US Consumer Watchdog to Overhaul Key Fair-Lending Regulation: What You Need to Know

The Consumer Financial Protection Bureau (CFPB) is poised for a significant change that could reshape the landscape of fair-lending regulations rooted in the civil rights era. This anticipated overhaul, championed by the current Republican administration, aims to align with an agenda focused on reducing perceived regulatory burdens on businesses.

The Context of the Changes

As reported on November 11, 2020, the CFPB's upcoming proposed changes revolve around the 1974 Equal Credit Opportunity Act (ECOA). These revisions follow former President Donald Trump's executive order from April, directing federal regulators to minimize regulations that could inadvertently promote favoritism and burdens on businesses while still addressing issues of discrimination.

What is ‘Disparate Impact’?

At the heart of these changes is the concept of 'disparate impact,' which has often been a tool for identifying unintentional discrimination against minorities in various sectors, including housing and lending. Critics, particularly from Congressional Democrats, contend that narrowing this liability could lead to an increase in systemic racial and gender discrimination.

Contentions Surrounding the Overhaul

Proponents of the regulatory reform argue that eliminating or reducing the implications of disparate impact will ease the operational pressures on businesses. They assert that companies should not be penalized for outcomes that appear discriminatory without evidence of intent. However, consumer advocates argue vehemently against this perspective, highlighting that disparate impact enforcement is crucial for combating historical inequities.

Potential Implications of the Proposal

The forthcoming changes could significantly limit the application of disparate impact as a requirement under the ECOA, subsequently restricting the use of Special Purpose Credit Programs. These programs, previously encouraged during the Biden administration, were designed to promote credit access in underserved communities. Such restrictions raise alarms regarding the potential for regression in achieving equitable lending practices.

The Historical Context

Historically, the disparate impact framework has been instrumental for the government, allowing for the identification and rectification of discriminatory practices within banking and mortgage sectors. Stephen Hayes, a former senior attorney for the CFPB, emphasized that removing this enforcement tool would hinder the government’s ability to tackle discrimination effectively, especially as credit markets become increasingly complex and automated.

Legal Precedents and Future Considerations

Despite the proposed regulatory changes by the Trump administration, the doctrine of disparate impact remains grounded in Supreme Court precedent, which will continue to apply, regardless of the CFPB's new regulations. This persistent reliance on judicial determinations creates an interesting dynamic for companies navigating these potentially conflicting regulatory environments.

Other Regulatory Modifications

In addition to changes regarding disparate impact, the CFPB has also been involved in modifying rules that previously aimed to prevent creditors from discouraging borrowers from seeking credit through misleading advertising. Recently, a court blocked the CFPB from refining a settlement with a lender accused of 'redlining' practices, reflecting the precarious balance between regulation and enforcement