- in United States
- within Finance and Banking, Antitrust/Competition Law and Cannabis & Hemp topic(s)
The CFPB has issued a proposed rule that would make substantial changes to Regulation B under the Equal Credit Opportunity Act (ECOA). In one of the most significant changes, the bureau has preliminary determined that disparate-impact claims are not authorized by ECOA. The proposal also addresses what constitutes prohibited discouragement of applicants or prospective applicants and would substantially revise the rules governing special purpose credit programs (SPCPs) offered by for-profit creditors, essentially eliminating many of such SPCPs. The comment period is short, as comments are due December 15, 2025.
Disparate Impact. The CFPB noted that the Supreme Court has not determined whether a disparate-impact claim is permitted under ECOA, and added that "[t]he 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. (Disparate impact also is referred to as the "effects test.")
The CFPB proposes to delete language indicating that disparate-impact liability may be applicable under ECOA and to include a provision affirmatively stating that ECOA "does not provide that the "effects test" applies for determining whether there is discrimination in violation of the Act."
The proposal would add the following language to the Regulation B Commentary: "The Act 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." The CFPB does not propose to provide guidance on what would constitute a proxy for a protected characteristic.
Discouragement. The CFPB proposes to revise the provisions in Regulation B regarding the prohibition on discouraging applicants or prospective applicants on a prohibited basis to clarify and limit what constitutes discouragement. The main discouragement provision in the current Regulation B provides that "[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." The CFPB proposes to revise the provision to read as follows:
"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). For purposes of this paragraph (b), oral or written statements are spoken or written words, or visual images such as symbols, photographs, or videos."
The CFPB also proposes to revise the Regulation B Commentary to delete the following example of prohibited discouragement: "The use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy of exclusion in violation of the Act." The proposal would add the following example of prohibited discouragement: "Statements directed at the general public that express a discriminatory preference or a policy of exclusion against consumers based on one or more prohibited basis characteristics in violation of the Act."
The Commentary also would be revised to provide that "encouraging statements directed at one group of consumers cannot discourage other consumers who were not the intended recipients of the statements" and to add the following examples of statements that are not prohibited discouragement:
- Statements directed at one group of consumers, encouraging that group of consumers to apply for credit.
- Statements in support of local law enforcement.
- Statements 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.
- Statements encouraging consumers to seek out resources to develop their financial literacy.
Addressing the discouragement prohibition in the preamble, the CFPB states that it "is concerned that the overbroad coverage of the regulation and its potential interpretations may constrain free speech and commercial activity in ways that are unwarranted." This appears to stem from the view of the CFPB under current leadership that the CFPB case against Townstone Financial [was improper in part because it targeted the company for protected political statements made by company representatives in a radio show and podcast.]
When the CFPB indicated in its Spring 2025 regulatory agenda that it intended to assess whether rulemaking or other actions regarding Regulation B would facilitate compliance with ECOA by clarifying the obligations imposed by the statute, there was speculation by some that the CFPB might propose removing the prospective applicant references from Regulation B, given that ECOA focuses on only applicants. The proposals regarding discouragement reflect a narrower approach.
Special Purpose Credit Programs. The SPCP provisions of ECOA are as follows:
"It is not a violation of this section for a creditor to refuse to extend credit offered pursuant to-
(1) any credit assistance program expressly authorized by law for an economically disadvantaged class of persons;
(2) any credit assistance program administered by a nonprofit organization for its members or an economically disadvantaged class of persons; or
(3) any special purpose credit program offered by a profit-making organization to meet special social needs which meets standards prescribed in regulations by the Bureau;
if such refusal is required by or made pursuant to such program."
The CFPB proposal is focused on SPCPs offered by for-profit entities. As reflected in the ECOA SPCP provisions, the CFPB has more authority to regulate such SPCPs.
Significantly, the proposal would prohibit such SPCPs from using the race, color, national origin, or sex, or any combination thereof, of the applicant, as a common characteristic or factor in determining eligibility for the program. The proposal would allow the use of religion, marital status, age or the receipt of public assistance income, or any combination thereof, in such a SPCP, but only if the for-profit organization provides evidence for each participant who receives credit through the program that in the absence of the program the participant would not receive such credit as a result of those specific characteristics. The corresponding provision in the current Regulation B is less stringent, as it provides that a SPCP offered by a for-profit entity must be "established and administered to extend credit to a class of persons who, under the organization's customary standards of creditworthiness, probably would not receive such credit or would receive it on less favorable terms than are ordinarily available to other applicants applying to the organization for a similar type and amount of credit."
Supporters of SPCPs likely will be concerned about the following statement by the CFPB in the preamble:
"While the Bureau declines in this proposal to reach a conclusion about whether ECOA's SPCP provision permitting discrimination in favor of groups with special social needs—typically minority groups—is unconstitutional, the Bureau is mindful of recent Supreme Court decisions highlighting the legal infirmity under the Fifth and Fourteenth Amendments of laws that enable such discrimination.61 The constitutional guarantee of equal protection generally prohibits the government from discriminatory treatment on the bases of race, color, national origin, or sex; where those categories are implicated, it requires a thorough examination of the purported need for such discrimination and whether it is appropriately limited. Consistent with that precedent and the purposes of ECOA, and pursuant to its authority provided by 15 U.S.C. 1691(c)(3) to set standards for SPCPs offered or participated in by for-profit organizations to meet special social needs, the Bureau has reexamined the provisions of Regulation B that allow such SPCPs to use a prohibited basis—including but not limited to race, color, national origin, or sex—as common characteristics.
61 See, e.g., Students for Fair Admissions, Inc. v. President & Fellows of Harvard Coll., 600 U.S. 181 (2023). Cf. Ames v. Ohio Dep't of Youth Servs., 605 U.S. 303 (2025) (affirming that there is no exception to civil rights laws (e.g., Title VII) that allows for discrimination against majority groups). See also Nuziard v. Minority Bus. Dev. Agency, 721 F. Supp. 3d 431, 465 (N.D. Tex. 2024), appeal dismissed, No. 24-10603, 2024 WL 5279784 (5th Cir. July 22, 2024); Strickland v. United States Dep't of Agric., 736 F. Supp. 3d 469, 480 (N.D. Tex. 2024)."
You can read an analysis of the Students for Fair Admissions case by our Labor and Employment Group here.
If the proposals are finalized, they almost certainly will be challenged in court, and perhaps that is what the CFPB would like to happen so that the issues addressed by the proposals eventually are reviewed by the Supreme Court.
The Ballard Spahr Consumer Financial Services group will be recording a podcast on the proposals to be released in the future.
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