Does Your Institution Need to Add Gender Identity and Sexual Orientation to its Fair Lending Program?
On March 9, 2021, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule to clarify that the prohibited basis of “sex” under the Equal Credit Opportunity Act (ECOA) includes, “sexual orientation discrimination and gender identity discrimination.” Does this mean your institution needs to add gender identity and sexual orientation to its fair lending program? The short answer is yes. In this blog post I discuss what this could mean for your institution.
Let’s begin by reviewing the interpretive rule. The CFPB states in the interpretive rule that it interprets the term “sex” in ECOA to “include discrimination based on sexual orientation and/or gender identity.” The CFPB based its interpretation on the U.S. Supreme Court’s 2020 decision in Bostock v. Clayton County, Georgia, which held that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 (Title VII) encompasses sexual orientation and gender identity. The interpretive rule also notes that “associational discrimination” on these bases is also prohibited and states that this is, “discrimination based on the sex, including sexual orientation and/or gender identity, of the persons with whom the individual associates.” In addition, the CFPB’s interpretive rule reiterates that, “discrimination against individuals, and not merely against groups, is covered.”
The issue in the interpretive rule should not be new to the industry. This interpretation of ECOA is consistent with a prior 2016 letter from then-Director Cordray, which opined that the current law at that time supported an interpretation that ECOA prohibited gender identity and sexual orientation discrimination. But now that this view has been stated in a formal interpretive rule (and in light of the Bostock decision), this is now the law of the land for financial institutions.
The interpretive rule also provides several examples of such gender and sexual orientation discrimination, which it describes in the process of explaining the CFPB’s legal basis for the interpretive rule. These examples, which follow, are helpful illustrations of activity that the CFPB would view as violating ECOA: (1) a creditor declines the loan application of a male applicant on the basis that he is attracted to men; (2) a creditor declines the loan forbearance application of a transgender person who was identified as male at birth but who now identifies as female, but approves the application of an otherwise similarly-situated applicant who was identified as female at birth and now continues to identify as female; (3) a creditor rejects an application from a woman because the loan officer regards her as insufficiently feminine, and also rejects an application from a man because the loan officer regards him as being insufficiently masculine; (4) a small business lender discourages a small business owner appearing at its office from applying for a business loan and tells the prospective applicant to go home and change because, in the view of the creditor, the small business customer’s attire does not accord with the customer’s gender; and, as an example of associational discrimination (5) a creditor requires a person applying for credit who is married to a person of the same sex to provide different documentation of the marriage than a person applying for credit who is married to a person of the opposite sex.
These examples are of overt discrimination or disparate treatment towards individual applicants. This could potentially happen with loan officer or other staff. It is wrong to discriminate in these and other ways, and it will be important to add training for your staff to ensure they understand that any disparate treatment or overt discrimination towards individual consumers based on sexual orientation or gender identity, such as these examples, will be a violation of ECOA.
But could there be another more general looming risk for institutions from this interpretive rule, in light of the CFPB’s recent focus on marketing discrimination? Possibly (although this rabbit hole could potentially expose the absurdity of the marketing discrimination theory of discrimination).
In the CFPB’s 2021 and 2020 Fair Lending Reports to Congress, the CFPB reiterated that its fair lending work in mortgage origination focused on marketing discrimination in violation of Regulation B’s prohibition against discouraging potential applicants on a prohibited basis. The CFPB stated it was focusing on whether lenders discouraged prospective applicants from minority neighborhoods, which involves ECOA’s prohibited bases of “race” or “ethnicity.” But the aforementioned Regulation B provision on which the marketing discrimination theory is based can technically be applied to the prohibited basis of “sex” as well, which means sexual orientation and gender identity could be the basis of such a claim. The interpretive rule does note that ECOA applies to discrimination against groups.
What could a marketing discrimination claim under Regulation B based on sexual orientation or gender identity look like? It is helpful to look at recent CFPB activity in this area. In the CFPB’s Supervisory Highlights Issue 22 (Summer 2020), the CFPB stated it identified marketing discrimination in recent exams of lenders and described the allegedly illicit activity. The facts the CFPB as discriminatory were that lenders: (1) advertised in a publication with a wide circulation in the MSAs with ads that prominently featured a white model; (2) used marketing materials intended to be distributed to consumers by loan originators that featured almost exclusively white models; and (3) lenders included headshots of the lenders’ mortgage professionals in nearly all its open house marketing materials, and in almost all these materials, the headshots showed professionals who appeared to be white. The CFPB also stated that evidence of intent to discriminate was found in the lenders’ HMDA data, which allegedly showed the lenders “received significantly fewer applications from majority-minority and high-minority neighborhoods” than “peer lenders.”
