Federal and state fair lending regulators are charting different courses for the future of “disparate impact” liability under the Equal Credit Opportunity Act and analogous state law. For its part, the federal policymaking apparatus is working to limit or eliminate disparate impact liability under ECOA, basing the change on the Supreme Court’s 2015 Inclusive Communities decision. Some state regulators—who share ECOA enforcement authority with their federal counterparts and can also bring actions to enforce state fair lending law—have raised public objection and taken action to replace rescinded federal disparate impact guidance.

The first notable development in this area came in May 2018, when Congress approved a joint resolution expressing disapproval of CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (Bulletin)—long a target of Congressional Republicans and some in the auto lending industry because of a view that the Bureau’s activities in this area were an end-run around an express exclusion of auto dealers from Bureau jurisdiction and because of disagreement with the statistical methods used to police for disparate impact. The Bulletin had warned indirect auto lenders that they may be liable under ECOA if dealer markup and compensation practices result in disparities on a prohibited basis, and the Bureau brought several enforcement actions predicated on the legal theory announced in the Bulletin.

In response to the joint resolution disapproving the Bulletin, Acting Director Mick Mulvaney issued a statement “thank[ing] the President and the Congress for reaffirming that the Bureau lacks the power to act outside or federal statutes” and announcing that the Bureau would be “reexamining the requirements of the Equal Credit Opportunity Act (ECOA).” The statement referred to the Supreme Court’s Inclusive Communities decision as “distinguishing between antidiscrimination statutes that refer to the consequences of actions [a reference to the Fair Housing Act] and those that refer only to the intent of the actor [a reference to ECOA].” Acting Director Mulvaney’s statement confirmed that the new Bureau leadership credits the view that ECOA only applies to intentional, or “disparate treatment,” discrimination. Also, in direct response to the Inclusive Communities decision, the Department of Housing and Urban Development is reconsidering its implementation of disparate impact under the Fair Housing Act.

These developments drew a quick rebuke from state authorities that remain committed to monitoring for disparate impact in auto lending and beyond. On August 23, the New York Department of Financial Services (DFS) released updated guidance on fair lending compliance for indirect auto lending. The New York guidance, in effect, re-imposes the requirements of the Bureau’s earlier (now voided) Bulletin, at least within the scope of DFS’ authority. And on September 5, nineteen state Attorneys General wrote to Acting Director Mulvaney warning that “any action to reinterpret ECOA not to provide for disparate impact liability could be set aside by a court as arbitrary, capricious, and otherwise not in accordance with law.”

*             *             *

These fair lending developments illustrate two cross-cutting initiatives currently at work in the area of financial regulation. First is the federal regulators’ deregulatory push, exhibited recently by the federal banking agencies denunciation of informal agency guidance as a tool of regulation. Institutions have been constrained by, but also benefited from, informal issuances such as the Bureau’s indirect auto bulletin. Industry has sometimes resisted so-called “guidance” that agencies issue without notice and comment process or the other trappings of rulemaking. Evidently responding to these criticisms, the federal banking agencies recently announced (through guidance, no less) a new set of principles for the use of supervisory guidance for regulated institutions. The guidance “confirms” that supervisory guidance does not have the force and effect of law; states that the agencies will not take enforcement actions based on supervisory guidance (rather, any such action will be predicated on a law or rule); and explains that supervisory guidance can outline supervisory expectations or priorities and articulate general views regarding appropriate practices in a given area. By not altogether dismissing the relevance of supervisory guidance, the agencies’ announcement implicitly recognizes the fundamental tension in this area—that guidance often benefits regulated institutions by providing certainty, even if some guidance is not well-considered.

Second, as the Bureau and other regulators retrench and adopt a deregulatory posture, state authorities (particularly of the opposing party) are stepping into the breach. State authorities have their own laws to enforce fair lending, in addition to the ability to advance disparate impact cases under the federal ECOA. The states’ authority is not constrained by Acting Director Mulvaney’s disapproval of the disparate impact theory of liability. However, state authority would be significantly limited should the Bureau effectuate its “reexamination” with a rulemaking. In the meantime, the Bureau’s official interpretation of ECOA continues to provide for liability through disparate impact, and at least some states have signaled their faith in this approach.