OCC Drops "Disparate Impact" Oversight
Commentary by Thomas Delaney and Steven Lofchie
The OCC removed "disparate impact" liability from fair lending guidance for banks.
The move follows President Donald Trump's Executive Order, "Restoring Equality of Opportunity and Meritocracy," which called for agencies to eliminate the use of disparate impact liability, "to avoid violating the Constitution, Federal civil rights laws, and basic American ideals."
In a Compliance Bulletin, the OCC said it updated its fair lending exam manual to remove references to supervising for disparate-impact liability and also "instructed its examiners that they should no longer examine for disparate impact." According to the Bulletin, "[e]xaminers will not request, review, or conclude on or follow-up on": (i) "matters related to a bank's disparate impact risk;" (ii) "internal disparate-impact risk analysis," or (iii) "disparate-impact risk assessment processes or procedures."
Commentary
“If you didn’t mean it, it must not have happened.”
For several years, national banks, particularly smaller community banks, have bristled when confronted with critical OCC examination findings alleging discriminatory lending practices based on disparate-impact analyses. Banks subject to such examination criticism often pointed to the absence of any evidence indicating that they engaged in disparate treatment, intentional discrimination, based on the race, color or national origin of residents of identified census tracts, when marketing of bank products or underwriting of loans. They often argued that data used to support findings of disparate impact were flawed by the underlying statistical analysis, including comparisons to so-called “peer” institutions that had a much larger or longer established presence in the identified markets. If unable to persuade examiners to reconsider their findings, banks would see their compliance ratings reduced, be required to undertake extensive and costly remedial measures, and potentially be referred to the Department of Justice for further enforcement action. With the OCC aligning its fair lending supervisory process to EO 14281, national banks are now free from having to defend their records against findings that may evidence de facto discrimination, albeit unintended.
Commentary
This is a positive development, at least for integrating the use of AI in credit and other consumer-related decisions. So long as regulators took the view that any disparity had to be fully explainable, the use of AI was inherently problematic, because AI is inherently something of a blackbox and thus its "decisions" are not fully explainable.