Bank Lawyer's Blog

There Ain't No "There," There

Last week, an article by Andy Peters in the American Banker hit a nerve. It profiled a California bank that had tried to make small dollar loans work as an alternative to payday lending, but had decided to give up the effort.

One PacificCoast Bank in Oakland, Calif., is regrouping as it looks to battle payday lenders in the San Francisco Bay area.

The $282 million-asset thrift recently pulled the plug on its One Pac Pal loan, which it tailored to offer low-income clients short-term credit at reasonable rates and terms. The program, which began 18 months earlier, lost too much money, says Kat Taylor, One PacificCoast's chief executive.

"We have not yet found an economically sustainable product that's sufficient to save enough people" from payday lenders, she says.

I hate to say "I told you so," but...Oh, who am I kidding. I TOLD YOU SO!From August 1, 2007:

In June, when the FDIC issued its final Affordable Small-Dollar Loan Guidelines and FDIC Chairman Sheila Bair was pressing commercial banks to compete with payday lenders for the "Mini Me" loan biz, even banks in states like North Carolina, which kicked out the bottom feeders, were rolling their eyeballs in disdain at the prospect of rushing in to fill the breach. Among other problems, the Guidelines "encourage" banks to cap the APR at 36 percent.

[...]

The North Carolina banks banks profiled in the linked article didn't believe that there was enough bang for the buck to justify dipping their toes in the shallow water. Even the lone credit union that offered a payday loan-like product wasn't making any money on it because it was barred by state law from charging more than an 18% APR and it was actually requiring the loan to be paid back in 90 days. If it had only rolled the loan over (and over and over) and neglected to comply with the usury laws, it might, like Madonna, have been able to "get into the groove" and make some real payday lender-like money.

Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which, according to another article, represents about 60 percent of the payday loan industry, said the 36% annual percentage rate cap was a non-starter for commercial banks.

"There's an effort to cap loans at 36 percent annual rate, which the FDIC guidelines suggest. How that works into two- week loans is $1.38 per $100," she says. "I know payday lenders can't make money on that, so banks couldn't possibly either."

Mr. Peters' latest article also quotes a consultant as correctly noting that at the same time these loans pose a high risk of nonpayment, they bear a high regulatory compliance risk and, because credit scores must be thrown out the window (or reliance on them reduced), a high underwriting risk. Peters also notes that the FDIC ended its small dollar loan pilot program in 2009 because banks couldn't make a return sufficient to cover the risk.

One PacificCoast bank's experience is in line with the consistent experience of other FDIC-insured banks who've tried to beat payday lenders at their own game over the past six years. Basic business principles don't change. However, they've never ceased to be ignored in the service of an ideological agenda, one which holds that payday loans are evil because they have high fees that "trap" poor people in a never-ending spiral of debt, people who are too stupid and/or unsophisticated and/or desperate to think for themselves, and who must be protected from their inherent deficiencies by those who know better. Guys like Recess Richie and the Payday Slayers.

It's obvious that trying to use traditional banks as payday lending alternatives is not going to work. Unless, of course, you let them earn the same return that payday lenders earn.Which kind of thwarts the "higher purpose," doesn't it?

That's right Liz, reality bites.

A New Approach To Compliance

Steve Van Beek, NAFCU's Director of Regulatory Compliance, has a dynamite article in the latest issue of The Federal Credit Union, that community banks, as well as credit unions, would do well to heed. In addition to noting the obvious fact that Dodd-Frank's increase of regulations means increased compliance burdens for credit unions, he discusses a very important "paradigm shift" in the way credit unions (and community banks) need to view compliance. In the years "BFD" (Before Franken-Dodd), the compliance officer was often brought into the discussion of a product or service at a late date, and then gave it a thumbs up or thumbs down verdict. Steve rightly notes that the old school approach is a good way to be schooled by the CFPB.

Steve observes that the "CFPB's focus is principle-based as wellas requirement-based."

Not only will credit unions need to determine if their product or service is compliant with laws, regulations and guidance, but they will also need to expend resources to document that the product or service provides a benefit to members.

