Mortgage

What the Supreme Court’s disparate impact ruling means for lenders

Lower courts have to work out specifics

In a blow to the housing and mortgage finance industry, but a victory for fair housing advocates, the Supreme Court in June ruled in a contentious and qualified opinion that the legal doctrine of “disparate impact” is cognizable under the Fair Housing Act.

The 5-4 decision holds that there is a disparate impact claim under the FHA as a matter of statutory interpretation.

The majority opinion, which was written by Justice Anthony Kennedy, strongly cautions that remedial orders in disparate impact cases that impose racial targets or quotas could be unconstitutional.

The question in the case of Texas Department of Housing and Community Affairs v. Inclusive Communities Projects is whether the Fair Housing Act allows lawsuits based on disparate impact – that is, an allegation that a law or practice has a discriminatory effect, even if it wasn’t based on a discriminatory purpose. The Court had granted review to consider this question in two earlier cases, but both of those cases settled before the Court could rule on them.

Texas had argued that the lawsuit by Inclusive Communities was invalid, and the question before the high court was whether the Fair Housing Act allows people to sue over practices that might not be explicitly discriminatory, but end up hurting minorities disproportionately.

Notably, the court held that “disparate impact doesn’t mandate that affordable housing be located in neighborhoods with any particular characteristic,” meaning, apparently, that it does not necessarily support Obama Administration efforts to place more affordable housing in suburban and upscale developments.

Michael Skojec, who represented the Houston Housing Authority, which filed an amicus brief in the case, explained the reach of the decision.

“While the Court in Inclusive Communities recognized that disparate-impact can provide a basis for a finding of liability under the FHA, at the same time, the Court emphasized that a number of barriers should exist to pleading and proving such claims,” Skojec said.

“Specifically, the Court said that a party bringing a disparate-impact claim must establish robust” causation by providing statistical or other evidence that a policy directly caused a disparate impact.

 Justice Kennedy ‘s majority opinion held that such a “robust causality requirement” ensures that racial imbalance, without more, does not alone serve to establish  disparate impact, and protects defendants from being held liable for racial disparities they did not create.

“The Court suggested several factors that could be considered in response to a disparate-impact claim, including costs, traffic patterns, preservation of historic architecture, and quality of life, all of which, the Court said, could serve to show that the housing decision at issue did not erect ‘artificial, arbitrary, or unnecessary’ barriers to fair housing,” Skojec said.

F2 quote4On behalf of associations representing the financial services and mortgage lending industries, Paul Hancock and his colleagues at the law firm of K&L Gates have filed a total of five amicus briefs with the Supreme Court addressing the issue of whether the “disparate impact” theory is cognizable under the Fair Housing Act.

“The Court’s decision today resolves an important legal issue about which there has been principled disagreement among White House administrations, as well as among advocacy and industry groups, for decades,” Hancock told HousingWire. “While the Court, by a razor-thin margin, upheld the application of disparate impact under the Fair Housing Act, the Court also imposed important limitations on the application of the legal theory.

“For example, the Court held that a racial imbalance, without more, does not establish a case of discrimination, and directed lower courts to ‘examine with care’ the claims presented at the pleading stage,” Hancock said. “The Court further directed that remedial orders in disparate impact cases must ‘concentrate on the elimination of the offending practice’ and employ ‘race-neutral [remedial] means.’ ”

He said that the limitations that were announced were believed necessary by the Court to “avoid serious constitutional questions that might arise” and “to protect potential defendants against abusive disparate-impact claims.”

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said this will actually undermine housing opportunities as those who file housing discrimination lawsuits don’t have to show they were victims of intentional discrimination.

“America is based on equal opportunity, not equal results. The dubious legal theory of disparate impact and the Supreme Court’s ruling pervert this founding principle. Discrimination in housing and lending on the basis of race, sex or other prohibited factors is morally repugnant and against the law. Our government must continue to combat discrimination in housing and lending and punish those responsible,” Hensarling said.

“Inventing discrimination through a disparate impact theory, however, is not a helpful tool in fighting actual discrimination.

