Fair Lending Developments: The End of Discretionary Pricing?

By John L Ropiequet, Christopher 5. Naveja, and L Jean Noonan *

INTRODUCTION

Fair lending litigation has returned to the mortgage finance arena after the conclusion of a wave of class actions against auto finance companies. The courts continue to deal with numerous cases filed against mortgage lenders under the Equal Credit Opportunity Act ("ECOA")! and the Fair Housing Act ("FHA").2 These cases are largely based on data that the lenders themselves must collect and report concerning the race, ethnicity, and income levels of their borrowers plus interest rates and fees for higher-priced loans pursuant to the requirements of the Home Mortgage Disclosure Act ("HMDA? and Regulation C promulgated thereunder. 4 Situations where loan officers are given discretion to set interest rates and points, coupled with HMDA data suggesting that minority racial groups have a disproportionate number of higher-priced loans, appear to present inviting targets for claims of racial discrimination.

Equally notable developments have occurred on the enforcement side. Federal enforcement actions have been filed by both the U.S. Department of Justice ("DO]") and the Federal Trade Commission ("FTC). This may signal renewed interest by the agencies in acting against perceived racial discrimination by lenders. Again, the agencies appear to be targeting loan officer pricing discretion coupled with HMDA data showing a disparate impact on minorities.

In addition, state enforcement of anti-discrimination laws against national banks was stymied by federal decisions that applied a regulation of the Office of the

* John L Ropiequet is a Partner in the law firm of Arnstein & l.ehr LLP in its Chicago office and is a member of the Illinois Bar. He is Pro Bono Liaison of the Committee on Consumer Financial Services of the American Bar Associations Section of Business Law. Christopher S. Naveja is a Partner in the law firm of Arnstein & l.ehr LLP in its Chicago office and is a member of the Illinois Bar. L Jean Noonan is a Partner at Hudson Cook.Ll.P where she manages the firms Washington, D.C., office. She is a member of the Maryland Bar.

1. Pub. L No. 93-495, 88 Stat. 1500, 1521 (1970) (codified as amended at 15 U.s.C. §§ 1691- 1691£ (2006)).

2. Pub. L No. 90-284, 82 Stat. 81 (1968) (codified as amended at 42 U.s.C. §§ 3601-3631 (2006)).

3. Home Mortgage Disclosure Act ofl975, Pub. L No. 94-200, §§ 301-310,89 Stat. 1124, 1125 (codified as amended at 12 U.s.C. §§ 2801-2810 (2006)).

4. 12 C.ER. pt. 203 (2009).

571

572 The Business Lawyer; Vol. 65, February 2010

comptroller of the Currency ("OCe") to enjoin the New York Attorney General from investigating their activities." The U.S. Supreme Court's decision in Cuomo v. Clearing House Ass'n," which reversed those decisions, has lifted that bar by invalidating the regulation and limiting restrictions on state enforcement actions.

PRIVATE LITIGATION DEVELOPMENTS

- : .

Courts have rendered decisions on pleadings issues in a number of cases against mortgage lenders, all of them denying motions to dismiss in whole or in part. None of the cases has reached the class certification or summary judgment stage yet, although some have been dismissed by agreement, presumably following settlement. 7 This continues the trend noted in the previous Annual Survey. 8 Many of the complaints attack as discriminatory lender discretionary pricing policies or the practice of allowing loan officers to use discretionary or subjective credit factors as well objective factors iri setting interest rates, points, or yield spread premiums." HMDA data and studies of HMDA data are frequently cited as factual support for the plaintiffs' allegations of disparate impact on minority borrowers. 10 The'more significant developments are as follows.

DISPARATE IMPACT ClAIMS ARE ACTiONABLE

The reliance of the plaintiff's bar on evidence of a disparate impact on minority borrowers rather than disparate treatment to support their claims of racial discrimination in mortgage lending has led some defendants to argue for an extension of the u.s. Supreme Court's decision in Smith v. City of Jackson,ll which analyzed disparate impact claims under the Age Discrimination in Employment Act and Title VII of the Civil Rights Act of 1964. However, the courts uniformly

5. See OCC v. Spitzer, 396 F. Supp. 2d 3S3 (S.D.N.Y. 2005), affd in part, rev'd in part sub nom.

Clearing House Ass'n v. Cuomo, 510 F.3d 105 (2d Cir, 2007), affd in part, rev'd'in part, 129 S. Ct. 2710 (2009); Clearing House Ass'n v. Spitzer, 394 F. Supp. 2d 620 (S.D.N.Y. 2005), affd in part, rev'd in part sub nom. Clearing House Ass'n v. Cuomo, 510 F.3d 105 (2d Cir. 2007), affd in part, rev'd in part, 129 S. Ct. 2710 (2009).

