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Credit Discrimination: G.8 First Amended Complaint Alleging ECOA Notice and State Fair Housing Violations

UNITED STATES DISTRICT COURT

DISTRICT OF CALIFORNIA

[Consumer 1] and [Consumer 2],

Plaintiffs,

v.

JP Morgan Chase Bank N.A.;

Chase Home Finance, LLC;

U.S. Bank, N.A.; California

Reconveyance Corporation;

and DOES 1-50,

Defendants.

DEMAND FOR JURY TRIAL; FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE EQUAL CREDIT OPPORTUNITY ACT; CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT; AND CALIFORNIA BUSINESS AND PROFESSIONS

Credit Discrimination: 4.1.1 Overview

Credit discrimination can be proved in either of two instances: when a creditor utilizes a prohibited factor in making a credit decision or, alternatively, when a creditor uses factors that are not necessarily prohibited or improper but nevertheless have a disparate impact upon a protected group.1 At the same time, credit discrimination statutes are not violated merely because an applicant is adversely treated and the applicant is a member of a protected group.

Credit Discrimination: 4.2.1 Introduction

Discrimination is prohibited if there is a linkage between the discrimination and a prohibited basis such that the creditor’s decision-making process results in individuals being treated differently because of a prohibited basis.

Credit Discrimination: 4.2.3.1 The McDonnell Douglas Burden Shifting Analysis

If the plaintiff does not have direct evidence of disparate treatment, a prima facie case may be established through circumstantial evidence.25 To prove disparate treatment using circumstantial evidence, most courts will require that a plaintiff first establish a prima facie case by showing: (1) membership in a protected class; (2) application for credit for which the plaintiff was qualified; (3) rejection despite qualification; and (4) that the defendant continued to approve credit for similarly qualified applicants.

Credit Discrimination: 4.2.3.3 The McDonnell Douglas Standard in Predatory Lending/Reverse Redlining Cases

In reverse redlining cases, it is critical to ensure that the court uses a modified test for determining whether a prima facie case exists. The key difference in predatory lending cases is that lenders generally grant credit, but on predatory terms. Thus, the traditional third prong of the McDonnell Douglas analysis—that the applicant be denied credit—will not be met. Borrowers may also argue in some cases that they were given a loan that they did not have the ability to repay.

Credit Discrimination: 4.3.1.1 Disparate Impact Cognizable Under Both ECOA and FHA

An alternative under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) (but not the Civil Rights Acts) to proving disparate treatment is proving disparate impact. Under a disparate impact theory, the creditor may not be treating applicants differently on a prohibited basis, but there still may be illegal discrimination if the effect of the creditor’s practices is to adversely impact a particular protected class.

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