The Supreme Court has decided to hear a fair housing case that could upend a legal theory that the Department of Justice, banking regulators and private attorneys use to show mortgage lenders have discriminated against minority borrowers.
Most fair lending cases against lenders these days are based on a "disparate impact" legal theory where the government or other plaintiffs rely on data and maps to show discriminatory lending practices.
Prior to the Obama administration, the Justice Department and banking regulators adhered to a “disparate treatment” standard where they had to go beyond statistics and prove intent to discriminate.
“Under the disparate impact theory, they rely exclusively on statistics,” according to Andrew Sandler, a partner at the Washington law firm BuckleySandler.
“There is some likelihood that the Supreme Court will significantly narrow or eliminate the use of disparate impact under the Fair Housing Act in fair lending cases,” Sandler told NMN.
Sandler has represented many banks and mortgage companies in fair lending cases.
He stressed the government should find evidence of intent to discriminate before filing cases against lenders. “Discrimination is about intent, not statistics,” he added.
At a Nov. 7 meeting, the Supreme Court justices decided to grant certiorari and review a fair housing case called Magner v. Gallagher.
This case involves efforts by the city of St. Paul, Minn., to enforcement of housing code violations against a company that provides rental housing to many low-income blacks.
The 8th Circuit Court of Appeals reversed a lower court decision that would have allowed the city to enforce the housing code. The appeals court ruled that the case should go to trial because the rental company's attorneys "presented sufficient evidence of disparate impact on African-Americans."
It takes at least five of the nine Supreme Court justices to grant certiorari and the case will likely be argued before the high court early next year.
“It is now up to the Supreme Court to decide whether that theory is applicable under the Fair Housing Act,” according to Paul Hancock, a partner at K&L Gates in Miami.
Hancock represents Wells Fargo Bank NA and Wells Fargo Finance in a fair lending case filed by Illinois attorney general Lisa Madigan.
The AG relies on disparate impact in trying to prove the two Wells Fargo units targeted black neighborhoods in Chicago in making high-cost subprime loans.
Madigan also claims Wells Fargo compensation policies provided incentives for loan officers to make subprime loans even if the borrowers could qualify from prime loans.
An Illinois state judge recently rejected Wells Fargo's motion to dismiss the case and now the AG can proceed with discovery.
Wells Fargo contends its lending practices are not discriminatory and there is no basis for the allegations by the attorney general.
Meanwhile, the Supreme Court could rule on the Magner case by June and it could have an impact on the Wells Fargo case and other pending fair lending cases.
“If the court decides the disparate impact theory is not applicable under the Fair Housing Act, all the plaintiffs would have to show intentional discrimination," Hancock said.
In most cases, the plaintiffs are not prepared to show intent, he added.