6. 129 S. Ct. 2710 (2009).

7. See, e.g., Kimbrew v. Fremont Reorganization Corp., No. 01 OS-3277 AG (ANx) (CD. Cal.

June 24, 2009) (order of dimissal); Hoffman v. Option One Mortgage Corp., No. 07 C 4916 (N.D. Ill. July 14, 2009) (order of dismissal); Whitley v. Taylor Bean &: Whitacker Mortgage Corp., No. OSC 3114 (N.D. Ill. July 2S, 2009) (order of dismissal).

S. John L. Ropiequet &: L. Jean Noonan, Recent Developments in Fair Lending: The Dawn of a New Litigation Era?, 64 Bus. LAw. 563,564-74 (2009) [hereinafter Fair Lending 2009].

9. See, e.g., Guerra v. GMAC LLC, No. 2:0S-cv-1297-LDD, 2009 u.s. Dist. LEXIS 13776, at *5 (E.D. Pa. Feb. 20, 2009); Steele v. GE Money Bank, No. OS C lSS0, 2009 us. Dist. LEXIS 11536, at *5 (N.D. Ill. Feb. 17, 2009); Taylor v. Accredited Home Lenders, Inc., 5S0 F. Supp. 2d 1062, 1066 (S.D. Cal. 200S).

10. See, e.g., Second Amended Complaint at 7-S, Rodriguez v. Bear Steams Cos., No. 07-cv-lSI6 (JCH), 2009 Ll.S. Dist. LEXIS 31525 (D. Conn. Apr. 14,2009); Amended Complaint at 5-S, Steele v. GE Money Bank, No. OS C lSS0, 2009 U.S. Dist. LEXIS 11536 (N.D. Ill. Feb. 17,2009); Amended Complaint at 4-S, Hoffman v. Option One Mortgage Corp., 5S9 F. Supp. 2d 1009 (N.D. Ill. 200S) (No. 07 C 4916); Complaint at 4-6, Kimbrew v. Fremont Reorganization Corp., No. 01 OS-03277 AG (ANx), 200S U.S. Dist. LEXIS 10S632 (CD. Cal. Nov. 17, 200S); Complaint at 3-6, Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062, 1066 (S.D. Cal. 200S) (No. 07 0I1732JAHJMA).

11. 544 U.S. 22S (2005).

Fair Lending Developments: The End oj Discretionary Pricing? 573

have continued to reject all attempts to apply this analysis to bar disparate impact claims under the ECOA and the FHA. 12

In National Community Reinvestment Coalition v. Accredited Home Lenders Holding CO.,13 for example, the principal argument was that disparate impact claims were not cognizable under the FHA. 14 The court carefully examined the legislative history of the FHA and agency interpretations of it, concluding that the FHA allowed such claims." It found further confirmation of this conclusion in the fact that all eleven U.S. Courts of Appeals had held that "the FHA does provide for a disparate impact cause of action."!" and noted as well that many other district courts had reached the same conclusion on the Smith argument" The court also held that the plaintiff association had organizational standing to sue for racial discrimination because the defendants' actions allegedly caused it to divert resources from its educational, counseling, and outreach services. 18

Likewise, the courts reached the same result in Hoffman v. Option One Mortgage COrp.19 and in Guerra v. GMAC u.c.20 Neither court was willing to find that the Smith decision, by implication, overruled prior precedent that recognized disparate impact liability under the FHA and the ECOA.21

In Steele v GE Money Bank,22 the court went one step further than merely declining to find that Smith impliedly overruled numerous cases that had permitted disparate impact claims. It cited Smith along with Hoffman as authority that affirmatively set forth the elements of a disparate impact claim under the ECOA and the FHA, stating that "a plaintiff must: (1) identify a specific practice or policy adopted by a defendant; (2) demonstrate a disparate impact on a protected group; and (3) show a causal relationship between the challenged practice and the alleged disparate impact. "23 Finding that the plaintiffs had met this burden, the court denied the defendants' motion to dismiss. 24

CONTINUING VIOLATION THEORY

In two decisions discussed in the previous Annual Survey,25 the courts permitted the plaintiffs to maintain racial discrimination claims even though they filed

12. Previous cases rejecting this theory were discussed in detail in Fair Lending 2009, supra note 8,

at 569-74.

