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How Disparate Impact Ruling Affects Lenders’ Daily Operations

JUL 6, 2015 10:45am ET
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The Supreme Court’s recent ruling that the disparate impact theory of liability can be applied to the Fair Housing Act means mortgage lenders must be even more vigilant in their ongoing testing and evaluation of business practices that could be interpreted as even unintentional discrimination.

Among other things, the Fair Housing Act makes it illegal to “refuse to sell or rent, to deny or otherwise make unavailable a dwelling to a person…or to discriminate against any person making certain real estate transactions because of race or other protected characteristic.”

The Court, which split 5-4 on the case, ruled that the language in the Department of Housing and Urban Development’s Fair Housing Act, including the phrase to “otherwise make unavailable” indicated that neutral policies and/or practices that cause discriminatory effects could be subject to action, even if intent to discriminate isn’t found.

In a disparate treatment case, a lender accused of discrimination would only need to provide (not prove) that a practice or policy that has a discriminatory effect had a legitimate, nondiscriminatory reason. As long as a plaintiff could not prove the policy or practice was a pretext for discrimination, the lender prevails.

In a disparate impact case, the burden on the lender is far greater. Instead of having the burden to articulate a legitimate reason, a plaintiff merely needs to show that a seemingly-neutral policy caused discrimination. Once that is shown, the burden shifts to the lender to prove that the practice in question is a business necessity.

A business necessity is a practice that serves the legitimate employment goals of the lender in a significant way. Importantly, in describing the business necessity defense, the Court noted that businesses need to be free to make “practical business choices and profit-related decisions that sustain a vibrant and dynamic free enterprise system.”

Yet, even if a lender meets this burden, the plaintiff might still prevail by showing that other practices would serve the lender’s interest with less of a discriminatory effect.

Ultimately, what this means for lenders is that regular regression testing is essential. A lender with disparate lending patterns will have to prove that any challenged practices are necessary, and such practices were put into place due to a lack of less-discriminatory alternatives available to reach the same goal.

Lenders should also immediately review their pricing policies; the discretion given to loan officers in pricing; pricing exception policies; and branch, loan officer and manager compensation practices.

Obviously, lenders who do not have statistically significant lending disparities do not have to worry about disparate impact claims, but they cannot thumbnail such conclusions or merely rely upon shortcuts.

Lenders must perform regular regression analyses consistent with those performed by the Equal Employment Opportunity Commission, and should do so at corporate, branch and regional levels.

Moreover, lenders should carefully examine the reasons why they maintain certain pricing and compensation practices and ensure they can explain their necessity, even if no disparity exists.

Many lenders will need to consider placing additional controls in place so as to ensure their policies and practices are not unnecessarily broad.

Beyond the compliance concerns, lenders should consider how this decision could impact day-to-day business. In many respects, larger institutions will need to be more careful about pricing and compensation. Even small numerical disparities can give rise to statistically significant disparities given the overall volume of business.

The bandwidth of a standard deviation (the test that measures the disparity) gets smaller the larger the number of data points.

Smaller lenders in fact, could actually benefit because the smaller number of files likely provide a slightly greater degree of flexibility. Since pricing will likely need to be flatter across the board, lenders that are capable of providing more personalized service and faster decision-making will have an advantage.

Relationships with referral sources and overall reputation for service will be key as the pricing distinctions become blurred.

Overall, the Supreme Court’s decision will significantly affect the lending industry and lenders should carefully evaluate their compliance, origination, pricing and compensation strategies.

Developers: Beware of Disparate Impact After Supreme Court Ruling

01-July-2015 Authors J. William Callison

In Fair Housing Act Case, Supreme Court Backs ‘Disparate Impact’ Claims

June 25, 201512:26 PM ET by Bill Chappelle
The Supreme Court handed a victory to the Obama administration and civil rights groups on Thursday when, by a 5-4 decision, it upheld a key tool used for more than four decades to fight housing discrimination.

The Supreme Court handed a victory to the Obama administration and civil rights groups on Thursday when, by a 5-4 decision, it upheld a key tool used for more than four decades to fight housing discrimination.

Eric Gay/AP

Civil rights groups won a victory Thursday, as the Supreme Court ruled that claims of racial discrimination in housing cases shouldn’t be limited by questions of intent.

