This past month (February 2013), the US Department of Housing and Urban Development (HUD) published their Disparate Impact Rule as an amendment to the Fair Housing Act.
Under this ruling, parties are now potentially liable for discriminatory effects (disparate impact) and not just discriminatory actions. While the HUD rule established a three-part test for determining whether a practice with discriminatory effects violates the Fair Housing Act, this ruling shifts the burden of proof to the defendant on whether a given practice has an unjustified disparate impact on a protected class.
Under this Disparate Impact Rule, private accusers and government prosecutors can challenge housing or mortgage lending practices they claim have a disparate impact on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent! The rule also permits practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.
The result is this ruling likely makes it easier for the government or borrowers to win disputes over allegations of racial discrimination, even when there was no evidence of any intent to discriminate!
The mortgage industry is very concerned since that fine line between legitimate underwriting criteria and a potential disparate impact charge can easily be blurred. For example, an underwriting analysis of credit reports and credit scores legitimately helps lenders determine whether a borrower is credit-worthy. However, while there’s no discriminatory intent to setting minimum credit scores, some “protected classes” (minority groups) statistically have lower credit scores and might have difficulty meeting those minimum scores.
While the banking industry is keenly aware of these potential adverse liabilities, Realtors should be aware that they are equally at risk! For example, on Long Island, many neighborhoods tend to be segregated based on the economic capability (wealth) of the homeowners, as demonstrated by the price ranges of the homes in the neighborhood. These wealthier neighborhoods may also have lower ratios of minority homeowners – or home shoppers. Thus for example, a real estate office catering to high-end homes and estates may find themselves the subject of a disparate impact suit because their “practices” had a disparate impact on a protected class of individuals!
Think this is a bit far-fetched?
In September 2012, The US Department of Justice settled a case against Luther Burbank Savings Bank in California that challenged the bank’s minimum loan amount policy for its wholesale single-family residential mortgage loan program. The complaint alleged that Luther originated significantly fewer single-family residential mortgage loans to African-Americans, Hispanic borrowers, and homeowners in lower-income neighborhoods throughout California than comparable prime lenders. The alleged disparate impact was NOT due to overt discrimination; rather because these “protected classes” were not applying for the financially sophisticated (like interest only) jumbo loans which was this lender’s niche!
The bank agreed to a $2 million settlement.
Banks are arguing it’s unfair to level charges of discrimination merely because statistics show a particular lending practice has an uneven impact. While the banking industry is promising to fight the ruling in court, attorneys admit that under the current pro-regulatory administration, it will certainly be an uphill battle.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.