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HUD could soon defang disparate-impact rule

The use of disparate-impact legal theory struck fear into the mortgage industry through the Obama years, as federal agencies stepped up their enforcement of fair-lending laws and ultimately won multimillion-dollar settlements against some of the nation’s biggest banks.

These cases were built on the idea that a company, including mortgage companies through underwriting or lending practices, could discriminate against a protected minority class when their policies produced discriminatory, or disparate, outcomes, even if companies had no apparent intent to discriminate.

But could the days of disparate-impact cases be numbered?

fairhousingThe banking industry has been lobbying the U.S. Department of Housing and Urban Development (HUD) to establish a much higher bar for the use of disparate impact, basically making it nearly impossible to win a fair-lending abuse case using disparate impact, unless there is an obvious link between a company’s policies and a harmful result. 

Through the summer, HUD sought input on its 2013 rule that established a framework for how disparate impact should be applied to establish violations of the Fair Housing Act, the 1968 landmark law intended to stamp out discriminatory practices in housing and end segregation.

Banking lobbyists want the rule severely tightened, shifting the onus on plaintiffs to prove that the violator’s policies are clearly linked to a discriminatory outcome.

Banking trade groups, like the Mortgage Bankers Association and American Bankers Association, have argued that HUD’s rule doesn’t align with the 2015 Supreme Court decision on disparate impact in the so-called Inclusive Communities case involving the Texas Department of Housing and Community Affairs and the Inclusive Communities Project. Inclusive Communities, a Dallas non-profit dedicated to promoting racial integration, sued over how the Texas agency allocated housing tax credits. Over a period of 14 years through 2009, the Texas Department of Housing and Community Affairs didn’t allocate tax credits for family units in predominantly white neighborhoods, a practice that concentrated low-income housing projects in poorer minority neighborhoods.  

Although that case didn’t specifically address HUD’s rule, the Supreme Court decided, by a 5-4 ruling, that disparate impact could be legitimately used in Fair Housing Act cases. However, the majority opinion appeared to establish a high bar for a plaintiff to prove disparate impact. Plaintiffs must identify specific policies leading to the discriminatory outcomes, and establish “a robust causality” between the policy and the harmful outcome.

The banking industry contends that HUD’s rule as written falls far below that bar, merely requiring the plaintiff to show a statistical variation, and then shifting the onus on the defending company to prove there was no violation.

HUD closed out its industry comment period on Aug. 20. HUD will likely propose adjustments, said Jeffrey Naimon, a partner with the Washington, D.C.-based Buckley Sandler.

“There are different things they can do,” Naimon said. “They can rescind the entire rule, but I think that is probably unlikely. The most likely outcome here is that they will revise the rule in material ways to conform it to the Supreme Court’s decision.”

The advocacy group, the National Community Reinvestment Coalition (NCRC), though, says banking lobbyists should not be too hasty in seeking a rule change. 

“My own belief is that is kind of a short-sighted view,” said NCRC Chief Executive Officer Jesse Van Tol. "Even if some changes are made now, they are likely to be turned back under a different administration." He also noted that the courts may choose to ignore HUD’s future guidance and interpret disparate impact using past precedents.

Van Tol said that NCRC is concerned that the Trump administration will water down fair-housing and lending protections. This concern also extends to the recent notice by the Office of the Comptroller of the Currency, the bank regulator, that it proposes to “modernize” the Community Reinvestment Act. That law was passed in 1977 to stop cases of  so-called redlining, where lenders avoid making loans in lower-income communities.

Van Tol also said Trump-led agencies have shown less willingness to enforce rules on the books, preferring a policy of allowing companies to correct their policies after violations are uncovered. He said that lenders may become lackadaisical in their practices, and avoid correcting problems until they are caught. 

“The reason enforcement actions are pursued is that sends a very clear and loud signal to the entire industry,” Van Tol said. “An enforcement action very clearly sends a signal to the industry that some type of activity is out of bounds. Many of the cases that have been brought, and brought successfully over the last several years, were systemic impact cases. These were practices that were prevalent in the industry, and the effect of enforcement was to send a clear and loud signal to the industry that they needed to clean up that practice.” 


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