13. 573 E Supp. 2d 70 (D.D.C 2008).

14. rd. at 73.

15. rd. at 77-79.

16. rd. at 78 (citing cases).

17. rd. at 78-79 (citing cases).

18. See id. at 75. See also NAACP v. Ameriquest Mongage Co., 635 E Supp, 2d 1096, 1l01-03 (CD. CaL 2009) (holding plaintiffs allegations of a disparate adverse impact on African-Americans due to defendants policies and practices was sufficient to provide both organizational standing for the NAACP and associational standing for its members to sue for FHA and ECOA violations).

19. 589 E Supp. 2d 1009 (N.D. IlL 2008).

20. 2009 u.s, Dist. LEXIS 13776 (E.D. Pa. Feb. 20, 2009).

21. Hoffman, 589 E Supp. 2d at 1010-11; Guerra, 2009 U.s. Dist. LEXIS 13776, at *8-10 &: n.3.

22. 2009 us. Dist. LEXIS 11536 (N.D. III. Feb. 17,2009).

23. rd. at *9.

24. rd. at *15-16.

25. See Fair Lending 2009, supra note 8, at 570-74.

574 The Business Lawyer; Vol. 65, February 2010

suit more than two years after they entered into mortgage loans. Both courts held that the plaintiffs had alleged "continuous violations" through their monthly payments on the loans, so that their claims were not barred by the statute of limirations." The court reached the same result in Taylor v. Accredited Home Lenders, Inc.,27 holding under the continuing violation theory that the plaintiffs claims were not barred by the statute of limitations because the plaintiff suffered an actionable wrong each time she made a mortgage payment that was improperly inflated by the defendants discriminatory pricing pollcy "

The court in Kimbrew v. Fremont Reorganization COrp.29 reached a different result. The defendants argued that the disparate impact claims of some of the plaintiffs were time-barred by the ECOA's and the FHA's two-year statutes of limitations." The plaintiffs argued that the defendants' conduct was part of a continuing violation and thus was not barred." The court found that the continuing violation theory did not apply because only "single incidents of violative conduct" had occurred when each plaintiff entered into a 10an.32 Since allegedly discriminatory markups on the loans of the plaintiffs whose loans were less than two years old did not affect the rights of plaintiffs whose loans were more than two years old, it declined to follow other district courts that had applied the doctrine."

REVERSE RED LINING

Reverse redlining, or targeting minority borrowers for higher cost loans, has been used as a basis for alleging racial discrimination in private litigation, as well as in a case brought by the City of Baltimore. In that case, the court found that the city had standing to bring claims for both disparate treatment of minority city residents and, disparate impact on them." In Rodriguez v. Bear Stearns COS.,35 the plaintiffs alleged that the defendants targeted them based on their race for predatory mortgage servicing practices in violation of the FHA.36 The plaintiffs alleged that the defendants used. a computer algorithm to evaluate and select for purchase portfolios of subprime loans primarily made to Latino and African-American borrowers and then engaged in predatory servicing practices with respect to the loans

26. See Ramirez v. GreenPoint Mortgage Funding, Inc., 633 F. Supp. 2d 922, 930 (N.D. Cal. 2008);

Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 261-62 (D. Mass. 2008).

27. 580 F. Supp. 2d 1062 (S.D. Cal. 2008).

28. ld. at 1065-66 (citing Havens Realty Corp. v. Coleman, 455 U.s. 363, 380':"'81 (1982)).

29. 2008 U.S. Dist. LEXIS 108632 (N.D. Cal. Nov. 17,2008).

30. ld. at *7.

31. ld.

32. ld. at * 10.

33. ld. at * 10-11.

34. See Mayor &: City Council of Bait. v. Wells Fargo Bank, N.A., 631 F. Supp. 2d 702, 704 (D. Md. 2009). See also Richard E. Gottlieb &: Brett]. Natarelli, Update on Munidpal Nuisance and Discrimination Utigation, 65 Bus. Law, 665 (2010) (in this Annual Survey).

35. No. 07-cv-1816 (jCH), 2009 us. Dist. LEXIS 31525 (D. Conn. Apr. 14,2009).

36. ld. at *6-7.

