Deregulation Doesn't Mean Lower Risk

QUESTION 

My main concern is that AI is about to take over my human responsibilities. It may come as a surprise, but I am a lawyer who serves as internal counsel for a lender in 35 states. You might think that a lawyer should have nothing to worry about when it comes to AI. I started here two years ago. The company continues to grow. There were four lawyers in our legal department. Yet, now there are three. One of them was fired, and in her place is an AI tool. I have a feeling that I am next to go! 

What are we doing to ourselves? Why are we allowing AI to put us out of work and take our livelihoods from us? These are not humans, yet they can take our human knowledge, pose as humans, and replace us. I see the downsizing of AI replacing humans. 

We are using your AI Policy Program to help us navigate AI’s compliance risks. It looks like AI is here to stay. AI regulations should protect consumers, and AI should not threaten our jobs! 

I see slow-to-no AI regulations and very little understanding of how it will adversely affect humans.   

What is being done to regulate artificial intelligence? 

OUR COMPLIANCE SOLUTION

AI POLICY PROGRAM FOR MORTGAGE BANKING™    

Our AI Policy Program aligns with Freddie Mac's and Fannie Mae’s requirements.   

Our AI Policy Program consists of the following policies:  

1.       AI Governance Policy 

2.       AI Use Policy  

3.       AI Workplace Policy  

4.       AI Credit Underwriting Policy  

5.       AI Do & Do Not Policy  

6.       AI Ethics Policy  

7.       AI Vendor Management Policy 

8.       AI Mortgage Fraud Policy 

9.       AI Anti-Money Laundering Policy

Contact us for Information! 

RESPONSE 

You say AI is not human, and it certainly isn't. Indeed, the Internet and its derivatives, such as social media, are not human. The Internet, social media, and AI are all inanimate, lifeless, insentient, spiritless, uninhabited, inorganic, labyrinthine, concatenating chains that are composed of winding strands of human meaning. 

These chains have no significance other than the understanding we invent for them. They are not our essence. We follow those chains, each of them like endless sands on a vast beach. The sands are unlimited, but the ones in our hourglass are finite. 

We are Hansel and Gretel, following breadcrumbs that lead to the cannibalistic witch. Inevitably, these brute, cold, insensate vessels into which we pour our being do not know we are there. They are numb, dumb, and oblivious, soullessly mimicking us, like an alien intelligence whose center is everywhere. 

Attempts to regulate AI technologies have not shown much foresight. Some of this negligence is by design and stems from an inability to recognize its implications. The mad dash into a new, unregulated, or semi-regulated technology is hubris borne of money, politics, and ego. AI technologies are expanding at a rate that outpaces the development of regulatory frameworks to mitigate their risks. 

The alien intelligence is ready for us. Are we ready for it? 

Over the past year, federal regulators have sharply pulled back on AI-related enforcement, including fair lending. The CFPB has scaled back liability for disparate impact under ECOA. Bank examiners are conducting fewer fair lending risk assessments. The administration has made deregulation its explicit policy goal. It would be easy to read this as a green light. It isn't. 

"Deregulation" Doesn't Mean Lower Risk 

What's actually happening is a shift in venue, not a reduction in exposure. Enforcement is moving from Washington to state attorneys general, private litigation, and a separate federal statute that nobody has rolled back. For mortgage originators and servicers using AI in underwriting, pricing, marketing, or servicing, the practical compliance burden hasn't gone away. It is just coming from different directions, and those directions are harder to predict than a single federal rulebook ever was.

CFPB Eliminates Disparate Impact

YOUR QUESTION 

YouTube

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 

Policies and Procedures 

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.

CFPB’s Massive Withdrawal of Guidance

QUESTION 

The CFPB recently withdrew guidance for many policies and legal interpretations. As my company’s  Chief Risk Officer and General Counsel, I was asked by our Board to provide an outline of the CFPB's withdrawn guidance and the effect such withdrawal will have on lending and servicing. I have reviewed all the withdrawn documents and written an analysis of their impact. However, I still can’t figure out the difference that the withdrawn guidance makes in our legal and regulatory risks. 

So, I am writing you for some feedback. I don’t need an outline of every withdrawn document. What I’m looking for is some insight into the overall impact of withdrawing the guidance. Our external law firm provided an excellent overview. But I would like something more conclusory with respect to the practical effect caused by the withdrawal. 

