Ed: #92: Disparate Impact's Demise?

DI (and DEI) get a reckoning in Trump 2.0

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LIRC’ing for over 30 years

After working almost 5 years at large law firm in Chicago, and right before I started a new job as General Counsel of a Midwestern bank with 3 residential mortgage lending subsidiaries, I attended the 1994 MBA Legal Issues Seminar (now called the Legal Issues and Regulatory Conference- “LIRC”). The 1994 LIRC was my first introduction to the mortgage banking business. In addition to the (pre-internet) materials provided by MBA, the notebook pictured above contains over 15 pages of my handwritten notes (which were written when I still could read my own handwriting) to consider with my new company and position.

Since then, LIRC has become the premier annual conference in the mortgage banking legal and compliance world. In over 30 years I have never missed a meeting.[1] The 1994 meeting was in San Diego which is also where the 2025 MBA LIRC again returns this week.[2] I look forward to seeing many of you there again shortly. If you attended the 1994 LIRC and will be at this year’s meeting, we should all have a drink together.[3]

LIRC’ing around disparate impact theory (DI)

The 1994 LIRC was also my introduction to the disparate impact theory (DI) and its application to mortgage lending.[4] Throughout my career since 1994, I have counseled mortgage bankers about the importance of measuring your lending patterns and avoiding disparate outcomes. I have also seen first-hand how enforcement officials can use statistical disparities to assert “angry” discrimination claims in cases where lenders are just trying to profitably originate loans. In 1994, however, DI was a brand-new issue driven by some disturbing studies[5] of racially disparate lending outcomes. Much has happened in the last thirty years, but despite (i) ubiquitous mortgage banker fair lending compliance efforts premised on analysis of lending patterns, and (ii) widespread fair lending enforcement based on DI, the racial homeownership and wealth gap persists.[6]

Throat clearing (again) about fair lending

Readers of these Musings are aware of my opinions[7] about fair lending and enforcement. I have often discussed the government’s (particularly the CFPB’s) overreach and politically inspired prosecution efforts[8] seeking fair lending consent orders against mortgage lenders in cases such as Townstone and Trident. But, I also believe that intentional discrimination is both illegal and morally unacceptable. It seems trite and obvious to say, but for mortgage originators, illegal discrimination is more than simply bad for business; it’s moronic.[9]

That said, I have also taken issue with performatively angry CFPB enforcement interpretations seeking to elevate DI as the sole evidence needed to prove illegal discrimination cases.[10] I have further discussed how the federal government’s fair lending enforcement efforts were legally dubious, and, perhaps more importantly, practically ineffective to lower the racial homeownership and wealth gap.[11]

Let’s be clear, however; DI is exclusively a racial question in mortgage lending.[12] To my knowledge (without any research), no one has ever tried to make a disparate impact-based case regarding age, sex/gender identity, or sexual orientation discrimination[13] in mortgage lending. Meanwhile, the government’s fair lending enforcement actions punishing and claiming racist intent arising from statistical disparities alone[14] have exposed DEI’s critical race theory-based illiberalism.[15] Using government power to advance particular racial outcomes to the exclusion of other considerations[16] isn’t consistent with definitions of fairness premised on equal opportunity rather than outcomes.

Trump’s attacks on DEI and DI

Today it is apparent that the outrage expressed in many enforcement actions against lenders[17] is facing a backlash with an (inevitably) equally angry and mean response. Regardless of whether my characterizations of it are accurate, there’s clearly a “new sheriff in town” and DI (and its DEI premise) may not get out alive.[18]

In particular for the mortgage industry, the merry-go-round of HUD’s disparate impact rule will continue its “tortured history” as HUD has said it will reconsider (again) its 2023 DI Rule issued pursuant to various DEI inspired Biden Administration Executive Orders (EOs). But, as is the case with EOs, they are easy to reverse in any new administration. Trump’s EOs are typically designed to be performative for his populist base and trigger his “liberal” enemies. Creating durable changes in policy does not seem to be a priority yet.

