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CEI Opposes Risky, Race-Conscious Federal Lending Requirements in Supreme Court Case

Supreme-Court“Disparate impact” is a term in anti-discrimination law for when a neutral policy happens to affect minorities more than whites. One example is a standardized test that whites pass at a higher rate than some minority group, even though test scores are calculated the same way for members of all races. Disparate-impact is most commonly discussed in the context of hiring and school admissions. But in fact it can also play a role in financial melt-downs. Government can use the "disparate-impact" notion to pressure banks and mortgage companies into engaging in risky, race-conscious lending,

It’s for that reason the Competitive Enterprise Institute recently joined in an amicus brief filed by the Pacific Legal Foundation in a pending Supreme Court case, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. The question presented is whether federal agencies can inject race-conscious “disparate-impact” considerations into laws that were intended to be colorblind bans on racial discrimination, such as the Fair Housing Act.

Banks have been under pressure from lawmakers and regulators to give loans to minorities with bad credit to avoid liability for “racially disparate impact,” and to provide “affordable housing” and promote racial “diversity.” For example, the Obama administration has ratcheted up such pressure, demanding targeted banks make preferential loans to minorities with bad credit, notes Investor’s Business Daily. Such pressure played a key role in triggering the mortgage crisis, judging from a story in The New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.” (which in fact happened, at enormous expense to taxpayers).

Although the Mount Holly case will have a big impact on banks and lending, it itself involves a lawsuit against a municipality, not a bank. As Pacific Legal Foundation's Ralph Kasarda notes, "Mount Holly concerns a lawsuit by homeowners in New Jersey claiming a redevelopment plan by the Township of Mount Holly is racially discriminatory. They argue that the Township’s use of eminent domain to purchase their homes and replace them with more expensive homes has a disparate impact on minorities. The Township argues that its actions are not discriminatory. A lower court agreed, finding that 'the dilapidated, overcrowded, poorly designed community, in addition to the high level of crime in the area, is clearly detrimental to the safety, health, morals and welfare of the community.' The Third Circuit Court of Appeals found that the Township’s actions were not intentionally discriminatory, but held the lawsuit could go forward under a disparate impact theory."

Our amicus brief in the Mount Holly case points out that the legislative history and plain language of the Fair Housing Act does not support a disparate-impact cause of action, contrary to the Obama administration’s claims. The brief was principally authored by the Pacific Legal Foundation, and co-authored by lawyers at the Competitive Enterprise Institute, the Center for Equal Opportunity and the Cato Institute.

The brief contains arguments that I’ve previously discussed, such as the fact that deferring to the Obama administration’s recent interpretation of the Fair Housing Act as including a “disparate impact” cause of action would violate a principle of statutory interpretation known as the constitutional-avoidance canon (or canon of constitutional doubts). This means that a statute should not be interpreted in a way that potentially violates the Constitution, or unnecessarily raises constitutional questions -- such as interpreting it to require race-conscious action. Governmental pressure to engage in race-conscious decisionmaking is presumptively unconstitutional, as the courts have noted in striking down things such as the FCC's mandate that broadcasters make efforts to promote "racial diversity" in employment, in cases such as Lutheran Church--Missouri Synod v. FCC (1998). (I say "presumptively unconstitutional" -- not unconstitutional in all cases -- because there are limited exceptions, such as the Supreme Court's ruling that universities may consider race as a factor to promote diversity under the rubric of "academic freedom." The contours of these exceptions are not well-defined even in the university setting and continue to be the subject of litigation, as the Supreme Court's recent Fisher v. University of Texas decision illustrates). Interpreting the Fair Housing Act to allow disparate-impact claims also violates other principles of statutory interpretation, such as federalism canons, as I explain at this link.

This is not the first Supreme Court case that raises this issue. An earlier case known as Magner v. Gallagher also did so, but the Obama administration paid off the challenger in that case (the City of Saint Paul, Minn.) to get it to drop its challenge to race-conscious disparate impact rules, before the Supreme Court could rule on it. As we and The Wall Street Journal described earlier, the Obama administration declined to pursue a fraud claim worth up to $180 million against a city to get it to drop its pending Supreme Court challenge to a dubious interpretation of the Fair Housing Act that the Obama administration has used as a tool to get banks to adopt racial quotas in lending. In doing so, it ignored the objections of career Justice Department lawyers, and likely cost taxpayers tens of millions of dollars in a case of “particularly egregious” fraud. CEI jointly filed an amicus brief in that case, Magner v. Gallagher, challenging the validity of “disparate impact” claims under the Fair Housing Act, and explaining how the administration was using the club of “disparate impact” lawsuits to force banks to use racial preferences.

Disparate-impact” claims alleging “unintentional” discrimination are authorized in the workplace by the Civil Rights Act of 1964, but not in most other settings. The Supreme Court has rejected “disparate impact” claims in most other contexts, such as in contracts and schools and under the Constitution’s equal protection clause. Despite court rulings casting doubt on this “disparate impact” theory outside the workplace, the Obama administration has paid liberal trial lawyers countless millions of dollars to settle baseless “disparate impact” lawsuits brought against government agencies by minority plaintiffs, even after federal judges have expressed skepticism about those very lawsuits, suggesting that they were meritless.

Obama’s first Assistant Attorney General for Civil Rights, Thomas Perez, argued that bankers who don’t make as many loans to blacks as whites (because they make lending decisions based on traditional lending criteria such as credit scores, which tend to be higher among white applicants than black applicants) are engaged in a “form of discrimination and bigotry” as serious as “cross-burning.” Perez compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” treating welfare “as valid income in mortgage applications” and providing “favorable interest rates and down-payment assistance for minority borrowers with weak credit,” notes Investor’s Business Daily.

Fearing bad publicity from being accused of “racism”, banks have paid out millions in settlements after being sued by the Justice Department. A Michigan judge called one proposed settlement “extortion.” These settlements provide cash for “politically favored ‘community groups ” allied with the Obama administration, and a Wall Street Journal article predicts that “many” of the loans mandated by these settlements “will eventually go bad.”

The banks accused of “racism” by the Obama administration include banks that were previously praised by non-political government agencies for their success in minority outreach and lending to minorities in regions in which they did business. For example, the Obama administration is suing Cardinal Financial Corp., even though “the FDIC in the past gave kudos to Cardinal for its lending practices. Justice is now accusing Cardinal of failing to open branches and achieve racial loan quotas in counties that its federal regulator never before contended should be the focus of its lending,” arguing that it was not enough for the bank to make loans to minority applicants who applied for loans, and that it had an affirmative duty to open new branches in heavily black areas it had never done business in before. The Obama administration’s demands suggest it learned nothing from the financial crisis, which was caused partly by “diversity” mandates and affordable housing mandates that encouraged lending to people with bad credit scores who later defaulted on their loans.

The Pacific Legal Foundation's Ralph Kasarda discusses the Mount Holly case and the problems caused by disparate-impact lawsuits at this link.