Fair Lending Clarity Series: Navigating the 2025 Regulatory Shifts
Welcome to our new blog mini-series on fair lending in 2025. With recent updates from the FDIC and OCC, including the removal of disparate impact from examination procedures, there's a lot of confusion around how disparate treatment (DT) and disparate impact (DI) differ, especially when statistical evidence is involved. This series breaks it down piece by piece, drawing on the latest guidance to provide clarity for lenders, compliance pros, and industry watchers. We'll explain the changes, debunk misconceptions, and offer practical tips.
Let's dive in with Part 1!
Part 1: Demystifying Disparate Treatment vs. Disparate Impact: A Clear Guide to the OCC & FDIC 2025 Fair Lending Changes
In the evolving world of fair lending, distinguishing between disparate treatment and disparate impact has never been more critical, especially after the OCC and the FDIC both recently announced changes to their examination approaches. This revision, aligned with shifts by the current administration, removes all references to disparate impact, indicating that exams will focus solely on disparate treatment.
But what does this mean, and what does it change?
Disparate Treatment and Disparate Impact Defined
Disparate treatment occurs when a lender treats applicants differently based on protected characteristics like race, age, or sex, without legitimate justification. It's about inconsistencies: for example, helping a non-minority couple fix a credit report error but denying a minority couple the same chance. Proof can be overt (explicit bias) or comparative (unexplained differences via file reviews or stats). Stats play a role here, like higher denial rates for protected groups when not explained by relevant factors such as credit score.
Disparate impact, conversely, involves neutral policies applied equally, BUT disproportionately and adversely affect protected groups. The classic example is requiring a minimum loan amount which results in denial of otherwise credit-worthy protected-group applicants. With respect to disparate impact, no other evidence would be needed - it would be purely outcome-focused. The FDIC's update follows the April 2025 Executive Order 14281, directing agencies to cease disparate impact enforcement. The OCC led with a July 2025 revision, removing disparate from its Fair Lending Handbook, and the FDIC followed suit in August. This is the type of situation their guidance indicates they would not focus on.
The key point is to understand the differences in disparate impact and disparate treatment, and that's harder to do than it may sound, as they do overlap and are subject to interpretation. One way to remember is that disparate impact is based on neutrality and consistency: a policy that is neutral and may have not discriminatory intent and is applied consistently, but adversely affects a protected group. Disparate treatment is much broader, BUT the key component is inconsistency related to treatment of applicants. This is how most people, and the examiners, think about fair lending.
Key Takeaways
First, it is important to understand that in the community bank space in particular, pure disparate impact cases have rarely, if ever been pursued. There is typically some degree of disparate treatment involved when there has been regulatory action that may have a disparate impact implication.
Second, expect the agencies to broaden their interpretation of disparate treatment and narrow their interpretation of disparate impact.
Therefore, from a practical standpoint, there will not be a major impact on day-to-day risk management and monitoring.
Bonus Tip: Strengthen compliance management systems (CMS) with evaluations focused on disparate treatment.
Stay tuned for more in this series!
Resources:
FDIC changes to compliance manual: https://www.fdic.gov/news/financial-institution-letters/2025/update-fdics-consumer-compliance-examination-manual?source=govdelivery&utm_medium=email&utm_source=govdelivery.
OCC changes: https://occ.gov/news-issuances/bulletins/2025/bulletin-2025-16.html.
Understanding (3) forms of lending discrimination: https://www.premierinsights.com/blog/blog/understanding-the-3-types-of-fair-lending-discrimination.
Executive Order 14821 April 23, 2025: https://www.federalregister.gov/documents/2025/04/28/2025-07378/restoring-equality-of-opportunity-and-meritocracy.
