A recent lending discrimination case settled in Massachusetts illustrates why state attorneys general are pushing to keep the legal theory of 'disparate impact' alive as they pursue Fair Housing Act discrimination claims.
Massachusetts Attorney General Martha Coakley says the state recently settled with Option One Mortgage Corp. after investigating the firm’s discretionary pricing policies for independent mortgage brokers.
In a brief filed with the U.S. Supreme Court in the Township of Mount Holly v. Mt. Holly Gardens Citizens case, Coakley’s office says Option One's broker compensation practices seemed neutral on their face, but eventually resulted in African American and Hispanic borrowers paying more for their mortgages.
To obtain an enforcement action against Option One, all Coakley’s office had to prove was disparate impact — a legal theory that says, even without an intent to discriminate, a firm’s lending practices are considered discriminatory if they have a disparate effect on a minority or disenfranchised group.
This is why the Township of Mount Holly case is so attractive to the lending industry, as well as federal housing agencies and attorneys general. Through this case, the Supreme Court will decide whether disparate impact can survive as the appropriate legal theory in Fair Housing Act discrimination cases.
The lending community is on the other side of the argument, filing their own briefs as Martha Coakley and various state AGs file theirs.
Absent proof of 'an intent' to discriminate, it’s dangerous to focus on lending outcomes, legal experts claim.
Paul Hancock, an attorney with K&L Gates out of Miami, filed a brief with the Supreme Court on behalf of the lending industry in the same case.
While he says, the lending industry wants strong enforcement of all discriminatory lending claims under the Fair Housing Act, he disagrees with the “disparate impact” standard that Martha Coakley and numerous state AGs are backing. Hancock said those in support of disparate impact want to challenge lending standards even if the outcomes of those standards are based on ‘objective’ and ‘neutral' underwriting standards.
"The problem with this approach is equal racial outcomes become the only way to avoid litigation," he told HousingWire. He describes the ‘disparate impact’ formula as one that forces equal results, which would, in effect, force lenders to develop racial quotos. This is not what Congress envisioned for the Fair Housing Act, Hancock said.
If you combine the disparate impact legal theory and the new lending rules under Dodd-Frank, lenders feel caught between a rock and a hard place. On one hand, they have to ensure lending reaches all groups, while also facing litigation risk if those loans default later on as the ability-to-repay rule and other standards come into play.
Hancock says lending outcomes based on objective standards should be enough. "That’s not discrimination, that’s just the neutral applicaiton of risk-based underwriting," he explained.
He added, "The lenders feel in a bind because, on one hand, they are being told to tighten credit standards." But as those standards go up, any impact on minority access to credit – even without discriminatory intent – raises concerns of the potential for discrimination claims under the disparate impact theory.
"We strongly support enforcement of the Fair Housing Act, Hancock said. "But discrimination means consumers are treated differently because of race, i.e., intentional discrimination ... that standard is what Congress intended (under the Fair Housing Act) and is adequate for achieving our national goals and in eliminating discrimination in housing."
Attorneys general from 11 other states joined Coakley in her brief. She remains undeterred and a strong supporter of disparate impact.
"Disparate impact claims are an important tool used to eliminate discrimination in the housing market, one of the primary principles of the Fair Housing Act," Coakley said. "The court has already recognized disparate impact claims under many civil rights statutes, and we urge the court to do the same with the FHA."