Disparate Impact is Dead. Long Live Disparate Impact.

Is the Trump Administration's Executive Order a misguided rejection of valid anti-discrimination law, or a reaction to how the law has been interpreted and enforced? In this article, I examine the DOJ and CFPB's disparate impact enforcement history to shed light on this question.

It was a (not unexpected) policy reversal — but it still hit the industry with force.

On April 23, 2025, the Trump Administration issued the Executive Order "Restoring Equality of Opportunity and Meritocracy" that proscribed:

"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."

While the precise legal parameters of this Executive Order ("EO") are undoubtedly important, that is not my primary focus here; excellent legal summaries and analyses are available from many law firms. Instead, I want to explore why the new Administration felt the need to de-prioritize disparate impact enforcement by federal agencies — particularly the bank regulatory agencies, the US Department of Housing and Urban Development ("HUD"), and the US Department of Justice ("DOJ").

The stated reasons for the EO are that:

" ... disparate-impact liability ... holds that a near insurmountable presumption of unlawful discrimination exists 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.  Disparate-impact liability all but requires individuals and businesses to consider race and engage in racial balancing to avoid potentially crippling legal liability.  It not only undermines our national values, but also runs contrary to equal protection under the law and, therefore, violates our Constitution.  (emphasis mine)

The dominant narrative in legal and compliance circles is that this EO is simply an ideologically-based complaint about valid, long-standing anti-discrimination laws confirmed multiple times by the U.S. Supreme Court ("SCOTUS"). Other than de-prioritizing the enforcement of these laws, the EO does not alter existing laws, change SCOTUS precedents, or lessen consumer lenders' responsibility for disparate impact compliance.

And I mostly agree with these views — particularly given SCOTUS's clear decision in Texas Department of Housing & Community Affairs v. The Inclusive Communities Project, Inc. ("Inclusive Communities") that disparate impact claims are cognizable under the Fair Housing Act ("FHA"),[1] and the importance of such liability to address unintentional, but no less harmful, policy-driven discrimination of the type SCOTUS described.

So, is this EO simply much ado about nothing? An administration futilely tilting at legally-sound windmills?

Well, that would be the easy interpretation.

Nothing much to see here. The law is still the law. If they don't want to enforce it, the states will. And, in any case, there is a five-year statute of limitations that could push a lender's disparate impact liability into the next (presumably Democratic) administration.

In my opinion, such a reductive view may overlook a larger and more important point regarding why the Administration felt compelled to issue this EO. Is the issue with disparate impact itself, or perhaps with how federal regulatory agencies have interpreted and enforced it, conforming (or not) with the limitations of the underlying statutes as articulated by SCOTUS?

To answer these questions, I look back at how the DOJ and CFPB (the "Agencies") have historically enforced disparate impact liability for banks and other consumer lenders. As you will see, this is a very storied past with many twists and turns highlighting the Agencies' fight for enforcement power to advance their policy priorities. I believe this context is crucial in understanding why this EO may have been issued, what the current Administration's specific concerns may be regarding disparate impact, and how fair lending professionals may wish to manage their ongoing disparate impact risk in light of this EO.

And with that, let's dive in.

The Obama Administration Employs Disparate Impact Liability to Significantly Scale Fair Lending Enforcement After the Great Financial Crisis

In response to the Great Financial Crisis, the DOJ's fair lending enforcement activity under President Obama markedly expanded and evolved through its novel application of disparate impact liability to statistical disparities in lenders' mortgage lending outcomes. As noted by the Skadden Arps law firm :

"... the Department of Justice, for many years, proceeded with fair lending cases only if it could allege disparate treatment or intentional discrimination. However, in a break from prior policy, the Obama Administration last year announced that it would prosecute both disparate treatment and disparate impact fair lending cases and launched an aggressive campaign to investigate and pursue disparate impact cases based on statistical analyses of loan data. This enforcement posture mirrored actions taken by class action lawyers, who had filed numerous lawsuits against lenders based on the theory of disparate impact." — Recent Supreme Court Actions Likely to Affect Fair Lending ‘Disparate Impact’ Litigation and Enforcement, Skadden Arps, November 17, 2011 (emphasis mine)

Historically, government fair lending disparate impact claims were exceedingly rare, most likely due to a broader consensus of their legal uncertainty under the Equal Credit Opportunity Act ("ECOA") and the FHA. However, DOJ leadership under the Obama Administration broke with this precedent. It embarked on a coordinated interagency campaign to rapidly scale mortgage-related fair lending enforcement activity, using disparate impact liability as its central tool, to address the lending disparities of the Great Financial Crisis ("GFC"). The three main cornerstones of this enforcement campaign were:

• Establishing in 2010 a dedicated "Fair Lending Unit" within the DOJ's Civil Rights Division staffed with attorneys, economists, and statisticians to uncover statistical evidence of disparate impact within retail and wholesale mortgage lending activity, and initiating FHA-based disparate impact claims against the associated lenders.

• Rapidly expanding its use of statistically-driven disparate impact liability to generate many multi-million dollar fair lending settlements. Prior fair lending cases brought under traditional disparate treatment liability required lengthy investigations to prove discriminatory intent and to identify specific victims, with financial settlements rarely exceeding $1-2 million. As such, these more conventional fair lending cases were difficult to scale rapidly.

  Alternatively, the DOJ was able to bring a disparate impact case simply by identifying statistically significant, company-wide lending outcome disparities against one or more protected class groups. Using the novel theory that the lender's "policy of discretion" (i.e., permitting negotiations of loan terms with customers) was the proximate cause of the resulting disparate impact, these cookie-cutter lawsuits quickly yielded enormous fair lending settlement amounts from the largest lenders — in some cases, hundreds of millions of dollars — and splashy DOJ press releases.[2] Notably, none of these disparate impact cases were litigated before a court.

• Issuing, by way of HUD, the 2013 Discriminatory Effects Standard ("HUD's 2013 Standard"), laying out HUD's interpretation of FHA disparate impact liability. HUD's 2013 Standard stated that disparate impact was cognizable under the FHA and articulated a three-step "burden-shifting framework" for evaluating whether challenged facially-neutral policies or practices have an illegal disparate impact (adopting the burden-shifting framework from Title VII of the 1991 Civil Rights Act for employment discrimination).[3] Two notable features of HUD's interpretation were that: (1) plaintiffs did not need to specify the policy or practice causing the alleged disparate impact, and (2) its interpretation of the third step did not require a less discriminatory alternative to serve the defendant's business interests equally.[4]

By all measures, this campaign was highly successful, initiating more than 60 active fair lending matters during its first year of operation (2010), according to the DOJ's reporting.[5]  To put this into context, in its first year, the DOJ "received more referrals [from other federal regulatory agencies] than it received in any of the last 20 years. Notably, there were 26 referrals based on race or national origin discrimination, more than we received in any previous year and more than we received in the last three years combined."[6]

After The Successful Campaign Against Mortgage Lenders, the Agencies Aggressively Expand Disparate Impact Liability to Auto Lending (and ECOA)

The Consumer Financial Protection Bureau ("CFPB") was officially launched in 2011-2012, and Director Richard Cordray quickly aligned the Bureau's priorities with those of the DOJ, formally committing to use disparate impact liability in its ECOA fair lending enforcement.[7]

"Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B." — CFPB Bulletin 2012-04 (Fair Lending)

With the massive success of the DOJ's mortgage-lending disparate impact campaign (exceeding $600 million in settlements), the Agencies quickly launched their statistically driven fair lending enforcement machine against the indirect auto lending industry. This sector was a natural next target as it possessed structural features similar to those that made the mortgage lending cases so successful, notably,

• A third-party originator compensation system that relied on discretionary price negotiations with consumers (i.e., dealer mark-ups or dealer participation),

• Automated loan origination processes that provided ample lender origination data to perform statistically-based price comparisons, and

• The potential for a substantially large and newsworthy number of disparate impact victims and financial settlements, given the hundreds of thousands of auto lending transactions conducted each year.

