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Racial Bias in Lending, Housing Gets Supreme Court Review

Photographer: Daniel Acker/Bloomberg

The case will test a legal theory, known as “disparate impact,” that U.S. President Barack Obama's administration has repeatedly invoked in lawsuits against banks over housing and auto loans. Close

The case will test a legal theory, known as “disparate impact,” that U.S. President... Read More

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Photographer: Daniel Acker/Bloomberg

The case will test a legal theory, known as “disparate impact,” that U.S. President Barack Obama's administration has repeatedly invoked in lawsuits against banks over housing and auto loans.

The U.S. Supreme Court will decide whether people who file housing discrimination suits must show they were victims of intentional bias, accepting a case that may undercut the Obama administration’s crackdown on the lending industry.

The justices today agreed to consider an appeal by Mount Holly, New Jersey, which is fighting a U.S. Fair Housing Act lawsuit filed by residents over the demolition of a predominantly minority neighborhood. The town says the residents must prove an intent to discriminate, not just that the project has a disproportionate effect on racial minorities.

The case will test a legal theory, known as “disparate impact,” that the Obama administration has repeatedly invoked in lawsuits against banks over housing and auto loans. Bank of America Corp., Wells Fargo & Co. (WFC) and SunTrust Banks Inc. (STI) have agreed to pay at least $480 million to settle claims since December 2011.

“Defending allegations of disparate impact -- even if proven to be meritless -- is typically very expensive,” five lender trade groups, led by the American Financial Services Association, argued in papers urging the justices to intervene.

A decision favoring the banking industry would mark a major change in the enforcement of the 1968 fair-housing law. Eleven courts of appeals have ruled on the issue, and all have said the statute allows disparate-impact claims.

Equal Credit

The high court’s ruling might also affect the Equal Credit Opportunity Act, which bars discrimination in all types of lending and contains similar language. The Consumer Financial Protection Bureau has relied on the disparate-impact doctrine in its enforcement of that law.

The Supreme Court under Chief Justice John Roberts already is preparing to rule in two cases that may redefine longstanding legal protections for racial minorities. The justices will rule by the end of June on university affirmative action programs and the 1965 Voting Rights Act.

The justices will hear the new case in the nine-month term that starts in October.

The housing case stems from an effort by Mount Holly to redevelop what it said was a blighted, high-crime area. Known as the Gardens, the neighborhood was originally developed to provide homes for returning World War II veterans and their growing families. In more recent years, the Gardens was the only predominantly black and Hispanic area in town, with 75 percent minority residents in 329 residential units.

Stalled Redevelopment

The town began buying homes in the Gardens, in most cases paying between $30,000 and $50,000, until only 70 remained in private hands. The redevelopment effort has since stalled, even as the town has destroyed scores of homes and accumulated $18 million in debt. No new houses have been built, and the remaining structures now form a patchwork amid vacant lots.

A group of current and former residents sued, claiming the effort had a disparate impact on minorities. A federal appeals court said the case could go forward.

In its appeal, Mount Holly says the Fair Housing Act is written differently than other discrimination laws, indicating that Congress didn’t intend to allow disparate-impact claims. The town says government agencies shouldn’t be left vulnerable to suits over non-discriminatory policies.

“Allowing disparate-impact claims under the FHA would render illegal many legitimate governmental and private activities designed to promote the general welfare of the community,” Mount Holly argued.

‘Longstanding Agreement’

The suing residents and Obama administration urged the court not to hear the appeal.

“Where the courts of appeals are in broad and longstanding agreement on an issue of statutory interpretation and Congress has acquiesced in this interpretation for nearly 38 years, there is simply no need for this court to weigh in on the meaning of the statutory text,” the residents said in court papers.

The administration pointed to a new Department of Housing and Urban Development regulation that interprets the Fair Housing Act as allowing disparate-impact claims. That interpretation “should be dispositive,” U.S. Solicitor General Donald Verrilli argued.

The Supreme Court had agreed to consider the disparate-impact issue in its 2011-12 term in a case involving St. Paul, Minnesota. The case was scuttled when the city dropped its appeal at the Obama administration’s urging.

Thomas Perez

The Obama administration’s handling of the St. Paul case is now at the center of the fight over Thomas Perez’s nomination to be labor secretary. As head of the Justice Department’s Civil Rights Division, Perez supported a deal under which St. Paul withdrew its Supreme Court appeal and the department agreed not to join a fraud suit against the city.

Republicans say the government might have recovered $200 million in the fraud case, a whistle-blower suit accusing the city of improperly receiving federal housing grants. Perez says the fraud case was weak and the accord was in the best interest of the country.

The new case is Township of Mount Holly v. Mount Holly Gardens Citizens in Action, 11-1507.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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