Baby in a puddle
Identifying the duties our society thinks strangers owe to each other in various circumstances is challenging and very fact specific. I’m not talking about any kind of situation where someone has a recognized duty to help others, such as a first responder, a parental relationship or even if you have created a harmful situation for someone else[1]. Some of these duties or obligations are created and spelled out in our laws, but others are just reflected in our morality and etiquette.
During my first year in law school, these issues were framed in my Torts class as the question of whether you are legally obligated to move an infant drowning in a puddle[2]. That is, at what point does or should the law impose a duty to act (or refrain from acting) to prevent harm or help others. I think we can all agree that anyone who doesn’t move the drowning baby is an unfeeling monster to be shunned in polite company, but should they be legally punished for their callousness?[3]Everyone will have different thoughts on this issue, but the people who will have the last say on any legal question in the US are the nine justices of the Supreme Court (SCOTUS).
Encourage and Discourage
Meanwhile, as far as the meaning of words goes, I think we can all agree[4]that the opposite of “encourage” is “discourage”. But, with apologies to my more spiritual friends and family who believe that prayer alone can influence real world outcomes,[5] something more than just thought[6]is needed to find legal liability when the issue involves illegal encouragement or discouragement. Typically, by failing to encourage someone, it does not legally mean you have discouraged them (or vice-versa). Legally, encouragement or discouragement requires you to actually do something or take some action.
So, for example, if an independent mortgage banker[7]fails to take affirmative actions to address racially unbalanced outcomes in its community, does that mean they are discriminating illegally under the fair lending laws by discouraging prospective applicants? Well, if recent CFPB consent orders are to be used as a guide[8], then, yes. Absent proof of discriminatory intent, Modern-day redlining enforcement, it would seem, depends upon: (i) ECOA and Reg B applying to prospective loan applicants, (ii) discouragement meaning the failure to act, and (iii) proof of discouragement can be found in disparate impact/effects[9]. To win a redlining case, essentially CFPB needs to make a legal triple play, with each element subject to factual and legal challenge.
Prospective applicants
By now, everyone who reads this blog has heard about the Townstone fair lending decision in which the US District Court concluded that Regulation B does not extend to prospective applicants because ECOA only addresses “applicants”.[10]But, what if despite losing at the District Court level, CFPB is ultimately found to be correct,[11]and a controlling decision concludes that Reg B properly covers prospectiveapplicants? Would that mean “game over” for anyone fighting a modern-day redlining or other fair lending accusation from CFPB?
Discouragement defined
Even if the government is ultimately correct about Reg B’s application to prospective applicants, proof of discouragement of prospective applicants, however, is still a factual question.[12]In that regard, a court is unlikely to simply assume, as a matter of law, that illegal discouragement has occurred even if someone has uttered an insensitive or insulting remark or put similar comments in an email or text.[13] Rather, if Reg B controls regarding prospective applicants, then CFPB with have to apply Reg B’s definition of “discouragement” to the applicable facts (as interpreted by the Reg B supporting commentary) which says,
“1002.4 (b) Discouragement. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
Official Interpretation on Discouragement
1. Prospective applicants. Generally, the regulation’s protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the Act – to promote the availability of credit on a nondiscriminatory basis – § 1002.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit. Practices prohibited by this section include:
i. A statement that the applicant should not bother to apply, after the applicant states that he is retired.
ii. The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the Act.[14]
iii. The use of interview scripts that discourage applications on a prohibited basis.
2. Affirmative advertising. A creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor.”
So, not only does this Reg B definition of “discouragement” recognize that discouragement is an active verb (as opposed to the failure to act), but one must also look at a “reasonable person” and not apply that to the most sensitive/eggshell applicant. Again, these are questions for the finders of fact, not matters of law.
