Consumer Compliance Outlook: Third-Fourth Quarter 2015

On the Docket: Recent Federal Court Opinions

Fair Housing Act — 24 C.F.R. §100.500

The U.S. Supreme Court rules that disparate impact claims are cognizable under the FHA. Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. PDF External Link 135 S. CT. 2507 (2015). The FHA prohibits discrimination in housing and mortgage lending, but legal challenges have raised questions about whether it solely allows disparate treatment claims or also permits claims of disparate impact (when neutral policies or practices have a disproportionately adverse effect on a prohibited basis). The plaintiffs asserted both types of claims against a Texas housing agency that allocated federal tax credits for low-income housing predominately to areas with high minority populations, allegedly perpetuating segregated housing. The district court rejected the disparate treatment claim but ruled in favor of the plaintiffs on the disparate impact claim. On appeal, the Fifth Circuit affirmed this part of the district court’s ruling, and the agency appealed to the Supreme Court.

The Supreme Court affirmed that disparate impact claims are cognizable under Sections 804 and 805 of the FHA, based on the “results-oriented language” of the FHA and “the Court’s interpretation of similar language in Title VII and the ADEA [Age Discrimination in Employment Act], Congress’ ratification of disparate-impact claims in 1988 against the backdrop of the unanimous view of nine Courts of Appeals, and the statutory purpose.” The court first noted 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 actors. …” The court said this principle applies to Section 804(a) of the FHA because it makes it unlawful “‘[to] refuse to sell or rent … or otherwise make unavailableor deny, a dwelling to a person because of race’ or other protected characteristic. …” The court also found that Section 805, concerning discrimination in residential real estate-related transactions, applies to disparate impact claims because the court had construed another statute with language similar to Section 805 to apply to disparate impact claims. In addition, when Congress amended the FHA in 1988, nine federal appeals courts had already upheld disparate impact claims under the FHA, and Congress did not disturb this interpretation. Finally, the court noted that disparate impact claims further the FHA’s policy against housing discrimination, stating, “[R]ecognition of disparate-impact liability under the FHA plays an important role in uncovering discriminatory intent: it permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.”

The court also clarified the three-step legal framework used to analyze disparate impact claims. First, the plaintiff must establish a prima facie case by identifying a specific policy that caused the disparity. The court explained that a disparate impact claim based solely on a statistical disparity fails if the plaintiff cannot identify the policy or policies causing that disparity. The court further noted that a “robust causality requirement ensures that ‘[r]acial imbalance … does not, without more, establish a prima facie case of disparate impact’ and thus protects defendants from being held liable for racial disparities they did not create.” With respect to the second step in the framework, the court noted that “housing authorities and private developers [must] be allowed to maintain a policy if they can prove it is necessary to achieve a valid interest.” The court stated: “This step of the analysis is analogous to the business necessity standard under Title VII and provides a defense against disparate- impact liability.” The court stated that without the safeguards of the burden-shifting framework, disparate-impact liability “might displace valid governmental and private priorities, rather than solely ‘remov[ing] … artificial, arbitrary, and unnecessary barriers.’” Third, with respect to the final step in the framework, the court quoted a previous opinion holding that a court must determine that a plaintiff has shown that there is “‘an available alternative … practice that has less disparate impact and serves the [entity’s] legitimate needs.’” Finally, the court stated that when violations are found, the remedies should concentrate on eliminating the offending practice and, if additional measures are adopted, that those measures should strive to eliminate the racial disparities through race-neutral means. In light of the Supreme Court’s decision, the case was remanded to the Fifth Circuit for further consideration.

Federal court dismisses class-action lawsuit alleging FHA disparate impact violations. City of Los Angeles v. Wells Fargo Bank, PDF External Link 2015 WL 4398858 (C.D. Cal. 2015). In 2013, the City of Los Angeles filed suit against Wells Fargo & Co. and Wells Fargo Bank, N.A. (collectively, “Wells Fargo”), alleging both FHA disparate treatment and disparate impact violations on the basis of race and national origin. Los Angeles alleged the disparate impact violations in connection with Wells Fargo’s supposed disproportionate origination to minority borrowers of loans classified as higher-priced mortgage loans under the Home Mortgage Disclosure Act (the court referred to the same as “high-cost loans” in its decision) and United States Federal Housing Authority (USFHA) loans. The case is one of the first to apply disparate impact analysis following the Supreme Court’s recent Inclusive Communities decision.

