Foggy on Fair Lending


Greater uncertainty wins as the Supreme Court upholds statistical evidence in fair lending claims

By Karen Epper Hoffman

Is discrimination truly discrimination if it is unintentional?

According to the U.S. Supreme Court, it is, and the high court’s recent ruling to that effect is likely to affect community banks, their regulatory examinations and their potential exposure to fair lending lawsuits.

The Supreme Court upheld the disparate-impact theory of anti-discrimination law, which means that financial institutions could be held liable for neutral practices that pose adverse lending decisions against certain borrowers, even when there is no intent to discriminate. The ruling was seen as a setback for the banking industry, which has long held that the Fair Housing Act should be limited to cases of intentional discrimination.

However, Lilly Thomas, ICBA’s vice president and senior regulatory counsel, points out that while the court upheld the use of statistical results to determine discriminatory impact, it also imposed a “robust causality requirement” which limited the application of the disparate-impact theory. She says plaintiffs must not only show a disparate impact but also must tie that claim to a specific policy or policies. Furthermore, community banks still have the defense of “showing a business reason to justify their policies.”

ICBA’s 2015 Policy Resolution on Fair Lending

  • ICBA and community banks support equal access to credit and fair lending and condemn discrimination based on race, ethnicity, national origin, gender, religion or other listed classification.
  • Regulators should use consistent and transparent standards when evaluating a community bank’s fair lending practices.
  • ICBA opposes any cause of action under the fair lending laws, including the Equal Credit Opportunity Act and Fair Housing Act, for disparate impact without a finding of intentional discrimination.
  • ICBA opposes the use of disparate impact to enforce fair lending laws against indirect auto lenders to combat the discriminatory behavior of auto dealers.
  • Community banks should receive proper notice of any changes to the methodologies, standards or analysis regulators use to assess fair
    lending compliance.
  • Regulators should be transparent in the legal theories and methodologies they use when enforcing fair lending laws. The banking agencies also should preserve the confidentiality of specific community bank information. Analytical methods used to evaluate fair lending law compliance must be disclosed.

Read more about ICBA’s policy resolutions, including its resolution on fair lending issues, online at

If the creditor can show it had a valid business necessity for a policy or practice that resulted in unfavorable treatment to a borrower, the plaintiff would have to prove that a less discriminatory policy or practice wouldn’t have resulted in the same outcome.

Conversely, however, a plaintiff could win a fair lending claim if he or she can demonstrate that another policy or practice serving the same business purpose would have resulted in a less discriminatory effect, says Melissa D. Blaser, senior manager for Wipfli LLP, a community bank consulting firm in Edina, Minn.

Nevertheless, for community bankers concerns remain that the Supreme Court’s ruling, while essentially an affirmation of previous rulings, could open a whole new can of worms in terms of how fair lending violation claims are reviewed and enforced.

David Boulanger, compliance counsel for community banking software company D+H in Lake Mary, Fla., said that although regulators will not likely change their examination procedures during fair lending exams of community banks, “The real question is, To what extent, if at all, will regulators try to apply the limitations set forth in the case?”
For example, Boulanger points out the high court stated “a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or polices causing that disparity.” Although regulators in the past may have relied on statistical evidence, “will regulators heed the court’s admonition against reliance solely on statistical disparity?” he adds.

Thomas does not believe the court ruling will necessarily change regulatory exams, but it will likely “support an exam that looks at the end result, which may create a challenge for community banks.” However, she adds that the court’s decision was based on an analysis of the Fair Housing Act, which still leaves open the question of whether the same decision would be held for claims under the Equal Credit Opportunity Act.

Given the situation, what should community banks do to protect themselves? They can start by looking at their own statistics, paying more attention (as regulators will) to the impact of their policies and not just the intent, according to Thomas. The ruling also could make having an automated compliance management software system that can gather and report on a bank’s borrower data increasingly important, she says. This is particularly true for borrowers in protected classes, such as race, religion, sex, familial status or national origin.

Community banks also should carefully monitor lending that applies discretionary or exception pricing, consultants say. Banks also should develop clear policies on discretionary pricing that clearly spell out when discretionary pricing can and can’t be used, as well as strong auditing procedures to ensure those policies are consistently followed. How a bank services its loans, particularly in how it collects and mitigates losses for troubled loans, also should be performed consistently, which should have clearly documented policies that are consistently audited.

Most of all, in light of the Supreme Court’s ruling, Thomas advises community banks to be prepared to demonstrate to regulators a strong overall commitment to searching for possible fair lending issues in their operations. This now should particularly include accepting a greater role for statistical reviews. “Demonstrating a commitment to preventive action toward the overall purpose of fair lending regulations for ensuring that similar borrowers are treated the same is very important,” she says.

Community banks should know that for a court or regulator to find their lending practices unfair, a clear link to an actual policy and its discriminatory impact should be found, Thomas adds. “This will put some extra burdens on community banks to do extra work, even though they may have very neutral policies,” she says.

Blaser agrees that community banks should be proactive and review their policies and practices for possible disparate impact, and they should explain and document the business necessity for all of their policies or practices. Because regulators will likely focus fair lending reviews on finding pricing disparities, Boulanger recommends carefully reviewing those policies and decisions in particular.

Karen Epper Hoffman is a financial freelance writer in Washington state.

Tim Cook, ICBA’s senior vice president of publications, contributed to this story.