Why? Steve's glad you asked. Th answer is UDAAP: unfair, deceptive or abusive acts or practices. You have a new sheriff in town, the CFPB. It's focused on how consumers use products and services and how consumer service and product providers might "take advantage" of consumers. In other words, the CFPB seems to be running down the path of determining what products and services are "suitable" for consumers and which are not. It's a brave new world, one in which the old focus on checking off items on a compliance checklist is not going to get the job done. Instead, financial institutions will "need to build a UDAAP review into their product structure and development and monitor their products and services over time, as the UDAAP standard is not static."

There's a lot more meat on the bones, and I highly recommend that you read the whole article. It's a good warning shot across the bow of the critically dysfunctional and soon-to-be-beaten-down dinosaurs who squawk an outdated mantra: "Show me where it says I can't do that." Believe me, if you don't understand that it's a whole knew compliance ballgame and learn the new rules, pronto, the CFPB tire tracks will make a nice pair of bookends on the back of your bowling shirt as you lie face down and flattened in the middle of the consumer compliance highway.

FDIC's Take On FFIEC's Social Media Guidance

I ran across an interview recently that the FDIC's Elizabeth Khalil gave to InfoSecurity's Tracy Kitten about the FFIEC's proposed guidance on social media. Among my take-aways are the following:

• The push for the guidance came from smaller banks that wanted the regulators to give them some free advice. We all understand the fact that because small banks have less money available to pay for expensive lawyers, they look to leverage off of every free resource they can glom onto. Trade associations aren't free, but if you're paying your dues, you look to them to give you your money's worth. Since banks pay the federal bank regulators assessments, they want some bang for those bucks, as well. I get it.
• While Ms. Khalil mentioned "reputational risk" as the second major risk of the three she discussed ("compliance issues" was number one and "third party risk" was the third), I think reputational risk layers through much of the regulators' concerns. For example, misuse of consumers' personal information may be a compliance risk issue, and a Facebook vulnerability to hackers is a third-party risk. However, they both can impact the bank's reputation. Bad things that happen in a bank's social media endeavors often pose a reputational risk as an additional risk, and that's a safety and soundness concern which, in turn, is a regulatory compliance concern.
• None of what's in the guidance is new, and banks that are already engaged in social media activities should already be familiar with the elements of the guidance. If they're not, they better become familiar in a hurry and hope that no one notices.
• Due diligence on third party service providers that you intend to use is critical. The due diligence needs to be ongoing. A third party's faux pas can bite the bank in the backside as well as the third party. Monitoring is essential.
• As is the case with online banking security, the regulators encourage banks to educate consumers on social media risks. For example, the regulators will look favorably on a bank educating its social media users on the risk of fraudulent bank sites, how to recognize the real deal from the fraudster, and that they should never give up personal information over social media. 
• Whether or not a bank is actively using social media to interface with current or potential customers, it needs to have a social media use policy. The bank's employees are using social media, and other people may be saying bad things about you in cyberspace. The bank should have a policy that deals with these issues.

The final guidance is expected to be out in the near future (the comment period closed March 25th), depending on the nature of the comments received.Interested bankers should keep their eyes peeled (although, don't hold your breath).

I'll be giving a breakout session on social media compliance on July 3, 2013 at CUNA’s America’s Credit Union Conference in New York City. If you're a reader and are attending that conference, say hello.

Florida Continues To Pummel Stern

Nearly two years ago, we noted that the Florida Bar had filed a complaint against former Florida Foreclosure King David J. Stern over alleged ethical lapses related to the meltdown of his foreclosure mill firm in the wake of a robosigning scandal. The wheels of justice grind exceedingly slowly (at least, they do in The Sunshine State), but last week, the Bar filed another whopper against Stern.

It took two years, but the Florida Bar has finally dropped a doozey of a complaint against former foreclosure king David J. Stern.

The 80-page complaint includes 17 counts or charges that Stern violated the Bar’s rules of professional conduct. The Bar alleges that Stern failed to properly supervise lawyers and non-lawyers at his firm and failed to halt regular violations of Bar rules.

The article summarizes the allegations made in the long complaint. Most have them appear to have been made public previously.

