Fight over unpopular fair-lending standard rages long after court case

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WASHINGTON — More than three years after a Supreme Court ruling validated "disparate impact" as a legal argument in fair-lending cases, the banking industry and housing advocacy groups are still at odds over how to interpret the decision.

The ruling supported disparate impact — which holds lenders liable for discrimination even if it was unintended — under the Fair Housing Act. But it also suggested a higher legal bar for plaintiffs to make their case.

The case, known as Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, is playing a central role in the Department of Housing and Urban Development's plan to change its disparate impact rule.

In recent comment letters, banking industry representatives are calling on HUD to realign its rule with the 2015 court ruling in order to end frivolous lawsuits. On the other side, advocacy groups argue the court decision endorsed HUD's current framework.

“Allegations of lending discrimination present a very serious charge, are expensive to defend, and can occasion an immediate reputational injury and business disruption,” wrote Rod Alba, the American Bankers Association’s senior counsel for mortgage finance, in a comment letter to HUD. “No matter how frivolous such suits may be, the threat may cause lenders to manage their end numbers, which creates another kind of risk that Inclusive Communities cautions against.”

The department released six questions in June for public comment as part of an advance notice of proposed rulemaking. The department asked if the disparate impact rule should be clarified in a way to reduce uncertainty and decrease regulatory burden, and whether the rule should include any safe harbors for defendants for certain categories of claims. HUD received a total of 500 comment letters.

HUD's rule was written in 2013, but was revised in 2016 by the Obama administration to address concerns that it did not conform to the 2015 ruling.

However, the rule is still unpopular with lenders, who argue it needs more extensive changes. Industry groups say HUD's current policy makes it more difficult than necessary for defendants to fight discrimination claims. The rule requires a plaintiff to first prove that a certain practice resulted in a discriminatory effect. But then the burden of proof shifts to the defendant to prove that the practice in question is essential in to fulfill a non-discriminatory purpose.

Opponents of HUD’s rule were heartened to see the Supreme Court rule that the plaintiff must demonstrate a causal connection, which they believed would prevent defendants from being held responsible for a racial disparity they did not cause.

“Under the Rule, defendants are expected to prove the challenged practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest,” wrote Mortgage Bankers Association Senior Vice President Pete Mills in a comment letter. “In contrast, the Supreme Court stated defendants must not be prevented from achieving legitimate objectives through possible liability.”

The Independent Community Bankers of America also claimed that HUD’s rule as it stands disproportionately affects community banks, which typically have fewer resources than large banks to defend cases in court.

“The differences in the framework [between the Supreme Court ruling and the HUD rule] and, specifically, the three prongs of the burden-shifting standards, create uncertainty and increase burdens for community banks, which must determine how to reconcile these different standards so that they are able to meet their fair lending responsibilities,” wrote Lilly Thomas, the senior regulatory counsel for the group, in a comment letter.

But fair housing advocates argue that in its 2015 ruling, the Supreme Court actually endorsed HUD’s disparate impact rule, rendering a revision unnecessary.

“The Court expressed no reservations about the Rule’s framework, nor indicated any significant differences between the Rule and the contours of disparate impact liability," wrote Shamus Roller, the executive director of the National Housing Law Project. “Post-Inclusive Communities cases have echoed the consistency between the Rule and the Supreme Court decision.”

Patricia Kidd, the executive director of the Fair Housing Resource Center, contended in the group’s comment letter that claims that the Inclusive Communities ruling required HUD to revisit its rule are “simply incorrect.”

“The U.S. Supreme Court implicitly adopted the current Disparate Impact Rule in the Inclusive Communities decision,” Kidd wrote. “Nothing in the Inclusive Communities decision — in its holding or dicta — necessitates any reconsideration of the current Disparate Impact Rule.”

Thomas Ward, the vice president of legal advocacy for the National Association of Home Builders, also stated that if HUD were to revise the disparate impact standard, it would be overstepping its authority.

“Nothing in Congress’s delegation to HUD mentions these judicial rules and procedures, nor is there any other Congressional directive that would provide HUD authority that is clearly within the province of the judiciary,” he wrote in the group’s comment letter, adding that Congress did not intend to delegate this much authority to HUD.

Kidd also argued that scrapping the original rule would be a violation of the Administrative Procedure Act, which directs the way federal agencies establish rules and regulations.

“To disregard the extensive record and the plain import of Inclusive Communities by retreating from the Rule now would be arbitrary, capricious and contrary to law,” she wrote.

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