Weekly Fintech Focus

  • HUD finalizes fair lending rule that clarifies disparate impact claims, but leaves out controversial defenses for algorithms.
  • California’s DBO to receive a new name and new oversight powers.
  • CFPB will host its first Tech Sprint in October, focused on adverse action notices.

HUD Finalizes Fair Lending Rule Without Its Proposed Defense for Algorithms

The Department of Housing and Urban Development (HUD) finalized a rule that implements the agency’s Fair Housing Act (FHA) disparate impact standard. We discussed HUD’s proposed rule last year in this blog post. In an effort to bring HUD rules in line with a 2015 Supreme Court case, the final rule establishes a uniform standard for determining when a housing policy or practice with a discriminatory effect violates the FHA. The final rule is substantially the same as the proposed rule except the final rule does away with the controversial defense for algorithms found in the proposal.

In summary, the final rule codifies a burden-shifting framework for disparate impact claims. The five elements of the burden-shifting framework are:

  1. The challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective;
  2. The challenged policy or practice has a disproportionately adverse effect on members of a protected class;
  3. There is a robust causal link between the challenged policy or practice and the disparate impact;
  4. The alleged disparity caused by the policy or practice is significant; and
  5. There is a direct link between the injury asserted and the injurious conduct alleged.

The defense for algorithms would have provided defendants with the ability to rebut a plaintiff’s prima facie disparate impact claim by showing that the defendant’s use of a risk assessment algorithm was non-discriminatory. The defendant’s rebuttal could have included identification of material factors in the algorithmic model that could not be the cause of the disparate impact and advanced a valid objective (or showing) that the algorithm that was developed by a third party was industry standard or had been subject to critical review.

In response to numerous comments, the final rule recognizes that it would be premature to directly address algorithms in this final rule as technology is still rapidly changing and the proposed rule may have had too broad an effect. However, the final rule does note that other defenses in the rule should serve as an alternative to the algorithm defenses that showed the algorithm did not cause the disparate impact. Under the final rule, instead of the algorithm defenses, a defendant can still defend its risk assessment model (algorithmic or otherwise) by showing that its use of the model served a valid interest—such as by showing that the predictive analysis accurately assessed risk, or that the model is not overly restrictive on members of a protected class.

California’s Consumer Financial Regulator to Get a New Name and New Powers

If the governor of California does not veto the bill, the new year will find that the California Department of Business Oversight (DBO) is getting a new name and new authorities after the passage of Assembly Bill 1864. The DBO will be renamed the Department of Financial Protection and Innovation (DFPI), and the agency will have the authority to enforce all consumer financial products or services laws. The bill enacts the California Consumer Financial Protection Law (CCFPL) to expand the agency’s oversight powers to new industry players through future regulations and empowers the agency to enforce against abusive acts or practices in addition to unlawful, unfair, or deceptive acts or practices. The DFPI will be empowered to create future registration requirements for a broader swath of consumer financial industry players, including entities that act as consumer reporting agencies, debt collectors, and to entities that the DFPI considers engaged in activities that attempt to evade consumer financial laws or are engaged in activities that are permissible for a bank to offer and will likely have a material impact on consumers. Presumably, future registration requirements could apply to credit reporting agencies or to buy-now pay-later companies. There are notable exemptions in the CCFPL, including escrow agents, finance lenders or brokers, and check sellers and bill payers.

CFPB to Host Its First Tech Sprint

The Consumer Financial Protection Bureau (CFPB) announced that it will hold its first Tech Sprint on October 5-9, 2020. The Tech Sprint will bring together teams to work on developing innovative approaches to electronically-delivered adverse action notices. Teams will be tasked with improving the accuracy, preventing illegal discrimination, and educating consumers for future applications. The CFPB is still seeking participants, including disclosure experts, designers, developers, consumer advocates, consultants, technologists, and legal or compliance specialists.