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Credit Discrimination: 8.4 Class Action Claims

Because of the nature of the claims discussed in this chapter, it will often make sense to bring claims on behalf of a class of borrowers rather than a single individual. Attorneys with limited class action experience should find knowledgeable co-counsel; this is not only prudent but is a prerequisite to class certification, which requires fair and adequate representation.25

Credit Discrimination: 8.5.1 General

Redlining is the practice of denying credit to particular neighborhoods on a discriminatory basis.38 The flip side is reverse redlining, the practice of targeting these same communities or protected classes for predatory lending. In some cases, the creditor may not even offer better terms to other borrowers; the key element of reverse redlining is the targeting of protected racial groups, older people, and others for unusually bad credit terms.

Credit Discrimination: 8.5.3 Unfair Credit Terms Sufficient to Show Reverse Redlining

It is not enough to show that a lender targets a protected class. The plaintiff must also show that the lender targets the protected class to offer unfair or predatory loans. A discrimination claim is also actionable if the lender merely offers less advantageous terms to protected classes than to others.57 But, if the allegation is that the lender targets protected classes but offers the same terms to others, then the plaintiff must also show that those terms are unfair or predatory.

Credit Discrimination: 8.5.4 Borrowers Should Not Need to Demonstrate Qualification for a Loan

A number of credit discrimination cases concerning the denial of credit enunciate a required element that the consumer “qualify for a loan.” While this makes sense in the context of challenging a credit denial, it should not be a necessary element of a reverse redlining claim. As discussed above, one aspect of reverse redlining is that lenders may make very expensive loans to borrowers who are clearly unable to afford them.

Credit Discrimination: 8.6.1 The Practice Described

In many credit contexts, lenders establish risk-based credit terms for a consumer and then give discretion to dealers, brokers, loan officers, and others to mark up the credit charges based upon subjective factors.

Credit Discrimination: 8.6.3 Elements of the Discrimination Claim: Disparate Impact Versus Disparate Treatment

Dealers, brokers, and others who mark up loans on a subjective basis may discriminate against those belonging to protected classes, setting up a basic disparate treatment claim under the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), and the federal Civil Rights statutes. With evidence of disparate treatment, the discrimination case should be a strong one because there is no defense that the higher rate was based upon risk.

Credit Discrimination: 8.6.5 Statistical Proof of the Discriminatory Impact

The plaintiff has the burden of showing that the identified pricing policy, despite being facially neutral, has a disparate impact on a protected class. To do so requires proof that the protected class pays more in upcharges than other borrowers. The consumer must show “statistical evidence of a kind and degree sufficient to show that the practice in question has caused” the assessment of the higher finance charge mark-up on plaintiffs “because of their membership in a protected group.”116

Credit Discrimination: 8.6.6 Business Necessity and a Less Discriminatory Alternative

When a consumer in a discretionary mark-up case shows that the pricing policy has a disparate impact on a protected class, the lender must present a business necessity for the practice.122 The fact that the protected class on average includes higher credit risks cannot be a justification because the upcharge is not based upon risk.123 Lenders may claim a business necessity that they must provide incentives to dealers or brokers so that these third parties will steer business to the lender, n

Credit Discrimination: 8.7.2 Types of Price Discrimination

One example of illegal price discrimination is when identical goods are sold at different stores owned by the same merchant at different prices, with the higher priced goods being sold in neighborhoods made up primarily of people of color. There can also be differences in the goods’ quality and the store’s policies as to refunds, exchanges, and warranties.131 The merchant will have to justify this different treatment by increased costs of business in the neighborhood of color.

Credit Discrimination: 9.1 Introduction

Federal and state credit discrimination statutes cover a wide range of credit activity. Most of the litigation in this area focuses on the application process and other transactions in which consumers are denied credit on a discriminatory basis. This chapter discusses often overlooked claims that might arise after credit is granted.

Credit Discrimination: 9.2.1 Loan Servicing

The official interpretations of Regulation B give “administration of accounts” as an example of the types of dealings between creditor and applicant that are covered by the Equal Credit Opportunity Act’s (ECOA) general prohibition against discrimination.1 Thus, a creditor cannot discriminate on a prohibited basis with respect to ease of payment, willingness to restructure or postpone payments, providing information about account balances, or denying a loan modification.2 Under the Fair Housing A

Credit Discrimination: 9.2.3 Changes in Account Status

The ECOA’s general rule against discrimination applies not only to the initial granting of credit but to any changes in an account, such as raising the credit limit, changing credit terms, renewing the account, or terminating credit.

Credit Discrimination: 9.2.4 Treatment upon Default

When a consumer is delinquent on an account, a creditor can take various steps to collect the amount due or enforce the credit agreement. Such actions are related to the credit transaction and, under the ECOA, creditors may not treat debtors differently post-default on a prohibited basis.

Credit Discrimination: 9.3 Collection Against Non-Obligated Spouse Under Necessaries, Family Expense Laws

Many states still have laws on the books dating from the early nineteenth century, when it was widely held that a married woman could not contract in her own name.46 The courts developed a fiction that the wife was acting as her husband’s agent. The husband was presumed to have authorized his wife’s purchases, unless the creditor was otherwise notified. Essentially, common law placed a unilateral obligation on the husband to support his wife financially.

Credit Discrimination: 9.4.1.1 Introduction

Regulation B establishes procedures that creditors must follow when they furnish information about certain accounts to credit reporting agencies.55 These procedures are designed to ensure that each spouse may build a credit history on the basis of accounts which they both use or for which both are contractually liable even if only one spouse is listed as the primary obligor.

Credit Discrimination: 9.4.1.2 Scope and Exemptions

Creditors are not required to furnish credit information on its accounts; these requirements apply only to creditors that choose to furnish credit information to credit bureaus or to other creditors.56 The requirements do not apply to incidental consumer credit57 or to securities credit.58

Credit Discrimination: 9.4.1.3 Creditors Must Furnish Information About Joint Account Holders and Authorized User-Spouses

The spousal credit reporting provisions require a creditor that furnishes credit information to a reporting agency to designate any new account to reflect the participation of both spouses if the applicant’s spouse is permitted to use the account or is contractually liable on the account.63 Spouses who are permitted to use an account but who have not agreed to be liable for the debt are called “authorized users.”64

Credit Discrimination: 9.4.1.4 Interaction with the Fair Credit Reporting Act

The spousal reporting requirements of Regulation B apply only to accounts held or used by spouses. Nevertheless, the official interpretations permit creditors to designate all joint or authorized user accounts to reflect the participation of both parties even if the parties are not married to each other.77 The extension of this option to authorized users who are not married has presented problems for consumers when the account holder becomes delinquent or goes into default.

Credit Discrimination: 9.4.1.5 “Piggybacking”

The credit scoring algorithms developed by Fair Isaac91 currently factor into the calculation of a credit score, the information about authorized users that creditors submit pursuant to Regulation B. If the account has a positive payment history, it will raise the score of the authorized user.