There is a Fair Housing case that has far reaching implications on consumer finance litigation to be heard by the U.S. Supreme Court.   The court has agreed to decide whether plaintiff’s suing under the Fair Housing Act may bring disparate impact claims and if so, the proper testing for such claims.

Disparate impact relates to practices that may be considered discriminatory and illegal if they have a disproportionate adverse impact on members of a minority group.

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 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 Supreme Court will be deciding these two key 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 issues could have significant impact on fair lending litigation at private and government levels, and effect mortgage lenders both directly and indirectly.

If the Supreme Court decides 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, there could be serious implications for disparate impact claims under the Equal Credit Opportunity Act (ECOA).

It is not uncommon for fair lending litigation to be brought against mortgage lenders in part under the Fair Housing Act.  The Department of Housing and Urban Development (HUD) recently released a proposed rulei under the Fair Housing Act to “establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act.”

This case is not just a litigation issue; regulatory compliance and examinations could be effected. The Supreme Court’s decision in Magnerii may either remove disparate impact analysis altogether, or may change how both the CFPB and examined institutions look at testing for disparate impact.  The Supreme Court’s decision is one that will watched carefully by lenders.

i  Proposed Rule November 16, 2011;  Proposed Rule

ii Magner outlined in Consumer Financial Services Alert, November 18, 2011; Supreme Court Magner Case