The Docket: A Trailer Park Case Worries Bank Lawyers

WASHINGTON - Mountain Side Mobile Estates is easily the most important trailer park in the banking industry's history.

That's right - I said trailer park.

The Golden, Colo., mobile home facility is at the center of a colossal dispute that could establish the burden of proof for fair-lending cases that focus on patterns and practices of bias, rather than on specific instances.

The case began innocuously enough in the 1960s, when the trailer park was opened as an adults-only facility. That restriction was dropped in 1989, just days before the a new provision of the Fair Housing Act took effect. That law forbids discrimination against families with children. (There are exceptions, but they don't apply here.)

The park replaced its adults-only requirement with a limit of three people per trailer. A family with three children challenged that rule, saying it violated the Fair Housing Act.

The Department of Housing and Urban Development agreed in July 1992, when it filed formal charges. HUD contended that the occupancy limit, despite its seeming neutrality, had a "disparate impact" on families. The department's data showed that most families with children have more than three members.

At a series of hearings before an administrative law judge, lawyers for the trailer park argued that it had a business necessity for the three- person limit - to prevent overcrowding and avoid overloading the sewer system.

The law says businesses are not liable for practices otherwise banned as discriminatory if they are shown to be motivated by legitimate business reasons.

The administrative law judge bought the trailer park's argument three times, only to be overruled by HUD Secretary Henry Cisneros, who said that to avoid liability the trailer park must show a "compelling need or necessity" for the practice.

The Justice Department endorsed that standard in the brief it filed in August with the federal appeals court in Denver, setting off alarm bells with banking lawyers everywhere.

"It's like a pincers movement," said Robert Ledig, a partner at Fried, Frank, Harris, Shriver & Jacobson. "It is happening at the same time that a lot of people think this area is losing steam."

What worries Mr. Ledig and other banking lawyers is that if the court upholds the Justice Department in the case, banks will be subject to the same "compelling need or necessity" standard. That's an extremely difficult standard to meet.

But how can a bank's lending problems resemble a trailer park's housing policy? Easily.

The key here is the underlying argument, rather than the facts. A bank can adopt a lending policy, such as requiring five years of steady employment for mortgage borrowers, that statistically affects minorities more than whites, women more than men, or any protected class more than the population as a whole.

The government can argue, just as it did with Mountain Side, that this policy has a disparate effect. The bank then must show the reason for the policy.

The American Bankers Association has been helping the trailer park's owners in their appeal before the U.S. Court of Appeals for the 10th Circuit. They want the court to define "business necessity" as something bearing a significant relationship to a significant business objective, and not necessarily as an absolute necessity for corporate survival.

Mr. Ledig said that if the trailer park loses, banks will become even less likely to challenge a pattern-and-practice case. The Justice Department and private litigants will use this fear of trial to extract even larger settlements, he said.

But John P. Relman, director of the fair-housing project at the Washington Lawyer's Committee for Civil Rights and Urban Affairs, said the banking industry is getting into a lather over nothing.

Constitutional law cases define "compelling" as a standard that can rarely, if ever, be met, he said. But the Justice Department isn't using that definition in these cases, he said. Rather, the department is taking a definition from earlier employment law cases that is much easier to prove, he said.

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