CFPB Expands ECOA Prohibited Bases to Include Sexual Orientation and Gender Identity

Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

On March 9, 2021, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an Interpretive Rule that the prohibitions against sex discrimination in the Equal Credit Opportunity Act (ECOA) and Regulation B encompass sexual orientation discrimination and gender identity discrimination. When published, the rule will have immediate effect. This alert explains the development and why it matters.

What Happened

Make no mistake: The CFPB is now all-in on fair lending.

We have anticipated this development since the historic Supreme Court decision in Bostock v. Clayton County, Georgia last June, and the Interpretative Rule cites to that opinion at length. The CFPB’s justification for expanding the list of prohibited bases through an interpretive rule is that its conclusion is based on a “straightforward application of legal terms with plain and settled meanings.”

The Interpretive Rule provides some insight into the types of activities that the CFPB will identify as instances of sexual orientation and gender identity discrimination. The Interpretive Rule clarifies that discrimination against individuals, not merely groups, is covered by ECOA and Regulation B. This point is illustrated by a hypothetical loan officer who rejects applications from insufficiently masculine male applicants and insufficiently feminine female applicants. According to the CFPB, this loan officer may be treating men and women as groups equally but is discriminating against individuals. The Interpretive Rule states that sex discrimination also includes “discrimination motivated by perceived nonconformity with sex-based or gender-based stereotypes.” This includes discrimination based on a lender’s perception that a customer’s attire does not accord with the customer’s gender.

This expansion of the list of prohibited characteristics dovetails with an area of emphasis for the Biden administration and follows the lead of the Department of Housing and Urban Development (HUD). On his first day in office, President Biden signed an executive order on combating discrimination on the basis of gender identity and sexual orientation. In the wake of that executive order, HUD’s acting assistant director for fair housing and equal opportunity issued a memorandum “directing HUD’s Office of Fair Housing and Equal Opportunity (FHEO) to take the actions outlined in this memo to administer and fully enforce the Fair Housing Act to prohibit discrimination because of sexual orientation and gender identity.”

Why It Matters

Because this is an interpretive rule, it will go into effect as soon as it is published in the Federal Register. There will not be a period for notice and comments, nor will there be a 30-day delayed effective date. If lenders have not proactively updated training materials, this should be done immediately. Other risk factors may exist in policies, procedures and application forms. Given the expected return of disparate impact as a theory of liability under ECOA, lenders should review automated scoring, decisioning and pricing models for variables that could be proxies for these new prohibited bases.

We are likely moving into an era of aggressive CFPB enforcement, and the CFPB will be actively looking for instances of discrimination on these new prohibited bases. Manatt is currently representing a number of clients with respect to anticipated examinations and enforcement activity in this area.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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