To reduce the risk of another financial crisis, and prevent the government from pressuring banks and mortgage companies to engage in risky, race-conscious lending, the Competitive Enterprise Institute recently joined in an amicus brief filed by the Pacific Legal Foundation in a pending Supreme Court case, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. The question presented is whether race-conscious “disparate-impact” causes of action can be read into laws, like the Fair Housing Act, that ban racial discrimination, by government agencies, thus effectively turning the colorblind intentions of such laws upside down.
“Disparate impact” is when a neutral policy happens to impact more minorities than whites, like a standardized test that whites pass at a higher rate than some minority group, even though test scores are calculated the same way for members of all races. The Supreme Court sometimes declines to interpret anti-discrimination statutes as banning neutral practices that have a “disparate impact,” but in other cases, it interprets then as banning “disparate impact,” deferring to the statutory interpretation of civil-rights agencies, like the EEOC, that like “disparate impact” rules because they expand agencies’ power to regulate businesses and interfere with their race-neutral criteria for things like hiring, lending, or leasing apartments.
Banks have been under pressure from lawmakers and regulators to give loans to minorities with bad credit, in order to avoid liability for “racially disparate impact,” and to provide “affordable housing” and promote racial “diversity.” (For example, the Obama administration has ratcheted up such pressure, demanding that targeted banks make preferential loans to minorities with bad credit, notes Investor’s Business Daily, extracting such racial preferences in recent settlements with banks.) Such pressure played a key role in triggering the mortgage crisis, judging from a story in The New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.” (which in fact happened, at enormous expense to taxpayers).
Our amicus brief in the Mount Holly case points out that the legislative history and plain language of the Fair Housing Act does not support a disparate-impact cause of action, contrary to the Obama Administration’s claims. The brief was principally authored by the Pacific Legal Foundation, and co-authored by lawyers at the Competitive Enterprise Institute, the Center for Equal Opportunity, and the Cato Institute. As usual, Pacific Legal Foundation drafted a high-quality brief.
The brief contains arguments that I’ve previously raised, such as the fact that deferring to the Obama administration’s recent interpretation of the Fair Housing Act as including a “disparate impact” cause of action would violate a principle of statutory interpretation known as the canon of constitutional doubts. The Obama administration’s position also conflicts with the federalism canon of statutory construction set forth in the Supreme Court’s decision in United States v. Bass.
This is not the first Supreme Court case that raises this issue. An earlier case known as Magner v. Gallagher also did so, but the Obama administration paid off the challenger in that case (the City of Saint Paul, Minnesota) to get it to drop its challenge to race-conscious disparate impact rules, before the Supreme Court could rule on it. As we and the Wall Street Journal described earlier, the Obama administration declined to pursue a fraud claim worth up to $180 million against a city to get it to drop its pending Supreme Court challenge to a dubious interpretation of the Fair Housing Act that the Obama administration has used as a tool to get banks to adopt racial quotas in lending. In doing so, it ignored the objections of career Justice Department lawyers, and likely cost taxpayers tens of millions of dollars in a case of “particularly egregious” fraud.
CEI jointly filed an amicus brief in that case, Magner v. Gallagher, challenging the validity of “disparate impact” claims under the Fair Housing Act, and explaining how the administration was using the club of “disparate impact” lawsuits to force banks to use racial preferences.
“Disparate-impact” claims alleging “unintentional” discrimination are authorized in the workplace by the Civil Rights Act of 1964, but not in most other settings. The Supreme Court has rejected “disparate impact” claims in most other contexts, such as in contracts and schools, and under the Constitution’s equal protection clause. Despite court rulings casting doubt on this “disparate impact” theory outside the workplace, the Obama administration has paid liberal trial lawyers countless millions of dollars to settle baseless “disparate impact” lawsuits brought against government agencies by minority plaintiffs, even after federal judges have expressed skepticism about those very lawsuits, suggesting that they were meritless.
Obama’s first Assistant Attorney General for Civil Rights, Thomas Perez, argued that bankers who don’t make as many loans to blacks as whites (because they make lending decisions based on traditional lending criteria like credit scores, which tend to be higher among white applicants than black applicants) are engaged in a “form of discrimination and bigotry” as serious as “cross-burning.” Perez compared bankers to “Klansmen,” and extracted settlements from banks “setting aside prime-rate mortgages for low-income blacks and Hispanics with blemished credit,” treating welfare “as valid income in mortgage applications” and providing “favorable interest rates and down-payment assistance for minority borrowers with weak credit,” notes Investor’s Business Daily.
Fearing bad publicity from being accused of “racism”, banks have paid out millions in settlements after being sued by the Justice Department. A Michigan judge called one proposed settlement “extortion.” These settlements provide cash for “politically favored ‘community groups’ ” allied with the Obama administration, and a Wall Street Journal article predicts that “many” of the loans mandated by these settlements “will eventually go bad.”