Fair Lending Developments; The End oj Discretionary Pricing? 575

so targeted." Although the plaintiffs' allegations were twice dismissed on motion as too speculative, their third complaint survived a motion to dismiss." The court concluded that the plaintiffs' newest allegations detailing specific facts about the defendants' underwriting practices on "scratch and dent" loans and their predatory servicing practices, along with details of the named plaintiffs' personal experiences in the collection process, were sufficient to state a plausible claim of discrimination actionable under the FHA. 39

Similarly; the plaintiff in Whitley v. Taylor Bean & Whitacker Mortgage Corp. 40 also claimed targeting in connection with ECOA and FHA claims. The principal plaintiff alleged that the defendants falsified information on her loan application and fraudulently overstated the value of her property." The defendants argued that they could not have discriminated against the plaintiff because she alleged that the fraudulent loan application included false information that she was Caucasian when in fact she was African-American." The plaintiff argued that the defendants' knowledge ef her race, not the false information contained in the application, led to less favorable loan terms and that this was a direct result of intentional discrimination and the disparate impact of the defendants' pricing policies for interest rates and closing fees." The court agreed and held that these allegations were sufficient to state claims under the ECOA and the FHA.44

ENFORCEMENT DEVELOPMENTS DO] CONSENT DECREES

The DO] settled a case with Nationwide Nevada, LLC ("Nationwide"), resolving allegations of discrimination against applicants for automobile financing who lived on Indian reservations." The enforcement action, which originated from an investigation by the DO] Civil Rights Division," furthered a longstanding interest of the DOj.47 The government alleged that Nationwide and its general partner,

37. rd. at *17-19.

38. rd. at *20-21.

39. rd. However; the coun did not find the plaintiffs' allegations sufficient to sustain c1aitns of in-

tentional disparate treatment. rd. at *24-27.

40. 607 E Supp. 2d 885 (N.D. Ill. 2009).

41. rd. at 892.

42. rd. at 900-01.

43. rd. at 901.

44. rd. at 901-02.

45. United States v. Nationwide Nev., LLC, No. 2:08-cv-01309-ECR-RJJ (D. Nev. Sept. 30, 2008) (consent order), available at http://www.justice.gov/crtlhousingldocumentslnatnevadasettlefinal.pdf. 46. See Press Release, U.S. Dep't of Justice, Justice Department Settlement Resolves Allegations of Discrimination Against Borrowers on Indian Reservations (Sept. 29, 2008) (No. 08-063), available at http://www.usdoj.gov/opa/pr12008/September/08-cn-863.htmi.

47. See, e.g., Amended Complaint, United States v. Blackpipe State Bank, No. 5:93-cv-5U5 (0.5.0.

Jan. 21, 1994), available at http://www.justice.gov/crtlhousingldocumentslbpsbcomp. php; Complaint, United States v. First Nat'l Bank of Gordon, No. 5:96-cv-5035 (0.5.0. May 7,1997), available at http:// www.justice.gov/crtlhousingldocumentslbpsbcomp.php.

576 The Business Lawyer; Vol. 65, February 2010

NAC Management Corp. ("NAC), engaged in a pattern or practice of discrimination on the basis of race, color, or national origin by refusing to purchase automobile sales finance contracts from dealers if Nationwide believed that the applicant or co-applicant resided on an Indian reservation." The practice allegedly affected residents on at least fifteen reservations in Nevada, Utah, Arizona, California, and Oregon and was not justified by legitimate business considerations."

The consent order prohibits the companies from discrimination on the basis of race, color, or national origin against credit applicants because they live on an Indian reservation. 50 It requires NAC to modify its credit policy to state that residency on an Indian reservation is not a valid basis for declining to purchase automobile sales finance contracts." The consent order allows NAC to decline an application if it cannot determine, after good-faith attempts, that it would be permitted to enter the reservation to perform self-help repossession. 52 The order requires Nationwide to send notices to all its dealers and to put statements on its rate sheets saying that it does not discriminate against applicants residing on Indian reservations. 53 The companies are required to conduct equal credit opportunity training programs and to create a fund of $170,000 to compensate aggrieved applicants. 54

