President Trump recently signed
In writing, it sounded like a revolution. But in practice, at least for banks, experts say the order is likely to have a much more limited effect.
That's because in recent years, the federal government's stance on disparate impact has varied so widely from president to president — from strict enforcement under Democrats to far less under Republicans — that many banks assume the rules will eventually change back again. To play it safe, they may just leave their lending policies unchanged.
"Historically, we've seen a bit of a ping-pong match, back and forth, between Democratic and Republican officials," said
The concept of disparate impact was first applied to employment discrimination. In 1971, the Supreme Court found that the electric company Duke Power had used aptitude tests to illegally segregate its employees, even though no explicit intent to discriminate was evident.
Since then, other court cases and legislation have expanded the doctrine's purview, applying it to housing, lending and other areas. Civil rights groups say it's a vital tool for battling discrimination, including by banks.
"Disparate impact is a particularly important legal standard to have in order to determine whether or not there's unlawful discrimination in mortgage lending," said Gregory Squires, a sociology professor at George Washington University and a fair housing advocate. "The requirement to demonstrate that there was discriminatory intent is a much more difficult hurdle to meet than just demonstrating how particular policies have an adverse impact and serve no legitimate purpose."
But enforcement of this standard has been uneven. The Obama administration strictly applied disparate impact to housing and auto loans — so much so that it sparked an
And now, most recently, the second Trump administration has ordered all applications of the standard to stop. Nearly a week before the president's executive order, Mark Paoletta, the chief legal officer of the Consumer Financial Protection Bureau,
"This disparate impact regulation has been a real exciting political football match," said Chris Willis, a partner at the law firm
According to Willis, the back-and-forth has taught many banks to tune out all the changes, for their own sake. One particular concern involves relatively long statutes of limitations. If a future Democratic administration begins enforcing disparate impact again, federal regulators may hold banks liable for policies they had in place several years ago. And even if the policies were only in effect during the anti-disparate-impact Trump era, Willis said, that excuse is unlikely to work in court.
"There's a limit for institutions that take a long view of their business operations and of their regulatory compliance," he said. "They don't feel they can realistically change the direction of their operations so wildly every four years or eight years."
The other problem for banks is that changing their lending policies so frequently would simply be bad for business.
"If you go to the business and say, 'OK, all this stuff in underwriting we told you not to do it is now fair game, but you may have to turn it off again in four years,'" Willis said, "the business doesn't want to do that, because that's very disruptive to them. … They don't want to be flipping back and forth like a weather vane in the political winds."
What, then, will be the impact of Trump's order? For larger, more established lenders, Van Tol said, the recurring swings of the political pendulum may have a "mitigating effect" on how much they change their practices.
"Highly regulated institutions — banks, brand-name mortgage companies — will be more likely to continue with an approach that considers disparate impact," he said.
But for smaller firms, it may be a different story.
"What sometimes happens is … startup companies, less well-known companies, sort of fly-by-night operations, begin to take advantage of the fact that the government's no longer really enforcing to this standard," he said. "So you could start to see more discrimination at the edges of the market, and that's likely to be one of the outcomes of the executive order."
Another factor to consider is that Trump's April 23 executive order does not change the law. It only changes — for the time being — how certain laws are enforced by the federal government. And, importantly for banks, the government is not the only plaintiff that can sue for discrimination.
"Disparate impact is still part of the law," Van Tol said. "I think the executive order, even after it's carried out by the agencies, won't necessarily have the effect of preventing other people from bringing legal cases."
