Disparate Impact

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 is 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”, Marvin discusses the use of disparate impact to undermine the use of 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 15th 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, and the Equal Employment Opportunity Commission (EEOC) are using the statistical disparate impact discrimination effects test in their regulatory enforcement actions.

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

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 exoffenders…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 20th CFPB Director Richard Cordray reminded everyone that the CFPB is committed to the disparate impact doctrine in executing its rulemaking and enforcement mission.  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 nondiscriminatory 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 ideologies that are running the funny farm are forcing all of us to jump through the looking glass, head first.

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