The Supreme Court recently handed down a decision related to the disparate impact theory of liability and it has important ramifications for mortgage lenders. The Court specifically found that this theory can be applied to the Fair Housing Act. This calls for lenders to be more aware and rigorous in both the testing and analysis of business practices that could in any way be perceived as discrimination.
Meaning of the Fair Housing Act
The Fair Housing Act, among many other stipulations, prohibits individuals from refusing to rent or sell a property, denying, or otherwise making a particular dwelling unavailable to someone based on a protected characteristic. This brings discrimination to the front and center for all lenders, especially because anything perceived as discrimination could now be grounds for legal trouble.
The Court’s Ruling
The Supreme Court was split 5-4 on this case. The final ruling held that the language in the Fair Housing Act could be interpreted to mean that neutral practices or polices that lead to discriminatory effects could be illegal, even if there is no intent to discriminate. It’s not a cut and dry issue, though: it all falls down to the evidence and burden of proof and whether the case is disparate treatment or disparate impact.
How This Influences Lenders
Let’s walk through what this would look like in a potential case with disparate treatment. A lender who has been accused of discrimination would need to show the court that a policy or practice deemed to have a discriminatory effect was based on non-discriminatory reasons. Unless a plaintiff was able to show that the policy or practice was intended for discrimination, a lender would prevail.
That’s not the case with disparate impact, however. The burden falling to the lender is much bigger in this scenario. A plaintiff only has to show that a policy, even if it appears to be a neutral one, has the ultimate impact of discriminating against a particular group. The plaintiff simply must draw the connection between the policy and the outcome of discrimination.
In response, the lender has to show that the policy in question is a “business necessity”. In order to show this, the lender must be able to demonstrate that the policy or question serves the company’s employment goals. In reaction, a plaintiff might argue that there are other practices that could serve this same need without the impact of discrimination.
In order to combat this potential risk, lenders need to constantly conduct regression testing. Disparate patterns of lending mean that a lender may have to argue why the practices behind it are essential for the company. Knowing potential alternatives could be beneficial for avoiding legal action as well.
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