[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] A GENERAL OVERVIEW OF DISPARATE IMPACT THEORY ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS FIRST SESSION __________ NOVEMBER 19, 2013 __________ Printed for the use of the Committee on Financial Services Serial No. 113-51 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PRINTING OFFICE 86-686 PDF WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking Chairman Member SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York Emeritus NYDIA M. VELAZQUEZ, New York PETER T. KING, New York MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia KEVIN McCARTHY, California AL GREEN, Texas STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri BILL POSEY, Florida GWEN MOORE, Wisconsin MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota Pennsylvania ED PERLMUTTER, Colorado LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama ROBERT HURT, Virginia BILL FOSTER, Illinois MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan STEVE STIVERS, Ohio PATRICK MURPHY, Florida STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio RANDY HULTGREN, Illinois DENNY HECK, Washington DENNIS A. ROSS, Florida ROBERT PITTENGER, North Carolina ANN WAGNER, Missouri ANDY BARR, Kentucky TOM COTTON, Arkansas KEITH J. ROTHFUS, Pennsylvania Shannon McGahn, Staff Director James H. Clinger, Chief Counsel Subcommittee on Oversight and Investigations PATRICK T. McHENRY, North Carolina, Chairman MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member Pennsylvania, Vice Chairman EMANUEL CLEAVER, Missouri PETER T. KING, New York KEITH ELLISON, Minnesota MICHELE BACHMANN, Minnesota ED PERLMUTTER, Colorado SEAN P. DUFFY, Wisconsin CAROLYN B. MALONEY, New York MICHAEL G. GRIMM, New York JOHN K. DELANEY, Maryland STEPHEN LEE FINCHER, Tennessee KYRSTEN SINEMA, Arizona RANDY HULTGREN, Illinois JOYCE BEATTY, Ohio DENNIS A. ROSS, Florida DENNY HECK, Washington ANN WAGNER, Missouri ANDY BARR, Kentucky C O N T E N T S ---------- Page Hearing held on: November 19, 2013............................................ 1 Appendix: November 19, 2013............................................ 33 WITNESSES Tuesday, November 19, 2013 Kirsanow, Peter N., Commissioner, U.S. Commission on Civil Rights, and Partner, Benesch, Friedlander, Coplan & Arnoff..... 5 Marcus, Kenneth L., President and General Counsel, Louis D. Brandeis Center for Human Rights Under Law..................... 7 Parker, Dennis D., Director, Racial Justice Program, American Civil Liberties Union.......................................... 8 APPENDIX Prepared statements: Kirsanow, Peter N............................................ 34 Marcus, Kenneth L............................................ 39 Parker, Dennis D............................................. 46 Additional Material Submitted for the Record McHenry, Hon. Patrick: Written statement of the National Association of Mutual Insurance Companies (NAMIC)................................ 110 Ellison, Hon. Keith: Written responses to questions submitted to Dennis Parker.... 134 A GENERAL OVERVIEW OF DISPARATE IMPACT THEORY ---------- Tuesday, November 19, 2013 U.S. House of Representatives, Subcommittee on Oversight and Investigations, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 10:06 a.m., in room 2128, Rayburn House Office Building, Hon. Patrick McHenry [chairman of the subcommittee] presiding. Members present: Representatives McHenry, Duffy, Fincher, Hultgren, Barr, Rothfus; Green, Cleaver, Ellison, Maloney, Delaney, Beatty, and Heck. Ex officio present: Representatives Hensarling and Waters. Also present: Representative Garrett. Chairman McHenry. The Subcommittee on Oversight and Investigations will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Today's hearing is entitled, ``A General Overview of Disparate Impact Theory.'' I will now recognize myself for 5 minutes for an opening statement. Fairness, fundamental fairness, ensures that those who must enforce the law, know the law. Fairness, fundamental fairness, also says that those who are under the law will understand the law. Those who benefit from the law should have a level of understanding of what the rules of the game are as well. Discrimination based on race, sex, or other prohibitive factors is destructive and morally repugnant. More specific to the jurisdiction of this committee, discrimination in housing and in lending is unfair and unjust and has no place in the American marketplace. Unfortunately, discrimination still exists. For this reason, the protections afforded by the Federal Civil Rights Statutes remain important and necessary. These statutes, like the Fair Housing Act and the Equal Credit Opportunity Act, obligate the government to investigate allegations of discrimination, and to take appropriate action to end discriminatory practices and provide relief to victims. According to the legal theory of disparate impact, the government or private litigants can bring discrimination claims based solely on statistics that suggest an otherwise neutral policy disparately impacts protected classes. While I believe data can be helpful in better understanding the roots of disparity, it is disconcerting that unlike other illegal discrimination claims, disparate impact claims do not require the government or a private plaintiff to provide intent to discriminate. It is important to remember that resources to fight discrimination are not unlimited. I believe our witnesses today make a strong argument that precious resources to fight discrimination are needlessly diluted when agencies with civil rights missions attack disparities that arise for reasons other than discrimination. This is a timely hearing, as the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB) are considering disparate impact in their regulatory writing and the issuing of guidance. And up until a few days ago, the Supreme Court was planning to address the legitimacy of disparate impact claims under the Fair Housing Act this term. That, as has been covered in the press, is no longer the case. In front of us today, we have an expert panel of witnesses who have spent their careers fighting illegal discrimination. In the course of this hearing, I hope to gain a better understanding of the challenges facing those seeking fair treatment under the law and the best way to protect minorities and the most vulnerable in our society from illegal discrimination. And with that, I yield 5 minutes for an opening statement to the ranking member of the subcommittee, Mr. Green of Texas. Mr. Green. Thank you, Mr. Chairman. And I would like to thank you for acknowledging that we still have invidious discrimination, that the battle to end invidious discrimination is not yet over. I am also appreciative that you have embraced this hearing with an open mind so that we can come to conclusions about a long settled standard of disparate impact. It is my belief that this hearing will be about whether discrimination has to have intention to be harmful. It will be about whether good people can make bad policy. It will be about whether or not a financial institution can charge African Americans $2,937 more than similarly situated White customers for their loans, and charge Hispanics $2,187 more for their loans. I mention these specific examples because these are examples of how the disparate impact standard, well-settled standard, has had a positive impact on our society and especially on people in certain classes. I would like to hearken back, if I may, to 1968, because it was the death of Dr. King that allowed or caused, if you will, this Congress, meaning the Congress of the United States of America, to pass the Civil Rights Act of 1968, which has Title VIII within it, the Fair Housing Act. And it was not an easy time for us in this country. There was invidious discrimination. But there was also covert discrimination. And the Civil Rights Act of 1968 allows us to fight both overt and covert discrimination. It is great to be able to prove intentionality, that there was intent to do harm. But there are many cases wherein the intent is well-concealed, and the law allows us to use the disparate impact standard to get to that intent that is well- concealed. We would not be here today, in my opinion, debating an issue of whether or not you have to have intent to do harm to me, if you should hit me with your car. And I am someplace that I lawfully should be. I am not in any way negligent. You don't have to have intent to harm me. And you don't have to have intent to be liable for the harm that you cause. Intentionality is obviously an element that, if proven, is beneficial. But there are other ways, there are other circumstances that allow us to prove harm. And this harm has been shown to be proven with the disparate impact theory. My hope, Mr. Chairman, is that after today's hearing, we will not find law being promulgated, legislation being promulgated to eliminate or limit what we have had for more than 40 years now as good standing law. My hope is that as we move forward, we may do some things to improve upon what was done in 1968, but not limit it and not circumvent what we have found to be a means by which we can continue to combat invidious discrimination. Finally, Mr. Chairman, let me say this: This has been a continuing fight to eradicate discrimination. The law in 1968 was not passed unanimously. And since its passage, we have had many efforts to try to limit it, or eliminate it. We have had litigation. And some of the litigation has been settled. I think that this litigation has been settled had many aspects to it that we may discuss today. But I do believe that the courts, all of the courts that have taken up these issues which have walked away with the notion that it is a legitimate standard which can be used to help eliminate invidious discrimination. We have come a long way, but we are not there yet. And my hope is that we won't today or at some point in the near future decide that we are going to turn back the clock to a pre-1968 era. I yield back the balance of my time. Chairman McHenry. And under prior agreement with the ranking member, Mrs. Beatty is recognized for 2 minutes. Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking Member, for holding this hearing today. I think it is very timely. Let me also thank you for being here as witnesses for something which is very difficult and painful for me, as I reflect back to growing up in 1968, and to being discriminated against in the housing market because of the color of my skin. Mr. Chairman, it was very welcoming to hear your opening remarks and also the remarks of Ranking Member Green. I will use your words, Mr. Chairman, throughout my conversation and dialogue with the witnesses today, that discrimination has no place in the American marketplace. And so, as we later question and have dialogue with the witnesses, you will hear those comments from me. Let me just say that today's hearing comes at a very interesting time, coming 1 week after the notice of the settlement in the Mount Holly case. Certainly, we all are familiar with that case, and this settlement seems to finally conclude the decade-long dispute regarding the use of disparate impact theory in the context of housing policy. Certainly, you know that this case was scheduled for argument before the Supreme Court, and was expected to be a landmark case, which would have given the highest court in the land the opportunity to evaluate the applicability and future of the legal theory of disparate impact in the housing market. And certainly, we know it was never argued before the Supreme Court, and the disparate impact clause of the Fair Housing Act has consistently been held up 11 different times in the court of appeals over the last 4 years. I think I will leave you with this thought: Has discrimination been so institutionalized that we don't know the difference between intentional and unintentional discrimination? Thank you, Mr. Chairman. Chairman McHenry. Thank you, Mrs. Beatty. We will now recognize our distinguished panel of witnesses. First, Peter N. Kirsanow, is a Commissioner on the United States Commission on Civil Rights, where he is currently serving his second 6-year term. From 2006 to 2008, Commissioner Kirsanow also served as a member of the National Labor Relations Board. He was appointed to both positions by President George W. Bush, and is a partner with the law firm of Benesch, Friedlander, Coplan & Arnoff, as part of its Labor Employment Practices Group, and is also a member of the firm's Diversity and Inclusion Committee. Commissioner Kirsanow received his B.A. in 1976 from Cornell University, and his J.D. with honors in 1979 from Cleveland State University, where he served as articles editor of the Cleveland State Law Review. Second, Kenneth L. Marcus is the President and General Counsel of the Louis D. Brandeis Center for Human Rights Under Law. Mr. Marcus founded the Brandeis Center in 2011 to combat the resurgence of anti-Semitism in American higher education. He is the author of the award-winning book, ``Jewish Identity and Civil Rights in America,'' and previously held the Lillie and Nathan Ackerman Chair in Equality and Justice in America at the Baruch School of Public Affairs at the City University of New York. Mr. Marcus served in the George W. Bush Administration as the Staff Director of the United States Commission on Civil Rights, and as the General Deputy Assistant Secretary of Housing and Urban Development for Fair Housing and Equal Opportunity. Mr. Marcus is a magna cum laude graduate of Williams College, and is also a graduate of the Boalt Hall School of Law at Berkeley. And finally, Dennis Parker is the Director of Civil Justice Programs with the American Civil Liberties Union. In that position, Mr. Parker focuses on combating discrimination and addressing other related issues. Prior to joining the ACLU, Mr. Parker was the Chief of the Civil Rights Bureau in the Office of the New York State Attorney General under Eliot Spitzer. Mr. Parker previously served for 14 years at the NAACP Legal Defense and Education Fund, and teaches race, poverty and constitutional law at the Columbia University School of Law Institute. And Mr. Parker is a graduate of Harvard Law School and Middlebury College. The witnesses will now be recognized for 5 minutes for an oral presentation of their testimony. And, without objection, the witnesses' written statements will be made a part of the record, and the witnesses will have until close of business Friday to revise and extend their witness testimony. On your tables, there are lights--red, yellow, and green-- and I don't have to explain the meaning of those. Even Members of Congress mostly understand that. The microphone is also very sensitive, so make sure it is directed towards your mouth. And dealing with the technology as we are, I have to say those things. So, with that, we will now recognize Commissioner Kirsanow for 5 minutes. STATEMENT OF PETER N. KIRSANOW, COMMISSIONER, U.S. COMMISSION ON CIVIL RIGHTS, AND PARTNER, BENESCH, FRIEDLANDER, COPLAN & ARNOFF Mr. Kirsanow. Thank you, Chairman McHenry, Ranking Member Green, and members of the subcommittee. I am a member of the U.S. Commission on Civil Rights. And as you know, the Civil Rights Commission was created by the 1957 Civil Rights Act to, among other things, investigate denials of equal protection and discrimination on the basis of race and other protected classifications. In furtherance of the Commission's objective to investigate denials of equal protection and discrimination on the basis of race and other protected classifications, we have held a number of hearings over the years related to disparate impact, either directly or indirectly. And the last such hearing occurred in December of 2012. There are four broad concepts or conclusions that can be drawn from those hearings. First, the doctrine of disparate impact is at least of dubious legality and provenance under the Equal Protection Clause. Second, in many respects, the implementation of disparate impact has been profoundly misguided and elevates equal outcomes over equal opportunity. Third, although in some respects it has definitely been well-intended, as we have seen in a number of Civil Rights Commission hearings, it has a tendency to harm its purported intended beneficiary. And finally, it is antithetical to the proposition that individuals are supposed to be judged by the content of their character, versus the color of their skin, because the qualifications standards test devices, policies, dealing with or that purportedly result in disparate impact reveal character--and that may reveal character--often are subordinated to raw color calculations. Expanding for a moment on the dubious legality of disparate impact, disparate impact emerged from the 1964 Civil Rights Act. If you take a look at the Floor debate among Floor managers of the 1964 Civil Rights Act, disparate impact was not contemplated as a doctrine to prove discrimination or any form of discrimination, as the 1964 Civil Rights Act, but the theoretical framework for disparate impact was already being developed by attorneys for the EEOC. And when the Fair Housing Act was adopted in 1968, disparate impact had not yet been adopted as a doctrine for demonstrating some type of discrimination under the 1964 Civil Rights Act. It wasn't until 1971, when the Supreme Court did adopt disparate impact under Griggs v. Duke Power, that it did become a doctrine with respect to employment law, with respect to Title VII. What is interesting about Griggs v. Duke Power is, you may recall, there was the requirement that was applied only after job positions were opened up to everybody, that everyone have a high school diploma, among other things, and that had disparate impact among Black employees. The Supreme Court indicated that it had to have some type of job relatedness or business necessity to be justified. What is often forgotten is that standard device test qualification was adopted with a discriminatory intent. After the 1971 decision in Griggs v. Duke Power, disparate impact metasticized into a number of other areas that there hadn't been up to that point any prediction that it would be expanded to other areas. Disparate impact necessarily classifies on the basis of race, and to that extent, unless it meets the strict scrutiny standard which is the highest standard of our Nation's juris prudence, it violates the equal protection clause unless it serves the compelling governmental interest or is nearly tailored to serve that interest. And that is of dubious probability given the Seattle case, the Louisville case, and even Grutter v. Bollinger. In terms of its misguidedness, any classification, any type of standard, any type of test will necessarily have a disparate impact, because we judge people on the basis of individuality and not race. Famously, one of my colleagues, during a debate, said that she would write a check for $10,000 to anyone who could identify any standard, any device, any policy, any practice that did not yield a disparate impact. I would never make such an offer, maybe $10, but