According to the newspaper, neither Stern nor his attorneys could be reached for comment (although another article states that Stern's lawyer, Jeffrey Tew, "told the newspaper Thursday that Stern has done nothing to warrant discipline"). Unfortunately for Stern, a former nemesis was ready and willing to pipe up with an opinion.

Former assistant state attorney general Theresa Edwards, who investigated Stern several years ago before being fired by the AG's office, said she thinks the bar should have acted sooner. (Contacted by the newspaper, the Bar declined, through a spokeswoman, to comment.)

"Considering the amount of money he's made, his bar license will be of little concern to him," said Edwards, who is now in private practice.

Biting off more than you can chew, then trying to gulp it down by cutting corners, appears, in retrospect, to have been a bad business plan. Then again, perhaps Ms. Edwards is correct. Perhaps he's made so much money that he won't care what the state does with his law license.

We'll see. At this rate, it may be another two years before this plays out. By that time, only crackpot bloggers may even remember who Stern was.

Tighten Up! No, Loosen Up!

The Obama administration’s recent call for mortgage lenders to loosen underwriting standards on residential mortgage loans to less-than-“Qualified Mortgagors” as long as the FHA (i.e., the American taxpayer) is taking most of the risk of default, generated some pretty strong reaction from the usual suspects.

"If that were to come to pass, that would open the flood-gates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

[…]

"There's always a tension that you have to take seriously between providing clarity and rules of the road and not giving any opportunity to restart the kind of irresponsible lending that we saw in the mid-2000s," said a senior administration official who was not authorized to speak on the record.

Ya’ think?

The administration is also purportedly urging the Justice Department to ease up on lenders who make loans in accordance with the administration-encouraged looser and goosier FHA underwriting critera. The FHA also claims that it hopes to encourage "by example" Fannie Mae and Freddie Mac to follow along. It's as if the subprime meltdown never occurred and Dodd-Frank was never passed, except for the fact that the federal banking regulators, including the CFPB, are taking a directly contrary approach to mortgage underwriting. Moreover, loan originators live in mortal fear of Freddie and Fannie repurchase requests, which have been massive, since those two publicly-controlled giants are the conventional residential mortgage market.

This whip-saw of inconsistency evidences a major example of cognitive dissonance.

Private reaction from bankers and bank lawyers with whom I attended the recent Texas Bankers Association Annual Legal Conference in Austin, Texas, was even more derisive.  Much time during that conference was spent parsing the nuances of “Qualified Mortgages” and “Qualified Residential Mortgages,” which will make qualifying for a residential mortgage loan much more difficult for many potential homeowners. In addition, the plethora of new regulations being spewed out by the CFPB makes consumer lending, including making single family mortgage loans, riskier and more expensive. The bottom line for a number of community bankers is that they will be making few, if any, residential mortgage loans, at least not directly. In addition, bankers who decide to make residential mortgage loans are definitely not crazy about making anything other than loans that will fall under the QM safe harbor.

I would say that it’s amazing that the administration could talk so glibly out of both sides of its mouth, except that it’s not at all amazing. It’s what these cynical, pandering clowns do as naturally as breathing in oxygen and exhaling carbon dioxide.

Three Hurdles To Jump Pose No Obstacle To An Elephant

Banking compliance consultant Nancy Griffin thinks that bankers fear the "effects test" (i.e., "disparate impact"), which, I think, is correct. She also thinks that they should not be as afraid of disparate impact as they seem to be, because it's a three-part test and the "effect" is only one part.

The effects test is a three-part analysis:

1. The analysis starts with whether a policy or practice that appears neutral on its face has a discriminatory effect on a prohibited basis--disparate impact.

2. Next the test looks at whether the policy or practice that seems to discriminate on a prohibited basis actually has a business necessity supporting its use.

3. The final step is to determine whether there is a way to meet the same business necessity without such a discriminatory impact.

Obviously, step 1 has received all the press, and causes the most heartburn. The problem for bankers is that they rarely know what the "unintended" effects on a protected class of a facially bias-neutral practice might be. However, Nancy thinks that Step 2 is where the "real analysis" should begin.

