Henry C. Meier, Esq. of The Law Office of Henry C. Meier, Esq.
The NCUA announced that it would no longer be considering disparate impact as part of its examination of federally insured credit unions. In a letter to credit union board of directors released on Thursday, the NCUA explained that examiners will no longer review, conclude, or follow up on “matters related to a credit union’s disparate impact risk, internal disparate-impact risk analysis, or disparate-impact risk assessment processes or procedures.”
The NCUA’s action came shortly after the FDIC announced that its regulators could no longer examine bank practices to determine if they have a disparate impact on minority loan applicants. The announcement could have a major impact on a wide range of lending practices.
The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) outlaw discrimination on the basis of race, sex, age, and other protected characteristics. It is a bedrock compliance principle that in evaluating an institution’s lending practices, care has to be taken not only to prohibit intentional discrimination – i.e. disparate treatment – but also to guard against policies and practices that had the effect of disproportionately harming a protected class.
As part of the announcement, the NCUA released an amended version of its Fair Lending Guide. The amended guide removes the “effects test”,” pursuant to which the NCUA had examiners use the following questions for purposes of evaluating whether credit unions may be committing a violation of the Equal Credit Opportunity Act;
1. Does a particular credit practice have a statistically disproportionate impact on a protected group (those covered under the prohibited basis definition)?
2. If so, can the credit union show that the practice serves a genuine business need?
3. If so, is there a less discriminating way to meet that business need?
The redacted FDIC manual contained the following example: A mortgage lender has a policy of only making mortgage loans for $60,000 or more. According to the redacted manual, the policy disproportionately harms minority mortgage applicants. As a result, the lender would have to demonstrate the policy reflects a “business necessity” which very generally means evidence that the policy is necessary to implement a nondiscriminatory requirement. The key distinction is that, whereas disparate treatment is proven with the evidence of intent to discriminate, disparate impact has no corresponding mental state requirement and can often be proven with statistical evidence.
In April, the Trump Administration issued Executive Order 14281 “Restoring Equality of Opportunity and Meritocracy.” It ordered executive branch agencies, a designation the Trump Administration argues includes the NCUA, to work with the Attorney General to examine “all existing regulations, guidance, rules, or orders that impose disparate-impact liability or similar requirements, and detail agency steps for their amendment or repeal, as appropriate under applicable law.” It also mandated that they evaluate similar state level laws and regulations. The NCUA action follows similar moves by the FDIC and OCC.
Although the NCUA took this action in response the Executive Order issued in April, it is part of a larger legal battle that has been brewing for decades over the proper interpretation of the Fair Housing Act and the ECOA. For example, in the 2005 case Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062, 1068 (S.D. Cal. 2008) African Americans sued a loan originator over its policy of granting brokers discretion when charging fees to loan applicants. The plaintiffs argued that the policy disproportionately impacted minority applicants because they were charged higher fees. The lender argued that neither the ECOA or the FHA prohibited policies that disproportionately impacted minorities in the absence of proof that the disparity was intentional. The District Court refused to dismiss the lawsuit.