 Stat. 1125 (codified at 12 U.S.C. 2801-10 (2000)).


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frequent and amount than similarly situated whites.89 The essence of the plaintiffs claim was

that minority GreenPoint borrowers were more likely than white borrowers to have received a

higher cost loan and, although differences in creditworthiness may have explained some of this

disparity, the Discretionary Pricing Policy explained a significant portion of the disparity. The

court ruled that these allegations were sufficient to allege a disparate impact of the Discretionary

Pricing Policy on minority borrowers compared to whites with similar credit risks.90

The defendant further argued that some of the claims were time-barred by the two-year

statute of limitations under the ECOA and the FHA because the complaint was filed more than

two years after they received their loan. The plaintiffs argued that the discovery rule, the

continuing violation doctrine, and GreenPoints fraudulent concealment of operative facts tolled

the statute. Because the court found the continuing violation argument persuasive, it did not

address alternative theories.91 The court held that the allegations of discriminatory conduct

constituted a pattern that continued into the limitations period and thus were timely.92

Miller v. Countrywide Bank, N.A.

In Miller v. Countrywide Bank, N.A.,93 plaintiffs alleged that Countrywide Bank, its

subsidiaries and retail mortgage lenders table-funded by Countrywide discriminated against a

nationwide class of African-American borrowers. As in Ramirez, plaintiffs claimed that

Countrywides Discretionary Pricing Policy authorizes unchecked, subjective surcharge of

89 2008 WL 20510018 at *5.90

Id.91Id, at *6.92Id.93 No. 07cv11275-NG, 2008 U.S. Dist. Lexis 62547 (D. Mass. July 30, 2008). The case wassubsequently transferred to the Western District of Kentucky as MDL 1974 pursuant to an orderof the U.S. Judicial Panel on Multidistrict Litigation (JPML Aug. 7, 2008).


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additional points and fees to an otherwise objective risk-based financing rate.94 This policy for

both retail and wholesale access to loans allegedly subjected black financing applicants to a

significantly higher likelihood of exposure to discretionary points, fees and interest mark-ups.95

Relief was sought for consumers who obtained home mortgage loans from Countrywide between

January 1, 2001 and the date of final judgment.96

In addition to the subjective non-risk based aspect which the Discretionary Pricing Policy

allegedly permitted, plaintiffs further alleged that because of Countrywides policies as to

where to place its offices and how to market its products, black borrowers are more likely than

white borrowers to apply for credit from Countrywide through its sub-prime subsidiary or

through a broker, further increasing mortgage costs in a discriminatory fashion.97 Plaintiffs

specifically alleged that HMDA data supported their claims of discrimination under the ECOA

and the FHA:

Based on the latest available Home Mortgage Disclosure Act(HMDA) data, available from the Department of Housing andUrban Development, blacks who borrow from Countrywide areover three times more likely than whites to have received a high-APR loan to purchase a home and over two times more likely tohave received a high-APR to refinance their home.98

The complaint detailed the risk-related process used by Countrywide to determine a

mortgage score on objective factors and a par rate for interest based on the mortgage score, 99

then alleged that the Discretionary Pricing Policy allowed subjective imposition of additional

94Complaint at 2.

95Id. at 3.96Id. at 18.97Id. at 31-32.98Id. at 33.99Id. at 40-43.


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non-risk based charges on regularly published rate sheets on top of the par rate.100 Despite

the Discretionary Pricing Policy being facially neutral, statistical analysis of other credit

pricing systems like that used by Countrywide allegedly revealed that blacks, after controlling

for credit risk, are substantially more likely than similarly situated whites to pay such

charges.101

Countrywide and the other defendants moved to dismiss the complaint on a variety of

grounds for failure to state a claim. They argued that plaintiffs had not sufficiently alleged the

existence of a specific discriminatory policy to support a disparate impact claim under the ECOA

or the FHA, that the disparate impact was insufficiently pleaded, that a causal connection

between the policy and the alleged disparate impact was insufficiently pleaded, and that some

claims were barred by the two-year statutes of limitation in the ECOA102 and the FHA.103

Like the Zamudio and Ramirez courts, the Millercourt rejected the claim that Smith v.

City of Jackson104

barred their claims. It held that what the Supreme Court required in Smith was

that the plaintiffs identify a Countrywide policy that had a discriminatory effect with sufficient

specificity. It found that they had done so:

Plaintiffs have identified the practice at issue: establishing a parrate keyed to objective indicators of creditworthiness whilesimultaneously authorizing additional charges keyed to factorsunrelated to those criteria. Plaintiffs alleged that that the net effectof that discretionary pricing policy yields a discriminatoryresult.105

100Id. at 44.