The more accurate and effective the factors considered in evaluating credit are, the more accurately they will distinguish between good and bad credit risks. And, the accuracy of the factors becomes a powerful defense against any challenge of discrimination in effect.

Common sense should tell you that this works.

I have no problem with those statements.

As to step 3, Nancy claims that every banker should already be familiar with making this determination.

This type of analysis has been at the core of what is inaccurately referred to as "CRA lending."  The question in this phase is to figure out whether there is any other way to achieve the business purpose of distinguishing between good and bad credit risks than to use the factor that is challenged as discriminatory.

In looking for ways to make loans to low-income credit applicants, the industry has reevaluated almost all of the underwriting principles. Often, community groups asked banks to apply different debt ratios to low-income applicants or look instead to cash flow and proven ability to manage a high housing cost relative to income. In many situations, these loans could be supported by the alternative analysis. In these cases, there was an alternative way to make the loan that reduced any disparate impact of using ratios.

While she mentions the fact that many of these "alternative ways to make loans" went too far and resulted in some serious pain (in other words, the subprime mortgage meltdown), she claims this result has a "silver lining."

Some of the alternatives to basic underwriting principles have been tested and proven dangerous. This experience helps with the third step of the effects test. It makes clear that flexible underwriting is something to be done only with great care. Underwriting should not be changed simply to change the demographic effect. Before changes there should be careful research and testing.

I suppose that is true to some extent. However, I'm not as sanguine as Nancy that step 3 will be that easy to support in every case where the stricter underwriting standards that are used to achieve "QM" or "QRM" status are always employed. I can see the day, especially when the economy improves, when the fact that a bank is simply trying to meet the Dodd-Frank "safe harbor" underwriting standards is far from being a lock on satisfying steps 2 and 3. I especially think that an ideologically motivated Justice Department (and HUD) of the type we have in place currently, will remain unimpressed by any logical arguments that support a bank on steps 2 and 3 if they "find" that there's been a "disparate impact" on a protected class under step 1.

We need to remember that "disparate impact" itself is a questionable legal theory, so questionable that the US Justice Department fears its consideration by the US Supreme Court. Banks aren't scared of "disparate impact" claims only because they're so difficult to anticipate in the ordinary course of business, but because the federal government seems intent on using such claims to browbeat large settlements out of bankers on a cost-benefits basis (pay the government to end the pain), regardless of whether or not the highest court in the land would ultimately overturn the government. If the government is willing to use a questionable legal theory to serve ideological notions of "fairness" in credit redistribution (as it does in its quest for income redistribution), why would steps 2 and 3 deter it? If step 1 is bogus, why would objectively valid opinions that steps 2 and 3 favor the bank be impediments to simply alleging that they do not, and beating the bank over the head with litigation defense costs until it yields?

Yes, bankers fear the effects test. The fact that the test involves a three step process should provide only cold comfort to them.

Beating The CFPB To The Punch

Community banks have been concerned that, although they might be exempt from direct supervision and enforcement by the CFPB, they would be recipients of a "trickle down" effect that would result when their primary federal bank regulator would attempt to demonstrate that it could stay abreast, or even ahead, of the CFPB when it comes to cracking down on unfair, deceptive, and "abusive" practices. Fraud, small banks understand, but they tend to fear zealots who may not be able to define an "abusive" practice with precision, but sure as shooting know it when they see it.

An article in the most recent issue of Bank Safety & Soundness Advisor (paid subscription required) indicates that community bankers' fears are not without some foundation.

In a recent Webcast, officials from the Fed along with the Federal Reserve Bank of San Francisco showcased a broadbased enforcement approach to UDAP rules and regulations, and some high expectations for how banks should be identifying and resolving complaints involving abusive or deceptive practices.

While some of the examples cited, including inflating borrower income on loan applications and charging "bogus points and origination fees" are clearly fraudulent, the net appears to be cast widely by the Fed.

Officials indicated they view as a kind of red flag banks pushing new or modified products and services to generate new revenue, especially if done in conjunction with third-party vendors where fees are shared.

“While searching for revenue is part of what a bank needs to do, there is also a need to make sure
there is compliance with UDAP and consideration of UDAP risk,” said Maureen Yap, the Federal
Reserve’s special counsel for fair lending.

