The U.S. Department of Justice (DOJ) has announced a proposed consent order with Charter Bank to settle charges that the bank violated the Equal Credit Opportunity Act (ECOA) by discriminating on the basis of national origin in connection with its vehicle-secured loans.

The DOJ claimed that the bank's pricing policy or practice resulted in Hispanic borrowers paying higher prices for vehicle-secured loans than similarly situated non-Hispanic borrowers. The DOJ said that the action originated from a referral by the Federal Deposit Insurance Corporation.

The loans in question were non-purchase money loans secured by a consumer's vehicle. According to the DOJ's complaint filed in a Texas federal district court, the bank's policy prior to August 2014 gave loan officers discretion to deviate upward or downward from the interest rates listed on the bank’s rate sheets by approximately three percentage points. In August 2014, the bank implemented a revised policy that prohibited discretionary adjustments.

The complaint alleged that, after accounting for risk factors that the bank documented it considered in pricing the loans, the pricing system resulted in Hispanic borrowers being charged interest rates that were, on average, 108 basis points higher than the rates charged similarly situated non-Hispanics. The DOJ claimed that the disparity was "statistically significant, and the difference is based on national origin and not based on creditworthiness or other objective criteria related to borrower risk."

According to the DOJ, information as to each applicant's national origin was available and known to the bank's loan officers who personally handled the loans. The DOJ claimed that the bank did not properly instruct its loan officers regarding their obligation to treat prospective customers without regard to national origin and failed to supervise or monitor the performance of its loan officers to ensure fair lending compliance.

In the complaint, the DOJ asserted various theories for its ECOA claims. The complaint alleged that the bank's policy or practice of giving its employees "broad subjective discretion" in setting interest rates had a disparate detrimental impact on Hispanic borrowers that was not justified by business necessity or legitimate business interests that could not be reasonably achieved as well by means less disparate in their impact on Hispanic borrowers. (The complaint’s focus on the bank’s pricing system may have been intended to address the U.S. Supreme Court’s admonition in Inclusive Communities that a disparate impact claim based upon a statistical disparity "must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.")

The DOJ also alleged that the bank’s policy and practices constituted "a pattern or practice of resistance to the full enjoyment of rights secured by ECOA" and that such pattern or practice of discrimination was "intentional, willful, and implemented with reckless disregard for the rights of Hispanic borrowers." The DOJ's allegation of intentional discrimination was presumably based on loan officers' alleged knowledge of borrowers' national origin.

The consent order, which is subject to court approval, requires the bank to pay $165,820 into an escrow account to compensate for monetary damages that may have been suffered by affected borrowers as a result of the bank's alleged ECOA violations. It also requires the bank to maintain its pricing policy for consumer loans as revised in August 2014 and its monitoring program designed to detect disparities in interest rates and pricing adjustments for the bank's loan products. In addition to providing ECOA training to bank employees, the bank must also display a prescribed notice of non-discrimination in all locations where loan applications are received and provide a substantially similar notice to all applicants for vehicle-secured loans.

The DOJ's action demonstrates that there are risks when loan officers are permitted to deviate from standard pricing. Lenders that permit loan officers to deviate from standard pricing should conduct an analysis to assess if there are potential trends that could be viewed as presenting a fair lending concern to regulators.

Ballard Spahr's Consumer Financial Services Group has created a Fair Lending Task Force that 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 understand the statistical analyses that underlie fair lending assessments and discrimination claims.

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