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DOJ’s Disparate Impact Theory Won’t Work When Comparing Apples to Oranges
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DOJ’s Disparate Impact Theory Won’t Work When Comparing Apples to Oranges

We recently began a series of articles examining the Justice Department’s theory in discriminatory lending cases where Justice claims some banks’ lending policies result in a disparate impact on certain groups of borrowers. 

In this article, we will discuss the fact that a disparate impact theory can’t reasonably be applied in a lending context because lending decisions are customer-specific, with customer privacy tightly protected and regulated.  If the relevant information relied on by banks to make lending decisions is not available to the Justice Department, then it stands to reason Justice can’t compare similar credit applicants to support a disparate impact claim.

Lenders consider many aspects of borrowers’ private financial information, including credit reports, debt to income ratios, loan to property value ratios, and proposed down payments.  Most such private customer information is not publicly available for Justice’s purview and number crunching. 

So what statistics does Justice rely on to support disparate impact claims?  That’s a good question.

In a recent article on Investors.com, writer Paul Sperry pointed out the lack of transparency as to exactly how Justice arrives at their disparate impact conclusions.

“Justice denies ignoring creditworthiness and other legitimate business reasons for loan disparities. It argues that in all cases, it compared black and Latino applicants with “similarly situated” whites before drawing conclusions about bias.

Asked to define “similarly situated,” Justice referred IBD to court-filed complaints. But none of them fully defined the term.

Prosecutors have devised various screens to trawl mortgage data for racial disparities. But the Treasury Department databases don’t include detailed personal credit information that factor prominently in lending decisions.

Missing are borrowers’ credit scores, household debt-to-income ratios, loan-to-property-value ratios, down payments, employment history, documented income, assets and other key variables.”

In fact, as we’ve pointed out, regulators’ methodology for establishing a statistical disparate impact among credit applicants is a mystery.  The truth is Justice can’t possibly consider all of the factors involved in lending decisions, because not all of a customer’s private information is available to the Justice Department in the first place.  Without reviewing all of the relevant information, how can Justice claim certain loan applicants are “similarly situated”?  

Let’s think about that for a second.  Does living in the same neighborhood and having similar incomes make credit applicants similarly situated?  Not necessarily, and possibly not by a long shot.  But if that is all it takes for Justice to claim banks’ lending procedures produce a disparate impact, then it is time to hold Justice accountable for irresponsible strong-arm tactics that end up costing consumers more for banking products in the long run.

If you are a bank or another business facing similar issues, consult with legal counsel to help you develop a sound legal strategy.  The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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