101Id. at 48.102 15 U.S.C. 1691e(f).103 42 U.S.C. 3613(a)(1)(A).104 544 U.S. 228, 125 S. Ct. 1536, 161 L. Ed. 2d 410 (2005).105 2008 U.S. Dist. Lexis 62547 at *13.


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Defendants argued that plaintiffs real argument was that Countrywides personnel

should not be able to negotiate the interest rate and points above the par rate set by the objective

criteria in the shadow of market forces.106 The court found defendants market forces

argument troubling because anti-discriminatory statutes like the ECOA and the FHA had been

enacted to correct what the market could not self-correct.107 It also found that a market

forces argument had previously been rejected in auto finance ECOA cases.108 The court further

found that both disparate impact and a causal connection were adequately pleaded.109

The argument that one of the plaintiffs claims was barred by the statute of limitations

because she filed suit more than two years after taking out a loan was also rejected. Like the

Ramirez court, theMillercourt accepted a continuing violation theory since the plaintiffs claim

challenged a continuing policy and practice -- namely the discretionary pricing policy which

enables racial discriminatory practices, unrelated to creditworthiness -- the effects of which she

continues to experience.110 Although it observed that the courts were divided on whether the

discovery rule applies to ECOA and FHA cases, and thus whether such cases must be filed

within two years after the loan has been taken out, the court found no need to address that issue

because of finding that that there was a continuing violation.111

RACIAL DISCRIMINATION IN AUTO FINANCE

Ten years after it settled the last of a series of class action cases against mortgage lenders

which alleged that their commission-driven pricing systems discriminated against racial

106Id. at *13-14.107Id. at *16.108

Id., citing Jones v. Ford Motor Credit Co., 2002 U.S. Dist. Lexis 1098 (S.D.N.Y. Jan. 22,2002); Smith v. Chrysler Financial Co., U.S. Dist. Lexis 1798 (D.N.J. Jan. 15, 2003).109Id. at *18-21.110Id. at *27.111Id. at *34. However, it found that fraudulent concealment sufficient to toll the statute oflimitations was not adequately pleaded. Id. at *35.


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minorities,112 the DOJ announced settlements with two Philadelphia-area auto dealers which

allegedly had engaged in a pattern or practice of discrimination against African-American

customers by charging them higher interest rates on auto loans. In both United States v.

Springfield Ford, Inc.113

and United States v. Pacifico Ford, Inc.,114 the DOJ alleged that the

dealers systematically charged higher markups, known as dealer reserves,115 on auto loan interest

rates to African-American customers. The consent orders enjoined both dealers from

discriminating against any consumer on the basis of race or color in terms or conditions for the

extension of credit, including the setting of dealer reserves and APR interest rates.116 In addition,

the dealers were restricted to interest rate caps on dealer reserves of not more than 2.5% for

credit contracts with a term of 60 months or less or 2.0% where the term was greater than 60

months.117 Among other things, the consent orders further required the dealers to prepare formal

written guidelines to effectuate the interest rate caps, including requiring their employees to

document good faith, competitive reasons for negotiating a lower dealer reserve for any

transaction that deviated from the caps.118 The dealers also were required to establish training

112See Press Release, U.S. Dept of Justice, Justice Department Reaches Settlement With NewMexico Lender that Allegedly Discriminated Against Hispanics (Jan. 28, 1997),http://www.usdoj.gov/opa/pr/1997/january97/036cr.htm. See also Fair Lending 2008 at 665.113 No. 07 C 3469 (E.D. Pa.).114 No. 07 C 3470 (E.D. Pa.).115 Dealer reserves, also known as APR splits, credits, dealer spreads or dealer markups, arisewhen a finance company sets a minimum acceptable APR interest rate on credit contracts that itwill purchase, typically called its buy rate, and compensates the dealer for all or a portion ofthe extra interest if the dealer negotiates an APR interest rate that is higher than the buy rate.

See Fair Lending 2007 at 664; Eugene J. Kelley, Jr., John L. Ropiequet & Anna-Katrina S.Christakis,APR Splits: Still Legal After All These Years, 56 Consumer Fin. L.Q. Rep. 296, 296-97 (2002).116 Consent Orders at 5, United States v. Springfield Ford, Inc., No. 07 C 3469 (E.D. Pa. Sept.17, 2007), United States v. Pacifico Ford, Inc., No. 07 C 3470 (E.D. Pa. Sept. 17, 2007)[hereinafter Consent Orders].117 Consent Orders at 6.118 Consent Orders at 7.