And the officials underscored the idea that an act or practice does not have to violate another law to be unfair or deceptive. A potentially tell-tale sign of that: cases where revenue growth depends on consumers making what regulators and examiners feel are poor financial choices.

There you go: what an examiner "feels is a poor financial choice" by a consumer is the acid test. That gives a whole boatload of precision and certainty to the determination of what is and is not "abusive." Every bank will have to have a Potter Stewart on staff to make the call, I guess.

The potential burden is not going to be light.

For individual institutions, the potential coverage is huge, including not only all products and services, but every phase of the life cycle, including development, marketing, and loss mitigation activities.

One bank's "bogus points" scam, perpetrated by rogue loan originators, led to a determination that it had a "disparate impact" on minorities, and earned that bank a referral to the Justice Department. So, there's that potential liability to look forward to, as well.

What's a small community bank to do? Fed officials tried to be helpful.

Officials declined to address specific fact situations bankers posed during the March 5 webcast. They suggested that banks use the same sort of analysis that regulators do in assessing potential misconduct.

Yap said the Fed tells examiners to focus on the “INN” in determining whether conduct is unfair under the law. There must be “injury” to the consumer or group of consumers, the injury is “not reasonably avoidable,” and there are “no countervailing benefits.”

She said Fed examiners focus on the “MRM” to judge whether behavior is deceptive. Does the representation or omission “mislead” the consumer? Is the consumer response “reasonable”
given the representation or omission? Is the misrepresentation or omission “material”?

“The act or practice does not have to violate another law to be unfair or deceptive,” she said.
“If the prongs of the analysis are satisfi ed a UDAAP violation can be cited.” She said CA Letter 07-08 — a joint Federal Reserve/FDIC statement on consumer compliance exam procedures for UDAP — was “very instructive” in the types of questions bank should expect.

There's your heading on a course through the fog-bound waters of "abuse": think like an examiner.

And after you take that journey down a rabbit "warren" (pun intended), you can resurface and start walking like an Egyptian.

You've got your marching orders, folks. You can get with the program or you can get out of the business. Welcome to this brave new world.

Impeding Foreclosure Hurts Homeowners As Well As Lenders

According to a story at Housingwire, a recent study by research firm Corelogic concludes that those states with more cumbersome and lengthy foreclosure processes impose "hidden costs" on homebuyers.

"Extended disposition timelines impose operational costs on servicers, carrying costs on investors in the mortgages, and in some cases, significant legal risk and compliance costs," said Mark Fleming, chief economist for CoreLogic.

"The likely result is more expensive mortgages and possibly increased rationing of credit based on the additional costs of disposition, which may vary dramatically by local foreclosure process requirements," he added.

In the short run, however, all the homes tied up in foreclosure restricts supply and, for the immediate future, stablizes or actually increases home prices. In some states and regions (California, the South and the Southwest), a steep drop in REO, due to investor demand, has also helped housing prices.

Unfortunately, over the long run, in addition to the possible increase in borrowing costs in long-foreclosure states, the results are not favorable. An earlier Housingwire piece that addressed a study by LPS, claimed that judicial foreclosure states were lagging in recovery versus non-judicial foreclosure states. These studies support Housingwire's publisher Paul Jackson's long-asserted contention that housing markets would have recovered more quickly than they have if foreclosure was allowed to run its course and inventory was cleared more quickly. In other words, the desire to "do good" over the short term may be prolonging the pain and adding new pain to the residential housing market.

"Ability-to-Repay" Rule About to Crimp Entrepreneurs?

Rhonda Abrams, who writes about entrepreneurship, claims in a recent USA Today opinion piece that the CFPB's "Ability-to-Repay" rule will have what most social engineering legislation has: unintended consequences. For small businesses and entrepreneurs, one of those consequences will be that "getting a mortgage will become a whole lot harder soon."

And I'm betting it's going to be a heck of a lot harder for people who are self-employed or own a small business to qualify — assuming the business is run as a sole proprietorship, limited liability company or S corporation and income passes through to a personal tax return.

