Pub. 5 2015 Issue 3

About the Authors: Justin Long, a partner with Bracewell & Giuliani LLP, serves as head of the firm’s financial institutions practice. Justin fo- cuses on matters involving corporate finance, mergers and acquisitions and state and federal bank regulatory matters. He advises financial in- stitutions and corporations on public and private securities offerings, securities law compliance and reporting obligations, mergers, acquisitions, asset sales and acquisitions, and other corporate reorganizations. Justin also assists financial institutions with regulatory compliance and enforcement issues and private equity and fund investments and he counsels clients regarding internal investigations, corporate governance and general corporate matters. As an associate with Bracewell & Giuliani LLP, Patrick Hanchey counsels and represents banks and other financial institution clients in matters involving state and federal banking laws, regulations, enforcement actions, and other corporate activities, such as mergers, acquisitions and holding company formations. He also has experience representing banks, creditors and individual directors and officers in connection with FDIC receivership and resolution powers. Patrick’s practice also includes white collar criminal defense focused on the representation of bank officers, directors and shareholders in government actions and investigations. actions. Less than a month after the Court’s decision, the CFPB settled an action against American Honda Finance Corporation under the ECOA based in part on disparate impact liability. The action related to Honda’s practice of granting dealers the discretion to charge up to 225 basis points higher to borrowers. While neither Honda nor the dealers recorded the borrowers’ race, the CFPB and the DOJ alleged that African-American borrowers were shown to pay a statistically significant higher rate than white borrowers (according to the CFPB’s nationality and race probabilities as determined by a formula based on borrower geography and surnames). While Honda settled this claim with the CFPB, it could have been an interesting test case for the new standard set forth by the Court in Inclusive Community, particularly as to whether the CFPB’s probability-based race assignment would stand up as sufficient to establish a prima facie case of disparate impact. Additionally, it is interesting to note that the CFPB did not seek civil money penalties from Honda as it had done in previous cases (most notably in its enforcement action against Ally Financial last year), instead imposing a restitution payment and agreeing to a mandated reduction in certain fees charged by Honda. It is unclear whether the balancing act set forth by the Court in Inclusive Community tempered the CFPB’s bargaining power to seek civil money penalties, or if the CFPB’s decision was based on other factors unique to Honda. The industry may receive answers in the near future, as the CFPB is still pursuing similar claims against other major auto lenders such as Toyota, Nissan and Fifth Third Bank. Addi- tionally, the political process still may provide relief to lenders in spite of the Court’s decision. For example, the lending industry has garnered some unexpected support from a group of Congressional Democrats, who signed onto a Republican bill that would restrict DOJ’s use of disparate impact theory in auto lending cases. While that bill was introduced in April 2015, several months before the Court’s decision in Inclusive Community, it is interesting to note that several Democrats joined as cosponsors of the bill in July, after the Court’s deci- sion. Moving forward, banks and other lenders should continue to take proactive steps now to minimize the risk of defending disparate impact allegations in the future. Areas of concerns continue to include discretionary pricing policies, subjective criteria in loan approval processes, minimum loan amounts, and geographical type grading systems. As a result, institu- tions should review existing policies and adopt policies and procedures to minimize the chance for statistical disparities in lending practices, especially any policies in which subjective factors are utilized. Institutions should also consider if their policies might adversely affect a potential class. To the extent institutions allow for discretion or exceptions from these policies or procedures, they should require documentation of specific, nondiscriminatory justification for such excep- tions. Similarly, senior leadership of institutions should be aware that “big picture” strategic decisions, such as deciding to enter or exit a particular market segment or geographic area, will likely have a direct influence on potential disparate impact claims because of unforeseen statistical consequences of these decisions. When making these types of decisions, institutions should ensure that business justifications are suf- ficiently analyzed and well documented. Lastly, institutions should ensure that internal and external auditing functions are in place to minimize the risk of statistical disparities giv- ing rise to discrimination claims even when the institution follows its policies and procedures and documents decisions appropriately. When engaging third parties to conduct reviews, including reviews involving statistical analysis of potential impact to customers, institutions should consider having outside legal counsel engage the third party. This action would allow for the potential protection of such work under the attorney- client privilege, which could better position an institution in its efforts to proactively evaluate statistical anomalies and develop contingency plans while limiting the risk of such proactive efforts being used against the institution in the future. Ultimately, the Court’s decision in Inclusive Com- munity solidifies disparate impact as a potential pitfall for the banking and lending industries. While future interpretation and implementation of the Court’s decision could potentially soften the blow of disparate impact, and legislative initiatives may provide some protection, it is more important than ever for institutions to be proactive in protecting against future disparate impact claims. w n Supreme Court Decision — continued from page 19 20 www.azbankers.org