HUD finalizes discriminatory lending rules opposed by financial industry

By Peter Schroeder - 02/08/13 04:26 PM ET

The Department of Housing and Urban Development (HUD) announced Friday it had finalized rules to sniff out discriminatory lending practices that had previously been challenged by the banking industry.

The so-called "disparate impact" rule uses statistical analysis to determine if discriminatory behavior has taken place. HUD's rules apply that policy to the nation's fair housing laws.

“HUD is maintaining well-established legal precedent and formalizing a nationally consistent, uniform burden-shifting test for determining whether a given housing practice has an unjustified discriminatory effect,” said John Trasviña, HUD’s assistant secretary for Fair Housing and Equal Opportunity.

Under disparate impact, a party can claim a discriminatory practice without proving the intent or existence of discrimination. Rather, discrimination can be charged under that doctrine if statistical analysis reveals that certain groups faced more negative outcomes than others.

The Obama administration has used this approach to build discriminatory lending cases in the past, and HUD's new rules formalize the use of it as policy. However, as the government has received hundreds of millions of dollars in discriminatory lending suits, the banking industry has argued against the policy.

Wells Fargo agreed in July to pay at least $175 million to settle Department of Justice claims it discriminated against thousands of African-American and Hispanic borrowers — claims that were built based on an analysis of loans made from 2004 and 2009 by the bank and its independent brokers. Wells Fargo did not admit to wrongdoing in the settlement and said it was settling simply to avoid costly litigation.

Bank of America agreed to pay $335 million in 2011 to settle discriminatory lending charges filed against Countrywide Financial, which the bank purchased in 2008. There, the government again charged under disparate impact that hundreds of thousands of minority borrowers received loans that had costlier terms than those provided to white borrowers. The settlement was the largest in the history of discriminatory lending cases.

In July, the American Bankers Association sent a letter to regulators calling on them to stop using the practice, arguing that it fails to actually find the intent to discriminate.

"ABA members are strong advocates for fair lending and fully support enforcement against practices that intentionally discriminate," said Frank Keating, ABA president and CEO. "However, disparate impact asserts fair lending violations occurred based only on statistical differences, where neither intent nor discrimination can be proven."

The ABA also argued that prior judicial rulings have suggested that government does not have the power to enforce fair housing and borrowing laws by using the disparate impact approach.

Rep. Elijah Cummings (D-Md.), the ranking member of the House Oversight Committee, hailed the new rules in a statement.

"Minorities continue to be routinely subjected to discriminatory practices with regard to access to housing, which harms the economic recovery of this nation," he said. "I am encouraged by HUD’s actions and will remain vigilant in my efforts to secure access to first-rate housing for all.”