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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

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

Earlier this week, the U.S. Department of Housing and Urban Development (HUD)’s Office of General Counsel (OGC) published guidance on the Fair Housing Act’s treatment of Special Purpose Credit Programs (SPCPs). An SPCP is a tool that lenders can use to target underserved communities without violating the Equal Credit Opportunity Act (ECOA) and its implementing…

Three federal agencies announced a coordinated settlement today with a Mississippi-headquartered bank for allegedly redlining predominantly Black and Hispanic neighborhoods in the Memphis, Tennessee area. The action was the result of the OCC’s examination of the bank’s lending activities from 2014 to 2016. The OCC found that the bank had engaged in a “pattern or…

Last week, a pair of fair housing organizations got their wish when a federal judge in Massachusetts granted their request for a preliminary injunction and stay of the effective date of the Department of Housing and Urban Development’s (HUD) new disparate impact rule (the “2020 Rule”), discussed in our recent fair lending newsletter. Plaintiffs Massachusetts Fair Housing Center and Housing Works, Inc. filed a motion in the U.S. District Court for the District of Massachusetts seeking to vacate HUD’s 2020 Rule under the Administrative Procedure Act (APA), on the grounds that it is “contrary to law,” “arbitrary and capricious,” and that certain of its provisions violate the APA’s notice and comment requirements. The court only addressed the plaintiffs’ second argument—that the 2020 Rule is arbitrary and capricious—which it found was likely meritorious.

The court compared the disparate impact rule HUD had issued in 2013 (“2013 Rule”) to the 2020 Rule. Both versions of the rule state the general premise that liability may be established under the Fair Housing Act based on a practice’s discriminatory effect, if the practice was not motivated by a discriminatory intent. But as the court noted, the 2020 Rule significantly altered the 2013 Rule’s standards. The court found that the changes HUD had made constituted a “massive overhaul” of HUD’s disparate impact standards, by introducing onerous pleading requirements on plaintiffs while simultaneously easing the burden on defendants and arming them with broad new defenses.
Continue Reading More Uncertainty around the Future of the Disparate Impact Theory of Liability