A New Defense Against Municipal Disparate Impact Claims

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Banks and non-bank lenders face a variety of fair lending disparate impact claims, which allege unintentional and unfavorable disparate impacts of otherwise neutral policies or practices on minority borrowers. Regulators, consumer groups and the mortgage industry have long debated whether disparate impact claims are permissible under the federal Fair Housing Act. Lenders take the position that they are not because the statute covers only intentional discrimination and not discriminatory effects, while consumer advocacy groups argue that discriminatory effects are implied in the statute.

Banks have defended themselves by relying on a 2005 Supreme Court decision, Smith v. City of Jackson, which held that the Age Discrimination in Employment Act only permits claims for intentional discrimination. Like the FHA, the ADEA does not include language covering discriminatory effects. The Supreme Court has twice agreed to hear FHA disparate impact cases in the last two years, but litigants in each case dismissed their appeals before the court could decide the issue. In a late March ruling that had nothing to do with either housing or discrimination, however, the court quietly established an alternative way to defend far-fetched claims—including under the FHA.

Originally Published in American Banker - May 28, 2014.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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