I nonetheless go along with the proposition that it would be extremely difficult to find anything that didn't yield a disparate impact. With respect to housing criteria, and loan criteria for example, almost any qualification would yield a disparate impact on the basis of race, sex, national origin--maybe color--almost any protected class. Employment rates, income, assets, criminal history, family structure--each one of those has different yields depending upon which class someone belongs to. Finally, with respect to whether or not it has universally broadly--universal good effects, it has a tendency to harm its beneficiaries--I see my time is up. I would be glad to expand on these remarks in the question-and-answer period. Thank you, Mr. Chairman. [The prepared statement of Mr. Kirsanow can be found on page 34 of the appendix.] Chairman McHenry. Mr. Marcus? STATEMENT OF KENNETH L. MARCUS, PRESIDENT AND GENERAL COUNSEL, LOUIS D. BRANDEIS CENTER FOR HUMAN RIGHTS UNDER LAW Mr. Marcus. Thank you, Chairman McHenry, Ranking Member Green, and distinguished members of the subcommittee. I am honored to appear again before this committee. At the same time I confess to being somewhat mortified to have to be discussing this particular topic. I don't think any of us is pleased by the obligation to be fighting discrimination in this day and age. And yet, we are continually reminded that discrimination persists despite the progress that we have made over the decades. When I was in the civil rights enforcement area within government, and even today in the public interest advocacy realm, I have found numerous instances of intentional discrimination and bigotry including in the housing realm in which, even nowadays, African Americans, Hispanics, and others are often faced with a situation in which renters do not want them, lenders do not want them, and so on and so forth, and I believe this to be one of the greatest evils that we face to this day. In my written testimony, I give a couple of examples from very recently in which HUD found blatant intentional discrimination, in one case against Burmese immigrants where renters simply did not want them on their premises. And in another instance, in which renters not only did not want African Americans in their mobile home community, but also didn't want anyone who would date an African American. We have these blatant cases, and it is my feeling that the scarce resources of the Federal civil rights agencies are seldom sufficient to deal with them. And one of the challenges that we have is that our governmental agencies are often dividing their resources between cases involving blatant intentional discrimination and other things. Now, it is my view that disparities are important to observe. As a civil rights enforcement official, I was certainly on the lookout for racial and ethnic disparities. For instance, at the Department of Education, I was continually sifting through data to see whether there were disparate rates of minorities being either subjected to discipline or to misidentification for special education. The reason I did that is because I have always considered disparities to be a kind of smoke. And where there is smoke, there is sometimes fire. And when there is smoke, a good fire department sends a truck to see what is going on. But, I also believe that it is possible to confuse the smoke and the fire. And I think too much of the time we say that the disparate impact is the problem when in fact it is in fact sometimes a symptom of the problem or a sign of the problem. Now, when we do that, when we say, we are not going to look for intentional discrimination, we are simply going to look for disparities, there are several different kinds of problems that arise. One is the diversion of resources that I mentioned. And I think that if you go through the most recent charges by the Office of Fair Housing and Equal Opportunity, you will find that there are some charges that appear to be based on actual discrimination. And, there are other charges where you would probably agree that they are not of the sort of severity that you would want them clogging up the system. So I think it is a real problem when our scarce resources are diverted into things other than discrimination. There is also a problem of equal protection. And Commissioner Kirsanow averred to that somewhat. One of the challenges with disparate impact is that virtually--I would say that when income and wealth are unevenly distributed in society, virtually any standard for underwriting or for determining who to rent to will have a disparate impact. And so that pushes people into an untenable situation: either be subject to potential liability for violation of Title VIII or other discrimination laws, even if there is no intent to discriminate or no unconscious discrimination; or try to eliminate that disparity in a way that may require race- conscious action that will violate the equal protection clause. So in many cases, attempts to comply with disparate impact will run the risk of violating the equal protection clause, which is why Justice Scalia indicated in the Ricci v. DeStefano case that the day will come in which the conflict becomes unavoidable between those provisions. And finally, in many cases, there is a pressure to impose some sort of quota or other artificial means of eliminating a disparity rather than simply saying, we will use purely race- neutral means. So what I would say is that while we need to push as hard as we can to eliminate intentional and even unconscious discrimination, disparate impact, as it has been applied, is often counterproductive towards those efforts. [The prepared statement of Mr. Marcus can be found on page 39 of the appendix.] Chairman McHenry. Mr. Parker? STATEMENT OF DENNIS D. PARKER, DIRECTOR, RACIAL JUSTICE PROGRAM, AMERICAN CIVIL LIBERTIES UNION Mr. Parker. Good morning, Chairman McHenry, Ranking Member Green, and members of the subcommittee. My name is Dennis Parker, and I am the director of the Racial Justice Program of the American Civil Liberties Union. Our charge is to eliminate barriers to full participation in civic society. And in the name of full disclosure, I am one of the attorneys on the Atkins v. Morgan Stanley case, a case that relies on disparate impact to prove the devastating impact of unfair lending practices on people of color in Detroit. The Fair Housing Act was passed nearly 50 years ago to address problems of residential segregation and conditions of poverty which had blocked access to opportunity to communities of color and led to civil unrest. From the outset, the bipartisan sponsors and supporters of the Fair Housing Act recognized that it was necessary to prohibit all forms of discrimination--both acts resulting from discriminatory intent as well as acts neutral on their face, which had an unjustified discriminatory effect. In order to achieve the broad antidiscrimination goals of the Act, Congress, the government agencies charged with enforcing the Act, and each of the courts which had interpreted the Act have recognized that the disparate impact standard is a necessary tool in fighting discrimination in all of its forms, and that without the standard practices which have the same discriminatory consequences as intentional discrimination would be shielded from the reach of the law. Both at the time that the statute was passed, and on subsequent occasions, Congress has resisted attempts to limit the application of the law to instances of intentional discrimination. Between the enactment of the Fair Housing Act in 1968 and the time when Congress made significant changes to the Act in 1988, all nine courts of appeals which considered the issue concluded that the Fair Housing Act permitted the use of disparate impact claims to fight discrimination in all of its forms. In 1988, against the backdrop of the unanimous approval of disparate impact claims by all courts of appeals, Congress extended the coverage of the Act to prohibit discrimination based on familial status and disability, added specific exemptions to the Act which would only make sense in light of a continuing disparate impact standard, and enhanced the Department of Housing and Urban Development's authority to interpret the Fair Housing Act. In the years following the amendments, HUD, the Justice Department, and the agencies charged with enforcing the fair housing and fair lending laws have interpreted the fair housing laws to permit disparate impact claims; have trained their employees to use disparate impact analysis, and have brought enforcement actions relying on disparate impact. During that same period, the two circuit courts which had not previously addressed the question of the validity of the disparate impact statement, joined the other nine circuits in approving it. On February 15th of this year, HUD reaffirmed the decades-long recognition of the availability of the standard after going through a period of formal notice and comment. The need for the disparate impact standard as a tool in fighting discrimination is as great or greater now than it has ever been. Problems of residential segregation and the accompanying limitation on access to fine schools, transportation, healthy environments, and employment opportunities continue to plague the Nation. One striking example of the continuing need for an effective way of addressing the increasingly subtle way in which protected classes are denied fair housing can be seen in the wake of the economic crisis of 2008. Discriminatory lending practices, which included providing high-risk