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The Chilling Effect of the Disparate Impact Theory on the Lending Industry – Glass & Goldberg | Financing, Property & Bankruptcy Law
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The Chilling Effect of the Disparate Impact Theory on the Lending Industry

We’ve written at length recently about the Department of Justice’s unofficial war on the lending industry, evidenced by the onslaught of lawsuits brought by Justice against banks under the disparate impact theory.[1] 

Previous articles addressed the lack of definition or objectivity in Justice’s claims, the fact that disparate impact is not a statutorily permissible claim in a lending context, compliance problems resulting from Justice’s ambiguous claims and secretive number-crunching, and the fact that Justice can’t make a fair statistical comparison in a lending context based on publicly available information.

In this article, we will address the potential chilling effect of the disparate impact theory on the banking industry.

Everyone knows banks in general are persona non grata in the court of popular opinion, and have been for several years, fueled in large part by media use of the banking industry as the whipping boy during the recession.  The public relations wounds inflicted on the banking industry have only just started to heal, if at all.

Today, as our economy tentatively begins hauling itself upright, the Department of Justice apparently didn’t get a memo to rein it in.  Instead, Justice seems determined to extract another pound of flesh, even as the bank-bashing party winds down. 

Without getting into a lengthy debate about whether or which bank behaved badly or made poor investment choices, let’s focus on one thing everyone can agree on.  The U.S. economy took a major step backward and is just now arguably beginning to show signs of life and recovery.

As we move forward, vowing to never make the same mistakes again, we need to consider and guard against the potential negatives of swinging from one extreme to the other.

Proponents of bigger government may be happy to know banks are more tightly regulated than five years ago, that there are promises of even tighter regulation on the horizon, and that the Department of Justice will spend millions of tax dollars in the coming year alone to haul banks into court to defend disparate impact in lending claims.

Business people, on the other hand, can see the dangers of more regulation and free wheeling regulators.  The chilling effect of tighter regulations and heightened scrutiny will inevitably lead the banking industry to assume a defensive posture.  Rather than credit becoming more available, Justice’s rash of disparate impact in lending claims is likely to have the opposite effect, at a time when our teetering economy can ill afford it.  Marginal loan markets may dry up altogether as more banks realize it is not worth the hassle to serve those markets.  Small businesses and individuals without stellar credit will be left with few or no credit options.[2]

While we’re considering extremes, it could be even worse.  The flood of disparate impact claims has its own problems, but that’s not all banks have to worry about today.  In addition to Justice’s imaginative disparate impact claims, and beyond the mountain of regulations already in effect, another federal agency, the Consumer Financial Protection Bureau, has the banking industry in its crosshairs.

Banks, like all for-profit businesses, exist to make money.  If banking becomes so heavily regulated that the costs of compliance outweigh profitability, the banking industry as we know it will shrink, and could eventually cease to exist.  Some banks may reorganize and provide a handful of niche services, but unless the non-profit sector suddenly grows a great compassion for bank customers, we will have to look to the government to provide banking services. We could expect a similar quality of product and service as social security, Medicare, or the U.S. Postal Service.

How many bank accounts do you have?  What would you do with your money and how would you pay your bills without a checking or savings account?  What do you think about the government taking over the banking industry?  Surely, the government is immune from making poor investment choices … did someone say social security?

Of course, it doesn’t help that this is an election year or that as a society we can’t move on until we have a target.  So, the fact remains that until there is a new public enemy number one, the Department of Justice, with its mean bark and powerful teeth, will continue going after banks like the bulldogs that mauled a minivan trying to get to the kitten in the engine compartment.  Impressive, but perhaps misguided – I mean, did we ever figure out what the minivan did wrong in the first place?

If you are a bank or another business facing regulatory compliance or other issues, consult with legal counsel to help you develop a sound legal strategy.  The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation, finance, and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

[1] “Disparate impact” is the statistical summary prosecutors point to in support of claims that banks must have behaved in a discriminatory manner, because the purported statistical outcome shows Group A received fewer loans or less favorable loan terms than Group B.

[2] Half of U.S. workers work for a small business, many of which rely on credit to some extent to stay in business from month to month.


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