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Supreme Court to hear fair housing case that could impact mortgage industry

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A fair housing case headed to the Supreme Court could have direct and indirect impacts on mortgage lending and regulatory enforcement. The nation's highest court will decide whether plaintiffs suing under the Fair Housing Act may bring disparate impact claims and, if so, what the proper test for such claims would be. The act prohibits housing discrimination on the basis of race, color, religion, sex, familial status or national origin. In Magner v. Gallagher, a group of rental property owners in St. Paul, Minn., sued the city and several officials, over aggressive code enforcement. In 2002, St. Paul got tough on problem rental properties, doing sweeps for housing code violations and requiring code compliance certification on the properties. The city allegedly forced rental owners to make expensive renovations. The enforcement resulted in increased maintenance costs, condemnations and some forced selling of properties, the landlords alleged. They claim the city violated the Fair Housing Act through its get-tough enforcement, which ultimately reduced availability of affordable housing in the city and negatively impacted lower-income and minority residents. The trial judge dismissed the case on summary judgment, citing insufficient evidence of disparate impact. On appeal, the 8th Circuit Court reversed the case in respect to disparate impact while upholding other parts of the trial court's summary judgment. The Supreme Court agreed to decide two questions: whether disparate impact claims may be brought under the Fair Housing Act and, if so, what is the appropriate legal test for analyzing such claims. "Both of these issues could have a significant impact on fair lending litigation at the private and governmental levels," Philadelphia-based law firm Ballard Spahr wrote in a note to clients Friday. The Department of Housing and Urban Development published a proposed rule in the Federal Register under the Fair Housing Act on Nov. 16 to establish uniform standards for determining when a housing practice with a discriminatory effect violates the act. It's not clear whether the HUD proposed rule was conceived before the Supreme Court granted a hearing on the Magner case. "The viability of disparate impact claims under the Fair Housing Act is an issue that could affect mortgage lenders both directly and indirectly," Ballard Spahr said. "From a direct standpoint, it is not uncommon for fair lending litigation brought against mortgage lenders to be brought in part under the Fair Housing Act. If the Supreme Court holds that disparate impact claims cannot be pursued, it will take away one of the legal avenues that private and governmental litigants could use in such cases. But, more broadly, if the Supreme Court holds that disparate impact claims are not actionable under the Fair Housing Act … and disagrees with HUD’s interpretation of the statute, it would carry serious implications for disparate impact claims under the Equal Credit Opportunity Act." The ECOA and the FHA do not explicitly permit disparate impact claims, but there is a long-standing administrative interpretation that allows them, the law firm said. "Even if the Supreme Court upholds the availability of disparate impact as a theory for relief under the Fair Housing Act, it will have the opportunity to definitively set forth the applicable analytical model for proving such claims, and to provide guidance to lower courts on the type of evidentiary showing that a plaintiff must make in order to pursue a disparate impact claim," Ballard Spahr said. Regulatory issues are also at play. The Consumer Financial Protection Bureau incorporated disparate treatment and disparate impact testing into its mortgage servicing examination procedures. The Supreme Court’s decision in Magner may remove disparate impact analysis from the picture, or may change how the CFPB looks at testing for disparate impact. "The Supreme Court’s decision," Ballard Spahr said, "will definitely be one for lenders to watch very carefully." Write to Kerry Curry. Follow her on Twitter @communicatorKLC.

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