subprime loans to members of communities of color, communities which had previously experienced a long history of intentional discrimination in the form of racial steering, redlining, and lack of access to financial institutions. The combination of the abusive lending practices and the history of discrimination resulted in a foreclosure crisis which had a particularly serious impact on communities of color. And I would point out that the impact of these loans extended to people who had good credit. An African American or a Latino person with a high credit rating was more likely to get an abusive subprime loan than a White similarly-situated person. The impact was serious on the communities of color and it reversed many of the gains that were made over the past 50 years. I notice that my time is up and so I will just say that the disparate impact standard permits the defendant in the case to show that there was a justification for the policy and practice that is being challenged. By permitting the balance between impact goals and the means of achieving those goals, the disparate impact standard permits challenges to barriers which prohibit equal opportunity to fair housing. It is common sense that any policy which unnecessarily excludes people from housing because of their race, gender, ethnicity or any other protected class should be set aside for one which asserts everyone's needs fairly, effectively, and without discrimination. Disparate impact is a commonsense way, and we urge that its continued use be permitted. [The prepared statement of Mr. Parker can be found on page 46 of the appendix.] Chairman McHenry. I will now recognize myself for 5 minutes for questioning. Commissioner Kirsanow, what is disparate impact? Mr. Kirsanow. Disparate impact is the result of any type of standard, test, qualification, policy, or practice which yields a disproportionate outcome for members of a protected class. At least, that is the colloquial definition of it. Now, disparate impact obviously deals with outcome. It is not necessarily anything to do with opportunity and input. In addition to that, disparate impact has no bearing on whether or not some type of device, policy, or practice is intentionally adopted in order to discriminate on the basis of a protected class. Chairman McHenry. I am not a lawyer, so how does disparate impact differ from disparate treatment discrimination? Mr. Kirsanow. Right. Disparate treatment presumes some type of intentional treatment, disparate treatment. That is, you take a Black applicant and a White applicant and you consciously and intentionally--because you can have unconscious discrimination also--or unconsciously and intentionally discriminate against someone on the basis of their protected class, the Black applicant for example. Disparate impact is where there was no intent necessarily to discriminate, yet because of a qualification standard--let's say, for example, in Griggs v. Duke Power, that you have a requirement that everybody who obtains a particular employment position have a high school diploma. At least in that area, North Carolina--I'm sorry, South Carolina at the time--the number of Black applicants for a position who had a high school diploma would be far below that of Whites. The outcome therefore would be that more Whites would get that position. That would be disparate impact. In Griggs v. Duke Power, that was done intentionally. In many disparate impact cases, there has been no proof of discrimination as the motivating factor for that particular qualification or standard. Chairman McHenry. So, Mr. Marcus, is disparate impact fair? The use of disparate impact as a legal theory, is it fair? Mr. Marcus. In my view, some uses are fair. Some may not be. I would say there are two ways of looking at disparate impact. For some, disparate impact is a way of smoking out intentional discrimination that cannot be demonstrated through other ways. So we say, there may not be evidence of intentional discrimination, and yet we think it is there. So we create an analytical device that will help us to find it. The other approach is to say, no, disparate impact has nothing to do with intent. It is all about the effect. It is a way of eliminating certain effects on minorities that cannot be justified by business necessity. I believe that there may be ways of using disparate impact to find intentional discrimination, and perhaps the courts will even narrow disparate impact doctrine in order to do that. But where disparate impact becomes detached from discrimination, where it is no longer about intentional discrimination, it has all kinds of unfair ramifications. One is that it prevents agencies and lawyers from focusing on real intentional or even unconscious discrimination. And another is that it treats employers or lenders or others as if they were bigots, as if they were discriminators when they have no conscious or even unconscious intent to discriminate against anybody. So by lumping real bigots in with people who develop policies that have no conscious or unconscious animus, I think it can be unfair. Chairman McHenry. So, Commissioner Kirsanow, was disparate impact discrimination prohibited under the Civil Rights Act of 1964? Mr. Kirsanow. The intent in 1964, if you look at what the Floor managers were talking about, Congressman McCullough for example and others, there was no intent to use disparate impact, that is to have equality of outcomes. There was considerable debate about that. Clearly, there was an element within Congress that wanted to use that as a tool or device, as Ken indicated, but the outcome of all that was that it would-- that is, the 1964 Civil Rights Act, would be calculated to address, as Ranking Member Green talked about, invidious discrimination; an intent to discriminate on the basis of, back in 1964, race and all the other protected classes. Chairman McHenry. My time is short. So was disparate impact addressed in the original Fair Housing Act of 1968? Mr. Kirsanow. Not specifically. There was considerable debate about that, and disparate impact first came to fruition in 1971 with Griggs v. Duke Power. Chairman McHenry. Okay. We will now recognize Mr. Cleaver for 5 minutes. Mr. Cleaver. Thank you, Mr. Chairman. And to the ranking member, thank you for the hearing. Mr. Marcus, let us assume that in 1984, a certain neighborhood had filed a covenant with the mortgages of the land involved in a subdivision. And the covenant prohibited selling your home to an African American. And then they put a list together of individuals who wanted to buy in that area, but since African Americans could not buy based on the covenant, the list was non-African American or predominantly Anglo Whites. And then we then have people filing a lawsuit based on exclusion because they are Black and they can't move in. There is a list of people who can move in. And everybody who lives there is White. How do we deal with that kind of an issue? Mr. Marcus. That is an interesting hypothetical, Congressman Cleaver. Mr. Cleaver. It may not be that hypothetical. I am just creating something, but it may not be that hypothetical. Mr. Marcus. Either way, it is an interesting one. I do think that racially restrictive covenants are repugnant. Now, I have argued in my written testimony and elsewhere that disparate impact can avert a conflict with the equal protection clause if the courts allow a good faith affirmative defense. In my view, that is a way of separating out disparate impact cases that are based on intentional or unconscious discrimination from those that are not. Now, if a court were to apply the sort of standard that I have suggested, then they would look at this list, which appears facially neutral. If they find that there is this sort of impact, that is to say, all of the names are White names, then one would look at why is that; why are all of the names White names? Is there some entirely good faith reason? Maybe they are all family members. Or maybe there is some legitimate reason. But if it turns out that there is no good-faith reason, and that it was intended as a way of excluding numbers of a particular racial group, then I think that it is discriminatory and should be considered discriminatory. Mr. Cleaver. Okay. Mr. Parker, I want to stay on this. Mr. Parker. Yes. And I would also--because there are actually concrete examples of exactly what you are talking about. Towns which have restrictions, or that give advantages to current residents of that town, that can have the impact of excluding people of color if the town is a single-race town. There is no allegation of intentional discrimination or a hatred toward people of color, but the effect is the same. And the Fair Housing Act looks at the consequence. If you are excluded from property, if your house is foreclosed on and it is because of disparate impact, it is little consolation that it is not the result of some intentional discrimination. But the consequences are still there. And it is important that the law recognize the fact that those consequences have occurred and continue to occur. Mr. Cleaver. Now, we still have racial covenants--on the books all over the country, just to my knowledge, they are not being enforced. The Civil Rights Act said you can't do that, so public accommodation in most cities eliminated that. But there are still administered, nobody bothered to clean it up. So if you go in the courthouses you are going to find this. I guess my issue is--in 2013, nobody, nobody is going to admit discrimination. I mean, nobody. I am talking about nobody and