The first public salvo in this new disparate impact enforcement campaign was launched in March 2013 with the CFPB's publication of Bulletin 2013-02, Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act. This document — labeled as industry "guidance" — put banks on official notice that they would be held legally liable for portfolio-level average dealer mark-up disparities across demographic groups under ECOA's disparate impact liability.[8]

The second salvo came a few months later when the Agencies announced in December 2013 a $98 million ECOA disparate impact settlement with Ally Financial, Inc. (the "largest-ever settlement in an auto loan discrimination case") for allegedly discriminatory dealer mark-ups against Black, Hispanic, and Asian / Pacific Islander customers based solely on the existence of statistical disparities in average dealer mark-up amounts across demographic groups.[9]

In addition to the Agencies' controversial use of ECOA disparate impact liability, their reliance on statistical disparities, and their effective refusal to consider lender business interest defenses, the Ally settlement was also significant because the discrimination claims were not based on actual borrower race and ethnicity data, as lenders were legally prohibited from collecting it.[10]. As noted in the Ally Consent Order, the Agencies "solved" this critical data limitation by estimating the alleged disparities using a statistically-based race/ethnicity proxy methodology called Bayesian Improved Surname Geocoding ("BISG"). This highly controversial proxy approach assigned each borrower a range of probabilities reflecting the uncertain likelihood of their actual race or ethnicity, and was known to have significant accuracy limitations.[11]

Despite widespread industry complaints about the legality of this enforcement campaign, by Fall 2014 the Agencies had leveraged this statistically driven enforcement process into private disparate impact cases with several other banks, resulting in more than $56 million in additional financial settlements.[12] Simultaneously, the CFPB expanded its regulatory reach even further by issuing a proposed rule to supervise non-bank auto finance companies, thereby bringing the major captive auto finance lenders (e.g., Honda, Toyota, Nissan) into the pool of lenders subject to the Agencies' ECOA disparate impact campaign. This rule, finalized in mid-2015, resulted in two additional public ECOA disparate impact enforcement actions — one against American Honda Finance Corporation ($24 million settlement) and another against Toyota Motor Credit Corporation ($22 million settlement).

The Agencies Push For Demographic Parity, the Industry and Lawyers Fight Back, and the Supreme Court (Eventually) Weighs In

The mortgage industry's reaction to the Agencies' disparate impact enforcement actions was significant. For example, shortly after settling its case with the DOJ in 2011, Wells Fargo — the largest U.S. wholesale mortgage lender — announced that it was exiting the wholesale mortgage lending channel due to its inability and unwillingness to manage equal pricing outcomes (i.e., demographic parity) across its network of individual mortgage brokers — as would be required under the DOJ's statistically-based disparate impact theory:

"While not part of the DOJ settlement, Wells Fargo, on its own volition, also announced today that ... it will discontinue funding mortgages that are originated, priced and sold by independent mortgage brokers through its mortgage Wholesale channel. ...Mortgage brokers operate as independent businesses and are not employed by Wells Fargo. Therefore, Wells Fargo cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers." — Mortgage News Daily, July 12, 2012

In auto lending, while a few lenders experimented with the Agencies' desired flat fee dealer compensation system to eliminate pricing discretion, most lenders chose to mitigate the fair lending risk through more restrictive dealer mark-up caps, enhanced documentation for why a borrower was provided a "discount" from this maximum cap amount, and the implementation of hopelessly complex and expensive disparate impact monitoring and customer remediation systems based on the CFPB's flawed BISG race/ethnicity proxy methodology.

Most troubling about these mandatory disparate impact monitoring systems was their goal to enforce demographic parity at both the individual dealer AND the overall company levels — regardless of any legitimate deal differences that might justify dealer mark-up variability across customers.[13]

"Until Ally’s compliance program effectively eliminates disparities, Ally will pay harmed consumers each year under the order." — CFPB and DOJ Order Ally to Pay $80 Million to Consumers Harmed by Discriminatory Auto Loan Pricing, December 20, 2013.

In effect, the Agencies were requiring the industry to adopt pricing quotas on all future loan transactions by implementing a form of ex-post race-based pricing. That is, to avoid future disparate impact litigation, lenders were directed to implement ongoing monitoring of company-wide loan originations for statistical disparities in average dealer mark-ups. If these disparities were not within a narrowly prescribed threshold set by the Agencies, then lenders would need to provide protected class borrowers with remedial cash payments and/or interest rate reductions to achieve effective demographic parity across all consumer loan transactions.

While some may argue that this is nothing more than the Agencies helping to eliminate an inherently discriminatory pricing system, others would question whether these statistical disparities — based on nothing more than the aggregation of negotiated deal terms across hundreds of independent auto dealers — were the type of arbitrary, policy-driven adverse outcomes that disparate impact liability was designed to solve. As we will see shortly, this type of race-based quota, implemented by the industry to avoid ruinous disparate impact claims, was precisely the concern expressed by SCOTUS in Inclusive Communities that led it to limit such liability.

Leading Law Firms Dispute the Agencies' Legal Basis For ECOA Disparate Impact Liability

On the legal front, several leading law firms publicly disputed the Agencies' position that the ECOA and FHA provide for disparate impact liability — pointing to the differences in statutory language between these laws and the corresponding language in Title VII of the Civil Rights Act, which SCOTUS previously ruled permitted disparate impact claims (in Griggs vs. Duke Power Co.). For example,

"... the FHA and ECOA contain very similar language to the disparate treatment wings of Title VII and the ADEA , but contain nothing resembling the disparate impact provisions of those statutes." ... "Congress’s decision to use the term 'discriminate' in the FHA and ECOA—and not to use any 'effects' language as it did in other anti-discrimination statutes—signifies a deliberate decision not to permit disparate impact claims under the FHA and ECOA." — Disparate Impact Under FHA and ECOA: A Theory Without a Statutory Basis, BuckleySandler, July 13, 2012. (emphasis mine)

"As authority for the 'disparate impact' test, the CFPB relies on the statement in a Regulation B footnote that, based on the ECOA’s legislative history, Congress intended the 'effects test' analysis applied by the U.S. Supreme Court in Griggs v. Duke Power Co. to Title VII employment discrimination claims to also apply to lending discrimination claims. We take issue with the CFPB’s position and the soundness of the authority on which the CFPB relies for several reasons. First, there is no 'effects' or comparable language in the text of the ECOA, unlike Title VII. Second, the ECOA legislative history referred to in the footnote consists of statements made in committee reports issued in connection with ECOA amendments that did not amend the ECOA language that prohibits credit discrimination 'on the basis of' race, color, religion, etc. As a result, that legislative history should not be relied on as an indicator of what Congress intended when enacting such ECOA language. Third, while Title VII does contain an anti-discrimination provision that uses language similar to that of the ECOA, the Supreme Court did not rely on that similar language for its holding in Griggs. Rather, the provision at issue in Griggs referred to employment practices that 'adversely affect' employees on the basis of race." — CFPB confirms plans to use “disparate impact” to prove lending discrimination, Ballard Spahr, April 18, 2012.

Clearly, a valid and honest legal debate existed during this period regarding the Agencies' statutory authority to bring ECOA disparate impact claims against consumer lenders. The Agencies, however, simply disagreed with these legal positions and continued to implement their enforcement campaign largely unfettered. And, due to the Agencies' strategy of settling these cases without litigation, and the lenders' preference to avoid the severe reputational and financial risks of a public trial, this key legal dispute remained unresolved (and remains unresolved to this day).

