Unfairness and disparate effects: a reply to Professor Jeff Sovern

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In a blog post published on July 30 on Consumer Law and Policy Blog [link], Professor Jeff Sovern discusses comments from CFPB officials that the Bureau will not use the disparate effects or impact test to determine if discrimination has occurred when using its UDAAP authority.  In those comments, Director Rohit Chopra and Assistant Director Eric Halperin indicated that “unfair” for purposes of the CFPB’s UDAAP authority has its own test and that the Bureau will use that test rather than the disparate effects test when using its UDAAP authority to determine if a discriminatory practice is unfair.

For starters, it is unlikely that the CFPB does not intend to use disparate impact to determine if a practice is discriminatory.  When the CFPB announced the change to the UDAAP section of its examination manual, as an example of discrimination that it could target as unfair, it used a bank not allowing people of color to open a deposit account.  Since this would be an instance of intentional discrimination or disparate treatment, a disparate impact analysis is not necessary to determine if the bank’s practice is discriminatory. 

But how would the CFPB approach a bank policy that was race neutral on its face but resulted in a high number of people of color not being allowed to open deposit accounts?  Unless, contrary to prior statements, the CFPB only intends to target intentional discrimination as a UDAAP violation, it would presumably argue that the bank’s policy was discriminatory because of its disparate impact on people of color.  And once having made that determination, it would then decide if the policy is unfair using the UDAAP standard.  Indeed, one of the changes made to the examination manual directs examiners, when identifying  areas for potential transaction testing, to determine whether “the entity uses decision-making processes in its eligibility determinations, underwriting, pricing, servicing or collections that result in discrimination.   

Assuming this would be the CFPB’s approach, one might say the CFPB wants to have its cake and eat it too—meaning use disparate impact to establish discrimination but replace the safeguards of the next step in a disparate impact analysis with the unfairness standard.  As discussed in the white paper about the UDAAP change sent to the CFPB by four leading industry trade groups, the CFPB’s approach ignores a number of the safeguards that the U.S. Supreme Court, in its Inclusive Communities decision, said must be observed to sustain a disparate impact claim.  Those safeguards prevent disparate impact liability from attaching unless the policy or practice at issue creates “artificial, arbitrary, and unnecessary barriers,” a standard that the Supreme Court found necessary to ensure that defendants “must not be prevented from achieving legitimate objectives.”  Most significantly, when determining whether a company’s policy has a legitimate business justification, the Supreme Court recognized the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.”

In contrast, under the UDAAP unfairness standard, a policy is unfair if (1) it causes or is likely to cause substantial injury to consumers, (2) the injury is not reasonably avoidable by consumers, and (3) the injury is not outweighed by countervailing benefits to consumers or to competition.  Once a policy is found to have a disparate impact, it would seem to be a foregone conclusion that the CFPB would find the first two prongs of the unfairness standards to be present.  And it seems likely the CFPB would give little or no weight to “practical business choices and profit-related decisions” in applying the third prong.

According to Professor Sovern, the outcome is likely to be the same whether the  CFPB uses the unfairness standard or a disparate impact test—namely the policy would be unlawful under either analysis.  However, without the safeguards required by the Supreme Court’s decision, it seems much more likely that a company’s policy would be deemed unlawful when the unfairness standard is used than when a  disparate impact analysis is used.  We do not see any reasoned basis for finding that a company has engaged in unlawful discrimination in connection with non-credit transactions when the same policy, if used in connection with credit transactions, would be found to be lawful under a disparate impact analysis.  Professor Sovern may be right that a policy that would fail the disparate impact test is likely to also be unfair.   But instead of wondering how often conduct will fail the disparate impact test but not be unfair, we think Professor Sovern should be wondering how often conduct might PASS the disparate impact test but nevertheless be deemed unfair. 

Putting aside the disparate impact issue, I continue to take issue with the underlying premise of Professor Sovern’s blog post – namely, that the CFPB can use the “unfairness “ prong of UDAAP to target  discrimination in connection with credit and non-credit consumer financial products and services.  Moreover, even if the CFPB’s interpretation of “unfairness “is correct, hopefully, Professor Sovern would agree with me that this is the type of major pronouncement that should be accomplished through a notice-and-comment UDAAP rulemaking rather than by unilaterally amending the CFPB’s examination manual (which technically only applies to certain mega-banks and non-banks).  All stakeholders (consumers and industry alike) should have been given the opportunity to comment on such an important change in the law.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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