Lawmakers Voice Support for Disparate Impact
House lawmakers largely appear to support the controversial legal theory that regulators have been using to pursue lenders for potential discrimination despite complaints from bankers that it does not consider whether loan disparities are intentional.
Bankers have said that regulators overuse "disparate impact" theory in investigating potential fair lending cases, but several members of the House Financial Services Committee defended it during a subcommittee hearing on Tuesday.
"My issue is in 2013, nobody is going to admit discrimination," said Rep. Emanuel Cleaver, D-Mo. "So if nobody admits it then they are either unintentionally committing it—committing discriminatory acts—or they are denying that what they're doing is in fact discriminatory."
The hearing comes at a time when regulators such as the Consumer Financial Protection Bureau and the Department of Housing and Urban Development have warned they would cite disparate impact against lenders with policies, practices or third-party relationships that hurt any protected class.
The financial industry had been hopeful that a case involving the Mount Holly, N.J., township council, which was expected to be heard soon before the Supreme Court, would limit the use of disparate impact. But that case was settled outside of court last week, thereby providing a basis for the Obama administration to continue encouraging fair lending suits and for regulators to proceed with their investigations.
To be sure, some House GOP members raised concerns about fairness, noting that disparate impact does not take into account whether the potential discrimination was intentional. They said regulators should not use the theory against lenders with otherwise neutral policies.
"While I believe data can be helpful in better understanding the roots of disparity, it's disconcerting that unlike other illegal discrimination claims, disparate impact claims do not require the government or a private plaintiff to provide intent to discriminate," said Rep. Patrick T. McHenry, R-N.C., chairman of the oversight and investigations subcommittee.
He suggested that if there is limited funding to pursue such cases, it should be reserved for offenders intending to discriminate against certain borrowers.
"It's important to remember that resources to fight discrimination are not unlimited," he said.
Representatives testifying on behalf of civil rights groups mostly agreed about the overall importance of disparate impact.
But Kenneth Marcus, president and general counsel of the Louis D. Brandeis Center for Human Rights Under Law, cautioned that regulators should not bundle lenders who unintentionally discriminate because of a "neutral" policy with those who are clearly discriminatory "bigots."
Using disparate impact outside of intentional discrimination "prevents agencies and lawyers from focusing on real intentional or even unconscious discrimination. And another is that it treats employers or lenders or others as if they were bigots, as if they were discriminators when they have no conscious or even unconscious intent to discriminate against anybody," Marcus said. "So by lumping real bigots in with people who develop policies that have no conscious or unconscious animus, I think it can be unfair."
However, civil rights advocates also acknowledged that it was easier for regulators to use disparate impact than to spend resources trying to prove an intentional discrimination case, known as disparate treatment.
"When you have limited resources, you've got to decide where you're going to direct those resources. And when you're talking about disparate impact claims, I don't want to overstate this, but it is in some respects easier to make out a case of disparate impact than it is intentional discrimination," said Peter Kirsanow, a partner at Benesch, Friedlander, Coplan & Aronoff and member of the U.S. Commission on Civil Rights. "So you go where the money is. You go where you're more likely to receive and achieve a desired result."
But many lenders are worried they may face more disparate impact cases once the CFPB's new mortgage rules go into effect in January. The rules created a safe class of loans known as "qualified mortgages," that must meet certain underwriting criteria, including debt to income restrictions. Because QM loans carry greater legal protections, many lenders are only planning to make such loans.
But they fear that if they do so, the QM criteria could inadvertently exclude minorities and other protected classes, sparking a new wave of regulatory investigations.
Financial regulators issued a joint statement last month telling lenders that QM does not conflict with fair lending laws. However, Marcus told lawmakers at the hearing that it is possible the debt-to-income ratio requirement in the qualified mortgage rule could disproportionately affect a protected class and create a liability for the lender.
"It could. And it seems to me that there are legitimate enforcement methods of finding intentional discrimination that don't require any of that," said Marcus, a former general deputy assistant secretary of HUD's Fair Housing and Equal Opportunity. "What we found an indication of, at HUD, is that there are many cases where minorities are treated less well when they walk into a lending institution."
For example, Marcus said there are "plenty of instances" where a white person who walked into a branch was given information and encouragement for a loan while a minority was discouraged and had to wait.
Dennis Parker, director of the racial justice program at the American Civil Liberties Union agreed, adding that discriminatory cases were even more prevalent after the housing crisis than before.
"The combination of the abusive lending practices and the history of discrimination resulted in a foreclosure crisis which had a particularly serious impact on communities of color…and it reversed many of the gains that were made over the past 50 years," Parker said. "Disparate impact is a common sense way and we urge that its continued use be permitted."