Supreme Court may be denied chance to rule on case with big implications for mortgage lenders

Lawsuit that would provide clarity on Obama administration’s discrimination test could settle

Mortgage lenders, real estate owners, brokers and others who are counting on the U.S. Supreme Court to torpedo the Obama administration’s “disparate impact” attacks don’t know it yet, but it looks like the court might not get to rule on the issue in its new term that began yesterday.

Based on discussions with some of the key protagonists in the case — “Township of Mount Holly v. Mt. Holly Garden Citizens Action Inc.” — I think it’s likely that the case will be settled before the court can formally hear arguments on it.

Supreme Court image via Shutterstock.
Supreme Court image via Shutterstock.

That would greatly please the White House and Justice Department, who fear that the conservative majority on the court is eager to get a chance to nullify their controversial interpretation of the Fair Housing Act — an interpretation that has already cost major mortgage lenders millions of dollars and worried rental real estate owners, employers, the automobile industry and other business interests nationwide.

Disparate impact theory boils down to this: Proponents like the Obama administration believe the Fair Housing Act prohibits not only intentional discrimination against minorities, but also extends to discriminatory effects of policies, where one group is treated differently from others, even though there was no intent to do so.

Critics of the administration’s interpretation dispute this vigorously, arguing that there is no reference to disparate impact in the Fair Housing Act, only intentional discrimination.

In the Mt. Holly case now on the high court’s docket, a New Jersey neighborhood that had crime and property condition problems was targeted for urban renewal by the local township government. The project involves acquiring and demolishing dwellings and replacing them with new mixed-use commercial and residential development. Some current residents would qualify for the new housing units, but others would be displaced or be unable to afford them.

Since the residents in the targeted area, known as Mt. Holly Gardens, are predominantly minorities, they sued to stop the project on disparate impact grounds, among other arguments. Although they could not prove that the township government intentionally sought to discriminate against them, they maintained that the net effect of the renewal plan is disproportionately harmful to minority groups.

The case was accepted by the Supreme Court for its new term despite a request by the Department of Justice that it reject it. Financial groups — mortgage lenders and bankers — filed a friend-of-the-court brief last month urging the court to examine the negative impacts of disparate impact theory on the underwriting standards that are widely used in industries where consumers make extensive use of credit.

The brief argued that because African-Americans and Hispanics have lower credit scores and lower financial reserves on average compared to whites, most lenders are vulnerable to disparate impact accusations simply because they reject more minority applicants or quote them higher interest rates using risk-based statistical models in their underwriting. Fannie Mae and Freddie Mac, now run in conservatorship by the federal government itself, also employ risk-based models that yield disparate results because they rely on credit scoring.

Prominent lenders including Bank of America and Wells Fargo have settled suits filed by Obama’s Justice Department on disparate impact grounds. Late last month, Plaza Home Mortgage settled a similar suit, but later protested that Justice’s allegations were flawed and unfair.

Now it appears the court may not get a shot at deciding which interpretation of the fair housing law is correct. In discussions I had last week with lawyers on both sides of the Mt. Holly Gardens case, it became apparent that they are determined to settle the underlying issues locally, and hope to do so in the coming weeks. These issues include replacement units for residents, compensation to assist those who have to move and details related to the redevelopment plan itself.

Olga Pomar, a Camden, N.J.-based legal services attorney who represents a number of the plaintiffs, confirmed that “we have settlement discussions ongoing … I am optimistic,” she said.

George R. Saponaro, who represents Mt. Holly Township in the case and serves as the municipality’s solicitor, told me that “we’re resolving all the differences,” including demands by the remaining homeowners and tenants. Saponaro said the objective of the current township administration is to try to reach out and deal with the concerns of the remaining residents and to speed up the process leading to a final settlement of the case.

“We’re close to it (resolution) in principle,” he said, though “we’re never going to satisfy (everybody) completely.”

If the Mt. Holly case does settle, it will not remain on the Supreme Court’s docket. It will also be the second time that a disparate impact case accepted for high court review settles before the justices get a chance to hear arguments. In a controversial move two years ago, the Justice Department convinced the city of St. Paul, Minn., to settle a disparate impact case involving rental housing policies, reportedly because the administration was concerned about a negative ruling by the court’s conservatives.

This time, according to sources knowledgeable about the situation, there has been no overt involvement by the administration in the case. Saponaro said, however, that he had received “a couple of calls” from banks offering unspecified assistance.

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.


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