By Cyrus Mostaghim
DISCLAIMER: While the author is an employee of the Consumer Financial Protection Bureau (CFPB), this article’s contents reflect the author’s thoughts as a private citizen, not as an employee or representative of the CFPB. The author wrote this article using only publicly available information and without the use of any CFPB resources. The article’s contents SHOULD NOT be interpreted to be associated with the CFPB in any manner or construed in any way to be a representation or statement from the CFPB.
On October 29, 2019, the Subcommittee on Oversight and Investigations of the House Committee on Financial Services held a historic hearing that discussed discrimination against the LGBTQ+ community.[1] The hearing was timely with the state of Michigan’s recent approval of the Superbia Credit Union charter, the first LGBTQ+ oriented financial institution.[2] Michael Myers, Superbia’s founder, was inspired to counteract certain issues members of the LGBTQ+ community face.[3] These issues include denying phone services to a Transgender account holder for not sounding like the gender on file and denying mortgage services to a qualified same-sex couple shortly after gay marriage was legalized in 2015 by Obergefell v. Hodges.[4]
The Subcommittee heard testimony from LGBTQ+ advocates, academia, and the consumer data industry.[5] Subcommittee members recognized that discrimination based on gender, sexual orientation, and gender identity exists and is wrong.[6] The Subcommittee’s memo noted “that researchers analyzed Home Mortgage Disclosure Act data from 1990-2015 and found same-sex mortgage co-applicants were 73.12% more likely to be denied a loan than different-sex applicants.”[7] Research also shows that same-sex borrowers are charged between 0.02-0.2% more in interest than heterosexual borrowers, with spillover effects impacting heterosexual couples residing in neighborhoods with a higher population of same-sex couples, an indicator of reverse redlining.[8] Additionally, racial discrimination occurs in both human-based decisions and FinTech’s algorithm-based decisions used “to screen and rate would-be borrowers in a way that is quicker and less resource-intensive.”[9] FinTech’s flaws probably impact LGBTQ+ applicants because:
“[W]hile machine-learning algorithms enable companies to realize new efficiencies, they are as susceptible as any system to the “garbage in, garbage out” syndrome. In the case of self-learning systems, the type of “garbage” is biased data. Left unchecked, feeding biased data to self-learning systems can lead to unintended and sometimes dangerous outcomes.”[10]
Current regulatory practices pose an important challenge in addressing this issue since they lack any procedure to aid in identifying discrimination against LGBTQ+ individuals.[11] Because the current data points collected for the Home Mortgage Disclosure Act (HMDA) and the Equal Credit Opportunity Act (ECOA) of 1974 do not include sexual orientation or gender identity, it is nearly impossible to identify discrimination against the LGBTQ+ community through the regulatory supervision and examination functions.[12] While legal precedent exists interpreting that Title VII protects sexual orientation and gender identity as sex discrimination, it is not universal and the Supreme Court could overturn it in 2020.[13]
Regardless of the cases before the Supreme Court, Congress can amend Title VII to include sexual orientation and gender identity by passing the Equality Act or enacting separate legislation specific to fair lending like Representative Al Green’s (D-TX) Fair Lending Act for All.[14] Thus, regulators might have to decide how to adjust regulatory requirements so that examinations of financial institutions can identify discriminatory lending practices against the LGBTQ+ community. Regulators could decide that financial institutions must collect the sexual orientation and gender identity of applicants or use an alternative method like the one proposed by Dr. Hua Sun and Dr. Lei Gao. [15] Financial institutions will then have to adjust to the changes associated with regulatory compliance requirements, examinations, and changes to the institutions’ internal compliance procedures.
Regardless of the path forward for compliance, this is a problem that financial institutions and their regulators should pay attention to because it impacts consumer finances through the amount of interest paid over the life of a loan.[16] If the Supreme Court decides that sexual orientation and gender identity do not fall under Title VII of the Civil Rights Act, Congress must enact legislation to address such discrimination.[17] If Congress and financial institutions, traditional and FinTech alike, are not proactive in addressing discrimination, the current industry risks losing business from the LGBTQ+ community, a group with $1 trillion in purchasing power in the U.S. and $3.7 trillion globally, to Superbia or other new LGBTQ+ focused financial institutions.[18] Financial institutions also risk losing business from two other groups as they become aware of the trend of charging higher interest rates to same-sex borrowers.[19] Naturally, members of the first group are LGBTQ+ allies and the second group’s members are heterosexual same-sex borrowers, such as family members or same-sex friends buying an investment property.[20] These allies and heterosexual same-sex applicants may choose to take their business to entities like Superbia where, truly, all customers are welcome.[21]
[1] Mike Albanese, ‘Landmark’ Hearing on LGBTQ Housing Discrimination, MReport (Oct. 29, 2019), https://themreport.com/daily-dose/10-29-2019/lgbtq-housing-discrimination-subject-of-hearing.
