Equal Credit Opportunity Act (ECOA)

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While federal regulatory agencies retreat from enforcing disparate impact discrimination, at least one state agency has stepped forward. Massachusetts Attorney General Andrea Joy Campbell announced on July 10, 2025 a settlement with a student loan company, resolving allegations that the company’s artificial intelligence (“AI”) underwriting models resulted in unlawful disparate impact based on race and immigration status.

The disparate impact theory of discrimination in the lending context has been controversial. It has been 10 years since the Supreme Court held in Inclusive Communities that disparate impact is available under the Fair Housing Act if a plaintiff points to a policy or policies of the defendant that caused the disparity. In the fair lending context, then, disparate impact applies to mortgage loans. However, for other types of consumer credit – like auto loans or student loans – a plaintiff or government enforcer claiming discrimination would need to rely on the Equal Credit Opportunity Act (“ECOA”). While ECOA prohibits discrimination against an applicant with respect to any aspect of a credit transaction, there has been much debate over whether it applies to discrimination in the form of disparate impact. The federal government for years relied heavily on ECOA to bring credit discrimination actions. The Biden Administration pursued a vigorous redlining initiative against mortgage lenders. The government used the vast amount of data obtained under the Home Mortgage Disclosure Act (“HMDA”) and compared the activities of various lenders within a geographic area to determine whether a lender was significantly lagging its peers in making loans to certain protected groups. The government then looked to the lender’s branch locations, advertising strategies, the racial/ethnic make-up of its loan officers, and other factors to assert that the lender had discouraged loan applicants from protected classes. Through that redlining initiative, the government settled dozens of cases, resulting in well over $100 million in payments.

HMDA data provides extensive, if imperfect, demographic data on mortgage lending activities and has been key to building claims of lending discrimination, particularly disparate impact. However, that level of data is not generally available for other types of lending, like student loans. Without such data, the Office of the Massachusetts Attorney General (“OAG”) in this case reviewed the lender’s algorithmic rules, its use of judgmental discretion in the loan approval process, and internal communications, which the Attorney General described as exhibiting bias.

Disparate Impact Based on Race, National Origin

In that review, the OAG looked back to the scoring model the lender used prior to 2017, which relied in part on a Cohort Default Rate – the average rate of loan defaults associated with specific higher education institutions. The OAG asserted that use of that factor in its underwriting model resulted in disparate impact in approval rates and loan terms, disfavoring Black and Hispanic applicants in violation of ECOA and the state’s prohibition against unfair or deceptive acts or practices (“UDAP”). The public settlement order did not provide the level of statistical disparities. In addition, until 2023, the OAG asserted that the lender also included immigration status in its algorithm, knocking out applicants who lacked a green card. That factor “created a risk of a disparate outcome against applicants on the basis of national origin,” and as such violated ECOA and UDAP according to the OAG. The settlement order prohibits the lender from using the Cohort Default Rate or the knock-out rule for applicants without a green card (although it appears the lender had discontinued those considerations years ago).Continue Reading Massachusetts AG Settles Fair Lending Action Based Upon AI Underwriting Model

On June 12, 2025, Judge Valderrama of the federal district court for the Northern District of Illinois denied the joint motion to vacate the stipulated final judgment reached between the Consumer Financial Protection Bureau (“CFPB”) and Townstone Financial, Inc., in an action alleging violations of the Equal Credit Opportunity Act (“ECOA”).

As explained in Mayer…

In an unprecedented move, the Consumer Financial Protection Bureau’s (“CFPB” or “Bureau”) Acting Director is seeking to vacate the Bureau’s settlement with Townstone Financial (“Townstone” or the “Company”), which was entered by the US District Court for the Northern District of Illinois on November 7, 2024. In a press release, Acting Director Vought stated that the CFPB “abused its power, used radical ‘equity’ arguments to tag Townstone as a racist with zero evidence . . . to further the goal of DEI in lending via their regulation by enforcement tactics.”Continue Reading CFPB Seeks to Vacate Townstone Redlining Settlement

The CFPB’s 1071 Rule is on hold.  On October 26, 2023, the United States District Court for the Southern District of Texas issued a nationwide injunction that enjoins the Consumer Financial Protection Bureau (“CFPB”) from implementing and enforcing its small business lending data collection rule (the “1071 Rule”).  The injunction stems from a lawsuit filed…

