Disparate Impact to benefit the Suits?

Caroline Gerardo NMLS # 324982
Newport Beach, California
Mortgage Banker
cell  phone: (949)784.9699


The Mortgage Bankers Association released their report February 21, 2013 showing mortgage delinquencies are at their lowest levels since 2008.
Nationwide we have hit the “turn around” point. 
 The Mortgage Bankers Bureau has acknowledged several areas of concern regarding the Qualified Mortgage rule and potential negative impact on the access to and availability of mortgage credit to certain consumers.
The Bureau is asking mortgage brokers and bankers to apply pressure  under the Dodd/Frank Act and consider an extension to the effective date for the Qualified Mortgage for further analysis of the loans originated today and how originators are currently determining consumers ability to repay.

On February 8 2013, HUD issued a final rule authorizing so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The final ruling spells out the details for private or governmental plaintiffs challenging housing or mortgage lending practices that have a “disparate impact” on protected classes of individuals. This will open the door to lawsuits even if the practice is in reality neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. In other words, any protected class could file suit claiming under this rule that they were treated unfairly or over charged whether if it is true or not. The rule also will allow challenges based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.

This month HUD nailed down a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the final rule states that the defendant would have the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative” Defendants shoulder the burden of proof that the challenged practice “has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests.”

HUD explained in the rule’s preamble that, although it declined to use the term “business necessity” in the second prong of the disparate impact analysis, the phrase “substantial, legitimate, nondiscriminatory interest” is “equivalent to the ‘business necessity’ standard found in the Joint Policy Statement. The standard set forth in this rule is not to be interpreted as a more lenient standard than ‘business necessity.’” HUD also highlighted the removal of the word “manifest,” which was replaced by the language “a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” HUD noted that the revised language is “intended to convey that defendants and respondents . . . must be able to prove with evidence the substantial, legitimate, nondiscriminatory interest supporting the challenged practice and the necessity of the challenged practice to achieve that interest.”

Regarding the discriminatory alternative prong, HUD clarified that the alternative must also serve the specified interest supporting the challenge. However, HUD declined to specify in the rule that the less discriminatory alternative must be “equally effective” as the challenged policy – which would have made the rule consistent with the legal standard set forth in the Supreme Court case Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989).

The final ruling also itemizes these points:

  • HUD’s decision not to address comments raising objections to the rule based on the fact that the disparate impact standard is inconsistent with that set forth in Smith v. City of Jackson Miss., 544 U.S. 228 (2005) and Wards Cove.
  • HUD’s statement that the rule applies to pending and future cases because it is not a change in HUD’s position but rather a formal interpretation of the Fair Housing Act that clarifies the appropriate standards for proving a violation under an effects theory. HUD also chose not to conduct a cost/benefit analysis on this basis.
  • HUD’s clarification that the Fair Housing Act provides in these cases awards of damages, both actual and punitive. This means huge dollar lawsuits and the “suits” not consumers most always reap the benefits in legal fees.
  • Changes in the language in the regulation stating that unlawful discriminatory conduct under the Fair Housing Act includes “servicing of loans or other financial assistance with respect to dwellings in a manner that discriminates, or servicing loans or other financial assistance which are secured by residential real estate in a manner that discriminates, or providing such loans or financial assistance with other terms or conditions that discriminate” on a prohibited basis.
  • Language in the preamble restating HUD’s position that the Fair Housing Act applies to homeowner’s insurance.
This is interesting and I wonder if we will see insurance corporations catch what this could cost. Landlords will also be subject to this rule. How can a small landlord measure and report what quota of a protected class they rented to? Mortgage companies will provide statistical information on loans denied and fees charged measuring against these protected groups ( by racial group, religious affiliation, marital status, gay and lesbians?) Mortgage originators, insurance companies and insurance companies don't track all aspects of "protected groups." This opens up a dumpster of lawsuits to be poured into our court system. HUD failed to define the groups and nail down how to verify if a person was discriminated against. Does this mean a small individual landlord must rent his unit to a person with bad credit who also is a person of color?
What do you think?


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