Alternative Commercial Finance Monthly | July 2025

State regulators look to lenders’ use of AI models for disparate impact

Background

In May, we reported that regulators may consider use of AI in their analysis of compliance with fair lending laws. The attorney general of Massachusetts recently announced a settlement with a student loan lending company for its use of AI models that allegedly resulted in discrimination, violating fair lending laws. The state’s theory of the violations was based on disparate impact. The Massachusetts AG relied in part on the lender’s algorithms in determining that statistical disparities existed. Specifically, the use of immigration status in the algorithm allegedly led to discrimination based on national origin, and the use of default rates for specific schools led to a disparate impact on loan approval and terms for racial minority applicants.

Takeaways

Lenders that use AI models in connection with loan applications need to test the models to ensure compliance with applicable fair lending laws. The settlement order with the Massachusetts AG includes guidelines on assessing the algorithms and data used to train and test AI models for disparate impact and other forms of discrimination. Lenders should be aware that state and federal regulators may look to their use of AI models in addition to traditional means of testing compliance with lending laws.

CFPB extends compliance dates for small business lending data collection rule under Dodd-Frank Act

On June 18, 2025, the Consumer Financial Protection Bureau (CFPB) published an interim final rule extending the compliance dates for the small business lending data collection rule, as required under Section 1071 of the Dodd-Frank Act. The CFPB’s stated goal is to ensure a uniform application of the rule across all covered institutions.

Background

Dodd-Frank Act Section 1071 directs the CFPB to adopt regulations governing the collection of small business lending data. Specifically, Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain, and submit to the bureau certain data on applications for credit for women-owned, minority-owned, and small businesses.

Since the final rule’s publication in 2023, the CFPB’s rulemaking has been the subject of ongoing litigation, resulting in multiple court orders staying its enforcement. However, these stays only applied to the plaintiffs and intervenors involved in the litigation, such as those in the U.S. Court of Appeals for the Fifth Circuit and the U.S. District Court for the Eastern District of Kentucky. As a result, other financial institutions remained subject to the rule’s existing compliance schedule until the CFPB clarified its position.

The interim rule

Given the inconsistent application of compliance deadlines resulting from these stays, the CFPB published the interim rule to “facilitate consistent compliance across all covered financial institutions.” Specifically, the interim rule formally extends the compliance dates for all covered financial institutions that are not subject to the court-ordered stays. Additionally, the CFPB will allow financial institutions to use their originations from either 2022-23, 2023-24, or 2024-25 to determine which tier they belong to under the rule.

The new compliance deadlines are as follows:

Table 1: compliance dates and filing deadlines

Source: Consumer Financial Protection Bureau Interim Rule 90 FR 25874

To correspond with the revised compliance deadlines, the CFPB is also updating the grace period for data collected in 2026 and 2027, as well as a portion of data collected in 2028. The CFPB is seeking public comments on the interim rule. All comments are due on or before July 18, 2025.

Other Section 1071 updates

The CFPB’s interim rule follows the bureau’s previous announcement that they would initiate new Section 1071 rulemaking. On April 3, the CFPB filed a response motion in one of the pending lawsuits challenging the 1071 Final Rule where the agency stated that the “CFPB’s new leadership has directed staff to initiate a new Section 1071 rulemaking [and] anticipates issuing a Notice of Proposed Rulemaking as expeditiously as reasonably possible,” which the CFPB believes may moot or otherwise resolve the litigation.

Additionally, on April 2, the House Financial Services Committee approved H.R. 976, which would repeal Section 1071.

Takeaways

Considering the current uncertainty surrounding Section 1071 and the final rule’s continued existence, industry participants should keep a close eye on new developments. Husch Blackwell is actively monitoring the rule and will provide timely updates when relevant.

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Contact us

If you have any questions about how these developments impact your business or need help evaluating your compliance strategy, please contact the Husch Blackwell Alternative Commercial Finance team.

This newsletter is for informational purposes only and does not constitute legal advice. For guidance tailored to your specific situation, please consult your Husch Blackwell attorney.