“Avoiding” modern-day redlining
In 2021, the Justice Department’s announcement about its Combatting Redlining Initiative, (re)defined redlining as, “an illegal practice in which lenders avoid providing services to individuals living in communities of color because of the race or national origin of the people who live in those communities.” [emphasis added]. Whether the word “avoid” is synonymous with discouragement such that fair lending imposes a duty to affirmatively lend in an equitable fashion remains open to debate. In that regard, the discrimination allegations offered by the CFPB in Trident’s fair lending Consent Order are instructive:
1) Trident’s employees shared racist and insensitive emails about people and neighborhoods.
2) Trident avoided minority neighborhoods by locating only 2 offices of 53 in majority minority neighborhoods.
3) Trident’s marketing campaigns and advertisements failed to include minority models or employees and targeted mostly majority white neighborhoods.
In the Consent Order, CFPB alleged actionable discrimination based on a disparate impact analysis of Trident’s lending patterns.[15]
Assuming prospective applicants are covered,[16] do these facts amount to discouraging applicants? Of course, that depends on how much of a duty to seek racially equitable outcomes one believes a mortgage lender should have. CFPB and the Justice Department have quite clearly indicated they believe that duty exists under the fair lending laws, but enforcement agencies do not have the final say on the interpretation of laws. That power belongs to the nine SCOTUS justices, so it is worthwhile to read the tea leaves on how they might view these duties.
SCOTUS insight?
Recently, a unanimous SCOTUS decision involving Twitter’s potential liability for a domestic terrorist act inspired by ISIS social media postings may provide a window into SCOTUS’ thinking about how action or inaction impacts liability for illegal encouragement (a/k/a aiding and abetting liability). The Twitter decision was remarkable in that despite involving complex issues about the nature of social media algorithms, SCOTUS decided the case on purely non-digital old-school legal grounds.[17]
Obviously, this wasn’t a case directly on point for discouraging applicants under fair lending, but the fact that the SCOTUS justices were unanimous in their views about “baby in a puddle” type issues portend important implications for fair lending enforcement and the consent order “guidance” that fair lending modern-day redlining settlements have been promoting. That is, all of the SCOTUS justices viewed social media companies’ duties to the broader community through the lens of the common law of aiding and abetting liability and not any special duties of digital communication media in the internet age.[18] Speaking for the unanimous court Justice Thomas’ noted,
“…, our legal system generally does not impose liability for mere omissions, inactions, or nonfeasance; although inaction can be culpable in the face of some independent duty to act, the law does not impose a generalized duty to rescue…. The phrase “aids and abets” in §2333(d)(2), as elsewhere, refers to a conscious, voluntary, and culpable participation in another’s wrongdoing …. The only affirmative “conduct” defendants allegedly undertook was creating their platforms and setting up their algorithms to display content relevant to user inputs and user history…. algorithms appear agnostic[19]as to the nature of the content, matching any content (including ISIS’ content) with any user who is more likely to view that content.” [citations omitted]
Justice Jackson, however, also offered a solo concurrence to the unanimous opinion, saying somewhat ominously, “Other cases presenting different allegations and different records may lead to different conclusions.”[20] So, we’ll have to see how she feels about action, inaction and agnostic behavior applied to a different case later.
Twitter applied to modern-day redlining.
Still, it might be useful to apply the following quote from the Twitter decision to fair lending liability for failing to take affirmative actions towards creating equitable outcomes (where the “tort” is that prospective applicants are discouraged from applying),
“The point of aiding and abetting is to impose liability on those who consciously and culpably participated in the tort at issue. The focus must remain on assistance to the tort for which plaintiffs seek to impose liability. When there is a direct nexus between the defendant’s acts and the tort, courts may more easily infer such culpable assistance. But, the more attenuated the nexus, the more courts should demand that plaintiffs show culpable participation through intentional aid that substantially furthered the tort. And, if a plaintiff ’s theory would hold a defendant liable for all the torts of an enterprise, then a showing of pervasive and systemic aid is required to ensure that defendants actually aided and abetted each tort of that enterprise.”