In a joint statement released October 12, the US Department of Justice (DOJ) and Consumer Financial Protection Bureau (CFPB) cautioned lenders about considering immigration status in credit decisions. Although the CFPB’s Regulation B (which implements the Equal Credit Opportunity Act—or ECOA) expressly permits creditors to consider immigration status in certain circumstances, the joint statement advises…

In explaining its view of the pleading standards in a disparate treatment discrimination case, the Consumer Financial Protection Bureau (“CFPB”) shed light on its interpretation of the Truth in Lending Act’s (“TILA’s”) appraisal independence standards, providing that a lender is not required to rely on a biased appraisal.

The underlying case relates to a claim that an appraiser undervalued a home because of the homeowners’ race, and that the lender knew of the undervaluation. In mid-March, the CFPB and the Department of Justice filed a Statement of Interest in the case, addressing the applicability of nondiscrimination principles in the property valuation context. In doing so, the agencies also addressed the federal requirements for appraiser independence.

TILA and its Regulation Z prohibit lenders or other covered persons from coercing, instructing, or inducing an appraiser to cause the appraised value to be based on any factor other than the appraiser’s independent judgment. They also prohibit lenders from suborning any mischaracterization of a property’s appraised value or materially altering a property valuation. A lender that reasonably believes an appraiser has materially violated ethical or professional requirements must report the appraiser to the appropriate state agency. In addition, to comply with Regulation Z’s conflict-of-interest requirements, mortgage lenders generally ensure that the appraiser reports to a person who is not part of the lenders’ loan production function, and that no person in that function is involved in selecting the appraiser. Agencies and investors may impose additional requirements or prohibitions addressing appraisal independence.

The regulations expressly permit a lender to ask the appraiser to consider additional information, provide further detail or explanation, or correct errors. However, lenders must walk a fine line – while they may ask for additional information, explanations, or corrections, they are understandably careful in questioning an appraiser’s conclusions and are limited in their ability to obtain a second appraisal. (For instance, Fannie Mae generally prohibits its lenders from obtaining a second appraisal without a reasonable and documented basis for believing that the first appraisal is flawed.)Continue Reading CFPB Addresses the Fine Lines of Appraisal Independence

On May 9, 2022, the CFPB issued an Advisory Opinion outlining its position that the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, extend beyond applicants seeking credit to include those who have received credit. The 16-page Advisory Opinion lays out the Bureau’s position that the statutory text, legislative purpose and judicial…

The U.S. Federal Housing Finance Agency’s (“FHFA”) draft strategic plan, which we discussed in an earlier post, sets forth FHFA’s goals and objectives for the next four years. Unsurprisingly, FHFA’s recent focus on fair lending issues is reflected in the plan. Over the course of the past year, FHFA has made numerous strides in…

In an extraordinary announcement yesterday, the US Consumer Financial Protection Bureau (CFPB or Bureau) unveiled a broad expansion of its supervisory procedures to include examining supervised entities for discriminatory conduct that the agency alleges could constitute unfair practices in violation of the Dodd-Frank Act. Going forward, it appears that every exam for unfair, deceptive or abusive acts or practices (UDAAP) is likely to include an assessment of a company’s antidiscrimination programs as applied to all aspects of all consumer financial products or services, regardless of whether that company extends any credit or would otherwise be subject to the Equal Credit Opportunity Act (ECOA). In recent months, the Bureau has been laser focused on issues of fair lending and racial equity in the consumer credit market, including redlining, pricing and algorithmic bias, among others. With this change, the CFPB will be broadening its racial equity focus to cover every aspect of the consumer financial services sector.
Continue Reading CFPB Announces It Will Seek to Extend ECOA-Like Antidiscrimination Provisions Broadly to All Consumer Finance Activities

On February 23, 2022, the US Consumer Financial Protection Bureau (“CFPB” or “Bureau”) took the first step in an eventual rulemaking by publishing an outline of proposals and alternatives under consideration to prevent algorithmic bias in automated valuation models (AVMs). AVMs are software-based tools used to determine the value of real estate as an alternative…