BANKTHINK

Disparate Impact Rule Works, Critics Notwithstanding

Print
Email
Reprints
Comment (1)
Twitter
LinkedIn
Facebook
Google+

JOIN THE DISCUSSION

(1) Comment

SEE MORE IN

RELATED TAGS

Legal Bills Pile Up at Banks
Each quarter banks report their worst-case estimates of costs tied to lawsuits and regulatory probes. Some banks reported lower figures in recent quarters, but others are braced to spend more to resolve legacy issues. New legal threats loom, too.

(Image: Fotolia)

Comments (1)
An issue overlooked by proponents and opponents of the application of the disparate impact theory to fair housing/fair lending issues (and many other issues as well) is highlighted by the final rule's requirement that even when a covered entity is able to provide a sound business justification for a practice causing a disparate impact on a protected group, the entity will still be held liable if there exists a less discriminatory alternative to the challenged practice. Though very few people understand the matter, typically practices that would be deemed less discriminatory alternatives to those causing a disparate impact, while reducing relative differences in rates of experiencing favorable outcomes, will tend to increase the relative differences in adverse outcomes on which regulators continue to focus on the latter to measure compliance, .

A fairly succinct explanation of this pattern may be found in my recent article in the American Statistical Association membership magazine:

"Misunderstanding of Statistics Leads to Misguided Law Enforcement Policies," Amstat News, Dec. 2012: http://magazine.amstat.org/blog/2012/12/01/misguided-law-enforcement/

A shorter explanation may be found in this BankThink item from last year:

"'Disparate Impact': Regulators Need a Lesson in Statistics" (American Banker, June 5, 2012: http://www.americanbanker.com/bankthink/disparate-impact-regulators-need-a-lesson-in-statistics-1049886-1.html

Many other discussions of this matter in American Banker and elsewhere going back to 1992 may be found here: http://jpscanlan.com/lendingdisparities.html

An illustration of the issue that is particularly pertinent to the lending context is found in credit score data from a putative class action, which show how lowering a credit score requirement, while reducing relative differences in satisfying the requirement, will tend to increase relative differences in failing to satisfy it:
http://jpscanlan.com/scanlansrule/creditscoreillustration.html
http://jpscanlan.com/images/Credit_Score_Illustrations_Figures.pdf
Posted by JPScanlan | Friday, February 22 2013 at 1:18PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
Marketplace
Fiserv is a leading global provider of information management and electronic commerce systems for the financial services industry.
Learn More
Informa Research Services is the premier provider of competitive intelligence, mystery shopping, and compliance testing services to the financial industry.
Learn More
CSC is a leader in private-label, third-party loan servicing with 30+ years of proven experience in delivering effective, cost-effective solutions.
Learn More
Already a subscriber? Log in here
Please note you must now log in with your email address and password.