Few people today argue that mortgage lenders, originators, home insurers or landlords should deny housing services to applicants based on race, gender or other protected statuses, although research from the Urban Institute shows that it still happens across the country. Rule changes proposed this past August by the U.S. Department of Housing and Urban Development (HUD), however, could prevent minority borrowers from building the wealth through homeownership that their white peers are typically able to experience.
HUD’s proposed changes directly challenge the long-established principle that discriminatory impacts — regardless of intent — are illegal. Known as disparate impact, this principle has been in effect for more than 50 years. It has been accepted by every U.S. appellate court that has fielded such a case. Furthermore, the U.S. Supreme Court affirmed disparate impact as a category of racial discrimination in 2015.
If dishonest and discriminatory mortgage professionals are allowed to operate without legal consequence in our communities, it would hurt the reputations and businesses of honest lenders and originators. This would further poison the real estate market and limit homeownership opportunities in communities of color, which is the direct opposite intent of the Fair Housing Act of 1968.
Uniform standards
Disparate impact points to the structural racism that traditionally plagues segregated neighborhoods. Lenders are more likely to deny mortgages or charge higher fees to borrowers in these areas. Borrowers with lower credit scores may be charged higher insurance premiums — even if they have good payment records. The people most affected by these discriminatory practices are likely to be in communities of color.
To make matters worse, these proposed rule changes were followed by a second proposal, announced just months after, that would effectively eliminate the requirement that localities and public housing authorities analyze barriers to access to fair housing in their communities. This would let cities off the hook and weaken disparate impact protections.
In 1968, the year that Martin Luther King Jr. was assassinated, the Kerner Commission recommended a comprehensive and enforceable housing law at the federal level that would cover all housing rentals or sales, including transactions involving single-family homes. This proposal was a direct response to de jure (legalized) discrimination that made the home-purchase market unfair to most African Americans. Federal officials responded by passing the Fair Housing Act, an important legislative accomplishment of the civil rights era.
To emphasize the value of the disparate-impact rule, HUD established uniform standards in 2013 for identifying discriminatory housing policies that violate the Fair Housing Act. These standards discourage landlords, real estate agents, lenders, originators and home insurers, among others, from openly excluding protected groups as they navigate the housing market. So, for now, disparate impact is against the law.
These uniform standards were not created in a vacuum. They not only offer real protections for homebuyers, they also provide guidance to mortgage lenders and brokers who use good business practices and strive to meet the spirit and letter of the Fair Housing Act.
Legal precedent
There are two prime examples of court cases involving mortgage lenders — both of which were resolved in 2011 — that helped shape the narrative for the value of disparate-impact theory. In these cases, banking regulators reviewed the mortgages made by these companies in the years preceding the 2008 financial crisis. And in both instances, regulators not only found the lenders incentivized loan officers to charge borrowers higher interest rates than justified by underwriting, they also found these more costly loans were disproportionately targeted to African American and Hispanic borrowers.
These lenders had operations in multiple states and offered loans through the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). The FHA and VA offer programs that serve first-time homeowners, communities of color and lower-income buyers at higher rates than those of Fannie Mae and Freddie Mac. This means that, in certain markets, interest rates may have been pushed up across the board while otherwise qualified minority families were being denied a chance at affordable homeownership opportunities.
In one of these cases, the Federal Reserve found evidence that the lender “had displayed a pattern or practice of charging African-American borrowers higher annual percentage rates of interest” than white counterparts and there were no reasons to fully explain why other than race. The settlement documents noted the lenders did not have an explicit policy to charge minority borrowers more, but their compensation packages to originators incentivized the resulting patterns.
In other words, the discrimination was documented by a disparate impact, which resulted in a protected class paying more than other classes for the same loan. These two lenders were not alone. Post-recession research published in the University of Colorado Law Review found that, in the years leading up to the Great Recession, poorer and predominantly minority neighborhoods were “served by a patchwork of short-term lenders and independent mortgage brokers who charge higher interest rates and fees than their national counterparts.”
Regulatory proposal
Under HUD’s proposed changes, lenders and other parties involved in the mortgage process that are accused of discrimination could defend these results. They could accomplish this by arguing that their underwriting and risk-assessment practices are based on an algorithm developed by a third party; that they are using the algorithm as intended, even if it results in discrimination; and that such discrimination is not inherent to the algorithm.
Furthermore, HUD’s proposal requires a plaintiff to demonstrate that the defendant’s policy or practice is without value, even before they are permitted to review lending records. In cases like the ones previously mentioned, this would allow the patterns — and thus, the disparate impact — to remain undiscovered. The proposal undermines the disparate-impact rule by shifting liability from lenders and insurers to outside vendors. It also gives a green light to those who are working to conceal their discriminatory practices.
This past November, Newsday released the results of a three-year investigation to quantify discrimination against minority home seekers on Long Island, New York. It found steering and other discriminatory actions by real estate agents among 10 of the 12 companies tested. The apparent fair-housing violations — which did not immediately bring forth any criminal charges — range from subtle to textbook examples. The investigation uncovered a continuing pattern of unequal treatment in affluent areas with desirable schools and economic opportunities that draw homebuyers of all backgrounds.
Last year, the Village of Garden City, New York was ordered to pay $5.3 million to settle a housing-discrimination lawsuit that began in 2005. The ruling stated that Garden City’s zoning rules undermined affordable housing by steering minority households to communities with lower-performing schools and concentrated poverty. Under HUD’s proposed regulatory changes, however, a defendant could argue that the government officials, lenders and insurers who were involved should face no liability. Victims of discrimination would be out of luck.
Cases based on disparate impact are already challenging to win in the courtroom, even though the principle is settled law. If HUD implements the proposed changes, undercutting both the 2015 Supreme Court ruling and HUD’s own standards from 2013, that challenge will be insurmountable.
Although the financial crisis of 2008 stripped wealth from American families across the board, it was particularly devastating to African American consumers seeking mortgage credit. Today’s black homeownership rates are essentially the same as they were in 1968. This means that financial gains achieved over the past five decades have simply disappeared. Without well-enforced anti-discrimination measures to temper the housing market, this wealth will be difficult — if not impossible — to recover.
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Now, more than ever, protections are needed to ensure access to affordable-housing and homeownership options that help families of color build wealth. HUD’s proposed changes could derail the American dream for many people at a time when vulnerable communities desperately need to build prosperity. If these potential changes to the disparate-impact rule are adopted, the situation will become even more dire.