so, if nobody admits it then they are either unintentionally committing discriminatory acts or they are denying that what they are doing is in fact discriminatory. So I am always concerned about this issue because I think at this moment in time, we are having some--it is a weird moment in history. And I am not sure that we need to take too many steps away from the Civil Rights Acts that have been passed in the past. I have gone over my time, Mr. Chairman. I apologize, and I yield back. Chairman McHenry. I thank my colleague. We will now recognize Mr. Duffy for 5 minutes. Mr. Duffy. Thank you, Mr. Chairman, and I appreciate the witnesses' testimony this morning and the conversation we are having on what I think is a very important topic. I would agree, I think, with everyone today that discrimination still exists in America. It hasn't been rooted out, and I think it is incumbent upon the Congress and the country to do all we can to make sure we do root it out and make sure it doesn't exist. But we are not at that point today. But I do want to have a more in-depth conversation on disparate impact, and Mr. Kirsanow, I think in your opening statement, you had indicated that there were potential unintentional consequences that would negatively affect those whom you think would be beneficiaries of disparate impact. And I think you were running out of time, so I wanted to ask you a follow-up to give you an opportunity to explain that further, how people could actually be hurt under this theory who were supposed to be benefited. Mr. Kirsanow. Yes, thank you, Congressman. There are a number of examples, but I would like to limit them to the area which I know best, and that is with respect to employment law, where you see the greatest amount of litigation with respect to disparate impact. We had a hearing just recently at the Civil Rights Commission against--with respect to the EEOC's relatively new criminal background check policy, which makes it a little bit more difficult than it had in the past for employers to conduct criminal background checks on applicants. I will cut right to the chase on this. It is well-intended, it is designed to increase the reentry of felons into the workplace, something that needs to be done. It is based on the presumption, the realistic presumption that Black and Hispanic applicants are more likely to be screened out as the result of criminal background checks. But as well-intended as it may be, in many respects it may be misguided. I will just give you a little bit of information with respect to how it harms the intended beneficiaries. The presumption was that it would increase the probability that Blacks and Hispanics would be hired because the rigorous nature of the background check that is employing what is known as the green standards based on the 11th Circuit, I think it was, case outlying under what circumstances a criminal background check would be permissible. That is, what type of offense was it? Which job are you applying for? How long ago was the offense? It made the green standards a little bit more stringent. But at the same time what happened is, employers, because it was so difficult to implement the background checks, would abandon their use and resort to impermissible criteria with which to make hiring decisions. There have been several studies that show that where employers are allowed or have less of a burden, in terms of having criminal background checks, and use background checks robustly, they are more likely to hire Black and Hispanic applicants rather than resort to impermissible stereotypes and thereby exclude them. In one study, employers were 4 times more likely--4 is not a minor matter--to do so. And in another State, 10.7--I will strike that. Employers who used criminal background checks were 10.7 percent more likely to have recently hired a Black applicant than those who did not. And the reason, obviously, is because employers are--they make judgments and they have to make judgments with respect to who they are hiring. And they prefer not to have felons, if they don't know what kind of felony it is. Mr. Duffy. All right. And I thank you for expanding upon that. Taking intentional discrimination and setting that aside for a moment, I would--they exist, and I want to move it over. But I want to look at the unintentional discrimination, if you want to call it disparate impact. If there is no intentional discrimination and we find there is disparate impact, in the end is the consequence that we have now different standards for different people? Different standards if it is based on race or color or sex or national origin that we will have different standards for different people, if we find disparate impact in a certain space? Or am I wrong on that? Mr. Kirsanow. It is more likely that you have no or lowered standards. It is-- Mr. Duffy. What was that? Mr. Kirsanow. It is more likely that rather than having different standards, you will have lowered standards or no standards whatsoever. So that you tend to eliminate the impact as much as possible. That won't happen, however. In some cases you will have some slightly different standards, at least that are unconsciously applied to different protected classes. But what we have seen, and especially in the employment context is, an abandonment of standards so that you don't get hit with the disparate impact liability. You may see that, kind of the reverse of that in the Richard-- Mr. Duffy. What is the consequence of far lower standards? Mr. Kirsanow. The consequence is, in an employment context for example, you will hire employees who may not make the grade. They come in, can't make the grade, then get fired. Then the employer gets sued for disparate treatment, based on that. Or you get individuals who are not eligible for a particular loan, they cannot make the payments, or the monthly payments, and are more likely to be foreclosed upon. So there are unintended consequences that harm the intended beneficiaries. Chairman McHenry. The gentleman's time has expired. Mr. Duffy. I yield back. Chairman McHenry. Thank you. We will now recognize Mrs. Maloney for 5 minutes. Mrs. Maloney. I would like to thank the chairman and the ranking member for holding this hearing and really focusing on this important issue. The purpose of the Fair Housing Act of 1968 was to reverse what Bobby Kennedy described as the insidious effect of racial segregation in housing. And to accomplish this goal, the Fair Housing Act prohibits housing providers from discriminating on the basis of race, color, religion, sex, disability, family status, and national origin. Earlier this year, HUD issued a final rule stating that a housing-related practice is discriminatory if it has a so- called disparate impact on one of those protected classes and does not serve a legitimate business purpose. Opponents of this rule argue that it creates too much uncertainty for lenders. However, it is important to note that HUD's rule did not change the law in any way, shape, or form; it just formalized the disparate impact test that HUD and the Department of Justice had been using for over 40 years. More importantly, the disparate impact test, contrary to popular belief, does not punish sound business decisions. All a housing lender has to do to avoid liability for a business practice that has a discriminatory effect is show that the practice serves an important business purpose, and there aren't less discriminatory ways to serve that same important business service. So, I would just call that common sense, and if the end result of the disparate impact rule is that it forces lenders to think twice about whether or not there are less discriminatory ways to accomplish its business objectives, then I say this is all the better for our country. I would like to ask Mr. Parker, do the same types of problems exist, the entrenched residential segregation that drove Congress to enact the Landmark Fair Housing Act back in 1968, does that still exist today? Mr. Parker. Many of the problems that existed then continue to exist. As has been mentioned, there are still instances of intentional discrimination. But there are also a web of practices that working together, tend to deprive protected classes of equal opportunity in housing. And the example that I gave of the lending market of the mortgages that were given in the run up to 2008, is a perfect example that it had a disparate impact on particular communities and it is an impact that could only be gotten at by using the disparate impacts standard, because there aren't individuals whom you can show acted intentionally to discriminate. You rely on the statistical evidence to show that there is a difference in treatment that would result in highly qualified people of color being denied mortgages or being given mortgages with terms that are detrimental. Mrs. Maloney. So you still believe the disparate impact rule is necessary, and it is necessary as an appropriate remedy, and you can't get to this determination without the disparate impact, is that correct? Mr. Parker. I believe it is at least as necessary as it was at the time when the Fair Housing Act was passed. Mrs. Maloney. Given that HUD and the courts have been enforcing the disparate impact rule for over 40 years now, Mr. Parker, do you think that lenders and other housing providers have had sufficient time to adjust and be aware of the rule and the standards? Mr. Parker. I think they certainly have. And, as you pointed out, the disparate impact standard creates a structure that permits them to assert a legitimate business