Lawyers and compliance consultants familiar with the Supreme Court's ruling on disparate impact advised credit unions to examine their lending policies in light of the ruling, but not necessarily change them.
In a six to three decision on June 18, the justices ruled that plaintiffs who show a given housing policy has a disparate impact on a legally protected class of consumers have standing to sue a lender, even if the lender did not intend for the policy to be discriminatory.
However, lawyers and compliance consultants familiar with discrimination complaints noted that the ruling merely affirmed what had already been policy among federal regulators since 1994, and one with which most credit unions have already complied.
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Ron Glancz, a partner with the Washington law firm Venable LLC, noted that the NCUA included disparate impact, otherwise known as the effects test, in its March 2013 fair lending manual.
"While not specifically mentioned in the ECOA, the legislative history of the ECOA indicates Congress intended an 'effects test' concept to apply to a credit union's determination of creditworthiness," the NCUA wrote in the manual. "The effects test refers to a credit practice that appears facially neutral, but has a disproportionately negative effect on a prohibited basis, even though the credit union has no intent to discriminate. This type of practice is discriminatory, in effect, unless the credit union can demonstrate the practice meets a legitimate business need that cannot be reasonably achieved by means less disparate in impact."
If the court had decided the case the other way, Glancz pointed out, there might have been a reason to wonder whether someone might mount a case against disparate impact in other types of lending such as credit cards or auto loans.
Based on the ruling, he explained, a credit union that has an existing policy against discrimination that complies with disparate impact standards probably doesn't have to update it; however, it's always a good idea to double check.
Glancz also pointed out that the court's ruling actually makes it a little more difficult for plaintiffs to bring a disparate impact case because the majority opinion made it clear that plaintiffs should have to show a causal relationship between the given policy and the disparate impact that they were alleging from the very first pleading in the case. This standard will be hard to meet, he said.
However, Cynthia Augello, a partner with the New York-based law firm of Cullen and Dykeman, said such cases would remain a drain on credit unions. She noted that each case has three steps: The plaintiff has to allege a policy's disparate impact successfully; the lender can then show why that policy is a necessary business practice; and, the plaintiff may then assert an alternative, nondiscriminatory policy to use instead.
This can take months in court, she pointed out.
"These cases have the potential to be very big deal for all financial institutions," Augello said.
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