“The Supreme Court’s extension of disparate impact theory to the Fair Housing Act will hurt precisely those minority groups that our federal civil rights statutes set out to protect. In fact, disparate impact will have predictable, negative consequences for all Americans who will experience a less competitive and more expensive market for housing and credit — all without providing any meaningful support for the fight against actual discrimination,” Hensarling said.

Organizations in the industry including the Mortgage Bankers Association and American Bankers Association opposed the use of the doctrine of disparate impact, saying it hamstrings lenders and financial companies that have race-neutral policies, but have results that don’t fit demographic distributions.

“There is no place in this industry for those who intentionally discriminate against borrowers,” said Rob Van Raaphorst, associate vice president of public affairs at the MBA. “It is incumbent on all lenders to ensure that they are compliant with the interpretation of the law communicated by the court today.”

“While we are disappointed in today’s decision upholding disparate impact liability under the Fair Housing Act, we are pleased in the limits the court placed on plaintiffs’ ability to bring disparate impact claims – and the constitutional restraints the Court recognized on remedies available for such claims,” said U.S. Chamber of Commerce Center for Capital Markets Competitiveness President and CEO David Hirschmann.

 “Today’s decision acknowledges the threat of unfettered disparate impact liability makes it harder rather than easier to develop and finance affordable housing. The Court’s assessment in placing severe limitations on the use of disparate impact is correct, and we hope that courts will implement today’s decision in a way that avoids adverse outcomes.”

Fair housing advocates praised the surprise ruling.

“For many years, the application of disparate impact doctrine has helped to expose housing practices that may appear neutral on their face but have discriminatory effects on protected classes,” said John Taylor, CEO of the National Community Reinvestment Coalition, an affordable housing advocacy group.

“Housing discrimination today often isn’t as blatant as it was in the past, so this is a vital tool for enforcing fair housing law. We applaud the Supreme Court for making the right decision today.At the same time, we remain vigilant in the cause of fair housing for all Americans,”  Taylor said.

Dennis Parker, director of the ACLU’s Racial Justice Program, said the ruling was needed.

“This ruling recognizes the stark reality that housing discrimination, regardless of intent, persists for many Americans,” Parker said. “This decision retains the essential protections of the Fair Housing Act, meaning the law will continue to serve as an important tool in rooting out pernicious forms of racial segregation and discrimination.”

“We applaud the Supreme Court for its decision today in ensuring that disparate impact will remain a safeguard against covert and unintended discrimination,” said Sheila Crowley, president and CEO of the National Low Income Housing Coalition. “Everyone deserves an opportunity to have adequate housing.”

Housing & Urban Development Secretary Julian Castro likewise welcomed the ruling on Twitter. “Today’s SCOTUS opinion upholding disparate impact analysis under Fair Housing Act is a strong victory for equal opportunity in our country,” he tweeted on June 25.

Fred Fuchs, a veteran civil legal aid housing lawyer at Texas RioGrande Legal Aid, said, “The Supreme Court today held that disparate impact claims frequently used by civil legal aid organizations to fight housing discrimination are recognized under the Fair Housing Act. The importance of the holding to all citizens cannot be overstated. The Court lays to rest the issue of whether the Fair Housing Act permits such claims.

“Had the Court ruled otherwise, it would have made it harder for civil legal aid programs to fight housing discrimination and robbed the Fair Housing Act of its enforcement teeth.”

Notably, the ruling most directly deals with public housing policy at the government level, but it will have a downstream impact on mortgage, lending and other housing areas in the private sector.

How that will shake out will require time and testing, legal experts say.

Rich Andreano, a partner in the Washington D.C. office of Ballard Spahr who sat in on the Supreme Court hearing of the case, said the Supreme Court’s “final word” on the issue is far from final. It raises a slew of questions that have to be hashed out in lower courts going forward.

“Mortgage lenders have clearly been subject to disparate impact claims before because regulators and lower courts said it was possible to apply it. A lot of questions arise from this. Unfortunately it may be something that has to be worked out in the lower courts, and it may be over the next 20 years before we know,” he said. “Where the opinion is important is what must the allegation be and in what specific instances will the burdens be applied. It will require the lower courts to further define what the Supreme Court meant.