The Supreme Court Rules That a "Policy of Discretion" is an Insufficient Basis to Support a Company-Wide Disparate Impact Claim

In addition to disputing the cognizability of disparate impact under ECOA, the industry and its lawyers pointed to a recent 2011 Supreme Court decision — Wal-Mart Stores, Inc. v Dukes ("Wal-Mart") — in which SCOTUS ruled that a general "policy of discretion" was insufficient to support the basis for a Title VII disparate impact claim. While technically applying to a Rule 23(a) class certification decision, SCOTUS stated that such a decision was also enmeshed with the merits of the Title VII disparate impact claim itself:

"In this case, proof of commonality necessarily overlaps with respondents’ merits contention that Wal-Mart engages in a pattern or practice of discrimination. ... That is so because, in resolving an individual’s Title VII claim, the crux of the inquiry is “the reason for a particular employment decision,” ... Here respondents wish to sue about literally millions of employment decisions at once. Without some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer to the crucial question why was I disfavored."[14] (emphasis mine)

SCOTUS further stated:

"The only corporate policy that the plaintiffs’ evidence convincingly establishes is Wal-Mart’s “policy” of allowing discretion by local supervisors over employment matters. On its face, of course, that is just the opposite of a uniform employment practice that would provide the commonality needed for a class action; it is a policy against having uniform employment practices. It is also a very common and presumptively reasonable way of doing business—one that we have said “should itself raise no inference of discriminatory conduct." (emphasis mine)

"In a company of Wal-Mart’s size and geographical scope, it is quite unbelievable that all managers would exercise their discretion in a common way without some common direction. Respondents attempt to make that showing by means of statistical and anecdotal evidence, but their evidence falls well short. ... In the landmark case of ours which held that giving discretion to lower-level supervisors can be the basis of Title VII liability under a disparate-impact theory, the plurality opinion conditioned that holding on the corollary that merely proving that the discretionary system has produced a racial or sexual disparity is not enough. '[T]he plaintiff must begin by identifying the specific employment practice that is challenged.' ... That is all the more necessary when a class of plaintiffs is sought to be certified. Other than the bare existence of delegated discretion, respondents have identified no 'specific employment practice'—much less one that ties all their 1.5 million claims together. Merely showing that Wal-Mart’s policy of discretion has produced an overall sex-based disparity does not suffice." (emphasis mine)

While admitting that individual managers, given enough discretion, could certainly make employment decisions causing an illegal disparate impact, SCOTUS rejected the notion that such discretion, when exercised by thousands of individual managers, was — without additional corporate guidance — the cause of a corporate-wide illegal statistical employment disparity.

From a regulatory enforcement perspective, industry lawyers argued that the Wal-Mart decision effectively invalidated the similar foundations of the Agencies' post-financial crisis disparate impact enforcement cases — specifically the assertion that a lender's "policy of discretion" implemented by hundreds of independent loan originators caused company-wide statistical pricing disparities that were evidence of an illegal disparate impact.[15]

However, as with the legal debate over ECOA disparate impact cognizability, the Agencies simply dismissed this SCOTUS decision out of hand, claiming it did not apply to them.

"Institutions may also argue that Wal-Mart Stores, Inc. vs. Dukes ... negates anti-discrimination suits based on discretionary policies, but the holding of Wal-Mart is limited to the class certification context and thus inapplicable to the CFPB because it is a government agency not subject to class certification requirements." — CFPB Auto Finance Discrimination Action Plan, undated.

Whether this is a legally correct position is a matter for the courts to decide. However, one would generally expect an independent federal agency to exercise more circumspection when employing enforcement approaches that rely on contested interpretations of federal statutes. Yes, the Agencies were not bringing actual class action lawsuits against the industry, but many legal practitioners saw SCOTUS's ruling as more than just a Rule 23(a) procedural opinion. It was also an interpretation of an essential limitation to disparate impact claims — specifically, what constituted a "causal" policy. And perhaps the CFPB would have been seen as less dogmatic and partisan by some had it publicly provided a more reasoned, legally-grounded, and self-reflective analysis of how Wal-Mart applied (or not) to its ECOA disparate impact enforcement approach.

But it did not, and the Agencies' indirect auto disparate impact enforcement campaign continued unabated.

Yet, there was another ray of hope for the industry on the horizon.

At long last, two separate disputes were making their way to the Supreme Court involving whether disparate impact claims were cognizable under the FHA. Many leading law firms believed that these cases might finally put the nail in the coffin of the Agencies' aggressive disparate impact enforcement campaigns.

But the Agencies were not going down without a fight ...

The Supreme Court (Tries to) Weigh In on the Cognizability of FHA Disparate Impact Claims

The first of these two cases was Magner v. Gallagher ("Magner") in which landlords in the City of St. Paul, MN sued the city housing authorities for what they claimed was a policy of stricter enforcement of city housing codes against residential rental properties — thereby causing increased rental costs that had a disparate impact on minority residents. After going through both a trial court and an appeals court, the City of St. Paul appealed to the Supreme Court in 2011 to decide whether disparate impact claims were cognizable under the FHA (the law underlying the landlords' claims).

However, in an extraordinary reversal shortly before the case was to be heard by SCOTUS in early 2012, the City of St. Paul, the petitioner, unexpectedly withdrew its appeal due to concerns that it might win. According to a statement from the City:

“…[a win by the city could] completely eliminate ‘disparate impact’ civil rights enforcement, including under the Fair Housing Act and the Equal Credit Opportunity Act. This would undercut important and necessary civil rights cases throughout the nation. The risk of such an unfortunate outcome is the primary reason the city has asked the Supreme Court to dismiss the petition.”

Subsequent reporting by the NY Times suggested that the City withdrew its appeal due to "pressure from the Obama Administration". MSNBC reported similarly, indicating that the U.S. Department of Justice intervened with the City to encourage withdrawal due to concerns that the Supreme Court would rule against FHA disparate impact liability. Democratic House members further substantiated these claims in their subsequent investigation of the matter, although they cleared the DOJ against accusations of improper / unethical actions:

"... in November 2011, the Department [of Justice] proposed that St. Paul withdraw the Magner case to avoid an adverse ruling by the Supreme Court that could have invalidated the disparate impact standard and impaired its ability to combat discrimination in housing. In response, St. Paul proposed that the Department refrain from intervening in two unrelated False Claims Act cases in which St. Paul was a defendant." — Results of Investigation of Justice Department Role in St. Paul's Decision to Withdraw Appeal to Supreme Court in Magner v. Gallagher, April 14, 2013.[16]

The following year, SCOTUS had a second chance to address this question in a separate case, Mount Holly v. Mount Holly Gardens Citizens in Action — an FHA-based litigation against a New Jersey township alleging disparate impact against minority residents as a result of the township's plans to redevelop and upgrade certain blighted neighborhoods. After a federal appeals court remanded the case back to the trial court for consideration of disparate impact liability, the township — as petitioner — appealed to SCOTUS on the question of whether the FHA permitted disparate impact claims.

In a similar pattern to the Magner case, however, the Mount Holly case unexpectedly settled in late 2013, just a few weeks before its scheduled SCOTUS oral arguments. Once again, the withdrawal denied SCOTUS the opportunity to weigh in on FHA disparate impact liability, and denied the financial services industry the opportunity to resolve judicially their disagreements with the Agencies over the specific contours of their fair lending compliance responsibilities.

The Third Time's the Charm

Finally, in 2015, the question of FHA disparate impact liability reached the Supreme Court in the case of Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. ("Inclusive Communities"). In this dispute, a Texas housing agency was accused of disproportionately allocating federal low-income housing tax credits to minority areas of Dallas. Since landlords receiving such credits were required to accept housing vouchers provided to low-income residents, residents using such vouchers were concentrated primarily in minority neighborhoods — thereby creating a disparate impact according to the suit. As with the previous two cases, the petitioner asked SCOTUS to rule on whether disparate impact claims were permitted under the FHA.

