Bankers See Only Upside in Critical Supreme Court Case

Banks routinely turn to the federal courts to help defend themselves against a slew of financial regulations from the Obama administration but a new Supreme Court case offers the industry a rare chance to go on offense.

The lawsuit, which involves a redevelopment plan in the town of Mount Holly, N.J., has the potential to sharply roll back the reach of the nation's fair-lending laws. The high court's decision Monday to accept the case was a preliminary victory for lenders and a disappointment to anti-discrimination advocates who fear the suit will upset decades of precedent.

Lenders hope the Supreme Court will overturn a longstanding legal theory that allows fair lending suits when there is no evidence that the lender intentionally discriminated against a particular racial or ethnic group, as long as the bank's policies had a disparate impact on minorities.

Banks see large potential benefits, and no potential harm, in the high court's decision to hear the case, since the worst-case outcome, from their perspective, would simply result in a continuation of the status quo.

"With the Supreme Court's decision to accept the Mt. Holly case, the end may be near for the period of overreach in fair lending enforcement," says Andrew Sandler, an attorney who represents banks in the suits.

Fair housing advocates argued, on the other hand, that discrimination is still a problem, and that disparate impact theory helps ferret out discriminatory practices that are intentional but subtle or well-concealed.

"It's critical to getting at covert discrimination, which is very difficult to prove," says Alan Jenkins, executive director of the Opportunity Project, a nonprofit organization that supports the use of disparate impact theory in the mortgage lending sphere.

"This case comes at a particularly critical time as African-American families struggle to overcome the devastating effects of the recession on homeownership and wealth," Sherrilyn Ifill, president of the NAACP Legal Defense Fund, said in a news release.

The case that the Supreme Court agreed to hear is known as Township of Mount Holly v. Mt. Holly Garden Citizens in Action.

The suit stems from a redevelopment plan that would displace residents of a predominantly minority neighborhood in Mount Holly. Residents sued, arguing that the plan violates the Fair Housing Act of 1968 because it would have a disparate impact on minorities. The plaintiffs got a favorable ruling from a lower court, and the town then appealed to the Supreme Court.

Although the case does not involve lending, if the Supreme Court were to strike down the use of disparate impact theory under the Fair Housing Act, the ruling would have major ramifications for fair lending cases.

Most immediately, such a decision would limit the ability of plaintiffs to sue a mortgage lender based on a statistical analysis showing that a particular practice had a disparate impact on minority borrowers.

Ultimately, according to industry lawyers involved in these cases, a decision that is favorable to banks could also have a major impact on fair lending enforcement involving other types of credit, including auto loans and credit cards.

That's because the Equal Credit Opportunity Act, which bars discrimination in the provision of consumer credit, also contains language that would be vulnerable to a legal challenge.

But even before the courts address that second law, a ruling that strikes down the use of disparate impact theory in mortgage suits could prompt banking regulators to readjust their approach to fair lending cases involving other loan types, according to Christopher Willis, a Ballard Spahr lawyer who frequently represents lenders.

"It ought to cause a reevaluation, particularly in those areas where there is a reliance on disparate impact," Willis says.

Both sides in the Mount Holly case appear to have plausible legal arguments to make.

Opponents of the disparate impact theory will point to a line of decisions that emphasize the actual text of federal laws. That's because the Fair Housing Act does not contain certain key language found in other federal laws, which the courts have pointed to in justifying their decisions to allow use of the disparate impact theory under those laws.

The theory's supporters will point to a separate line of cases in which the courts give deference to the legal interpretations of executive-branch agencies. Those court decisions are potentially important because the Obama administration's Department of Housing and Urban Development issued a rule earlier this year that interprets the Fair Housing Act as allowing disparate impact cases.

Justice Antonin Scalia figures to be a key player in the case. Scalia is known as a judge who points to the text of the law in framing his decisions.

But in a 2005 case involving the use of the disparate impact theory in the employment discrimination context, he broke ranks with other conservative justices and argued that the executive branch's interpretation of the law should be given deference.

However, in another case from last year, Scalia wrote an opinion that took issue with HUD's interpretation of the Real Estate Settlement Procedures Act, calling the agency's interpretation "manifestly inconsistent" with the law's text.

Lawyers who represent lenders express optimism that HUD's interpretation of the Fair Housing Act will fall based on similar reasoning. "Most people on the industry side believe that the result of the case will be that there's no disparate impact," Willis says.

On the other hand, fair housing advocates can draw solace from the fact that it generally does not take a majority of the Supreme Court's nine justices to accept a case. Usually, a vote of four justices is sufficient to hear a case, while five votes are needed to reach a final decision.

Given the circumstances of the Mount Holly case, it seems likely that any justice who voted to hear the appeal is at least open to the idea of overturning the use of disparate impact theory. The Obama Administration, which is aligned with fair housing advocates on the issue, had urged the justices not to accept the appeal.

Oral arguments in the case will be scheduled for the Supreme Court's upcoming term, which starts in the fall. Any decision could be a year or so away, assuming the parties to the case do not settle out of court.