Why? The very sensible provisions were designed for people who receive paychecks rather than run businesses. Small-business owners and the self-employed are likely to have greater challenges with some of the provisions:

Among the problems for entrepreneurs, Rhonda points out the following:

• Verifying income for an sole proprietor or pass through entity depends on income shown on tax returns, rather than net worth (used as an alternative to tax return income in the "bad old" days of low-doc, no-doc loans). In addition, small business owners may show lower net income because they take aggressive positions on tax deductions and/or plow gross income back into the business. Fewer entrepreneurs may be able to provide the verification needed to satisfy the rule.
• Debt-to-income ratios may be tougher to meet because business debt shows up as personal debt, and, in the case of business lines of credit, the entire line shows up as debt even if no draw are made.
• Personal services businesses are often poor in hard assets but rich is goodwill developed by a highly skilled entrepreneur. In addition, entrepreneurs often live in high-home priced areas, and use their home as their office, which increases mortgage debt.

Abrams advises those entrepreneurs who've been thinking about taking advantage of low interest rates to buy or refinance, to do so this year. She also advises entrepreneurs to think twice about taking advantage of legitimate deductions that lower tax return reported income to the point where qualifying for a home mortgage loan may be jeopardized.

The abuses of the past engender remedies that cause disadvantages for some future borrowers, at a time when the country's problem is no longer that too many loans are being made but too few.

Disparate Impact On Ex-Cons A No-No

Credit Union consultant and pundit Marvin Umholz has been hammering on the Obama administration's use of "disparate impact" theory in not only the fair lending context, but in the equal opportunity employment context, as well (previously discussed here). In his latest email newsletter "CU Strategic Hot Topics" (you can email Marvin at marvin.umholtz@comcast.net to be added to the circulation list), Marvin discusses the use of disparate impact to undermine the use of by financial institutions of background checks on prospective employees. The following is the section of the newsletter that focuses on this problem.

The new U.S. Department of Housing and Urban Development (HUD) rule entitled, “Implementation of the Fair Housing Act – Disparate Impact Rule (FR 5508) was posted in the Federal Register February 15^th www.federalregister.gov/articles/2013/02/15/2013-03375/implementation-of-the-fair-housing-acts-discriminatory-effects-standard?utm_medium=section_news&utm_source=homepage.  However, HUD’s use of the disparate impact doctrine to statistically prove discrimination regardless of intent represents just the latest in the executive branch’s efforts to utilize the controversial effects test to enforce the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), and other laws.  In addition to HUD, the CFPB, the U.S. Department of Justice www.justice.gov, and the Equal Employment Opportunity Commission (EEOC) http://www1.eeoc.gov//eeoc/newsroom/wysk/arrest_conviction_records.cfm are using the statistical disparate impact discrimination effects test in their regulatory enforcement actions.

A February 15^th opinion essay in The Wall Street Journal reminded this correspondent that the EEOC

http://online.wsj.com/article/SB10001424127887323701904578276491630786614.html?KEYWORDS=perform+criminal+background+checks+at+your+peril is also a disparate impact activist in the extreme.  The op-ed began, “Should it be a federal crime for businesses to refuse to hire ex-convicts?  Yes, according to the Equal Credit Opportunity Commission, which recently released 20,000 convoluted words of regulatory ‘guidance’ to direct businesses to hire more felons and other ex-offenders…Last April, the agency unveiled its ‘Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions,’ declaring that ‘criminal record exclusions have a disparate impact based on race and national origin’…These statistical disparities inspired the EEOC to rewrite the corporate hiring handbook to level the playing field between ‘protected groups’ and the rest of the workforce…Most businesses perform criminal background checks on job applicants, but the EEOC guidance frowns on such checks and creates new legal tripwires that could spark federal lawsuits…If a background check discloses a criminal offense, the EEOC expects a company to do an intricate ‘individualized assessment’ that will somehow prove that it has a ‘business necessity’ not to hire the ex-offender (or that his offense disqualifies him for a specific job).”  Ex-offenders were disproportionately represented in the “protected groups” setting the stage for the EEOC’s statistical disparate impact effects test to the hiring process.