In a close 5-4 decision, SCOTUS affirmed that disparate impact claims were cognizable under the FHA — an apparent victory for the Agencies. However, it also outlined specific limitations to, and requirements for, such claims to prevent abusive suits based solely on simple statistical disparities. According to the majority opinion,

"But disparate-impact liability has always been properly limited in key respects to avoid serious constitutional questions that might arise under the FHA, e.g., if such liability were imposed based solely on a showing of a statistical disparity." (emphasis mine)

"Without adequate safeguards at the prima facie stage, disparate-impact liability might cause race to be used and considered in a pervasive way and “would almost inexorably lead” governmental or private entities to use “numerical quotas,” and serious constitutional questions then could arise." (emphasis mine)

Far from simply rubber-stamping the permissibility of FHA disparate impact claims, SCOTUS balanced this permissibility with a rigorous set of standards for such claims to succeed — standards that, in many ways, were based on those from related federal anti-discrimination laws such as Title VII of the Civil Rights Act and the Age Discrimination in Employment Act — along with relevant SCOTUS interpretations of these laws such as Griggs vs. Duke Power Co. and Wards Cove Packing Co., Inc. v. Antonio ("Ward's Cove").  

In particular, SCOTUS made important clarifications to the standards of evidence required within the three-step burden-shifting framework outlined in Ward's Cove:

"The limitations on disparate-impact liability discussed here are ... necessary to protect potential defendants against abusive disparate-impact claims." (emphasis mine)

"A disparate-impact claim relying on a statistical disparity must fail if the plaintiff cannot point to a defendant's policy or policies causing that disparity. A robust causality requirement ensures that “[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact” and thus protects defendants from being held liable for racial disparities they did not create. Wards Cove Packing Co. v. Antonio, 490 U. S. 642, 653 (1989), superseded by statute on other grounds, 42 U. S. C. § 2000e–2(k)." (emphasis mine)

"Policies, whether governmental or private, are not contrary to the disparate-impact requirement unless they are “artificial, arbitrary, and unnecessary barriers.” Griggs, supra, at 431." (emphasis mine)

"... disparate-impact liability must be limited so employers and other regulated entities are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system. And before rejecting a business justification—or, in the case of a governmental entity, an analogous public interest—a court must determine that a plaintiff has shown that there is “an available alternative . . . practice that has less disparate impact and serves the [entity’s] legitimate needs.” Ricci, supra, at 578." (emphasis mine)

“Remedial orders in disparate-impact cases should concentrate on the elimination of the offending practice that “arbitrar[ily] . . . operate[s] invidiously to discriminate on the basis of rac[e].” (emphasis mine)

In the end, Inclusive Communities turned out to be a significant ruling, but one with contrasting effects. On the one hand, the Agencies prevailed since SCOTUS ruled that disparate impact claims were cognizable under the FHA — consistent with their prior and ongoing enforcement activities in the mortgage lending sector. However,

• SCOTUS's Inclusive Communities ruling did not settle the disparate impact cognizability question for ECOA which — as many law firms pointed out — had different statutory language than Title VII and the FHA. Accordingly, the legality of the Agencies' disparate impact enforcement actions in the auto lending space remained unresolved.[17]

• Despite the Agencies' statements to the contrary, both Inclusive Communities and Wal-Mart theoretically ripped a big hole in their ECOA disparate impact enforcement approach for the following four reasons.

  • SCOTUS ruled in Inclusive Communities that statistical disparities in lending outcomes — i.e., the basis of the Agencies' disparate impact enforcement approach since 2009 — were insufficient alone to establish a prima facie case for such claims.

  • Wal-Mart significantly limited the Agencies' ability to use the lender's "policy of discretion" as the underlying causal reason for observed company-wide pricing disparities.

  • The Agencies failed to identify any "artificial, arbitrary, and unnecessary" policies or practices responsible for the lenders' pricing disparities, as discussed in Inclusive Communities.

  • The Agencies did not follow the three-step burden-shifting framework described in Ward's Cove in their evaluation of the lender's liability for disparate impact. In particular, they dismissed out of hand any business justifications asserted by the lenders for discretionary dealer mark-up amounts, and they did not offer a less discriminatory alternative that would have had a similar business effect.[18]

The Agencies Respond to Inclusive Communities By ... Not Changing Their Disparate Impact Enforcement Campaign

The Agencies celebrated the Inclusive Communities decision as vindication of their long-standing interpretation of, and position on, FHA disparate impact cognizability, and the appropriateness of HUD's 2013 Discriminatory Effects Standard [19] — seeing no reason to make any changes to their disparate impact enforcement approach. Others in the legal community, however, saw things much differently:

"To date, the government has resisted any suggestion that Inclusive Communities had any negative bearing on the HUD rule. Rather, HUD and the U.S. Department of Justice have made public statements that Inclusive Communities reinforces standards that have always applied to disparate-impact claims and is entirely consistent with the government’s enforcement of the FHA. ... [However,] Inclusive Communities has a silver lining––namely, the significant limitations it placed on disparate-impact claims brought under the FHA. Because it appears that enforcement agencies will continue to use the same enforcement theories as previously, businesses should continue to direct their compliance programs pursuant to government enforcement policies to reduce legal risk. But at the same time, business should be prepared to vigorously defend their practices under the proper legal standards if a matter reaches litigation." — Inclusive Communities Project’s Silver Linings: Assessing the High Court’s 2015 Fair Housing Act Ruling, by Paul F. Hancock, Andrew C. Glass, and Olivia Kelman, November 20, 2015. (emphasis mine)

And so for the remaining 18 months of the Obama administration, it was business as usual at the Agencies, even though SCOTUS's disparate impact decisions — while consistent with the Agencies' ability to bring FHA-related disparate impact claims — were inconsistent with how the Agencies were bringing these claims.[20] In fact, not one month after the Inclusive Communities opinion, in July 2015, the Agencies settled an ECOA dealer mark-up disparate impact claim against American Honda Finance Corp. for $24 million. This was followed by similar settlements in September 2015 with Fifth Third Bank for $18 million and in February 2016 with Toyota Motor Credit Corp. for nearly $22 million.

The Agencies were able to proceed with business as usual because no lender was willing to litigate the disparate impact claims in court, even with SCOTUS's recent Inclusive Communities decision. Notably, this business-as-usual behavior was in stark contrast to the federal courts (including Courts of Appeals), which began to apply Inclusive Communities' more rigorous standards to private FHA disparate impact litigation — with deleterious effects. For example:[21]

• Ruling that one plaintiff failed to cite the defendant's specific policy or practice causing the alleged harm.

• Ruling that one plaintiff's advocacy for remedial action was equivalent to racial quotas — rather than simply seeking the removal of "artificial, arbitrary, and unnecessary" barriers.

As one leading fair lending law firm put it:

"It is no surprise the CFPB has been noticeably silent about ... what happened to the plaintiffs in the Inclusive Communities case after it was remanded to the appeals court. That court further remanded it back to the district court to reconsider in light of the Supreme Court's ruling. Predictably, the case was dismissed because it was based solely on statistical analysis. And, at least one other district court has dismissed a disparate impact case for the same reason. I think it's reasonable to assume that the last thing the CFPB or the Justice Department want to do is litigate an auto finance disparate impact case, given their heavy reliance on questionable statistical analysis and a lack of further evidence of discrimination. It would be only a matter of time for a case to make its way through the courts resulting in what would very likely be a defeat for the agencies." — Like A Dog With a Bone, Hudson Cook, February 1, 2017. 

