In a ruling that could have a chilling effect on the mortgage market, the U.S. Supreme Court has upheld a circuit court's earlier ruling that the legal doctrine of disparate impact is applicable to the Fair Housing Act.
The 5-4 decision means borrowers who feel they were discriminated against when their loans were denied can bring class-action lawsuits against lenders – regardless of whether a lender's policies are found to be intentionally discriminatory.
In writing the court's decision, however, Justice Anthony Kennedy says that although minorities who allege racial discrimination don't have to prove intent to sue, mere statistical evidence of a policy's impact on a minority group might not in and of itself be grounds for a suit.
Kennedy further warns that when courts rule in disparate impact cases, they cannot impose racial targets or quotas, as that would be unconstitutional.
The ruling – a victory for housing and civil rights advocates – came as a surprise to some legal experts who had predicted that the conservative majority on the court would overturn the circuit court's earlier ruling.
In that earlier suit, which was based on an abundance of case law, Inclusive Communities Inc. maintained that the way Texas distributed federal tax credits for low-income housing developments was inequitable because most of the funds were funneled into the most distressed neighborhoods, which tended to be mostly black. The group argued that low-income housing should be spread out across the city so that poor people have a wider range of places to live.
Although Texas housing officials changed their policies in response to Inclusive Communities' lawsuit, the Fifth Circuit Court of Appeals ultimately ruled that the group's claims were sufficient to sue and remanded the case back to federal district court. The state then appealed to the Supreme Court, arguing that the Fair Housing Act does not allow suits over disparate impacts. The Supreme Court, however, held that disparate impact does apply under the Fair Housing Act and upheld the circuit court's earlier ruling.
For mortgage lenders, the Supreme Court's decision basically means that even if a lender applies the exact same policies to all borrowers in ‘color-blind’ fashion, it can nevertheless be sued if its policies are found to have the effect of discrimination, whether intentional or not.
In a statement, Frank Keating, president and CEO of the American Bankers Association (ABA), says while the association and its members ‘are strong advocates for fair lending and enforcement of the Fair Housing Act,’ the disparate impact theory ‘is not the right tool to achieve fairness and prevent discrimination in lending.’
‘This approach can have unintended consequences, such as causing financial institutions to shrink their operations rather than risk litigation, hurting the very groups it is intended to help,’ Keating says. ‘We believe that fair lending is achieved by consistently adhering to the same safe and sound credit standards for making, pricing and servicing loans for all customers, eliminating the potential for unfair treatment of any individual.
‘The banking industry is committed to a discrimination-free lending environment,’ he adds. ‘The ABA will continue to work with federal agencies to establish clear criteria about how a bank's fair lending performance will be judged.’
To read the full decision, click here.
For more, check out this report in the Wall Street Journal.