The court affirmed a Court of Appeals decision in a case in which a nonprofit group, the Inclusive Communities Project, said that the Texas Department of Housing and Community Affairs had contributed to “segregated housing patterns by allocating too many tax credits to housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.”

The 5-4 ruling endorses the notion of citing disparate impact in housing cases, meaning that statistics and other evidence can be used to show decisions and practices have discriminatory effects — without proving that they’re the result of discriminatory intentions.

“Justice Anthony Kennedy surprised many legal experts by siding with the court’s four liberals,” NPR’s Carrie Johnson reports. “Business groups had long sought to limit lawsuits over the 1968 Fair Housing Act.”

Reacting to the ruling, Attorney General Loretta Lynch says, “While our nation has made tremendous progress since the Fair Housing Act was passed in 1968, disparate impact claims remain an all-too-necessary mechanism for rooting out discrimination in housing and lending.”

The majority wrote, “Recognition of disparate-impact claims is consistent with the FHA’s central purpose” of ending discriminatory practices in housing.

The justices wrote, “These unlawful practices include zoning laws and other housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification.”

But the dissenting justices say that Thursday’s ruling creates a legal liability that wasn’t intended in the original 1968 law.

The ruling brings clarity to an issue that had lingered in doubt: Are plaintiffs in housing discrimination cases required to prove an intent to discriminate? Or is it enough for them to show that some practices have an outsized negative effect on minorities?

Two previous high-profile cases had been settled, as neither side was willing to risk a defeat in the Supreme Court.

The court decided the case 5-4; Justice Clarence Thomas wrote a dissenting opinion, as did Justice Samuel Alito, whose opinion was joined by Thomas, Chief John Roberts and Justice Antonin Scalia.

“By any measure, the Court today makes a serious mistake,” Alito wrote in his dissent, in which he said the majority opinion went too far in applying the Fair Housing law. Alito said Congress intended to cover disparate treatment — not claims of disparate impact.

Adopted in 1968, the Fair Housing Act says that it is illegal to “refuse to sell or rent… or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race.”

He wrote, “The Court acknowledges the risk that disparate impact may be used to ‘perpetuate race-based considerations rather than move beyond them.'”

In a shorter dissent, Thomas said the foundation of the majority’s ruling “is made of sand.”

Thomas said that the court’s 1971 ruling in the Griggs v. Duke Power Co. case, which had authorized disparate impact claims, represented “the triumph of an agency’s preferences over Congress’ enactment and of assumption over fact.”

The Fair Housing Act — and the deep correlations between housing and poverty in America — was put under new focus back in 2013, when journalist Nikole Hannah-Jones dove into the issue for ProPublica, as part of a series titled Segregation Now.

Hannah-Jones’ work was the focus of an episode of This American Life — and when she spoke to NPR’s Gene Demby about the Fair Housing Act shortly afterward, she said:

“I knew housing discrimination was illegal, but that’s about it. So, many things surprised me along the way, but two facts surprised me most. One, it was kind of unbelievable how egregiously little the governments — federal on down — have done to enforce this landmark civil rights law. I discovered governments have largely spent the last 45 years going about their business as if this law didn’t exist, and in fact, were often taking actions that came out on the wrong side of the law. Two, I was literally taken aback by the fact that this law not only called for an end to housing discrimination, but that it mandated that the federal government wield its considerable powers to take affirmative steps to break down that housing segregation it created.”

Supreme Court upholds a key tool fighting discrimination in the housing market

By Emily Badger June 25


Civil rights groups and the Obama administration won a major victory Thursday as the Supreme Court upheld a tool that advocates argue is essential to fighting housing discrimination and patterns of segregation that have persisted in America for decades.

In the 5-4 decision written by Justice Anthony Kennedy, the court ruled that the 1968 Fair Housing Act prevents more than just intentional discrimination in the housing market. The court said the law can also prohibit seemingly race-neutral policies that have the effect of disproportionately harming minorities and other protected groups, even if there is no overt evidence of bias behind them.

“The Court acknowledges,” Kennedy wrote, “the Fair Housing Act’s continuing role in moving the Nation toward a more integrated society.”

He cautioned, though, that “disparate impact” claims don’t simply arise any time statistical disparities appear along racial lines in housing. It must be clear that housing policies caused that disparity, and that those policies don’t serve another valid goal.

