The document discusses the increasing focus on fair lending laws and the disparate impact doctrine as federal agencies ramp up efforts to combat discriminatory practices in credit markets. The Consumer Financial Protection Bureau (CFPB) is leading these initiatives, raising concerns among lenders regarding compliance with new regulations stemming from the Dodd-Frank Act. As various cases related to discriminatory practices are settled or postponed, the federal crackdown continues, with implications for the mortgage industry and potential benefits for legal professionals navigating the evolving regulatory landscape.

1. Temperature Rising: Fair Lending Law
Gets Hotter, Puts New Focus on Disparate
Impact Doctrine
A LexisNexis® White Paper

2. Highlights
•
Federal departments and agencies are intensifying their efforts to stamp
out discriminatory practices that unlawfully deny segments of society
fair access to credit markets.
Perhaps that’s because pickpocketing itself has a rich and colorful history.
As entertainment, the art can be both astounding and at times downright
hilarious.2 It is less so when it is conducted with more serious intent.
In such circumstances, law enforcement officials naturally take a dim view
of the activity.
•
The Consumer Financial Protection Bureau (CFPB) has joined other
federal agencies in supervising fair lending practices, and in view of its
broad mandate, lenders will need to be more vigilant than ever in their
compliance with a wide range of anti-discrimination laws and regulations.
So, too, do some federal agencies when they liken certain discriminatory
practices to “silent pickpocketing.” They are referring to actions—intentional
or otherwise—that unlawfully price out or deny segments of society from fair
access to credit markets.
•
The CFPB has signaled that it intends to play hardball when it comes
to Home Mortgage Disclosure Act data integrity. It has also moved
aggressively to put its stamp on auto financing.
Those agencies are now intensifying their efforts to stamp out such practices.
Fair lending law is heating up, and with that a fresh debate concerning the
“disparate impact” classification of discrimination has been ignited.
•
A set of sweeping new CFPB mortgage rules stemming from Dodd-Frank
have alarmed financial institutions and increased worries of exposure to
greater risk of federal scrutiny under the disparate impact doctrine.
The Shape of Things to Come
•
Two cases that might have settled whether disparate impact should
apply under the Fair Housing Act were settled shortly before they were
to be argued before the Supreme Court; however, there might still be an
opportunity to test the theory.
•
According to The Wall Street Journal, top in-house lawyers will likely
benefit as they play an increasingly key role in helping organizations
navigate a multitude of new regulations and other legal challenges.
Introduction
The School of the Seven Bells is a fabled academy for pickpockets and
thieves that supposedly exists somewhere in Colombia. The mysterious
educational institution gets its name from the final exam its students must
pass. In that test, the instructor’s clothing is booby-trapped with seven
strategically placed small bells. The students must slip valuables from the
instructor’s pockets without allowing any of the bells to ring.
The story often changes, but whatever the truth—if there is any—the legend of
such an academy for advancing the fine art of petty larceny refuses to die.1
What’s happening now has been in the making for several years. When
President Obama took office in 2009, for example, his administration
inherited a financial crisis that disproportionately affected minorities. And
while there are increasing signs of a recovery from the Great Recession, years
of economic progress have vanished for many African Americans and
Hispanics in particular, and home ownership remains largely out of reach.3
That has put new energy into efforts to ensure that the economic turnaround
is more inclusive.
Another factor is the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank), which was passed by Congress in 2010.
It brought about the creation of the Consumer Financial Protection Bureau
(CFPB), which has since joined other federal agencies in supervising fair
lending practices. In view of the CFPB’s broad mandate, lenders will need
to be more vigilant than ever in their compliance with a wide range of
anti-discrimination laws and regulations.
“The CFPB’s work in the area of fair lending is a priority and has only just begun,”
the agency declared in its first report on the subject to Congress4 in December
2012. In a statement accompanying the report, Patrice Alexander Ficklin, the
CFPB’s Assistant Director for Fair Lending and Equal Opportunity, said she will
provide a “fresh look at ways that a federal agency with fair lending supervisory,
Temperature Rising: Fair Lending Law Gets Hotter, Puts New Focus on Disparate Impact Doctrine

