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How Disparate Is Your Impact? The Current State of Fair Lending Litigation and Litigation Interruptus

American Bar Association Committee on Consumer Financial Services Winter Meeting – Park City, Utah January 10-12, 2014. How Disparate Is Your Impact? The Current State of Fair Lending Litigation and Litigation Interruptus. L. Jean Noonan Hudson Cook LLP Washington, D.C. John L. Ropiequet

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How Disparate Is Your Impact? The Current State of Fair Lending Litigation and Litigation Interruptus

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  1. American Bar Association Committee on Consumer Financial ServicesWinter Meeting – Park City, Utah January 10-12, 2014 How Disparate Is Your Impact?The Current State of Fair Lending Litigationand Litigation Interruptus L. Jean Noonan Hudson Cook LLP Washington, D.C John L. Ropiequet Arnstein & Lehr LLP Chicago, Illinois Gary Klein Klein Kavanagh Costello, LLPBoston, Massachusetts

  2. What’s happened with disparate impact fair lending claims after Wal-Mart Stores, Inc. v. Dukes (June 2011)? • With millions of discretionary decisions, need some “glue” to hold the decision-making together for classwide resolution to be possible • Giving discretion to local managers is the opposite of the uniform practice needed for a nationwide class action • With no common mode of exercising discretion identified, pervasive non-common issues make a class action impossible.

  3. The end of national class actions? • Wells Fargo (N.D. Cal.) – class certification denied Sept. 2011 – settled Mar. 2012 • Countrywide(W.D. Ky.) – class certification denied Oct. 2011–affirmed by 6th Cir. Jan. 2013 • Barrett v. H&R Block (D. Mass.) – class decertified Sept. 2012 –appeal denied by 1st Cir. Feb. 2013 • Rodriguez v. National City Bank (E.D. Pa.) – class settlement approval denied Sept. 2011– affirmed by 3d Cir. Aug. 2013

  4. What’s happened post-Dukes? • Are “regional” or “local” fair lending class actions being filed? • Harris v. Citigroup (D. Mass. Aug. 2012) • Are individual fair lending cases being filed?

  5. What is the Government’s Reaction to Dukes? Big settlements come out of the pipeline • U.S. v. Countrywide (C.D. Cal. Dec. 2011) - $335M • U.S. v. SunTrust (E.D. Va. May 2012) - $21M • U.S. v. Wells Fargo (D.D.C. July 2012) - $175M – DOJ expresses disparate impact in terms of odds instead of HMDA discrepancies in basis points

  6. What is the Government’s Reaction to Dukes? Small settlements, too • U.S. v. C&F Mortgage (E.D. Va. Sept. 2011) - $140,000 • U.S. v. GFI Mortgage Bankers (S.D.N.Y. Aug. 2012) - $3.5M plus admission of guilt • U.S. v. Texas Champion Bank (S.D. Tex. Feb. 2013) - $700,000 • U.S. v. Plaza Home Mortgage (S.D. Cal. Sept. 2013) - $3.0M • U.S. v. Southport Bank (E.D. Wis. Sept. 2013) - $687,000

  7. Bold Statements by the Regulators DOJ statement by AAG Perez Nov. 2011 “This Administration has been clear: we will pursue discrimination cases based on both intentional discrimination and disparate impact. Both theories are legitimate and critical tools of robust civil rights enforcement.”

  8. Bold Statements by the Regulators CFPB statements by Director Cordray: “We want consumers to avoid the marketplace’s silent pickpocket – discrimination. We cannot afford to tolerate practices, intentional or not, that unlawfully price out or cut off segments of the population from the credit markets.” (Apr. 2012) Strong statement “reaffirming” that disparate impact doctrine is “the law of the land.” (Nov. 2013)

  9. Bold Statements by the Regulators HUD final rule on disparate impact in fair lending cases (Feb. 2013) • Plaintiff’s burden to show prima facie case that the practice “actually or predictably results in a discriminatory impact.” • Burden then shifts to defendant to prove that the practice “is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests.” • Plaintiff may then establish liability by proving that the defendant’s interest “could be served by a practice that has a less discriminatory effect.”

  10. What About Auto Finance? • CFPB Bulletin 2013-02 (Mar. 21, 2013) • Option 1: Eliminate dealer discretion on finance charge markups • Option 2: Impose controls on dealer markups, monitor and address effects of policy that create “unexplained pricing disparities on prohibited bases” • CFPB Compensation Options (Nov. 13, 2013) • Flat dollar amount • Flat percentage of amount financed • Hybrid based on percentage of amount financed and loan term • Enforcement actions in the DOJ/CFPB pipeline?

