Entering text into the input field will update the search result below

Ross Aldridge Reviews The Las Vegas Nevada Disparity Impact Theory As Related To The Supreme Courts Financial Bubble Buster?

May 23, 2015 8:16 PM ETSKF
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Will the Supreme Court pave the way for the Automobile Financial Bubble to burst? If the 1964 Title VII law is interpreted as sub prime target practice toward certain minorities then sell your big financial securities sector stocks because this will only be the tip of the iceberg. We reviewed various aspects of financial restitution that could be enforced as a retroactive fine as far back as 2000.

The courts have put limits on liability for disparity cases but the CFPB will be filing new charges that could reset these limits.

Follow Ross Aldridge in Las Vegas Nevada here:

Last week American Banker reported on statistics from the CFPB showing potential evidence of race discrimination within the agency. As explained in the article:

Specifically, CFPB managers show a pattern of ranking white employees distinctly better than minorities in performance reviews used to grant raises and issue bonuses. Overall, whites were twice as likely in 2013 to receive the agency's top grade than were African-American or Hispanic employees, the data shows.

The report is particularly interesting because the statistics can only be evidence of discrimination under the somewhat controversial disparate impact theory that the Bureau has pushed in recent years. Using a disparate impact analysis the CFPB has declared policies and procedures discriminatory based on statistical evidence showing a disproportionate effect on protected classes. For example, if the CFPB finds that minorities are statistically more likely to be charged a higher interest rate for a particular financial services product or program, the CFPB may declare that product or program discriminatory. The disparate impact theory does not require any evidence of discriminatory intent on the part of the lender. Ronald Rubin, a former CFPB enforcement attorney, recently explained the CFPB's use of disparate impact theory in relation to indirect lending by car dealers.

On Monday, American Banker reported that the CFPB has scrapped the evaluation program and gone back to the drawing board in an attempt to create an evaluation program that won't provide statistics that could be interpreted as evidence of discrimination.

Whether the CFPB will come back from the experience with a better understanding of the pitfalls of the disparate impact theory remains to be seen.

Auto lenders shouldn't count on the U.S. Supreme Court to rescue the auto finance industry from the disparate impact theory, said Chris Willis, a partner with the Ballard Spahr LLP law firm.

The Consumer Financial Protection Bureau relies on the disparate impact theory to try and prove discrimination in auto loans.

"There's a feeling in the industry that anything based on disparate impact is about to be wiped off the face of earth by what's going on in the court system," Willis said Tuesday at the Auto Finance Risk & Compliance Summit in San Diego.

That feeling is based on what the court may do in a closely watched housing discrimination case, with a decision due by the end of June.

However, even if the auto finance industry gets its wish in the housing case, there's no way the CFPB would abandon the disparate impact theory in auto finance, Willis said.

Since late 2013, the CFPB has used the disparate impact theory to generate more than $150 million in consumer restitution and civil penalties, and force auto lenders to adopt strict monitoring of indirect loans originated at dealerships.

"If you had a tool that was that effective to curb behavior you don't like, would you readily let it go? Or would you fight to keep it alive and keep using it?" Willis said. "I think it's the latter."

Tags: Ballard Spahr LLP, CFPB, disparate impact

What is the Disparity Impact Theory?

Disparate Impact

A theory of liability that prohibits an employer from using a facially neutral employment practice that has an unjustified adverse impact on members of a protected class. A facially neutral employment practice is one that does not appear to be discriminatory on its face; rather it is one that is discriminatory in its application or effect.

Under Title VII of the Civil Rights Act of 1964, plaintiffs may sue employers who discriminate on the basis of race, color, gender, religion, or national origin. Employers who intentionally discriminate are obvious candidates for a lawsuit,but the courts also allow plaintiffs to prove liability if the employer has treated classes of people differently using apparently neutral employment policies. The disparate impact theory of liability will succeed if the plaintiff can prove that these employment policies had the effect of excluding persons who are members of Title VII's protected classes. Once disparate impact is established, the employer must justify the continued use of the procedure or procedures causing the adverse impact as a "business necessity."

Proof of discriminatory motive is not required, because in these types of cases Congress is concerned with the consequences of employment practices, not simply the motivation. If the employer proves that the requirement being challenged is job related, the plaintiff must then show that other selection devices without a similar discriminatory effect would also serve the employer's legitimate interest in efficient workmanship.

The Supreme Court, in Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971), articulated the disparate impact theory and constructed a model of proof that the plaintiff and defendant must use in presenting their cases. In Griggs, the employer required a high school diploma and a passing score on two professionally developed tests. Although the lower courts found no liability because the plaintiff failed to prove that the employer had a discriminatory motive for the requirements, the Supreme Court reversed the decision. The Court stated that Title VII "proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation." In a famous quote, the Court said that the "absence of discriminatory intent does not redeem employment procedures or testing mechanisms that operate as 'built in headwinds' for minority groups and are unrelated to measuring job capacity."

