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The End of Disparate Impact Liability?

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On April 23, 2025, President Trump signed an Executive Order entitled “Restoring Equality of Opportunity and Meritocracy,” which seeks to “eliminate the use of disparate-impact liability in all contexts to the maximum degree possible.”

This sweeping eradication of the disparate impact theory is not surprising. Indeed, the Consumer Financial Protection Bureau (CFPB) under the first Trump Administration (Trump I) strongly questioned the doctrine and ultimately brought no disparate impact enforcement actions. Further, the Trump I CFPB rescinded Bulletin 2013-02, in which the CFPB had previously asserted that indirect auto lenders may be held liable under the legal doctrines of both disparate treatment and disparate impact for disparities in their portfolio. What’s more, the Congressional resolution rescinding the Bulletin further prevented the CFPB “from ever reissuing a substantially similar rule unless specifically authorized to do so by law.” In addition, the CFPB under Trump I challenged the validity of the disparate impact theory under the Equal Credit Opportunity Act (ECOA) in light of the of the U.S. Supreme Court 2015 ruling in Texas Department of Housing v. Inclusive Communities Project Inc., which applied the disparate impact theory under different language found in the Fair Housing Act. And earlier this year, Attorney General Bondi ordered the U.S. Department of Justice (DOJ) to issue updated guidance that “narrow[s] the use of ‘disparate impact’ theories that effectively require use of race- or sex-based preference.”

Nonetheless, the language of the Executive Order is stark: “It is the policy of the United States to eliminate the use of disparate-impact liability in all contexts to the maximum degree possible to avoid violating the Constitution, Federal civil rights laws, and basic American ideals.” To that end, the Executive Order boldly demands that all agencies “deprioritize enforcement of all statutes and regulations to the extent they include disparate-impact liability.”

What is the Disparate Impact Theory?

Disparate impact is a theory of discrimination applied when a facially neutral practice has a statistically significant impact on a protected group. According to the Executive Order, “disparate-impact liability” creates “a near insurmountable presumption of unlawful discrimination … where there are any differences in outcomes in certain circumstances among different races, sexes, or similar groups, even if there is no facially discriminatory policy or practice or discriminatory intent involved, and even if everyone has an equal opportunity to succeed.”  The order criticizes disparate-impact liability as “all but requir[ing] individuals and businesses to consider race and engage in racial balancing to avoid potentially crippling legal liability.”  Thus, according to President Trump, disparate-impact liability prevents employers from “act[ing] in the best interests of the job applicant, the employer, and the American public” and undermines “meritocracy,” “a colorblind society,” and “the American Dream.”

Civil rights advocates, on the other hand, argue that the Trump Administration misstates the disparate impact legal theory and effectively instructs the government to stop enforcing key civil rights protections in the workplace, at schools, and throughout society – the latter of which includes the offering of loans and other consumer financial products and services. Does this Executive Order then mean that lenders can once again impose facially neutral policies that traditionally have been viewed as discriminatory under the disparate impact theory, such as increased minimum loan amount requirements (beyond investor and agency thresholds) or practices that exclude self-employment income?

What Does the Executive Order Mean for Financial Services Enforcement?

As stated previously, the Executive Order directs all federal agencies to deprioritize enforcement of all statutes and regulations to the extent they include disparate impact liability. Consequently, the Executive Order also instructs all heads of federal agencies, including the CFPB and the U.S. Department of Housing and Urban Development (HUD), to evaluate all pending proceedings relying on disparate impact theories and “take appropriate action” within 45 days.  Agencies must conduct a similar review of “consent judgments and permanent injunctions” within 90 days.

The above indicates that federal agencies may not pursue fair lending actions rooted in disparate impact – at least for a while. The Executive Order even attempts to curtail state actions by requiring the Attorney General, “in coordination with other agencies,” to determine whether state laws imposing disparate impact liability are preempted. Of course, private litigation is still a real tool for consumer complainants. And federal agencies may still look to the disparate treatment theory to pursue and remediate potential fair lending violations under ECOA, the Fair Housing Act, and other federal statutes. Further, certain federal claims, more recently characterized (or mischaracterized) as disparate impact, such as pricing discrimination, may continue to be brought, but as newly and perhaps more appropriately packaged disparate treatment claims.

What Does the Executive Order Mean for Financial Services Compliance?

Given the potential for private litigation and increased interest by the states in light of federal deprioritization – not to mention the fact that the statute of limitations for most federal fair lending violations can be up to five (5) years, lenders should continue to conduct their routine fair lending monitoring and testing, which seeks to detect disparities among statutorily protected groups. Frankly, this testing alone cannot identify whether any disparities are due to discrimination, much less whether the discrimination was of the disparate treatment or disparate impact variety (though the results are more likely to detect disparate impact discrimination than isolated instances of discriminatory treatment). Nevertheless, the results of monitoring and testing provide lenders with a starting point for assessing their policies, procedures, and practices for fair lending compliance. One question that remains, however, is whether lenders should add White as a racial category in their monitoring efforts.

