Mortgage industry groups on Tuesday made their voices heard in response to the Department of Housing and Urban Development’s proposed reinstatement of its 2013 disparate impact rule.
Numerous industry stakeholders asked HUD to make some changes to the regulation to raise and further explain the threshold for disparate impact claims. A homeowners insurer trade group, which has mounted successful legal challenges of the standard in the past, said it sees no reason the rule should apply to its industry.
The argument for the higher threshold for claims arose following a 2015 Supreme Court decision which upheld the disparate impact regulation. The 5-4 decision said that disparate impact claims are included in the Fair Housing Act, but it more specifically defined the three-step process to prove a strong link between a business practice and discrimination.
But the mortgage industry and HUD don’t see eye-to-eye on how that decision should be taken into account.
HUD, in its proposal to reinstate the standard, wrote that the Supreme Court only considered a judgment reached after discovery and bench trial. Thus the agency believes the court’s decision was not intended to apply to pleading standards for Fair Housing Act cases.
The ruling stated that “disparate-impact liability has always been properly limited in key respects,” HUD noted, so, it was “clear that it was not adding additional pleading or proof requirements or calling for a significant departure from pre-existing precedent.”
Without that clarification, mortgage industry groups are concerned they will be flooded with lawsuits based only on statistical disparities. The Community Home Lenders Association argued in its letter that smaller independent mortgage banks don’t have the “economies of scale to respond to a proliferation of lawsuits that fail to make a prima facie case.”
Groups including the Mortgage Bankers Association took up that argument in their joint letter to HUD.
The MBA, along with the American Bankers Association, the Consumer Bankers Association and the Independent Community Bankers of America, wrote that the 2015 ruling is the “law of the land,” and HUD’s rule should be aligned with it.
“Recodifying the 2013 Rule would reinstate a standard that predates and is inconsistent with binding Supreme Court precedent,” the groups wrote. “Each new administration’s initiation of rule changes creates uncertainty for industry members and fair housing advocates alike, and undermines the fundamental statutory goal of expanding credit opportunity and availability.”
The CHLA also argued that third parties — namely, the federal government — should take responsibility for potential disparate impact. Independent mortgage banks originate loans for federal agencies, and it is the agencies, not the lenders, who determine the underwriting and pricing.
“Disparities in pricing due to [loan level price adjustments] do not constitute discrimination – but merely reflect policies of a third party,” CHLA wrote.
The group also points out that independent mortgage banks lend more to minorities and underserved borrowers than banks do. Further, the group said it is concerned that the government sponsored entities would consider the caps on higher-risk loans retroactive, as they did with the 7% cap on non-owner occupied homes.
“The recent Fannie action to slash lenders who exceeded the 7% PSPA cap on investor/second homes to a mere 3% of their total GSE loans shows that lenders ignore their ‘higher risk’ ratio at their peril,” the CHLA wrote.
The Housing Policy Council asked that HUD clarify that defendants in disparate impact claims could give “commercially reasonable determinations” as a defense for their policies. The group also requested that when identifying alternative, non-discriminatory practices, claimants be limited to practices that are “economically viable, operationally feasible, and readily available to the defendant.”
One of the trade associations to weigh in on the regulation, the National Association of Mutual Insurance Companies, which represents property insurers, took a more combative stance in its feedback. Previously, NAMIC successfully challenged the disparate impact rule in court.
A federal judge found HUD had exceeded its authority, siding with co-plaintiffs American Insurance Association and NAMIC in 2014. The Court of Appeals vacated that decision in 2015 and remanded it for further consideration. NAMIC has said that if the agency were to move forward with the rule, it would likely continue its legal challenge.
NAMIC argues that there is no need for the rule to apply to insurers, in part because it contends there is no evidence for homeowner insurer disparate impact. It also pointed out that there is already state regulation outlawing “unfairly discriminatory” insurance rates.
Race and protected class characteristics, NAMIC has said, are not part of the insurance risk assessment process, which takes into account factors including the distance from a fire station, the breed of dog owned, trampoline use and whether the home is likely to contain lead paint, among other things.
Those underwriting factors could be called into question if they were found to have a disparate impact. To avoid any statistical disparities, NAMIC said that insurers would need to charge everyone the same rate, regardless of risk.
“This calls into question conclusions drawn simply from statistical samplings and underscores why the business of risk classification defies a disparate impact analysis,” NAMIC wrote.