These facts indicate that the CFPB (and likely other agencies) believes it is a violation of Regulation B for a lender’s marketing to include, or predominantly include, only white models, and not other races. The third fact could also be interpreted as indicating the CFPB found it a violation of Regulation B that “almost all” of the lenders’ loan officers were white.
In addition, it is useful to look at the facts in the CFPB’s recent lawsuit against Townstone Financial, Inc. (which our firm represents), alleging a violation of Regulation B based on the marketing discrimination theory, because it is the first marketing discrimination lawsuit against a non-bank, which consequentially does not rely on the institution’s assessment area under the Community Reinvestment Act. We’ve written about the case in several blog posts (Townstone Fact Sheet, Townstone Motion to Dismiss, and Townstone Reply). The CFPB alleged that Townstone Financial (which, at the time, was a small Chicago-based mortgage lender with at most six loan officers) committed a violation of ECOA because: (1) its staff made five short statements regarding political and social issues during four years of weekly broadcasting on an AM radio show and podcast that the CFPB believed would discourage prospective African American applicants (Townstone has obtained consumer testing of the statements with actual African American consumers from the South Side of Chicago that shows that consumers were not discouraged and, in fact, were encouraged by the statements); (2) did not have African American loan officers; (3) did not target marketing specifically to African Americans, even though it advertised broadly to the MSA; and (4) allegedly had a “statistically significant” lower percentage of applications from African American neighborhoods in Chicago than “peer lenders” (Townstone has obtained a HMDA peer analysis that shows it was not an outlier). These facts are similar to the cases described in the Supervisory Highlights.
Based on the facts in this lawsuit and the CFPB’s Supervisory Highlights, one could see that the CFPB (or another agency) could potentially bring a marketing discrimination claim based on: (1) a lender’s advertisements not including photographs of same-sex couples or transgender persons; (2) a lender’s lack of marketing specifically to the LGBTQ community; (3) a lender not having LGBTQ loan officers; or even (3) a lender’s staff person engaging in political speech that the CFPB believes may discourage LGBTQ persons.
A setback for the CFPB or another regulator bringing such a claim would be that, unlike for claims based on race and ethnicity, the agency would not have the same ability to conduct a peer analysis using HMDA data to use as an additional fact in support of such a claim. In past marketing discrimination cases based on race or ethnicity, the agencies have used a HMDA peer analysis to allege a statistically significant difference between the lender and “peer lenders.” But there is technically no HMDA data point for sexual orientation or transgender identification (not yet at least). Could the CFPB or another agency bring a case without a HMDA peer analysis? Possibly, depending on how aggressive the government wants to be. The peer analysis is typically one of a multitude of facts of circumstantial evidence to support a disparate treatment claim, and it is essentially used to show the effects of the lender’s actions that the CFPB would allege are the discouraging acts.
In addition, perhaps the HMDA data could provide proxies for such characteristics. For example, the CFPB’s 2015 HMDA rule allows consumers to select both male and female for sex, or to decline to provide their sex. It’s possible the CFPB or another aggressive regulator is considering whether that could potentially provide a proxy for a consumer’s transgender identification. And whether co-applicants are a same-sex couple could potentially be ascertained in the HMDA and application data (although a peer analysis may be difficult in this case). Whether there would be sufficient data to conduct a statistical analysis on any of these bases is certainly an issue with which agencies would have to contend. It would be interesting to hear from some HMDA data gurus out there on whether this is even a possibility (I haven’t talked to any, I’m just brainstorming here).
But consumer complaints could provide other useful evidence of the effects of marketing discrimination. There could potentially be consumer complaints that provide real-world evidence of the effects of such marketing, or an intent by the institution’s staff to discriminate. There are already consumer complaints in the CFPB’s complaint database raising issues regarding transgender identification.
I am not saying that such a marketing discrimination claim by the CFPB or another agency is likely. I am just pointing out the possibility. But if an agency wanted to bring such a claim, the agency would not need an airtight case. Agencies typically allege such discrimination claims against depository institutions with an eye towards a settlement. The CFPB and other agencies expect the institutions they supervise to view those settlements as precedent, and avoid the activity that the agency described in the settlement. It may be prudent to consider how to reduce your institution’s risk for such a claim.
In any event, in light of the CFPB’s recent interpretive rule, it would be prudent to conduct additional staff training on the potential for overt discrimination or disparate treatment based on sexual orientation and gender identity.
You can find the CFPB’s interpretive rule here: https://www.consumerfinance.gov/rules-policy/final-rules/equal-credit-opportunity-regulation-b/.
If you would like to discuss any of the issues in this post, please contact Rich Horn at rich@garrishorn.com.