In the three-step model defined by the Griggs Court, the plaintiff must first prove that a specific employment practice adversely affects employment opportunities of Title VII protected classes. If the plaintiff can establish a disparate impact, the employer must demonstrate that the challenged practice is justified by "business necessity" or that the practice is "manifestly related" to job duties. The courts, between 1971 and 1989, used these two phrases interchangeably. If the employer does not meet the burdens of production and persuasion in proving business necessity, the plaintiff prevails. If the employer does meet these burdens, the third step requires the plaintiff to demonstrate that alternative practices exist that would meet the business needs of the employer yet would not have a discriminatory effect.

The plaintiff has the burden of persuading the fact finder that the employment practice used by the employer adversely affects the employment opportunities of a Title VII protected class. If the plaintiff fails to meet this burden, the court will dismiss the action under Rule 41(b) of the Federal Rules of Civil Procedure.

Demonstrating that the employer's workforce does not reflect the racial, ethnic, or gender percentage of the population of the area does not prove disparate impact. Such an imbalance may be the product of legitimate factors, such as geography, cultural differences, or the lack of unchallenged qualifications for the job. Therefore, it is incumbent upon the plaintiff to show that the imbalance is because of the challenged practice. The most compelling evidence of disparate impact is proof that an employment practice selects members of a protected class in a proportion smaller than their percentage in the pool of actual applicants, or, in promotion and benefit cases, in a proportion smaller than in the actual pool of eligible employees.

If the plaintiff proves that the employer's practice had a disproportionate impact on a protected class, the burden shifts to the defendant to justify its use of the challenged practice. Griggs labeled this burden as business necessity, but suggested that exclusionary practices would be justified if they were manifestly related to job duties.

Business necessity is the only known defense against the accusation that a personnel practice denies protected classes equal opportunity for hire, promotion, training, earnings and any other term or condition of employment. Three conditions must exist before business necessity can be asserted: (1) The standard used as the basis for the employment practice must be apparently neutral; (2) the standard must be uniformly applied by the employer; and (3) the standard must have a disparate impact on a protected class.

The term business necessity is a fluid concept rather than a bright-line rule (a firm legal standard that courts are required to honor without regard to the particular circumstances of the case being heard). In some cases, courts conclude that business necessity is established by showing a reasonable relationship between the practice in question and the employer's business needs. However, the majority of courts hold that an employment practice having a discriminatory impact can be justified on business necessity grounds only if it is "essential" to the safety and efficiency of the employer's operations. These courts contend that the mere fact that the employment practice serves legitimate management functions will not justify discrimination.

The Supreme Court, in Wards Cove Packing v. Atonio, 490 U.S. 642, 109 S.Ct. 2115, 104 L.Ed.2d 733 (1989), revisited the concept of business necessity and realigned the burdens of proof and persuasion. The Wards Cove Packing Company employed low-paid cannery workers in its salmon canning facility in Alaska and higher-paid non-cannery workers at the company offices in Washington and Oregon. Non-white workers filled a high percentage of the cannery worker positions; primarily white workers held the non-cannery worker jobs. The court of appeals found this statistical disparity sufficient to establish a Prima Facie case of disparate impact.

The Supreme Court reversed and remanded because the statistical proof the plaintiffs offered was not adequate. As to the defendant's Burden of Proof, the Court stated that the employer "carries the burden of producing evidence of a business justification for his employment practice. The Burden of Persuasion, however, remains with the disparate-impact plaintiff." This meant that although the employer had to show a legitimate business reason for using a test or certain job requirements, the plaintiff had to prove that he or she was denied a desired employment opportunity based on race, color, religion, gender, or national origin. This pushed the burden closer to that of disparate treatment, where the plaintiff has to show intentional discrimination by the employer. This is often difficult to prove. In addition, the Court held that just because the plaintiff could offer nondiscriminatory alternatives did not prove that the employer had improper motivations for the use of the employment practice.

The Wards Cove decision was severely criticized by Civil Rights leaders, who believed the Supreme Court had made disparate impact cases almost impossible to win. Congress responded by passing the civil rights act of 1991, which over turned Wards Cove. In effect, Congress reversed the Court's holding that the burden of proof must remain with the employee at all times. Therefore, once the plaintiff has carried the burden of proving that the challenged employment practice causes a disparate impact, the employer must not only articulate a business justification for the practice but must also prove the validity of the asserted justification.

Interpretation of the law is gauged by attorneys and judges. Now that congress has authorized and armed the CFPB this will be a landmark case that may be the first domino to fall in a new house of cards.

Analyst's Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.