Last week the United States District Court for the District of Columbia invalidated the Department of Housing and Urban Development’s rule that violations of the Fair Housing Act could be proven through the disparate impact theory. Although multiple circuit courts had previously ruled that disparate impact was discrimination under the Fair Housing Act, all of these decisions preceded the United States Supreme Court decision in Smith v. City of Jackson, where the court determined that the disparate impact theory was only available where the statute in question evinced clear intent to bar effects-based rather than prohibiting merely intentional discrimination. Judge Leon ruled in the instant case that the FHA contained no indicia that it prohibited effects-based discrimination, and thus rejected HUD’s rule.
The ultimate importance of this decision will not be known until the Supreme Court decides the issue in a case involving the Texas Department of Housing and Community Affairs and a Dallas-based integrated housing group, the Inclusive Communities Project, which is currently pending. However, if the Supreme Court ultimately decides that the Fair Housing Act does not prohibit practices that merely cause discriminatory effects, it would diminish at least one pressure point to discretionary pricing. To be clear, the loan officer compensation rules, and other new Consumer Financial Protection Bureau rules (such as the unfair, deceptive, or abusive acts or practices all covered persons or service providers are legally required to refrain fromn under the Dodd-Frank Wall Street Reform and Consumer Protection Act) will still caution strongly against broad-based unfettered discretion. Moreover, such discretion could still lead to pricing disparities that could create an inference of discriminatory intent. As such, lenders cannot afford to relax when it comes to performing regression analysis and fair lending training. However, depending on how things ultimately shake out, lenders that have strong fair lending compliance infrastructure may find they have an opportunity to be a bit more aggressive and flexible in pricing.