Make no mistake, it’s bad news for the auto finance industry that the U.S. Supreme Court upheld the disparate impact theory in a housing case this week instead of throwing the theory out.
“My clients are unhappy, to say the least,” said Nick Smyth, an attorney in the Washington office of the Reed Smith LLP law firm, in the firm’s Financial Industry Group. Before joining the firm this year, he was an enforcement attorney with the Consumer Financial Protection Bureau.
Auto lenders were hoping the Supreme Court would invalidate the disparate impact theory, the main tool the CFPB uses to accuse auto lenders and dealers of discrimination.
It’s debatable whether such a ruling in a housing case would have set a precedent for auto lending, since housing regulation comes under the Fair Housing Act and auto loans come under the Equal Credit Opportunity Act.
Attorneys in the auto finance space are having exactly that debate, analyzing the arguments the Supreme Court majority made, to try and predict what effect those arguments would have in auto finance.
“For anybody to say, ‘Oh, well, that’s the end of dealer reserve,’ it’s way, way too soon for that,” Mark Joseph Kenney, chair of the Severson & Werson law firm in San Francisco, told Auto Finance News in a phone interview today. “I think there’s a lot of bad information out there.”
However, there’s no sugar-coating the fact that the decision upholding disparate impact is generally unfavorable to auto lenders, compared with the alternative scenario if the court had declared it unconstitutional.
The follow-on effect is on any potential future legal battle in the auto finance space, attorneys said. If the Supreme Court had ruled against disparate impact, even in a housing case, it might have made auto lenders more willing to fight the CFPB in court – which so far, no lender has done — instead of settling out of court.
“There was a glimmer of hope that if it [disparate impact] was struck down for FHA that would really hurt the CFPB’s chance under ECOA, and make them [the CFPB] reluctant to litigate it,” Smith told Auto Finance News in a phone interview today. “Now, I think maybe the CFPB would be slightly more willing to litigate it.”
Smyth said other aspects of the CFPB’s approach to auto finance regulation may be more vulnerable, such as its reliance on statistical probability to assign borrowers to protected classes.
