Big banks urge HUD to shelve redlining plan. Small banks say not so fast.

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WASHINGTON — In what is a sea change from their prior stance in “disparate impact,” big banks are urging the Trump administration to reconsider plans to weaken fair-lending rules. But the banking industry is far from united in that view, and so far the agency responsible for enforcing fair-lending laws, the Department of Housing and Urban Development, has shown no willingness to abandon the proposal.

Large lenders including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo all urged HUD to withdraw a plan that would put more of an the onus on borrowers to prove discrimination when bringing redlining claims against lenders. They argue that the proposal, first introduced a year ago, would weaken efforts to curb discrimination at a time of intense national focus on racial equity.

But small banks continue to support the proposal, saying it would reduce frivolous claims and help focus fair-lending enforcement on catching the truly bad actors.

“We do not want to see the proposal retracted,” said Lilly Thomas, executive vice president and senior regulatory counsel at the Independent Community Bankers of America.

The disparate impact rule written by the Obama administration “is so wide and so broad” that “all it provides is permanent employment for lawyers,” said HUD Secretary Ben Carson.
The disparate impact rule written by the Obama administration “is so wide and so broad” that “all it provides is permanent employment for lawyers,” said HUD Secretary Ben Carson.

A 2015 Supreme Court decision affirmed disparate impact, which enables plaintiffs to allege discrimination even if a lender did not show discriminatory intent. But the ruling also suggested that HUD should restrict how the legal doctrine is applied.

The HUD proposal would establish a five-step procedure for a consumer to demonstrate discrimination. Consumer advocates have argued that the plan would effectively make the burden of proof too high.

The industry initially supported the plan widely.

In an October 2019 comment letter, the Mortgage Bankers Association, whose membership includes the nation’s largest banks, said it “supports HUD’s decision to amend its disparate impact standard to” be consistent with the Supreme Court ruling.”

But following nationwide protests over systemic racism in the aftermath of the killing of George Floyd, large lenders and their trade groups have changed course.

“At a time when we as a nation are having important and too-long-ignored conversations about racial inequality, we believe it is appropriate to withhold publication of the final disparate impact rule,” Robert Broeksmit, the MBA's president and chief executive, wrote in a July 16 letter. “Instead, we call on HUD to bring the housing, lending, and civil rights communities together for renewed discussions about how to address the stubbornly wide housing and wealth gaps faced by communities of color that still exist — and by some measures have grown worse — more than 50 years after the passage of the Fair Housing Act.”

BofA, Citi, JPMorgan, Quicken Loans and Wells Fargo expressed similar sentiments in letters of their own. They cited recent events — including the heavy impact of the coronavirus pandemic on low- and moderate-income communities — and the nationwide conversation about systemic racism as justifying a pause in the rulemaking effort.

“Now is the time for all of us to rededicate ourselves to the principle that everyone should be afforded the full protection of equal and fair justice under the law,” wrote Mark O’Donovan, CEO of JPMorgan’s home lending division. “We look forward to continuing to work with HUD on a disparate impact rule that preserves the ability to effectively address unintentional discrimination. This collective effort is critical to ensuring economic fairness and equal access to housing.”

Housing advocacy groups have hailed the big banks’ sudden change of heart.

“It’s really an inflection point in the industry. This is the first time this has ever happened,” said Lisa Rice, president and CEO of the National Fair Housing Alliance. “Heretofore we have never been able to successfully get the industry to rethink its position on disparate impact.”

Rice said the HUD proposal had previously already made some within the industry uncomfortable since it was seen as raising a barrier to disparate impact claims. The protests following George Floyd’s killing were “the straw that broke the camel’s back,” she said.

“The rule is so bad that it even shocked some people in the industry,” Rice said. “There was a lot of infighting over this Trump [rule]. There were a lot of people in lending institutions who were saying, ‘We can’t go this far, guys.’ ”

It is unclear whether HUD is considering any change in plans, but the initial response from the department’s leadership appeared to maintain support for the plan’s rationale.

After The Wall Street Journal reported on the letters from Quicken and BofA, HUD Secretary Ben Carson indicated there were continuing concerns that the current disparate impact framework — developed in the Obama administration — is too broad.

“What people need to understand is that it is so wide and so broad, the way it is written all it provides is permanent employment for lawyers,” he said in an appearance on Yahoo Finance.

In a July 14 letter to Bank of America, Deputy HUD Secretary Brian Montgomery wrote that “the leadership and professional staff at HUD is working on a daily basis to live up to the spirit of the Fair Housing Act.”

“Although the Supreme Court decision did not address HUD’s rules directly, the Court went out of its way to urge caution in applying disparate impact theory in a manner that might undermine the very mission of both fair housing and helping to develop communities that suffer from lack of investment,” Montgomery said, adding later that the department will review all comment letters “it received before issuing a final rule later this year.”

Some observers suggested the big banks’ recent stance won’t affect the administration’s plans.

“If I had to guess … it’s just conjecture, but I imagine they’ll go forward with it,” said Stephen Ornstein, a partner with Alston & Bird.

The ICBA’s Thomas acknowledged that the industry is split between big banks and small banks on the issue.

“Supporting a proposal that comports with the United States Supreme Court decision in no way whatsoever implies or intends to suggest that we support illegal discrimination at all, or any community banks do,” she said. “Those are very separate issues.”

She said the current disparate impact regime uses “a huge net to capture a minnow.”

“Certainly, we want to identify and hold bad actors accountable for illegal discrimination,” Thomas said. “What we don’t want to see is a lot of frivolous and false positives going through the system, tying up the system, costing a lot of money. Those costs would inevitably flow down to consumers. What we want to see is targeted and quality repercussions for bad actors.”

Ornstein said the large banks calling for the plan to be tabled may be calculating that whatever rule the Trump administration writes could be quickly overturned if the presumptive Democratic nominee, Joe Biden, wins in November.

“In a Biden administration, if the rule were to be implemented, at the end of the Trump administration, it would probably be withdrawn. It may not have a full shelf life as it is,” Ornstein said. “I think you’ll see a sea change in how these laws are enforced in a different administration.”

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HUD Redlining Bank of America Wells Fargo JPMorgan Chase Regulatory relief ICBA Mortgages