The DO] simultaneously filed a complaint and consent order against First lowndes Bank, a state-chartered institution in Alabama, alleging that it discriminated against African-Americans on the basis of race or color in connection with interest rates on first-lien loans for owner-occupied manufactured housing, 55 The Federal Deposit Insurance Corporation referred the matter to the DO] for prosecution based on information gathered in its examination of the bank. 56 The complaint alleged that the bank allowed its loan officers discretion to set interest rates within broad parameters. 57 This allegedly caused African-American borrowers to be charged interest rates an average of 150 basis points higher than similarly situated white borrowers. 58 The DO] alleged that these pricing differences for manufactured housing loans could not be explained by differences in individual creditworthiness or loan amount. 59

48. Complaint at 3, United States v. Nationwide Nev., LLC, No. 2:08-cv-01309-ECR-R]] (D. Nev.

Sept. 30, 2008), available at http://www.justice.gov/crtlhousingldocumentsinatnevadacomp.pdf.

49. Id.

50. United States v. Nationwide Nev., LLC, No. 2:08-cv-01309-ECR-R]], at 4 (D. Nev. Sept. 30, 2008) (consent order), available at http://www.justice.gov/crtlhousingldocumentsinatnevadasettiefi nal.pdf.

51. Id.

52. Id.

53. Id. at 5.

54. Id. at 6-9.

55. Complaint at 1-3, United States v. First Lowndes Bank, Inc., 2:08-cv-798-WKW (M.D. Ala.

Nov. 11, 2008), available at http://www.justice.gov/crtlhousingldocumentsllowndescomp.pdf.

56. Id. at 2.

57. Id. at 3.

58. Id. at 4.

59. rd. at 3-4.

Fair Lending Developments: The End of Discretionary Pricing? 577

In the consent order, the bank agreed to an injunction against discrimination on the basis of race or color/" The order authorizes the bank to permit a deviation from applicable interest rates on its rate sheet only if it: (0 specifies the limits on any upward or downward deviation; (ii) specifies the factors the loan officer can use in exercising pricing discretion; (iii) provides each applicant with a written notice that the interest rate is negotiable; and (iv) documents in each loan file the factors it considers when setting an interest rate that varies from the rate sheet and how each factor affects the pricing decision." The consent order requires the bank to conduct a quarterly review of all non-commercial residential real estate loans to determine whether pricing or other differences exist between borrowers on the basis of race and the reasons for any differences found." The bank is also required to submit a request to the DO] for advance approval of any changes to its non-commercial residential real estate loan policy? If the DO] objects to any change and the bank does not agree, the dispute can be brought to court for resolution." The bank agreed to conduct equal credit opportunity training for its personnel and to establish a settlement fund of $185,000 for compensation to injured consumers."

In the Nationwide settlement, establishing who was injured by the alleged discriminatory practice is relatively straightforward: injured consumers are otherwise-qualified applicants who were denied credit because they lived on an Indian reservation. In contrast, determining who was injured by First Lowndes Bank's pricing decisions is conceptually much more difficult. The order defines "aggrieved persons" as African-Americans who "may have been charged" a higher interest rate than comparable white borrowers for first-lien loans for owneroccupied manufactured loans during a period spanning more than six years." The consent order requires the bank to provide electronic information for AfricanAmerican borrowers and borrowers whose race is unknown," but not for white borrowers from the same time period, so it is unclear how the government plans to determine the interest rate paid by comparable white borrowers.

FTC ENFORCEMENT ACTIONS

The FTC brought its first discrimination action against a mortgage lender based on HMDA data in 2008, alleging that Gateway Funding Diversified Mortgage Services C'Gateway"), a Pennsylvania-based mortgage lender, and its general partner, Gateway Funding, Inc. ("GFl"), discriminated against African-Americans and Hispanics based on race and national origin in connection with the pricing of

60. United States v. First Lowndes Bank, Inc., 2:08-cv-798-WKw, at 4 (M.D. Ala. Nov. 11,2008)

(consent order), available at http://wwwjustice.gov/crt!housingldocumentsllowndessetdefinal.pdf.

61. [d. at 4-5.

62. [d. at 5-6.

63. [d. at 6.

64. [d. at 6-7.

65. [d. at 7-9.

66. [d. at 10.

67. [d.

