As feds retreat, California boosts fair-lending enforcement

• Key insight: The California legislature has passed a bill empowering the state's own regulators to enforce fair-lending laws.
• What's at stake: The legislation, which has yet to be signed by Gov. Gavin Newsom, arrives as the Trump administration rolls back enforcement of rules against unintentional discrimination.
• Expert quote: "I think it's necessary because it's clear that the federal government isn't going to do anything." —Gregory Squires, emeritus professor of public policy and sociology, George Washington University

As the U.S. government scales back fair-lending enforcement, California is working to pick up the slack.

On Aug. 27, the California State Legislature passed a bill that would empower state regulators to check mortgage lenders for compliance with nondiscrimination laws. The bill, called the California Fair Lending Examination Act, is now awaiting Gov. Gavin Newsom's signature.

"This is a consumer protection bill that shows California's willingness to lead even when the federal government will not," Democratic Assemblymember Mia Bonta, who authored the bill, said in a statement.

The legislation comes at a time when national regulators are rolling back antidiscrimination enforcement in banking. Last year, President Trump issued an order rejecting the concept of disparate impact, the idea that a business can discriminate even without intending to do so.

Federal bank regulators have followed suit. The Consumer Financial Protection Bureau has stopped enforcing disparate-impact rules; the Justice Department has dropped its prosecutions of redlining; and the Department of Housing and Urban Development has been working to repeal its own disparate-impact regulations.

Amid that vacuum, Golden State lawmakers voted to take matters into the state's hands. If the new bill becomes law, California's own financial regulatory agency — the Department of Financial Protection and Innovation — will be required to examine lenders for discriminatory actions, as defined by both state and federal laws.

Proponents of the bill say it's a necessary antidote to redlining and other discriminatory lending practices, which have historically blocked minority groups from building wealth.

"There are lots of different groups that stand to suffer if fair lending and fair housing laws are not enforced," Gregory Squires, an emeritus public policy and sociology professor at George Washington University, told American Banker.

"People of color have more difficulty getting loans and therefore getting housing," he said. "Veterans might not get the credit that is due them if they have a disability issue. Women who are subject to harassment by landlords or others may have difficulty securing their rights in the housing market."

If the federal government will not defend these groups, Squires said, it's up to individual states to step in.

"I think it's necessary because it's clear that the federal government isn't going to do anything," he said. "The fact is the federal government is no longer in the fair-housing business."

The National Community Reinvestment Coalition, a Washington, D.C.-based advocacy group, also hailed the California bill as a step in the right direction.

"Given the persistent deregulatory efforts at the federal level, it is refreshing to see," Tara Flynn, the NCRC's policy director, told American Banker by email. "It is an important first step, but there is more to do."

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But some in the banking industry wonder if the bill, assuming it becomes law, will make much of a difference. In spite of Trump's push, many banks have been reluctant to abandon their internal protocols on disparate impact, because they know a future administration may someday require them once again.

"I actually don't think it'll change much," Chris Willis, a partner at the law firm Troutman Pepper Locke who advises financial firms, said of the California bill. Willis said lenders know what might happen "the next time a Democrat sits in the White House."

Federal enforcement of disparate impact, to put it mildly, has been uneven. The Obama administration's application with respect to housing and auto loans sparked an industry backlash. Then the first Trump administration did its best to reverse those policies. Then the Biden administration reverted toward Obama's approach, before the second Trump administration undid it again.

This ping-pong effect, Willis said, has taken some of the bite out of the current administration's calls for zero enforcement.

"Just because the CFPB has now said there's no disparate impact under the Equal Credit Opportunity Act, I don't think that means most market participants believe that it's really gone," he said.

What's more, the U.S. Supreme Court has explicitly said that disparate impact applies in federal housing law cases. In the 2015 case Texas Department of Housing and Community Affairs vs. Inclusive Communities Project, the high court ruled that discriminatory practices — even unintentional ones — are banned by the Fair Housing Act of 1968.

"The United States Supreme Court said there is disparate impact liability under the Fair Housing Act," Willis said. "And so there's nothing any administrative agency in Washington can do to say that that's not the case anymore."

Squires, however, believes the California legislation could still do some good — even if its effect is mostly psychological.

"Right now [lenders] might feel they're getting a pass because of the posture of the federal government," Squires said. "But if the state takes this action, I think it will result in mortgage lenders and housing providers paying more attention to fair lending and fair-housing laws than would otherwise be the case."