Introduction

Illinois has joined a growing number of states that are expanding fair lending obligations at the state level even as the federal government moves in the opposite direction. On July 31, 2026, SB 3777 became Public Act 104-0744, amending the Illinois Human Rights Act (Act) to prohibit not only intentional discrimination in lending and credit card issuance, but also the use of facially neutral underwriting criteria or methodologies that produce discriminatory effects. The Act applies to financial institutions, credit card issuers, employers and providers of public accommodations. The amendments to the Act will become effective on January 1, 2027.

Notably, the Illinois Human Rights Act does not define the term “financial institution.” As a result, questions may arise regarding the statute’s application to nonbank lenders, fintech companies, marketplace lenders, and other entities that extend consumer credit but are not traditional depository institutions. By contrast, the Act separately applies to any “person who offers credit cards to the public,” suggesting that the General Assembly intended the credit card provisions to have broad applicability.

For creditors operating in Illinois, this legislation marks a meaningful shift on the state level. It codifies a disparate impact framework for credit decisions—one that imposes a demanding burden on lenders to justify their practices and demonstrate the absence of less discriminatory alternatives.

What the Law Provides

The New “Criteria or Methods” Prohibition

Prior Illinois law already prohibited intentional discrimination in lending and credit card issuance on protected-class grounds. Public Act 104-0744 goes considerably further by adding new provisions making it a civil rights violation for financial institutions making loans, persons offering credit cards to the public, employers and certain public accommodations to use “criteria or methods” that have the effect of subjecting individuals to unlawful discrimination.

The statute broadly defines “criteria or methods” to include “practices, policies, and groups of practices or policies” that may have the effect of subjecting individuals to prohibited discrimination. This definition is significant. It means that plaintiffs and regulators may challenge not merely isolated underwriting decisions, but entire credit programs, pricing methodologies, automated underwriting systems, credit scoring models, fraud prevention tools, or other institutional policies that allegedly produce disparate outcomes.

The Disparate Impact Framework

The legislation’s most consequential feature is its adoption of a statutory disparate impact standard. Under the new law, lending criteria or methods are unlawful if (1) they are not necessary to achieve a substantial, legitimate, nondiscriminatory interest, or (2) even if such an interest exists, that interest could be served by another practice having a less discriminatory effect.

In practical terms, a creditor challenged under this statute must demonstrate both that the practice at issue serves a substantial, legitimate, nondiscriminatory objective and that no less discriminatory alternative would adequately serve that objective. This two-part framework tracks disparate impact standards in other civil rights contexts and effectively incorporates an “alternative practice” analysis into Illinois credit discrimination law. However, in the credit context the amendments place the burden on the financial institution or credit card issuer to demonstrate that there is no less discriminatory alternative to a challenged practice. In contrast, in the employment context the amendments require that the complainant demonstrate that the business necessity cited by an employer could be achieved through a practice that has a less discriminatory practice. Similarly, under the U.S. Department of Housing and Urban Development (HUD) disparate impact rule under the Fair Housing Act, if a party defending a challenged practice demonstrates that it has substantial, legitimate, nondiscriminatory interests supporting the practice, the party challenging the practice is required to demonstrate that such interests could be served by another practice that has a less discriminatory effect. HUD has proposed to rescind the rule.

Thei structure applicable in the credit context will almost certainly invite disputes over statistical analyses, model validation, and whether plaintiffs can identify feasible alternative underwriting methodologies that would reduce discriminatory effects while still achieving legitimate business purposes.

Implications for AI and Automated Underwriting

Although the legislation does not mention artificial intelligence, its timing is notable. Financial institutions increasingly rely on machine learning models, alternative data, fraud detection algorithms, and automated underwriting systems. In the past, those systems have been routinely evaluated for disparate impact under federal fair lending guidance, and Illinois has now created an explicit state statutory vehicle for challenging them.

Creditors using sophisticated underwriting models should anticipate increased scrutiny of: automated underwriting systems; credit scoring models; pricing algorithms; fraud detection models; alternative data sources; and model governance and validation processes.

Institutions will need to demonstrate not only that these systems improve risk prediction, but also that they are necessary to achieve legitimate business objectives and that no alternative would produce materially less discriminatory effects. There is no express requirement that the alternative be reasonable or cost effective. For lenders that rely heavily on algorithmic decision-making, this provision creates a distinct litigation risk under state law even where federal regulators may not be actively pursuing similar theories.

Enforcement and Regulatory Coordination

The legislation addresses regulatory coordination in two respects. First, it provides that the Illinois Department of Human Rights may consult with the Illinois Department of Financial and Professional Regulation or a financial institution’s primary prudential regulator when investigating complaints. Second, it expressly preserves the Department of Human Rights’ independent authority to investigate discrimination complaints involving financial institutions and clarifies that nothing in the Act limits the examination authority of the Office of the Comptroller of the Currency, the National Credit Union Administration, or the Illinois Department of Financial and Professional Regulation.

The practical effect is that state human rights investigations may proceed alongside, rather than in lieu of, examinations conducted by traditional financial regulators.

Relationship to Federal Fair Lending Law

The Act, as amended, sets forth fair lending requirements that are in addition to the federal fair lending requirements under the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), and other federal laws. It creates an additional state-law cause of action with an expressly stated disparate impact framework.

The Equal Credit Opportunity Act and Regulation B

On April 22, 2026, the Consumer Financial Protection Bureau (CFPB), under then Acting Director Russell Vought, issued a significant final rule reshaping the agency’s approach to fair lending enforcement under ECOA and Regulation B. In particular, the amendments remove the effects-test language from Regulation B and provide that ECOA does not support effects test liability. Effect tests language is another reference to disparate impact liability.

Important Limitation: No Change to the Fair Housing Act (“FHA”)

While as noted above, HUD has proposed to rescind its disparate impact rule under the FHA, the Supreme Court’s decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519 (2015), that disparate impact claims may be brought under the FHA remains the law of the land.

State Developments: A Growing Trend

Illinois is not acting in isolation. Several other states have moved to embrace disparate impact theories in consumer credit, even as the federal government retreats from that framework.

California has long maintained one of the most robust state fair lending regimes in the country. The California Fair Employment and Housing Act and the Unruh Civil Rights Act provide broad anti-discrimination protections that California courts and regulators have applied to lending practices producing discriminatory effects, supplementing federal fair lending requirements with state-level enforcement.

New York has similarly taken an expansive approach. Through a combination of statutory authority, regulatory guidance, and enforcement actions by the New York Department of Financial Services, the state has signaled that facially neutral lending practices producing disparate outcomes may violate state anti-discrimination law. New York regulators have been particularly active in scrutinizing algorithmic underwriting and fair lending compliance among fintech lenders.

New Jersey has also adopted measures reinforcing disparate impact liability in the lending context. The New Jersey Law Against Discrimination (and its regulations promulgated thereunder) is one of the broadest state civil rights statutes in the nation, and New Jersey courts have recognized disparate impact claims in connection with credit and financial services.

The broader pattern is clear: a growing number of states are affirmatively embracing disparate impact theories for consumer credit at the very moment the federal government is pulling back. This divergence creates an increasingly complex compliance environment for lenders operating across state lines, as institutions may face materially different legal standards depending on the jurisdiction.