3. enforcement and rule-making responsibilities can ensure compliance with the
federal fair lending laws, while also promoting access to responsible credit for
underserved markets and consumers.”
Such remarks alarmed the financial industry at the time, and while the agency
has since worked hard to be cordial in its dealings with lending institutions, it
has also shown a firm resolve to make good on its promise to protect
consumers by various means at its disposal.
In Hot Pursuit
One way the CFPB has put lenders on notice is by signaling that it intends to play
hardball when it comes to Home Mortgage Disclosure Act (HMDA) data integrity.
To prove the point, it has conducted reviews at dozens of mortgage companies
and released consent orders5 with civil penalties for significant data errors.
The CFPB has also moved aggressively to put its stamp on auto financing.
“Consumers should not have to pay more for a car loan simply based on their
race,” said CFPB Director Richard Cordray in a media release6 accompanying
the issuance of a March 2013 bulletin7 intended to clarify the agency’s
“authority to pursue auto lenders whose policies harm consumers through
unlawful discrimination.”
The bulletin provided guidance for indirect auto lenders on ways to limit fair
lending risk, while reminding its readers that the Equal Credit Opportunity Act
makes it illegal for a creditor to discriminate in any way, including based on
race, color, religion, national origin, sex, marital status and age.
With that in mind, the CFPB recommended that indirect auto lenders should
“take steps to ensure that they are operating in compliance with fair lending
laws as applied to dealer markup and compensation policies.”
Other Factors in Play
Of course, that’s not the only news in fair lending law. A set of sweeping new
CFPB rules stemming from Dodd-Frank are expected to fundamentally alter
how the U.S. mortgage industry functions. From a high level, the new rules8
implement various Dodd-Frank sections and amend several existing
regulations, including Regulations Z, X and B, which implement the Truth in
Lending Act, Real Estate Settlement Procedures Act and Equal Credit
Opportunity Act, respectively.
The Ability-to-Repay (ATR) and Qualified Mortgage (QM) Standards Rule has
garnered the most attention.9 It is intended to protect consumers from
“irresponsible” mortgage lending by requiring that lenders follow strict
procedures for determining that prospective borrowers can actually repay
their loans. “We believe it is critical to move forward so these rules can
deliver the new protections intended for consumers,” Director Cordray has
remarked repeatedly.
That message concerns many in the mortgage industry who say that the new
rules will require additional effort and resources to ensure compliance.
There’s also a worry that the ATR/QM rule could expose financial institutions
to greater risk of federal scrutiny under the disparate impact doctrine that,
along with overt and comparative disparate treatment, is fundamental to
anti-discrimination laws.
Specifically, lenders are concerned that a facially neutral policy (e.g., issuing
Qualified Mortgages only) could be perceived to have a disproportionately
negative effect on a protected class. That fear prompted federal bank
regulatory agencies and the CFPB to issue an Interagency Statement on Fair
Lending Compliance10 on October 22, 2013. In it, the agencies outlined some
principles that will guide supervision and enforcement, while indicating that a
lender’s decision to originate only Qualified Mortgages would not elevate the
institution’s fair-lending risk, “absent any other factors.”
Still, the unease persists. Mortgage applicants in protected classes will
disproportionately fail to meet ATR/QM requirements, given the current
home ownership landscape. Also, while the regulatory agencies have weighed
in on the matter with general and specific guidance, there remains the
potential for private litigation based on disparate impact theory.
Silver Linings for Some
Indeed, such litigation has already occurred. The result so far is that the
disparate impact doctrine remains intact, but that’s largely by default. Two
cases that might have settled whether disparate impact should apply under
the Fair Housing Act (FHA), for example, were settled shortly before they
were to be argued before the Supreme Court, thereby sparing the
government potentially risky showdowns over the doctrine’s legitimacy.
Temperature Rising: Fair Lending Law Gets Hotter, Puts New Focus on Disparate Impact Doctrine

4. The court had agreed to consider the issue in Magner v. Gallagher,11 a test of
disparate impact involving the city of St. Paul, Minnesota. However, that
opportunity was scuttled when the city dropped its appeal at the urging of the
Justice Department. That bought the federal government some time—and
also some unwanted controversy. As head of the DOJ’s Civil Rights Division,
current Labor Secretary Thomas Perez reportedly arranged a deal12 under
which St. Paul withdrew its appeal and the Department agreed not to pursue a
fraud suit against the city.
More recently, the Supreme Court agreed to hear Township of Mount Holly v.
Mt. Holly Gardens Citizens in Action,13 in which a group of residents of Mount
Holly, New Jersey, argued that redevelopment efforts by the city had a
disparate impact on an area’s predominantly African American and Hispanic
populations. But that, too, was settled shortly before the case was to be
heard, thus delaying a debate about whether such claims could be brought
under the FHA. Moreover, questions were raised about the source of funding
used to settle the dispute.14
In both instances, critics—who, feeling suddenly deprived, might have easily
invoked pickpocket analogies of their own—questioned federal involvement
in derailing the cases.
Whether there is anything to such accusations, the fact remains that the
cases were not heard. However, there might still be an opportunity to test the
disparate impact theory in court.
The American Insurance Association and the National Association of Mutual
Insurance Companies—organizations whose members sell homeowners
insurance—have filed a lawsuit15 in the U.S. District Court for the District of
Columbia in which they are challenging the Department of Housing and Urban
Development’s February 2013 final rule16 formalizing the use of disparate
impact under the FHA. The associations are seeking to invalidate the rule on
the grounds that the FHA prohibits only intentional discrimination. It’s not yet
known when the case will be heard.
In the meantime, the federal crackdown on discriminatory practices goes on,
and disparate impact is often invoked in lawsuits against banks and other
institutions. Those suits are paying handsome dividends, too. For example,
Bank of America Corporation, Wells Fargo & Company and SunTrust Banks,
Inc. are just a few prominent institutions that have agreed to pay at least
$480 million to settle claims since 2011, the non-profit news organization
ProPublica17 has reported.
Without a doubt, fair lending law is getting hotter. The good news? According
to The Wall Street Journal, top in-house lawyers will likely benefit,18 as general
counsel play an increasingly key role in helping organizations navigate a
multitude of new regulations and other legal challenges.
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Temperature Rising: Fair Lending Law Gets Hotter, Puts New Focus on Disparate Impact Doctrine

