Advocacy Groups And Private Companies File Lawsuit Against Revised ECOA Rule

As expected, advocacy groups and private companies have filed a lawsuit challenging the CFPB’s recent final rule (Final Rule) revising Regulation B, which implements the Equal Credit Opportunity Act (ECOA). The lawsuit was filed in the federal district court for the District of Columbia by the National Fair Housing Alliance, Rise Economy (fka California Reinvestment Coalition), BLDS, LLC and SolasAI. The first two entities are nonprofit organizations focusing on the provision of various services to communities. According to the complaint, BLDS and SolasAI are both private companies, with the former conducting and providing statistical, economic, and quantitative analyses to clients such as financial institutions, governmental entities, and others and the latter developing software and providing other services to help financial institutions and other companies detect, explain, and reduce discrimination and bias in credit models and other algorithms, particularly in machine learning models that use artificial intelligence.

As previously reported, the CFPB issued the Final Rule in April 2026 revising Regulation B in significant respects. We addressed the revisions in depth during a podcast. Briefly, the Final Rule made three significant changes to Regulation B:

• It removed the “effects test” references from Regulation B and added to the Regulation the following: “[ECOA] does not provide that the ‘‘effects test’’ applies for determining whether there is discrimination in violation of the Act.” “Effects test” is another term for referencing disparate impact liability, thus, the revisions are intended to provide that disparate impact claims may not be brought under ECOA. The Final Rule also adds the following to the Regulation B Commentary: “[ECOA] does not provide for the prohibition of practices that are facially neutral as to prohibited bases, except to the extent that facially neutral criteria function as proxies for protected characteristics designed or applied with the intention of advantaging or disadvantaging individuals based on protected characteristics.”
• It clarified and limited what is considered discouragement of an applicant or prospective applicant on a prohibited basis. We provide additional details regarding these revisions below.
• It prohibited the use of the race, color, national origin, or sex, or any combination thereof, of the applicant as a common characteristic or factor in determining eligibility for a special purpose credit program (SPCP) offered by a for-profit entity. While the Final Rule allows the use of religion, marital status, age or the receipt of public assistance income, or any combination thereof, in a SPCP offered by a for-profit entity, it adds more stringent requirements. No changes were made regarding SPCPs offered by governmental or non-profit entities.

The plaintiffs challenge the Final Rule on substantive grounds and on grounds that the rulemaking process was deficient.

Disparate Impact

In the preamble to the Final Rule, the CFPB set forth its view that the “text of ECOA does not state that disparate-impact claims are cognizable under ECOA, nor does it contain effects-based language of the type that has been found in other statutes to invoke disparate-impact liability. However, in promulgating Regulation B, the Board relied on legislative history to support authorizing disparate-impact liability.” The plaintiffs disagree, arguing that the “Final Rule’s assertion that ECOA does not provide for disparate-impact liability is contradicted by the plain language of the statute, which is not limited to intentional discrimination. ECOA prohibits discrimination ‘on the basis of’ certain protected classes. ‘On the basis of’ is the same effects-based language the Supreme Court used in Griggs [v. Duke Power Co.] when it determined that Title VII requires ‘the removal of artificial, arbitrary, and unnecessary barriers to employment when the barriers operate invidiously to discriminate on the basis of racial or other impermissible classification.’ (Emphasis added). Congress expressly modeled ECOA’s discrimination prohibition with Griggs’s approach to antidiscrimination law in mind.”

Among various other arguments, the plaintiffs also argue that the Final Rule is “fundamentally at odds with ECOA’s purpose because elimination of disparate impact liability will result in more credit discrimination” and that “[d]isparate impact compliance remains critical today to ensure equality of credit opportunity in a rapidly expanding world of automated models and targeted digital advertising that decide who gets credit offers, which applicants are approved, and the price each pays for credit.” Additionally, the plaintiffs assert that the Final Rule “similarly fails to provide an answer to comments that pointed out that, prior to ECOA’s enactment, Congress deleted from the draft ECOA legislation language that would have signaled an intentional discrimination limitation, and that, after enactment, Congress twice rejected attempts to narrow ECOA’s reach to intentional discrimination.” The plaintiffs further assert that the CFPB ignored comments raising various points supporting the existence of disparate impact liability under ECOA.

The Trump Administration might actually welcome the challenge. Since the CFPB proposed the removal of disparate impact from ECOA, we suspected that an underlying goal was to trigger litigation that would be a vehicle to get before the Supreme Court the issue of whether disparate impact claims may be brought under ECOA. The Supreme Court has never addressed the issue, although lower courts have determined that disparate impact claims may be brought under ECOA. Should the district court and then the U.S. Court of Appeals for the District of Columbia Circuit address the substantive issue of whether disparate impact claims may be brought under ECOA, we view it as likely that both courts rule that such claims are allowed under ECOA. However, should the issue reach the Supreme Court, we view it likely that such position would face strong headwinds.

