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

John 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 Consumer Financial Services of the American Bar Association’s Section of Business Law. L. Jean Noonan is a partner at Hudson Cook, LLP, where she manages the firm’s Washington, D.C. office. She is a member of the Washington D.C. Bar. 2 Nicole F. Munro, L. Jean Noonan & R. Elizabeth Topoluk, Recent Developments in Fair Lending and the ECOA: A Look at Housing Finance and Motor Vehicle Dealer Participation, 60 Bus. 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 Rate Participation 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)). 4 See Fair Lending 2008 at 665. 1


and what creditors can do to avoid discriminating against members of protected minorities. 5 As suggested in a previous Annual 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

See Fair Lending 2007 at 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). 6 See Fair Lending 2007 at 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). 2


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 ECOA’s requirement that a creditor may not “discriminate

Complaint at ¶¶ 15, 22, Martinez v. Freedom Mortgage Team, Inc., No. 07 C 3442 (N.D. Ill. Jun. 19, 2007). 10 Id. at ¶¶ 18-20. 11 Id. at ¶ 23. 12 Id. at ¶ 24. 13 A yield spread premium is compensation paid to a mortgage broker by a funding source in addition to any fees which the borrower may pay to the broker. See Eugene J. Kelley, Jr., John L. Ropiequet, and Jason M. Rosenthal, Recent Developments in Yield Spread Premium Litigation, 54 Consumer Fin. L.Q. Rep. 33, 34 (2000). 14 Id. at ¶ 26. 15 Id. at ¶¶ 27, 35, 40. 16 42 U.S.C. § 3605(a). 17 527 F. Supp. 2d at 834. 3


against any applicant, with respect to any aspect of a credit transaction–on the basis of race”18 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 plaintiff’s 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 another’s discrimination may not necessarily connote a discriminatory intent on the part of the reaper, a discriminatory effect (even absent any discriminatory intent) can constitute a violation of the Housing Act.22

18 19

15 U.S.C. § 1691(a)(1). 527 F. Supp. 2d at 834. 20 Id. at 834-35. 21 Id. 22 Id. at 835, citing Gomez v. Chody, 867 F.2d 395, 402 (7th Cir. 1989). 4

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 plaintiff’s income on his loan application.27 Tribett v. BNC Mortgage, Inc. The plaintiffs in Tribett v. BNC Mortgage, Inc.28 likewise 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 24

527 F. Supp. 2d at 835. 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). 5

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
30 31

Id. at ¶¶ 9-10. Id. at ¶¶ 11-12. 32 Id. at ¶¶ 13-15. 33 Id. at ¶¶ 16-19, 25. 34 Id. at ¶ 21. 35 Id. at ¶ 26. 36 Id. at ¶ 27. 37 Id. 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). 6

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

39 40

Id. at *9. Id. 41 Id. 42 15 U.S.C. § 1691d(e). 43 2008 U.S. Dist. Lexis 3573 at *10. 44 Id. at *12. 7

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

534 F. Supp. 2d 835(N.D. 2008). Complaint at ¶¶ 50-51, 62-63, Ware v. Indymac Bank, F.S.B., No. 07 C 1982 (N.D. Ill. Apr. 10, 2007). 47 Id. at ¶¶ 11-14. 48 Id. at ¶ 15. 49 Id. at ¶¶ 26-29. 50 Id. at ¶¶ 29-30. 51 Id. at ¶ 16. 52 Id. at ¶ 19. 53 Id. at ¶ 35. 8
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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 Tribett court, 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 lender’s internal review of the

54 55

Id. at ¶¶ 53, 65. 534 F. Supp. 2d at 40. 56 Id. 57 Id. 58 Id. 59 Id. at 841, citing Tribett v. BNC Mortgage, Inc., 2008 U.S. Dist. Lexis 3573 at *3 (N.D. Ill. Jan. 17, 2008). 9

loan application constituted a direct violation of the ICFA. This met the requirement that only those who are directly involved in a consumer fraud can have ICFA liability.60 Although the court dismissed their claim for rescission under the TILA since the late disclosure of information given to them nevertheless met the statutory requirements,61 it found that a claim was stated under the CROA with respect to the alleged mortgage fraud in connection with overstating income and assets since the CROA prohibited any “person,“ not just credit repair organizations, from making untrue or misleading statements with respect to creditworthiness.62 Zamudio v. HSBC North America Holdings Inc. Unlike Martinez, Tribett and Ware, the complaint in Zamudio v. HSBC North America Holdings Inc.63 did not allege mortgage fraud. Instead, as with the earlier auto finance class action complaints,64 the plaintiff only claimed that he and a class of similarly situated minority applicants for residential home mortgage loans were the victims of racial discrimination.65 He alleged that he attempted to refinance his mortgage loan with the defendant lender and that the appraised value of his residence met the minimum required for the refinance.66 However, his loan application was denied based on the results of the lender’s “inherently” discriminatory

