Fair Lending Lawsuit Could Affect Disparate Impact

The city of Miami was recently found to have standing to sue lenders under the Fair Housing Act in a case and decision that could eventually expand the implications of the recent disparate impact ruling. The 11th Circuit U.S. Court of Appeals allowed a lawsuit filed by the city of Miami to proceed based upon allegations that the lender had promoted urban blight and caused the city to experience reduced tax collections as a result of the lender’s alleged approval of loans to unqualified borrowers. Miami alleged that when those loans went bad, the homes were foreclosed upon and fell into disrepair. Because taxes collected by the city had fallen while costs to fight urban blight rose, the city sued the lender for making loans to unqualified borrowers. The 11th Circuit’s decision itself has nothing directly to do with the disparate impact analysis. However, the decision does implicitly expand the scope of the ruling. Since any party that can show a downstream, indirect impact of alleged bad lending practices can now bring suit, the number of persons or entities that could bring a disparate impact case expands. This is because one of the arguments — rejected by the Supreme Court — was that allowing disparate impact claims would cause an explosion of litigation. While the 11th Circuit’s decision does not address disparate impact, the fact is that parties with indirect injuries can now sue a lender for the unintended consequences of the lender’s practices. Many lenders see their obligations as limited directly to those impacted by their decisions — borrowers, investors, etc. A lender, however, must realize that it can now be sued for the unintended impact its practices have indirectly on persons or entities to whom it has no ties and with whom it never interacted. Although this decision does not bind all federal courts it certainly raises the prospect of such litigation — and underscores how imperative it is for lenders to have their fair lending testing, policies, practices and training in order. More plaintiffs with indirect injuries that can flow from unintended consequences is, in total, not good news for lenders.