Court Tosses HUD’s Disparate Impact Rule: Is Protection For Lenders From Disparate Impact Claims On The Horizon?

Since the 1970s, courts have routinely held that the Fair Housing Act, 42 U.S.C. §§ 3601 et seq., may remedy housing discrimination proven through use of the disparate impact theory. The doctrine of disparate impact permits a finding of discrimination without a "showing of discriminatory intent," provided the defendant's actions produce a disproportionate and adverse effect on persons with protected traits. Metropolitan Hous. Devel. Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1290 (7th Cir. 1977). At least 11 United States Courts of Appeals have affirmed the applicability of the disparate impact theory to the Fair Housing Act.

In 1994, the Department of Housing and Urban Development ("HUD") joined with the Department of Justice and 9 other federal agencies in their 1994 Interagency Policy Statement on Discrimination in Lending, to set forth their policies on "Fair Lending." This joint statement confirmed their view that disparate impact would be a method to prove not merely housing discrimination but also lending discrimination. Since that time, lenders and now even loan servicers have faced claims that their actions or policies could violate the anti‑discrimination provisions of the Equal Credit Opportunity Act or the Fair Housing Act, even though such actions or policies are facially neutral, so long as statistical evidence could demonstrate an adverse impact on persons within a protected class.

Once such a claim is made by a regulatory agency or brought by the Department of Justice, the lender faces a hard choice among very undesirable options: to spend time, resources and money to defend a disparate-impact discrimination claim, or negotiate a settlement. Given the substantial potential downside, including reputational issues arising from what may be publicized as racially‑discriminatory practices by the lender, many lenders have chosen to settle such cases, even though a strong legal position can be taken that liability should result only from disparate treatment toward, and not a disparate effect upon, a protected class.

More recently, regulatory enforcement of housing discrimination cases (including discrimination in lending) through use of the disparate impact theory has greatly expanded, particularly since the subprime mortgage crisis. In 2009, for example, the Obama administration formed an interagency task force to combat financial fraud. The task force, however, adopted a broad view of the acts constituting "financial...