Disparate Impact Rule Works, Critics Notwithstanding

A related concern is that the new rule will require lenders to make loans to unqualified borrowers, precisely the practice that (once again, it is wrongly argued) led to the foreclosure crisis, undermining efforts to revitalize communities hurt by previous (and possible future) crises.

The Fair Housing Act and other rules require housing providers to offer services on the basis of objective, non-racial considerations. In mortgages, this has meant requiring lenders to use fair, transparent, and sound underwriting. The foreclosure crisis resulted from the many lenders that refused to do so. So-called liar loans where income was not verified (or, worse, was fraudulently overstated) and other predatory practices resulted in many loans underperforming. That is what led to the housing bubble and foreclosure crises that followed. Such predatory practices were targeted to minority communities and minority borrowers were steered to subprime, often predatory, loans at a much greater rate than whites.  Research by the Fed and others shows that the rate of subprime lending was much greater in minority markets and research by the Center for Responsible Lending and others showed that predatory loans were more aggressively marketed there. 

The settlement of recent lawsuits and administrative complaints against Bank of America, Wells Fargo, and other major financial service providers are illustrative. When Wells Fargo loan officers referred to predatory, high-cost loans as "ghetto loans" for "mud people," this hardly reflected sound underwriting.

Perhaps the most provocative interpretation of the new rule is, as Roger Clegg, president of the Center for Equal Opportunity, incorrectly argued in a letter to the editor of the Journal (February 2, 2012), "The disparate-impact approach… is flatly at odds with the color-blind ideals of the civil rights movement and the laws for which it fought." In fact, by clarifying the disparate impact standard, this rule will discourage race-based decision making. By encouraging housing providers to justify, with objective evidence, practices which have a discriminatory effect, the provision of those services will increasingly be based on fair and equitable criteria rather than subjective and potentially discriminatory criteria.

Finally, there is concern that the disparate impact rule will encourage expensive, unnecessary, and often frivolous lawsuits. Again, by clarifying the longstanding policy and removing the inconsistencies in enforcement, lawsuits should be minimized.  Providers of housing and housing related services will be better informed about the law's requirements, enabling them to more effectively avoid legal action. Such enhanced voluntary compliance will result in the initiation of fewer lawsuits. In addition, courts have tools available to readily dismiss truly frivolous lawsuits. 

By clarifying what the law requires, HUD's disparate impact rule should resolve many of the current misunderstandings, resulting in far fewer legal actions. One consequence will be the targeting of scarce enforcement resources to those cases where there are more likely to be violations, enhancing the efficiency and effectiveness of fair housing law enforcement.

Gregory D. Squires is a professor of sociology and public policy and public administration at George Washington University.