A (Relatively Short) Disparate Impact Pause and the Continuing Battle Over Inclusive Communities' Limitations

In 2017, the new Trump Administration moved to shut down the Agencies' disparate impact enforcement campaigns as it believed they were exceeding their statutory authorities. To this end, the Government Accountability Office ("GAO") concluded in December 2017 that the CFPB's 2013-02 Bulletin on auto lending disparate impact was actually a new federal agency rule under the Congressional Review Act — not simply informal Agency guidance. Accordingly, since the CFPB failed to follow required congressional oversight procedures before implementing the Bulletin in 2013, Congress and President Trump formally repealed this Bulletin in May 2018. While a belated victory for the industry, the CFPB's failure to follow proper due process had caused significant business disruptions, costs, and reputational damage that were largely irreversible.

The Administration was also reported to have broader plans to dismantle the Agencies' disparate impact enforcement. According to Ballard Spahr in May 2018,

"Politico also reported that Mr. Mulvaney indicated that, as a result of Congress’s override of the CFPB bulletin concerning discretionary pricing by auto dealers, the CFPB is reviewing the application of the disparate impact theory under the ECOA.  ... Mr. Mulvaney is reported to have indicated that the Bureau’s review is not limited to the auto finance context and instead will look at the Bureau’s overall approach to ECOA liability.  His comments appear to be consistent with the statement issued by the CFPB following President Trump’s signing of the joint resolution overriding the CFPB bulletin in which the CFPB indicated that it would be reexamining ECOA requirements in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”

Relatedly, in June 2018, HUD issued an Advance Notice of Proposed Rulemaking ("ANPR") seeking comments on whether HUD should revise its 2013 Discriminatory Effects Standard in light of the Supreme Court's opinion in Inclusive Communities. As noted previously, the Obama Administration declined to make any revisions to HUD's 2013 Standard as it believed it was already fully aligned with SCOTUS's decision. While many consumer advocacy groups that responded to the ANPR saw no need to make changes to HUD's 2013 Standard, many industry groups pointed out several vital inconsistencies between HUD's 2013 Standard and the crucial limitations to FHA disparate impact claims enumerated in Inclusive Communities.[22]

These conflicting views sparked a battle — still raging to this day — over changing HUD's 2013 Standard to formally recognize SCOTUS's limitations on FHA disparate impact claims, as outlined in Inclusive Communities. Lining up on one side were many consumer and housing advocates, as well as proponents of equitable lending, who wished to retain the 2013 Standard's more plaintiff-friendly language that facilitated the type of streamlined disparate impact cases pursued by the Agencies under the Obama Administration. On the other side were many prominent law firms, industry trade groups, and the Trump Administration who wanted the 2013 Standards changed to more explicitly reflect the significant limitations handed down by SCOTUS to prevent the type of abusive disparate impact claims, backed by little more than statistical disparities, that the Court feared would lead — and, in fact, had led — to the pervasive adoption of racial quotas.[23]

After receiving a historic 45,758 comments on the proposed rule changes, HUD issued a new Discriminatory Effects Standard on September 4, 2020 ("HUD's 2020 Standard"), which largely synchronized HUD's 2013 Standard with the Inclusive Communities' disparate impact limitations. For specific details on these changes, see the excellent summary by Ballard Spahr, HUD issues final rule revising its FHA disparate impact standards to reflect SCOTUS Inclusive Communities decision, Consumer Finance Monitor, September 11, 2020.

However, days before HUD's 2020 Standard was to take effect, multiple housing advocacy groups filed lawsuits in several federal courts, alleging that the 2020 Standard violated the Administrative Procedures Act on various grounds. Based on the plaintiffs' claims, one of the federal court judges issued a nationwide injunction on October 25, 2020 preventing HUD from enforcing the 2020 Standard — thereby keeping the 2013 Standard in effect. With President Biden's win in the November 2020 General Election, it was unlikely that HUD's 2020 Standard would survive. And it didn't.

On March 17, 2023, HUD — under the Biden Administration — issued a final rule that reinstated the 2013 Discriminatory Effects Standard. Consistent with the Obama Administration, HUD maintained that the 2013 Standard was consistent with the 2015 Inclusive Communities decision and required no changes. Such a position was certainly not widely held across the industry, given that Inclusive Communities was decided two years after the 2013 Standard was implemented (see, for example, HUD reinstates 2013 Fair Housing Act disparate impact rule, Consumer Finance Monitor, March 20, 2023). Many, but certainly not all, industry stakeholders viewed HUD's decision as an example of how a federal agency can abuse Chevron deference to expansively interpret relevant statutes in a manner that favors its policy priorities — something the CFPB's Chopra era was particularly adept at, as we will see next.

The CFPB's Chopra Era: The Rise of the Technologists and the (Short-Lived) Adoption of Race-Based Credit Scoring Models

I am sure much will be written about the CFPB's Chopra era under President Biden. Some will certainly praise the Bureau's ground-breaking regulatory actions against "junk fees", fintechs and non-banks, redlining [24], UDAAP-based unfairness, and algorithmic discrimination (to name a few). Others, I expect, will be more critical of an independent federal agency that, in their opinion, aggressively exceeded its statutory authority to advance the Administration's policy priorities (e.g., "junk fees", UDAAP-based discrimination, and Big Tech regulatory oversight). As usual, the truth likely lies somewhere between these two perspectives, and I leave it to others to objectively analyze the Bureau's overall record.

What is relevant to this article is something different and unique to the Chopra CFPB — the creation of a Chief Technologist role filled by a political appointee reporting directly to the Director, and the Bureau's hiring of a data science team to advance Bureau priorities in the area of algorithmic disparate impact. As the media reported around the time of Director Chopra's appointment,

" ... consistent with his focus on Big Tech, data privacy, and algorithmic bias at the FTC, Director Chopra has made crystal clear that fair lending—and in particular, algorithmic discrimination—and other practices that adversely impact communities of color will be a top agency priority. For example, in remarks announcing the settlement of a traditional redlining case, Director Chopra focused largely on “digital redlining.” He specifically called out companies that gather “massive amounts of data and use it to make more and more decisions about our lives, including loan underwriting and advertising” and encouraged data scientists, engineers, and others with “detailed knowledge of the algorithms and technologies used by those companies and who know of potential discrimination or other misconduct” to report potential fair lending violations to the CFPB. These comments have led many to believe that Director Chopra may potentially pursue new or novel fair lending theories related to artificial intelligence, machine learning, and related underwriting with algorithms." — Half a Year and Counting: A Reaction to the First Months of Director Chopra’s Fair Lending Regulatory Agenda, Business Law Today, June 2022. (emphasis mine)

After the new data science team (the "technologists") was launched, they and their Bureau colleagues were eager to prove how they could advance the Director's supervisory and enforcement priorities. And it wasn't long before they piqued the interest of Bureau leadership with an open-source automated technology that purportedly removes "algorithmic disparate impact" (i.e., statistical disparities in loan approval rates and loan pricing) from credit scoring models. Soon enough, and without industry notice, the technologists were embedded with the Bureau's supervisory examination teams to demonstrate the value of this new technology-driven, disparate impact supervisory tool, even though lender credit scoring models had long been evaluated for fair lending compliance and disparate impact without major issues under the regulatory agencies' traditional fair lending examination procedures.

For the first time, certain supervised lenders were being asked to comply with large-scale data production and model documentation requests to allow the Bureau's technologists and supervisory teams: (1) to replicate each lender's credit scoring models, (2) to test for lending outcome disparities, and (3) to apply the automated "debiasing" technology to search for less discriminatory alternative ("LDA") models that, in the technologists' view, comparably achieved the lender's business needs.

One certainly could argue that this simply reflected a new technology-enabled supervisory examination process. However, given the Bureau's aggressive disparate impact enforcement history, it wouldn't be unfair to view this instead as a new, statistically-driven enforcement hammer looking for nails. What I believe is most likely is that the Bureau was both testing out this new examination approach and searching for a large lender who failed to properly evaluate (and adopt) a less discriminatory alternative model, when one was clearly available according to the open-source automated debiasing technology.