The op-ed continued, “Former EEOC General Counsel Donald Livingston, in testimony in December to the U.S. Commission on Civil Rights, warned that employers could be considered guilty of ‘race discrimination if they choose law abiding applicants over applicants with criminal convictions’ unless they conduct a comprehensive analysis of the ex-offender’s recent life history.  It is difficult to overstate the EEOC’s zealotry on this issue.  The agency is demanding that one of Mr. Livingston’s clients – the Freeman Companies, a convention and corporate events planner – pay compensation to rejected job applicants who lied about their criminal records…The EEOC is confident that its guidance will boost minority hiring, but studies published in the University of Chicago Legal Forum and the Journal of Law and Economics have found that businesses are much less likely to hire minority applicants when background checks are banned.  As the majority of black and Hispanic job applicants have clean legal records, the new EEOC mandate may harm the very groups it purports to help…The EEOC’s new regulatory regime is likely to chill hiring across the board and decrease opportunities for minority applicants.”  Did the EEOC run a cost-benefit analysis on this dangerous legal contortionism before it dove into these ideologically-questionable waters?  Does the EEOC consider its mission as being to inhibit job creation by exacerbating workplace uncertainty?

As recently as February 20^th CFPB Director Richard Cordray reminded everyone that the CFPB is committed to the disparate impact doctrine in executing its rulemaking and enforcement mission www.consumerfinance.gov/speeches/prepared-remarks-by-richard-cordray-at-a-consumer-advisory-board-meeting.  In his prepared remarks for delivery to the CFPB’s Consumer Advisory Board, Director Cordray said, “A final and consistent problem that can hijack consumers on the pathway to opportunity is the evil of discrimination.  For some people, the greatest challenges they face do not come from deceptive materials, debt traps, or market structures, but rather are rooted in something much more basic – unequal, invidious treatment based on characteristics such as race or gender or other bases prohibited by law.  The statistics show very clearly that communities of color were hit especially hard during the financial crisis.  All Americans saw drops in their household wealth, but African-Americans and Hispanics experienced the steepest drops.  This inequity is compounded by unequal access to responsible credit, which makes it difficult or even impossible to achieve their financial goals…We made it clear last year that – like other banking regulators and the Justice Department – we will pursue discrimination in consumer financial markets based on disparate impact as well as on intentional violations.  From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, it makes no practical difference whether a lender consciously intended to discriminate.  Every consumer, regardless of race, gender, or other characteristics protected by federal law, should have equal access to credit and an equal chance to pursue the pathway to opportunity.”  The disparate impact doctrine is unconstitutional at best and a collection of counter-productive left-wing class warfare victimization claptrap at worst.

It was quite obvious from his remarks that CFPB Director Cordray believed that the United States was a nation statistically overflowing with victims and some were more victimized than others.  That is a distorted concept of what a level playing field should be.  The zealous application of the disparate impact effects test is unlikely to assure anyone access to increased prosperity and instead could bring the financial services marketplace to a screeching halt – and subsequently trigger widespread non-discriminatory austerity as a result.  Would that be consistent with the disparate impact doctrine?  Talk of social responsibility needs to be realistic.  It is more dangerous to promise too much than too little.  Despite the real social and economic advancement that has been made by ethnic minorities and other “protected groups” in this country, the federal government is still stuck in the 1960s.  Hopefully contemporary Americans believe in equal opportunity, not statistically-driven equality-mongering.  When it comes to the disparate impact doctrine, one can certainly hope that the U.S. Supreme Court Justices are true believers in equal opportunity rather than statistical quotas.

This is scary stuff. A number of my financial institution clients deem it a matter of safety and soundness to include within their contracts with vendors a provision that requires the vendor to perform background checks on employees who will perform services for the institution, especially if the employees will be involved in the handling of funds or sensitive information. Does that contractual requirement provide the vendor a legitimate business reason for performing the checks notwithstanding the potential disparate impact upon members of a protected class that contains a high number of ex-cons? On the other hand, is the financial institution subjecting itself to potential liability by imposing such a requirement and, if so, is it inserting itself between the rock of disparate impact and the hard place of unsafe and unsound practices?

The ideologues that are running the funny farm are forcing all of us to jump through the looking glass, head first.