interest. And unless there is a finding that either that interest is not legitimate or that there is no other way to serve the goals, then it will stand. Mrs. Maloney. I am looking at the successful cases that the Justice Department has brought, using the disparate impact theory after the financial crisis, and particularly the Countrywide case that they brought. Do you think that these cases will have a positive impact by deterring other lenders from engaging in the same kinds of practices that Countrywide engaged in, in their lending practices? Mr. Parker. Yes, I think it will. And I think it serves the Nation as a whole because it eliminates the sort of practices that led to the economic disaster that we had in 2008. Mrs. Maloney. My time has expired. Thank you very much. Chairman McHenry. The gentlelady's time has expired. The gentleman from Illinois, Mr. Hultgren, is recognized for 5 minutes. Mr. Hultgren. Thank you, Mr. Chairman. And thank you all so much for being here today to discuss a very important topic. I wonder if I could address this first question to follow up on some of the discussion that my colleague from Wisconsin, Mr. Duffy, had started. I wanted to follow up a little bit more, go a little deeper on that. Commissioner Kirsanow, and Mr. Marcus, I wonder if you could talk briefly--are neutral practices with the disparate impact on protected groups necessarily indicative of intentional discrimination? Mr. Kirsanow. No, they are not necessarily indicative of intentional discrimination. One of the reasons under Griggs v. Duke Power that scholars say the Supreme Court had adopted the disparate impact standard was the difficulty in many occasions in proving intentional disparate treatment, as opposed to disparate outcomes. Disparate outcomes, you can see, it is quite simple. Is that necessarily evidence of disparate treatment or intentional discrimination? Sometimes, as Ken indicated? Yes, it is. It is smoke, but there is not always fire where there is smoke. Mr. Hultgren. Mr. Marcus, any thoughts? Mr. Marcus. No, it isn't. I have spent countless hours identifying disparities, especially in education, to ask the question, is there a reason, in a particular school district, that certain minorities have been designated for this or not designated for that, is there a reason? And over and over again, I would find legitimate, nondiscriminatory reasons for it, and then move on. Once in a while you can't find a legitimate reason, and you have to conclude at the end of the day, that it was based on discrimination. In my view, we need a better test for separating the wheat from the chaff. The current tests used by HUD, EEOC, and others don't really do that, in part, I think because they are not just looking for intentional discrimination, but they are also looking for other kinds of effects. And unless we say we are focused on discrimination, on intentional or even unconscious discrimination, we are going to pull them all in together. We are going to pull in both discrimination and also nondiscriminatory effects, and we will end up with the sorts of consequences that Commissioner Kirsanow described. Mr. Hultgren. Mr. Marcus, digging a little deeper on that, will the Obama Administration's embrace of disparate impact divert government resources away from combating intentional discrimination? Mr. Marcus. It can't help but do that. It is not as if our civil rights enforcement agencies have so much in the way of excessive funds that they can look for exotic or extraneous forms of cases. When you have to divide the work between as many different kinds of statutes as they do, and then you are looking not just for intentional and conscious discrimination, but also other nondiscriminatory effects, it means at the end of the day you are not able to do an effective job at enforcing any of the civil rights statutes. Mr. Hultgren. Mr. Marcus, based on your experience working in civil rights enforcement at the Department of Education, the Department of Housing and Urban Development, and also the Civil Rights Commission, do you believe using government resources to fight and overturn neutral practices that have a disparate impact on minorities, but are not rooted in intentional discrimination, is the best way to fight discrimination? Mr. Marcus. No, but I would make one distinction that I think that Commissioner Kirsanow did as well; there is intentional discrimination, and there is unconscious discrimination. And I think both need to be combated. If someone is intentionally trying to exclude minorities, we need to fight that. Even if they don't know that is what they are doing, but they are doing it, we need to fight that, too. But if neither exists, then there might be unfortunate policies, there might be policies that we want to speak out against because of inequities that we perceive, but if it is not discrimination, I don't think that we should be focusing our scarce civil rights resources on them. Mr. Hultgren. I have less than a minute left. If I can direct this to Commissioner Kirsanow and Mr. Marcus, if we have time, will the Obama Administration's insistence on pursuing disparate impact claims allow cases of intentional discrimination to go unpunished? And does pursuing disparate impact make society more vulnerable to intentional discrimination? Mr. Kirsanow. It could, because as Mr. Marcus indicated, when you have limited resources, you have to decide where you are going to direct those resources. And when you are talking about disparate impact claims, I don't want to overstate this, but it is in some respects easier to make out a case of disparate impact than it is intentional discrimination. So you go where the money is; you go where you are more likely to achieve a desired result. Whether or not--we have a multi-billion dollar apparatus designed to address discrimination in this country. Even that may be insufficient. But if you are going to focus on something that arguably could be in violation of the Equal Protection Clause, you are diverting resources away from intentional discrimination, where there is no dispute that we need robust enforcement activities. Chairman McHenry. I will now recognize-- Mr. Hultgren. Thanks very much, Commissioner. I yield back. Chairman McHenry. We will now recognize the ranking member of the full Financial Services Committee, Ms. Waters. Ms. Waters. Thank you very much. I am sorry that I was not here for the opening of this hearing. However, it is extremely important that we understand that the Fair Housing Act established a framework for rooting out both intentionally discriminatory acts and seemingly neutral policies that produce a disparate impact on discriminatory effects on certain groups or populations. Let me just ask our representative here from the ACLU about the Department of Justice, which reached a $335 million settlement with Countrywide, a now defunct mortgage company owned by Bank of America, the largest fair lending settlement on record in the United States. In that case, the Justice Department alleged that more than 200,000 African-American and Hispanic borrowers who qualified for loans were charged higher fees or placed into subprime loans while prime loans were provided for White borrowers with similar financial situations. As I look through all of the information, I see that similar actions by lenders such as Wells Fargo and others have taken place. Now, in African-American and Latino communities, we have had foreclosures which have basically caused great harm and pain in these communities, and we have been struggling trying to get corrections. We have been struggling trying to make sure that we give support to the communities, because when they do these foreclosures, it causes the value of other houses in the community to go down, et cetera, et cetera. It has been very harmful, and very painful. How was the disparate impact legal theory applied in these cases that I am talking about, in Countrywide in particular? How may the outcome in the Countrywide case have differed if the victims were unable to use the disparate impact doctrine? Mr. Parker. The Countrywide case and similar cases are perfect examples of the utility of the disparate impact standard. It is a perfect example of how the resources that were expended pursuing that case had an impact that, as you suggested, affects tens of thousands of African Americans. It had a profound effect on a large population of people. It permitted the court to address practices that cost these communities enormous sums of money. And all of it was made possible by a standard that could only--or by a case that could only have been brought using a disparate impact standard. It would have been impossible for individuals to show that they were the victims of intentional discrimination, but they were victims. And the communities of color have been victims of practices to the tune of tens of billions of dollars that have been lost to the-- Ms. Waters. If I may, I have a few minutes here. Mr. Parker. Sorry. Ms. Waters. This is true of the case against Wells Fargo, Morgan Stanley, Sun Trust, C&F Mortgage, and even HUD. And so, the question becomes whether it is intentional or not, the harm that can be caused, such as we see in these cases, is significant. And if we did not have disparate impact to bring these cases, what would happen? Mr. Parker. We would lose the opportunity to address some of the biggest problems that are facing our protected classes. We would deny opportunity to fair housing to a significant part of the population. Ms. Waters. Thank you, Mr. Chairman. I