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Two federal lawsuits brought by the Equal Employment Opportunity Commission last week spotlights an issue that is getting increasing attention from home mortgage lenders, rental property owners, local governments, and now the U.S. Supreme Court: “disparate impact.”
Disparate impact is a legal theory that has been aggressively advocated by the Obama administration. It holds that even if you have no intent to discriminate against a “protected class” of persons under the U.S. Civil Rights Act — whether racial or ethnic minorities, senior citizens, handicapped individuals or others — you may be in violation of the law if your policy or action disproportionately harms that class.
Last week’s suits by the EEOC challenged employment background check programs used by Dollar General Stores and auto manufacturer BMW’s South Carolina plant. Both companies routinely screen job applicants for past criminal activities.
The EEOC charged that by rejecting applications from people who have criminal convictions on their records, the two companies “disproportionately screened out African Americans from jobs” and that their policies “are not consistent with business necessity.”
What’s this got to do with housing or mortgages, you might ask? Plenty. Last week a delegation representing the tenant screening data industry called on HUD to scrap the disparate impact rules it adopted in February that open rental real estate owners “to costly discrimination litigation” if they screen out applicants who have been previously convicted of violent crimes and felonies. Such a policy puts landlords and property managers into an impossible conflict situation, argued the National Consumer Reporting Association.
On the one hand, HUD’s own Section 8 voucher program rules require landlords to refuse to rent to people who have been convicted of certain crimes, such as running a methamphetamine lab inside a prior residence. On top of that, many local ordinances — the group cited Chicago and Milwaukee — “hold landowners responsible for the actions of those renting their properties. This is mandated on the assumption that owners are able to screen and reject potential renters who display historical behavior that could lead to future similar malevolences and, in turn, landowner punishment.”
Yet HUD’s final disparate impact rule puts rental property owners in potential legal jeopardy if they refuse to rent to applicants with certain criminal convictions. They risk money-gobbling lawsuits for doing what they are required to do under federal and local regulations.
In the case of the Section 8 program, it’s especially troubling, the National Consumer Reporting Association said. The HUD office that handles Section 8 subsidized rentals is telling landlords to do something that could trigger legal action from another office inside HUD, the fair housing and equal opportunity division.
But HUD and the EEOC are not the only players in this controversy. The Consumer Financial Protection Bureau, which has regulatory authority over the Equal Credit Opportunity Act, has announced that it plans to apply a disparate impact theory of discrimination to lending, including mortgages.
CFPB’s biggest mortgage regulatory project , the Qualified Mortgage rule, which is set to take effect next January, essentially creates a national screening process to separate out people who don’t have the “ability to repay” loans or whose debt-to-income ratios exceed 43 percent. (When the rule is first implemented, loans that pass Fannie Mae, Freddie Mac or FHA automated screening will have a temporary exemption. The QM rule also screens out certain high-risk loan features such as negative amortization, interest-only and balloon payments.)
Once up and running, QM is virtually certain to exclude large numbers of applicants, with potentially greater relative impacts on modest-income and minority borrowers than others.
Will compliance with CFPB’s screening process expose lenders to disparate impact litigation, or threats of litigation? Earlier this month, eight trade associations — mainly representing banks and mortgage companies — wrote to HUD Secretary Shaun Donovan and CFPB Director Richard Cordray asking that very question.
Currently “there is no guidance” from either HUD or CFPB on how lenders can escape liability under the disparate impact theory, the group said, even though lenders may have no discriminatory intent. By toughening underwriting standards for mortgages, it’s entirely possible that fewer African-American and Latino homebuyers will be able to qualify for financing.
Certainly that constitutes a disparate impact, but like the Section 8 landlords, different government agencies or offices appear to be telling lenders to do contradictory things: On the one hand, they’re supposed to screen out applicants who may not be able to afford the loan. On the other, if their screening has a disproportionate impact on one or more minorities, lenders may be open to civil rights suits or threats of suits.
The lending groups asked both HUD and the CFPB to provide some urgently needed pointers including how “to assess less discriminatory alternatives in the context of complying with federal guidelines.”
No word yet on that from either agency.
Meanwhile, on Monday the U.S. Supreme Court agreed to rule for the first time on the application of disparate impact theory to fair housing. The court accepted the case of Mount Holly v. Mount Holly Gardens Citizens in Action Inc., which involves a claim of disparate impact by residents of a neighborhood targeted for redevelopment by the Township of Mount Holly, N. J.
A decision is not expected until next year, but it could be a landmark ruling for rental real estate owners, mortgage lenders and employers.
Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.