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. Congressional disapproval of the auto lending guidance overturned ECOA’s application to auto lenders. But it does nothing to stop the CFPB from pursuing similar kinds of enforcement actions against other lenders.
As I outline in my new paper, The CFPB and the Equal Credit Opportunity Act: How Regulators Can Improve Consumer Protection and Access to Credit, the heart of the matter is a legal theory known as “disparate impact.” 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. One example is a different CFPB enforcement action involving a credit card company that excluded Hispanic customers who otherwise met the qualifications of a credit card promotion offer simply because they were Hispanic. As opposed to disparate impact, disparate treatment cases identify genuinely aggrieved individuals.
The problems with a disparate impact theory of liability are apparent from the string of auto lending enforcement cases, as I have described in a previous blog post and discuss in the paper. But there is a more fundamental problem with the CFPB’s use of disparate impact, namely, that ECOA itself does not provide for it. It is a standard created from whole cloth that has no foundation in the statute.
The language of ECOA only includes the prohibition of discriminatory treatment, not the discriminatory effect of a certain policy, stating:
It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction—on the basis of race, color, religion, national origin, sex or marital status, or age …
In defining the scope of the law, Congress used the term “discriminate” to prohibit discriminatory treatment or intent. The ECOA includes no language relating to the consequences or effects of a given policy, which would impose disparate impact liability.
It is unfortunate that the Supreme Court has never decided whether disparate impact is valid under ECOA. But the court has ruled on many other anti-discrimination laws. The most recent was a dispute under the Fair Housing Act (FHA), Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. In that decision, Justice Anthony Kennedy announced that “antidiscrimination laws should be construed to encompass disparate-impact claims when their text refers to the consequences of actions and not just to the mindset of the actors, and where that interpretation is consistent with the statutory purpose.” Because the FHA includes this “effects” language, the court concluded that “this results-oriented language counsels in favor of recognizing disparate-impact liability.” ECOA, however, includes no “results-oriented language.”
When Mick Mulvaney took over the reins of the Consumer Financial Protection Bureau, 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.
Acting Director Mulvaney should seek to correct ECOA enforcement, rightfully focusing on prosecuting firms for disparate treatment, but rescinding any guidance documents that recognize the theory of disparate impact or—through a new rulemaking—bring the rule in line with the underlying statute.