A controversial legal theory on discrimination threatens to disrupt consumer lending and poses a potential liability for anyone securitizing these loans.

Called “disparate impact,” it is being used by the Department of Housing and Urban Development (HUD) to cite lenders for unintentional discrimination against minorities and others under the Fair Housing Act. The Consumer Finance Protection Bureau (CFPB) has also used disparate impact to cite finance companies under the Equal Credit Opportunity Act, or ECOA.

In June 2013, two insurance-industry trade groups filed a lawsuit contesting a rule enacted by HUD to codify a longstanding disparate-impact doctrine. HUD sought the rule in part because the two earlier cases contesting the doctrine were settled before the Supreme Court had a chance to review them.

“There was a feeling HUD was going through this rulemaking proceeding both as a prelude to greater enforcement activity and to bolster judicial deference to its position, since having a formal rule out there would codify its interpretation of the statute,” said John Culhane, a partner at Ballard Spahr.

Related Practice

Consumer Financial Services