Two recent court decisions zero in on the toughest areas of fair-lending: how to prove a bank policy is biased and how to distinguish between an honest mistake and a discriminatory decision to deny credit.

The Supreme Court indirectly tackled the first issue May 13 in United States v. Armstrong. The court ruled that the defendant in this drug case had to do more than prove a government policy affected minorities more than whites. Rather, the justices said, he had to that whites in similar circumstances were treated better.

The ruling is a major defeat for the disparate-impact theory of discrimination, according to Robert Ledig, a partner at the Washington law firm of Fried, Frank, Harris, Shriver & Jacobson. Disparate-impact holds that a racially neutral policy can cause discrimination if it adversely affects more minorities than whites.

The Justice Department has threatened to bring disparate-impact cases against banks, alleging that loan policies caused a disproportionate number of qualified minorities to be rejected for credit. The department has not yet alleged this offense, however.

In the appeal, Christopher Lee Armstrong, who was arrested in 1992 for trying to buy and sell crack cocaine, challenged his prosecution by federal authorities. He said the U.S. Attorney's Office for the Central District of California selected only black defendants to prosecute under the tougher federal drug laws. He supported his challenge with a study showing that all of the 24 defendants targeted in this federal prosecution were black.

The justices, however, said Mr. Armstrong needed to prove that federal prosecutors skipped over similar white defendants.

Mr. Ledig said this requirement strikes at the heart of disparate- impact. He said the Justice Department won't be able to prove a case simply by showing that banks rejected qualified minorities. Rather, it would have to prove the bank approved similar white applicants. "The presumption at the Justice Department has been that, all things equal, you should have equal rejections," he said. "The court didn't buy that."

A second case went even further. The U.S. Court of Appeals for the Fifth Circuit in New Orleans overturned on May 31 the jury's verdict in a fair- lending case against First Madison Bank in Houston. The court said a litigant has to do more than simply show the bank improperly applied its underwriting standards. Rather, it must show the bank intended to discriminate.

The court said the Fair Housing Act "does not create a cause of action for bungling a deal" or "failing to follow industry custom." Rather, the law simply prohibits banks from using race as a factor in lending decisions, it said.

Andrew Sandler, a partner at the Washington law firm of Skadden, Arps, Slate, Meagher & Flom, said the decision distinguishes for the first time between banks that rejected an applicant by accident and those that rejected the person because of race.

However, Paul Hancock, chief of the housing and civil enforcement section at the Justice Department, said neither case weakens the department's enforcement efforts.

When the department brings a disparate-impact case, it will be backed by evidence that whites were treated differently, he said. In addition, the department prosecutes discrimination, not mistakes, Mr. Hancock said.

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