Last week the Supreme Court settled the question of whether the Fair Housing Act (“FHA”) recognizes disparate impact claims. In a 5-4 split decision the Supreme Court ruled in Texas Dept. of Housing v. Inclusive Communities that claims for disparate impact under the FHA are permitted. The FHA makes it unlawful to “refuse to sell or rent . . . or otherwise make unavailable [emphasis added] or deny, a dwelling to a person … or to discriminate against any person in making certain real-estate transactions because of race or other protected characteristic”. The Court partly based its ruling on interpreting “otherwise make unavailable” to mean that lenders can be liable for facially neutral policies that result in discrimination even in the absence of discriminatory intent. Essentially, the Court ruled that a lender can be found liable under the FHA for policies that have a discriminatory effect even if the lender did not intend any such disparate impact. To better understand the consequences of this ruling, consider a case involving discriminatory treatment. In such a case, the lender that issued a policy with a discriminatory effect would only need to show that the policy had a legitimate nondiscriminatory reason and was not a pretext for discrimination. In a disparate impact case, on the other hand, the burden on the lender is far greater. In order to bring a disparate impact claim, a plaintiff needs only to show that a facially neutral policy has a discriminatory effect. Unlike disparate treatment, the plaintiff would not have to prove intent. The burden would then shift to the lender to show that the practice resulting in the discrimination is a “business necessity”. A business necessity is a practice that significantly relates to job performance. The practice does not have to be indispensable to the business, but should be substantial enough to correlate to job performance. If the lender is able to show that the practice was a business necessity, the plaintiff may nonetheless prevail by showing that other practices would serve the lender’s interest yet cause less of a discriminatory effect. Lenders should be particularly aware of this ruling and its potentially wide ranging effects. The American Bankers Association and a group of other associations including the Chamber of Commerce of the United States and the Consumers Bankers Association, filed an amicus brief citing a number of these effects. The brief argued that liability against residential mortgages lenders for disparate impact would create a “double-bind” between neutral lending regulations and the risk of lawsuits for discrimination under the FHA. For example, a mortgage lender who chooses to originate only Qualified-Mortgages would have to consider several factors such as the consumer’s debt-to-income ratio. Assuming debt-to-income ratios vary considerably between demographics, the amicus brief argued that such a lender may face disparate impact challenges. As a result of this ruling, it is of paramount importance that lenders undergo regression analysis consistent with those performed by the EEOC on a regular basis at both the corporate and branch/regional level. If the analysis yields disparate lending patterns, the lender will have to show that the policy yielding those patterns are a business necessity. Furthermore, these policies should not be implemented if another policy would reach the same goal with less disparate lending patterns. In addition, lenders should review their pricing policies, loan officer compensation agreements and practices, the discretion of loan officers in pricing, and pricing exception policies, to name a few. Lenders should also be ready to explain why any given policy is a business necessity. Apart from compliance issues, lenders should consider the practical effects this ruling can have on business. It is likely that smaller lenders may be less impacted than larger institutions because a smaller number of files may afford them slightly more flexibility in terms of pricing (the standard deviation gets smaller with a larger the number of data points). Furthermore, since pricing will likely flatten all around, lenders with a focus on personalized service and faster decision making will be at an advantage. Lenders should look to revamp customer relations, improve response times, and continue to build relationships with referral sources to remain competitive. Overall, lenders should pay very close attention to the Supreme Court’s ruling. Lenders should regularly run regression analyses and evaluate their compliance, pricing, origination, and compensation policies within the framework of business necessity.