SMAARTBank.Compliance Insights

Building a Better Road to Governance Success

The Federal Reserve's proposal to modify supervisory expectations for Boards of Directors should be welcome news to directors who chafe at being a redundant form of management, rather than effective overseers of corporate strategy and management performance. Read the BankThink column in American Banker from September 1, 2017.

Posted on Friday, September 1, 2017 by Registered CommenterWebmaster | Comments Off

Wells Fargo Sales Incentives Case--Lessons for Directors

Read the Banking Exchange Blog Column about what bank directors should learn from the recent Wells Fargo Sales Incentive Case settlment with regard to assessing compliance risk and making their compliance programs accountable to early Board engagement when an institution's ethics are compromised. 

Posted on Saturday, October 29, 2016 by Registered CommenterWebmaster | Comments Off

Managing Fair Lending Risk After Inclusive Communities (Epilog)

The remand of the underlying controversy in Inclusive Communities 135 S.Ct. 2507 (2015) has finally been decided by Judge Fitzwater of the Northern District of Texas. Applying the robust causality requirement articulated by Justice Kennedy, the lower Court found that plaintiffs failed to meet the burden of proving a prima facie case and dismissed the complaint.  The District Court took great pains to examine the record against a variety of alleged claims, but found them all wanting.

The District Court Memorandum Opinion emphasizes several points that prior analysis in this series discussed:

1)      Demonstrating a prima facie case is a fundamental obligation of the plaintiff and a key focus for defendants who seek to prevail in disparate impact cases.

2)      Wards Cove remains a viable precedent post-Inclusive Communities for defining the hurdles to be cleared when proving a prima facie case.

3)      The Inclusive Communities robust causality requirement compels plaintiff to identify a specific neutral policy that erects an impermissible barrier to housing opportunity.

Part B of Judge Fitzwater’s Opinion (Slip Opinion p. 16 – 18) also finds that plaintiff’s assertion of discriminatory discretion is not a valid disparate impact claim about a neutral policy, but is instead a disparate treatment claim about the exercise of discretion, not the existence of discretion. As a disparate treatment claim, plaintiff would be obligated to prove intent.

An analysis of the opinion appears on the Nixon Peabody site.

Posted on Tuesday, October 18, 2016 by Registered CommenterWebmaster | Comments Off

Managing Fair Lending Risk After Inclusive Communities (Part III)

Although the Supreme Court’s decision in Inclusive Communities, 135 S.Ct. 2507 (2015) is focused on interpreting the Fair Housing Act, its reasoning turns out to have considerable import for enforcement of the Equal Credit Opportunity Act (ECOA.) ECOA as implemented by Regulation B is expressly tied to the Griggs and Albermarle Paper Company v. Moody line of disparate impact or effects discrimination cases. 12 C.F.R. 1002.6(a): “The legislative history of the Act indicates that the Congress intended an “effects test” concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co., 401 U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975), to be applicable to a creditor’s determination of creditworthiness.” Quoted and endorsed by the Consumer Financial Protection Bureau in Bulletin 2012-04.

 A look back at the history of Regulation B provides further support for incorporating subsequent interpretation of the Griggs line of cases to current application of effects discrimination enforcement under ECOA.  As the Federal Reserve Board noted in 1977 when adopting Griggs as the lodestar for effects discrimination in the credit context: “As a judicial doctrine, the effects test is not well suited to regulatory implementation.  In addition, it is, of course, subject to change as it is examined and applied by the courts.” (Emphasis added.) 42 FR 1246 (1-6-77).

Inclusive Communities is such an authoritative application of the Griggs effects test. It puts primary emphasis on the importance of fulfilling the requirements for establishing a prima facie case of disparate impact or effects discrimination.  The Supreme Court underscores that “a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” Slip Op. at 20. Inclusive Communities goes on to demonstrate the continued vitality of Wards Cove Packing v. Atonio  490 U.S. 642 (1989) in articulating the requirements of the prima facie case and the significance of those obligations in “protect[ing] defendants from being held liable for racial disparities they did not create.” Slip Op. at 20.

Other necessary elements of a prima facie case in the Griggs, Albermarle and Wards Cove line of authority include plaintiff’s obligation to

  1. Prove that the plaintiff (or adversely affected person) is a member of the prohibited basis group, McDonnell Douglas v. Green 411 U.S. 792, 802 (1973)—a particularly relevant requirement that error-filled proxies would not appear to satisfy;
  2. Demonstrate that the plaintiff qualifies for the credit in question under applicable criteria other than the challenged policy, Id. at 802;  Griggs at 424; and
  3. Conduct its statistical analysis such that the alleged disparity is predicated on a proper comparison between the racial composition of the creditor’s borrowers and the racial composition of the qualified prospective borrowers in the relevant credit market, Wards Cove supra. at 651; Hazelwood School Dist. V. United States 433 U.S. 299, 308 (1977).

