Federal agencies and states are increasingly taking divergent approaches to disparate-impact liability. While the federal government has moved to eliminate disparate-impact enforcement, several states have taken steps to preserve or expand liability based on discriminatory effects. Most recently, on August 7, the FTC announced a policy statement providing that it will no longer pursue disparate-impact claims under any statute it enforces and will no longer bring antidiscrimination claims under Section 5 of the FTC Act.
The FTC stated that neither Section 5 nor the Equal Credit Opportunity Act (ECOA) authorizes disparate-impact claims. Under the new policy, the Commission will continue to pursue disparate-treatment claims under ECOA where the facts support intentional discrimination, but it will not pursue liability based solely on a policy’s differential effects. The FTC also modified certain compliance obligations arising from prior auto-dealer matters involving statistical analyses associated with disparate-impact theories. The FTC’s actions come on the heels of an April 2025 executive order directing agencies to curtail disparate-impact enforcement (previously discussed here).
At the state level, however, regulators and legislatures have taken steps to preserve or expressly establish disparate-impact standards (See our discussion of New Jersey here.) On July 31, Illinois enacted the Civil Rights Safeguard Act, which takes effect January 1, 2027 and expressly incorporates an effects-based discrimination standard into the Illinois Human Rights Act. For financial institutions, the Act prohibits the use of lending criteria or methods that have the effect of subjecting individuals to unlawful discrimination where the practice is not necessary to achieve a substantial, legitimate, nondiscriminatory interest or that interest could be served through another practice with a less discriminatory effect.
The Illinois amendments define “criteria or methods” to include practices, policies, and groups of practices or policies. They also apply the new standard to persons offering credit cards to the public and permit the Illinois Department of Human Rights to consult with state or federal financial regulators when investigating a charge involving a financial institution.
These developments reflect a widening divide over the role of disparate-impact liability in fair lending. While federal agencies are retreating from effects-based theories, states may continue to adopt or preserve their own standards, creating different substantive requirements across jurisdictions.
Putting It Into Practice: The divergent approaches in state and federal disparate impact liability leave financial institutions facing substantially different fair lending expectations depending on the applicable jurisdiction. Financial institutions should therefore continue assessing fair lending compliance on a state-by-state basis notwithstanding the federal pullback.