Welcome to Part 3 of our blog mini-series on navigating the regulatory fair lending shifts in 2025, where we are offering real-world advice to lenders with regard to navigating the fluid regulatory landscape.
In part 1 and part 2 we discussed some basic definitions and the importance of statistical evidence in the context of recent changes made by the OCC and the FDIC in their approaches to fair lending examinations stemming from recent executive orders from the current administration. Specifically, both agencies have indicated they will now focus on disparate treatment and no longer focus on disparate impact with regard to fair lending discrimination. In this post, we provide a review and a deeper probe and further define these terms.
Defining the Theories
The regulatory and enforcement agencies have historically recognized (3) types of lending discrimination: (1) overt discrimination, (2) disparate treatment, and (3) disparate impact. Let’s set aside overt discrimination, and focus on disparate treatment and impact.
Disparate Treatment: This occurs when a lender treats applicants differently based on protected characteristics (e.g., race, sex, or national origin) without a legitimate, nondiscriminatory reason. The FDIC manual highlights examples like a lender assisting a non-minority couple to correct a credit report error while denying a minority couple the same opportunity without discussion. This can be overt (e.g., a policy favoring applicants over 30) or comparative, relying on evidence like file reviews or statistical disparities that lack justification.
Disparate Impact: Historically, disparate impact in its pure form targeted neutral policies (e.g., a $60,000 minimum loan amount) that disproportionately harmed protected groups, like minorities with lower-income properties, without requiring intent. The manual’s removal of this section signals its de-prioritization.
Why the Shift?
The move stems from Executive Order 14281, which directs federal agencies to end disparate impact enforcement, reflecting concerns that it overreaches into neutral business decisions. The OCC’s earlier update and FDIC’s alignment suggest a unified approach to focus on discrimination with respect to differences in treatment, not pure policy effects.
Compliance Implications
As we pointed out earlier in this series, this change is not as significant as it may seem. This is because pure disparate impact (potential discriminatory impact of neutral policies) was rarely enforced, but instead, regulatory actions typically required a disparate treatment element which demonstrated inconsistencies. For lenders, this means exams will zero in on disparate treatment risks, such as redlining (which are now framed as disparate treatment) or underwriting and pricing disparities – consistent with what they have always done.
The FDIC manual’s scoping process for example uses statistical tools like HMDA data to identify focal points for disparate treatment analysis. For community banks in particular, where disparate impact enforcement was rare, will likely see minimal change. However, larger institutions or those with multi-agency oversight should remain cautious, as disparate impact may persist in legal contexts.
Action Item
MAKE SURE YOU UNDERSTAND YOUR RISK. Enhance CMS to confirm monitoring of statistical disparities, ensure legitimate factors explain any disparities, and are well-documented.
Stay tuned for Part 4, where we’ll dive into exam strategies!
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.
