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Managing Fair Lending Risk After Inclusive Communities (Part II)

In less than a month, the constructive impact of Inclusive Communities is being demonstrated in other litigation. In City of Los Angeles v. Wells Fargo, Judge Otis Wright of the United States District Court for the Central District of California ruled against the City’s claims that Wells Fargo engaged in discriminatory lending by, among other things, making high cost and FHA loans with a statistically disproportionate incidence among minority borrowers.

Judge Wright applied the “cautionary standards” articulated by Justice Kennedy in Inclusive Communities stressing that LA’s “entire disparate impact claim must ‘solely’ seek to remove a policy that is ‘artificial, arbitrary and [an] unnecessary barrier[].’” After applying these standards, the District Court reached the following conclusions:

First, inadequate risk management monitoring practices are not the type of barrier erecting policies that can be said to cause the adverse statistical disparity sought to be redressed by a disparate impact claim.  Indeed were such monitoring of “relevant data” implemented with the purpose “to identify and correct the disproportionate issuance of high cost loans to minority borrowers,” the result, the Court reasoned, would be a “roundabout way of arguing for a racial quota” that “is inapposite to the instructions of the Supreme Court … [which] specifically noted that the disparate impact claims must not force private actors to ‘adopt racial quotas.’”

Second, adherence to government loan program requirements and procedures which in turn “’contributes to the disproportionate issuance of loans to minority borrowers’ … cannot mean that [the lender] created an artificial, arbitrary or unnecessary barrier…. If any disparate impact results from [such] loans, it is a result of federal policy and not [lender] policy.” In other words, the governmental loan program elements that an FHA lender is bound to apply demonstrate an instance alluded to by Justice Kennedy in Inclusive Communities, where [a plaintiff] “cannot show a causal connection between the [lender’s] policy and a disparate impact … because federal law substantially limits the [lender’s] discretion” and, consequently, “should result in dismissal of the case.” (Inclusive Communities, Slip Opinion at p.21.) Accordingly, Judge Wright found that the City had not demonstrated the necessary robust causality required by Inclusive Communities and granted Wells Fargo’s Motion for Summary Judgment.

While Judge Wright’s decision represents one District Court and may face appeal (affirmed on appeal) , the analysis it embodies should be incorporated in measured form by lenders evaluating their fair lending compliance programs and assessing the regulatory risk they face for disparate impact Fair Housing Act claims, as well as, the appetite they have for such risk or for defending their programs.  As previously noted in my prior post of Part I, Inclusive Communities provides support for why compliance with CFPB mortgage rules implementing Dodd-Frank Title XIV regarding Ability to Repay and Qualified Mortgages should not place lenders in jeopardy for the “double bind of liability” due to any statistical impact on the lender’s portfolio resulting from such compliance.

Posted on Monday, August 3, 2015 by Registered CommenterWebmaster | Comments Off