Discouragement

While the CFPB modified the Regulation B provisions prohibiting the discouragement of applicants or prospective applicants from applying for credit, it did not seek to remove the prospective applicant reference from Regulation B. That is interesting given that ECOA refers to “applicants” and only Regulation B refers to both “applicants” and “prospective applicants” in terms of discouragement. We revisit this issue further below.

In the preamble to the Final Rule the CFPB observed that the Federal Reserve Board, which had rulemaking authority under ECOA before such authority was transferred to the CFPB by Dodd-Frank, believed that including discouragement provisions in Regulation B was “necessary to protect applicants against discriminatory acts occurring before an application is initiated.’’ While the CFPB indicated that it shares this concern, it stated that “in the years since the Board first adopted the discouragement provision, the provision has been interpreted to prohibit conduct that is not necessary or proper to prohibit in order to prevent the circumvention or evasion of ECOA’s purposes. The Bureau is concerned that this, in turn, has had an unnecessarily chilling effect on creditors’ business practices and exercise of their rights to speak about matters of public interest.”

The Final Rule replaces the prior discouragement provision—“[a] creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application”—with “[a] creditor shall not make any oral or written statement, in advertising or otherwise, directed at applicants or prospective applicants that the creditor knows or should know would cause a reasonable person to believe that the creditor would deny, or would grant on less favorable terms, a credit application by the applicant or prospective applicant because of the applicant or prospective applicant’s prohibited basis characteristic(s).”

The Final Rule also provides that for purposes of the revised discouragement provision, “oral or written statements are spoken or written words, or visual images such as symbols, photographs, or videos.” Addressing this provision the CFPB explains that “[a]s a result, certain business practices, such as business decisions about where to locate branch offices, where to advertise, or where to engage with the community through open houses or similar events, would not constitute prohibited discouragement even if they had some communicative effect that some consumers could arguably find discouraging.”

Additionally, the Final Rule replaces the affirmative advertising provision—“[a] creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit, especially groups that might not normally seek credit from that creditor” with the following example of a statement that does not violate the discouragement provision: “Statements directed at one group of consumers, encouraging that group of consumers to apply for credit.” The example is not limited to affirmative marketing to traditionally disadvantaged groups. Other examples of statements that do not violate the discouragement provision that were added by the Final Rule include “[s]tatements in support of local law enforcement” and “[s]tatements recommending that, before buying a home in a particular neighborhood, consumers investigate, for example, the neighborhood’s schools, its proximity to grocery stores, and its crime statistics.”

The plaintiffs challenge all of these revisions. The plaintiffs state that changes made by the Final Rule “are not the result of reasoned expert agency decision-making. Rather, in a remarkable abdication of agency responsibility, the CFPB acknowledges that the Final Rule fosters the very circumvention and evasion of ECOA that Congress directed the CFPB to prevent.”

Addressing the CFPB’s rationale for narrowing the discouragement provisions, which is set forth above, the plaintiffs state that “[t]he CFPB proffered no factual support, data, evidence, or even hypotheticals for these sweeping statements, nor any information suggesting that any changed facts or circumstances support this departure from its longstanding position on discouragement.” The plaintiffs also state that the Final Rule “drastically restricts” the ability of Regulation B to prevent redlining, pointing to the CFPB’s statement that under the Final Rule business decisions about where to locate branch offices, where to advertise, or where to engage with the community through open houses or similar events will not constitute discouraging statements.

Turning to the replacement of the affirmative marketing provision with the “[s]tatements directed at one group of consumers, encouraging that group of consumers to apply for credit” as an example of a statement that does not constitute discouragement, the plaintiffs assert that “[t]he difference made by the Final Rule is that creditors can now target consumers because of their protected class with the intent of discriminating against others, whereas before creditors could do so only to reach disadvantaged or neglected groups. The CFPB does not explain why that is a benefit to consumers or to creditors.” The plaintiffs also state that a “sign announcing that ‘whites Are Encouraged to Apply’ could certainly discourage Black applicants.”

The final assertion made by the plaintiffs regarding the discouragement revisions is that the CFPB failed to respond to comments noting that the examples quoted above of statements that do not violate the discouragement provision actually can convey a discriminatory intent.