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programs for their employees and to set up settlement funds to reimburse past victims of

discrimination.119

The DOJ noted that its consent orders resulted from an investigation

conducted jointly by it and the Pennsylvania Attorney Generals Office.120

The court records for the two cases consist solely of the complaints121 and the consent

orders filed with the court on the same day as the complaints. There is, therefore, no factual

record available to indicate what evidence of discrimination the DOJ and the Pennsylvania

Attorney General relied upon to show either intentional discrimination by the dealers or a

disparate impact on minorities. Thus, like the auto finance company settlements before them, the

consent orders give no guidance as to what conduct by auto dealers impermissibly crosses the

line into racial discrimination.122

The terms of the consent orders imposing restrictions on dealer conduct with respect to

setting dealer reserves were clearly modeled on the auto finance company settlements. The cap

on the dealer reserve of 2.0 to 2.5 percentage points is the same as what the auto finance

companies agreed to in their class action settlements.123 The requirement that dealer personnel

document deviations from the dealer reserve interest rate caps appears to make the caps not just a

119 Consent Orders at 14-21. Springfield Fords fund was designed to compensate pastvictims of discrimination up to $94,565 and Pacifico Fords fund was designed to pay up to$363,166.120 See Press Release, Justice Department Reaches Settlement With Two Philadelphia CarDealerships Regarding Alleged Race Discrimination in Auto Lending,http://www.usdoj.gov/opa/pr/2007/ august/07CRT639.html. Pennsylvania recovered costs of upto $15,000 from Springfield Ford and up to $40,000 from Pacifico Ford for future public

protection purposes. See Press Release, Attorney General Corbett Announces $55,000Settlement With Two Philadelphia Car Dealerships For Alleged Racial Discrimination Practices,http://www.attorneygeneral.gov/press.aspx?id=2830.121 See Complaint, United States v. Springfield Ford, Inc., No. 07 C 3469 (E.D.Pa. Aug. 21,2007); Complaint, United States v. Pacifico Ford, Inc., No. 07 C 3470 (E.D. Pa. Aug. 21, 2007).122SeeFair Lending 2007at 671-73.123See Fair Lending 2005 at 638-43; Fair Lending 2006at 820-24; Fair Lending 2007at 668-71.


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ceiling, but also a floor, with deviations from the caps to be justified only on the basis of meeting

competition. Thus, the consent orders contemplate that non-discriminatory conduct will be

assured by placing auto dealers and their personnel into a regulatory straitjacket which eliminates

discretionary action that might have a discriminatory impact on minority customers.

Conclusion

Although there has been some commentary which argues that mere discriminatory

effects, as opposed to intentional discrimination, are not sufficient to establish a violation of the

ECOA,124 there are still no case decisions which adopt that view. Where that issue has been

raised, the courts have ruled that both the FHA and the ECOA allow disparate impact claims.

Mortgage fraud and other predatory lending practices, which are likely to be relatively

easy to prove if such a case proceeds to a trial on the merits, have been successfully employed to

bolster claims of racial discrimination in mortgage lending, which may not be nearly so easy to

prove. Like the auto finance company ECOA litigation, the mortgage lending ECOA/FHA cases

have survived initial pleading challenges. Although the decisions reported to date have only

included one case where the plaintiffs made use of expanded information collected and disclosed

under the HMDA, unlike cases reported in the previousAnnual Survey,125 such data are likely to

be used to support many more claims of racial discrimination in mortgage lending as more cases

are filed and make their way through the courts.

The DOJ has seemingly given its imprimatur to employing the interest rate caps on dealer

reserves that arose in the settlements of the auto finance company class action cases. It is likely

124 See Peter N. Cubita and Michelle Hartmann, The ECOA Discrimination Proscription andDisparate Impact Interpreting the Meaning of the Words that Actually Are There, 61 Bus. Law.829 (2006).125See Fair Lending 2008 at 666-70.


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that if the DOJ brings more enforcement actions against auto dealers or auto finance companies,

it will seek to impose the same interest rate limits. Significantly, requiring the limits to be used

as both a cap and a floor in the absence of documented good cause for deviating from the caps

suggests that the DOJs enforcement agenda includes eliminating the possibility of

discriminatory conduct by effectively eliminating the exercise of discretion in setting dealer

reserves. Use of such caps on almost a non-discretionary basis thus may perhaps provide the

safe harbor that the statutes, regulations and case law have so far failed to provide to enable

creditors to show that they have not discriminated against members of protected minorities.

Recent Developments in Fair Lending, The Business Lawyer 563 (Vol.64, No.2,

February, 2009) (with L. Jean Noonan)

This document is republished with permission.

Documents

Recent Development in Fair Lending