This would enable the Bureau to initiate its first ECOA disparate impact enforcement action based solely on simple statistical outcome disparities, and the purported existence of valid LDA models produced by an open-source automated tool that few actually understood. With this enforcement action, it could then drive the Administration's racial equity policy broadly into the industry's millions of credit decisions each year without any due process or Congressional approval.

Even if this were a noble goal, let's stop and think about these actions for a moment.

• Instead of challenging the fair lending compliance of a lender's credit scoring models using traditional examination approaches that test the lender's Compliance Management System ("CMS") for design and operating effectiveness, the Bureau was now actively challenging bank management by estimating what it believed to be a superior credit model using its new team of technologists and an open-source algorithm that few decision makers at the Bureau understood.

• Contrary to Inclusive Communities, the Bureau's approach involved supervisory teams making critical management judgments as to whether the potential LDA credit models identified by its technologists had "comparable" predictive performance to the lender's own models, and otherwise met the lender's valid business interests. In the context of credit scoriing, a lender's valid business interests encompass multiple quantitative and qualitative dimensions, involving various model performance metrics — such as rank-order accuracy and calibration accuracy — as well as numerous business risk and operational considerations, including the monotonicity of estimated relationships, intuitive model explanability, model stability, low operational risk, and more. If the Bureau, as I expect, focused solely on one or two technical model performance measures to determine that its LDA model should be acceptable to the lender, this would be a woefully insufficient evaluation of the totality of a lender's valid business interests related to credit risk, model risk, and operational risk management. It would also, in my mind, cross the line of regulator independence — which I discuss more fully below.

• More broadly, through this new algorithmic disparate impact examination approach, the Bureau was also directing supervised lenders to adopt a credit model disparate impact framework that was likely at odds with SCOTUS's Inclusive Communities ruling. For example, the technologists' search for less discriminatory alternative credit models was triggered simply by the presence of a statistical disparity in loan approval rates of a specific magnitude, regardless of whether that disparity was driven by legitimate differences in the underlying creditworthiness between the groups. Additionally, rather than targeting remedial model adjustments to the specific "artificial, arbitrary, and unnecessary" credit factors believed to be driving the statistical disparity, the technologists' "debiasing" approach simply changed the weights on whatever factors were necessary to produce more equitable loan approval rates — even if such factors were clearly business justified (such as DTI, LTV, or prior bankruptcies).

• The Bureau's statistical disparity-based debiasing approach, if adopted by the bank, would effectively cause lenders to engage in reverse disparate impact discrimination to achieve more equitable loan approval rates between groups. As my research has shown,[25] these technologies latently encode a reverse disparate impact into the LDA model's structure to achieve approval rate disparity reduction — intentionally underpredicting the credit risk of credit profiles correlated with minority groups (to increase their approval rates) at the expense of overpredicting the credit risk of credit profiles correlated with White groups (to reduce their approval rates).

• The Bureau's superficial evaluation of the LDA models' predictive accuracy, based on one or two statistical metrics, reflected an insufficient concern for how the LDA model would impact the bank's safety and soundness, if adopted by the bank under regulatory pressure. What if the LDA model generated unexpected credit losses? What if private plaintiffs sued the bank for reverse discrimination? I assume that professional standards require a regulator, like any risk management group, to remain independent of the entity it is charged with overseeing to maintain its effectiveness and objectivity. However, this independence is lost when the risk manager becomes directly involved in the activities over which they have oversight. By pushing lenders to implement this specific automated debiasing methodology and, potentially, one of the LDA credit models the technologists identified, the Bureau — in my opinion — would be crossing the line of regulatory independence.

But, there was an even bigger problem.

The automated debiasing methodology adopted by the Bureau required race / ethnicity data on all applicants to produce its LDA credit models — and this was illegal.

As I wrote in a prior article on these methodologies, the use of demographic data in credit evaluation systems has always been considered an ECOA violation according to the following statutory language:

Except as provided in the Act and this regulation, a creditor shall not take a prohibited basis into account in any system of evaluating the creditworthiness of applicants. — 12 CFR Sec. 202(b)(1) (emphasis mine) 

Except as otherwise permitted or required by law, a creditor shall not consider race, color, religion, national origin, or sex (or an applicant’s or other person’s decision not to provide the information) in any aspect of a credit transaction. — 12 CFR Sec. 202(b)(9) (emphasis mine)

In fact, this prohibition against using borrower demographic information, either directly or via proxies, forms the basis of much of the federal bank regulatory agencies' fair lending examination procedures associated with credit decisions and credit scoring models.  As just one of many examples, the FFIEC's Interagency Fair Lending Examination Procedures states:

"Including variables in a credit scoring system that constitute a basis or factor prohibited by Regulation B is an overt indicator of discrimination."

As I understand it, this was a clearly known issue within the Bureau. And, of course, I am sure some lenders also expressed this concern. Nevertheless, I understand that the Bureau generally sought to finesse away these objections and, at some point, achieved a sufficient degree of confidence in these automated debiasing methodologies to make formal written references to them.

Unfortunately for the Bureau, however, the clock was running out once the result of the 2024 presidential election was decided, and a change of Administration was imminent. Despite the best efforts of its technologists' work, the Bureau was apparently unable to find a lender, like Ally Financial in 2013, against whom it could take formal disparate impact enforcement action to force industry changes to credit scoring models in the interest of racial equity.

Perhaps as a last chance to influence the industry or give credit to the work of its technologist team, the Bureau issued its Supervisory Highlights Special Edition publication on January 17, 2025 — the last business day of the Biden Administration. In this document, the Bureau finally went public with its campaign against algorithmic discrimination in credit scoring models and its endorsement of automated debiasing methodologies. While I have had much to say about this document elsewhere [26], the most alarming feature was its complete silence on how these technologies utilize race/ethnicity data to estimate LDA credit models. My critique notwithstanding, new CFPB leadership under President Trump dismissed the technologist team in February 2025 (along with the Chief Technologist). And on April 24, 2025, it withdrew the Supervisory Highlights Special Edition document, marking the end (for now?) of the technologists' rise at the Bureau.

So, Is Disparate Impact Dead?

As I wrote earlier, some may view the Agencies' history over the last two decades as highly successful, focusing on combating the scourge of lending discrimination in its most insidious form: disparate impact. However, Congress, through its legislation, and the courts, through their interpretations of disputed statutes, define the types of statistical disparities that are illegal, and which others are simply the benign consequence of demographically-correlated economic attributes interacting with objectively reasonable business requirements.

Unfortunately, our two primary anti-discrimination laws governing consumer lending — the ECOA and FHA — have notable imprecisions in their statutory text as to what types of lending outcome disparities are illegal. Under one of these laws, the Supreme Court has ruled that unintentional discrimination based on a neutral policy can be illegal if it disproportionately disadvantages individuals based on certain protected characteristics. However, it also placed important limitations on lawsuits based on such outcome disparities to prevent their abusive use in attacking the types of statistical disparities that our laws never intended to prohibit.

Historically, the enforcement of disparate impact by the Agencies has been highly controversial. Some have celebrated it as a well-needed expansion of the Agencies' valid enforcement authorities. And others have decried it as a cavalier "ends justify the means" approach to advance Administration policy priorities without proper due process, using shrewd exploitation of statutory imprecisions under Chevron deference, or simply asserting new law as needed (e.g., UDAAP-based discrimination). As I expect you know by now, my read of the history tends to lean to the latter.

