-
A Virginia mortgage lender has agreed to pay $140,000 in compensation and revise its pricing policies to settle a lawsuit alleging that it discriminated against minority borrowers, the Justice Department said Friday.
September 30 -
An aggressive push by the Justice Department to investigate fair lending claims is prompting a backlash from bankers who claim the government is abusing its authority.
August 1
WASHINGTON — The Supreme Court's decision to hear a housing case could reshape the legal landscape for banks, potentially making it harder for the government or private parties to prove violations of a federal law that bans lending discrimination.
The case ostensibly has little to do with lenders, instead focusing on a fight between landlords and the city of St. Paul, Minnesota. Yet it goes to the heart of a legal theory used to prosecute and pursue banks for discrimination.
In most parts of the country, courts have found that lenders don't have to intentionally discriminate in order to be in violation of the law. Rather, lenders can be found liable in certain circumstances if their practices have a "disparate impact" on minorities.
If the Supreme Court, which is more conservative-leaning, eliminates or restricts that legal standard, it would be a huge boon for certain banks whose lending practices have faced renewed scrutiny by the Justice Department since President Obama took office.
"I believe it's reasonably likely that the Court will significantly narrow or eliminate the use of disparate impact under the Fair Housing Act," said Andrew Sandler, chairman of Buckley Sandler LLP in Washington.
The Supreme Court has already limited the use of the disparate impact standard for other anti-discrimination laws. The high court ruled, for example, against a group of female Wal-Mart employees who alleged that the retailer's pay practices had a disparate impact that hurt women.
Many observers think the Supreme Court will rule similarly when it comes to housing fair lending laws.
"I think the Court has given a signal that it may cut back on disparate impact," said Joseph Barloon, a partner at Skadden, Arps, Slate, Meagher & Flom LLP. "I think it's potentially a very significant case, but a lot of it will depend on how broad or narrow a ruling the justices issue."
The case comes at a critical time for banks, as the Justice Department has moved aggressively to investigate banks for potential discrimination.
The same day the Supreme Court agreed to hear the case, Magner v. Gallagher, Assistant Attorney General Thomas Perez, who heads the Justice Department's Civil Rights Division, delivered a
"When I began my tenure in October 2009, I observed that the division's fair lending enforcement program had waned in the prior administration," Perez said Nov. 7 in remarks to the Community Reinvestment Act and Fair Lending Colloquium in Baltimore. "The political leadership in the prior administration sent an unmistakable message that it would be next to impossible to bring a fair lending lawsuit using disparate impact theory."
"As a result, the hands of the dedicated career staff were tied in so many instances," Perez added. "This administration has been clear; we will pursue discrimination cases based on both intentional discrimination and disparate impact. … Without a credible enforcement program, we can never achieve full compliance with the law or fully level the playing field between responsible lending institutions and unscrupulous lenders."
Last year, the Justice Department's Civil Rights Division created a fair lending unit, which takes referrals for potential cases from the federal banking regulators. Some of those cases allege that banks drew the lines for the areas they serve in a way that had a negative impact on minorities; other suits argue that banks developed pricing policies that had a disparate impact on blacks or Latinos.
In cases that have settled out of court, the Justice Department has secured more than $30 million in compensation for victims, Perez said in his recent speech.
One such case involved a mortgage-lending subsidiary of Citizens & Farmers Bank in West Point, Va.. In that case, the lender, C&F Mortgage Corp., used rate sheets to calculate a standard interest rate for each borrower based on factors related to the borrower's risk, but then gave its employees the discretion to deviate from those interest rates.
The Justice Department alleged that the lender's practices had a disparate negative impact on African Americans and Latinos. In order to settle the suit, C&F agreed to change its lending policies and pay $140,000 in compensation.
In an interview with American Banker in September, the bank's president denied treating any customers unfairly.
"Although we strongly disagree with the alleged findings, we just determined that we're better off to devote our resources to running our various companies and not spending it in the courtroom," president and CEO Larry Dillon said at the time.
These cases often involve statistical analyses, which plaintiffs use to find patterns in lending. Lawyers who defend banks object to the way statistics are being used as evidence of discrimination, saying that the analyses do not adequately compare similarly situated borrowers of different races.
Those on the other side of the debate respond that evidence of a disparate impact on minorities — for example, a statistical analysis that shows a disparity in interest rates charged to whites and blacks — is not enough to prove a violation of the Fair Housing Act.
"If a lender can show that the policy or practice serves a legitimate business need, they may not be liable," Perez said in his speech. "And in our cases, we will look at legitimate credit-worthiness factors to see if they explain differences in the prices paid by African-Americans or Latinos and white borrowers."
If the Supreme Court narrows or eliminates use of the tougher legal standard to prove housing discrimination, it would have an impact beyond cases filed by the Justice Department, since private litigants can also sue under the Fair Housing Act.
The case that the Supreme Court will hear sometime next year is an example of a suit brought by a private party.
The lawsuit was filed by a group of landlords against a number of code enforcement officers in the city of St. Paul, Minn. The landlords argue that several years ago, the city stepped up its enforcement of the local housing code, which raised the cost of renting to low-income tenants, which reduced the supply of affordable housing. This had an adverse impact on racial minorities, the landlords argue.
A federal appeals court sided with the landlords, but the defendants appealed to the Supreme Court.
The result is a fair-housing case with an odd set of facts. The landlords are suing, rather than being sued, as is more often the case.
Still, the stakes are high for banks whose compliance with fair-lending laws is under scrutiny.
Barloon, who defends banks in these cases, said that the unusual facts could limit the impact of the Court's eventual decision. But he foresaw little potential downside for defendants in fair-lending cases, because the disparate impact standard is widely accepted by lower courts today.
"By and large, I believe that the Court's decision is a good thing for lenders that are facing disparate impact claims," he said.
Greg Taylor, vice president and senior counsel at the American Bankers Association, said the case is significant because the Supreme Court has never ruled on whether the disparate impact standard applies to the Fair Housing Act. A ruling could reduce uncertainty about the standard banks must meet to comply with the law, he said.
"That's the big one — certainty," Taylor said.
Lawyers who represent plaintiffs in fair-housing cases acknowledge that the recent trend in the Supreme Court decisions does not bode well for their side, since conservative jurists have been limiting the use of the tougher legal standard as a way to show discrimination.
"Whenever they have a chance to whittle down, if not obliterate, disparate impact, they will," said Michael Aleo, a lawyer with Lesser, Newman & Nasser LLP in Northampton, Mass. "And that's not a secret."