-:_>r:··-··

578 The Business Lawyer; Vol. 65, February 2010

their purchase and refinance mortgage loans." The complaint alleged that Gateway gave its loan officers "nearly complete discretion" to set "overages," which are prices higher than its risk-based prices based on interest increases or additional fees or both." The FTC claimed that this discretion caused African-Americans and Hispanics to pay higher overages because of their race or ethnicity?? It alleged that these disparities in overages were substantial and could not be explained by factors related to underwriting risk or the credit characteristics of the borrowers. 71

The stipulated final judgment did not seek civil penalties, due to the defendants' . demonstrated inability to pay. 72 Instead, it ordered the companies to establish a $2,900,000 fund for equitable monetary relief and suspended all but $200,000 of that amount." The final judgment stated that, if the FTC found in its sole discretion that direct redress to consumers was impracticable, it could choose to use the funds for other equitable relief, including consumer education." The FTC could deposit any funds not used for equitable relief into the United States Treasury as disgorgement."

Gateway andGFI agreed to an injunction against engaging in race or national origin discrimination and to any other violations of the ECOA.76 They were required to. initiate a fair lending monitoring program, which included implementing effective fair lending policies; detailed periodic monitoring analyses of pricing by race and ethnicity for direct and wholesale lending, by branch and by loan originator; and a program for corrective action of any pricing disparities for African-American or Hispanic applicants, compared to non-Hispanic, white applicants, which are not justified by the underwriting risk or credit characteristics ofthe applicants. 77

The final judgment provided interesting guidance on what the FTC considers to be appropriate remedial actions when pricing disparities are discovered. It specified that the corrective actions must include verbal or written counseling, fair lending retraining, enhanced scrutiny of loans by branch or by loan originator, restriction of pricing discretion, termination of employment, and the provision of consumer refunds." The final judgment also requires the companies

6S. Complaint at 4, FTC v. Gateway Funding Diversified Mortgage Servs., L.P., No. 2:0S-cv-5S05

(E.D. Pa. Dec. 17, 200S), available at http://www.ftc.gov/osicaselistl0623063/0S1216gatewaycmpt.pdf. 69, Id.

70. Id. at 4-5.

71. Id. at 5, 7.

72. FTC v. Gateway Funding Diversified Mortgage Servs., L.P., No. 2:0S-cv-5S05, at 1 (E.D. Pa.

Dec. 17, 200S) (stipulated final judgment), available at http://www.ftc.gov/osicaselistl0623063/0S12 16gatewaystiporder.pdf.

73. Id. at 7-8.

74. Id. at S.

75. Id.

76. Id. at 4.

77. Id. at 4-6.

78. Id. at 6.

Fair Lending Developments: The End of Discretionary Pricing? 579

to conduct fair lending training and to maintain a comprehensive data integrity program. 79

The FTC filed a complaint against another mongage lender in 2009, charging that Golden Empire Mongage, Inc., and its individual owner discriminated against Hispanic applicants on the basis of national origin." The complaint alleged that the companys loan pricing had both a risk-based component and a discretionary overage." While the discretionary pricing policy capped overages at 3 percent of the loan amount, branch managers and senior managers were permitted to override the cap.82 The amount of the overages contributed to the compensation of loan officers and branch managers, the complaint alleged." Discrimination against Hispanics occurred both in the amount of overages and in the frequency of overrides to the overage cap, according to the complaint." The FTC sought injunctive and other equitable relief, including rescission or reformation of contracts, restitution, and disgorgement of ill-gotten monies." Notably, the defendants had not agreed to a consent decree as of this writing, but were taking action to defend the case on the merits.

CUOMO V. CLEARING HOUSE ASS'N

As discussed elsewhere in this Annual Survty,86 the u.s. Supreme Courts decision in Cuomo v. dearing House Ass'n87 brought to a conclusion litigation begun in 2005 when the New York Attorney General sent investigative demands to several national banks. Suits were filed in federal coun by a coalition of the targeted national banks" and their federal regulator, the acc, to enjoin the investigations of alleged race discrimination in mortgage lending on the ground that the National Bank Act ("NBA ")89 preempted the state investigations because they conflicted with the acC's exclusive visitorial rights under the NBA.90 The district coun ruled that because the acc had exclusive power to investigate discriminatory lending

79. Id. at 7.

80. Complaint at 6, FTC v. Golden Empire Mortgage, Inc., CV09-3227 CAS (S&) (CD. CaL May 7,

2009).

81. Id. at 4.

82. Id. at 4-5.

83. Id. at 4.

84. Id. at 5-6.

85. Id. at 7-8.

86. See David L Beam & Ralph T. Wutscher, The New Trajectory of Federal Preemption, 65 Bus. LAw. 645,646-650 (2010) (in this Annual Survey).

