Diversity and Disparate Impact

Former credit union executive and current credit union consultant Marvin Umholtz's most recent issue of his email newsletter "CU Strategic Hot Topics" had an interesting take on the NCUA's Office of Minority and Women Inclusion (OMWI) and the implications for credit unions of the NCUA's upcoming assessments of credit unions' diversity policies and practices. With Marvin's permission, I've excerpted the entire discussion.

Credit Union Diversity Policies and Practices Destined for NCUA OMWI Scrutiny

In the NCUA’s September edition of its newsletter www.ncuareport.org/ncuareport/201209#pg1 starting on page 6 there was an article featuring the NCUA Office of Minority and Women Inclusion (OMWI) www.ncua.gov/about/Leadership/CO/Pages/OMWI.aspx that should serve as a reminder that the NCUA will soon begin assessing federally insured credit union diversity policies and practices.  As the article explained, the NCUA OMWI (along with those OMWI offices at the CFPB http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-hires-stuart-ishimaru-to-head-the-office-of-minority-and-women-inclusion the Federal Reserve System www.federalreserve.gov/publications/other-reports/files/omwi-report-20120402.pdf and the individual regional Federal Reserve Banks, the Office of the Comptroller of the Currency www.occ.gov/about/who-we-are/careers/omwi.html, the Federal Deposit Insurance Corporation www.fdic.gov/about/diversity/FDIC_OMWI_Annual_Report_2011.pdf, and the U.S. Treasury www.treasury.gov/about/organizational-structure/offices/Pages/omwi.aspx) has three missions under the Dodd-Frank Act Section 342 addressing the diversity of the agency’s workforce, contractors, and regulated entities.  The NCUA article pointed out that among those missions, “By law, each OMWI must develop standards to assess diversity in the agency’s regulated entities.  NCUA’s regulated entities consist of all federally insured credit unions.  NCUA’s OMWI Director and NCUA staff are now participating on a regulated entities subcommittee consisting of representatives from each covered agency.  The purpose of the subcommittee is to ensure a common framework and consistent approach among the agencies in implementing Section 342 with respect to regulated entities…NCUA’s ultimate goal for assessing credit union diversity standards is to develop an approach that satisfies congressional intent, but that also minimizes any potential regulatory reporting burdens by using pre-existing data sources wherever possible.  Once NCUA drafts proposed diversity assessment standards, the agency will make it available for public comment.”  Based upon past statements from the NCUA OMWI Director to this correspondent, the NCUA Board is expected to adopt a policy implementing Section 342 prior to the end of 2012. 

Section 342 was added in the 11^th hour at the insistence of Congresswoman Maxine Waters (D-CA) http://waters.house.gov during the House-Senate conference committee on the highly partisan Dodd-Frank Act.  Even to this day Congresswoman Waters continues to be among the Dodd-Frank Act’s staunchest defenders.  Having recently been cleared of longstanding House Ethics Committee charges, Congresswoman Waters now is again considered to be the first in line for either Ranking Minority Member or Chairperson of the House Financial Services Committee in 2013, depending on which political party holds majority control www.politico.com/news/stories/0912/81725.html following the 2012 elections.  Since this correspondent disagrees with Congresswoman Waters’ policy positions on financial services issues 99.99% of the time, neither one of those alternatives is good news.

During a September 21^st speech to the Congressional Black Caucus, CFPB Director Richard Cordray www.consumerfinance.gov/speeches/prepared-remarks-by-director-richard-cordray-at-the-congressional-black-caucus-foundation reported about the CFPB’s OMWI.  He said, “In January, at the same time that President Obama appointed me to serve as the first Director of the Consumer Bureau, we began standing up the OMWI.  In April, we were fortunate to bring on Stuart Ishimaru to lead our OMWI.  Stuart’s extensive work promoting diversity in the Civil Rights Division of the Department of Justice and the Equal Employment Opportunity Commission – and frankly throughout his life – makes him the perfect person for the job.  He has worked on behalf of underserved communities, and he brings with him decades of experience in overseeing federal policies geared toward fostering difference in the workplace and creating opportunities for women and minorities.”  Director Cordray then explained what the agency was doing in terms of workplace diversity and contractor outreach, but it was his comments about regulated entities that caught this correspondent’s attention and foreshadowed the CFPB’s likely activism.

Cordray said, “Third, and very importantly, Congress has directed that the OMWI will work to create standards to assess diversity at the financial institutions that the Consumer Bureau regulates.  Take a moment to grasp how this aspect of our task greatly broadens our opportunity.  The financial realm encompasses trillions of dollars of assets and employs more than five million people in the United States.  To the extent that we can encourage and influence a broadening of equal opportunity in this powerful and dynamic sector of the American economy, we will quite possibly make breakthroughs for the principles of diversity and inclusion that will be profound and lasting.  Just as we are convinced that having a mix of employee backgrounds and experiences is good for our work at the Consumer Bureau, we likewise are convinced that the same is true for financial institutions themselves.  Like us, they serve the broad consumer public of this country.  And like us, they will better understand the changing demographics and needs of their customer base if their own workforce is reflective of our changing society.”

Director Cordray continued talking about his ideological premise and politically-loaded interpretations, “As a new agency, we have the rare advantage of not being wedded to the old ways, and thus of being able to forge our own path.  I happen to believe that we are at a moment of time in this country where business leaders, both in the financial industry and elsewhere, are able to grasp the importance of the outlook that I have just described.  For a long time, the financial services industry did not traditionally reflect all its potential customers.  But it feels to me like this sector is ripe for change and is beginning to embrace this change.  If we are willing to step forward right now and make a persuasive case for diversity and inclusion, then I believe we will find that we are casting our bread upon the waters at a propitious time and this important effort will be crowned with success.  Put bluntly, there is a great business opportunity here for a sizable industry, and I am confident that good business leaders will be prepared to seize that opportunity.”  Since the CFPB has near dictator-like authorities over the financial services industry, one doesn’t know whether to consider Director Cordray’s remarks to be harmless political pandering to a targeted constituency or a tangible threat to implement ideologically activist policies that push the boundaries of the law.

Perhaps the biggest significance of the industry diversity assessments to be undertaken by the NCUA and the CFPB, as well as all of the other various OMWIs, is that the findings could serve as fodder for fair lending violation cases based upon the disparate impact doctrine that has been publicly declared as policy by the CFPB, the U.S. Department of Justice (DOJ) www.doj.gov, the Department of Housing and Urban Development (HUD) www.hud.gov, the Equal Employment Opportunity Commission (EEOC) www.eeoc.gov, and the Department of Labor www.dol.gov/ofccp/regs/compliance/fccm/ofcpch1.htm, among others.  The NCUA OMWI will be on a data-fishing expedition that once shared with other federal agencies will surely lead to lawsuits and coerced settlements.  Where does the NCUA Board stand concerning the application of the disparate impact doctrine on credit unions?  Does the NCUA Board plan to use the OMWI assessments to build law enforcement cases against federal credit unions? 

There's enough there to concern banks, as well as credit unions, of course. The use of diversity examinations as "fishing expeditions" to uncover evidence to support disparate impact enforcement actions is a troublesome prospect. Moreover, I listened to a CFPB attorney tell a crowd of Texas bank lawyers six months ago that every CFPB examination team would include an enforcement lawyer. Thus, collecting evidence for enforcement actions appears to be part of the CFPB's normal examination agenda, so Marvin's concerns are well-founded. After all, none of the regulators who have primary examination authority for the under-$10 billion bank and credit union industry segment will want to appear to be less "diligent" than the CFPB.