The banks accused of “racism” by the Obama administration include banks that were previously praised by non-political government agencies for their success in minority outreach and lending to minorities in regions in which they did business. For example, the Obama administration is suing Cardinal Financial Corp., even though “the FDIC in the past gave kudos to Cardinal for its lending practices. Justice is now accusing Cardinal of failing to open branches and achieve racial loan quotas in counties that its federal regulator never before contended should be the focus of its lending,” arguing that it was not enough for the bank to make loans to minority applicants who applied for loans, and that it had an affirmative duty to open new branches in heavily black areas it had never done business in before.
The Obama administration’s demands suggest it learned nothing from the financial crisis, which was caused partly by “diversity” mandates and affordable housing mandates that encouraged lending to people with bad credit scores who later defaulted on their loans. Banks were under great pressure from liberal lawmakers to make loans to low-income and minority borrowers. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers,” The New York Times noted.
The Wall Street Journal gives additional details about the Obama administration’s corrupt bargain here (behind paywall; see bottom of this item for relevant excerpts from the Wall Street Journal, not behind paywall).
As I have previously explained, disparate-impact lawsuits should not be allowed under the Fair Housing Act, and laws with similar prohibitions on discrimination, for the following reasons:
1) Authorizing them would alter the state-federal balance in far-reaching ways, by rendering race-neutral rules (such as rules for preserving order in public housing projects) suspect (see United States v. Bass, 404 U.S. 336, 349-50 (1971) (“unless Congress conveys its purpose clearly, it will not be deemed to have significantly changed the federal state balance”).
(2) Reading racial disparate-impact prohibitions into the Fair Housing Act would violate the canon of constitutional doubts (by encouraging race-conscious actions), since Justice Scalia in Ricci v. DeStefano noted the tension between the Equal Protection Clause and Title VII disparate-impact law as applied to racial discrimination claims. See Ricci v. DeStefano, 129 S.Ct. 2658, 2682 (2009) (Scalia, J., concurring)(noting that given the strict scrutiny that applies to racial classifications, Title VII disparate-impact law, which is race-conscious, raises serious constitutional questions under the equal-protection clause; “the war between disparate impact and equal protection will be waged sooner or later, and it behooves us to begin thinking about how—and on what terms—to make peace between them.”); compare Miller v. Johnson, 515 U. S. 900, 923 (1995) (“Although we have deferred to the [Justice] Department’s interpretation in certain statutory cases . . . we have rejected agency interpretations to which we would otherwise defer where they raise serious constitutional questions. . . When the Justice Department’s interpretation of the Act compels race-based districting, it by definition raises a serious constitutional question . . . and should not receive deference”); NLRB v. Catholic Bishop of Chicago, 440 U.S. 490 (1979) (construing statutory language in federal labor laws extremely narrowly not to cover religious schools to avoid potential constitutional issue – even though doing so was much harder than construing the Fair Housing Act not to include disparate-impact claims); Northwest Austin Municipal Utility District No. 1 v. Holder, 129 S. Ct. 2504, 2513 (2009) (construing Voting Rights Act’s reach narrowly to avoid possible constitutional federalism problems).
(3) The Fair Housing Act is different from the Age Discrimination in Employment Act (ADEA), which the Court recognized as containing an implicit disparate-impact provision in Smith v. City of Jackson, 544 U.S. 228 (2005), since age-based classifications are not constitutionally suspect, Massachusetts v. Murgia, 427 U.S. 307 (1976)(age classifications are not subject to strict scrutiny); compare Richmond v. J.A. Croson Co., 488 U.S. 489 (1989) (racial balance requirement intended to help minorities triggered “strict scrutiny” because of its racial focus), but race-based classifications, such as racial disparate-impact claims, are constitutionally suspect, see Justice Scalia’s concurrence in Ricci v. DeStefano, 129 S.Ct. 2658, 2682 (2009), which noted that given the strict scrutiny that applies to racial classifications, “the war between disparate impact and equal protection will be waged sooner or later, and it behooves us to begin thinking about how—and on what terms—to make peace between them.”
(4) Even when an agency like HUD would otherwise receive great deference in interpreting a statute, under the Supreme Court’s Chevron decision, it will not receive any deference from the courts where its interpretation would raise potential constitutional problems. See Edward J. DeBartolo Corp. v. Florida Gulf Coast Building & Constr. Trades Council, 485 U. S. 568, 574-575 (1988) (construing National Labor Relations Act narrowly to avoid potential free-speech problems, despite the broad deference that the NLRB’s interpretation usually gets).