The Bureau’s Mortgage Servicing Examination Procedures, released on October 13, 2011, offer a fascinating insight into the CFPB’s supervision and enforcement priorities. There’s a great deal worthy of comment in the Procedures, but here I want to highlight one aspect of them: the heavy focus on the Equal Credit Opportunity Act.
The CFPB apparently intends to look for evidence of ECOA violations in three distinct areas: optional products, loan modifications, and foreclosures. The focus on ECOA isn’t a real surprise. After all, it is one of the federal consumer financial protection laws handed over to the CFPB earlier this year, and there has been a focus on ECOA in the mortgage industry ever since the discretionary pricing cases were filed a couple of years ago.
There are two aspects of the CFPB’s planned focus, though, that are cause for concern. First, with regard to loan modifications, under the “disparate treatment” section, the Examination Procedures call for several inquiries into “the exercise of discretion” by individuals involved in the process. The CFPB’s concentration on “discretion” suggests that the CFPB views discretion as “a factor that may indicate disparate treatment.” In Wal-Mart v Dukes, the U. S. Supreme Court rejected an employment discrimination class action predicated on “discretion” as the alleged discriminatory practice. According to the Supreme Court, giving discretion to employees is “a very common and presumptively reasonable way of doing business—one that we have said ‘should itself raise no inference of discriminatory conduct.’” It’s not clear whether the CFPB’s truly views “discretion” as a factor that “may indicate disparate treatment,” but I believe that any inference along those lines would not be consistent with the Supreme Court’s decision in Dukes.
Second, the Examination Procedures envision several different statistical inquiries designed to test for “disparate impact” in loan modifications and foreclosures. This analysis covers the receipt of loan modifications; the processing time for such modifications; the terms of the modifications; and the incidence of foreclosures. In all instances, the CFPB states that it plans to examine the treatment of “protected class members” as compared to “non-protected class members.” In concept, this sounds simple, but it isn’t.
In disparate impact litigation, huge battles rage over the statistical methods used to assess discrimination – including the size and composition of samples and the control factors applied in the analysis. Given the impact of such decisions on a statistical analysis, what will the CFPB do to make sure that its assessment of “disparate impact” is fair, transparent, and neutral? Will it permit the examined institution to conduct its own statistical analysis? And will the disparate impact analysis devolve into the kind of “battle of experts” typically seen in a private class action? The Examination Procedures leave all of these questions unanswered. But with the stakes involved and the extreme expense associated with these sorts of analyses, this is an area in which the CFPB should provide much more clarity and should adopt measures both to ensure fairness in this aspect of its examinations and to avoid imposing massive costs on the institutions it supervises.