The Justice Department’s complaint filed in conjunction with the record $335 million settlement of lending discrimination claims against Countrywide Financial Corp. sends one clear message to lenders: Once aware that their practices lead to racial disparities in things like assignment to subprime loans, lenders must seek out less discriminatory alternatives. That message puts lenders in a difficult position, and not for the first time.
In the 1990s, when standard lending criteria were found to cause disparities in rejection rates of white and minority mortgage applicants, lenders were urged to relax those criteria. Doing so was akin to the lowering of cutoffs on employment tests that disproportionately disadvantaged certain groups. Lowering cutoffs had long been regarded as reducing the disparate impact of such tests because it reduces relative differences in pass rates. For example, if pass rates are 80 percent for an advantaged group (AG) and 63 percent for a disadvantaged group (DG), DG’s pass rate is about 21 percent lower than AG’s pass rate. But if the cutoff is lowered to the point where 95 percent of AG passes, assuming normal test score distributions, DG’s pass rate would be about 87 percent. Thus, with the lower cutoff, DG’s pass rate would be only 8.4 percent lower than AG’s pass rate.
