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DOJ’s Disparate Impact Theory Has No Statutory Basis in a Discriminatory Lending Context
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DOJ’s Disparate Impact Theory Has No Statutory Basis in a Discriminatory Lending Context

We recently discussed the Justice Department’s unofficial war against banks, as evidenced by the spike in discriminatory lending lawsuits in the last three years.  Most often, Justice claimed certain banks’ lending policies had a disparate impact on protected classes of borrowers.[1]

In our last article, we examined the ambiguity of the disparate impact theory in a discriminatory lending context. Though the theory as it relates to employment discrimination is clearly defined in statutory and case law, it is not at all clear how the theory can be reasonably applied in discriminatory lending claims.

In this article, we will review the statutory basis behind disparate impact claims.

As noted before, an employer’s disparate impact on protected classes is proscribed by Title VII. (See 42 USC § 2000e–2 – Unlawful employment practices, subparagraph k.) 

However, as it relates to discriminatory lending, the disparate impact theory is not included in ECOA or FHA as an alternative means of proving discriminatory lending practices.  It is just a theory proposed by prosecutors as an alternative means of supporting their claims.

Nonetheless, some courts have agreed with prosecutors and allowed them to pursue discriminatory lending cases under the disparate impact theory, relying on older Supreme Court employment discrimination cases. 

As case law developed, higher courts specifically addressed the reason disparate impact claims are permitted in employment cases, consequently eroding lower courts’ reliance on prior case law to support allowing disparate impact claims in other, non-employment discrimination cases.

In 2005, for example, the Supreme Court decided Smith v. City of Jackson, clarifying that disparate impact claims were permissible in employment discrimination cases due to specific language in Title VII[2].  The Court emphasized that a statute’s text governs whether claims are allowed, and courts cannot arbitrarily expand a statute to include other claims.  In other words, if a statute does not expressly allow disparate impact claims, then the claims cannot stand. 

As noted above, Title VII contains specific language permitting disparate impact claims.  ECOA and FHA do not. 

To date, no federal appellate court has decided whether disparate impact is a cognizable claim under ECOA or FHA in light of Smith v. City of Jackson.  So, despite the logical and factual basis of the argument against such claims, it will remain nothing more than a legal argument until a court agrees with it, to the consternation of banks and their lawyers alike.

For now, banks must manage the uncertainty presented by application of the disparate impact theory to discriminatory lending claims.  Check back soon to read more about this and other challenges currently facing the banking industry.

Likewise, if you are a bank or another business facing regulatory compliance issues, consult with counsel to ensure to develop a sound legal strategy.  The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.


[1] “Disparate impact” is the statistical summary prosecutors point to in support of claims that banks must have behaved in a discriminatory manner, because the purported statistical outcome shows Group A received fewer loans or less favorable loan terms than Group B.

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