- Key insight: The new CFPB rule protects lenders from being penalized for unintentional discrimination, including in cases involving automated algorithms and credit models.
- What's at stake: The new rule narrows the legal definition of "discouragement," making it easier for banks to avoid doing business in minority communities, the lawsuit alleges.
- Forward look: A federal court may delay the effective date of the CFPB's new rule to determine if it complies with the Administrative Procedure Act.
The Consumer Financial Protection Bureau is facing a lawsuit over a new rule that significantly weakens anti-discrimination protections under the Equal Credit Opportunity Act.
On Wednesday, the National Fair Housing Alliance and two fair-lending compliance firms
Under the new CFPB rule, lenders could not be penalized for unintentional discrimination caused by automated algorithms or credit models. Only proven, intentional discrimination would be enforced at the federal level.
"The final rule does not reflect reasoned decision-making or an expert, good-faith effort to implement our nation's foundational credit antidiscrimination statute," the lawsuit states.
"Quite the opposite. Indeed, the CFPB acknowledges that the amendments are likely to increase credit discrimination, the very thing the statute is designed to prevent."
The 73-page lawsuit, filed in the U.S. District Court for the District of Columbia, alleges the CFPB rushed out the final rule in just 32 days, without providing adequate notice and opportunity to comment. The Administrative Procedure Act sets rules for federal agencies and prohibits regulations that are deemed "arbitrary and capricious."
Elena Babinecz, a partner at Baker Donelson and former manager of the CFPB's ECOA rulemakings, said the bureau received 64,518 comments and needed to take more time to adequately consider them.
"This lawsuit will certainly be an uphill battle for the CFPB," Babinecz said. "The agency will struggle to justify its cost-benefit analysis, which by its own terms acknowledges the rule will lead to more discrimination, especially in rural areas,"
The lawsuit does not seek a preliminary injunction to stop the rule from going into effect on July 21. Still, Babinecz said the court is likely to delay the effective date of the final rule pending its consideration of the merits of the APA challenge.
"This means that none of those many thousands of comments it received resulted in the agency adjusting its cost-benefit analysis, nor did the agency attempt to gather additional relevant data," she said. "The CFPB acknowledged that, in many cases, it was simply unable to quantify the potential benefits, costs and impacts of the final rule because it lacks relevant data."
The new rule would impact consulting and compliance firms that banks and lenders hire to determine if they are in violation of fair-lending laws. Two such firms — BLDS, a Delaware consulting and analytics firm, and SolasAI, a Philadelphia software firm — joined the lawsuit because they expect to see less demand for their software and services after the rule takes effect. At that point, banks will no longer be legally required to test their AI algorithms for accidental bias.
Prior to the new rule, Regulation B prohibited lenders from "acts or practices" that discourage certain applicants from applying for loans. Under the new rule, a bank or lender can use targeted marketing directed at certain populations — and can exclude other groups without penalty. Only statements by lenders that discourage specific groups of applicants from applying for credit are prohibited.
The plaintiffs claim the new rule will make it easier for banks to avoid lending in minority communities because they will face no legal consequences for doing so.
The CFPB declined to comment on the lawsuit. In January, Vought defended what he called the Trump administration's "eradication of discriminatory race-based policies," including fair-lending laws, in an opinion article in the
"Our proposed regulatory changes will ensure that lenders are held accountable for how they actually treat people and not for the statistical results of their policies," Vought wrote. "The proposal also protects free speech by ensuring that liability attaches only to statements a lender knows will discourage a person from applying for credit."
However, the lawsuit alleges the CFPB "failed to identify any concrete problem with the current regulatory regime," and instead "relied on conclusory assertions and speculation, not evidence, to justify its dramatic departure from decades of settled ECOA implementation."
The new CFPB rule also specifically prohibits for-profit companies from creating special purpose credit programs that use race, color, national origin, or sex to expand credit access to historically underserved groups.
The plaintiffs claim the bureau's cost-benefit analysis justifying the new rule is filled with "generalizations and assumptions."
"The CFPB's simplistic references to general principles of economic theory, free-floating hypotheses about potential outcomes, and disregard of hard facts are not actual 'analysis' and, thus, do not satisfy the requirements of the Dodd-Frank Act," the lawsuit states.
The plaintiffs are represented by Relman Colfax, Public Citizen Litigation Group, and Democracy Forward.