In addition to several earlier Executive Orders regarding DEI, on April 25 the White House issued an EO signed by President Trump titled “Restoring Equality of Opportunity and Meritocracy,” instructing federal agencies to stop treating DI as a viable theory of liability in discrimination matters.

Admittedly, one might think based on my priors that I would applaud this EO. Take for example, the following excerpts from the EO’s Section 1 “Purpose”,

“A bedrock principle of the United States is that all citizens are treated equally under the law. This principle guarantees equality of opportunity, not equal outcomes. …., Disparate-impact liability all but requires individuals and businesses to consider race and engage in racial balancing to avoid potentially crippling legal liability. It not only undermines our national values, but also runs contrary to equal protection under the law and, therefore, violates our Constitution. …. As the Supreme Court put it, “[t]he way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”

Donald Trump surely did not write any of that EO, but it does express the thinking of classically liberal conservatives about DI quite well. Three years ago, I led with that same Supreme Court quote when I discussed the Trident consent order.

But is the DI EO just performative signaling or are there meaningful changes that could arise? While it is hard to imagine any federal fair lending enforcement action utilizing DI during the Trump administration, does this EO mean mortgage lenders can now ignore lending patterns?

Die DI, die DEI!

I tend to use a fair amount of metaphors in this blog, but rarely poetic metaphors unless written by William Butler Yeats. So, my sincere apologies for what follows:

A petty (non-AI generated) poem just popped in my head.
Trump 2.0 seeks to kill disparate impact, yet it hangs by a thread.
Beware, this zombie could still rise from the dead.
But will the Supreme Court damage DI’s brains instead?

“Supreme Court damage its brains” What?!! Sorry, I had to work with that zombie metaphor and everyone[19] knows that you kill zombies by damaging their brains. Anyway, after that rhyming recess, here’s a more serious perspective on DI’s status which will also provide perspective on my preceding poem.[20]

The law of DI today

Despite its compelling philosophical arguments, Trump’s EO doesn’t actually change the law at all; it only says DI may not be used in enforcement at the federal level. Courts, however, have the power to make their own interpretation of the fair lending laws and will have the final say (fair lending laws can also be enforced by private and state plaintiffs). In that regard, while DI is not expressly mentioned in fair lending statutes and regulations, in a close (5/4) 2015 decision, the Supreme Court recognized DI as potentially probative, but not necessarily conclusive evidence of discriminatory intent under the Fair Housing Act (see Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc.).[21]

Specifically, in Inclusive Communities, SCOTUS rejected Fair Housing Act liability based solely on statistical disparities, noting that a plaintiff would also have to show that a defendant’s policy(s) actually caused that disparity to find liability. Even though most SCOTUS observers will tell you that the current makeup of the Supreme Court with a firm textualist/originalist majority is unlikely to reach a similar result today, the Inclusive Communities decision remains the law of the land on DI. I’m not aware of any case that could force SCOTUS to revisit Inclusive Communities, but advocates are probably working to find that. In the meantime, proving whether disparities exist or whether caused by a specific policy is typically a massively expensive and time-consuming litigation project for all involved which explains why all have settled to date.

Moreover, as 2025 LIRC attendees will hear ad nauseum, Trump’s EOs and HUD’s policies have no impact on state enforcement efforts or application to state law. Perhaps, most importantly given the statute of limitations for fair lending actions, the DI EO can easily be reversed by a new President. So, DI is only mostly dead, and I expect the merry-go-round to keep spinning until SCOTUS weighs in again.

Discouraging applicants?

The debate over DI may never be settled by SCOTUS or the political process: In fact, DI may in some instances be evidence of racism, but it also has been used by power-seeking critical race theory proponents to assert their own “equity” agenda unfairly victimizing and disparaging people and institutions. As I have often written, “equity” (justice) is in the eye of the beholder, and an equally performative (and mean-spirited) backlash to using the law to achieve one vision of equity[22] at the expense of another[23] is human nature. I sometimes wonder, however, if the outrage messaging expressed in DI-driven fair lending enforcement, such as the press releases from CFPB’s modern day redlining cases noted in Fn. #14 or Fn. #17, might have a discouraging impact on minorities who might think, “why bother to apply for a loan when the government keeps saying that the mortgage industry are racists.”

