CFPB Pullback Moves Fair-Lending Burden to States

The Consumer Financial Protection Bureau plans to weaken its unequal results rules. A rule can look fair but still hurt one group more than others. Regulators treat that pattern as a fairness problem — even when no one meant to discriminate. This is not the relief subprime lenders may expect. 

A weakened CFPB likely means lenders will have a greater dependence on state regulators, and more private lawsuits will likely occur. This creates a more unpredictable map for lenders who serve nonprime borrowers.

This impacts subprime lenders and automobile finance companies, including:

• Underwriting
• Cash-flow checks
• Alternative data
• Different price levels

Changes can create results that hurt protected groups. Until now, federal rules have helped lenders identify fairness problems. A weaker rule creates unclear standards and raises questions about how to check models, write down prices, and avoid fair-lending complaints.

An increase in delinquencies adds more pressure. It costs more for lenders to borrow money, states will use their own fairness rules, and courts also loom larger in credit cases. Subprime lenders may see decreased federal activity, but more danger from states and private suits may result.

Technology plays a major role, too. Stephen Hayes, a former CFPB attorney, warned that weaker rules remove a tool that helped find intentional discrimination. This may occur as markets get more automated. Subprime lenders use more computer-based decisions than prime lenders. Small data problems can cause them legal trouble.

Subprime lenders face more pressure on how they set prices, make approval calls, and use overrides. Unequal results rules let regulators review results that harmed protected groups. This is true even when the rules appeared neutral. Weakening its place in the Equal Credit Opportunity Act moves more of the burden onto lenders.

The biggest fairness risk now comes from automated systems. These models use scorecards, price levels, feature weights, and alternative data. Even simple variables can have an effect on protected classes. States and plaintiffs will target these systems — which are hard to explain and easy to link to fairness problems.

Manual overrides help lenders take a second look at thin-file applicants. But unclear overrides can also change results in apparently unfair ways. These choices need tighter steps as well as explicit notes.

States are taking more action. Some states now put pressure on lenders with regard to automated systems, proxy variables, and approval gaps. Weaker federal rules could afflict lenders with different regulations in each state. That increases the cost of compliance — and credit risk will remain high.

Courts will still review results even if the CFPB steps back. Some cases have already removed unequal results claims. But that does not remove the risk. It moves the fight to other paths. Plaintiffs will test new claims under state law.

The CFPB has a plan to put limits on Special Purpose Credit Programs. SPCPs were a safe tool to help subprime consumers. Subprime lenders used them in neighborhoods with low credit access.

Lenders will lose a useful tool should SPCPs shrink. This affects:

• Outreach in high-denial ZIP codes
• Program prices for thin-file applicants
• Work with community partners
• Products for borrowers recovering from shocks

Subprime lenders already must deal with increased funding costs and defaults. The loss of Special Purpose Credit Programs will be a problem for steady growth.

Courts are active in this area, too. A recent case involving a Chicago-area lender showed how claims pop up when borrowers experience discrimination. Lenders may need new ways to reach people without the occurrence of similar claims.

Subprime lenders may see short-term relief should fewer federal cases rely on unequal results. But the long-term picture brings unclear rules. States and private lawsuits will fill the gap. Computer-based decisions will get more attention. Growth in areas with low credit access may slow without Special Purpose Credit Programs.

In addition, lenders should review their models in states with strong fairness rules. These include California, New York, Arkansas, Utah, and Florida. These states will now drive much of the next wave of actions.

The best way forward is strong model checks and clear override notes, as well as close review of price levels. Lenders who act early will be ready for the next shift — from the CFPB, the courts, or the states.