In my first post in this series, I discussed how the CFPB’s new director, Kathleen Kraninger, assured the Senate Banking Committee in her confirmation hearing that she was committed to upholding the rule of law. More than just a buzzword, Director Kraninger has shown her commitment through such actions as asking Congress to clarify the bureau’s authority to supervise for compliance with the Military Lending Act and ending “regulation by enforcement.” And yet, there is much more work the new bureau can do to uphold the rule of law.
One important reform is rectifying the original meaning of the Equal Credit Opportunity Act. ECOA is a landmark civil rights law from the 1960s that was enacted to ensure that all consumers have equal opportunity in credit applications. ECOA continues to serve a noble purpose—preventing discrimination in the granting of credit—but modern interpretations of the law through its implementing rules, Regulation B, have stretched its meaning beyond recognition to enact a policy agenda that Congress never intended.
The battle is between two different methods of preventing discrimination: disparate treatment and disparate impact. Disparate treatment occurs when a lender treats a consumer differently because of a prohibited characteristic, such as race or gender. For example, a bank cannot exclude customers who meet the qualifications of a credit card promotion offer simply because they are Hispanic.
On the other hand, 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.
From a policy standpoint, the disparate impact doctrine is problematic, as was exemplified by a string of enforcement actions taken by the bureau against auto-finance companies starting in 2013. Nevertheless, one of the greatest issues with the bureau’s interpretation of ECOA is that there is simply no textual basis for the disparate impact doctrine.
As former-Justice Kennedy wrote in the landmark fair lending case, Texas Department of Housing and Community Affairs v. Inclusive Communities Project, for a statute to confer disparate impact liability, it must reference the effects or consequences of a certain policy:
[A]ntidiscrimination 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.
While other anti-discrimination statutes, such as the Fair Housing Act (FHA) and Age Discrimination in Employment Act (ADEA), include this language, ECOA does not. Instead, the ECOA broadly prohibits discriminatory treatment, stating at 15 U.S. Code § 1691:
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 of a given policy, which would impose disparate impact liability.
Director Kraninger and the bureau should make clear in regulation what exists in law—that ECOA prohibits discriminatory treatment, not discriminatory impact. As a matter of law, the disparate impact standard of liability has no basis in ECOA. It is without foundation in the text, which the Supreme Court regarded as essential in Inclusive Communities. Regulation B should be reformed to prohibit only disparate treatment.
Previous post on reform proposals for the Consumer Financial Protection Bureau: