Can ‘Disparate Impact’ Become the Basis for a Fair-Lending Claim?

By: Nicole Kardell

As part of its aggressive program to protect consumers in financial matters, the Consumer Protection Financial Bureau (CFPB) has announced that it is prepared to adopt a controversial “disparate impact” theory of liability against lenders. A case that the U.S. Supreme Court may accept would have a major impact on whether the CFPB is actually going to be able to do that.

The “disparate impact” theory was first articulated by the Supreme Court and further addressed by the Civil Rights Act of 1991 in the employment discrimination context. In a 1971 decision, Griggs v. Duke Power Co., the Court held that Title VII “proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation.”

In the employment context, under Griggs, even though an employer may not intend to discriminate against a protected group, it may still be found liable under anti-discrimination laws for practices that disproportionately disadvantage such a group.

The theory was administratively adopted for federal fair lending laws in the 1990s, as laid out in a 1994 Interagency Policy Statement on Fair Lending. This statement from the Department of Justice and other federal agencies says that lenders may be liable for fair lending law violations if their policies or practices are shown to have a disparate impact on protected groups – even if there was no intent to discriminate. The statement, however, does not have the force of law.

In addition, the federal government, in practice, had not aggressively pursued fair lending cases in the absence of intentional discrimination against a protected group — until the Obama Administration’s CFPB announced its intention to use the “disparate impact” theory.

That is where the pending Supreme Court case, Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. comes in. In that case, the Township of Mount Holly, N.J., made plans to redevelop a blighted residential area that was primarily inhabited by low- and moderate-income minority residents. Under the plan, the neighborhood would be demolished, and significantly more-expensive housing would be built. Many of the residents objected to the redevelopment, saying that their neighborhood would be destroyed and that they would not be able to afford to live in the new neighborhood. They sued under the Fair Housing Act, alleging that although the plan was not specifically targeted against minorities, it would have a disparate impact on them. The U.S. Court of Appeals for the Third Circuit allowed the case to proceed, and the Supreme Court is now considering it.

The issue is whether “disparate impact” is cognizable under the Fair Housing Act, as it is in the employment context. If the Court holds that impact as well as intent leads to a cause of action under the Fair Housing Act, the CFPB will go ahead and act under the theory. It will bring cases, for example, against banks that make loans only in areas that happen to be inhabited by high-income people and decline to make loans in areas where low-income people (many of whom are minorities) live. It will use geography as a proxy for racial or ethnic discrimination: Where were loans made, and where were they denied?

The Supreme Court has not yet decided whether it will hear the Mount Holly case. The most recent activity was the Court’s request, at the end of October, that the U.S. solicitor general formally express the views of the U.S. government on the issue. The solicitor general has not yet filed, and it will probably be a few weeks until he does file and the justices consider the SG’s arguments and decide whether to grant certiorari.

Consumer advocacy groups have actively pushed the disparate impact theory. The National Fair Housing Alliance has filed administrative complaints against Bank of America, Wells Fargo, and U.S. Bancorp, alleging that bank practices in maintaining foreclosed properties discriminate against people in predominantly black and Hispanic neighborhoods. Bank of America, Wells Fargo and SunTrust have recently paid some $500 million to settle claims: Since the banks opted to settle these cases, there was no formal legal ruling on the theory of liability.

Thus, “disparate impact” has been slowly taking hold in the lending context – without any real statutory basis or judicial clarification. The theory is still being used only by extension or analogy to the employment context. A high court ruling would clarify this very important area of law. Lenders, developers, and borrowers are waiting for clarification.