In a case that could have both direct and indirect impacts on consumer finance litigation, the U.S. Supreme Court has agreed to decide whether plaintiffs suing under the Fair Housing Act may bring disparate impact claims and, if so, the proper test for such claims.

The justices’ November 7 decision to grant certiorari in Magner v. Gallagher may have broad ramifications, extending to fair lending litigation and even regulatory enforcement.

In Magner, a group of rental property owners in St. Paul, Minnesota, sued the City of St. Paul and a number of city officials, claiming that enforcement of the city’s housing code increased costs to rental property owners, and, in turn, reduced the availability of affordable housing in the city. This allegedly had a disparate impact on the availability of housing for racial minorities, because such minorities were disproportionately represented in the City’s affordable housing market.

The trial judge dismissed the case on summary judgment, concluding there was insufficient evidence of disparate impact or, in the alternative, that the plaintiffs failed to show an alternative method by which the City could accomplish the legitimate, non-discriminatory purposes of its housing code.

On appeal, the Eighth Circuit reversed, holding that the plaintiffs had presented sufficient evidence of disparate impact. In doing so, the Eighth Circuit assumed that disparate impact analysis was a viable method to establish a violation of the Fair Housing Act, following earlier circuit precedent. The Eighth Circuit applied its own three-part test to analyzing the plaintiffs’ disparate impact claim—a test that varies among the federal courts of appeal.

Now the Supreme Court has agreed to decide two questions: (1) whether disparate impact claims may be brought under the Fair Housing Act, and (2) if so, what is the appropriate legal test for analyzing such claims, among the various tests adopted by the circuits. Both of these issues could have a significant impact on fair lending litigation at the private and governmental levels.

Coincidentally, the Department of Housing and Urban Development released a proposed rule under the Fair Housing Act on November 16, 2011, the purpose of which is to “establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act.” The HUD notice in the Federal Register recounts the history of the disparate impact theory under the Fair Housing Act, and details the varying tests adopted by the federal circuits, even citing the Eighth Circuit’s decision in Magner as an example of the standard that HUD proposed to adopt in its rule.

Presumably, the HUD proposed rule was conceived before the Supreme Court granted certiorari, but it nonetheless injects the question of administrative deference as an issue that the Supreme Court will confront in deciding Magner.

With regard to the questions before the Supreme Court, the viability of disparate impact claims under the Fair Housing Act is an issue that could affect mortgage lenders both directly and indirectly.

From a direct standpoint, it is not uncommon for fair lending litigation brought against mortgage lenders to be brought in part under the Fair Housing Act. If the Supreme Court holds that disparate impact claims cannot be pursued, it will take away one of the legal avenues that private and governmental litigants could use in such cases.

But, more broadly, if the Supreme Court holds that disparate impact claims are not actionable under the Fair Housing Act because of a lack of plain-language support, and disagrees with HUD’s interpretation of the statute, it would carry serious implications for disparate impact claims under the Equal Credit Opportunity Act. Like the Fair Housing Act, ECOA does not explicitly permit disparate impact claims, but there is a long-standing administrative interpretation in Regulation B that asserts that disparate impact claims can be brought under ECOA. Thus, it is possible that the Supreme Court’s decision in Magner may profoundly impact ECOA as well as the Fair Housing Act.

Moreover, even if the Supreme Court upholds the availability of disparate impact as a theory for relief under the Fair Housing Act, it will have the opportunity to definitively set forth the applicable analytical model for proving such claims, and to provide guidance to lower courts on the type of evidentiary showing that a plaintiff must make in order to pursue a disparate impact claim. Again, if the Court reaches this issue, it is highly likely that its ruling will affect disparate impact analysis in a broader context than the Fair Housing Act, and may well be applied to ECOA claims.

This is not merely a litigation issue. It also reaches regulatory compliance and examinations. The Consumer Financial Protection Bureau has expressly incorporated both disparate treatment and disparate impact testing into its Mortgage Servicing Examination Procedures, and the Supreme Court’s decision in Magner may either remove disparate impact analysis from the picture altogether, or may change how both the CFPB and examined institutions look at testing for disparate impact. The Supreme Court’s decision will definitely be one for lenders to watch very carefully.

Ballard Spahr’s Consumer Financial Services group produces the CFPB Monitor, a blog that focuses exclusively on important developments at the Consumer Financial Protection Bureau. To subscribe, use the links provided to the right.

The Consumer Financial Services group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Mercedes K. Tunstall, 202.661.2221 or tunstallm@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com; Christopher J. Willis, 678.420.9436 or willisc@ballardspahr.com; or Stefanie H. Jackman at 678.420.9490 or jackmans@ballardspahr.com. 


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