Get Ready for Disparate Impact

FEB 14, 2013 5:25pm ET
Comment (1)



On Feb. 8, the U.S. Department of Housing and Urban Development issued its final rule authorizing disparate impact test claims under the Fair Housing Act. The rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a “disparate impact” on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.


This rule formally establishes the three-part burden-shifting test for determining when a practice with a discriminatory effect violates the Fair Housing Act. Under this test, the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If the respondent or defendant satisfies this burden, then the charging party or plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.

This rule also adds and revises illustrations of practices that violate the Act through intentional discrimination or through a discriminatory effect under the standards outlined in § 100.500. (24cdfrpart100)


More laws, more regulations, more rules, more confusion.



As of April 1, 20 states or state agencies will begin offering a new Uniform State Test for the licensing of state-regulated mortgage loan originators. Four additional states will adopt the test on July 1. The new test, which is comprised of 125 questions, replaces the current national test and, for the states implementing the UST, removes the requirement of an additional state-specific test component for that state as of the implementation date. The UST is intended to help streamline the state license process for MLOs that would like to obtain licenses in multiple states. Any individual wishing to become licensed as an MLO, or who has not already passed the current national test, may take this new test, whether or not the state in which they are wishing to become licensed has adopted the test.

In addition, currently licensed MLOs will be able to take a new “standalone” UST (comprised of 25 questions) to meet testing requirements for states that are now adopting the test and for those that will adopt the test in the future. The “standalone” UST will only be available for about one year following the April 1 rollout, and the Mortgage Bankers Association is encouraging all current state-licensed MLOs to take this “standalone” UST during the time that it is available. More states plan on adopting the UST in the future, but first must amend existing regulations and/or statues so that the UST will satisfy specific testing requirements for those states.  (Compliments of Weiner, Brodsky)


Unfortunately, Arizona, California and Nevada are not among the states adopting the test. (Editor’s Note: New York regulators have said they are also not adopting the UST.) So you still have to take both.



HUD-Office of the Inspector General conducted a limited review of Federal Housing Administration loans underwritten by Standard Pacific Mortgage Inc. The lender was selected based on the results of an auditability survey, which determined that Standard Pacific Mortgage allowed prohibited restrictive covenants to be filed against FHA-insured properties. The objective of the review was to determine the extent to which Standard Pacific Mortgage failed to prevent the recording of prohibited restrictive covenants or potential liens in connection with FHA-insured loans closed between Jan. 1, 2008, and Dec. 31, 2011.

Standard Pacific Mortgage did not follow HUD requirements regarding free assumability and liens when it underwrote loans that had executed and recorded agreements between Standard Pacific Homes and the FHA borrower, containing prohibited restrictive covenants and liens in connection with FHA-insured properties. This noncompliance occurred because Standard Pacific Mortgage did not exercise due diligence and was unaware that the restrictive covenants recorded between Standard Pacific Homes and the borrowers violated HUD-FHA requirements. As a result, it was found 90 FHA-insured loans (28 claim loans and 62 active loans) with a corresponding prohibited restrictive covenant and lien recorded with the applicable county recording office, and Standard Pacific Mortgage placed the FHA fund at unnecessary risk for potential losses.

Comments (1)
Regarding the FHA commentary. The moral is: This is what happens when a builder is allowed to own and operate a mtg banking co. The big builders were huge cause of the crash and crisis. Whole subdivisions sold on crap.
Builder builds and sells house and provides financing. Builder does not have a clue, just wants loans closed. Makes money 3 ways. Very strong conflict of interest. BUILDERS AND RE COMPANIES SHOULD NOT BE ALLOWED TO OWN AND OPERATE MTG COMPANIES.
Posted by KARIN B | Tuesday, February 19 2013 at 2:24PM ET
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