Fair-lending doctrines could take beating from conservative court

WASHINGTON — The industry lost a Supreme Court battle in 2015 protecting the use of "disparate impact" in housing discrimination cases, but legal observers see potential for the fair-lending tide to turn if Judge Brett Kavanaugh is confirmed to the high court.

The 2015 ruling, related to how Texas awards housing tax credits, bolstered the legal standard under the Fair Housing Act that lenders can be punished for a discriminatory result they did not intend.

But the court has yet to resolve questions on two other topics related to fair lending that experts say could have more favorable results for banks if the Supreme Court moves even further rightward with the addition of Kavanaugh.

Yuri Gripas/Bloomberg

One deals with whether disparate impact applies to cases argued under a different law, the Equal Credit Opportunity Act. The other involves whether cities and other jurisdictions can claim damages, such as lost tax revenue or foreclosure-related costs, from lending policies alleged to have harmed minority borrowers.

"To the extent that you have a more liberal judge, they are more likely to say that disparate impact is fully applicable under ECOA," said Rod Alba, senior vice president for mortgage finance at the American Bankers Association. "To the extent that you have a more conservative judge, they are more likely to rule that disparate impact does not apply under ECOA."

But the other question, regarding cities arguing that a bank's discriminatory lending practice was a "proximate cause" of injury, may come up sooner with at least three different lawsuits moving through lower courts.

"Where we think the law can develop is in further establishing what exactly is that robust causality, what is that proximate cause. That’s where we think the court could set a very high bar," said Richard Andreano, practice leader of Ballard Spahr's Mortgage Banking Group. "While it would allow the claims still to exist, it could set the bar very high to really limit it to cases where the plaintiff clearly showed that the practice they were complaining of did in fact lead to the disparate results that they’re citing."

Last year, in the case of Bank of America Corp. v. City of Miami, the Supreme Court held that the city of Miami had standing to bring the case under the Fair Housing Act, but did not adequately demonstrate that the bank's practices were a proximate cause of injuries suffered by the city.

The justices ruled 5-3 that the city could sue, with Chief Justice John Roberts siding with the liberal wing of the court. However, the Supreme Court did not define or set the boundaries required to establish proximate cause, and left the issue up to a lower court.

“Sometimes you’ll look at a situation and there will be multiple things that went wrong, but each one of those things that went wrong isn’t the thing that caused the injury,” said Michael Rakower, an attorney at Rakower Law in New York. “You have to find the thing that caused the injury and that’s the proximate cause.”

Ralph Wutscher, an attorney at Maurice Wutscher in Chicago, said the decision suggested that plaintiffs had to show true causality beyond mere "ripples of harm" in the housing market.

Additional litigation centered on proximate cause is moving forward in numerous jurisdictions, and is “likely to develop in a fractured manner leading ultimately to an eventual determination by the Supreme Court,” Wutscher said.

One such case is County of Cook v. Wells Fargo & Co., in which the Illinois county said the bank’s allegedly discriminatory mortgage lending and servicing practices led to increased administrative costs for foreclosures, decreased tax revenue and racial instability.

While the U.S. District Court for the Northern District of Illinois found that there was a connection between Wells Fargo’s practices and some of the alleged harm, it also ruled that decreased tax revenue and racial volatility were not a direct result.

A similar case in a different court — City of Philadelphia v. Wells Fargo & Co. — had a different result: The U.S. District Court for the Eastern District of Pennsylvania did side with the city of Philadelphia that racial stability was directly affected by discriminatory lending practices.

"The courts — including eventually the Supreme Court of the United States — could end up ruling in favor of the banks in a number of different ways, but one way that may be more likely than others would be a ruling that neither [Cook County nor Philadelphia] properly demonstrated that any of the claimed damages were proximately caused by any alleged violation," Wutscher said.

Andreano said that if Kavanaugh is confirmed to sit on the court, "the bench might seek to further define that standard in a way that requires more concrete allegations and claims to actually have a successful claim that would get past a motion to dismiss.”

Meanwhile, the Department of Housing and Urban Development has signaled it is looking to soften its rule on disparate impact. In June, the department released an advance notice of proposed rulemaking asking for public comment on decreasing regulatory burden, providing more clarity and whether the rule should provide defenses or safe harbors to claims of disparate impact liability. Under the Obama administration in 2016, the rule was revised after the Inclusive Communities ruling.

Housing advocates worry about fair-lending cases losing the momentum from the gains in the 2015 Texas ruling.

“It is more important now more than ever, when our nation faces a housing crisis and persistent segregation, that we preserve the full use of the disparate impact doctrine to protect returning veterans, survivors of domestic violence, people with disabilities, rent-burdened tenants, and everyday hardworking families,” said Lisa Rice, the head of the National Fair Housing Alliance.