The Consumer Financial Protection Bureau now possesses a Supreme Court majority opinion as reinforcement to continue to leverage disparate impact as a regulatory method to oversee and potentially reprimand the auto finance industry.

The Supreme Court released its opinion this week on a case involving the Fair Housing Act, but a wide array of legal experts and industry supporters explained the CFPB can use the high court’s 5-4 decision to keep disparate impact theory as pathway of vehicle financing enforcement.

To recap, disparate impact is a theory where a policy or practice can be deemed discriminatory and illegal if it has a disproportionate adverse effect on minorities or other protected classes, even if unintentional. It’s the theory the CFPB used to penalize Ally Financial at the end of 2013 to the tune of $80 million.

The CFPB uses the Bayesian Improved Surname Geocoding (BISG) proxy methodology to determine disparate impact to legally protected groups. Officials explained that BISG estimates race and ethnicity based on an applicant’s name and census data. 

The legal theory became the focus of a debate in front of the Supreme Court back in January with the case of the Texas Department of Housing and Community Affairs versus the Inclusive Communities Project. The case focused on the use of low income housing tax credits, which are federal tax credits distributed to low-income housing developers by state housing authorities.

In 2009, the Inclusive Communities Project (ICP) sued the Texas Department of Housing and Community Affairs (TDHCA) claiming that TDHCA disproportionately granted tax credits to minority neighborhoods and away from affluent neighborhoods, a practice attorneys said perpetuated segregation in violation of the Fair Housing Act. At trial, ICP attempted to show discrimination by disparate impact, and the court ruled against TDHCA, which later appealed claiming that the district court used the wrong standard to evaluate disparate impact claims.

Ruling in favor of ICP were associate justices Ruth Bader Ginsburg, Sonia Sotomayor, Stephen Breyer, Elena Kagan and Anthony Kennedy, who wrote the opinion for the majority. Opposing the decision were chief justice John Roberts and associate justices Antonin Scalia, Clarence Thomas and Samuel Alito Jr. While Alito composed the opposing opinion, Thomas also penned a separate dissenting view, too.

In fact, Alito closed the dissenting document by stating, “We should avoid, rather than invite, such ‘difficult constitutional questions.’ By any measure, the court today makes a serious mistake.”

Industry reaction to Supreme Court’s decision

Terry O’Loughlin, who spent more than 15 years with the attorney general’s office in Florida specializing in the prosecution of dealerships and others involved in the auto industry, concurred with Alito and the dissenting justices. After leaving his prosecutorial post, O’Loughlin joined Reynolds and Reynolds where he has been the director of compliance for nearly a decade.

“As with some of its other recent decisions, the Supreme Court’s decision in this case is a manifest departure from commonsense and judicial prudence,” O’Loughlin said in a message to SubPrime Auto Finance News. “The mission of any court or judge is to interpret the law as written not to fabricate additions to it to advance a certain agenda.  If a federal act, such as the Fair Housing Act, doesn’t include certain legal theories in the act to apply, it is not the court’s role to provide them.”

“The CFPB will now feel vindicated,” O’Loughlin continued. “This decision will embolden it to continue its social engineering experiment causing higher costs to the public without much benefit.  All dealers should implement the NADA’s Fair Credit Compliance Policy & Program with dispatch.”

Long before the Supreme Court heard arguments about disparate impact, the American Financial Services Association commissioned a nearly year-long study about how the CFPB uses BISG to show discrimination. AFSA said its examination of more than 8.2 million auto financing contracts found that the disparity alleged by the CFPB between the amount of dealer reserve charged to minorities and non-minorities is not supported by data.

AFSA president and chief executive officer Chris Stinebert looked for the positives of the outcome through a message to SubPrime Auto Finance News.

“The U.S. Supreme Court upheld the theory of disparate impact under the Fair Housing Act in Texas Department of Housing and Community Affairs, et al. v. The Inclusive Communities Project, Inc., but significantly narrowed how disparate impact can be used,” Stinebert said. “While important for the housing market, the ruling does not extend to other areas of consumer lending such as vehicle finance.

