Fair Lending Update

By: Steven Kuehl

A variety of lending practices have been found to be illegal under the Fair Housing Act (“FHA”), including some that are not specifically mentioned in the Act but that have been determined to be illegal because they violate requirements and prohibitions that are implicit in the Act’s language.  On June 17, 2013, the U.S. Supreme Court granted certiorari (judicial review) in the case of Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens in Action, Inc., et al., deciding it will hear a case that may have vast ramifications for the use of the disparate impact theory under the FHA. The crux of the issue before the Court is whether disparate impact claims are cognizable under the FHA.  The petitioners in this case raise the question that since the FHA on its face does not discuss “affect” or “effect,” the Court should not read those words into the FHA.

In essence, disparate impact can result in a finding of discrimination and thereby legal liability for employers, lenders, and others, even if no intent to discriminate can be proven.  Under the current legal framework, the regulatory agencies that are empowered to implement the FHA, and the Equal Credit Opportunity Act (via its implementing Regulation B), have utilized the disparate impact theory and applied it to the consumer-lending industry.

The disparate impact theory was formerly known as the “Effects Test” and came about within the context of employment law through the 1971 U.S. Supreme Court, case Griggs v. Duke Power Co.

In Griggs, Duke employee Willie Griggs, on behalf of a number of his fellow workers, challenged the power company’s policy of hiring only high school graduates.  In the region from which the utility drew applicants, only 12% of Blacks had high school diplomas as compared to 34% of Whites.  Duke Power had established the policy to ensure that all employees could read applicable danger warnings.  Since a literacy test would meet the business need in lieu of a high school degree, the court ruled that the power company could not establish a sufficient business justification for the policy.  It had a disparate impact on minorities even though there was no intent by Duke to discriminate.  Throughout the years, many federal courts of appeals have recognized disparate impact claims under the FHA, by applying the Supreme Court’s previous rulings regarding employment discrimination.  In bank regulatory terms, disparate impact is the most stringent of three tests that include overt discrimination, generally the easiest to prove, and comparative discrimination, where bank policy, even without intent, screens applicants of a protected class.  In today’s credit world, some examples of disparate impact policies could include:

  • The requirement of a minimum mortgage loan amount in a region where minority applicants disproportionately purchase homes whose value does not meet the threshold;
  • Not lending on improved property located in a Special Flood Hazard Area (SFHA), if minority neighborhoods and SFHAs overlap; and
  • A credit scoring model that, irrespective of repayment records, yields a lower score for borrowers with finance company loans in their credit history, if a particular group obtains, on average, more loans from finance companies.

In Mt. Holly, the township proposed a redevelopment plan that would raze existing homes occupied by low-income residents and replace them with more expensive housing.  The low-income residents filed suit alleging a disparate impact.  The actual text of the FHA does not mention disparate impact theory.

The Consumer Financial Protection Bureau recently reaffirmed that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority for compliance with the Equal Credit Opportunity Act and Regulation B.  Additionally, on February 15, 2013, the Department of Housing and Urban Development (HUD) issued a final rule that formalized HUD’s long-held recognition of discriminatory effects liability.  Mt. Holly now offers the Supreme Court the opportunity to decide whether the FHA’s statutory text permits disparate impact claims.

This entry was posted in Fair Lending. Bookmark the permalink.

Comments are closed.