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Credit Discrimination: 4.3.1.3 Advantages of the Disparate Impact Approach

The disparate impact approach gives the plaintiff another avenue to pursue whenever disparate treatment cannot be proven. Even though the business justification is the real reason for the creditor’s actions, the creditor’s actions may still be illegal if they have a disparate impact on a protected class and use of some other factor would satisfy the creditor’s legitimate business needs with less of a disparate impact. The plaintiff does not need to show intent to discriminate but instead must show that a facially neutral policy has a discriminatory effect.

Credit Discrimination: 4.3.2.1 General

There is limited case law on the disparate impact theory of liability in credit discrimination cases. As a result, both Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA) cases rely heavily on the much more developed body of law in the employment discrimination area.70 Thus, it is important for practitioners to keep track of the continuing evolution of the disparate impact theory in the area of employment.

Credit Discrimination: 4.3.2.2 ECOA Burden of Proof

The burden of proof in disparate impact cases is somewhat clearer for ECOA claims than for FHA claims. Unlike the FHA, the legislative history of the ECOA expressly instructs the courts to use employment discrimination cases in construing the ECOA “effects test.”76

In addition, the official interpretations of Regulation B state:

Credit Discrimination: 4.3.2.3 FHA Burden of Proof

Historically, courts have taken two approaches to analyzing FHA disparate impact cases.80 The first approach is a balancing test articulated by the Seventh Circuit in Metropolitan Housing Development Co. v. Village of Arlington Heights (“Arlington Heights II”).81 The second is a burden-shifting framework akin to the one used in employment discrimination and ECOA cases and first articulated by the Second Circuit in Huntington Branch NAACP v.

Credit Discrimination: 4.3.2.4.1 Introduction

Despite the confusion in FHA cases, most courts in credit discrimination cases will follow the employment law standards, asking whether a policy, procedure, or practice specifically identified by the plaintiff has a significantly greater discriminatory impact on members of a protected class.92 HUD’s regulation clarifying the standard for disparate impact claims under the FHA defines “discriminatory effect” (and what the plaintiff must demonstrate in order to establish a prima facie case) as:

Credit Discrimination: 4.3.2.4.2 Identification of a specific policy

The plaintiff first must show that a specific policy caused a significant disparate effect on a protected group. Although the policy being challenged is often not in question, there are instances when the defendant will challenge whether the plaintiff has in fact identified a specific policy.94

Credit Discrimination: 4.3.2.5 Business Justification

If the plaintiff meets the prima facie burden described above, then the burden of proof shifts to the creditor to show a legitimate and necessary business justification.137 The fact that the burden of showing the business justification shifts to the defendant after an initial showing by the plaintiff of discriminatory impact is buttressed by Congressional action in the employment area.

Credit Discrimination: 4.3.2.6 Are There Alternative Practices with Less Disparate Impact?

Once the creditor carries its burden of establishing a legitimate and significant business justification, then the remaining issue is whether the legitimate business concern can be met in some other fashion with less of a disparate impact. If the creditor demonstrates a significant business justification, the plaintiff can still prove discrimination if another practice meeting the creditor’s legitimate concerns would have less of a discriminatory impact.161

Credit Discrimination: 4.4.1 The Consumer’s Own Records

The plaintiff should possess certain information useful for a credit discrimination case. The first item to check for is whether the plaintiff received a notice of action taken by the creditor and whether this notice is in the proper format.172 The Equal Credit Opportunity Act (ECOA) requires that creditors provide notice of an adverse action, generally in writing.173 The notice must either state the reason for the action taken or give the applicant the right to request the reason.

Credit Discrimination: 4.4.2 The Creditor’s Own Files

The creditor’s files are critical in any credit discrimination case. The ECOA sets out specific records that creditors must retain for twenty-five months following the date the creditor notifies an applicant of the action taken on an application (that is, the records are supposed to be retained until the statute of limitations usually has expired on possible ECOA actions).181

The creditor must retain the following documents:

Credit Discrimination: 4.4.4 Testers

Testers are an important source of information about a creditor’s practices. Testers are most frequently used by fair housing organizations, other nonprofit organizations and, in some cases, the government. Typically, paired testers have been similarly trained and are instructed to act in an identical manner and provide identical information. The only difference is the tester’s race, sex, or other characteristic that would suggest discrimination on a prohibited basis.