With respect to the 16 higher-priced mortgage loans (defined as loans with an annual percentage rate that is 1.5 or more points higher than the average prime offer rate [APOR] for first-lien loans and 3.5 or more points higher than the APOR for subordinate-lien loans), the court found that the disparity in Wells Fargo originations was statistically insignificant: Hispanic borrowers had a 0.0033 percent likelihood of receiving higher-priced mortgage loans, similarly situated African American borrowers had a 0.0067 percent likelihood of receiving higher-priced mortgage loans, and similarly situated non-Hispanic white borrowers had a 0.0008 percent likelihood of receiving higher-priced mortgage loans. The court noted that a disparate impact violation requires proof of a “significantly adverse” effect on minorities and observed that these negligible disparities did not meet that standard: “The City must provide evidence of a significantly disproportionate effect on minorities, and comparing thousandths of a percentage fails to meet the minimum threshold … .” The court further noted that, under Inclusive Communities, Los Angeles was required to identify a “robust causality” — that is, a Wells Fargo policy or policies that caused the alleged disparate impact — which it could not do.

With respect to the USFHA loans — of which Wells Fargo originated 625 to Hispanic borrowers, 140 to African American borrowers, and 385 to white borrowers — the court noted that Inclusive Communities required evidence of a practice that has a “disproportionately adverse effect on minorities.” Although the USFHA loans had some drawbacks compared with conventional mortgage loans, the court found that both the federal government (and, in prior years, Los Angeles) touted the virtues of USFHA loans, and an expert witness for Los Angeles acknowledged the “benefits of USFHA loans.” The court found that, when compared with conventional mortgages, USFHA loans were beneficial: “When the benefits and purpose of USFHA loans are considered, the Court fails to see how minority borrowers are adversely affected. USFHA loans allow low-income families, who could otherwise not qualify for a loan, to buy a home. … Minority borrowers with poor credit and little money for a down payment can put their family in a home through a USFHA loan.” Additionally, regarding high-cost loans, the court noted that Los Angeles again was unable to identify a Wells Fargo policy or policies relating to USFHA loans that produced the alleged disparate impact. Accordingly, the court granted Wells Fargo’s motion for summary judgment.


Second Circuit holds that the National Bank Act (NBA) does not preempt a borrower’s home state usury law after a national bank lender assigns the loan to a creditor that is not a national bank. Madden v. Midland Funding, LLC, PDF External Link 786 F.3d 246 (2d Cir. 2015). The NBA permits national banks to charge interest rates on loans to the extent permitted by the laws of the state where they are incorporated and preempts other states’ laws that are contrary. 12 U.S.C. §85. Here, the Second Circuit ruled that the NBA’s preemption of a state usury law does not apply after a national bank assigns a loan to a creditor that is not a national bank.

Midland Funding, a debt purchaser, bought charged-off consumer credit card debts, including the plaintiff’s credit card account, from Bank of America, a national bank. An affiliate of Midland Funding then contacted the plaintiff, a New York resident, to obtain payment and stated, under the cardholder agreement, the interest rate on the debt was 27 percent per year. The plaintiff filed a class-action lawsuit alleging that the interest rate violated New York’s usury law, which prohibits interest rates in excess of 25 percent per year. Midland Funding argued that it was entitled to charge a higher rate based on the laws of Delaware, where the assignor national bank was incorporated. The Second Circuit rejected this argument, finding that NBA preemption could only apply to such a creditor if it were an agent or a subsidiary of a national bank or was otherwise acting on behalf of a national bank or if the application of the challenged state law significantly interferes with a national bank’s ability to exercise its powers under the NBA. The court found that appropriately applying the usury law of a borrower’s home state to an assignee that is not a national bank would not limit the assignor national bank’s activities unless the new creditor was acting on behalf of the national bank: “To apply NBA preemption to an action taken by a non-national bank entity, application of state law to that action must significantly interfere with a national bank’s ability to exercise its power under the NBA.” In this case, however, Midland Funding owned the debt and was collecting it on its own behalf. Midland Funding also argued that a Delaware choice-of-law provision applied pursuant to the change in terms notice. The Second Circuit reversed the district court’s finding of NBA preemption and vacated its judgment for the defendants, returning the case to the district court for further proceedings consistent with its opinion — including Delaware choice-of-law provision, class certification, and Fair Debt Collection Practices Act claims that were dependent in part on the NBA preemption clause.