Yesterday, the CFPB issued its annual report to Congress about its fair lending enforcement, supervision and areas of focus.
The CFPB reported that 189 institutions were cited for fair lending violations in 2023 (up from 174 in 2022).
33 institutions were referred to the Department of Justice for suspected violations of fair lending laws – a 175 percent increase over 2020 levels.
But the main thing about this report is that it signals the CFPB’s heightened focus on Less Discriminatory Alternatives (LDA).
LDAs (lending algorithms or policies that achieve the same legitimate business objectives as current practices but with less discriminatory impact on protected groups) have been a focal point of research and development for several years, including by me and my colleagues at FairPlay.
Despite this, the CFPB’s report to Congress last year did not mention the search for LDAs even once.
This year, the CFPB mentions searching for and implementing LDAs three times.
What’s more, the CFPB said in 2023 it issued “several” fair lending-related Matters Requiring Attention directing financial institutions to “develop a process for the consideration of a range of less discriminatory models.”
Additionally, the CFPB advised Congress that a primary focus of its supervisory activities in the future will involve “reviewing the fair lending testing regimes of financial institutions to ensure they regularly test for both disparate treatment and disparate impact, including searches for and implementation of LDAs.”
And if that wasn’t enough to convince you that 2024 is the year of the Less Discriminatory Alternative, just hours after the CFPB report’s release, two of America’s leading consumer groups – the Consumer Federation of America and Consumer Reports – issued an open letter calling for guidance on how lenders should search for and implement LDAs
These consumer groups want the CFPB to issue guidance on:
- Techniques for searching for LDAs
- Metrics and thresholds for assessing the fairness of LDAs
- The frequency with which lenders should search for LDAs
- The level of effort that lenders should expend to search for LDAs; and
- How lenders should evaluate the viability of LDAs.
The key takeaway from all this is that if you’re not already searching for fairer variants of your underwriting and pricing models, now is the time to start.
Some resources you might find helpful on your LDA journey include:
- A paper we published with the National Fair Housing Alliance showing that LDAs can increase approval rates for Black and Hispanic mortgage applicants 5-13% with no increase in risk; and
- A guide to stress-testing your LDAs to evaluate whether they’re likely to perform within your risk tolerance and be fairer.
Or if reading isn’t your thing and you need a Sherpa to navigate this minefield just call me – I’m friendly!
