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In August 2025, prudential regulators, the Federal Depository Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) joined the Office of the Comptroller of the Currency (OCC) in officially removing references to “disparate impact” from its Fair Lending guidance and examination handbooks. Federal regulators evaluate fair lending primarily based on disparate treatment and disparate impact. Disparate treatment is when a lender intentionally discriminates against a protected group, whereas disparate impact is when a lender has a neutral policy or practice that harms a protected group even without intent to discriminate.
Regulators will no longer examine for disparate impact for the first time in decades. This shift reflects changing regulatory priorities at the federal level and an increased opportunity for states to fill that gap.
This shift is a result of Executive Order 14281, Restoring Equality of Opportunity and Meritocracy issued on April 23, 2025, which required federal agencies to identify and eliminate the use of disparate impact liability in all contexts, arguing that disparate impact creates legal uncertainty and prevents opportunities for all.
Some in the industry view this as a victory for reducing regulatory burden. Supporters have advocated that disparate impact enforcement is a costly compliance burden which is subjective and difficult to measure. Industry groups such as the American Bankers Association recently advocated for the rescinding and replacement of the Department of Housing and Urban Development’s Fair Housing Act (FHA) 2023 Disparate Impact Rule, arguing banks spend substantial resources to comply. However, this is far from the end of disparate impact. Although federal regulators may be stepping away from enforcing disparate impact, states may see this as an opportunity to expand their oversight. For some states such as Massachusetts, the rollback signals not less enforcement but a call to action to safeguard consumers and maintain fair access to credit. Massachusetts has a history of supporting the validity of disparate impact claims under the Fair Housing Act.
Regardless of perspective on disparate impact, one fact is clear: the legal, reputational and compliance risks tied to disparate impact have not gone away, only the federal enforcement focus has shifted.
For financial institutions, this means more than adjusting to a change in examination procedures. It means navigating an increasingly unpredictable regulatory landscape, one in which the rules may shift again with the next administration.
The Bigger Picture
Fair lending laws such as the FHA and the Equal Credit Opportunity Act (ECOA) were enacted to ensure consumers receive access to credit free from discrimination on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
While the removal of disparate impact from federal fair lending guidance and exam deprioritization may seem like it is addressing regulatory burden, it does not change the laws themselves, state enforcement of their fair lending laws, litigation, or the reputational risk that comes from engaging in disparate treatment of consumers.
The ECOA and FHA have not been rescinded and still prohibit any form of discrimination, including disparate impact. The legal precedent that disparate impact is valid under the FHA was set in the Supreme Court case Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc in 2015.
States also remain active players. Many states have their own fair lending laws that evaluate disparate impact and can enforce them, as well as being able to enforce an extension of federal protections under the Dodd-Frank Act. Federal deregulation does not eliminate risk, it creates unpredictability. Not only is unpredictability costly, it brings uncertainty and often forces compliance functions to be reactive rather than proactive.
This is a clear reminder to banks that deregulation at the federal level is not an opportunity for non-compliance in their financial institutions. Instead, compliance teams should prepare for a state-led enforcement era and maintain robust programs that go beyond the minimum federal requirements to avoid litigation and reputational fallout over discriminatory lending practices.
Why Should You Care?
States such as New York, Massachusetts, California, and Illinois already have strong fair lending and unfair, deceptive, or abusive acts or practices (UDAAP) laws. Many of these laws remain in force and may be interpreted to cover disparate impact even without federal examination pressure.
States are already starting to show signs that not only can they enforce their fair lending laws but that they will in the spirit of disparate impact. Massachusetts recently reaffirmed that its anti-discrimination statutes apply fully to lending practices, regardless of federal priorities, by reaching a $2.5m fair lending settlement with a student loan provider for disparate impact. This underscores that state level scrutiny is active.
Without federal enforcement of disparate impact, banks operating across multiple jurisdictions face increased compliance complexity due to a patchwork of state level fair lending regulations that continue to uphold the enforcement of disparate impact.
Prudential regulators may not be currently examining for disparate impact but that could change with the next administration. What a financial institution doesn't do now can be put back on the agenda if another administration decides to reverse these executive orders.
In addition, legal and reputational risk remains. In 2024, Navy Federal Credit Union experienced both legal and reputational risk when a CNN article alleged discriminatory lending practices. The backlash from the article called for regulators to investigate the claims by various parties on the hill and advocacy groups, which resulted in several lawsuits and reputational harm. Parts of the initial lawsuit were later dismissed. The U.S. District Court for the Eastern District of Virginia still accepted the claim of disparate impact and the loss of customer trust remains.
This instance of legal and reputational risk highlights a key reality: banks can experience claims of unfair lending practices due to disparate impact without federal oversight or enforcement. The federal regulatory priority may be shifting but the liabilities remain. Financial institutions that scale back monitoring and testing for disparate impact may find themselves unprepared for state-level scrutiny, as well as lawsuits, or in this case a journalist, who decided to investigate the public Home Mortgage Disclosure Act (HMDA) data and trigger public scrutiny almost overnight.
Financial institutions that continue to monitor and analyze their lending data for disparate impact will be better positioned to manage not only fair lending risk but legal and reputational risk. Consumers expect equitable access to credit, making fair lending a core element of consumer protection, regardless of shifting federal priorities.
Next Steps
Banks can mitigate risks and maintain consumer trust by taking these proactive steps to account for today’s patchwork of state rules, while remaining agile enough to pivot if federal priorities change again:
- Maintain strong fair lending programs that monitor for both disparate treatment and disparate impact, even if not federally required.
- Track state laws and enforcement trends in every jurisdiction where the bank operates.
- Enhance governance and training so staff understand fair lending obligations and how to avoid discriminatory outcomes in product design, marketing, and underwriting.
- Periodically review lending policy and procedures to identify and mitigate potential discriminatory effects in policies and processes.
- Have an audit trail of decision-making processes to show consistent, equitable practices, especially if artificial intelligence is used in any part of the credit decision-making process.
Federal deregulation does not equate to reduced risk exposure; if anything, it adds complexity and unpredictability, in particular when it continues to come through executive orders. Executive orders to change laws or guidance is not the standard method for regulatory change, as the underlying laws remain legally binding. Banks that only focus on reduced burden may miss the broader impact: rising state enforcement, ongoing litigation risk, potential regulatory reversals during the next administration, and increased reputational risk.