And that is partly why I believe this Executive Order was issued. Over the last two decades, despite SCOTUS's attempts to prevent abusive use, those within the Trump orbit have seen our federal Agencies driving — directly and indirectly — disparate impact enforcement approaches that they believe are intentionally legally defective to achieve aggressive policy priorities for which they do not have, and likely cannot get, the necessary legislative backing.

But how can they enforce statutes using legally defective interpretations?

Because virtually no one subject to these Agencies' jurisdictions wants to challenge them in court, given the time, expense, and reputational damage that it involves. So these lenders adopt the policies the Agencies are promoting under their defective legal interpretations, such as demographic pricing parity and race-based credit scoring models, to minimize — ironically — their legal and compliance risks.

OK, but what about true disparate impact? You know, the type of discrimination the Supreme Court affirmed in Inclusive Communities?

Well, this type of discrimination requires the Agencies to actually investigate and find specific causal policies that represent "artificial, arbitrary, and unnecessary" barriers to credit access. And since most of the larger lenders already scrupulously avoid these types of credit model factors via their disparate impact compliance risk management policies and procedures, this type of disparate impact discrimination — more meaningfully grounded in policy rather than in simple statistical disparities — appears to be a lower priority for the Agencies.[27]

So, how should lenders respond to this Executive Order?

Disparate impact is not dead. However, what may be dead is the aggressive, statistically-based type of disparate impact enforcement seen over the last two decades — at least for the next four (or more?) years. What still lives on is the traditional disparate impact liability outlined in Inclusive Communities. That type of fair lending compliance risk management should remain a top priority for consumer lenders even if the current Administration declines to make it an enforcement priority. It is wrong and illegal, and should be vigorously prevented from impacting consumer credit decisions. To read about my specific recommendations under this more traditional interpretation of credit model disparate impact, see my article Algorithmic Justice: What's Wrong With the Technologists' Credit Model Disparate Impact Framework?

What about the argument that the Agencies' more aggressive disparate impact enforcement will be back sometime in the future (or is being taken up now by state regulators), and we need to manage that risk today?

That's a risk management call. Following the prior Agencies' interpretations, directives, and "guidance" comes with its own set of risks in today's policy environment, in which discrimination against any racial group is viewed as actionable. And, technically, according to SCOTUS, it is.

* * *

ENDNOTES:

[1] While Inclusive Communities indisputably supports FHA disparate impact liability for mortgage-related lending outcomes, I note that:

• This decision did not resolve the issue of cognizability under ECOA, which is relevant to a broader range of consumer lending products, including credit cards, auto loans, and unsecured loans.

• There is still an active dispute in legal circles as to whether ECOA includes specific language providing for disparate impact liability — regardless of the Federal Reserve's inclusion of Effects Test language in its implementing Regulation B text (see Supplement I Official Staff Interpretation Sec. 202.6(a)(2)). Such text does not have the effect of law simply by being present in a federal agency's implementing regulation, and the strength of the agency's ECOA interpretation is now questionable, given SCOTUS's overruling of Chevron deference in Loper Bright vs. Raimondo.

• There was vigorous dissent in SCOTUS's 5-4 Inclusive Communities opinion by Justices Alito, Thomas, and Roberts, who argued that the FHA language did not contemplate disparate impact liability. This is relevant as: (1) the composition of SCOTUS has changed since the Inclusive Communities decision in 2015 — with Gorsuch, Kavanaugh, Jackson, and Barrett replacing Ginsburg, Kennedy, Breyer, and Scalia, and (2) the current SCOTUS has shown a propensity to take cases involving US anti-discrimination laws and protections (e.g., Students for Fair Admissions vs. President and Fellows of Harvard College and Ames vs. Ohio Department of Youth Services). These considerations make it possible that the current SCOTUS may revisit the cognizability of, and the requirements for, disparate impact liability under federal fair lending laws (or, perhaps, just under ECOA) — with the potential for a different majority outcome.

[2] In 2011, the DOJ's settlement with Countrywide/Bank of America was described by the DOJ as a "landmark fair lending case," with the highest amount of monetary relief ($335 million) ever awarded in a fair lending enforcement action. Although not explicitly called a disparate impact case (perhaps intentionally), the language of the DOJ's Complaint was certainly consistent with this theory of liability, as it referred to Countrywide's "policy of discretion" as well as other language associated with disparate impact legal claims:

[Countrywide's] "home mortgage lending policies allowed its employees and mortgage brokers both to set the loan prices charged to borrowers and to place borrowers into loan products in ways that were not connected to a borrower's creditworthiness or other objective criteria related to borrower risk." ... "Countrywide's policies and practices ... were not justified by business necessity or legitimate business interests. There were less discriminatory alternatives available to Countrywide than these policies or practices.". (emphasis mine)

Shortly after this settlement, the DOJ settled similar fair lending allegations with Suntrust Mortgage, Inc. — the second-largest fair lending settlement at the time ($21 million). In a speech announcing this settlement, DOJ Civil Rights Division leader Thomas Perez explicitly referenced the disparate impact theory of liability underlying this settlement:

"SunTrust ... allowed its loan officers and brokers to alter ... prices without regard to borrower risk. This subjective and unguided discretion resulted in African-American and Latino borrowers paying more than similar qualified white borrowers.  SunTrust incentivized discrimination by sharing its discriminatory charges with any retail mortgage loan officer or wholesale mortgage broker who could obtain inflated prices from African-American and Hispanic borrowers. Furthermore, SunTrust did not require its employees to justify or document the reasons for many of the pricing adjustments not based on borrower risk and failed to adequately monitor for and fully remedy the effect of racial disparities in those pricing adjustments. Our complaint alleges that these policies had a disparate impact on African-American and Latino borrowers." (emphasis mine}

[3] HUD's 2013 Discriminatory Effects Standard was critical for the Agencies' fair lending enforcement as, at the time, Agency interpretations of federal law for administrative purposes received broad deference by Courts (known as Chevron deference). Accordingly, FHA disparate impact claims and the three-stage burden-shifting framework used to evaluate such claims had the imprimatur of statutory authority, despite significant legal debate still existing regarding these interpretations, and the Supreme Court having not yet ruled on them.

I also note that industry trade groups criticized HUD's 2013 Discriminatory Effects Standard for "erroneously reject[ing] Wards Cove as supplying the governing standard for Fair Housing Act disparate impact claims in its 2013 Rule ... [instead choosing] the 'Title VII discriminatory effects standard codified by Congress in 1991' as the standard ... Because HUD lacks legislative authority and authority to overrule Supreme Court precedent, the 2013 Rule is flawed. The 2013 Rule’s legal error in rejecting Wards Cove in the context of FHA and adopting the standard of the 1991 Title VII amendments was confirmed in 2015 when the Supreme Court decided Inclusive Communities and continued to rely on Wards Cove in the Fair Housing Act context."

[4] See The Pendulum Always Swings Twice: Disparate Impact Under the Obama, Trump, and Biden Administrations, American Bar Association Consumer Financial Services Committee Newsletter, May 14, 2021. "The Obama administration’s 2013 HUD Rule did more than preserve decades of disparate impact precedent—it sought to make it significantly easier for plaintiffs to succeed in court."

[5] See The Attorney General's 2010 Annual Report to Congress Pursuant to the Equal Credit Opportunity Act (p. 4).

[6] Ibid., p. 6.

[7] I note that many law firms and industry groups pushed back on the CFPB's assertion of legal authority to pursue disparate impact claims under ECOA and Regulation B. See, for example,

• CFPB confirms plans to use “disparate impact” to prove lending discrimination, Ballard Spahr Consumer Finance Monitor, April 18, 2012.

• U.S. Department of Justice Turns Spotlight on Disparate Impact Discrimination Claims, Dechert OnPoint, September 2012, referencing The American Bankers Association's July 18, 2012 Letter to Federal Reserve Chairman Bernanke, "asserting that the terms of the FHA and the ECOA do not support disparate impact theory".

