Supreme Court Tries Again to Tackle 'Disparate Impact'

WASHINGTON — The Supreme Court said Thursday it would hear a case related to the use of "disparate impact" theory to pursue entities for unintentional discrimination, a move that could have significant ramifications for banks.

It was the third time the high court agreed to tackle the issue, but the first two were settled before the Supreme Court could issue a ruling.

Many bankers hope the high court will at least curb regulators' ability to rely on disparate impact when they pursue enforcement actions. But whatever the court decides could have a significant impact on how the government goes after lenders in the future.

"This will have a substantial impact on future enforcement actions under the Fair Housing Act regardless of what the Supreme Court decides," said Paul Hancock, an attorney at K&L Gates who's represented the banking industry in fair-lending cases.

At issue is a case between the Texas Department of Housing and Community Affairs and a Dallas-based integrated housing group, the Inclusive Communities Project.

The housing group claims that Texas violated the Fair Housing Act by incentivizing minorities to stay in low-income housing because of the state's use of federal low-income housing tax credits.

The group is applying the so-called "disparate impact" theory in which discrimination can be cited because the end result of a policy or process shows disparities of a protected legal class regardless of the actual intent. Major lenders such as Ally Financial, Bank of America and Wells Fargo have been penalized by regulators largely based on portfolio-wide analysis that shows minorities or other protected classes have not received as favorable rates and terms.

The Supreme Court has agreed to specifically look at whether disparate impact is valid under the Fair Housing Act. But observers say the decision could also affect the government's ability to use disparate impact under other laws like the Equal Credit Opportunity Act. Regulators have often used that law in disparate impact cases against major mortgage and auto lenders.

"While there are a few different provisions in the Federal Housing Act compared to ECOA... all the prohibitions in this case are based on the use of disparate impact against a protected class," said Richard Andreano, the practice leader of Ballard Spahr's mortgage banking group. "So while the case isn't brought under ECOA, the belief by the industry is that the Supreme Court's decision will signal what the ruling should be in how to apply disparate impact to the Fair Housing Act or ECOA."

The latest move by the high court appears to confirm the theory that the Supreme Court is anxious to rule on the issue of disparate impact.

The high court was scheduled to hear a disparate impact case in early 2012, but the city of St. Paul, Minn., dropped its challenge under pressure by the Justice Department, a move that was criticized by Republican lawmakers.

A year later, the Supreme Court was slated to hear a case involving the township council of Mount Holly, N.J., which argued minority residents would be hurt by a local redevelopment plan. But the township reached a settlement a month before the hearing was set.

This time, however, observers said the case is unlikely to be settled out of court because it involves a state being sued for disparate impact rather than a local municipality or a company.

"The state was sued in what it believes was simply doing its job in passing out housing tax credits," Andreano said. "This is not a situation where it makes sense for Texas to negotiate a settlement because they don't want to be restricted from conduct that they believe to be appropriate."

The Supreme Court is also scheduled to hear the case early next year, which is considered to be quick.

"It's not going to be a long time," Hancock said. "It's been pretty clear the Supreme Court thinks the issue of whether disparate impact theory is recognized under the Federal Housing Act is of significant public importance since the court has agreed to consider the issue three times in three years. That is rare."

In the meantime, observers said regulators will continue with their approach on the use of disparate impact.

"Whatever pace the regulators are on, they will continue and if the Supreme Court decides the theory can't be brought, then the regulators might take a step back and reassess what to do going forward. But the regulators have been finding ways to take disparate impact claims and framing them as intentional discrimination claims," Andreano said. "So while the Supreme Court decision might knock out disparate impact claims, I don't think it ends the fight in this area by any means."