Disparate Impact In Fair Lending: A Theory Without A Basis And The Law Of Unintended Consequences


The disparate impact theory of discrimination allows the government or a private plaintiff to establish discrimination based solely on the outcome of a neutral policy, without having to prove any actual intent to discriminate. Although the text of the Fair Housing Act (FHA) does not create liability for facially neutral activities with unequal effects, lower court decisions over the years have relied on jurisprudence focused on other statutes with different language, agency guidance, and selective readings of legislative history to permit disparate impact claims. The US Supreme Court more recently has issued several decisions undermining this broad focus on the goals of the FHA, holding that the plain language of an anti-discrimination statute—and not a broad interpretation of its purpose—is dispositive of whether disparate impact claims are permitted.

Nonetheless, these Supreme Court cases have not addressed the use of disparate impact under the FHA directly, and federal regulatory and enforcement agencies with fair lending enforcement authority seeking to achieve broad policy objectives increasingly seek to rely on disparate impact claims to advance their agenda. Because lenders have been reluctant to engage in protracted litigation with these agencies, disparate impact analysis continues to be effectively used to place affirmative obligations on lenders with respect to the underwriting and pricing of loans to protected-class borrowers designed to achieve statistical equivalence between groups. In effect, this result chills innovation and reduces the breadth of credit available to qualified borrowers, causing lenders to retreat from offering lending products and services that could increase vulnerability to claims of discrimination based only on statistical outcomes of objective and neutrally applied lending criteria.

The Supreme Court signaled its interest in addressing directly the threshold question of whether the FHA permits disparate impact claims last term and again this term, granting certiorari on the issue in two successive cases. However, with the active encouragement and participation of government agencies and/or community organizations receiving government funding, both cases settled shortly before oral argument, denying the Supreme Court the opportunity to rule on the longstanding issue.

Originally published in The Banking & Financial Services Policy Report; reposted with permission.

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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