QUESTION
As a
lender in all the states, we are always going through state banking examinations.
About three weeks ago, we learned that one of the states have taken the position that our ECOA policy does not adequately set forth guidelines for sexual orientation and gender identity.
We thought our policy was comprehensive, it was reviewed by our attorneys, yet we need to update the policy and send it to the examiner. We are hoping you can provide some guidance.
What are some features of sexual orientation and gender identity policy statements with regards to ECOA?
ANSWER
Your question
is timely. The fact is discrimination in lending has drawn considerable
litigation over the years. Frankly, you should not be too confident that you have
a total grasp of the policy requirements. I think I can guess the state that
issued the adverse finding. But one state issuing a finding with respect to
matters such as discrimination is one state too many!
Recently, the Consumer Financial Protection Bureau (CFPB or Bureau) clarified that discrimination by lenders on the basis of sexual orientation and gender identity is illegal. On March 9, 2021, the CFPB issued an interpretive rule[i], effective immediately upon publication in the Federal Register, clarifying that the prohibition against sex discrimination under the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B includes: sexual orientation discrimination, gender identity discrimination, discrimination based on actual or perceived nonconformity with traditional sex- or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.
This clarification is consistent with the Supreme Court’s ruling in Bostock v. Clayton County, Georgia[ii], that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 (Title VII) encompasses sexual orientation discrimination and gender identity discrimination, as well as many of the public comments received in response to the CFPB’s July 28, 2020 request for information (RFI) on whether the Bostock decision should affect how the CFPB interprets ECOA. I am sure the CFPB will review and update its publications and examination guidance documents, as needed, to reflect this interpretive rule and take enforcement actions to hold financial institutions accountable for ECOA violations.
In a sense, this is not the first rodeo for the CFPB to react to such concerns. Before the issuance of the Bostock opinion, at least twenty states and the District of Columbia prohibited discrimination on the bases of sexual orientation and/or gender identity either in all credit transactions or in certain (i.e., housing-related) credit transactions. Consequently, financial institutions subject to such laws were required to comply with those mandates prior to the issuance of the Bostock opinion. Many financial institutions recognize sexual orientation and/or gender identity to be protected classes under State laws and may have determined to incorporate practices that prohibit discrimination on these bases.
After the Supreme Court issued the Bostock opinion, though, diverse stakeholders asked the Bureau to clarify that ECOA’s and Regulation B’s prohibition of “sex” discrimination includes discrimination on the bases of sexual orientation and/or gender identity. Many comments to the Bureau’s recent Request for Information on the Equal Credit Opportunity Act and Regulation B (RFI)[iii] from a variety of stakeholders, including consumer and civil rights advocates, a local government official, an academic institution, and industry representatives, reiterated this request for regulatory clarification. Thus, the Bureau issued this interpretive rule to address any regulatory uncertainty that may still exist under ECOA and Regulation B as to the term “sex” so as to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities and to ensure that consumers are protected from discrimination.[iv]
There is considerable litigation surrounding the fact that the ECOA and Title VII are generally interpreted consistently. Like Title VII, ECOA prohibits sex discrimination (among other bases) and does not require that sex (or other protected characteristics) be the sole or primary reason for an action to be discriminatory. Indeed, intent is removed as a defense. As the applicable statute provides, “Disparate treatment on a prohibited basis is illegal whether or not it results from a conscious intent to discriminate.”[v]
Like Title VII, the ECOA applies to sex discrimination against individuals, not just to situations where all men or all women (or any other group of people with a common protected characteristic) are discriminated against categorically. In fact, in Bostock it was held that “an employer cannot escape liability [under Title VII] by demonstrating that it treats males and females comparably as groups”.[vi] Indeed, Regulation B clarifies that ECOA prohibits discrimination based not only on the characteristics of an applicant but also based on the characteristics of a person with whom an applicant associates.[vii]
The Bureau clearly believes that even though the term “sex” is not defined in ECOA or Regulation B, the prohibitions against discrimination on the basis of “sex” under ECOA and Regulation B are correctly interpreted to include discrimination based on sexual orientation and/or gender identity.
In sum, the Bureau has determined that under ECOA and Regulation B:
(1) sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex;
(2) an applicant’s sex must be a “but for” cause of the injury, but need not be the only cause; and
(3) discrimination against individuals, and not merely against groups, is covered.
If you have not heard of the “but for” cause of injury, it is simply a test that an action is a cause of an injury if, but for the action, the injury wouldn't have occurred. This theory often occurs in negligence cases. In other words, would the harm have occurred if the defendant hadn't acted in the way they did? If the answer is NO, then the action caused the harm. In most cases, the “but for” test is sufficient.
The Bureau also clarified that ECOA’s and Regulation B’s prohibition against sex discrimination encompasses discrimination motivated by perceived nonconformity with sex-based or gender-based stereotypes, as well as discrimination based on an applicant’s associations.
Amongst a host of caveats and prohibitions, here are three basic rules:
1. Sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex.
2. Sex does not have to be the sole or primary reason for an action to be discriminatory.
3. Sex discrimination against individuals is applicable, not just to situations where all men or all women are discriminated against categorically.
Furthermore, there is a prohibition regarding discrimination on the basis of “sex” motivated by perceived nonconformity with sex-based or gender-based stereotypes, including those related to gender identity and/or sexual orientation, as well as discrimination based on an applicant’s associations. This has been given the term associational discrimination.
The CFPB’s interpretation regarding associational discrimination is similarly consistent with the Court’s reasoning in Bostock regarding how discrimination based on the sex, including sexual orientation and/or gender identity, of the persons with whom the individual associates is prohibited under Title VII.
It is relatively easy to fall into the associational discrimination trap. For instance, a creditor engages in such associational discrimination if it 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.
The Bureau’s interpretation is consistent with the principle, applied by Federal agencies for decades, that credit discrimination on a prohibited basis includes discrimination against an applicant because of the protected characteristics of individuals with whom they are affiliated or associated (i.e., spouses, domestic partners, dates, friends, coworkers). Moreover, the Bureau has previously established that a creditor may not discriminate against an applicant because of that person’s personal or business dealings with members of a protected class, because of the protected class of any persons associated with the extension of credit, or because of the protected class of other residents in the neighborhood where the property offered as collateral is located.
Thus, the ECOA and Regulation B prohibition against discrimination on the basis of “sex” includes discrimination or discouragement based on sexual orientation and/or gender identity, including but not limited to discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s associations.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
[i] Interpretive Rule, Bureau of Consumer Financial Protection, 12 CFR Part 1002, Equal Credit Opportunity (Regulation B); Discrimination on the Bases of Sexual Orientation and Gender Identity, March 9, 2021
[ii] Bostock v. Clayton Cty., Georgia, 140 S. Ct. 1731, 207 L. Ed. 2d 218 (2020)
[iii] 85 FR 46600 (Aug. 3, 2020)
[iv] 12 U.S.C. 5493(c)(2)(A), 5511(b)(2)
[v] See Official Staff Commentary, 12 CFR 1002, supp. I, ¶ 4(a)-1)
[vi] Bostock, 140 S. Ct. at 1734
[vii] 12 CFR 1002, supp. I, ¶ 2(z)–1
