The Consumer Financial Protection Bureau (CFPB) has been talking about disparate impact for years and the agency’s favorite controversial methodology – finding evidence of discriminatory practices in data and outcomes rather than intent – has been plenty of trouble for bankers. But the collections industry has not had to deal head-on with the CFPB’s methodology. Does that mean collections firms have nothing to worry about? Hardly, and here are three reasons why.
- The CFPB has very recently reaffirmed its commitment to data driven enforcement and has defended disparate impact in particular. The occasion was a hearing by the House Financial Services Committee. The American Banker had recently run a series of articles alleging that disparate impact analysis overstates potential discrimination. Several committee members pushed CFPB Director Richard Cordray over the article’s allegations, that the statistical tool biased findings in favor of discrimination. Cordray insisted that the agency relies and will continue to rely on analysis like disparate impact to drive rulemaking and enforcement.
- Regulators, the CFPB definitely notwithstanding, are taking a long, hard look at debt collection. See, for example, the CFPB’s recent settlements with two of the biggest debt buyers in the U.S., Encore Capital Group and Portfolio Recovery Associates (PRA). In the meantime, the industry awaits the CFPB’s forthcoming debt collection rule.
- Debt collection and disparate impact has caught the attention of journalists and the public. Look no further than a recent story put out by Pro Publica in partnership with NPR on the statistical discrepancies between how collection suits impact black neighborhoods versus white ones. Their findings: more black households than white households, on average, end up facing debt collection lawsuits.
- As the CFPB puts it, disparate impact occurs when a firm’s practices or policies are “facially neutral but have discriminatory effects. Sometimes these practices meet a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. But sometimes they do not.”
Agencies are always trying to find a way to spend more time, money, and effort on the accounts with the greatest propensity to pay and the minimal amount of time, money, and effort accounts that will not yield any return. This is what separates good operators from great operators. But, by doing so are collections firms unintentionally discriminating against a protected class?
It’s clear that regulators and journalist are checking to see if they are.
No reputable company or individual collector intentionally decides to offer people with Hispanic names only an 80% settlement and people with non-Hispanic names a 65% settlement. But, when the CFPB comes in and reviews all settlements, it is possible that the settlements or overall work efforts will be deemed to be discriminatory.
The catch is that disparate impact considers statistical outcomes, not intent, which is why collections firms need to anticipate the statistical outcomes from their policies and actions.
That’s why firms can’t sleep on potential disparate impact risk. Remember, UDAAP – Unfair, Deceptive and Abusive Acts and Practices – overlaps considerably with Equal Credit Opportunity Act (ECOA) prohibitions, specifically around disparate impact. Collection agencies and creditors are not allowed to discriminate on a variety of criteria, from race, color, religion, national origin, to marital status and source of income.
Specifically, collection agencies and creditors want to be on the lookout for:
- Loan or loan servicing practices that create a disparate impact on a protected class, whether intended or not;
- Consumer payment arrangements based on ability to pay, rather than offered categorically to any debt; and
- Settlement options that take protected class status into account, rather than being applied broadly to all consumers.
Tactics like this may seem limiting to collectors, but they are much cheaper than the cost of dealing with a UDAAP violation. Collectors best manage regulatory risk when they limit their exposure to special payment arrangements and settlement agreements and instead focus on blanket policies that do not favor one consumer over another.
For more information on disparate impact and UDAAP compliance, check out insideARM’s Compliance Overview: UDAAP.
What’s happened before:
By Aaron Steinberg