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The Doctrine of Disparate Impact and Your Mortgage

Bringing Down the Gavel on Disparate Impact

Bringing Down the Gavel on Disparate Impact

Orange County, CA – The Consumer Financial Protection Bureau, or CFPB, is a bureau under the Executive Branch of the US government. It was formed by the Dodd-Frank Act in 2010. The CFPB is tasked with “ensuring fair, equitable and nondiscriminatory acess to credit.” This includes mortgages, student loans, credit cards, and other forms of consumer credit.

Among the most sweeping of the rules the CFPB is implementing are the Qualified Mortgage, or QM, rules. The QM rules have been hotly debated at the highest levels.

Now the CFPB’s authority is under indirect attack by a lawsuit brought against the Department of Housing and Urban Development (HUD) by the insurance industry. In February, HUD formalized its use of the doctrine of disparate impact. It essentially says “if the effects of a given law or rule have sufficiently disparate impacts on a minority, that law or rule is discriminatory.”  HUD then took the rule a step farther and clarified that the law or rule is discriminatory even if there is an obvious lack of discriminatory intent. This broad  rule change leaves a massive gray area left open for interpretation.  

The groups leveling the lawsuit against HUD, the American Insurance Association and the National Association of Mutual Insurance Companies, claim that HUD cannot add that additional clause to the rule. It contradicts their own rule and violates existing laws. 

The relevance is that the CFPB uses ‘disparate impact’ tests as part of its fair lending investigations. If the lawsuit swings in favor of the AIA and NAMIC, the disparate impact tests that the CFPB is using may become dramatically less effective at ferreting out discriminatory lending policies. They won’t be able to deny that a lender is ‘fair’ based on policies that are unintentionally discriminatory.

Furthermore, many lawsuits against mortgage lenders are brought to bear under the doctrine of disparate impact. If HUD’s definition of the doctrine is ruled illegal and unintentional discrimination is barred as a legal grievance, most of those lawsuits would vanish due to lack of solid grounds.

Does the mortgage industry or consumers benefit more from the disparate impact lawsuits? It’s hard to tell right now; there are arguments to be made on both sides. Their is only one thing that’s certain. The debate will rage on and the QM rules, like them or not, will be in place Janury 2014.

Scott Storace

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