As noted above, the CFPB did not propose removing the reference to “prospective applicant” from Regulation B, even though ECOA refers to only “applicants.” As previously reported, in the CFPB v. Townstone Financial case, the U.S. Court of Appeals for the Seventh Circuit held that ECOA applies to prospective applicants. We were critical of the decision, and believed that the opinion of the district court in the case, holding that ECOA does not apply to prospective applicants, was the better reasoned ruling. Potentially, the revisions to the discouragement provisions made by the Final Rule are a backdoor way to have the prospective applicant issue reassessed. If so, the plaintiffs may have enhanced the potential for a reassessment by leaning heavily on the need for ECOA to apply to prospective applicants.

For-Profit Entity SPCPs

The plaintiffs assert that the Final Rule’s prohibition on the use race, color, national origin, or sex, or any combination thereof, of the applicant as a common characteristic or factor in determining eligibility for a SPCP offered by a for-profit entity is contrary to the express authorization of such programs under ECOA. Addressing the more stringent requirements imposed by the Final Rule on the use of religion, marital status, age or the receipt of public assistance income, or any combination thereof, in a SPCP offered by a for-profit entity, the plaintiffs state that “[t]hese new standards and requirements are so stringent that they make it essentially impossible for any for-profit lender to establish any SPCP whatsoever, thus effectively nullifying the statutory provision establishing them.”

The CFPB’s rationale for prohibiting the use race, color, national origin, or sex, or any combination thereof, of the applicant as a common characteristic or factor in determining eligibility for a SPCP offered by a for-profit entity was that “an SPCP offered or participated in by a for-profit organization that uses race, color, national origin, or sex as eligibility criteria is beyond what is presently necessary to meet the expressly limited congressional intent for such SPCPs.” Addressing this position, the plaintiffs state that “the Final Rule justifies ignoring statutory text because the CFPB believes that it can unilaterally determine when the policies that Congress enacted are no longer needed.”

Oddly, the plaintiffs note that the CFPB did not propose any changes regarding SPCPs offered by governmental or non-profit entities, and state that the CFPB did not provide “any reason for targeting only for-profit organizations.” This position appears to ignore the fact that under ECOA the CFPB has greater authority to regulate SPCPs offered by for-profit entities than SPCPs offered by governmental and non-profit entities. Specifically, ECOA provides for only for-profit entity SPCPs that they must meet “standards prescribed in regulations by the Bureau.”

Rulemaking Process

As noted above, in addition to making substantive challenges to the Final Rule, the plaintiffs also raise challenges on grounds that the rulemaking process was deficient. Allegations made by the plaintiffs include that the CFPB failed to:

• Engage in a meaningful analysis of the Final Rule’s costs and benefits.
• Comply with the Regulatory Flexibility Act because it did not seek required input from small businesses.
• Provide adequate time for notice and comment, as the comment period was only 32 days and included the Thanksgiving holiday. The comment period also overlapped with the comment period on the CFPB’s proposed revisions to the section 1071 small business lending data collection and reporting rule.
  • The plaintiffs note that despite the short comment period, 64,000 comments were received. Based on our observation, many comments were received after the comment deadline and many comments were brief statements of opposition to the proposal from consumers.
• Respond to significant comments.

The plaintiffs also assert that the Final Rule is invalid because Acting CFPB Director Russell Vought lacks lawful authority to direct the CFPB. The plaintiffs state that Vought has never been confirmed by the Senate and that none of the circumstances contemplated by the Federal Vacancies Reform Act (FVRA) apply. Addressing the FVRA claim, the plaintiffs note that former Director Rohit Chopra was fired by President Trump and because he “did not die or resign, and he remained able to perform the functions and duties of the office, and in fact did perform his duties for the first week of the current administration. President Trump’s authority to name an acting director under the Federal Vacancy Reform Act was therefore not triggered.”

Guidance from the Department of Justice regarding the FVRA notes that a vacancy arises for purposes of the Act “when a relevant officer ‘dies, resigns, or is otherwise unable to perform the functions and duties of the office’.” Addressing the otherwise unable to perform aspect, the opinion, referring to legislative history, indicates this includes when an officer is fired, imprisoned or sick.

Based on the June 2020 decision of the Supreme Court in Seila Law v. CFPB, the President has the authority to remove the CFPB Director at will. The plaintiffs basically are arguing that if the President has the authority to remove an agency head at will and does so, then there is no vacancy for purposes of the FVRA that allows the President to appoint an acting head of the agency. It appears that argument will encounter judicial skepticism.

Should the Final Rule be invalidated on one or more of the deficient rulemaking claims raised by the plaintiffs, that would send the rule back to the CFPB for further consideration. If so, at least for now, the Final Rule would not be a path for Supreme Court review of the disparate impact and prospective applicant issues.