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1
Pickpocket, “School of Seven Bells,” Beware of Pickpockets
(blog), August 19, 2010, http://pickpocket.blog.ca/2010/08/19/
school-of-seven-bells-9205095/.
2
Adam Green, “A Pickpocket’s Tale: The Spectacular Thefts of
Apollo Robbins,” The New Yorker, January 7, 2013, http://www.
newyorker.com/reporting/2013/01/07/130107fa_fact_green.
3
4
5
6
7
Prashant Gopal, “Hurt by Housing Bust, Black Homeowners
Miss Out on the Recovery,” Bloomberg Businessweek,
September 5, 2013, http://www.businessweek.com/articles/
2013-09-05/hurt-by-housing-bust-black-homeowners-miss-outon-the-recovery.
Consumer Financial Protection Bureau, Fair Lending Report of
the Consumer Financial Protection Bureau, December 2012,
http://files.consumerfinance.gov/f/201212_cfpb_fair-lendingreport.pdf.
Karen M. Morgan, “CFPB ramps up enforcement of HMDA,”
CFPB Monitor (blog), October 11, 2013, http://www.cfpbmonitor.
com/2013/10/11/cfpb-ramps-up-enforcement-of-hmda-2/.
Consumer Financial Protection Bureau, “CFPB to Hold Auto
Lenders Accountable for Illegal Discriminatory Markup,”
March 21, 2013, http://www.consumerfinance.gov/newsroom/
consumer-financial-protection-bureau-to-hold-auto-lendersaccountable-for-illegal-discriminatory-markup/.
Consumer Financial Protection Bureau, CFPB Bulletin, March
21, 2013, http://files.consumerfinance.gov/f/201303_cfpb_
march_-Auto-Finance-Bulletin.pdf.
8
Real Law Editorial Team, “Are You Ready? New DoddFrank Mortgage Rules Set for Early 2014,” This Is Real
Law (blog), November 4, 2013, http://www.thisisreallaw.
com/hot-topics/2013/11/04/new-dodd-frank-mortgage-rules.
html#sthash.5a2lUoSy.NxoGaWFi.dpuf.
14 Hans A. von Spakovsky, “Possible Use of Federal Dollars in
Settlement of Mount Holly Case,” National Review Online,
November 13, 2013, http://nationalreview.com/corner/363891/
possible-use-federal-dollars-settlement-mount-holly-case-hansvon-spakovsky.
9
Consumer Financial Protection Bureau, “Ability to Repay and
Qualified Mortgage Standards Under the Truth in Lending Act
(Regulation Z),” http://www.consumerfinance.gov/regulations/
ability-to-repay-and-qualified-mortgage-standards-under-thetruth-in-lending-act-regulation-z/.
15 Arthur D. Postal, “Industry Moves to Have Courts Vacate
Disparate Impact Rule,” Property Casualty 360, July 23, 2013,
http://www.propertycasualty360.com/2013/07/23/industrymoves-to-have-courts-vacate-disparate-imp.
10 Consumer Financial Protection Bureau et al., “Interagency
Statement on Fair Lending Compliance and the Ability-to-Repay
and Qualified Mortgage Standards Rule,” http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131022a1.pdf.
11 Legal Information Institute, Cornell University Law School,
“Magner v. Gallagher (10-1032),” LII Supreme Court Bulletin,
http://www.law.cornell.edu/supct/cert/10-1032.
12 “The Talented Mr. Perez: How Obama’s Labor nominee
muscled a city to drop a Supreme Court case,” The Wall Street
Journal, March 21, 2013, http://online.wsj.com/news/articles/SB
10001424127887324281004578356581889324790.
13 Legal Information Institute, Cornell University Law School,
“Township of Mount Holly v. Mount Holly Garden Citizens in
Action, Inc.,” LII Supreme Court Bulletin, http://www.law.cornell.
edu/supct/cert/11-1507.
16 U.S. Department of Housing and Urban Development, “HUD
Issues Rule Formalizing Standard on Discriminatory Effects
in Housing,” February 8, 2013, http://portal.hud.gov/hudportal/
HUD?src=/press/press_releases_media_advisories/2013/
HUDNo.13-022.
17 Christie Thompson, “Disparate Impact and Fair Housing:
Seven Cases You Should Know,” ProPublica, Feb.12, 2013,
http://www.propublica.org/article/disparate-impact-and-fairhousing-seven-cases-you-should-know.
18 Jennifer Smith, “For Corporate Lawyers, the Good Times Keep
Getting Better,” The Wall Street Journal Law Blog, November
19, 2013, http://blogs.wsj.com/law/2013/11/19/for-gcs-thegood-times-keep-getting-better/.
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