Federal Banking Agencies Announce Intent to Rescind 2023 Community Reinvestment Act Final Rule and Return to Prior Framework

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What Happened?

The Federal Deposit Insurance Corporation (“FDIC”), Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Office of the Comptroller of the Currency (“OCC”), (collectively, “federal banking agencies”) announced their intent to rescind the 2023 Community Reinvestment Act Final Rule (“Final Rule”) and to reinstate the CRA framework that existed prior to the 2023 CRA Final Rule.

Community Reinvestment Act (“CRA”)

The CRA was enacted in 1977 to address systemic inequities in access to credit in response to concerns that banks were engaging in redlining to deny credit to customers in low-income, minority areas. The CRA requires federal bank regulators to evaluate a financial institution’s record of meeting the credit needs of a given community, with separate evaluations for each area where the bank maintains a branch office, taking a particular focus on low- and moderate- income (“LMI) communities.

Given changes in technology and financial products since the CRA’s enactment, there have been several failed attempts over the past 30 years to revise and modernize CRA regulations. Before the 2023 CRA Final Rule, the last significant interagency revision to the regulations occurred in 1995.

Why Does it Matter?

Criticisms of the Final Rule

The federal banking agencies’ stated purpose for the Final Rule was to modernize CRA to address technological innovations and new product offerings in banking. However, many within the industry asserted that the Final Rule was contrary to the plain language of the CRA and congressional intent. The Final Rule fundamentally altered the determination of a bank’s assessment area, requiring inclusion of areas where the bank does not maintain any physical presence. The Final Rule set forth new tests, applicable to different banks based on asset size. Application and “scoring” under these tests was complicated and difficult to apply. Additionally, the Final Rule sought to evaluate banks’ deposit practices in addition to lending and investment activities.

Industry participants and trade groups asserted that the Final Rule would drastically and unnecessarily increase the regulatory burden placed on banks. The Final Rule could require banks to use deposits gathered from their local communities to make loans in places potentially thousands of miles away. The formulaic approach to scoring could result in decision-making divorced from the actual convenience and needs of a bank’s community. Banks also argued that the unnecessarily complex evaluation could force banks to close branches or reduce product offerings.

In March 2024, after a number of prominent bank trade groups sued to block the new rule, a Texas judge blocked the Final Rule, finding that the rule surpassed its statutory authority. The court found that the regulators exceeded their authority by expanding the lending test to evaluate banks in geographic areas where they did not maintain physical branches. Moreover, the court rejected the agencies contention that “credit needs” could be construed more broadly to include deposit products. The Final Rule has been on hold since the court’s ruling, and the federal banking agencies’ notice of intent to rescind the Final Rule puts an end to the Final Rule from a practical perspective.

Return to Prior Framework

In light of this litigation and the change in Presidential administration, the federal banking agencies decided to rescind the 2023 CRA Final Rule and return to the 1995 framework that existed prior to the Final Rule. Once the federal banking agencies formally rescind the Final Rule, Banks will not be required to comply with the more stringent and complex tests that the Final Rule would have required. However, it is important to note that the problems that the Final Rule sought to address still remain. The old framework still struggles to address the innovations and changes in the banking industry, including internet and mobile banking.

What Do I Need to Do?

Covered financial institutions should monitor further developments and confirm that the federal banking agencies do formally rescind the Final Rule. Banks should also evaluate their compliance with the existing CRA framework and keep abreast of new efforts to modernize CRA regulations moving forward. Alston & Bird’s Financial Services Group is actively monitoring these developments and is able to assist with any compliance concerns regarding these anticipated changes.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Arkansas:

  • House Bill 1184, which we expect to take effect on or about August 8, amends the Fair Mortgage Lending Act, Ark. Code Ann. §§ 23-39-501 et seq., to address the use of mortgage trigger leads. Specifically, the measure amends Section 23-39-513 of the Arkansas Code to impose obligations on a loan officer using a mortgage trigger lead in any capacity (such as clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission).

Idaho:

  • Effective July 1, House Bill 149 adds Section 26-31-221A to the Idaho Code, addressing consumer private in mortgage applications.  Specifically, the measure imposes obligations on an individual soliciting a consumer for a residential mortgage loan where a mortgage trigger lead is used in any capacity, to include (among other provisions): (a) clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission; and (b) avoiding knowing or negligent use of information from a mortgage trigger lead where the consumer opted out of prescreened offers or placed his or her phone number on a federal or state “do-not-call” list.

