Chance of Lawsuits Over Fair Lending Violations Increases

The U.S. Supreme Court, in the Mt. Holly, N.J. case, may have the final word on disparate impact. Credit: Thinkstock

Using Home Mortgage Disclosure Act data, it isn’t very hard to show that a lender is not serving certain areas in their community.
If those areas have high concentrations of minorities, the chances of being sued for a fair lending violation just increased due to a new rule issued by the Department of the Housing and Urban Development.
The final rule allows government and civil rights attorneys to use statistics to prove discriminatory lending practices. Under this “disparate impact” approach, the plaintiffs don’t have to prove intent to discriminate.
“We know that HMDA data for virtually all lenders shows some disparity correlated with race and national origin,” said Paul Hancock, a partner at K&L Gates.
On average minorities have lower credit scores than whites. So the use of credit scores can have a disproportionate impact on minorities. But it “doesn’t mean it’s discriminatory,” Hancock said. The HUD rule makes exceptions for practices with a “legally sufficient justification.”
Justice Department attorneys have used this legal standard for many years to bring fair lending cases against banks for failing to reach out to minority and low-income neighborhoods. And U.S. district courts have ruled in favor of plaintiffs in disparate impact in cases.
“Through the issuance of this rule, HUD is reaffirming its commitment to enforcing the Fair Housing Act in a consistent and uniform manner,” said HUD secretary Shaun Donovan. “This will ensure the continued strength of one of the most important tools for exposing and ending housing discrimination.”
HUD has the authority to investigate fair housing complaints and bring charges against lenders.
HUD has issued the rule just as the Supreme Court is considering whether to review a disparate impact case involving the Township of Mount Holly, N.J., and residents of a minority neighborhood who want to stop a redevelopment project.
Mortgage industry groups are urging the Supreme Court to hear the case and they have filed an amicus brief in the Mount Holly case that “strongly opposes” disparate impact.
“In the absence of guidance from the court, pressure continues on the residential mortgage lending industry to manage end numbers, which may assist in avoiding disparate-impact liability but runs counter to the purpose of the Fair Housing Act,” the joint industry brief says.