87. 129 S. Ct. 2710 (2009).

88. The targeted national banks included Wells Fargo, HSBC, JP. Morgan Chase, and Citigroup.

See Clearing House Ass'n v. Cuomo, 510 F.3d 105, 109 n.2 (2d Cir, 2007), affd in part, rev'd in part, 129 S. Ct. 2710 (2009).

89. Act of June 3, 1864, ch. 106, 13 Stat. 99 (codified as amended in scattered sections of 12 USC).

90. Cuomo, 129 S. Ct. at 2714-15.

"

580 The Business Lawyer; Vol. 65, February 2010

practices by national banks, the Attorney General lacked such authority?' This was affirmed by the U.S. Court of Appeals for the Second Circuit."

The Supreme Court reversed, although it did not reverse the trial courts original decision to enjoin the Attorney Generals investigative subpoenas." The Court ruled that visitorial power over the banks' corporate affairs was something separate from the power to enforce otherwise applicable state law against them and found that law enforcement activities were different from "general supervision and control" and "oversight" over national banks' activities." Accordingly, the Court held, "If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and would be treated like a litigant. "95 The Court refused to accord Chevron deference" to an OCC regulation that prohibited states from enforcing their own anti-discrimination laws against national banks because the regulation did not comport with the provisions of the NBA.97

The Court held that the NBA allowed a state attorney general to bring suit in court to enforce state laws against a national bank as "sovereign-as-law-enforcer," but did not allow the exercise of visitorial power by inspecting national banks' books and records on demand, something that was reserved to the OCC as "sovereign-as-supervisor.?" Thus, while the Attorney General could not be prohibited from bringing enforcement actions in state courts, he nevertheless could not issue investigative subpoenas on his own authority under state law since that would invade the federal visitorial power over national banks.?? This ruling will likely encourage state attorneys general to pick up where the New York Attorney General left off. 100

91. OCC v. Spitzer, 396 E Supp. 2d 383, 391 (S.D.N.Y. 2005), affd in part, rev'd in part sub nom.

Clearing House Ass'n v. Cuomo, 510 E3d 105 (2d Cir. 2007), affdinpart, rev'din part,129 S. Ct. 2710 (2009). In the companion bank coalition case, the district coun funher held that the OCCS exclusive authority applied whether the Attorney General purponed to act on behalf of the state or on behalf of the affected citizens of the state. Clearing House Ass'n v. Spitzer, 394 E Supp. 2d 620, 631 (S.D.N.Y. 2005), affd in part, rev'd in part sub nom. Clearing House Ass'n v. Cuomo, 510 E3d 105 (2d Cir. 2007), affd in part, rev'd in part, 129 S. Ct. 2710 (2009). For more on these decisions, see John L. Ropiequet, Nathan O. Lundby, Kenneth]. Rojc &: Sarah B. Rubezny, Update on ECOA and Fair Lending Developments, 63 Bus. LAw. 663, 668-70 (2008) [hereinafter Fair Lending200BJ.

92. 510 E3d 105 (Zd Cir. 2007).

93. Cuomo, 129 S. Ct. at 2722.

94. ld. at 2717.

95. ld. at 2718.

96. See Chevron U.S.A., Inc. v. Natural Res. DeL Council, Inc., 467 Ll.S. 837 (1984).

97. Cuomo, 129 S. Ct. at 2719.

98. ld. at 2721.

99. ld. at 2722.

100. The New York Attorney Generals immediate reaction to the u.s. Supreme Courts decision in his favor was limited to a press release that lauded it as "a huge win for consumers across the nation." Press Release, Office of the N.Y. State Attorney Gen., Statement from Attorney General Andrew Cuomo on Supreme Court Decision in Cuomo v. Clearinghouse Assodalion (June 29, 2009), http:// www.oag.state.ny.uslmedia_centerI2009/juneljune29a_09.html. However, the Illinois Attorney General filed an enforcement suit against a national bank one month later alleging racial discrimination and consumer fraud. See Complaint, People v. Wells Fargo &: Co., No. 09 CH 26434 (Ill. Cir. Ct. July 31, 2009), available at http://www.illinoisattomeygeneral.gov/pressrooml2009_07IWELLS%20 FARGO%20COMPLAINT_07·31-2009_13-44-30.pdf.