Inclusive Communities further emphasizes the importance of the prima facie case as a material hurdle to protect defendants from the deleterious effects of asserting unfounded claims.  “Without adequate safeguards at the prima facie stage, disparate-impact liability might cause race to be used and considered in a pervasive way…. Courts must therefore examine with care whether a plaintiff has made out a prima facie case… and prompt resolution of these cases is important.” Slip Op. at 20. This admonition of prompt resolution and disposal at the prima facie stage by courts should be similarly applicable to supervisory officials.

As important as the prima facie case is, Inclusive Communities also provides significant guidance on the second prong of the disparate-impact test.  As the Supreme Court notes, entrepreneurs must “be allowed to maintain a policy if they can prove it is necessary to achieve a valid interest… [and] must be given latitude to consider market factors… [among] a mix of factors.” After all “were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed [in the majority opinion], then disparate-impact liability might displace valid governmental and private priorities, rather than solely ‘removing … artificial, arbitrary and unnecessary barriers.’” Slip Op. at 19.

In summary, as Regulation B’s history makes clear, enforcement of disparate-impact claims under ECOA is constrained by the development of the Griggs and Albermarle case law as construed by the subsequent pronouncements in Wards Cove and Inclusive Communities. Consequently, agency supervisory and enforcement activities under ECOA should be conducted in a manner accountable to this Supreme Court precedent—“Governmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” Slip Op. at 21.

Posted on Saturday, August 29, 2015 by Registered CommenterWebmaster | Comments Off

Managing Fair Lending Risk After Inclusive Communities (Part II)

In less than a month, the constructive impact of Inclusive Communities is being demonstrated in other litigation. In City of Los Angeles v. Wells Fargo, Judge Otis Wright of the United States District Court for the Central District of California ruled against the City’s claims that Wells Fargo engaged in discriminatory lending by, among other things, making high cost and FHA loans with a statistically disproportionate incidence among minority borrowers.

Judge Wright applied the “cautionary standards” articulated by Justice Kennedy in Inclusive Communities stressing that LA’s “entire disparate impact claim must ‘solely’ seek to remove a policy that is ‘artificial, arbitrary and [an] unnecessary barrier[].’” After applying these standards, the District Court reached the following conclusions:

First, inadequate risk management monitoring practices are not the type of barrier erecting policies that can be said to cause the adverse statistical disparity sought to be redressed by a disparate impact claim.  Indeed were such monitoring of “relevant data” implemented with the purpose “to identify and correct the disproportionate issuance of high cost loans to minority borrowers,” the result, the Court reasoned, would be a “roundabout way of arguing for a racial quota” that “is inapposite to the instructions of the Supreme Court … [which] specifically noted that the disparate impact claims must not force private actors to ‘adopt racial quotas.’”

Second, adherence to government loan program requirements and procedures which in turn “’contributes to the disproportionate issuance of loans to minority borrowers’ … cannot mean that [the lender] created an artificial, arbitrary or unnecessary barrier…. If any disparate impact results from [such] loans, it is a result of federal policy and not [lender] policy.” In other words, the governmental loan program elements that an FHA lender is bound to apply demonstrate an instance alluded to by Justice Kennedy in Inclusive Communities, where [a plaintiff] “cannot show a causal connection between the [lender’s] policy and a disparate impact … because federal law substantially limits the [lender’s] discretion” and, consequently, “should result in dismissal of the case.” (Inclusive Communities, Slip Opinion at p.21.) Accordingly, Judge Wright found that the City had not demonstrated the necessary robust causality required by Inclusive Communities and granted Wells Fargo’s Motion for Summary Judgment.

While Judge Wright’s decision represents one District Court and may face appeal (affirmed on appeal) , the analysis it embodies should be incorporated in measured form by lenders evaluating their fair lending compliance programs and assessing the regulatory risk they face for disparate impact Fair Housing Act claims, as well as, the appetite they have for such risk or for defending their programs.  As previously noted in my prior post of Part I, Inclusive Communities provides support for why compliance with CFPB mortgage rules implementing Dodd-Frank Title XIV regarding Ability to Repay and Qualified Mortgages should not place lenders in jeopardy for the “double bind of liability” due to any statistical impact on the lender’s portfolio resulting from such compliance.

Posted on Monday, August 3, 2015 by Registered CommenterWebmaster | Comments Off
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