President Obama must decide whether to re-nominate a high-ranking Justice Department official whose Senate confirmation process has become tangled up in the dispute over when it is appropriate to charge banks with fair-lending violations.

The impasse centers around a behind-the-scenes deal the Justice Department struck last year with the city of St. Paul, Minn., in which city officials agreed to drop their Supreme Court appeal of a case that many observers believed would result in a curtailment of the federal government's use of a controversial legal theory in fair-lending cases.

In exchange for dropping its Supreme Court case, the city of St. Paul secured the Justice Department's agreement not to intervene in an unrelated lawsuit that could have yielded $180 million dollars or more in damages for U.S. taxpayers, according to congressional Republicans. Four GOP congressmen uncovered the DOJ's arrangement last September, and they are continuing their investigation.

The Obama Administration has stepped up the federal government's enforcement of fair-lending laws, establishing a unit inside the Justice Department that's dedicated to the issue and securing more than $500 million just from settlements with Wells Fargo and Bank of America's Countrywide unit.

The outcome in St. Paul, which Republicans call an inappropriate quid pro quo but which the Justice Department has defended, has become a flashpoint largely because of the high stakes for banks. Indeed, the industry is closely watching a court case in Mount Holly, N.J., that could be considered by the Supreme Court and raises similar fair-lending issues as the Minnesota case.

Under the legal theory at issue, the federal government need not find evidence that a lender intended to discriminate against minorities, but instead can prove its case by using statistics to show that the institution's lending policies had a disparate impact that harmed minority borrowers. Federal banking agencies support the disparate impact theory's continued use, while banks fiercely oppose it.

Last September, Obama nominated Tony West, formerly the head of the Justice Department's civil division, to become associate attorney general, which is the department's No. 3 position. West currently holds the post on an acting basis. His nomination for the permanent job expired this week when the most recent congressional session ended.

West was involved in the internal Justice Department discussions that led to the St. Paul deal, and Sen. Charles Grassley, the top Republican on the Senate Judiciary Committee, would like to use his confirmation hearing to ask questions about those deliberations in a public setting.

"Should the president decide to re-nominate Mr. West for a promotion at the Justice Department, he'll face some tough questions about what transpired at the department and his involvement," Grassley said Thursday in a written statement.

The question now facing President Obama is whether to re-nominate West, which could set the stage for a contentious confirmation hearing, or to choose someone else for the post. It is not clear that making another selection would defuse the partisan dispute.

The White House did not respond to a request for comment Thursday, nor did the Justice Department.

Grassley, of Iowa, also drew attention to 2009 congressional testimony in which West promised to defend taxpayer dollars through enforcement of the False Claims Act. That is the same law at issue in the case in which the Justice Department opted not to join plaintiffs that were suing the city of St. Paul.

"There are a lot of questions that need to be answered by Mr. West and others at the department regarding this deal," Grassley said.

Grassley has also been using his committee post as leverage to force the Justice Department to be more forthcoming with relevant documents.

In a Nov. 26 letter to Attorney General Eric Holder, Grassley pressed the Justice Department to turn over 1,202 documents related to the St. Paul case.

"It is unfortunate that Mr. West's nomination could be delayed by this request, but it is necessary because you have denied my staff access to documents essential to ensure adequate and appropriate Congressional oversight," Grassley wrote.

Senate investigators have been permitted to view the documents at issue, but have not been provided copies of them, according to a Republican Senate aide. The aide said the documents offer new details about the deal between the Justice Department and the city of St. Paul, but they do not provide a full picture of what happened.

For banks, St. Paul's decision to end its Supreme Court appeal of the disparate impact suit did not settle the legal issues surrounding the government's use of the controversial doctrine.

The Court is now considering whether to hear arguments in a similar case involving Mount Holly, N.J. The justices have asked the Obama administration's solicitor general to weigh in on the legal arguments in the case - in effect, deferring a decision about whether to hear the case.

Andrew Sandler, a lawyer who represents banks in fair lending cases and an outspoken critic of disparate impact theory, said that if the Supreme Court agrees to hear the Mount Holly case, its decision would likely be the most significant fair-lending development in recent years.

"Prior Supreme Court cases suggest a high likelihood that the Court would disallow the current aggressive overuse of the disparate impact theory in fair lending by the DOJ and other enforcement and regulatory agencies," Sandler said.

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