Long time subscriber! Thank you for your outstanding articles. We appreciate your clarity and straightforward responses. 

What impact does the withdrawal of the massive withdrawal of CFPB guidance documents have on mortgage originators and servicers? 

SOLUTION 

CMS Tune-up

RESPONSE 

Thank you for your kind words! My articles are a labor of love. I enjoy writing them, and I am grateful that you read them. Before I dig into the implications of the CFPB’s withdrawal of numerous guidance issuances, let me offer a few historical facts. 

Recent History 

The withdrawals of guidance stems from an Executive Order (EO) 13891 that goes back to 2019, which directed agencies to avoid using guidance documents to create regulatory burdens on the private sector.[i] President Trump issued the EO in his first term, and the Biden administration later rescinded it. 

The CFPB is maintaining that the principles the EO outlined are consistent with the requirements of the Administrative Procedure Act (APA), which are noted in the CFPB’s April 11, 2025 internal memo. The memo imposed a moratorium on the issuance of new guidance documents and initiated a full review of all existing guidance. The CFPB is supposed to complete the review by April 25^th. Any guidance not explicitly flagged to be retained, with a clear justification, would be subject to rescission.[ii] 

Three Reasons for the Withdrawal 

There are three ostensible reasons for the withdrawal of these guidance issuances: 

1.   The CFPB will now only issue guidance when it is truly necessary and when such guidance will lower, rather than raise, compliance burdens for regulated entities. 

2.   In response to President Trump’s deregulatory initiatives aimed at reducing bureaucracy, the CFPB is scaling back its enforcement activities and, as a result, does not require interpretive guidance to remain in effect at this time. 

3.   The CFPB has determined that there are no significant reliance interests justifying the retention of the withdrawn guidance. This is because parties generally recognize that guidance is nonbinding and does not create substantive rights. 

The Bureau says that while some guidance, or parts thereof, may be reinstated, it does not intend to prioritize enforcement against parties that do not conform to them during the period of withdrawal. 

What a Difference a Difference Makes 

In your inquiry you state that you “can’t make sense of the difference it makes in our legal and regulatory risks.” Frankly, I think your confusion is justified. I will explain shortly. Suffice it to say, for now, that withdrawal of the guidance documents will have little legal effect. Before getting to my view, let me mention a few areas that seem to be headlining as regulatory issues.

Free Market Dogma

QUESTION 

I am a former employee of a lender whose president is a hard-core hater of the CFPB. He believes that our government is out of control and the CFPB has been overreaching for years. He is glad that the CFPB is being shut down. I was a paralegal in the legal department. After having to put up with his railing and cursing about the government in general and the CFPB in particular, I decided to resign. Since then, I have been with a law firm and continue to attend law school. 

It's not as if his mortgage company has been in trouble with the CFPB. It complies with all the rules and regulations, and every audit by states and the CFPB itself has shown that the company complies adequately. There have been no administrative actions or fines. 

From what I can tell, the CFPB is a kind of anti-scam police. They are also involved in protecting consumers' financial interests with respect to financial products and services. I can't figure out why this is such a bad thing that it should be destroyed. I thought regulating on behalf of consumers is what good government is supposed to do. We can debate what overreach and unnecessary regulations are, but destroying the agency that actually helps consumers seems really dangerous. 

My former boss takes the position that any government involvement in the free market is an attack on free enterprise, which to him means running his business the way he wants to run it. And, any agency, like the CFPB, that regulates his company is an attack on its survival. I think that's really very extreme. I got tired of trying to convince him otherwise. 

I know this is controversial. I want to widen the lens a bit. You have always been willing to discuss controversial subjects. My former president reads every post you've written for years. I'm sure he will recognize me as the questioner, though I didn't tell you his name or company name. It may bother him that I am writing to you. Fortunately, I am no longer an employee. 

He often discusses your views and interpretations of the law. I have subscribed for years. I think you are a reliable resource for regulatory guidance. I want to know your view. It would really help! 

Is government involvement in free markets justifiable? 