Fair Lending Developments: The End of Discretionary Pricing? 581

CONCLUSION

As previous Annual Surveys have observed,'?' reported fair lending decisions tend to be limited to pleadings issues and the cases tend to end in consent decrees or settlement agreements, either reported or unreported. This trend has clearly continued. As a result,. practitioners who advise lenders, either for compliance purposes or to defend litigated claims of racial discrimination, have been given little or no guidance on many important issues.

The current wave of mortgage lending practices litigation and enforcement actions is likely to produce even more unanswered questions. For example, is HMDA data alone sufficient to establish a prima facie case of discriminatory effects that violate the FHA and the ECOA? Is there some threshold that must be crossed before a court will accept a statistical disparity in HMDA data as evidence of discrimination? Are there other "plus factors" like lender misconduct in preparing loan applications or collection practices that must be added to HMDA statistical disparities to establish an actionable claim of racial discrimination? What corrective factors is it appropriate to apply to explain and minimize a statistical disparity and thereby satisfy the defendant's burden of justifying apparently discriminatory effects?

The ECOA class action settlements against auto finance companies set limits for dealer participation in finance charges that were designed to eliminate discriminatory effects by reducing the amount of discretion dealer personnel could exercise when they set interest rates above the finance companies' buy rates. Thus, dealers were subject to a cap on their APR markup of 1.75 to 2.5 percentage points over the buy rate, depending on the term of the contract, in an effort to dampen the effects of their discrimination. 102 This was, at best, an indirect way of preventing discrimination since it was the dealers, not the finance companies, who dealt directly with the auto buyers who were the subjects of the alleged discrimination. Presumably, therefore, the dealers were the ones who actually engaged in discriminatory conduct.

A different model was heralded by two DO] consent decrees against auto dealers where the dealers were made subject to consent decrees that did more than just limit their pricing discretion to a certain range of APR markups. Instead, the decrees provided that if the dealers chose to mark up the APR on retail installment contracts, they could not deviate from that markup by charging any customer a smaller markup unless they could document good-faith reasons for doing

101. See Fair Lending 2008, supra note 91, at 676; John L. Ropiequet &: Nathan O. Lundby, Dealer Rate Participation Class Actions Under the ECOA: Have We Reached the End of the Road?, 62 Bus. Lsw, 663, 671-73 (2007) [hereinafter Fair Lending 2007].

102. See Fair Lending 2007, supra note 101, at 668-71; Kenneth]. Rojc &: Sara B. Robertson, Dealer Rate Participation Qass Action Settlements: Impact on Auto Financing, 61 Bus. Lxw. 819, 821 (2006); Nicole E Munro, L Jean Noonan &: R. Elizabeth Topoluk, Recent Developments in Fair Lending and the ECOA: A Look at Housing Finance and Motor Vehicle Dealer PartiCipation, 60 Bus. Lsw. 627, 638-42

(2005). -

582 The Business Lawyer; Vo!' 65, February 2010

so, like meeting competition from another dealer.'?' This model was designed to eliminate any possibility of racial discrimination among the dealers' customers by eliminating the dealers' ability to exercise any discretion over pricing.

Both private litigants and government enforcement agencies have alleged that, by having a "discretionary pricing policy" together with insufficient preventive policies to act as safeguards, lenders either encouraged their loan officers to engage in predatory or even discriminatory conduct or they enabled them to engage in such conduct. Proof of the discriminatory impact of such conduct was then established by HMDA data that allegedly showed that minority borrowers have a disproportionate number of higher-priced loans. The few consent decrees that have resulted so far that involve mortgage lenders appear to favor eliminating discrimination by eliminating pricing discretion in the same fashion that was seen in the auto dealer consent decrees.

While it is too soon to say what course settlements in private class action litigationwill take, it is entirely likely that the forces that led the auto finance companies to enter into settlements without creating case law precedents to guide others as to what the fair lending laws really require will have the same effect on mortgage lenders. Unless some of these cases reach a decision on the merits, so that the courts can make decisions based on evidence of discrimination, not just on allegations, the only conclusions that can be drawn from the reported case decisions will be that racial discrimination is not difficult to allege, that HMDA data and interpretations of the data may be enough to prove the existence of discriminatory effects, and that a successful defense of such a claim will be very difficult to accomplish.

103. See Fair Lending 2009, supra note 8, at 574-76.