Industry veteran challenges CFPB's support of disparate impact
Under this legal theory, the bureau's own lending rules make no sense
I often wonder if one of the requirements of entering the political arena is to have one’s sense of irony surgically removed.
This came to mind today while reading comments made by CFPB Director Richard Cordray at the American Banker Regulatory Symposium on the subject of lending discrimination, and specifically on the notion of “disparate impact.”
As reported in HousingWire, Director Cordray vowed to "pursue discrimination in consumer financial markets based on disparate impact as well as disparate treatment. From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate."
So the CFPB will search for patterns of behavior that look discriminatory, and prosecute the offending lenders, whether or not there was actually any intent to discriminate.
In today’s increasingly litigious and highly regulated environment, it’s almost not surprising that the CFPB and HUD have determined that whether or not a lender intended to discriminate, if the borrower and regulator believe there was discrimination, there was. And if a group of borrowers feels the same way, that discrimination becomes "disparate impact."
As any regular viewer of Law & Order can tell you, this is a slippery slope. After all, the essential difference between first and second-degree murder is intent. And the difference between murder and manslaughter is almost entirely intent – as in, did the defendant intend to kill the victim, or was it an accident? It seems to me that if our legal system allows this distinction to hold true for something as serious – and permanent – as a killing, it would apply to something a little less life-threatening as well.
But then, accused murderers are given the benefit of the doubt, and considered innocent until proven guilty – a courtesy not often afforded to banks and non-bank lenders these days.
As troubling as this all may be from a strictly legal standpoint (and the Supreme Court will have its chance to sort all of this out soon), what I find most interesting is the sheer irony of the situation.
The CFPB’s QM rules dictate that, among other things, a borrower must meet a debt-to-income (DTI) ratio of no more than 43%. This DTI ratio will prove an incredible hardship for borrowers at the lower end of the economic scale. And the lower end of the economic scale is more or less the group of people that the CFPB is trying to protect from discriminatory lending.
So – intentionally or not – the CFPB has enacted policies that, if followed by lenders, will almost certainly result in the kind of "disparate impact" that the CFPB is trying to prevent.
As someone who probably followed foreclosure trends as closely as anyone during the housing meltdown, I’m the last person to call for a return to the "bad old days."
While the industry tightened credit standards on its own long before the CFPB was formed, having a set of common sense guidelines to use as the basis for creating safer, more sustainable loans isn’t a bad thing.
But prosecuting lenders for following those rules won’t solve anything, and will ultimately be bad for everyone in the mortgage ecosystem. If the CFPB intends to pursue discrimination caused by policies that have a discriminatory effect, it may want to start by looking a little more closely at the policies of its own.