Massive Payoff To City For Dropping Challenge To Tool Used To Impose Racial Quotas In Lending

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.

As four congressmen noted,

On February 10, 2012, the City of St. Paul abruptly abandoned a case before the U.S. Supreme Court that observers said it was poised to win.  Slumlords had sued the city to prevent it from enforcing its housing code on the grounds that it disproportionately decreased the amount of housing available to minorities.  The City argued that the Fair Housing Act of 1968 (FHA) prohibits only intentional discrimination, not neutral practices like code enforcement that happen to impact particular groups disproportionately.

[Assistant Attorney General for Civil Rights Thomas] Perez fretted that a decision in the City’s favor would dry up the massive mortgage lending settlements his Division was obtaining by suing banks for housing discrimination based on disparate effects rather than any proof of intent to discriminate.  Accordingly, as documents reviewed by Committee staff show, he orchestrated a deal to induce the City to drop its Supreme Court challenge.  In exchange for St. Paul dropping its case before the high court, the Justice Department declined to intervene in an unrelated False Claims Act (FCA) case that had the potential to return over $180 million in damages to the U.S. treasury.

Many observers thought the Supreme Court was poised to hold that the FHA does not permit claims based on disparate impact when it agreed, in late 2011, to hear Magner v. Gallagher.[6]  However, on the eve of oral argument, St. Paul dropped the case.  News accounts attributed the reversal to calls from the Administration and former Senator Walter Mondale who called the decision “courageous.”  However, material reviewed by the Committees reveals the decision was in fact the result of a dubious bargain brokered by Mr. Perez in which the Department agreed, over the objections of career attorneys, not to join an unrelated fraud lawsuit against the City in exchange for the City’s dropping its Magner appeal.

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.

Assistant Attorney General Perez has argued that bankers who don’t make as many loans to blacks as whites (because they make lending decisions based on traditional lending criteria like 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 has 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, even though they would probably prevail before most judges if they aggressively fought such charges (although doing so would probably cost them millions in legal fees).  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. Banks were under great pressure from liberal lawmakers to make loans to low-income and minority borrowers. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers,” The New York Times noted.

The Wall Street Journal gives additional details about the Obama administration’s corrupt bargain here:

We reported earlier this year that Justice Department civil rights chief Thomas Perez had pressured the city of St. Paul, Minnesota to withdraw a lending discrimination case from the Supreme Court so he could use a dubious legal theory to browbeat banks into settlements. Now a House investigation has revealed more details about his intervention, which shows how ideology trumped the rule of law. . .Mr. Perez struck a quid pro quo with St. Paul to withdraw its lending discrimination case, Magner v. Gallagher, from the Supreme Court in exchange for the feds abandoning a separate False Claims Act lawsuit against the city.

Magner was the Supreme Court’s first chance to rule on whether “disparate-impact analysis,” which uses statistics to prove discrimination and sometimes impose racial quotas, can be used under the 1968 Fair Housing Act. Mr. Perez has used disparate impact to extract millions of dollars in settlements from big banks like Bank of America and Wells Fargo, and also smaller players like Michigan’s Citizens Republic Bancorp and California’s Luther Burbank Savings.

Most legal analysts believe the High Court was likely to strike down this use of disparate impact, stopping Mr. Perez’s operation and also curbing the Consumer Financial Protection Bureau, which has vowed to pursue disparate-impact enforcement too.

The other side of this quid pro quota was a False Claims Act case (known as Newell) against St. Paul that Justice considered joining a month before the Supreme Court decided to hear Magner. A St. Paul minority businessman and whistleblower, Fredrick Newell, alleged that the city had falsely certified how it distributed federal funds to “low income and very-low income individuals and businesses,” and he sought tens of millions of dollars in damages.

Justice lawyers labelled the case “particularly egregious.” The Department of Housing and Urban Development, Justice’s career attorneys and the U.S. Attorney in Minnesota recommended that the federal government join the lawsuit.

According to House investigators, Mr. Perez intervened with the city and with HUD to abandon Newell in exchange for the city withdrawing Magner. He did so against the advice of Justice’s staff attorneys, one of whom noted in a meeting that the deal made it look like Justice was “buying off St. Paul” as well as then-Deputy Assistant Attorney General Thomas Perrelli, who oversaw the Civil Division that handled Newell. . .