By a 5-4 vote, the U.S. Supreme Court today upheld the use of the disparate impact theory in a housing discrimination case, a case the auto finance industry has been keeping an eye on, for possible implications for enforcement in auto finance as well.
“I think it’s going to be business as usual for the CFPB in auto finance,” said Ken Rojc, managing partner in charge of the auto finance group for Chicago law firm Nisen & Elliott.
The Consumer Financial Protection Bureau uses the disparate impact theory to accuse auto lenders of allowing discrimination in auto finance, by allowing dealerships to set their own dealer reserve, also called dealer markup.
The net result, according to the CFPB, is that borrowers belonging to legally protected groups, especially minorities, often pay higher rates for dealer reserve than non-minorities with similar credit histories. Under the disparate impact theory, only the end result matters – the higher rates for minorities – regardless whether discrimination was intentional.
The U.S. Supreme Court has agreed to hear earlier disparate impact cases, but they were settled before reaching the highest court. Attorneys for auto lenders were watching the housing case for any impact on auto finance.
However, regulations that apply in housing discrimination cases don’t line up exactly with anti-discrimination laws in auto finance, said Chris Willis, a partner with the Ballard Spahr LLP law firm. Therefore, the housing case doesn’t set a clear-cut precedent for auto finance, he said.
“I would say that the decision may be a disappointment for auto finance companies, who had hoped it would come out the opposite way,” Willis told Auto Finance News today in an email.
“But the basis for the Supreme Court’s decision really points to the fact that the Equal Credit Opportunity Act is very different than the Fair Housing Act,” he said. The ECOA is the relevant law for auto finance, he said.
Rojc told Auto Finance News in a phone interview today the CFPB was going to stick with the disparate impact theory no matter how the housing case came out. “Most major financial institutions knew, and the CFPB has indicated, they were going to continue to use disparate impact,” he said. That’s not going to change unless the U.S. Supreme Court decides a disparate impact case under the ECOA, Rojc said.
