A pending U.S. Supreme Court decision that will determine whether lending discrimination cases can be kick-started under the Fair Housing Act using the disparate impact legal theory is going to directly impact lending discrimination cases brought under the Equal Credit Opportunity Act (ECOA), said Melanie Brody, an attorney for K&L Gates.
Brody made that assertion while partaking in a panel discussion on fair lending cases at the annual Residential Mortgage Litigation & Regulatory Enforcement Conference in Dallas, Texas, on Friday.
Under the disparate impact legal theory, a lender can be held liable under the Fair Housing Act for an origination pattern that ends up having a ‘disparate impact’ on a particular group, even when the lender possessed no discriminatory intent.
The key case – known as the Township of Mount Holly v. Mt. Holly Gardens Citizens – will be heard by the U.S. Supreme Court later this year unless some type of deal is cut, Brody added.
For the mortgage lending industry, a Supreme Court holding in Mount Holly will serve as a guidepost in lending discrimination cases, the attorney said. “If this case doesn’t settle … it is either going to eliminate the availability of this theory under the Fair Housing Act,” Brody said, or it will let lenders know disparate impact survives as an attack measure.
Even though the pending case applies to Fair Housing Act litigation, Brody said the CFPB publicly announced its own intention of utilizing the disparate impact theory when enforcing cases brought under ECOA—a law the bureau has the right to enforce.
Because the CFPB and the Department of Housing and Urban Development both pushed to define disparate impact as an appropriate legal theory in discrimination cases, the Supreme Court ruling in Mount Holly is likely to have a crossover effect on the CFPB’s ECOA cases even though the Supreme Court case specifically addresses the Fair Housing Act.
“The decision that interprets the Fair Housing Act will (likely) be applied by the courts to ECOA,” Brody said. “Courts will likely agree that ECOA needs to be interpreted consistently with the Fair Housing Act.”
Whether Congress accepts the ruling or not is unknown. Still, Brody believes the courts will apply whatever standard is decided upon to both Fair Housing Act and ECOA cases.
Consistency is one thing neither act has experienced.
Since 1989, HUD has generally taken a neutral position on whether disparate impact alone can create a valid claim for lending discrimination cases under the Fair Housing Act, Brody pointed out.
"They had not applied it aggressively, and they had not put out a rule," she explained. However, that relaxed approach changed in the past two years. Both HUD and the CFPB publicly spoke out in support of disparate impact.
This alone makes the Supreme Court’s interpretation, which could come as early as late winter, necessary to create market certainty.
But when it comes to disparate impact and fair lending cases, the sky is not falling down, said fellow panelist and attorney Philip Stein with Bilzin, Sumberg, Baena, Price & Axelrod LLP.
“I think there are some glimmers of hope for entities that may be feeling the wrath of the government sometimes,” he said.
Agencies are more motivated to administer a cure to some of the ills in the housing market. Yet, market forces have already created a much safer lending environment, Stein added.
“I think you have a number of lenders who are acutely tuned in to the need to be vigilant in their compliance in this area, and they have focused on meaningful ways to comply,” he further noted.
For starters, lending standards remain tight, Stein told the crowd. While this “may not be a good thing for society as a whole,” he explained, it does make for a safer lending environment across the board.
And even though the CFPB announced plans to use a new data tool to track lending discrimination patterns, Stein believes “a majority of the data is not going to reflect discrimination.”
In fact, regulators are now more supportive of regulatory scenarios in which all of the parties are focused on evaluating loan issues on a case-by-case basis, rather than the old loan sampling approach.
With this in effect, the reality of what is happening at the loan level is likely to become more apparent in lending discrimination cases – and that's not always to the lender's detriment, Stein pointed out.