Credit Discrimination: 4.4.5.1 General

The Home Mortgage Disclosure Act (HMDA)215 and the implementing regulations (“Regulation C”216) require that lenders collect certain data on loan applicants and that the Federal Financial Institutions Examination Council (FFIEC) prepare disclosure statements and produce various reports on the practices of these individual lenders.

Credit Discrimination: 4.4.5.2.1 Covered lenders

The HMDA reporting requirements apply to federally insured or regulated lenders or to loans that are insured by a federal agency or that the lender intends to sell to Fannie Mae or Freddie Mac.239 These institutions must also have a home or branch office in a metropolitan statistical area (MSA) or Metropolitan Division, originate at least one home purchase loan or refinancing loan secured by a first lien on a one-family to four-family dwelling, and have total assets above a threshold set annually by the CFPB.

Credit Discrimination: 4.4.5.2.2 Required data collection

Financial institutions are required to collect data regarding applications for covered loans that it receives, originates, and purchases for each calendar year.246 A covered loan is defined as a closed-end mortgage loan or open-end line of credit not considered an excluded transaction.247 Financial institutions are also required to collect data concerning requests under a preapproval program provided the request is denied, approved by the financial institution and rejected by the applicant, or r

Credit Discrimination: 4.4.5.3 Access to HMDA Data

The Home Mortgage Disclosure Act (HMDA) disclosure statements, aggregate data, and other reports are available to the public at central data depositories in each metropolitan area.254 They are also available electronically.255 Depository institutions are to make every effort to have disclosure statements available before July 1 of the following year.256 The aggregate data should be produced a few months later.2

Credit Discrimination: 4.4.5.4 Limitations of HMDA Data

Great care must be taken in using HMDA and other monitoring data. Data showing higher rejection rates for members of protected groups may not prove illegal discrimination. It may be that these applicants have lower incomes, have different housing collateral, have different credit histories, or some other variable. Further refinement of data is needed to present a persuasive case.

Credit Discrimination: 4.4.5.5 HMDA Analysis

The Federal Reserve Board (FRB)has released an overview of each year’s HMDA data since 2004.272 These FRB overviews focus on many different aspects of mortgage market activity but over the years have consistently found substantial differences in the incidence of higher-priced lending and in application denial rates across racial and ethnic lines.273 These differences cannot be fully explained by factors included in the HMDA data.274

Credit Discrimination: 4.4.6.2 Government-Sponsored Enterprise (Freddie Mac and Fannie Mae) Data

Federal law requires HUD to make available to the public data submitted to HUD by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) relating to those entities’ mortgage purchases.298 However, the statute allows HUD to withhold “proprietary information” from release.299 HUD’s regulations define “proprietary information” as data submitted by Fannie Mae and Freddie Mac that contains “trade secrets or privileged or confidential, comme

Credit Discrimination: 4.4.8 Non-Mortgage Data

Except for HMDA and ECOA mortgage data, a creditor legally should not have statistics as to the racial, sexual, or other characteristics of those denied or approved for credit. However, there are other possible sources of data. For example, in cases challenging the mark-up policies of car financing creditors, plaintiffs based their statistical proof of discrimination on race-coded driver’s licenses.311

Credit Discrimination: 4.4.9 Non-Mortgage Creditors’ Self-Testing Data

In 1999, the Federal Reserve Board (FRB) proposed removing the prohibition on seeking information about an applicant’s race, color, religion, national origin, and sex for non-mortgage credit products.317 This proposal was made in response to comments from the Department of Justice and the federal financial enforcement agencies that the enhanced ability to obtain data on race and ethnicity would aid fair lending enforcement, particularly with respect to small business lending.318 The proposal wou