Modernizing Fair Lending

Recent federal policy shifts have reinvigorated debate about the legitimacy of disparate impact liability, portraying it as a threat to meritocracy. These meritocratic concerns have laid bare a tension that is central to fairness protections more broadly: how we measure disparity. Disparate impact doctrine has long measured a single dimension, disparities in outcomes, for example loan approval rates in the context of fair lending. But a second, equally important dimension has largely gone unexamined—validity disparities, which capture how closely these outcomes correlate with underlying characteristics, such as creditworthiness. We offer a novel framework for disparate impact that reconciles this tension and offers a compelling rejoinder to recent meritocratic attacks: how to balance the unavoidable tradeoff between equal outcomes and equal validity. Both are vitally important yet distinct dimensions of disparity across protected classes, and pivotally, efforts to reduce disparities along one dimension can often worsen the other. We show how fair lending’s requirement to consider less discriminatory alternatives (LDAs)—which has long been part of disparate impact analyses but has received little practical or doctrinal attention—can help navigate these competing fairness goals, and inform what is required for disparate impact to endure as a viable legal doctrine and a compelling vision of fairness.