HUD Proposes Rescinding Disparate Impact Rule: Impacts for Mortgage Lenders 2026

In a significant development for the housing and mortgage industries, the U.S. Department of Housing and Urban Development (HUD) has proposed removing its regulations on disparate impact liability under the Fair Housing Act (FHA). This move, outlined in a proposed rule published in the Federal Register on January 14, 2026, aims to eliminate codified standards that have long been a source of uncertainty and regulatory burden for lenders, insurers, and other stakeholders. As a leader in mortgage fulfillment services, The Commonwealth Group closely monitors such changes, as they directly impact our clients' operations and compliance strategies.

 Understanding Disparate Impact Liability

Disparate impact refers to a legal theory under the FHA where a policy or practice that appears neutral on its face can be deemed discriminatory if it disproportionately affects protected classes—such as those based on race, color, national origin, religion, sex, familial status, or disability—even without evidence of intentional bias. HUD first formalized this standard in a 2013 rule, which established a three-step burden shifting framework for proving such claims.

Over the years, the rule has undergone revisions. In 2020, under the previous Trump administration, HUD tightened the standards to make it harder for plaintiffs to succeed in disparate impact claims, requiring them to prove a direct causal link and shifting more burden onto challengers. However, the Biden administration reinstated the 2013 version in 2023, arguing it provided greater clarity and aligned with Supreme Court precedent, including the 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which affirmed disparate impact as a valid theory under the FHA.

Despite these affirmations, critics in the industry have argued that the rule creates a "near insurmountable presumption of discrimination" based on statistical disparities alone, potentially exposing lenders to frivolous litigation over legitimate business practices like credit scoring or underwriting criteria.

 The Latest Proposal: What HUD is Doing

HUD's new proposed rule seeks to rescind the disparate impact regulations entirely by removing 24 CFR Part 100, Subpart G (including § 100.500) and amending § 100.5(b) to eliminate references to discriminatory effects. This would leave interpretations of disparate impact liability solely to the courts, rather than relying on agency defined standards.

The proposal cites several key rationales:

·        Executive Order 14281 (Restoring Equality of Opportunity and Meritocracy): Issued on April 23, 2025, this order directs federal agencies to eliminate disparate impact liability where possible, emphasizing merit-based systems over outcome-based presumptions of discrimination.

·        Supreme Court's Overruling of Chevron Deference: In the 2025 Loper Bright Enterprises v. Raimondo decision, the Court ended judicial deference to agency interpretations of ambiguous statutes, prompting HUD to defer to courts on FHA matters.

·        Regulatory Reform: Aligning with broader efforts to reduce burdens, HUD argues that removing the rule will promote clarity and predictability by avoiding agency overreach.

Public comments on the proposal are due by February 13, 2026, providing an opportunity for industry participants to weigh in.

Implications for the Mortgage Industry

For mortgage lenders, processors, and servicers, this proposal could represent a welcome shift. The disparate impact rule has often been cited as a barrier to innovation and efficiency, as companies hesitate to implement data driven tools or risk assessment models for fear of unintended statistical disparities leading to lawsuits. By deferring to courts, HUD's approach may reduce the presumption of guilt based on outcomes alone, allowing for more focus on intentional discrimination while preserving fair access to housing.

However, it is not without controversy. Fair housing advocates argue that rescinding the rule could weaken protections against systemic biases, potentially eroding civil rights guardrails established over decades. Organizations like the National Apartment Association and the National Multifamily Housing Council have previously called for revisions to align with Supreme Court rulings and include safeguards against abusive litigation.

At The Commonwealth Group, we see this as an opportunity to streamline compliance without compromising ethical standards. Our services in regulatory consulting, quality control, and operational support are designed to help clients navigate these changes, ensuring robust fair lending practices while optimizing profitability.

Looking Ahead

As the comment period unfolds, the mortgage sector should prepare for potential finalization of this rule, which could reshape fair housing enforcement. While disparate impact claims will not disappear—courts can still recognize them under the FHA—the absence of HUD's codified framework may lead to more case-by-case judicial scrutiny, potentially fostering a more balanced environment.

We encourage our partners to stay informed and engage in the rulemaking process. For tailored advice on how this proposal might affect your operations, contact our Martin Luplow at The Commonwealth Group ([email protected]). Together, we can adapt to these evolving regulations and continue driving success in the mortgage industry.

West Beibers, CMB, AMP, CRU 

Chief Executive Officer 

The Commonwealth Group Companies

*Disclaimer: This post is for informational purposes only and does not constitute legal advice. *