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[1] Setting aside meetings during the COVID era.

[2] I will moderate a fantastic panel of Washington DC based lawyers who will be forced to answer this “outside the Beltway” Midwestern lawyer’s questions about what the heck is going on there.

[3] The only person I know for sure was there in 1994 and will be in San Diego this year is Mitch Kider (who will be appearing on the DC panel referenced in Fn. #2 with me, Jonice Gray and Jeff Naimon). Mitch’s name was misspelled in the 1994 printed directory as “Mithcel”. Rumor has it that a secretary at the old WBSK firm lost their job over that typo. :)

[4] Disparate lending patterns serving as evidence of illegal discrimination is a concept borrowed from employment law.

[5] Most notably, a study by the Boston Fed in 1992 analyzing HMDA data.

[6] DI proponents may argue that enforcement and compliance have been insufficient, but after 30 years, that sounds to me like how communists reply when you point out to them how poorly communism has worked in practice: they will inevitably tell you that “real communism” has never been tried.

[7] These are not “legal opinions”. I often admonish my audience that this blog is not legal advice. This time my admonishment “goes to 11”. When it comes to fair lending, there are many good mortgage banking lawyers out there and it would be a very good time to contact one to make sure you have personalized advice on how to proceed in this new environment.

[8] I’m not going to say I predicted the about-face happening today in fair lending, but I will highlight for my readers that when I wrote about Townstone being “peak fair lending” it was before the election, and I had no insight on who would win at that point.

[9] I’m not addressing whether the failure to provide Sharia compliant loan products could be viewed as illegal discrimination, but I am certain that “Whites-Only Mortgage Company” would be a stupid name to drive business.

[10] See also, Ed. #52: Outrage, Empathy and Policymaking

[11] Sadly, in many iterations of the DEI movement, one could be called racist for even criticizing DI as a measure of intentional discrimination: the idea being that structural racism is evident in all disproportionate outcomes regardless of intentionality and to deny that is to support the structural racism leading to unequal outcomes.

[12] Enabled through HMDA. Changing HMDA will require a change to statutory law, but it is entirely inconsistent with Trump’s DEI and DI EOs.

[13] CFPB still felt it was necessary to issue now withdrawn guidance materials confirming that such discrimination would be a problem if identified.

[14] Nearly every fair lending consent order with the CFPB, however, always seemed to include a handful of allegedly racist or insensitive emails that somehow proved that the lender had discriminatory intent to discourage applications. As a result, press releases suggested these lenders deserved public outrage and shame for being racists. The CFPB’s Townstone prosecution took that concept to ridiculous levels.

[15] See also, discussion about the “Crits” in this Musing edition

[16] I often discuss the importance of narrative in compliance. If narrative doesn’t matter to fair lending compliance, then DI is just a quota system.

[17] Read, for example, any CFPB or DOJ press release arising from “modern day redlining” consent orders such as Trident’s.

[18] But, you’ll have to read FHFA Director Bill Pulte’s Twitter (X) feed if you want to know about the fate of Special Purpose Credit Programs going forward (or whatever else is going on at the GSEs).

[19] Zombie movies and series are everywhere. I haven’t seen a good vampire show in ages, but I probably could have gone with a vampire metaphor instead of zombie if I thought about longer (or asked ChatGPT).

[20] I do love me some gratuitous alliteration too.

[21] Interestingly, I could not locate the Inclusive Communities decision on the Supreme Court’s website, but I was able to find it on the Justice Department’s website. Note to Attorney General Pam Bondi: You might want to have someone take that down after you read Trump’s DI EO.

[22] The critical race theory view of DEI that structural racism is revealed wherever disparities exist.

[23] The constitutional promise (and MLK’s dream) of colorblind equal protection and opportunity.