Nebraska:

  • Effective March 12, Legislative Bill 251 amends surety bond provisions under the Residential Mortgage Licensing Act (“Act”). As amended, Section 45-724 of the Act requires a mortgage banker licensee to include its mortgage servicing portfolio (and not only its origination volume) in the calculation of its required surety bond.
  • Legislative Bill 21, which we expect to take effect on or about August 31, adopts the Uniform Unlawful Restriction in Land Records Act (“Act”). The Act will permit real property owners to unilaterally remove from any document related to the owner’s property “unlawful restrictions” (those that “purport[] to interfere with or restrict the transfer, use, or occupancy of real property”), and will prescribe the process by which an owner may amend a document to remove such restrictions.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from two states:

California:

Effective January 1, California Assembly Bill 3108 addresses mortgage fraud.  Previously, California law defined “mortgage fraud” to include, in connection with a mortgage loan transaction, filing with the county recorder any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.

Taking this a step further, the measure prohibits the filing of any document with the recorder of any county that a person knows to contain a material misstatement, misrepresentation, or omission. Further, the measure expressly provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with knowledge that the borrower intends to use the loan proceeds for other uses. For prosecution purposes, the alleged fraud value must be $950 or more (the threshold for grand theft).

A mortgage lender could unintentionally find itself guilty of mortgage fraud if it simply allows a borrower to use a business purpose loan for consumer purposes or makes a bridge loan that it knows will not be used for a dwelling. California’s Penal Code § 532f(b) makes it mortgage fraud for a mortgage broker or lender to allow mortgage-related documents to be formed and filed when the broker or lender has reason to know that the borrower intends on using the loan for purposes other than for what the loan is intended.

Although intent to defraud is an element to this crime, that element can only be determined through rigorous and time-consuming investigation. If a borrower, for example, uses a business loan for consumer purposes or does not apply the funds from a bridge loan towards a dwelling, the lender will be subject to additional scrutiny unless it can prove that all efforts were made to understand the borrower’s plans for the funds.

The measure also prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud. A “covered loan” means a consumer loan in which the original principal balance of the loan does not exceed the most current Fannie Mae conforming loan limit for a single-family first mortgage loan.

The measure also amends Section 4973 of the Financial Code, which imposes certain requirements ad restrictions (e.g., the inclusion of a prepayment fee or penalty after the first 36 months) in connection with covered loans and amends Section 532f of the Penal Code (as discussed above) in connection with the prohibition on committing mortgage fraud.

New York:

  • Effective June 11, Assembly Bill 424 amends Section 35 of the Banking Law, which relates to an information pamphlet that residential mortgage lenders must provide to applicants. In place of making a physical pamphlet available to lenders, the amended section requires the Department of Financial Services to notify mortgage bankers of the posting a digital version of the pamphlet on the Department’s website (and when it makes any changes thereto). The measure also amends the pamphlet contents to reflect that a lender may provide an applicant with a good faith estimate (instead of a loan estimate), depending on the type of loan for which the applicant is applying.
  • Effective May 15, Assembly Bill 2056 amends Section 283 of the Real Property Law, which limits the amount of flood insurance that a mortgagee may require a mortgagor to maintain. Under current law, that section provides that the maximum amount of coverage a mortgagee may require is the mortgage’s outstanding principal amount as of January 1 of the year the policy will be in effect. As amended, that section makes the maximum permitted amount of coverage the lesser of the outstanding principal amount or the residential property’s replacement. Additionally, AB2056 slightly alters the printed notice about flood insurance that a mortgagee must deliver to mortgagors, removing language referring to the fact that required coverage would only protect the interest of the lender or creditor in the property.
  • Effective March 21, New York Senate Bill 804 amends data breach notification requirements. Section 899-aa of the General Business Law requires a person or business to notify New York residents whose data is part of a breach, as well as to provide notice to certain governmental entities (including the Department of Financial Services). As amended, that section will require notification to the Department of Financial Services (in the form mandated by N.Y. Comp. Code R. & Regs. tit. 23, § 500.17) only by “covered entities.” A “covered entity” is any person who requires any type of authorization to operate under the Banking Law, Insurance Law, or Financial Services Law, and thus includes a mortgage banker or mortgage servicer.

DEI in Lending: Are Special Purpose Credit Programs About to DIE?