534 F. Supp. 2d at 842, citing Zekman v. Direct American Marketers, Inc., 182 Ill. 2d 359, 372-76, 695 N.E.2d 853, 860-62 (1988). 61 Id. at 844. 62 Id. at 846, citing Martinez v. Freedom Mortgage Team, Inc., 527 F. Supp. 2d 827 (N.D. Ill. 2007). 63 No. 07 C 4315, 2008 U.S. Dist. Lexis 13952 (N.D. Ill. Feb. 20, 2008). 64 See, e.g., Complaint, Rodriguez v. Ford Motor Credit Co., No. 01 C 8526 (N.D. Ill. Nov. 6, 2001). 65 Complaint at ¶ 1, Zamudio v. HSBC North America Holdings Inc., No. 07 C 4315 (N.D. Ill. Aug. 1, 2007). “Minority” was defined broadly as “all non-Caucasian and other racial minorities” protected under the FHA, the ECOA and other civil rights laws. Id. at ¶ 2. 66 Id. at ¶ 11(2d). There are two sets of ¶¶ 11-13 in the Complaint. 10


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 plaintiff’s 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 Court’s 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

Id. at ¶¶ 10-13(1st). Id. 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 (7th Cir. 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. 75 Id. at *5-6. 11
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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 GreenPoint’s “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 GreenPoint’s retail channel due to the locations of GreenPoint’s 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 GreenPoint’s 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 GREENPOINT’s 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 77

No. C08-0369 TEH, 2008 WL 20510018 (N.D. Cal. May 13, 2008). First Amended Complaint at ¶ 77. 78 Id. at ¶ 48. 79 Id, at ¶ 32. 80 Id, at ¶ 45. 81 Id, at ¶ 50. 82 Id, at ¶ 54. 12

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 defendant’s 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
83 84

Id, at ¶ 52. Id. at ¶¶ 98-99, 105-106. 85 2008 WL 20510018 at *3 (N.D. Cal. May 13, 2008). 86 Id. at *4. 87 Id. at *5. 88 Pub. L. No. 94-200, 89 Stat. 1125 (codified at 12 U.S.C. §§ 2801-10 (2000)). 13

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 GreenPoint’s 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

Countrywide’s Discretionary Pricing Policy “authorizes unchecked, subjective surcharge of

89 90

2008 WL 20510018 at *5. Id. 91 Id, at *6. 92 Id. 93 No. 07cv11275-NG, 2008 U.S. Dist. Lexis 62547 (D. Mass. July 30, 2008). The case was subsequently transferred to the Western District of Kentucky as MDL 1974 pursuant to an order of the U.S. Judicial Panel on Multidistrict Litigation (JPML Aug. 7, 2008). 14

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 Countrywide’s “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 and Urban Development, blacks who borrow from Countrywide are over three times more likely than whites to have received a highAPR loan to purchase a home and over two times more likely to have 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

94 95

Complaint at ¶ 2. Id. at ¶ 3. 96 Id. at ¶ 18. 97 Id. at ¶¶ 31-32. 98 Id. at ¶ 33. 99 Id. at ¶¶ 40-43. 15

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 Miller court 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 par rate keyed to objective indicators of creditworthiness while simultaneously authorizing additional charges keyed to factors unrelated to those criteria. Plaintiffs alleged that that the net effect of that discretionary pricing policy yields a discriminatory result.105

100 101

Id. at ¶ 44. Id. 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. 16

Defendants argued that plaintiffs’ real argument was that Countrywide’s 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, the Miller court accepted a continuing violation theory since the plaintiff’s 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 Id. at *13-14. Id. 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). 109 Id. at *18-21. 110 Id. at *27. 111 Id. at *34. However, it found that fraudulent concealment sufficient to toll the statute of limitations was not adequately pleaded. Id. at *35. 17
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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

See Press Release, U.S. Dep’t of Justice, Justice Department Reaches Settlement With New Mexico Lender that Allegedly Discriminated Against Hispanics (Jan. 28, 1997), 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, arise when a finance company sets a minimum acceptable APR interest rate on credit contracts that it will purchase, typically called its “buy rate,” and compensates the dealer for all or a portion of the 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, 29697 (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. 18


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 General’s 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

Consent Orders at ¶¶ 14-21. Springfield Ford’s fund was designed to compensate past victims of discrimination up to $94,565 and Pacifico Ford’s fund was designed to pay up to $363,166. 120 See Press Release, Justice Department Reaches Settlement With Two Philadelphia Car Dealerships Regarding Alleged Race Discrimination in Auto Lending, august/07CRT639.html. Pennsylvania recovered costs of up to $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 $55,000 Settlement With Two Philadelphia Car Dealerships For Alleged Racial Discrimination Practices, 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). 122 See Fair Lending 2007 at 671-73. 123 See Fair Lending 2005 at 638-43; Fair Lending 2006 at 820-24; Fair Lending 2007 at 66871. 19


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 previous Annual 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

See Peter N. Cubita and Michelle Hartmann, The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There, 61 Bus. Law. 829 (2006). 125 See Fair Lending 2008 at 666-70. 20


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 DOJ’s 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.


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