“A lot of the decision is based on housing and government action – lot in this case focused on that and very little on private housing. The questions become, ‘Do the courts find a distinction between housing policy and lending, as in whether to make a loan and how you price that loan? Does the government get broader discretion than the private sector?’ ” Andreano said. “It’s not fleshed out.”

If Ballard Spahr’s experts lean a little toward the industry and lender perspective, James A. Kowalski Jr., executive director of Jacksonville Area Legal Aid, is more on the affordable housing advocacy side.

“The opinion, which reminds everyone that the Fair Housing Act is, in fact, a civil rights act designed to remedy clear actions that have clear results, is a well-reasoned account of the protections intended by Congress to address inequities suffered by members of protected classes,” he said. “The decision confirms the long-existing law and also confirms the responsibilities of lenders under the law, and therefore it should be easier for lenders/servicers, etc. to create policies and procedures to comply with the law while also engaging in profitable business practices that are not only legal but also support a business model which is better for the bottom line.

“Put another way, the great failures of the loan origination model which led to the Great Recession by, among other actions, targeting qualified black borrowers, particularly black women, for high-risk loans, obviously violated the Fair Housing Act and were also obviously bad business, as these practices and their aftermath cost Americans billions of dollars in bailout and cleanup costs,” he said.

He added that assuming the opinion adds weight to the ECOA (Equal Credit Opportunity Act), then lenders/servicers/collectors who do not comply will do so because they have failed to prepare to meet this bright line standard and will face actual and punitive damages up to $10,000 and injunctive and declaratory relief, which can lead to remedies including a declaration that the obligations are unenforceable.

“To the point that the opinion puts limits on enforcement because the plaintiffs will also have to prove existence of a policy that led to disparate impact — again, the opinion makes clear this has always been the case,” Kowalski said.

On the other side of the aisle, Andreano says that there’s leeriness in the industry on how much regulators will feel constrained. Historically plaintiffs thought statistics alone can show the discrimination but industry said stats alone can’t show evidence of discrimination in a credit situation.

“Things are left open for interpretation at lower court level. Does the HUD rule stand as it is, or should it be revised to reflect the court’s opinion? That’s another question,” he said. “The first insight into this will be what lower court does in the Inclusive Communities case that brought all this up. Now the courts know that plaintiffs can use disparate impact, but that alone doesn’t prove anything about the conduct.”

And so it goes — perhaps less a clear victory for either side, and more a job security ruling for attorneys on both sides.

With the Supreme Court’s recent disparate-impact decision, lenders are considering the implications of the racial composition of their mortgage borrowers.

The National Association of Realtors sheds light on the topic with its Home Buyer and Seller Generational Trends Report 2015, which details not only the different age ranges of buyers and sellers, but also the racial makeup of those consumers.

The first illustration below outlines the findings, juxtaposed with population numbers from the Census Bureau’s 2013 population estimates by race. It’s pretty startling.

The chart illuminates the imbalance between the percentage of the population that identifies as Black or African-American (13.2%) and the percent of overall homebuyers who fit that category. There is an even greater disparity with those who identify as Hispanic/Latino (17.1%) versus the percentage of buyers from that population (5%).

On the other end of the spectrum, people identifying as White/Caucasian make up 62.6% of the population, but represent 85% of buyers and 92% of sellers. The only group that comes close to equilibrium on housing is the Asian/Pacific Islander group, which makes up 5.5% of the population and represents 5% of buyers and 4% of sellers.

The study wasn’t set up to explain what factors contributed to the imbalance, but another chart that is included in the study is intriguing for that reason. In the second chart, the percentage of mortgage applicants rejected by lenders in 2013 seems extremely low given the high credit standards of today. The study doesn’t break out the rejections by race, but the overall percentage of buyers rejected by lenders is 5% at its highest. That means that overall, 95% of borrowers get approved for a mortgage.

Which raises more questions than it answers. How do we account for the disparity in racial trends given the high overall acceptance rate? Is the low number because potential borrowers don’t even apply unless they have great credit? Or are the applicants overwhelmingly of races that get the most acceptances?

One thing is certain — the questions are just beginning as lenders find ways to reach out to a wider circle of borrowers.

Fig. 1

 

Fig. 2

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