Disparate Impact Ruling Starts Heated Debate in Auto Finance

Not so fast: Yesterday’s U.S. Supreme Court ruling on “disparate impacts” in a housing discrimination case does, too, have implications for auto lending, said an attorney who’s an expert in government regulation of financial services.

“This is of enormous concern to dealers and vehicle finance companies,” said Mark Joseph Kenney, chair of the Severson & Werson law firm in San Francisco, in an email.

This argument will likely go on for a while. “Views are all across the board,” even among attorneys who specialize in this space, said Nick Smyth, an attorney with Reed Smith LLP, and a former enforcement attorney with the Consumer Financial Protection Bureau.

Kenney disagreed with an Auto Finance News post yesterday in which a couple of other attorneys said the Supreme Court ruling would probably have no effect one way or the other on the CFPB’s use of the disparate impact theory to accuse auto lenders — and indirectly, dealers — of discrimination.

The CFPB argues that by allowing dealerships to set their own dealer markup on loans, they also allow dealerships to charge higher prices for legally protected groups like minorities, compared with “similarly situated” borrowers who don’t belong to protected classes.

Under the disparate impact theory, only the end result matters, regardless whether the discrimination is intentional. The financial services industry disagrees with the theory, but a disparate impact case never made it all the way to the Supreme Court before now without being settled first.

In the housing case, the Supreme Court “confirmed the utility of Disparate Impact analysis to impose liability under FHA,” the Fair Housing Act, Kenney said.

However, he said the detailed argument in the majority’s ruling “raises very serious doubt as to the availability of the Disparate Impact tool under the Equal Credit Opportunity Act,” the relevant law for auto lenders.