Serving clients for 120 years. How Disparate Is Your Impact? The Current State of Fair Lending...

Serving clients for 120 years.

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How Disparate Is Your Impact?The Current State of Fair Lending Litigationand Litigation Interruptus

L. Jean NoonanHudson Cook LLPWashington, D.C

John L. RopiequetArnstein & Lehr LLP

Chicago, Illinois

American Bar AssociationCommittee on Consumer Financial ServicesWinter Meeting – Park City, UtahJanuary 10-12, 2014

Gary KleinKlein Kavanagh Costello, LLP

Boston, Massachusetts


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What’s happened with disparate impact fair lending claims after Wal-Mart Stores, Inc. v. Dukes (June 2011)?

With millions of discretionary decisions, need some “glue” to hold the decision-making together for classwide resolution to be possible

Giving discretion to local managers is the opposite of the uniform practice needed for a nationwide class action

With no common mode of exercising discretion identified, pervasive non-common issues make a class action impossible.


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The end of national class actions?

Wells Fargo (N.D. Cal.) – class certification denied Sept. 2011 – settled Mar. 2012

Countrywide (W.D. Ky.) – class certification denied Oct. 2011–affirmed by 6th Cir. Jan. 2013

Barrett v. H&R Block (D. Mass.) – class decertified Sept. 2012 –appeal denied by 1st Cir. Feb. 2013

Rodriguez v. National City Bank (E.D. Pa.) – class settlement approval denied Sept. 2011– affirmed by 3d Cir. Aug. 2013


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What’s happened post-Dukes?

Are “regional” or “local” fair lending class actions being filed?

Harris v. Citigroup (D. Mass. Aug. 2012)

Are individual fair lending cases being filed?


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What is the Government’s Reaction to Dukes?Big settlements come out of the pipeline

U.S. v. Countrywide (C.D. Cal. Dec. 2011) - $335M

U.S. v. SunTrust (E.D. Va. May 2012) - $21M

U.S. v. Wells Fargo (D.D.C. July 2012) - $175M – DOJ expresses disparate impact in terms of odds instead of HMDA discrepancies in basis points


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What is the Government’s Reaction to Dukes?

Small settlements, too

U.S. v. C&F Mortgage (E.D. Va. Sept. 2011) - $140,000

U.S. v. GFI Mortgage Bankers (S.D.N.Y. Aug. 2012) - $3.5M plus admission of guilt

U.S. v. Texas Champion Bank (S.D. Tex. Feb. 2013) - $700,000

U.S. v. Plaza Home Mortgage (S.D. Cal. Sept. 2013) - $3.0M

U.S. v. Southport Bank (E.D. Wis. Sept. 2013) - $687,000


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Bold Statements by the RegulatorsDOJ statement by AAG Perez Nov. 2011

“This Administration has been clear: we will pursue discrimination cases based on both intentional discrimination and disparate impact. Both theories are legitimate and critical tools of robust civil rights enforcement.”


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Bold Statements by the RegulatorsCFPB statements by Director Cordray:

“We want consumers to avoid the marketplace’s silent pickpocket – discrimination. We cannot afford to tolerate practices, intentional or not, that unlawfully price out or cut off segments of the population from the credit markets.” (Apr. 2012)

Strong statement “reaffirming” that disparate impact doctrine is “the law of the land.” (Nov. 2013)


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Bold Statements by the RegulatorsHUD final rule on disparate impact in fair lending cases (Feb. 2013) Plaintiff’s burden to show prima facie case that

the practice “actually or predictably results in a discriminatory impact.”

Burden then shifts to defendant to prove that the practice “is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests.”

Plaintiff may then establish liability by proving that the defendant’s interest “could be served by a practice that has a less discriminatory effect.”


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What About Auto Finance?

