The Consumer Financial Protection Bureau (CFPB) published a notice of proposed rulemaking aimed at addressing ambiguity with respect to its rules applying Equal Credit Opportunity Act (ECOA) provisions when assessing creditors’ lending decisions.
The bureau’s main objectives with the proposed rulemaking include eliminating references to “disparate impact” from existing ECOA-based rules and narrowing the scope of other key provisions intended to prevent discrimination against borrowers within protected classes, including mortgage applicants and small-business owners.
According to the notice, published in the Federal Register on Nov. 13, the agency began reexamining its ECOA-based rules after reviewing public comments responding to a 2020 request for information (RIF) on ECOA and Regulation B, as well as information obtained through supervision and enforcement.
The bureau’s latest notice is a response to a pair of executive orders from President Donald Trump, directing federal agencies to eliminate disparate-impact liability “to the maximum degree possible” and to ensure enforcement of civil-rights laws “by ending illegal preferences and discrimination.”
The CFPB said these orders, together with its own review of Supreme Court precedents and statutory interpretations, led it to conclude that ECOA’s text does not authorize disparate-impact claims and that prior reliance on legislative history was misplaced.
“Consistent with these actions, the bureau proposes this rule to (i) provide that ECOA does not authorize disparate impact claims; (ii) amend the prohibition on discouraging applicants or prospective applicants to clarify that it prohibits statements of intent to discriminate in violation of ECOA and is not triggered merely by negative consumer impressions, and to clarify that encouraging statements by creditors directed at one group of consumers is not prohibited discouragement as to applicants or prospective applicants who were not the intended recipients of the statements; and (iii) amend the standards for SPCPs (special purpose credit programs) offered or participated in by for-profit organizations to include new standards and related restrictions,” the bureau wrote in the notice.
Although the Supreme Court has not ruled whether disparate impact claims are permissible under ECOA, the bureau noted that Sec. 701(a) of ECOA, as enacted in 1974, made it “unlawful for any creditor to discriminate against any applicant on the basis of sex or marital status with respect to any aspect of a credit transaction.” In 1976, ECOA was amended to expand the prohibited basis for discrimination in credit transactions.
Under the expanded discrimination provision, ECOA made it illegal for “any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under [the Consumer Credit Protection Act].”
In 1977, the Federal Reserve amended Regulation B to reference disparate impact, asserting that discrimination under ECOA could occur either through overt acts of discrimination or when a creditor’s facially neutral policy has a discriminatory effect on a prohibited basis, even without intent to discriminate.
ECOA’s “discouragement provision,” adopted in 1975 as part of Regulation B, prohibits creditors from making oral or written statements to applicants or prospective applicants that would discourage a reasonable person from applying for credit. The bureau contended the provision has been applied too broadly throughout its existence and has had a potentially chilling effect on creditors’ lawful commercial speech. It has proposed narrowing the rule so it will only prohibit statements demonstrating an intent to discriminate rather than statements that could merely cause negative consumer impressions.
Garris Horn LLP Co-Managing Partner Richard Horn called the CFPB’s interpretation of its ECOA rulemaking authority “flat-out terrible” in a post to his firm’s website.
“The CFPB essentially stated that ECOA’s general discretionary rulemaking authority allows the discouragement provision of Regulation B that extends to prospective applicants, even though ECOA itself is only limited to applicants,” Horn wrote. “This statutory interpretation of ECOA is totally inconsistent with the CFPB’s statement about statutory interpretation in the previous disparate impact section of its proposed rule. There, the CFPB stated with respect to statutory interpretation that ‘the most important consideration is the statutory language.’ But then for the discouragement provision, it completely ignores the statutory scope of ECOA.”
The CFPB went on to state that ECOA only applies to credit applicants, defined as persons that have applied for credit, before asserting that it had the rulemaking authority to broaden the scope of ECOA because “in the absence of a discouragement provision, creditors could sidestep this prohibition entirely by discouraging prospective applicants from applying for credit in the first place,” and that “a well-tailored discouragement provision that prohibits such practices protects ECOA’s purpose of making credit available on a non-discriminatory basis.”
“As our firm argued in the Townstone Financial lawsuit, this completely ignores ECOA’s statutory language and scope and allows the CFPB to create new law out of whole cloth,” Horn wrote. “This interpretation should be anathema to the current administration. Congress did not apply ECOA to ‘prospective applicants,’ and the CFPB does not have authority to use its general rulemaking authority to do so. It is quite frankly shocking that the current acting director of the CFPB would allow this interpretation of ECOA to go forward.”
The CFPB also indicated it believes current standards for SPCPs offered by for-profit organizations exceed congressional intent and may conflict with equal protection principles, noting that modern credit markets are substantially different from those in 1976. The bureau stated that it no longer finds it necessary or proper to permit for-profit SPCPs to use protected characteristics – such as race, color, national origin, or sex – for determining a borrower’s eligibility for such a program.
Given the bureau’s statement to the D.C. Circuit Court of Appeals that it expects its funding to run out in January, Horn said it is “hard to make sense” of the CFPB’s rulemaking plans with respect to ECOA or any other items listed on its Spring 2025 Unified Agenda.
“[I]t is unclear how the CFPB can finalize most of its proposed rules, or yet-to-be-proposed rules, if it will be forced to shut down in early 2026,” he wrote. “Finalizing a rulemaking takes time for some necessary steps, including reviewing and responding to public comments, drafting revisions to proposed rules and commentary, drafting new preamble and finalizing cost-benefit analyses.”
Horn added that, if there is some sort of internal race to finalize regulatory reform rules that would be beneficial to the industry before the bureau is shuttered, it would be beneficial for interested stakeholders to get a comment letter on the record.
Comments are due 30 days from the date the notice was published in the Federal Register.