  11. Ally – The First Pipeline Blast • Ally Bank and Ally FSI settled charges by CFPB and DOJ of alleged pricing disparities disfavoring blacks, Hispanics, Asians and Pacific Islanders (E.D. Mich. Dec. 2013) • $80 million in refunds and $13 million in civil penalties, plus choice of ongoing restitution or eliminating dealer markups

  12. What’s Happened in the Supreme Court on Disparate Impact? • Magner v. Gallagher, no. 10-1032 – cert. petition withdrawn after settlement brokered by DOJ two weeks before oral argument Feb. 2012 • Twp. of Mt. Holly v. Mt. Holly Gardens Citizens in Action, no. 11-1507 – cert. petition withdrawn after settlement two weeks before oral argument Dec. 2013 • American Insurance Ass’n v. HUD (D.D.C. filed June 2013) – a challenge to disparate impact in the on-deck circle?

  13. Current Cases of Interest • Wells Fargo REO discrimination settlements over handling of foreclosed properties with HUD and National Fair Housing Alliance (June 2013) • Additional REO discrimination administrative complaints pending and expanding geographically against U.S. Bank and Bank of America • Adkins v. Morgan Stanley (S.D.N.Y. July 2013) – claims of discrimination by mortgage securitizer survive motion to dismiss

  14. Current Cases of Interest • Rodriguez v. National City Bank • Class action dismissed, CFPB and DOJ take over (E.D. Pa. Aug. 2013) • $35 million consent order settlement on 9 to 14 BP differentials (W.D. Pa. Dec. 2013) • FHFA v. City of Chicago (N.D. Ill. Aug. 2013) – vacant property ordinance nullified as federally preempted

  15. Current Cases of Interest • New municipal cases claiming injury from reverse redlining • City of Los Angeles v. Wells Fargo, Citigroup, Bank of America (3 cases) (C.D. Cal. Dec. 2013) • City of Miami v. Wells Fargo, Citigroup, Bank of America (3 cases) (S.D. Fla. Dec. 2013)

  16. What are the Current Issues in Disparate Impact Cases? • What level of differential in race or national origin in HMDA data is “statistically significant”? • Should the differential also be economically significant?

  17. What are the Current Issues in Disparate Impact Cases? • How firm is the line between disparate treatment and disparate impact?

  18. What are the Current Issues in Disparate Impact Cases? • How data-driven is the CFPB’s investigation into discrimination in auto finance?

  19. What are the Current Issues in Disparate Impact Cases? • How valid is proxy evidence for measuring discrimination in non-mortgage lending where there are no HMDA data?

  20. What are the Current Issues in Disparate Impact Cases? • Will the CFPB reveal the basis or methodology for its proxy evidence in a manner that will allow everyone to work from the same dataset? • How do we ensure that it is the most appropriate methodology?

  21. What are the Current Issues in Disparate Impact Cases? • Can the CFPB’s proxy evidence methodology or dataset be used for compliance purposes as a safe harbor form of alternative for HMDA data?

  22. What are the Current Issues in Disparate Impact Cases? • Can or should a safe harbor be provided in some other fashion? • How and when will a lender’s own proxy evidence be accepted as valid?

  23. What are the Current Issues in Disparate Impact Cases? • Should an alternative for HMDA data be developed by regulation for non-mortgage lending to provide some measure of predictability to lenders? • Should non-mortgage creditors collect monitoring data under the self-testing rules of Regulation B?

  24. What are the Current Issues in Disparate Impact Cases? • In the absence of predictability for fair lending liability for non-mortgage lending, does disparate impact raise due process issues?

  25. Questions?

  26. Contact Information Gary Klein Klein Kavanagh Costello, LLP 85 Merrimac Street Boston, Massachusetts 02114 (617) 357-5500 klein@kkcllp.com L. Jean Noonan Hudson Cook LLP 1020 19th Street NW 7th Floor Washington, D.C. 20036 (202) 327-9700 jnoonan@hudco.com John L. RopiequetArnstein & Lehr LLP 120 S. Riverside Plaza Suite 1200 Chicago, Illinois 60606 (312) 876-7814 jlropiequet@arnstein.com

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