yield back the balance of my time. Chairman McHenry. I thank the ranking member. We will now recognize Mr. Barr for 5 minutes. Mr. Barr. Thank you, Mr. Chairman. Commissioner Kirsanow, I wanted to explore with you what the meaning of some of these Federal civil rights statutes actually is, specifically the statutory authority that some of these enforcement agencies actually have with respect to applying the disparate impact theory. So, what is the meaning of these statutes? Are these statutes designed to remedy intentional discrimination, disparate impact, or both? Mr. Kirsanow. With the exception of the 1991 Civil Rights Act, which was passed in large measure to address Ward's Cove Packing, all the other civil rights statutes were designed to address intentional discrimination, not disparate impact. Mr. Barr. Okay. And so the statutory language of, for example, the Fair Housing Act, and the statutory language of the Equal Credit Opportunity Act, is there any statutory language that mentions disparate impact? Mr. Kirsanow. There are rules that mention it or at least allude to it. But I would have to think about whether or not there is any statutory language that mentions disparate impact per se. Mr. Barr. So putting aside administrative regulations or rulemakings, does the statutory language authorize these enforcement agencies to apply disparate impact theory? Mr. Kirsanow. No, that has been an administrative prerogative. Mr. Barr. Okay. So under the Chevron doctrine, which grants to administrative agencies the ability to issue rules or interpretations based on a reasonable construction of an ambiguous statute, are these statutes sufficiently ambiguous-- in your judgment, are these statutes sufficiently ambiguous to confer the authority upon these agencies to apply disparate impact theory under Chevron, and are those rulemakings enforceable under the Chevron deference standard? Mr. Kirsanow. Right. I believe both under Chevron I and Chevron II, they would not be. However, having said that, as was stated in the concurring opinion Ricci v. DeStefano, the Supreme Court has not yet pronounced on that. Mr. Barr. So that is an unsettled question? Mr. Kirsanow. I would say it is still unsettled, but in my judgment, if you take a critical look, a rigorous look at Chevron I or Chevron II, the agencies go beyond the statutory authority in determining their authority under their governing statute. Mr. Barr. So the bottom line is that the statutes themselves do not authorize these agencies to apply disparate impact, at least not explicitly. Mr. Kirsanow. Not explicitly. Mr. Barr. Okay. With respect to the equal protection arguments and Scalia's concurring opinion in Ricci where he talks about the fact that there could be a war between disparate impact and equal protection, would the race-conscious decision-making that would naturally result from the application of disparate impact theory survive strict scrutiny under current Supreme Court precedent? Mr. Kirsanow. No. Mr. Barr. Okay. Would application--and let me ask Mr. Marcus the same question. Would you concur with the Commissioner's assessment of that, based on current Supreme Court precedent? Mr. Marcus. I would agree based on current Supreme Court precedent and based on the conception of disparate impact that is in all of the regulatory schemas that you described. I think it is possible to narrowly construe disparate impact in a way that saves it, but as currently written, I believe these disparate impact provisions violate equal protection. Mr. Barr. And Mr. Marcus, just a follow-up question. My time is expiring. I have about a minute left, so maybe you could take the remainder of the time and answer this question about your earlier testimony. Amplify your earlier testimony, when you discussed how application of disparate impact theory could very well harm the intended beneficiaries. Obviously, the objective of this hearing is to make sure we don't have discrimination in lending practices in this country. So, aside from diversion of scarce resources away from enforcement of intentional discrimination, could there be--or could you discuss the possibility of denying minorities or protected classes of people from credit because of application of disparate impact. Could this have a negative impact on access to credit for protected classes? And if so, how? How would application of disparate impact theory harm those intended beneficiaries, particularly in the way of access to credit? Mr. Marcus. It could, and along the lines that Commissioner Kirsanow also described. I think the problem is that virtually any facially-neutral standards that are effective for underwriting are going to create disparate impacts. So, if a lending institution wants to avoid liability, there are various things that it could do. One is to introduce a greater subjective component to eliminate the standards in question. In the event that it uses a more subjective approach, there is a greater likelihood of invidious discrimination. To the extent that it dilutes the criteria, this has the potential also of undermining the safety and soundness of the institution and the resulting potential instability certainly harms everyone. Chairman McHenry. The gentleman's time has expired. And we will have to move on here. Thank you, though. I will now recognize Mr. Ellison for 5 minutes. Mr. Ellison. Thank you, Mr. Chairman. And I thank the ranking member. I am really pleased that we are having this hearing because there is not enough discussion around civil rights, inclusion at all. And even if it is cast in this light, we still need to talk about civil and human rights. I just want to say, though, that I do find it amusing even that somebody would suggest that if we try to protect people from the discrimination that comes in the form of a statistical imbalance or disparate impact, that could undermine the effort to stop discrimination. Nobody who is a victim of discrimination or potentially is one would ever say such a ridiculous thing. That is the position of a privileged, comfortable person who really wants to discriminate, but wants to look good and feel good as they do it. This country of ours had legally sanctioned--you could legally discriminate against somebody because they were Black for about 346 years in the United States, from 1619 to 1965. You could say, ``You are Black; you are not allowed to be here.'' And yet not even, I don't know, not even 60 years pass, and all of a sudden we are just beyond that, even though we have disparities in everything. And of course, we have disparities in everything. If somebody were to restrict your legal right to freely exercise your rights for 11 hours, 15 minutes after they stopped saying they were doing it, admitting they were doing it, you still would be feeling the effects of it, of course. Now, this whole conversation I think just is evidence that people who believe in civil and human rights of all colors better really get busy because the people who want to recreate American apartheid are busy, active, and absolutely committed to reinstituting racial subordination in America. But you know what? People of all colors oppose the efforts that some are engaged in. And I think that they need to have as much vigor as the people who want to recreate a pre-civil rights America. So with that, that is just my candid views. Let me ask this question. I am curious to ask you a question, Mr. Parker. The disparity in subprime lending and foreclosure rates among minority communities is indisputable. According to a 2009 report by the Center for Responsible Lending, African Americans and Latinos are 47 percent and 45 percent more likely to face foreclosure than Whites. What role has disparate impact doctrine had in fighting lending discrimination since the financial crisis? Mr. Parker. Disparate impact is the main tool for fighting it. And I think it is important, as you pointed out, to recognize that in those cases, in the analyses that were done, they showed that employing correct underwriting standards, that African Americans and Latinos were still more likely to get risky subprime loans, in spite of their own creditworthiness. So all of this discussion about doing things that undercut credit examinations is completely counter to the reality of what is happening to communities of color. Mr. Ellison. Mr. Parker, if--let's just say we didn't have disparate impact and you had to prove case-by-case that the people involved in putting together those loans were intentionally discriminating because of race bias. Would there be any chance to try to counteract the overall effect of racial disparity? Mr. Parker. It would be virtually impossible for a number of reasons. One is the complexity of the lending process. One is that you don't know how similarly-situated people are treated unless you have access to that overall data. So that, yes, it would be virtually impossible to prove that. Mr. Ellison. Now, we live in 2013. How many mortgage lenders do you know who are going to say, ``You are Black; I don't like you; I don't think you ought to own a home, or if you do, you ought to have a higher-price mortgage.'' How many people are saying that? Is that a commonly done thing? Mr. Parker. It is not commonly done, but I think it is also necessary to recognize that the disparate impact standard, as has been suggested, makes it possible to ferret out intentional discrimination. But more importantly, it makes it possible to address unjustified practices that have a discriminatory impact on the basis of a protected category. Mr. Ellison. But