The Department of Justice's "pattern or practice" fair lending lawsuit against GFI Mortgage Bankers, Inc. has resulted in a settlement that requires GFI to pay a total of $3.555 million, consisting of $3.5 million in monetary damages to aggrieved borrowers and a $55,000 civil penalty.

The settlement means that this case will not be a test of the DOJ's attempt to use disparate impact evidence to establish that the defendant had engaged in intentional discrimination as alleged in the complaint. The complaint charged that there was a “statistically significant” disparity between the interest rates paid by various groups of borrowers, and that these disparities occurred because of a pricing policy that allowed individual loan officers to exercise discretion in setting interest rates and a compensation policy that rewarded the loan officers for making loans at higher interest rates.

However, rather than using this evidence to support a disparate impact claim, the DOJ instead asserted that the defendant had engaged in a "pattern or practice" of intentional discrimination because it “knew or had reason to know” that the statistical disparities existed. (See our prior legal alert for an analysis of the DOJ's legal theory, including the deficiencies we saw in the DOJ's complaint.)

The DOJ's decision to frame the case as "pattern or practice" instead of disparate impact might have resulted from the perception that, if not for the parties' dismissal of Magner v. Gallagher, the U.S. Supreme Court would likely have disallowed the use of disparate impact analysis under the Fair Housing Act, and the same analysis would have then been applied by lower courts to claims under the Equal Credit Opportunity Act. (The Supreme Court may have another opportunity to decide this term whether disparate impact claims are available under the Fair Housing Act if it grants the petition for certiorari filed in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. As discussed in our prior legal alert, the issues in Mount Holly are virtually a carbon copy of those raised in Magner.)

The consent order contains GFI's admission that the DOJ performed a statistical analysis which it claimed showed that certain interest rate and fee disparities were "statistically significant" and could not "be explained by objective credit characteristics of the borrowers or loan product features." In addition to payment of monetary relief, the settlement requires GFI to adopt fair lending policies that include limits on any pricing discretion given to GFI employees and requirements for justifying pricing that exceeds that discretion or deviates from a standard fee schedule. GFI must also develop a program to monitor loans it originates for interest rate and fee disparities and take corrective action if the monitoring shows statistically significant disparities.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

The group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right. For more information, please contact Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Fair Lending Task Force Leader Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com. John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com.

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