[2] Ruth Umoh, America’s First LGBT-Focused Credit Union to Launch in 2020, Forbes (Sept. 16, 2019), https://www.forbes.com/sites/ruthumoh/2019/09/16/americas-first-lgbt-focused-credit-union-to-launch-in-2020/#7fa48b315d17.
[3] Karma Allen, Meet the Man Hoping to Battle LGBTQ Bank Discrimination with a New Credit Union, abcNews (Oct. 9, 2019), https://abcnews.go.com/US/meet-man-hoping-battle-lgbtq-bank-discrimination-credit/story?id=65947300 [Hereinafter “Karma Allen”].
[4] Obergefell v. Hodges, 135 S. Ct. 2584 (2015); id.
[5] See Financial Services and the LGBTQ+ Community: A Review of Discrimination in Lending and Housing Before the H. Comm. on Fin. Serv. 116thCong. (2019) (providing witness list and their written testimony).
[6] See Albanese, supra note 1 (quoting testimony of various committee members).
[7] Id.
[8] Hua Sun and Lei Gao, Lending Practices to Same-Sex Borrowers, 116 PNAS 9293, 9293 (2019), https://www.pnas.org/content/116/19/9293. See Investopedia, https://www.investopedia.com/terms/r/redlining.asp (last visited Nov. 2019) (providing legal background on redlining).
[9] Hilary J. Allen, Driverless Finance, 10 Harv. Bus. L. Rev. (forthcoming 2020) (manuscript at 13), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3366016; Robert Bartlett et al., Consumer-Lending Discrimination in the FinTech Era, 1 (UC Berkley Research Paper, May 2019), https://faculty.haas.berkeley.edu/morse/research/papers/discrim.pdf.
[10] Chris DeBrusk, “The Risk of Machine-Learning Bias (and How to Prevent It)”, MIT Sloan Mgmt. Review (Mar. 26, 2018), https://sloanreview.mit.edu/article/the-risk-of-machine-learning-bias-and-how-to-prevent-it/.
[11] Sun and Gao, supra note 8 (“Unlike gender, race, and related categories, a loan applicant’s sexual orientation is not required to be disclosed and, hence, is impossible to be measured directly.”).
[12] See id.
[13] Hearing on Financial Services and the LGBTQ+ Community: A Review of Discrimination in Lending and Housing Before the H. Comm on Fin. Serv., 116th Cong. 2-3 (2019) (statement of Alphonso David, President, Human Rights Campaign) (discussing legal precedent and the pending cases before the Supreme Court) [hereinafter “David HRC Statement”]. See J. Dalton Courson, Circuit Splits on Interpretations of Title VII and Sexual-Orientation-Based Claims, ABA: Civil Rights Litigation (Mar. 19, 2018) (examining circuit splits on sexual orientation and gender identity counting as sex discrimination under Title VII), https://www.americanbar.org/groups/litigation/committees/civil-rights/practice/2018/circuits-split-on-interpretations-of-title-vii-and-sexual-orientation-based-claims/ (last visited Nov. 7, 2019); Sex-Based Discrimination, EEOC, https://www.eeoc.gov/laws/types/sex.cfm (last visited Nov. 7, 2019) (stating sexual orientation and gender identity are included as sex discrimination under Title VII).
[14] Fair Lending Act for All, H.R. 166, 116th Cong. (2019). See David HRC Statement, supra note 13, at 7 (stating the need for the Equality Act).
[15] See Sun and Gao, supra note 8 (“[W]e propose a method to infer a borrower’s sexual orientation indirectly without a self-identification requirement”).
[16] See Investopedia, supra note 8 (discussing charging higher prices for the same services); Christopher Murray, How Much Does a 1% Difference in Your Mortgage Rate Matter?, Money Under 30 (May 26, 2019), https://www.moneyunder30.com/1-percent-difference-mortgage-rate.
[17] See David HRC Statement, supra note 13.
[18] Karma Allen, supra note 3; John Schneider and David Auten, The $1 Trillion Marketing Executives are Ignoring, Forbes (Aug. 14, 2018), https://www.forbes.com/sites/debtfreeguys/2018/08/14/the-1-trillion-marketing-executives-are-ignoring/#18a1687da97f; Nick Wolny, The LGBTQ+ Community has $3.7 Trillion in Purchasing Power; Here’s How We Want You to Sell to Us, Entrepreneur (June 10, 2019), https://www.entrepreneur.com/article/334983.
[19] Umoh, supra note 2. See Sun and Gao, supra note 8 (discussing difference in interest charged to same-sex borrowers and the spillover effects to different-sex borrowers).
[20] See Id.
[21] See Id.
