HUD’s Proposed Fair Lending Rule: Deadline for Comments

By: Melissa S. Malpass

On November 16, 2011 the United States Department of Housing and Urban Development (“HUD”) released a proposed rule to establish that proof of intentional discrimination is not necessary to establish a violation of the Fair Housing Act, and that a violation may be established under a disparate impact approach. HUD’s proposal makes clear the intention of the agency to apply this new approach to lenders. In describing policies “that may have a disparate impact,” the proposal references: “mortgage pricing policies that give lenders or brokers discretion to impose additional charges or higher interest rates unrelated to a borrower’s creditworthiness” and “credit scoring overrides provided by a purchaser of loans.”

Though HUD claims in its proposal that the agency has “long interpreted the Act” to encompass a disparate impact test, HUD gives no explanation as to why the agency has chosen just now to articulate its position. It is no secret, however, that nine days before HUD issued its proposed rule, the Supreme Court granted certiorari in Magner v. Gallagher to determine precisely whether the disparate impact theory applies to the Fair Housing Act. One may wonder if HUD’s timing in articulating its so-called long-standing position on disparate impact has everything to do with the Supreme Court’s impending consideration of the issue.

Interested persons, including lenders, have until January 17, 2012 to comment on HUD’s proposal. Lenders should weigh in, as many aspects of the proposal directly affect the industry. For one, though recent regulatory changes such as the new loan officer compensation rule may minimize future fair lending concerns in this area relating to discretionary pricing, HUD likely will continue to challenge past practices. Moreover, HUD’s proposal not only shifts the burden of persuasion to defendants, but requires them to prove that any statistical racial impact arising from its policies has a “manifest relationship” to a legitimate business interest. This heightened standard may force lenders to defend even the most rudimentary lending practices, such as the use of credit scores and LTV requirements. In the face of these challenges, lenders may feel they are left with little choice but to “manage the end numbers,” even when the numbers are not caused by differential treatment on the basis of race or national origin.

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