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Final Rule on Disparate Impact Issued

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Despite industry opposition, the Department of Housing and Urban Development has issued a final rule that can find mortgage lenders guilty of discrimination even if there was no intent to discriminate.

Lending discrimination is prohibited by Title VIII of the Civil Rights Act of 1968, also known as the Fair Housing Act.

HUD’s longstanding interpretation of the law is that lending practices which have the effect of discrimination are prohibited whether or not the lender intended to discriminate.

The federal housing agency says its interpretation is in line with rulings from 11 federal appeals courts.

But since the law doesn’t spell out how to prove disparate impact discrimination, “HUD and courts are in agreement that practices with discriminatory effects may violate the Fair Housing Act, there has been some minor variation in the application of the discriminatory effects standard.”

So HUD released Implementation of the Fair Housing Act’s Discriminatory Effects Standard on Friday. The final rule, which hasn’t yet been published in the Federal Register, becomes effective 30 days after it is finally published.

The final rule, which was first proposed in November 2011, formally establishes a three-part burden-shifting test currently used by HUD and most federal courts. HUD says that the rule will provide “greater clarity and predictability for all parties engaged in housing transactions as to how the discriminatory effects standard applies.”

“Under this test, the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic,” HUD explained in the final rule. “If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If the respondent or defendant satisfies this burden, then the charging party or plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.”

The final rule came despite opposition from industry groups.

In July 2012, the American Bankers Association provided a white paper to HUD, the Consumer Financial Protection Bureau and the Department of Justice urging an end to the use disparate impact analysis. ABA said that such analysis is based on unsupported legal theory.

“Disparate impact relies on a legal theory that more recent Supreme Court cases have found invalid,” ABA President and Chief Executive Officer Frank Keating said in a statement. “Using disparate impact creates unnecessary compliance risk, limiting credit availability and driving up the cost of borrowing.”

In an October 2012 interview with Mortgage Daily, Mortgage Bankers Association President and CEO David H. Stevens noted that HUD’s disparate impact rule and the Qualified Mortgage’s ability-to-repay rule appear to be “a case of where one rule the federal government is promoting could produce an outcome that the federal government will be punishing,” leaving lenders in a no-win situation.

Luther Burbank Saving agreed to a $2 million settlement in September 2012 with the Justice Department to resolve allegations of disparate impact. The Santa Rosa, Calif.-based company had a minimum $400,000 residential loan amount for loans originated through its wholesale lending channel. That policy allegedly had a disparate impact on the basis of race and national origin — with just 6 percent of all of the bank’s Los Angeles loans made to black and Hispanic borrowers from 2006 to 2011.

A settlement was reached in July 2012 between GFI Mortgage Bankers Inc. and the Department of Justice overall alleged violations of the Fair Housing Act and the Equal Credit Opportunity Act. GFI’s practice of charging minorities higher pricing allegedly produced higher mortgage rates for minority borrowers that had a disparate impact.

Wells Fargo & Co.’s $175 million settlement that same month with the Justice Department resolved alleged disparate impact on mortgages to black and Hispanic borrowers. The settlement was accompanied by Wells Fargo’s closing down its wholesale lending division.

“The DOJ claims are based on a statistical survey of Wells Fargo Home Mortgage loans between 2004 and 2009, and the claims primarily relate to mortgages priced and sold to consumers by independent mortgage brokers,” according to a statement from Wells Fargo.

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