Bench Memos

Regulatory ‘I’ve Got a Secret’: CFPB’s Disparate-Impact Guidance

How can you comply with a law when you don’t know what it prohibits?

That’s a question that lenders continue to ask about the Consumer Financial Protection Bureau (CFPB), an agency created by the 2010 Dodd-Frank legislation, which refuses to explain how it determines whether certain lenders are engaging in racially discriminatory behavior.

CFPB regulations generally prohibit lenders from discriminating based on race, gender, or ethnicity. To make sure that discrimination can’t happen in the back office, it prohibits lenders from even collecting information about an applicant’s race, gender, or ethnicity. Buttressing these legal requirements, economic self-interest discourages lenders from offering noncompetitive loans to potential borrowers. But as Ammon Simon has previously explained, under CFPB regulations, a lender can be held responsible for racially biased lending based on controversial “disparate impact” statistical analysis even if not a single instance of intentional discrimination exists.

So what can a law-abiding lender do to avoid the large fines and ugly publicity that come with accusations of discrimination? Normally, this would be fairly simple: determine the legal standard, design a business practice that complies with it, and make sure it’s followed internally. However, this strategy doesn’t work if the government won’t tell you how to determine if your business practices have a “disparate impact.” Unlike the CFPB, which can simply discontinue an internal evaluation program that has a “disparate impact” on its minority employees, lenders lose business when they discontinue lending. And because lenders aren’t even allowed to collect information about the race, gender, or ethnicity of loan applicants, they have no way of knowing whether their programs create a “disparate impact.”

The CFPB has played its methods so close to the chest that it has refused to articulate anything more than generalities despite bipartisan requests from both houses of Congress, reports the Wall Street Journal. Perhaps the agency isn’t just making it up as it goes along and really does know what it means by “disparate impact.” But it is hard to see justice in a scheme where the government writes the rules, enforces the rules, and won’t tell anyone what the rules mean.

Jonathan Keim — Jonathan Keim is Counsel for the Judicial Crisis Network. A native of Peoria, Illinois, he is a graduate of Georgetown University Law Center and Princeton University, an experienced litigator, and ...

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