by Jeff Sovern
As we wrote about in May, the CFPB takes the position that it can use its unfairness power when consumer financial service companies discriminate. One issue that has arisen is whether when it does so, the Bureau will use the disparate effects test, sometimes called the disparate impact test, to determine if discrimination has occurred. I think the Bureau has answered that question in the negative, though I’m not sure how often it will really matter.
The disparate effects was originally something courts used in employment discrimination cases. When Congress enacted the Equal Credit Opportunity Act, barring discrimination in consumer credit transactions, courts transplanted the disparate effects test they were familiar with to the credit context. Under the disparate effects test (I’m simplifying a bit), a consumer carries the burden of showing discrimination even without proof that the company intended to discriminate, if the company’s conduct–such as the criteria it uses to grant loans–has a disparate impact on a protected group. But the company can still avoid liability if it can show that the challenged practice is legitimate, despite the impact on the protected group. So the question is whether that would also constitute unfair conduct, or, to put it another way, whether the Bureau will transplant the disparate effects test again to apply to unfairness.
The clearest answer to that question from the Bureau that I have heard came from CFPB Assistant Director for the Office of Enforcement Eric Halperin at an American University symposium (written summary here). As I understand it, Director Halperin explained that unfairness has its own test and that the Bureau will use that test rather than the disparate effects test when it is using its unfairness power. While Director Halperin did not purport to speak for the Bureau, Director Chopra has made similar statements.
But how much does it matter? As Director Halperin pointed out, unintentional conduct can be unfair under the Consumer Financial Protection Act. While the test of unfairness is worded differently from the disparate impact test, I wonder how often conduct will fail the disparate impact test but not be unfair. Something that produces a disparate impact is also likely to cause substantial injury to consumers that is not outweighed by countervailing benefits and cannot reasonably be avoided by consumers. If you can come up with an example of something that fails the disparate impact test but is not unfair, I hope you will post it in the comments.
