YOUR QUESTION
You may have heard about a major change to Regulation B. They eliminated disparate impact. I also learned that they changed a few other areas that were working to reduce discrimination. As an underwriter, I think this is wrong-headed. I think this reduces fair lending protection.
We met with our lawyer because we have a second review process, which weeds out potential discrimination in our loan process. Our lawyer says there is a shift away from not having to prove intent to discriminate to now having to prove intent. She says that this is a problem because proving intent is extremely difficult. In other words, discrimination is now possible without having to prove intent to discriminate – only the outcome matters.
So, if I get this right, even if the outcome is discrimination, the company that discriminated won't be held responsible if you can't prove an intent to discriminate. I don't understand why disparate impact protection is being weakened. It’s scary!
Do the changes to Regulation B basically eliminate disparate impact?
OUR COMPLIANCE SOLUTION
OUR RESPONSE
I am going to be blunt: the CFPB's April 2026 Final Rule ("Rule") amending Regulation B eliminates the "effects test" – that is, "disparate impact" – of the Equal Credit Opportunity Act (ECOA), while also restricting special-purpose credit programs (SPCPs), and narrowing the definition of "discouragement" of applicants or prospective applicants. This is clearly a significant regulatory shift away from fair lending restrictions.
However, saying it eliminates disparate impact and fair lending is not accurate. The Rule eliminates disparate impact liability specifically under ECOA and Regulation B. That's significant, but ECOA is only one of several legal frameworks that govern lending discrimination. The Rule does not affect several others that remain fully intact.
The Fair
Housing Act (FHA) still recognizes disparate impact for mortgage lending. The
Supreme Court confirmed this in Texas Department of Housing v. Inclusive
Communities Project (2015), and the Rule expressly does not touch FHA
liability. So a mortgage lender whose policies produce racially skewed outcomes
can still face a disparate impact challenge under the FHA, which is a
completely separate statute.
State fair lending laws are arguably the bigger remaining protection. Many states – for instance, California, New York, Illinois, and others – have their own anti-discrimination statutes that incorporate disparate impact standards, and federal rulemaking cannot preempt those. State attorneys general were among the most vocal opponents of the Rule precisely because they intend to continue using their own authorities.
The Department of Justice retains independent enforcement tools. And the Community Reinvestment Act, which addresses lending patterns in lower-income communities, operates on its own separate framework.
HOW DID THIS HAPPEN?
The CFPB received over 64,500 public comments, including ours. The overwhelming majority of comments opposed the Rule. Nevertheless, the Rule is now law. The compliance effective date is July 21, 2026. Whatever the comments offered, pro or con, the Rule largely finalizes a November 2025 proposal, with only clarifying edits rather than substantive revisions.
Since your question specifically involves the change to disparate impact, I will discuss it primarily. The other changes are also very significant and should be incorporated into your policies and procedures.
Eliminating the “effects test,” a change supposedly meant to lower compliance costs, actually gives lenders greater freedom to target protected groups.
WHAT IS THE EFFECTS TEST?
The purpose of the “effects test” is ultimately to protect against disparate impact. The "effects test" is actually a legal doctrine used to determine if a lender’s facially neutral policy creates a discriminatory, disproportionate impact on a protected class (for instance, race, gender, or age). It means a creditor can be liable for discrimination, even without discriminatory intent, if their practices have a discriminatory effect.
Most regulators know full well that they can challenge lending policies that, while appearing neutral, create a negative impact on protected groups. Most compliance lawyers know full well that a financial institution can expose itself to a disparate impact violation by creating a pattern or practice that results from defective lending policies. And most financial institutions know, or should know, that if a policy has a discriminatory effect, they must prove that a legitimate business necessity justifies it.
What the CFPB has done is to remove the “effects test” from Regulation B, thereby promulgating that ECOA does not recognize disparate impact liability. The focus now is on the intent to discriminate.
