Assistant Attorney General Thomas Perez cut an inappropriate deal with city officials in Saint Paul, Minn., in order to convince them to drop an appeal that the Supreme Court was scheduled to hear and that might have benefited banks, according to top GOP lawmakers.
In a letter Monday to Attorney General Eric Holder, GOP Rep. Patrick McHenry and three Republican colleagues alleged that Perez, who heads the Justice Department's Civil Rights Division, essentially bought off the city with a quid pro quo.
Under the deal, the Justice Department agreed not to intervene in an unrelated case, also involving the city of Saint Paul, which had the potential to yield $180 million in damages for U.S. taxpayers. In exchange, the city dropped its appeal of a case that might have prevented the Justice Department from using a key legal theory in fair-lending cases against banks, according to the letter, which was obtained by American Banker.
"One of the features of this quid pro quo, distinguishing it from a standard settlement or plea deal, was that it obstructed rather than furthered the ends of justice," wrote the four congressional Republicans. "It was only possible because Mr. Perez knew the disparate impact theory he was using was poised to be overturned by the Supreme Court."
"So he bargained away a valid case of fraud against American taxpayers in order to shield a questionable legal theory from Supreme Court scrutiny in order to keep on using it," the letter continued.
McHenry, R-N.C., has spent months investigating the Justice Department's involvement in the city of Saint Paul's decision to drop its Supreme Court appeal. He was joined on Monday's letter by House Oversight Committee Chairman Darrell Issa, House Judiciary Committee Chairman Lamar Smith, and Sen. Charles Grassley, the top Republican on the Senate Judiciary Committee.
A Justice Department spokesman defended its move, saying "the resolution reached in these cases was in the best interests of the United States and consistent with the Department's practice in reaching global settlements."
A spokeswoman for Saint Paul said the "primary" reason it dismissed the case was to preserve 40 years of civil rights law under the Fair Housing Act, but acknowledged that the Justice Department's decision was also a factor.
"Because of court orders then in effect, the city could not mention its secondary reason: to avoid conflict with the federal government in two pending lawsuits against the city that the city considered to be without merit," the spokeswoman said.
Justice's decision likely had a significant impact on the banking industry.
The Supreme Court case, Magner v. Gallagher, was being closely watched by both banks and consumer advocates.
At issue was whether an individual may allege discrimination under the Fair Housing Act based solely on the impact of a policy, rather than the intent.
In the Magner case, a group of landlords alleged that officials in Saint Paul targeted rental properties for housing code violations, which increased the burden on property owners and had a disparate impact on African-American tenants. The Eighth Circuit Court in Minnesota upheld the landlords' claim, even though there was no evidence that the city intended to discriminate.
For the past two years, the Justice Department has increased its use of the disparate impact doctrine to target lenders for fair lending violations resulting from policies that had a disparate impact on a group of borrowers, even if the lender did not intend to discriminate. Referrals of such cases from the banking regulators have spiked since 2010, and in April, the Consumer Financial Protection Bureau said it too planned to use the controversial doctrine to target lenders for fair lending violations.
The industry argues that the Fair Housing Act does not allow such claims if there is no intent to discriminate, and they accuse the Justice Department of using dubious statistical methods to back up its accusations.
The Supreme Court was prepared to review whether disparate impact claims are allowed under the law, and what test should be used to analyze them. If the high court had overturned the Eight Circuit Court's opinion, as many observers expected, it would have blown a hole in the Justice Department's legal strategy against banks and other lenders.
So there was widespread surprise in February 2012 when Saint Paul officials announced that they were abandoning their appeal.
According to Monday's letter by congressional Republicans, Perez had been working behind the scenes for months to arrange a deal with the city.
A separate part of the Justice Department, the Civil Fraud Section, had recommended that the department join a lawsuit alleging that Saint Paul violated the federal Fair Claims Act by falsely certifying that it was using federal funds for low-income workers of all races, while in fact focusing only on hiring minorities, according to the letter.
The decision by Perez to arrange a quid pro quo - by convincing the Justice Department not to intervene in the Fair Claims Act case - drew internal dissent from career attorneys inside the Justice Department, the four members of Congress allege.