The decision upholds a legal strategy that civil rights groups and the federal government have used for four decades to fight lending practices, local housing policies and zoning laws that have had the effect of limiting housing options available to minorities. Lower courts have repeatedly agreed that the Fair Housing Act allows such “disparate impact” claims, but the Supreme Court had not weighed in on the question until now.

As overt racial discrimination has receded from the housing market, civil rights lawyers and housing advocates have argued that “disparate impact” claims are vital to dismantling policies and practices that sound like they have little to do with race at all, such as zoning laws that bar multi-family apartment construction in wealthier white suburbs. If the Supreme Court had ruled that such claims couldn’t be made under the Fair Housing Act, civil rights groups argued that the landmark civil rights law would have lost much of its power.

“This really is the most we possibly could have hoped for,” said Betsy Julian, the president of the Inclusive Communities Project, the Texas nonprofit that brought the case. “We’re thrilled that ‘disparate impact’ as a principle was upheld. We’re also particularly gratified that the court appreciated that we are not a post-racial society when it comes to housing and that we have a ways to go.”

The ruling is a defeat for banks and developers who countered that the fear of disparate impact lawsuits might discourage them from trying to build affordable housing. Critics have also argued that “disparate impact” claims unfairly impugn the motives of banks, communities and developers who never intended to discriminate.

In his dissent, Justice Samuel A. Alito Jr. warned that the court “makes a serious mistake” in giving meaning to the Fair Housing Act that Congress never intended when it passed the law.

The case arose from a lawsuit filed by the Inclusive Communities Project against the Texas Department of Housing and Community Affairs over how it distributes tax credits for low-income housing. ICP argued that the state’s formula effectively ensured that low-income housing was primarily built in poor, minority neighborhoods, and seldom placed in white suburban ones. As a result, poorer, minority families in need of affordable housing had little option but to live in impoverished communities without access to good schools, jobs or opportunity.

“This is going to open up this issue all over the country,” said Myron Orfield, a law professor at the University of Minnesota. “The things that are happening in Texas are happening in every city in the Untied States. They’re all evading civil rights law by concentrating affordable housing in segregated neighborhoods, thus perpetuating segregation — which Justice Kennedy said they cannot do today.”

While the Texas case was winding its way through the courts, the Department of Housing and Urban Development, which is charged with enforcing the Fair Housing Act, issued a rule in 2013 explicitly interpreting the law to cover disparate impact claims. HUD Secretary Julian Castro in a statement Thursday called the ruling “another important step in the long march toward fulfilling one of our nation’s founding ideals: equal opportunity for all Americans.”

The White House, in a separate statement, said the decision “reflects the reality that discrimination often operates not just out in the open, but in more hidden forms,” such as predatory lending and exclusionary zoning.

The decision was expected to be a close one. The Supreme Court had twice previously tried to take up “disparate impact” cases to resolve the question, despite the agreement among lower courts. But both earlier cases settled before they reached the high court, to the relief of civil rights groups and administration officials who feared conservative justices were searching for a case to weaken the law.

The court’s four liberals sided in the case with Kennedy, while Alito was joined in his dissent by Antonin Scalia and John G. Roberts Jr. Clarence Thomas wrote a separate dissent.

In his rebuttal, Thomas wrote that racial imbalances don’t always disfavor minorities, pointing to instances in which minorities have dominated certain industries.

“And in our own country, for roughly a quarter-century now, over 70 percent of National Basketball Association players have been black,” Thomas wrote. “To presume that these and all other measurable disparities are products of racial discrimination is to ignore the complexities of human existence.”

The case is Texas Department of Housing and Community Affairs et al v. Inclusive Communities Project, Inc.
Emily Badger is a reporter for Wonkblog covering urban policy. She was previously a staff writer at The Atlantic Cities.

The Supreme Court’s Website now features an “Advanced Search” tool, which allows targeted searches of Website content. You can view the tool at this link and in the upper right-hand corner of the main page. The tool allows a user to select from among 12 fields to restrict any search, which will produce more accurate search outcomes.

The “Advanced Search” tool supplements the “All Documents” search tool, which continues to be available on the main page. If no checkboxes are selected in the “Advanced Search” tool, the search will return items from the “All Documents” search at the top right. Conversely, if all the checkboxes are selected, the search would return only documents within the 12 fields.


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