CFPB finalizes new ECOA rule in major fair lending pivot

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• Key insight: The CFPB claims that the Equal Credit Opportunity Act does not include statutory language that would allow for a so-called “disparate impact” test for instances of unintended discrimination. 
• What’s at stake: The changes don’t let lenders off the hook entirely. States such as California, Massachusetts and New Jersey maintain strict anti-discrimination rules, creating a compliance minefield for banks.
• Forward look: The CFPB is likely to be sued by state attorneys general and/or consumer advocacy groups over the changes, litigation that could take years to resolve. 

The Consumer Financial Protection Bureau is eliminating federal oversight of indirect discrimination known as disparate impact, a historic retreat by the federal government in how the civil rights law has been enforced for nearly 50 years. 

On Wednesday, the CFPB published a final rule in the Federal Register that changes language in Regulation B, which implements the Equal Credit Opportunity Act of 1974. ECOA bars lenders from discriminating based on race, color, sex, age or national origin, among other factors. 

The final rule is largely unchanged from a November proposal, which rewrites Reg B to say that ECOA “does not authorize disparate impact claims.”

“The rule is a major step back,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition. “It’s going to be much tougher to prove discrimination, at least during the Trump administration.” 

Elena Grigera Babinecz, an attorney at Baker Donelson and a former CFPB deputy assistant director for fair lending, said the current CFPB leadership believes that ECOA does not include the statutory anti-discrimination language that exists in other statutes, such as the Fair Housing Act.

“This is big because they’ve narrowed the scope of permissible theories of liability,” said Babinecz. “Now the CFPB is saying you’re only liable under ECOA if you can prove that someone intentionally discriminated against you.” 

In April, President Trump signed an executive order that sought to eliminate disparate impact liability in federal programs “to the maximum degree possible.” Prior to the Trump administration, the CFPB used disparate impact to target banks and lenders that engage in discriminatory practices such as redlining.

The change upends settled statutory interpretations that have stood for nearly 50 years, said Diane Thompson, deputy director and chief advocacy officer at the National Consumer Law Center and a former CFPB senior advisor during the Biden administration.

Yet, the bureau’s November proposal provided just 30 days of public comment period and the bureau took less than five months to consider 64,000 comments.

“This isn’t how you do rulemaking if you consider yourself accountable to the American people,” Thompson said. 

The inclusion of disparate impact in ECOA dates back to 1977, when the Federal Reserve Board amended Reg B to specifically authorize disparate impact liability, citing legislative history. In its proposed rule, the CFPB said that the Federal Reserve was wrong in using legislative history to authorize disparate impact claims.

“The CFPB made a decision based on the statutory language that the Federal Reserve Board and the CFPB have gotten it wrong,” Babinecz said. “I think they have a strong argument, given the composition of the Supreme Court right now, where they look to the language of a statute to decide whether something applies.” 

Disparate impact focuses on the outcomes of lending policies that appear neutral, with no intent to discriminate, but that disproportionately have a negative effect on a protected group such as race, religion or sex. Examples include a lender requiring a minimum loan amount, which may unintentionally exclude houses in minority neighborhoods, or lenders that use AI algorithms in underwriting that may discriminate against low-income borrowers. By contrast, discouragement focuses on actions that prevent people from applying for credit in the first place.

The rule goes into effect 90 days after being published in the Federal Register. Several lawyers said the CFPB will immediately be sued by state attorneys general or consumer advocacy groups.

“The CFPB has been in a rush to get this finalized,” said Eamonn Moran, a partner at Holland & Knight. “Everybody’s expecting litigation to happen pretty quickly. Part of the calculus is that the CFPB is aware that these rules are going to get challenged.”  

In 1971, the Supreme Court upheld disparate impact under the Fair Housing Act. That ruling, in Griggs v. Duke Power Co., found facially neutral policies or practices can be deemed discriminatory if they are found to have a disproportionately negative impact on protected groups — even where there is no proof of intentional discrimination.

“Disparate impact is still a legal theory that the courts recognize, regardless of what the CFPB and banking regulators say,” said Van Tol. “Its practical effect is that the bad actors will see a green light to return to practices that are marginal or cross the line, and the good actors will stay the course.” 

Because there is a five-year statute of limitations, many lenders will continue to keep compliance programs in place because the lookback reviews will be revived if a Democratic president succeeds Trump. 

The rule also places restrictions on Special Purpose Credit Programs that are created by lenders to address historical inequality. The rule narrows eligibility requirements and comes after Fannie Mae and Freddie Mac terminated SPCPs they had sponsored. Lenders may end up using third-parties such as nonprofits and community development institutions rather than be directly involved in a SPCP going forward, Moran said. 

Of the thousands of comments, the bureau received just 90 that addressed SPCPs, Moran said.

Despite the dramatic shift in policy the rule represents and the uncertainty that litigation over the rule will generate, disparate impact is not down for the count. Many states, including California, Massachusetts and New Jersey, have state laws that uphold disparate impact in lending, housing and employment, Moran said, and banks will still have to consider it when developing their own lending strategies.

“Even though the CFPB is stepping back, states will fill in the gaps,” Moran said. “Disparate impact still remains a hot-button issue despite legal and historical support for its use in other anti-discrimination statutes that the Supreme Court has weighed in on. That makes the defense of this rule more challenging.”