[8] In addition, the CFPB stated that dealer-specific disparities in average dealer mark-up amounts were also actionable under ECOA disparate impact theory.

This Bulletin was highly controversial and unpopular among most lenders, industry trade groups, and many consumer finance lawyers due to its allegedly flawed interpretation of ECOA, its retroactive application to lenders' past loan transactions, and its failure to follow the proper regulatory process (i.e., the Administrative Procedures Act ("APA")). For these reasons, this Bulletin was ultimately rescinded by Congress five years later in 2018 under the Congressional Review Act (after the GAO concluded that it was effectively a rule). By that time, however, the Agencies had sued numerous indirect auto lenders under the ECOA disparate impact liability theory and collected hundreds of millions of dollars in financial settlements.

[9] The Agencies further enraged the industry by taking what many considered an extreme position regarding "allowable" legitimate business interests that lenders could assert to help explain the alleged disparate impact (i.e., the second step in the three-step burden-shifting framework). See, for example, the American Financial Services Association's report, Fair Lending: Implications for the Indirect Auto Finance Market, published in November 2014.

Apart from explicit and documented policy rules that would cause dealer mark-up amounts to vary across customers (such as mark-up caps for certain loan programs, loan terms, or credit tiers), the Agencies would not consider any other business-related factors to explain some or all of the observed differences in average dealer mark-ups across borrower groups. This position effectively foreclosed lenders' ability to mount a valid business interests defense against these statistical disparities. For the Agencies, however, this position ensured a much more streamlined investigation and enforcement process that facilitated maximum financial settlement amounts.

Additionally, the Agencies further angered industry participants by assessing Ally an $18 million civil money penalty as a "deterrent effect," even though disparate impact represents unintentional discrimination and such penalties represent a form of punitive damages.

[10] This was a significant difference from the DOJ's prior mortgage lending disparate impact settlements, where such data was available for most lenders under the Home Mortgage Disclosure Act ("HMDA") and Regulation B.

[11] As my focus in this article is strictly on disparate impact theory, I refer readers to my other publications, which analyze the related controversies surrounding the CFPB's use of the BISG proxy methodology as a reliable indicator of borrower race and ethnicity. See, for example, The Hidden Biases of BISG Proxy-Based Disparity Estimates.

[12] See the CFPB's Summer 2014 Supervisory Highlights publication.

[13] Technically, the Agencies permitted the average dealer mark-up disparity to vary by no more than 10 basis points (0.10%) across demographic groups. However, when remediating disparities larger than this threshold, it was common for lenders to continue remediation until no residual disparity remained.

[14] Even though Title VII of the Civil Rights Act explicitly addresses employment discrimination, courts have looked to this statute and the Age Discrimination in Employment Act — along with their accumulated case law — to interpret similar language in other anti-discrimination statutes such as the FHA.

[15] See, for example,

• Recent Supreme Court Actions Likely to Affect Fair Lending ‘Disparate Impact’ Litigation and Enforcement, Skadden Arps, November 17, 2011.

• Auto Finance and Disparate Impact: Substantive Lessons Learned From Class Certification Decisions, Consumer Financial Services Law Report, May 1, 2015.

[16] I note that the Democratic House members concluded that "... the overwhelming evidence obtained during this investigation indicates that Mr. Perez and other Department officials acted professionally to advance the interests of civil rights and effectively combat the scourge of discrimination in housing," and "... the evidence demonstrates that the Department's decisions not to intervene in unrelated False Claims Act cases were based on the recommendations of senior career officials who are regarded as the nation's preeminent experts in their field."

[17] Some may disagree with this statement by pointing to certain federal courts that have recognized ECOA disparate impact liability. However, this by no means indicates that: (1) all federal courts share this view, (2) that there is no difference of opinion on this position, and (3) that SCOTUS would rule similarly under ECOA.

[18] Certainly, the Agencies provided indirect auto lenders alternative pricing options in its 2013-02 Indirect Auto Lending Bulletin and during its investigation process. These options included eliminating dealer discretion or adopting a flat fee dealer compensation scheme. However, the Agencies never articulated objectively why the ubiquitous business practice of negotiation was not a valid business interest for lenders, nor did they address how their asserted less discriminatory alternatives would have similar business effects to the lenders' existing discretionary system. And the reason for this is that they could not.

Those who agreed to adjust their dealer compensation policies in response to the Agencies' disparate impact campaign did not fare well. According to one prominent fair lending law firm: "... every settlement the CFPB has reached has left the subject finance company in a less competitive position than its peers ...." — Like A Dog With a Bone, Hudson Cook, February 1, 2017.  In fact, the two lenders that adopted flat fee compensation models ultimately abandoned these alternatives due to the negative impact on their businesses. See BB&T Bank Ends Flat-Rate Dealer Compensation Program, Auto Finance News, February 9, 2018.

[19] See HUD Secretary Julián Castro Statement on Ruling in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., June 25, 2015.

[20] I put aside the fact that the auto lending disparate impact enforcement actions were brought under ECOA — not the FHA, and the Inclusive Communities decision was specific to the latter. While legally distinct, it is not a stretch to believe that the Agencies viewed the two laws as similar in a legal sense. In fact, in CFPB Bulletin 2012-04 (Fair Lending), the CFPB states:

"Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B."

Additionally, at a House Financial Services Committee hearing on March 16, 2016, CFPB Director Cordray is reported to have testified as follows about the Inclusive Communities decision:

"Despite the fact that the U.S. Supreme Court’s Inclusive Communities decision did not address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act, Director Cordray indicated that he views the decision as confirming the validity of using disparate impact to prove discrimination by auto finance companies. When a Committee member took issue with Director Cordray’s view, noting that Inclusive Communities involved the Fair Housing Act and not the ECOA and that the ECOA and FHA use different statutory language, Director Cordray responded that the two statutes 'are applied hand in glove'." — Director Cordray appears before House Financial Services Committee, Consumer Finance Monitor, Ballard Spahr, March 17, 2016.

[21] See the discussion in Inclusive Communities Project’s Silver Linings: Assessing the High Court’s 2015 Fair Housing Act Ruling by Paul F. Hancock, Andrew C. Glass, and Olivia Kelman, November 20, 2015.

[22] For example, see Reconsideration of HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard; Docket No. FR-6111-A-01, American Financial Services Association, August 17, 2018, and Joint ABA, CBA, HPC Comments on HUD’s Proposed Rule on Fair Housing Act Disparate Impact, American Bankers Association, Consumer Bankers Association CBA, Housing Policy Council HPC, October 18, 2019.

[23] As I have noted previously, the Agencies' requirements for either fixed dealer compensation or ex-post loan price adjustments to eliminate statistical disparities in average dealer mark-up amounts across race / ethnic groups were effectively pricing quotas motivated by demographic parity.

[24] Some might question why I am not also highlighting the Chopra CFPB's redlining campaign, conducted jointly with the Biden DOJ, given its similar reliance on statistical lending disparities and its more than $150 million in financial settlements. The reason I have not explicitly included it is that it is unclear whether these cases were brought under disparate treatment liability or disparate impact liability. Nevertheless, this large-scale, statistically-driven fair lending enforcement campaign has generated similar controversies of regulatory aggressiveness and overreach. See, for example, When Redlining Enforcement Crosses the Line, Paul F. Hancock, American Bankers Association White Paper, May 2025.

[25] See the Fool's Gold series of articles on my AI LendScape Blog.

[26] See Technological Exception: The CFPB's Embrace of Race-Based Credit Scoring Models.

[27] I do note that the CFPB does examine credit scoring models for the presence of potential illegal demographic proxies. However, this is a different type of discrimination risk (disparate treatment).

© Pace Analytics Consulting LLP, 2025.