“Several important distinctions exist between the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA), the statute under which the Consumer Financial Protection Bureau (CFPB) has authority to oversee auto lenders,” he continued.

“Specifically, ECOA does not contain “effects” language contained in other anti-discrimination statutes. The Supreme Court determined that the language contained in the FHA is equivalent to language found in other civil rights statutes that recognize disparate impact,” Stinebert went on to say.

In a statement posted on the organization’s website, American Bankers Association president and chief executive officer Frank Keating reiterated his apprehension about what the broad implications of using disparate impact might be.

“ABA and our members are strong advocates for fair lending and enforcement of the Fair Housing Act. Disparate Impact theory, however, is not the right tool to achieve fairness and prevent discrimination in lending,” Keating said. “This approach can have unintended consequences, such as causing financial institutions to shrink their operations rather than risk litigation, hurting the very groups it is intended to help.        

“We believe that fair lending is achieved by consistently adhering to the same safe and sound credit standards for making, pricing and servicing loans for all customers, eliminating the potential for unfair treatment of any individual,” he continued.

“The banking industry is committed to a discrimination-free lending environment. ABA will continue to work with federal agencies to establish clear criteria about how a bank’s fair lending performance will be judged,” Keating went on to say.

Disparate impact questions raised in opinions

Even in his majority opinion, associate justice Kennedy acknowledged the potential problems using disparate impact can pose in an enforcement action.

“In a similar vein, a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity,” Kennedy wrote. “A robust causality requirement ensures that ‘[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact’ and thus protects defendants from being held liable for racial disparities they did not create.”

Kennedy explained this case provided an example.

“From the standpoint of determining advantage or disadvantage to racial minorities, it seems difficult to say as a general matter that a decision to build low-income housing in a blighted inner-city neighborhood instead of a suburb is discriminatory, or vice versa,” Kennedy wrote. “If those sorts of judgments are subject to challenge without adequate safeguards, then there is a danger that potential defendants may adopt racial quotas — a circumstance that itself raises serious constitutional concerns.

“Courts must therefore examine with care whether a plaintiff has made out a prima facie case of disparate impact and prompt resolution of these cases is important,” he continued. “A plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact.”

Kennedy went on to mention in the majority opinion that the limitations on disparate-impact liability are also necessary to protect potential defendants against “abusive” disparate-impact claims.

“If the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system,” Kennedy wrote. “And as to governmental entities, they must not be prevented from achieving legitimate objectives.”

Despite that analysis, the five associate justices made their decision to affirm disparate impact use.

“In light of the longstanding judicial interpretation of the FHA to encompass disparate-impact claims and congressional reaffirmation of that result, residents and policymakers have come to rely on the availability of disparate impact claims,” Kennedy wrote.

Meanwhile associate justice Alito constructed a legal crescendo that climaxed with him claiming the high court made an error with this judgment.

“The text of the FHA simply cannot be twisted to authorize disparate-impact claims. It is hard to imagine how Congress could have more clearly stated that the FHA prohibits only intentional discrimination than by forbidding acts done ‘because of race, color, religion, sex, familial status, or national origin,’” Alito wrote.

“Congress has done nothing since 1968 to change the meaning of the FHA prohibitions at issue in this case. In 1968, those prohibitions forbade certain housing practices if they were done ‘because of’ protected characteristics,” he continued. “Today, they still forbid certain housing practices if done ‘because of’ protected characteristics. The meaning of the unaltered language adopted in 1968 has not evolved.

Alito closed the dissenting opinion by emphasizing “privileging purpose over text also creates constitutional uncertainty.

“The court acknowledges the risk that disparate impact may be used to ‘perpetuate race-based considerations rather than move beyond them,’ he wrote. “Yet it still reads the FHA to authorize disparate-impact claims. We should avoid, rather than invite, such ‘difficult constitutional questions.’ By any measure, the court today makes a serious mistake.”