Clarifying the Ruling


Applying the U.S. Supreme Court’s decision on disparate impact

Last year the U.S. Supreme Court held that financial institutions could be held liable for neutral practices that pose adverse lending decisions against certain borrowers, even when there is no intent to discriminate, but with restrictive guidelines. Lilly Thomas, ICBA’s vice president–senior regulatory counsel, talked with Independent Banker about what impact the high court’s ruling could have on the fair lending examinations for community banks in the year ahead.

IB: How could fair lending exams change as a result of the Supreme Court’s ruling?

Thomas: It’s unclear whether the fair lending exams will change in the wake of the Supreme Court’s ruling. This case, which is based on a challenge of the disparate impact standard under the Fair Housing Act leaves open the question whether the disparate impact standard, and the important limitations set by the Court, would be upheld under the Equal Credit Opportunity Act.

IB: Did the court impose some important limitations on the use of disparate impact?

Thomas: Definitely. While the high court upheld the use of statistical results to determine discriminatory impact, it also imposed a “robust causality requirement” that limited the application of the disparate-impact theory. Borrowers must not only show a disparate impact but must also tie that claim to a specific policy or policies. Furthermore, lenders still have the defense of “showing a business reason to justify their policies.”

If a creditor can show it had a valid business necessity for a policy or practice that resulted in unfavorable treatment to a borrower, the borrower contesting a bank’s loan decision would have to prove that a less discriminatory policy or practice wouldn’t have resulted in the same outcome.

IB: So how should examiners apply the Supreme Court’s ruling?

Thomas: Examiners should recognize that statistical analysis alone of a bank’s lending practices is never enough to demonstrate a disparate impact. Examiners should be able to point to a specific policy or policies that cause the disparity before making a disparate impact claim. That would be appropriate, fair and in accordance with the court’s directive in law.

What’s clear is that regulators should listen to the Supreme Court, which means they should not evaluate any bank’s practices for fair lending based on statistics alone. 

IB: What’s the bottom line?

Examiners should recognize that statistical analysis alone of a bank’s lending practices is never enough to demonstrate a disparate impact.

Thomas: In preparing for their next compliance exams, community bankers should continue to look for discriminatory patterns to identify the impact of their policies. They should also carefully review their lending policies to ensure that any policy or policies did not cause possible discriminatory outcomes. Then they should check their auditing procedures to ensure they are consistently followed.

Overall, community bankers should be prepared to demonstrate to regulators that they are committed to finding and addressing any possible fair lending issues within its lending or operations.