ECOA and Reg B don’t really say anything about affirmative actions you should take to comply with their antidiscrimination provisions[21]. In fact, ECOA and Reg B don’t even reference disparate impact or an effects test, focusing instead on intentional discrimination and disparate treatment[22]. ECOA and Reg B are not on thier face affirmative action laws;[23]they are antidiscrimination laws. Requiring diversity in branch locations, marketing, hiring might all be good ideas for generating equitable outcomes[24], but whether all of that is mandated by Reg B under the idea that failure to do so is discriminatory discouragement is open to debate.
We might need a fair lending “Good Samaritan” law
Meanwhile, speaking of discouragement, at a recent MBA legal conference, a Justice Department fair lending enforcement official confirmed that modern-day redlining is still her primary enforcement priority. But when asked what might come next, she stated the DOJ would probably start looking at underwriting decisions by lenders who seek out diverse borrowers in neighborhoods they may be unaccustomed to lending in. One has to wonder if that threat might have the unintended effect of discouraging diverse lending in underserved neighborhoods. By comparison, to reduce disincentives to help others, many states have enacted “Good Samaritan” laws that encourage people to move babies in puddles and not fear liability for doing it wrong (unwinding from the law the maxim, “no good deed goes unpunished’). Maybe instead of more punishment for inequitable outcomes lenders don’t control, [25]perhaps instead the lending industry could use some praise[26]when they try to do something good.
[1] The first time I was humbled (but definitely not the last) in law school was when I said, “…, but he assumed the risk,…” and my famous Torts professor, Mort “the Tort” Horowitz, said, “Ok, Levy, what if I know you can’t swim and dare you to race me across the pool, but once you jump in I say, ‘I got you now, Levy’, and watch you drown”? I now realize that I ‘assumed the risk’ just by opening my mouth that day; something I have been willing to do so every day since and in particular with these Musings.
[2] If you want to watch ChatGPT struggle to write something cogent, ask it to describe the legal duties of strangers to each other using the example of an infant drowning in a puddle. Better yet, ask ChatGPT for an image of that baby in a puddle and it will tell you how to get mental health support.
[3]For example, could the distraught parents of the drowned baby sue the passer-by for the tort of negligence? As you can imagine this sparked a lot of interesting and somewhat off topic conversation in my first-year post Roe v. Wade, and pre-Dobbs Torts class.
[4] I have heard this phrase used twice in the past few weeks at industry conferences by lawyers presenting a factual situation applied to a legal standard. In my book, assuming away the legal analysis by offering a conclusion with popular appeal is not legal analysis at all. “We can all agree” is a populist ploy to sway a jury, but unhelpful as legal analysis.
[5] I am personally agnostic on this question. However, I am confident that prayer alone would be insufficient to find aiding and abetting liability for any crime. Agnosticism will reappear importantly in this Musing infra.
[6]See my discussion of the interplay between actions, narratives and thoughts in the RESPA context here: https://mortgagemusings.com/f/of-evil-minds-respa
[7] There are affirmative obligations created by the Community Reinvestment Act which specifically apply to depository banks.
[8] See all my prior Musings addressing “regulation by enforcement” (and my article from the April 2016 Mortgage Banking Magazine) for why consent orders are not good compliance guides.
[9] Disparate impact/discriminatory effect in connection with fair lending laws lacks express statutory reference or case law to support it. I do not intend to fully address the issues with fair lending disparate impact in this Musing edition, but the concept has received favorable consideration in connection with employment discrimination claims and HUD recently reinstated its 2013 Rule in that regard. Moreover, in 2012 shortly after CFPB was created, Patrice Ficklin, CFPB’s chief fair lending enforcement official, issued what she termed, Fair Notice on Fair Lending unequivocally supporting CFPB’s use of disparate impact as a measure of illegal discrimination under Reg B. I suspect SCOTUS will provide some insights into its thinking on disparate impact when the Harvard admissions case opinions are released.
