-
A new federal rule issued by the Department of Housing and Urban Development on housing discrimination will likely make it harder for banks to prevail in fair-lending disputes.
February 11 -
The regulatory maze currently being created under the pretext of helping the consumer and preventing the next housing bust will do neither and will continue to impede the recovery.
October 10 -
The Justice Department's latest fair lending report shows the agency has no signs of slowing its enforcement activity, which peaked in 2011 with the help of banking regulators.
March 30 -
Instead of pushing to avoid risk retention or liability for future frauds, banks that want to originate and sell mortgages should focus on containing and rolling back the disparate impact doctrine, which seems sure to savage them.
November 19
On Feb. 8, the Department of Housing and Urban Development issued a rule clarifying the circumstances under which certain practices may violate the Fair Housing Act as a result of a discriminatory effect.
Referred to as the disparate impact rule, this directive explains the longstanding prohibition under the law of practices that have a discriminatory effect even where there may not be evidence of discriminatory intent.
But to more fully realize the objectives of the law, it appears certain key misunderstandings must be clarified, particularly on the part of some housing providers.
Under the law, as clarified by the new rule, when a practice results in the denial of a service (e.g. refusing to rent an apartment or approve a mortgage loan) or unfavorable terms and conditions under which that service is available to members of protected classes, it would violate the Act if it did not serve a substantial, legitimate, and nondiscriminatory interest. (Protected classes under the law are race, color, religion, sex, handicap, familial status, or national origin.) If the practice did serve such a purpose, but the complainant can show a less discriminatory alternative is available that would equally serve that purpose, the practice in question would also violate the law. The rule makes clear that those practices having a negative impact on racial minorities and other protected classes are fully in compliance if they serve a significant business objective and no less discriminatory alternative is available to serve that interest.
While the rule is new, the disparate impact standard is not. This rule does not change the substance of the law in any way. It simply clarifies a longstanding policy in fair housing enforcement. For more than 40 years HUD, the Department of Justice, and other enforcement agencies have enforced the disparate impact standard, under Democratic and Republican administrations. All 11 circuit courts that have considered the issue of whether or not Congress intended for the law to prohibit such practices that had a discriminatory effect have ruled that this in fact was the intent.
There have been minor variations among the courts in the ways the disparate impact standard has been carried out. For example, in some circuits it is the defendant who had to prove there was no lesser discriminatory alternative that would serve the business purpose of a challenged practice that had a discriminatory effect for the practice to be in compliance. But in most circuits it was the complainant who had to show there was such an alternative for the practice to be struck down. Under this rule, it is now clear that it is the complainant who must make the case. Despite the few variations that have existed across the circuits, all have confirmed that there is a disparate impact standard under the law. This rule eliminates those inconsistencies.
One concern that has, mistakenly, been attributed to the Fair Housing Act and related fair housing rules is that they virtually require housing providers, particularly mortgage lenders, to implement racial quota systems. In an editorial entitled "
But this rule will not require a quota or any other specific remedy. It does require housing providers to offer evidence that a practice having a discriminatory effect serves an important business objective. So the rule increases, rather than reduces, the likelihood that mortgage lending, and the provision of other housing related services, will be based on objective evidence rather than subjective judgment – reducing the incentive to introduce anything like a quota system. The fact that evidence of intent to discriminate is not a requirement does not translate into a requirement to meet any particular numerical target. A question arises as to why any housing provider would want to continue a practice that did have a discriminatory effect but served no business objective.
A related concern is that the new rule will require lenders to make loans to unqualified borrowers, precisely the practice that (once again, it is wrongly argued) led to the foreclosure crisis, undermining efforts to revitalize communities hurt by previous (and possible future) crises.
The Fair Housing Act and other rules require housing providers to offer services on the basis of objective, non-racial considerations. In mortgages, this has meant requiring lenders to use fair, transparent, and sound underwriting. The foreclosure crisis resulted from the many lenders that refused to do so. So-called liar loans where income was not verified (or, worse, was fraudulently overstated) and other predatory practices resulted in many loans underperforming. That is what led to the housing bubble and foreclosure crises that followed. Such predatory practices were targeted to minority communities and minority borrowers were steered to subprime, often predatory, loans at a much greater rate than whites. Research by the Fed and others shows that the rate of subprime lending was much greater in minority markets and research by the Center for Responsible Lending and others showed that predatory loans were more aggressively marketed there.
The
Perhaps the most provocative interpretation of the new rule is, as Roger Clegg, president of the Center for Equal Opportunity, incorrectly argued in a
Finally, there is concern that the disparate impact rule will encourage expensive, unnecessary, and often frivolous lawsuits. Again, by clarifying the longstanding policy and removing the inconsistencies in enforcement, lawsuits should be minimized. Providers of housing and housing related services will be better informed about the law's requirements, enabling them to more effectively avoid legal action. Such enhanced voluntary compliance will result in the initiation of fewer lawsuits. In addition, courts have tools available to readily dismiss truly frivolous lawsuits.
By clarifying what the law requires, HUD's disparate impact rule should resolve many of the current misunderstandings, resulting in far fewer legal actions. One consequence will be the targeting of scarce enforcement resources to those cases where there are more likely to be violations, enhancing the efficiency and effectiveness of fair housing law enforcement.
Gregory D. Squires is a professor of sociology and public policy and public administration at George Washington University.
