Federal agencies reverse Biden-era credit guidance

• Key takeaway: Federal agencies rolled back Biden-era guidance Monday that encouraged creditors to offer special purpose credit programs to underserved communities.
• Expert quote: "Federal law does not authorize any generalized remedial 'equity' initiatives absent specific cases of unlawful discrimination, and creditors should not rely upon previous guidance which may have suggested otherwise." — Federal Register notice.
• What's at stake: The rescission of the Biden-era guidance follows the Consumer Financial Protection Bureau's April amendment to Regulation B, which imposed new restrictions on special purpose credit programs offered by for-profit creditors. 

The Trump administration moved Monday to reverse Biden-era guidance that encouraged creditors to offer special purpose credit programs to underserved communities.
In a notice published in the Federal Register, seven federal agencies, including the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, said they were rescinding the 2022 guidance to ensure creditors do not engage in activities that violate the Equal Credit Opportunity Act and its implementing regulation, Regulation B.  

"Federal law does not authorize any generalized remedial 'equity' initiatives absent specific cases of unlawful discrimination, and creditors should not rely upon previous guidance which may have suggested otherwise," the agencies said in the notice.

The interagency recession notice said the previous guidance referenced provisions of ECOA and Regulation B that have since been amended. The provisions had allowed creditors, under certain circumstances, to implement lending programs based on race, color or national origin.

"These prior interpretations cannot be reconciled with the statutory text of ECOA and the [Fair Housing Act], which expressly prohibit discrimination against individuals based on prohibited characteristics," the notice said.

The 2022 interagency guidance encouraged creditors to consider how they could expand access to credit to address "special social needs." The guidance said the seven agencies "encourage creditors" to explore opportunities to develop special purpose credit programs consistent with the requirements of ECOA and Regulation B.

The Monday rescission follows the CFPB's April rule that amended Regulation B to state that ECOA does not authorize disparate-impact liability. The rule also placed restrictions on for-profit creditors' use of race, color, national origin and sex as eligibility factors in special purpose credit programs.

A year prior, President Donald Trump signed an executive order that sought to eliminate disparate impact liability in federal programs "to the maximum degree possible." Prior to the Trump administration, the CFPB used disparate impact to target banks and lenders that engage in discriminatory practices such as redlining. 

ECOA prohibits discrimination in credit transactions based on race, color, religion, national origin, sex, marital status or age, among other factors. Regulation B implements the law and applies its requirements to creditors.

Despite the shift in federal policy, disparate-impact theories remain viable under some state laws. States including California, Massachusetts and New Jersey have laws that allow disparate-impact claims in areas including lending, housing and employment. Banks operating in those states may therefore continue to face state-level requirements related to disparate impact.

Because there is a five-year statute of limitations, many lenders will also likely continue to keep compliance programs in place because the look-back reviews will be revived if a Democratic president succeeds the Trump administration.