[10]Reg B very clearly refers to “prospective applicants” in its definition of “Discouragement”, but despite that language being in the regulation for decades, the Townstonecourt said that ECOA very clearly spoke only to “applicants”, thus the Reg B reference to prospective applicants did not survive a Chevron deference analysis.
[11] As noted in a previous Musing, to their credit, CFPB appealed the Townstone decision to the 7th Circuit rather than just seeking a more regulator friendly forum elsewhere. Of course, it is entirely possible they may do that too.
[12]Although not decided by the Townstone Court, I am aware that Townstone’s defense team obtained focus group reactions to the allegedly discouraging remarks to present a defense to the government’s discouragement claims.
[13]Still, insensitive or offensive remarks are going to make defense of any discouragement claim a lot more difficult.
[14]This Reg B section is the best argument for having marketing diversity, which, to overemphasize the metaphor, is basically as simple and morally correct to do as removing a drowning baby from the puddle.
[15]CFPB summarily rejected Trident’s business justification regarding service of an affiliated real estate company.
[16] If prospective applicants are not protected by Reg B, items 2 and 3 are meaningless.
[17] Citing extensively back to a pre-internet era, 1983 DC Circuit case: Halberstam v. Welch, 705 F. 2d 472.
[18]This sentiment may also be important for the implications I raised for RESPA interpretation based on CFPB’s misinterpretation of a neutrality obligation under RESPA in connection with its Advisory Opinion about digital mortgage shopping sites. Will that AO be cabined to the just online marketplaces or could it apply to human interactions as well? See, Ed. #58: Stuck In Neutral, CFPB Misinterprets RESPA (again) (mortgagemusings.com)
[19]My footnote: Agnostic behaviors generally do not create legal liability unless the behaviors are so bad as to be prohibited entirely (strict liability). Scienter, motivation, mens rea, (pick your word for having intentionality to achieve an outcome) almost always matter to the application of laws to facts.
[20] Indeed, such is the nature of the judicial review process in seeking justice in any dispute. Advisory Opinions podcast host Sarah Isgur was so taken with this quote from Justice Jackson that she claimed to want to use it for her first tattoo. I suspect this comment was to offer some wiggle room on future affirmative action related cases, but she recused herself from the Harvard admissions case, so it couldn’t have been specific to that. Still the 9-0 Twitter decision is going to be hard to reconcile against “discouraging” being tantamount to “failing to encourage”.
[21] But see, footnote 14, infra.
[22] But see, footnote 9, infra.
[23] Reg B does permit certain special purpose credit programs and marketing to redress historical discrimination. As a placeholder, I will probably need to revisit the affirmative action concept (as well as disparate impact) after SCOTUS rules in the Harvard admissions case.
[24] 50+ years of expansive fair lending enforcement has failed to move the needle on the racial homeownership gap. Is there any empirical case for narrowing the gap with the redlining consent order diversity requirements we are now seeing? We should study if these remedies will, in fact, achieve the desired outcomes, but not stop seeking other solutions to address the gap.
[25]Mortgage bankers generally do not make up the underwriting guidelines they apply. Over 95% of the country’s home mortgage underwriting is decided under the direct supervision of the federal government. If DOJ thinks underwriting guidelines are discriminatory (and they certainly are, looking at disparate impact), they should contact their colleagues at FHFA and HUD about that. For example, see my suggestions about misuse of credit scores here: https://mortgagemusings.com/f/ed-37-the-changing-faces-of-mortgage-banking.
[26] Based on his recent speech at the MBA Secondary Conference, I think MBA CEO Bob Broeksmit would agree. https://newslink.mba.org/mba-newslinks/2023/may/mba-newslink-wednesday-may-24-2023/mbasecondary23-broeksmit-you-dont-need-punishment-or-more-regulation-you-need-praise-and-relief-and-you-need-it-now/