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Managing Fair Lending Risk After Inclusive Communities (Part III)

Although the Supreme Court’s decision in Inclusive Communities 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