COMPLIANCE SOLUTION 

Management Tune-up 

RESPONSE 

I respond to controversial subjects as they may relate to many aspects of regulatory compliance. I make no apologies. I know they are controversial because we predictably get a small tranche of unsubscribes whenever I discuss a topic that bugs the unsubscribers. Sometimes, the unsubscribers write to me, and we have enjoyable correspondence. 

We offer this newsletter as a labor of love. It's free! All are welcome. However, I discuss the regulatory landscape with all its ups and downs, controversies, and wrangling, and always try to ensure that compliance with the law is clarified. My goal is to educate and offer some helpful guidance. 

Anyone who does not recognize that the government partners with markets, be it mortgage or any other economic market, exhibits a view that borders on willful ignorance. I have taught graduate classes on market action relating to mortgage origination, and one obvious factor we discuss is the "free market" concept, which is the thesis that markets should not allow government involvement (often framed as "government interference"). 

"Free market" lingo wears several masks, such as "free trade" and "free enterprise," but the notion that any economic market is free of government involvement is belied by the fact that the government must be involved in ensuring and monitoring its legal and regulatory framework. 

Now, for a dose of reality: 

There has never been a free market in the history of the world.

Never. Nowhere. Not now. Not ever. 

The concept indirectly stems from an economic theory called "laissez-faire" – which, in French, means "allow to do" – which is a financial concept that purports to inform free markets and capitalism. In that scenario, the government does not regulate business, taxes, or tariffs. Instead, it proposes that a market self-regulates through the economic mechanism of supply and demand of products and services. And, it asserts that individuals drive markets through self-interest, which, somehow, leads to social and economic benefits.

Guilty Until Proven Innocent?

QUESTION 

I am the Chief Executive Officer of a lender and servicer. Last week, the CFPB hit us with a Civil Investigative Demand. Our in-house lawyer has put a team together from various departments to respond to it. And you kindly referred us to an attorney who specializes in this process. We are retaining the attorney you recommended. 

At this point, many people in the company are aware that we received the Civil Investigative Demand, and I am very concerned about reputation risk. We have built a fantastic company, yet rumors have already started that we did something to violate laws and regulations. I need a way to calm everyone down and not worry. 

Because of the rumors, some employees now think we are guilty of wrongdoing. We intend to fight any such charges! I need to issue a statement that explains the process in plain and simple language. I need your help in providing information that helps them to understand the process. 

What is the CFPB’s Civil Investigative Demand? 

Are we guilty until proven innocent? 

COMPLIANCE SOLUTION 

CMS Tune-up®  

RESPONSE 

Rumour doth double, like the voice and echo,

The numbers of the feared.

Henry IV, Part 2, Shakespeare 

Allow me to put the above lines into our modern idiom: An unconfirmed report expands like an echo growing louder and louder, magnifying the perceived size and threat. 

DO NOT IGNORE THE RUMORS! 

Perhaps you think that the truth will reduce the rumors. Sometimes, it does; sometimes, it does not. One of my favorite literary figures, Jonathan Swift, once said that “falsehood flies, and the truth comes limping after it.” He cautioned that by the time people become “undeceived,” the “jest” is over, and the “tale” has already had its effect.  

Reputation risk is real, and adverse issues can hobble a company financially, even when there’s nothing to the allegations of wrongdoing. Some rumors don’t have a scintilla of truth, but they thrive nonetheless. Like a garden of weeds, pull out one, and another takes its place. Your aim should be to control the message. However, do not ignore rumors! 

PEEKING BENEATH THE CFPB HOOD 

I am going to give you a peek into the CFPB’s Civil Investigative Demand process. The acronym is “CID,” and for brevity, I will use this acronym. If you’re wondering if the CFPB has coopted the authority to conduct CIDs, you might be interested in knowing that it certainly does have the authority pursuant to the Dodd-Frank Act.[i] A primary access point to the authority is Unfair, Deceptive, or Abusive Acts or Practices (UDAAP),[ii] which

 “…take any action . . . to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service…”[iii] 

Most CIDs are triggered by CFPB examination. However, the examination is not the only source of the CID. I’ll get back to examinations momentarily. 

NON-EXAMINATION SOURCES OF CIDs 

Other sources can trigger a CID, many of them being external to the company itself. For instance, the Office of Enforcement monitors the CFPB’s Consumer Complaint Database for potential violations.[iv]