CFPB Bulletin 2013-02 (Mar. 21, 2013) Option 1: Eliminate dealer discretion on finance

charge markups Option 2: Impose controls on dealer markups, monitor

and address effects of policy that create “unexplained pricing disparities on prohibited bases”

CFPB Compensation Options (Nov. 13, 2013)

Flat dollar amount Flat percentage of amount financed Hybrid based on percentage of amount financed and

loan termEnforcement actions in the DOJ/CFPB

pipeline?


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Ally – The First Pipeline Blast

Ally Bank and Ally FSI settled charges by CFPB and DOJ of alleged pricing disparities disfavoring blacks, Hispanics, Asians and Pacific Islanders (E.D. Mich. Dec. 2013)

$80 million in refunds and $13 million in civil penalties, plus choice of ongoing restitution or eliminating dealer markups


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What’s Happened in the Supreme Court on Disparate Impact?

Magner v. Gallagher, no. 10-1032 – cert. petition withdrawn after settlement brokered by DOJ two weeks before oral argument Feb. 2012

Twp. of Mt. Holly v. Mt. Holly Gardens Citizens in Action, no. 11-1507 – cert. petition withdrawn after settlement two weeks before oral argument Dec. 2013

American Insurance Ass’n v. HUD (D.D.C. filed June 2013) – a challenge to disparate impact in the on-deck circle?


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Current Cases of Interest

Wells Fargo REO discrimination settlements over handling of foreclosed properties with HUD and National Fair Housing Alliance (June 2013)

Additional REO discrimination administrative complaints pending and expanding geographically against U.S. Bank and Bank of America

Adkins v. Morgan Stanley (S.D.N.Y. July 2013) – claims of discrimination by mortgage securitizer survive motion to dismiss


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Rodriguez v. National City Bank ◦ Class action dismissed, CFPB and DOJ

take over (E.D. Pa. Aug. 2013)◦ $35 million consent order settlement

on 9 to 14 BP differentials (W.D. Pa. Dec. 2013)

FHFA v. City of Chicago (N.D. Ill. Aug. 2013) – vacant property ordinance nullified as federally preempted


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New municipal cases claiming injury from reverse redlining◦ City of Los Angeles v. Wells Fargo,

Citigroup, Bank of America (3 cases) (C.D. Cal. Dec. 2013)

◦ City of Miami v. Wells Fargo, Citigroup, Bank of America (3 cases) (S.D. Fla. Dec. 2013)


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What are the Current Issues in Disparate Impact Cases?

What level of differential in race or national origin in HMDA data is “statistically significant”?

Should the differential also be economically significant?


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How firm is the line between disparate treatment and disparate impact?


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How data-driven is the CFPB’s investigation into discrimination in auto finance?


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How valid is proxy evidence for measuring discrimination in non-mortgage lending where there are no HMDA data?


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Will the CFPB reveal the basis or methodology for its proxy evidence in a manner that will allow everyone to work from the same dataset?

How do we ensure that it is the most appropriate methodology?


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Can the CFPB’s proxy evidence methodology or dataset be used for compliance purposes as a safe harbor form of alternative for HMDA data?


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Can or should a safe harbor be provided in some other fashion?

How and when will a lender’s own proxy evidence be accepted as valid?


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Should an alternative for HMDA data be developed by regulation for non-mortgage lending to provide some measure of predictability to lenders?

Should non-mortgage creditors collect monitoring data under the self-testing rules of Regulation B?


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In the absence of predictability for fair lending liability for non-mortgage lending, does disparate impact raise due process issues?


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Questions?


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Contact InformationL. Jean NoonanHudson Cook LLP1020 19th Street NW7th FloorWashington, D.C. 20036(202) [email protected]

John L. RopiequetArnstein & Lehr LLP120 S. Riverside PlazaSuite 1200Chicago, Illinois 60606(312) [email protected]

Gary KleinKlein Kavanagh Costello, LLP85 Merrimac StreetBoston, Massachusetts 02114(617) [email protected]

mailto:[email protected]




Serving clients for 120 years. How Disparate Is Your Impact? The Current State of Fair Lending...

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