For years, bankers have been waiting for the Supreme Court to limit their vulnerability to fair-lending lawsuits. But now, for the second time in less than two years, that hope has been dashed.
On Wednesday, the township council in Mount Holly, N.J., approved the settlement of a lawsuit that bankers had hoped would instead be decided by the Supreme Court.
The case represented the banking industry's best hope for judicial intervention in the face of the Obama Administration's stepped-up focus on fair-lending suits.
At issue in the suit was whether lawsuits can be brought under the Fair Housing Act on the basis of an action's disparate impact on a protected class of people, such as racial minorities. Banks argue that they should only be liable if they intend to discriminate.
"We respect Mount Holly Township's decision to settle, but we're disappointed that the Supreme Court has once again lost the opportunity to address whether disparate impact claims are appropriate under the Fair Housing Act," Frank Keating, president of the American Bankers Association, said in an email Thursday.
The case was filed by a group of Mount Holly residents who were going to be displaced by a local redevelopment plan. They argued that the plan would have a disparate impact on minority residents. Even though the case did not involve lending, it held large potential ramifications for the use of the disparate impact theory in fair-lending suits.
The most direct impact of a Supreme Court decision would have been on suits involving mortgage loans. But legal experts believed such a decision eventually would have affected fair -lending suits involving auto loans and credit cards, too.
Early last year, the city of Saint Paul, Minn., decided to end its Supreme Court appeal of another disparate impact suit. Saint Paul's decision sparked controversy, because the city faced pressure to drop its appeal from the Justice Department, which prosecutes fair-lending cases.
The Supreme Court had been scheduled to hear oral arguments in the Mounty Holly case on Dec. 4, but that won't happen now. Many observers believed that if the court were to decide the case, it was likely to strike down the use of the disparate impact theory.
"I think it is extremely disappointing that a clear reading from the Supreme Court on this very important issue will not be forthcoming, at least in the near term," Ken Markison, vice president and regulatory counsel at the Mortgage Bankers Association, said Thursday.
That perspective was echoed by Steven Zeisel, general counsel at the Consumer Bankers Association. "We were hoping that the court would look at the case, but the parties did what the parties did, so we're just going to have to wait for another opportunity," he said.
There appears to be little chance that the Supreme Court will hear another similar case in the near future. Insurance industry trade groups have filed a suit challenging the use disparate impact theory, but that case is still in the early stages of litigation. And several sources said they were unaware of any other cases in the pipeline.
Still, attorney Paul Hancock of K&L Gates, who has represented the banking industry in fair-lending cases, said: "This issue isn't going to go away."