Federal Rule Change Sparks Lawsuit from Fair Housing Organizations

On Wednesday, fair housing organizations filed a lawsuit against the federal government in response to a recent rule change that they believe would roll back decades of lending protections and potentially lead to increased discrimination against Black people.

Background: The Trump Administration's Rollback of Lending Protections

In 2020, the Trump administration announced its intention to revisit the Obama-era rule changes aimed at preventing discriminatory practices in the lending industry. These changes were introduced as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

The Obama-era regulations aimed to improve mortgage lending practices by increasing transparency and accountability in the process. Specifically, they required lenders to consider a borrower's income, creditworthiness, and other factors when evaluating loan applications. This was intended to prevent discriminatory practices, such as redlining (denying loans based on an applicant's zip code or neighborhood) and predatory lending.

The New Rule: Increased Flexibility for Lenders

In December 2022, the Consumer Financial Protection Bureau (CFPB) announced a new rule change that would allow lenders to use alternative credit scoring models. These models prioritize credit history from non-traditional sources, such as utility payments and social media activity.

Fair housing organizations argue that this new approach increases the risk of discriminatory practices against Black applicants. They contend that alternative credit scoring models are less effective at identifying creditworthiness in low-income and minority communities.

Criticism from Fair Housing Organizations

The National Fair Housing Alliance (NFHA) and other fair housing organizations have criticized the new rule change, stating that it would allow lenders to rely on biased criteria to evaluate loan applications. This, they argue, could lead to a resurgence of discriminatory practices, such as:

• Redlining: Denying loans based on an applicant's zip code or neighborhood
• Predatory lending: Offering excessive interest rates and fees to low-income borrowers
• Reverse redlining: Targeting minority communities with subprime mortgage products

Lawsuit Filed by Fair Housing Organizations

On Wednesday, the NFHA and other fair housing organizations filed a lawsuit against the CFPB in federal court. The lawsuit argues that the new rule change is inconsistent with the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA).

The plaintiffs claim that the rule change would:

• Increase the risk of discriminatory lending practices
• Roll back decades of progress made under the Obama-era regulations
• Harm low-income and minority communities disproportionately

Next Steps

The lawsuit is ongoing, with the plaintiffs seeking to block the new rule change or modify it to ensure that it aligns with federal law. The outcome of this case will have significant implications for the lending industry and fair housing in the United States.

As policymakers and regulatory agencies continue to grapple with issues of lending discrimination and fair housing, one thing is clear: the fight against discriminatory practices in the lending industry is far from over.