Is Disparate Impact Protection For Lenders On The Horizon?

Banking and Real Estate Law360

Authored Article


Since the 1970s, courts have routinely held that the Fair Housing Act, 42 U.S.C. §§ 3601 et seq., may remedy housing discrimination proven through use of the disparate impact theory. The doctrine of disparate impact permits a finding of discrimination without a “showing of discriminatory intent,” provided the defendant’s actions produce a disproportionate and adverse effect on persons with protected traits. Metropolitan Housing Development Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1290 (7th Cir. 1977). At least 11 United States Courts of Appeals have affirmed the applicability of the disparate impact theory to the Fair Housing Act.

In 1994, the Department of Housing and Urban Development joined with the U.S. Department of Justice and nine other federal agencies in their 1994 Interagency Policy Statement on Discrimination in Lending, to set forth their policies on “fair lending.” This joint statement confirmed their view that disparate impact would be a method to prove not merely housing discrimination but also lending discrimination. Since that time, lenders and now even loan servicers have faced claims that their actions or policies could violate the anti‑discrimination provisions of the Equal Credit Opportunity Act or the Fair Housing Act, even though such actions or policies are facially neutral, so long as statistical evidence could demonstrate an adverse impact on persons within a protected class.

Once such a claim is made by a regulatory agency or brought by the Department of Justice, the lender faces a hard choice among very undesirable options: to spend time, resources and money to defend a disparate impact discrimination claim, or negotiate a settlement. Given the substantial potential downside, including reputational issues arising from what may be publicized as racially discriminatory practices by the lender, many lenders have chosen to settle such cases, even though a strong legal position can be taken that liability should result only from disparate treatment toward, and not a disparate effect upon, a protected class.

More recently, regulatory enforcement of housing discrimination cases (including discrimination in lending) through use of the disparate impact theory has greatly expanded, particularly since the subprime mortgage crisis. In 2009, for example, the Obama administration formed an interagency task force to combat financial fraud. The task force, however, adopted a broad view of the acts constituting “financial fraud,” including perceived discrimination in the lending and financial markets. Within a year, the task force had “referred more matters involving a potential pattern or practice of discrimination to the Department of Justice than at any time in at least the last 20 years.” Fin. Fraud Enforcement Taskforce, First Year Report at 3.9 (2010).

Advancing housing discrimination claims based on a disparate impact theory, the Department of Justice has reached a number of high-profile settlements, most notably with Countrywide Financial Corp. and with St. Bernard’s Parish after Hurricane Katrina. Consumer and civil rights groups regularly applaud the government’s use of the disparate impact theory against perceived discrimination by the lending industry. Most recently, one leading advocate noted that “[d]isparate impact is a powerful tool for challenging the structural and institutional inequalities that persist in our housing and financial markets.” Press Release, NAACP Legal Defense and Education Fund, New HUD Regulations Will Help Reduce Housing Discrimination (Feb. 8, 2013).

Despite the enthusiasm in some quarters over the disparate impact theory, doubts nonetheless linger over whether the doctrine is truly available to enforce the Fair Housing Act’s or the Equal Credit Opportunity Act’s terms. These doubts intensified following the United States Supreme Court’s decision in Smith v. City of Jackson, wherein the court noted that a federal statute will prohibit practices resulting in a discriminatory impact without evidence of a discriminatory intent only if the statute contains clear language to that effect. 544 U.S. 228, 235-36 (2005).

Since Smith, challenges to the use of the discriminatory impact theory under the Fair Housing Act based on the absence of such authorizing language in the statute have been presented to the Supreme Court on three occasions. Although the court granted certiorari each time, the two earliest cases settled before the issue reached the court. The third and latest case, however, appears poised to finally present the issue for resolution. See Texas Dep’t of Hous. & Cmty. Affairs v. Inclusive Comtys. Project, No. 13-1371, — U.S. —, — S. Ct. —, (Oct. 2, 2014).

The Supreme Court’s apparent willingness to consider this issue has not gone unnoticed by the Obama administration. Within days of the court’s decision to take up this issue for the first time in 2011, HUD provided notice of its intent to adopt the discriminatory impact theory through the administrative rule-making process. Although the public comment period closed on Jan. 17, 2012, the administration made no effort to issue a final rule until just days after the court agreed in 2013 to take up the issue of the availability of the disparate impact theory under the Fair Housing Act for the second time. The administration’s reaction was to announce a final rule adopting the discriminatory impact theory, effective March 18, 2013.

In its new rule, HUD expressly provided that unlawful discrimination in lending and other housing practices may be established by a showing of discriminatory effect, even if not motivated by a discriminatory intent or accompanied by discriminatory treatment. The rule also confirmed that discrimination in loan servicing would be among the unlawful conduct prohibited, so loan servicers expressly face the same issues here as loan originators.

This new rule was almost immediately challenged by numerous parties, including the American Insurance Association. On Nov. 3, 2014, the United States District Court for the District of Columbia upheld the American Insurance Association’s challenge, and ordered HUD’s adoption of the disparate impact rule be vacated in its entirety. See Am. Ins. Assoc. v. United States Dep’t. of Hous. and Urban Devel., No. 13-cv-966, (D.D.C. Nov 03, 2014), opinion amended and superseded by —F.3d —, (D.D.C. Nov. 7, 2014).

In so doing, the court found that the new rule exceeded the agency’s rule-making authority because the Fair Housing Act does not contain language authorizing its enforcement based on a disparate impact analysis. The court further held that the proposed rule should be vacated because, as applied to the insurance industry, it risked violation of the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, et seq., by obligating property and title insurers to race-based data collection requirements at odds with state anti-insurance discrimination laws. The court’s opinion pulled no punches, chastising both the government generally, and Secretary of Labor Tom Perez specifically, in their efforts to apply the discriminatory impact theory against the lending and insurance industries.

While the lasting effects of this decision are presently unclear, it currently serves as a significant stumbling block to the administration’s ongoing efforts to regulate the banking and mortgage industries based on the perceived discriminatory effect of their lending practices, as well as a significant weapon for those wishing to challenge or resist any application of the disparate impact theory in the context of public or private Fair Housing Act claims. Ultimately, however, the legitimacy of the administration’s efforts and the applicability of the disparate impact theory to the Fair Housing Act, can only be resolved by the Supreme Court.

Republished with permission. This article first appeared in Banking and Real Estate Law360 on November 18, 2014.