On March 9, 2021, the Consumer Financial Protection Bureau (CFPB) issued an Interpretive Rule clarifying that the Equal Credit Opportunity Act (ECOA) and Regulation B prohibit discrimination based on:
- Sexual orientation;
- Gender identity;
- Actual or perceived nonconformity with sex-based or gender-based stereotypes; and
- An applicant's associations.
This Interpretive Rule will have an immediate effect once it is published in the Federal Register (not yet, as of the date of this post). It addresses stakeholders' requests for the CFPB to weigh in on such matters after the Supreme Court issued its decision in Bostock v. Clayton County, Georgia, 140 S. Ct. 1731, 207 L. Ed. 2d 218 (2020).
In Bostock, the U.S. Supreme Court ruled that the prohibition against sex discrimination in Title VII of the Civil Rights Act of 1964 encompasses sexual orientation and gender identity discrimination in the employment context. Soon thereafter, in July 2020, the CFPB published a request for information seeking comments on several ECOA and Regulation B issues including whether and how the Bostock decision should impact the CFPB's interpretation of ECOA's prohibition against sex-based credit discrimination. According to the CFPB, a variety of stakeholders requested regulatory clarification on these issues.
The Interpretive Rule sets forth the CFPB's reasoning based on the Bostock opinion. It finds that under ECOA and Regulation B:
- Consideration of sex is necessarily involved in sexual orientation discrimination and gender identity discrimination - Accordingly, "it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex;"
- Sex need not be the only cause of injury (so long as it is a "but for" cause) - For example, rejecting an applicant for being gay or transgender could relate to two causal factors, the person's sex plus the sex to which the individual is attracted or with which the individual identifies;
- Discrimination against groups and individuals is covered - The prohibition does not apply just to situations where a creditor discriminates against all men or all women, categorically. It applies to conduct towards each individual.
By way of example, according to the Interpretive Rule, a creditor cannot defend its discriminatory conduct by arguing that it rejects male and female applicants who are gay or transgender (thereby treating each group – males and females – the same). In this situation, each instance of discrimination is a violation; and
- The prohibition against sex discrimination includes discrimination that is "motivated by perceived nonconformity with sex-based or gender-based stereotypes, as well as discrimination based on an applicant's associations." - Such discrimination would include, for example, requiring a credit applicant who is married to a person of the same sex to provide different marriage documentation than a person who is married to a member of the opposite sex.
The CFPB's clarifications in the Interpretive Rule are consistent with its past position on the topic. A 2016 CFPB letter responding to inquiries about the issue explained a very similar stance based on the evolving law at that time.
Likewise, the Interpretive Rule follows the February 2021 memorandum issued by Acting Assistant Secretary of the U.S. Department of Housing and Urban Development (HUD) directing HUD's Office of Fair Housing and Equal Opportunity to administer and enforce the Fair Housing Act (FHA) to prohibit discrimination because of sexual orientation and gender identity. HUD's memorandum was issued to implement President Biden's January 25, 2021 Executive Order 13988, "Preventing and Combatting Discrimination on the Basis of Gender Identity or Sexual Orientation."
The Executive Order cites Bostock and sets forth that absent sufficient indications to the contrary, laws prohibiting sex discrimination also prohibit discrimination on the basis of gender identity or sexual orientation. It asks for all agency heads to assess agency actions (e.g., orders, regulations, guidance, policies, programs, etc.) under any statute or regulation that prohibits sex discrimination and to consider if the actions should be revised, suspended, or rescinded—or if new actions are necessary to fully implement the statute based on the policy set forth by the Executive Order.
Immediate Effective Date (Upon Publication in the Federal Register)
If you are a creditor under ECOA and are not already in compliance with the CFPB's Interpretive Rule, now is the time to revise your fair lending compliance management system. As pointed out in the Interpretive Rule, many states already include sexual orientation and gender identity in their statutes and regulations prohibiting discrimination in all or certain types (e.g., mortgage) of credit transactions.
For creditors operating in those states, this ruling may not have an immediate practical effect. However, creditors who have not yet incorporated prohibitions on sexual orientation and gender identity discrimination into their fair lending policies, procedures, monitoring, and training, should act immediately to ensure compliance with this Interpretive Rule.
We expect the CFPB to revive disparate impact as a theory of liability under ECOA (for the mortgage industry, also governed by the Fair Housing Act, disparate impact has been a settled theory of liability since the Supreme Court ruled in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519 (2015)).
As such, creditors should consider whether and how their underwriting, pricing, and decision-making should be revised to exclude variables that may be proxies for these prohibited bases.
Fair Lending Focus
Industry is expecting the CFPB to put fair lending front and center under its new leadership. This Interpretive Rule came as no surprise given Bostock and the February Executive Order; but this is likely only a prelude to more fair lending-focused efforts from the CFPB.