Disparate Impact: States Pick Up the Baton to Combat Housing Discrimination

The Federal Government Backs Away From Disparate Impact

• In April 2025, President Trump issued an executive order (EO 14281) directing federal agencies to eliminate disparate-impact liability "to the maximum degree possible."
• In response to that EO, the OCC, FDIC, CFPB, and HUD have stepped away from disparate impact claims:
  • The OCC and FDIC removed disparate impact from their fair-lending examination manuals.
  • HUD proposed to remove its disparate impact rule found at 24 C.F.R. Part 100, and instead, rely on court interpretations of disparate impact.
  • The CFPB finalized a rule amending Regulation B to remove the "effects test" or disparate impact from the rule (effective July 21); the rule had been proposed in November 2025. In finalizing this rule, the CFPB noted that covered persons were still liable under the Fair Housing Act and applicable State laws. Further, in its spring 2026 Semi-Annual Report to Congress, the CFPB noted that it was no longer using disparate impact in its supervision or enforcement of fair lending laws and that it was instead focused on uncovering direct evidence of intentional discrimination on a prohibited basis.

Several States Pick Up the Baton on Housing Discrimination

Since the issuance of EO 14281, several states have amended their statutes or regulations to clarify that disparate impact is still an available basis to prove discrimination on a prohibited basis. These states all have more prohibited bases than the current HUD rule and clearly apply to housing discrimination (including financial transactions in connection with residential real estate). And, New Jersey goes one step farther by having a different burden shifting regime that is potentially more plaintiff-friendly.

New Jersey

On December 15, 2025, the New Jersey Department of Law and Public Safety's Division on Civil Rights (DCR) adopted a Final Rule, effective immediately, to "clarify" that the New Jersey Law Against Discrimination (LAD) prohibits "[p]ractices and policies that have a disparate impact, . . . on members of a protected class, even if these practices and policies are not discriminatory on their face (that is, facially neutral) ….unless it is shown that such practices and policies are necessary to achieve a substantial, legitimate, nondiscriminatory interest and there is no less discriminatory alternative that would achieve the same interest."

Protected characteristics are defined to include race, creed, color, national origin, nationality, ancestry, age, marital status, civil union status, domestic partnership status, affectional or sexual orientation, genetic information, pregnancy, sex, gender identity or expression, disability or atypical hereditary cellular or blood trait of any individual, or liability for service in the armed forces, and any other characteristics protected pursuant to the Act.

In the housing context, the New Jersey rule provides that the complainant must show that the challenged policy or practice has a disparate impact on members of a protected class and then the respondent must show that the challenged policy or practice is necessary to achieve a valid interest and there is no less discriminatory alternative means of achieving that interest. The respondent may challenge that the complainant has not met the burden of showing disparate impact and the complainant may challenge that the respondent has not met its burden. Unlike the current HUD rule, New Jersey does not shift the burden back to plaintiffs to prove no less discriminatory alternative. The rule further defines types of evidence for disparate impact claims.

New York

On December 19, 2025, New York's law added section 5-a to Executive Law § 296, which provided that discriminatory effects may be used to prove housing discrimination. On April 22, 2026, the New York State Department of Financial Services reminded regulated entities of obligations under the new statutory provision, and stated the law –

prohibits discrimination in, among other things, the granting, withholding, extending, or renewing, or in the fixing of the rates, terms, or conditions of any form of credit on the basis of statutorily established characteristics. N.Y. Exec. L. § 296-a(1)(b). Discrimination is prohibited on the basis of race, creed, color, national origin, citizenship or immigration status, sexual orientation, gender identity or expression, military status, age, sex, marital status, status as a victim of domestic violence, disability, or familial status.

Maryland

On May 26, 2026, Maryland amended its statutes to prohibit housing practices that have a discriminatory effect, regardless of intent. Maryland now defines discriminatory effect as "an effect that actually or predictably has a disparate impact on a group of persons... because of race, color, religion, sex, disability, marital status, familial status, sexual orientation, gender identity, national origin, source of income, or military status." The statute also says that state policy is "to prohibit discriminatory practices or acts that have a discriminatory effect, regardless of intent." The bill expressly amended the state's existing prohibited housing practices (which include refusing to sell or rent a dwelling, discriminating in the terms or conditions of a sale or rental) and provides a person has not violated these prohibitions if: (i) the action was without discriminatory intent; (ii) the action was necessary to achieve one or more substantial, legitimate, and nondiscriminatory interests; and (iii) the person could not have achieved those interests by less discriminatory means. The bill did not expressly amend the section entitled "Discrimination in Residential Real Estate-Related Transactions," but the definitions appear to apply to this section.

Illinois

On July 31, 2026, the Governor signed Senate Bill 3777. The legislation amends the Human Rights Act, by prohibiting "practices, policies, and groups of practices or policies that may have the effect of subjecting individuals to discrimination prohibited under this Act." The legislative summary states that the amendment provides that it is a civil rights violation for any financial institution, person who offers credit cards to the public, or any person in relation to public accommodations to use criteria or methods that have the effect of subjecting individuals to discrimination on the basis of unlawful discrimination, citizenship status, family responsibilities, work authorization status, arrest record, or conviction record, if such criteria or methods are not necessary to achieve a substantial, legitimate, nondiscriminatory interest or if the substantial, legitimate, nondiscriminatory interest could be served by another practice that has a less discriminatory effect. "Unlawful discrimination" is further defined to include discrimination on the basis of "actual or perceived race, color, religion, national origin, ancestry, age, sex, marital status, order of protection status, disability, military status, sexual orientation, pregnancy, reproductive health decisions." Two provisions of the legislation focus on acts or practices relating to loans and credit cards. These provisions complement the prohibition on unlawful discrimination in housing enacted in 2024.

What to Watch for Next

While this article only addresses states that have explicitly enacted legislation in the past year, watch for case law recognizing disparate impact causes of action and for state laws that prohibit disparate impact when models or other automated decision tools are used.