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 Further, the Trump I CFPB rescinded Bulletin 2013-02, in which the CFPB had previously asserted that indirect auto lenders may be held liable under the legal doctrines of both disparate treatment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.
