This week President Trump signed a resolution of disapproval overturning one of the Consumer Financial Protection Bureau’s most controversial regulatory actions—the inappropriate application of the Equal Credit Opportunity Act (ECOA) to auto lenders. Axing the rule is both a great day for consumers’ access to credit and the rule of law, as I have detailed previously.
But something much more interesting came out of today’s announcement. In a press release from the CFPB, acting director Mick Mulvaney highlighted some of the underlying problems with how the regulator has enforced ECOA – a case that I made last week in my new paper, “The CFPB and the Equal Credit Opportunity Act: How Regulators Can Improve Consumer Protection and Access to Credit.”
As I explained, the greatest problem is not necessarily who ECOA is enforced against, but how it is enforced. While ECOA is an important civil rights statute, regulators have begun to exceed their authority beyond that noble goal to enact a policy agenda that Congress never intended. Mulvaney recognized as much in his statement:
I want to make it abundantly clear that the Bureau will continue to fight unlawful discrimination at every turn. We will vigorously enforce fair lending laws in our jurisdiction, and will stand on guard against disparate treatment of borrowers…
Given a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor, and in light of the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently, the Bureau will be reexamining the requirements of the ECOA.
The statement gets to the heart of what is wrong with the CFPB’s enforcement of ECOA, notably, that the legal theory known as “disparate impact” does not exist in the statute, yet the Bureau has recognized it in the past anyway.
Disparate impact occurs when a lender’s policy has a disproportionate effect on a certain class, even if the lender had no intent to discriminate and the practice appears to be neutral. This is opposed to the theory of “disparate treatment,” which occurs when a lender treats a consumer differently because of a characteristic that defines a protected category, such as race or gender. Under this theory, a firm must have the intent to discriminate against a protected class.
When Mulvaney took over the reins of the CFPB, he promised to “faithfully enforce the consumer protection laws as written, but not attempt to regulate beyond that mandate.” Yet both the text of the law and Supreme Court precedent suggest that the CFPB is not enforcing ECOA as written. Instead, it has been stretched beyond what Congress intended. Now, Mulvaney has the opportunity to fix the regulation by rescinding any guidance documents that recognize the theory of disparate impact. Alternatively, the Bureau could issue a new rulemaking to bring the rule in line with the underlying statute.