Supreme Court Appeal Carries High Stakes for Banks

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Banks may finally get their long-awaited fair-lending decision from the Supreme Court.

The nation's top court is expected to announce Monday whether it will hear arguments in a lawsuit that banks hope will sharply reduce their legal exposure to allegations of lending discrimination.

The Supreme Court agreed to hear a similar case in 2011, but the defendants in that suit eventually dropped their appeal following some controversial arm-twisting by the Obama administration.

The pending case involves a redevelopment plan in the town of Mount Holly, N.J. A group of African-American and Hispanic residents who would be displaced from their homes under the plan sued the town, alleging that the redevelopment would have a disparate impact on minorities.

The plaintiffs won before a federal appeals court, and now the town is appealing to the Supreme Court.

At stake is whether the Fair Housing Act of 1968 allows lawsuits in instances where there is no evidence of any intent to discriminate, but the defendant's actions nonetheless had a disparate impact on minorities.

Fair-lending suits against banks — not only in the mortgage realm, but also in credit card and auto lending — frequently rely on this same legal theory. Such cases have become a bigger worry for lenders under President Obama, whose administration has stepped up federal enforcement efforts.

Bankers argue that using statistical techniques to ferret out patterns in the racial impact of specific lending policies holds them to an unfair standard.

Paul Hancock, a bank industry lawyer at K&L Gates, notes that studies by the government have shown that African-Americans, on average, have lower credit scores than whites. "It's very important that the government recognize that the fair and equal application of non-discriminatory credit standards should not be the basis for suing lenders," Hancock says, "simply because the racial or ethnic outcomes do not satisfy the law of chance."

Neither the Obama Administration nor any banking groups are parties to the New Jersey lawsuit, but they are fighting the issues out in papers filed with the Supreme Court.

The Mortgage Bankers Association, the Independent Community Bankers of America and the American Financial Services Association and other industry trade groups are urging the Supreme Court to hear arguments in the New Jersey case, while the Justice Department is advising the Court not to get involved.

Fair-housing advocates prefer not to roll the dice with the Supreme Court because lower courts have generally backed their side of the argument. Their preferred outcome would be for the town of Mount Holly to reach an out-of-court settlement with the affected citizens, which would end the case.

"I hope that the sides can come together with an amicable resolution," says Shanna Smith, president of the National Fair Housing Alliance.

If the Supreme Court does hear the case, both sides appear to have promising legal arguments to present to the justices.

"Most people would probably handicap it as too close to call," says Anand Raman, a lawyer at Skadden Arps who frequently represents lenders.

Advocates for minorities and the Obama Administration will point to a February 2013 rule issued by the U.S. Department of Housing and Urban Development, which states that fair-housing cases may be brought when lending policies have a disparate impact on minority groups.

The HUD rule is considered important because of a line of Supreme Court decisions that give deference to executive branch agencies in interpreting federal laws. In this instance, HUD determined that the decades-old language of the Fair Housing Act should be interpreted to allow suits even if there is no evidence of any intent to discriminate.

John Culhane, a banking industry lawyer at Ballard Spahr, argues that the Obama administration wrote the HUD rule with the legal stakes in mind.

"That clearly was the intent of HUD," he says, "to issue the rule and to argue that it should be accorded deference."

In the New Jersey dispute, lenders point to another, more favorable series of Supreme Court decisions, which emphasize the importance of the actual text of the relevant law. Unlike some other federal laws, the Fair Housing Act does not include certain language that would put the disparate impact theory on more solid legal ground.

Still, because of the new HUD rule, bank industry lawyers look back to the 2011 case, which involved the city of St. Paul, Minn., as a missed opportunity.

After the Supreme Court agreed to hear arguments in that case, the Obama Justice Department persuaded the city of St. Paul to end its appeal, allegedly in exchange for a promise that the federal government would not join another unrelated lawsuit against the city. The Obama administration's maneuvering sparked howls of protest from Republicans on Capitol Hill.

If the Supreme Court decides to hear the New Jersey case, Justice Antonin Scalia figures to be a key vote.

In a 2005 case involving alleged employment discrimination, Scalia split with Justice Anthony Kennedy and other members of the court's conservative wing who argued that the relevant law did not allow disparate impact claims. Scalia argued in favor of deferring to the judgment of the executive branch.

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