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For the last several years, federal agencies, including the Consumer Financial Protection Bureau (“CFPB”), have been strongly encouraging financial institutions to implement and offer targeted credit assistance to historically underserved communities as one way to remedy the effects of redlining. Not surprisingly, in accordance with the prior Administration’s Combatting Redlining Initiative, every one of the 16 settlements by the CFPB and the U.S. Department of Justice (“DOJ”) against both bank and non-bank lenders have mandated that these lenders offer targeted credit assistance based on the race or ethnicity of the borrowers or the predominant race or ethnicity of their neighborhoods. To satisfy the terms of these settlements, the lenders often work with state and local agencies to help market and administer their targeted loan subsidies to eligible borrowers based on protected characteristics. And still more redlining cases, brought by fair housing organizations that receive funding through the U.S. Department of Housing and Urban Development (“HUD”) Private Enforcement Initiative (“PEI”), have been resolved via partnerships with federal- and state-funded entities to provide preferential treatment to Black and Hispanic borrowers and neighborhoods. However, given the current Administration’s stated goal of abolishing preferential treatment in favor of “colorblind equality,” it seems that preferential treatment in lending – even where beneficial to underserved and historically redlined communities – is on the chopping block.

DEI in the Current Political Climate

Only a couple of weeks into the new Administration, the message is clear: diversity, equity, and inclusion (“DEI”) initiatives are out. On January 22, 2025, President Trump signed an Executive Order terminating DEI initiatives in the federal workforce and in federal contracting and spending. Specifically, the Executive Order directs all departments and agencies to take strong action to end private sector “DEI discrimination,” including civil compliance investigations, and requires the Attorney General and the Secretary of Education to issue joint guidance regarding the measures and practices required to comply with the U.S. Supreme Court’s June 2023 decision in Students for Fair Admissions v. Harvard. As a reminder, the Supreme Court’s decision in Harvard effectively ended race-conscious admission programs at colleges and universities across the country.

Shortly after the President’s Executive Order, on January 31, 2025, Texas governor Greg Abbott issued his own Executive Order directing all Texas state agencies to eliminate any forms of DEI policies and to treat all people equally regardless of race. In particular, the Executive Oder requires all state agencies to comply with a “color-blind guarantee,” including by ensuring that “all agency rules, policies, employment practices, communications, curricula, use of state funds, awarding of government benefits, and all other official actions treat people equally, regardless of race.” Similarly, West Virginia governor Patrick Morrisey issued his own Executive Order prohibiting DEI efforts by any entity receiving state resources, and there are likely more of such state executive actions to come.

Are SPCPs a form of DEI?

The above federal and state executive actions cast significant doubt on the current legality and permissibility of special purpose credit programs (“SPCPs”), which have been recognized for years as an exception to the Equal Credit Opportunity Act (“ECOA”) prohibition on differential treatment in lending. SPCPs, by definition, provide credit assistance to borrowers via some preferential treatment, often on the basis of borrower race or ethnicity or the predominant race or ethnicity of the residents in the neighborhood. While there may be no agreed-upon definition of DEI, it is safe to say that a SPCP that provides credit assistance, or more favorable credit terms, to borrowers based on race or ethnicity is a form of DEI.

To that end, where the requirement for a lender to implement a SPCP is baked into the terms of a settlement with a federal government agency, and such agency conducts ongoing monitoring of the lender’s activities to ensure the SPCP is being properly carried out, one could argue that the government is effectively mandating differential treatment based on race or ethnicity – in violation of the new DEI prohibition. The same could be said where state agencies and non-profit organizations that receive federal and state funds assist lenders in marketing and administering their SPCPs. Even the HUD-funded Fair Housing Initiatives Program, which includes the PEI program, could be problematic from a White House perspective, given that federal and/or state funds are currently being spent on furthering alleged redlining remediation through differential treatment.

It is even possible that SPCPs offered voluntarily and proactively by lenders may be scrutinized, particularly if the lender receives any government funding or grants. Currently, both Fannie Mae and Freddie Mac offer SPCPs where borrowers receive down payment or closing cost assistance grants from both the government-sponsored enterprise (“GSE”) and the lender. It is unclear whether such GSE programs would fall within the scope of the President’s Executive Order.

Other Uses of DEI in Lending

Setting aside SPCPs, which are often imposed on lenders by the government as a way to remediate alleged redlining, federal and state agencies essentially expect lenders to engage in race-based action and differential treatment in an effort to manage fair lending risk. Indeed, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas. These federal agencies also consider a lender’s failure to specifically target neighborhoods based on race or ethnicity to be evidence of potential redlining. In other words, the government’s approach to date has not been “colorblind.” It will be interesting to see whether the agencies’ approach to redlining cases will change as a result of this shift away from DEI.

Takeaways for Lenders

Lenders that offer their own SPCPs or participate in GSE SPCPs should ensure that their written plans continue to meet the requirements of Regulation B, which implements ECOA. As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs.

More importantly, lenders that are worried about their fair lending compliance or are subject to a government inquiry for potential redlining should consult with counsel regarding the best approach for presenting evidence of their minority-area lending. These lenders also should strongly consider whether a government-mandated SPCP is the best way forward. While an SPCP, such as loan subsidies or other pricing or underwriting flexibilities may benefit underserved communities and likely expedite settlement of an enforcement matter, the risk of running afoul of DEI prohibitions is not immaterial.