Banking and mortgage trade associations filed a friend-of-the-court brief in a U.S. Supreme Court case where the forthcoming ruling will likely create a national standard for discriminatory lending practices. Trade groups warn the Supreme Court that if the ruling goes a certain way, mortgage lenders may face frivolous and unfounded lawsuits.
The Supreme Court is hearing Magner v. Gallagher in February. The decision will be a crucial legal precedent for financial firms as they try to meet the new requirements of the Fair Housing Act.
The controversial case revolves around rental conditions in the city of St. Paul, Minn. Claimants allege the landlords did not keep the properties up to code. They argue they are unfairly treated as African-Americans. Respondents counter that the sheer volume of African-American renters is much higher in the properties in question and therefore maintaining the housing code increases their costs and decreases the number of available units, driving up rents. The issue, they respondents say, is not one of discrimination, but of logistics.
The ruling by the Supreme Court will also determine if the Fair Housing Act requires a disparate-impact legal standard for discriminatory lending in the mortgage origination side as well — or whether there is disparate treatment of individuals during the mortgage lending process. The aim of the court case is to determine if certain types of discrimination, intentional or not, are covered by the Fair Housing Act. If not, then plaintiffs would need to prove specific, intended discrimination in courts, a much more difficult task.
Firms that have to comply with the Fair Housing Act see the distinction as significant, the trade groups say, because it means the difference between being judged on whether the lender treated all borrowers fairly during the process or whether the final outcome of the credit underwriting process is discriminatory.
The trial judge originally dismissed the case on summary judgment, citing insufficient evidence of disparate impact. On appeal, the 8th Circuit Court reversed the case in respect to disparate impact while upholding other parts of the trial court’s summary judgment.
Law firm K&L Gates filed the brief on behalf of the Independent Community Bankers of America, The Consumer Mortgage Coalition and the American Financial Services Association. They argue that simply because different people require different mortgage products, and additional regulatory requirements will likely constrict business more, doesn’t make for a discriminatory system by nature.
The case is of utmost importance, especially with the qualified residential mortgage and qualified mortgage lending rules still undefined by the Consumer Financial Protection Bureau. The urgency to get a precedential decision on this matter as the lending industry goes through a period of regulatory reconstruction is highlighted in the brief to the Supreme Court.
The QM standard will inevitably hold banks liable for loans that do not meet the “ability-to-repay requirement” established in Dodd-Frank. With these standards threatening the level of certainty borrowers have when lending money, the associations suggest in the brief that a clear Fair Housing Act standard should be outlined.
“The proposed QRM lending standards also may be characterized as quite conservative,” the parties wrote. “In particular, to qualify for such a loan, a borrower would be subject to ‘maximum front-end and back-end debt-to-income ratios of 28 percent and 36 percent, respectively; a maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase transaction; (and) a 20 percent down payment.”
The parties says in order to comply with the ability to repay requirement, lenders will have to underwrite more cautiously, restricting more loans to groups with less wealth and income.
“Such differentials may prompt disparate-impact lawsuits,” the associations wrote. “Even though lenders can defend such suits on the basis that their practices are undertaken in accordance with federal regulation, lenders will still face the reputational and monetary costs incurred in doing so.”
The associations claim in court records that a disparate-impact standard sets up a construct where a lender can be held accountable for not offering a mortgage product to disparately impacted groups even when the parties who applied fail to meet underwriting standards.
Meanwhile, the associations argue for a disparate-treatment standard, which would in their opinion punish firms for treating customers differently in the lending process as opposed to punishing firms for not issuing loans to disparate groups that do not qualify under established lending standards.
The case is slated to be heard by the Supreme Court in mid-February.
Write to Kerri Panchuk.