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Lending

Disparate impact case settles, leaving lenders back where they started

Firms had hoped for a Supreme Court decision

November 15, 2013
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Lenders looking for a U.S. Supreme Court decision on the legal theory of disparate impact in lending discrimination cases will have to wait until another case reaches the nation’s highest court to get clarity. And that could take months – even years, if at all.

The industry’s hopes were dashed this week when a lawsuit, known as Township of Mount Holly v. Mt. Holly Gardens Citizens, settled before appellate review at the Supreme Court.

The case was set to decide whether lenders must possess an intent to discriminate to be sued under the Fair Housing Act for discrimination.

The end result: Lenders are stuck without clarity, and the theory of disparate impact remains for as long as lower jurisdictions accept it and regulators allow it.

The Mount Holly case settled on its own with the town in question agreeing to build 44 homes in a blighted neighborhood, allowing families upset over new development to remain in the community.

This effectively killed the case, but not the debate over disparate impact as a legal theory.

The key question the Supreme Court faced in the case was whether disparate impact can survive as a legal theory under the Fair Housing Act.

Disparate impact claims allow borrowers or plaintiffs to allege discrimination if the outcome of a lending scheme ends up impacting a particular group, regardless of the parties’ intent.

The lending industry took issue with applying a theory that excludes the element of ‘intent’ from discrimination claims, prompting industry advocates to push for clarity at the Supreme Court level.

The Mount Holly case was the perfect tool, but the recent settlement quashed hopes of an easy precedential standard in the coming months.

"It’s very disappointing that this case appears to have been settled because there is a very real need for the Supreme Court to weigh in on this issue," said Andrew Sandler, chairman and executive partner at BuckleySandler.

The chairman says government agencies have been of the view that disparate impact is okay. But Sandler says, "We are quite confident that once the court has the opportunity to weigh in, it will direct a more reasonable future use of that theory."

He notes that a property insurance case pending in the D.C. federal district court has the potential to raise this challenge again, but there’s no way of knowing how far it will go.

For now, disparate impact remains a harbinger around the necks of lenders. The problem, Sandler says, is banks are afraid to fight lending discrimination cases even when they feel they are in the right.

"The banks and other financial firms are reluctant to litigate with their regulators, so these cases tend to settle," he noted. Most of the entities that settle believe the use of disparate impact is wrong, but they’re not prepared to launch these types of legal battles, Sandler told Housingwire.

So far, the industry is stuck in a holding pattern and disparate impact remains.

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