NCUA Eliminates “Disparate Impact” from Fair Lending Guidance
The National Credit Union Administration (NCUA) announced the removal of all references to “disparate impact” liability from its Fair Lending Guide and other agency issuances. This is consistent with Executive Order 14281 (EO), Restoring Equality of Opportunity and Meritocracy, signed by President Trump on April 23, 2025. The EO states that it is “the policy of the United States to eliminate the use of disparate-impact liability in all contexts to the maximum degree possible to avoid violating the Constitution, Federal civil rights laws, and basic American ideals.”
As America’s Credit Unions’ EO Tracker points out, the order:
• Revokes previous presidential approvals of regulations supporting disparate-impact standards under Title VI of the Civil Rights Act of 1964;
• Requires a coordinated review by the Attorney General, the Secretary of Housing and Urban Development, the Director of the Consumer Financial Protection Bureau , the Chair of the Federal Trade Commission, and the heads of other agencies enforcing the Equal Credit Opportunity Act to reassess all ongoing proceedings that rely on disparate-impact liability; and
• Mandates a review of ongoing investigations, lawsuits, and consent decrees based on disparate-impact liability, with a goal of curtailing or reversing them.
Ultimately, agencies are instructed to prioritize treating individuals “equally under the law” and focus on “equality of opportunity, not equal outcomes” as the guiding principle.
What is disparate impact liability?
The legal doctrine of disparate-impact liability (also known as the “effects test”) refers to a credit practice that appears facially neutral, but has a disproportionately negative effect on a “prohibited basis” (e.g., based on race, age, nationality, gender, etc.), even though the lender has no intent to discriminate. For example, lenders using automated underwriting systems may rely on geographic data that correlates with race. If the algorithm denies loans or offers worse terms to applicants from predominantly minority neighborhoods, this could result in disparate impact discrimination under the effects test.
Under previous guidance, such a policy or practice would be deemed discriminatory unless a lender could demonstrate that the practice met a legitimate business need that could not be reasonably achieved by means less disparate in impact. Any such language has now been stricken from NCUA’s guidance materials. The July 2017 NCUA Fair Lending Guide now reads: “References to disparate impact have been removed from this guide as of August 29, 2025. Removal of disparate impact is identified by a strikethrough. Refer to Letter to Credit Unions No. 25-CU-04.”
According to NCUA Letter 25-CU-04, NCUA instructed its examiners to no longer request, review, conclude or follow-up on:
• Matters related to a credit union’s disparate impact risk,
• Internal disparate-impact risk analysis, or
• Disparate-impact risk assessment processes or procedures.
Nevertheless, NCUA’s supervisory processes will continue to include regularly conducting fair lending risk assessments, analyzing Home Mortgage Disclosure Act (HMDA) data for possible evidence of disparate treatment (i.e., intentional discrimination), conducting risk-based fair lending examinations, and taking appropriate action if evidence of disparate treatment is found.
Further, “NCUA expects credit unions to provide fair access to financial services, treat members fairly, and comply with all applicable laws and regulations.” NCUA instructs credit unions to reach out to their examiners or the NCUA Office of Consumer Financial Protection with any questions on Letter 25-CU-04.
Given these developments, what exactly is the legal status of disparate impact?
While EO 14281 eliminates the use and enforcement of disparate impact at the federal level, the order does not invalidate the legal doctrine itself or repeal existing federal civil rights laws. In 2015, the U.S. Supreme Court explicitly upheld disparate impact liability under Title VII and the Fair Housing Act (FHA) in State of Texas in Texas Department of Housing and Community Affairs (TDHCA) v The Inclusive Communities Project. That ruling still stands as of the date of this blog post.
Many readers will remember HUD’s embattled disparate impact rule, originally adopted in 2013, significantly revised in 2020, and then reinstated in 2023 (click here for details). On August 4, 2025, HUD submitted a final rule titled “HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard” to the Office of Management and Budget (OMB) for review without public notice and comment. According to the notice, the rule would amend HUD’s interpretation of the Fair Housing Act’s disparate impact standard “to better reflect” the 2015 Inclusive Communities ruling. The full text is not yet available for public inspection; however, HUD’s revised interpretation will likely be more in line with the EO’s mandate.
Last but not least, let’s talk about state law. The EO instructs the Attorney General and federal agencies to review preemption authority regarding state laws, regulations, policies or practices that impose disparate-impact liability. Nevertheless, many states will continue to recognize and enforce disparate impact claims under their own civil rights statutes. So, while it appears that NCUA will no longer review for disparate impact, credit unions should still remember that state governments and class action attorneys may continue to do so.
Stay tuned for developments!
Questions? Suggestions for future blog posts? Contact the Compliance Team at compliance@americascreditunions.org.