• Opportunity to Reduce Fair Lending Risk Eludes Banking Industry
  • March 14, 2012 | Author: Craig N. Landrum
  • Law Firm: Jones, Walker, Waechter, Poitevent, Carrère & Denègre L.L.P. - Jackson Office
  • The banking industry lost an opportunity to reduce its fair lending risk exposure when the U.S. Supreme Court dismissed Magner v. Gallagher, U.S. No. 10-1032, in February at the request of the appellant, The City of St. Paul. The city was sued by landlords in the city claiming the city’s enforcement of its housing code violated the Fair Housing Act ("FHA") because it reduced the supply of affordable housing for minority residents on a disproportionate basis. The U.S. Court of Appeals for the Eighth Circuit agreed with the landlords holding that the FHA allows bias claims on a disparate impact theory. In its motion for withdrawal, the city cited concerns that a victory would substantially undermine important civil rights enforcement throughout the nation under the FHA as well as the Equal Credit Opportunity Act ("ECOA").

    There are three primary legal theories for fair lending liability. The first is overt discrimination where there is open and blatant discriminatory conduct. The second is disparate treatment where members of a protected class are treated differently or less favorably than other applicants and there is no legitimate nondiscriminatory business purpose for the treatment. The third theory, which was at issue in the Magner v. Gallagher case, is disparate impact. Under the disparate impact theory, a lender may be held liable even where a policy that is neutral on its face has a substantial and disproportionately adverse effect on members of a protected class if there is no legitimate nondiscriminatory business purpose for the policy. In such cases, a lender is required to demonstrate a business justification for the policy and no less discriminatory alternative exists.

    Unlike overt discrimination and disparate treatment, there is no element of intent to discriminate required under the disparate impact theory. The disparate impact theory has been the basis of several fair lending enforcement actions and settlements and is the basis of the examination theory of the federal regulators, especially in the Home Mortgage Disclosure Act outlier program. If the City of St. Paul had won its case, a showing of intent to discriminate would be required in any fair lending action under the FHA and the ECOA by confirming that the FHA and ECOA do not permit disparate impact claims, unlike Title VII or the ADEA. Disparate impact lending discrimination charges are based on statistical analysis rather than proof of discriminatory intent with respect to a loan. A favorable decision could have reversed the ever increasing fair lending risk banks currently face due to the creation of the Office of Fair Lending and Equal Opportunity of the Consumer Finance Protection Board as well as the creation of an aggressive fair lending unit at the Department of Justice in 2010. The CFPB has repeatedly stated its fair lending exams will be statistically based. Thus, for the time being, banks will be subjected to extensive statistical analysis to detect discriminatory lending patterns with no defense of a lack of discriminatory intent.