may be arbitrary? Mr. Parker. That are arbitrary, and as I said, unjustified or not justified by either business necessity or any other acceptable goal. And the idea that you would permit that to continue operating when it serves no legitimate purpose at the expense of protected classes is completely counter to the intent of the Fair Housing Act. Mr. Ellison. Thank you, Mr. Parker. Keep up the good work. Chairman McHenry. We will now recognize Mr. Rothfus for 5 minutes. Mr. Rothfus. Thank you, Mr. Chairman. Mr. Marcus, could you provide your insight on the impact of disparate impact and how it affects the availability of mortgages? Mr. Marcus. Now, that is a very, very, hard question. I will take a very broad look at it. And what I would say it this. To the extent that lending institutions are dissuaded from using nondiscriminatory facially neutral underwriting standards simply because they have a particular effect that could create legal liability, they will need to use other kinds of standards which may be less effective in determining a credit risk. And so what that does is ultimately create a weakening of the financial system. Mr. Rothfus. We are having this debate right now about Qualified Mortgages and the ability-to-repay rules that the Consumer Financial Protection Bureau has come out with. If an entity like the CFPB were, say, a private sector association that lending institutions had joined and the CFPB came up with some guidelines on lending such as the debt-to-income ratio at 43 percent for what is going to be a Qualified Mortgage, and it were determined under a disparate impact theory that would be found to disproportionately affect a protected class, might there be liability for such an association? Mr. Marcus. There could be. And it seems to me that there are legitimate enforcement methods of finding intentional discrimination that don't require any of that. What we found indication of at HUD is that there are many cases where minorities are treated less well when they walk into a lending institution. It is not as if someone will say, point blank, ``We don't want to lend to African Americans.'' Of course, that doesn't happen. But, there are certainly plenty of instances where you can find that the White person who walks in will be given information and encouragement, and the minority will be given discouragement and made to wait. There are lots of cases in which one can find different treatment. It is not easy. It often requires very patient enforcement activity, perhaps with pair testers, but there are ways of getting at different kinds of discrimination faced by minorities that don't create this unintended consequence. Mr. Rothfus. Is it more difficult than to find evidence of intentional discrimination? Mr. Marcus. It depends on the particular case, of course. There are cases in which intentional discrimination is fairly easy to find. And there are some cases in which people do explicitly state their prejudice, but they don't-- Mr. Rothfus. If you are observing a practice, for example, where they are giving more information to White people and less information to people of color, that is going to be evidence that you are going to be taking to determine whether there is a discriminatory intent there. Mr. Marcus. Yes. Mr. Rothfus. And it takes some time to do that? Mr. Marcus. Yes, it takes some time. It takes training and pair testers or something of that sort, but-- Mr. Rothfus. And resources to do that-- Mr. Marcus. Yes, yes-- Mr. Rothfus. --and to go after individuals like that? Mr. Marcus. Yes. Mr. Rothfus. Mr. Kirsanow, how would the defendant assert a legitimate business interest in the context of defending a claim rising under disparate impact? Mr. Kirsanow. One of the problems that any defendant has whether it is the employment context, the credit context, the housing context is you don't know going in. It is like the Laritzen case where I think it was Judge Easterbrook who said, ``You are going into litigation not knowing what standard is going to apply to you.'' It is the standard that the EEOC establishes for housing-- the HUD establishes or some other entity establishes. And to go for a moment back to the unintended consequences and the potential harms to the intended beneficiaries, I think Congressman Ellison cited the fact that Blacks have a 47 percent to 45 percent greater foreclosure rate. One of the things that lenders or employers--whoever the potential charged party does is, they change their standards to avoid disparate impact liability. And in the context of changing that standard, what happens then is loans may be let to people who may not be able to pay those loans back. If it was a level playing field in terms of the administration of loans, that is if there were no intentional discrimination you would think--and on a regression analysis--that Blacks, Hispanics and Whites would all have the same foreclosure rates. But that is not the case, which suggests that the changing or lowering of standards actually has a deleterious impact on the intended beneficiaries. Mr. Rothfus. I see my time has expired. Thank you, Mr. Chairman. Chairman McHenry. We will now recognize Mrs. Beatty for 5 minutes. Mrs. Beatty. Thank you so much, Mr. Chairman, and Mr. Ranking Member. I have two questions for the witnesses. Mr. Parker, the Federal courts and the U.S. Government have applied the disparate impact standards since the 1970s. And the financial services industry has had very clear guidance, I have been told, as to the application of the standard since at least 1994 when the Federal agencies with jurisdiction for lending discrimination issued interagency guidances. In other words, the industry has known for decades that they had to conform their businesses with the disparate impact standards. Can you point to any evidence whatsoever that the disparate impact standard has had negative effects on the lending industry? Mr. Parker. I can point to no such evidence. And there are two things I would like to say. First, the question of the legality of disparate impact is not unsettled. Every circuit court in the country has upheld the practice. And so it is the law in every circuit court in the country. Second, I would take vigorous exception to the idea that the financial collapse was due to overregulation or enforcement of our fair housing laws. The abandonment of the usual underwriting standards for a loan-to-value or debt-to-income were not abandoned because people were afraid that the law would be enforced against them. It was abandoned because of greed. It was abandoned because there was a way to make money, and it was money that was made at the expense of the communities that the laws were designed to protect. And to suggest that it was the law that was responsible for this is outrageous. Mrs. Beatty. Thank you so much. Mr. Commissioner, in reading your testimony--and let me quote--``The Supreme Court originally approved the use of disparate impact theory in the employment context. Unfortunately, the theory has metasticized and is being used in an area of law for which it was never intended. Rather than being used as a way to prove disparate treatment in cases where there is no smoking gun, it is now being used in a way to achieve racial balancing across society...'' I find it amazing, and in light of our history of disparate treatment in policies and the impact and what we just heard from Mr. Parker somewhat inappropriate, when I think of the word ``metasticize.'' Deadly cancer. Something that spreads, which is negative. And I guess, I am curious as to why you would use a term to say this is equivalent now to a deadly cancer that we are looking in this, especially when our chairman and others have said there is no place in the marketplace for discrimination. He didn't say intentional, unintentional, or as a result of disparate impact. We have come a long way from red-lining and from the prejudices, and it also made me think--and you can respond to this--that when you said there is no smoking gun. I think for many of us who grew up during this era or time, I don't care if it is the little lady with gloves and a purse who is standing there and denying me a right because of my skin color, versus a big smoking gun. Could you express to us why you chose those words? Mr. Kirsanow. Absolutely, thank you very much for that question. I do think that it is invidious to insist upon outcomes. Forty years ago--prior to 40 years ago, 50 years ago, 70 years ago, the outcome was that Whites would be advantaged. That was the desired outcome. It was wrong then. It is wrong now to seek a desired outcome on the basis of race. That is clearly in violation of the equal protection clause. Today, it may not be as big a problem as it was before, because maybe the right people are in charge. It all depends on where you sit. But to make determinations on the basis of race is antithetical to how this country is supposed to be governed. It is not a function of equal outcome; it is a function of equal opportunity. Mrs. Beatty. Well, unfortunately, some of us don't sit on that side. And certainly I hope you are not expecting me to believe that we live in a world that is fair no matter where you sit. We wouldn't be having this discussion, in my opinion, if there was still not discrimination and if there was not an impact from disparate impact treatment. Mr. Kirsanow. And Congresswoman, thank you very much for that, because in fact we have copious mechanisms for dealing with that. No one at this table is suggesting that intentional discrimination, disparate treatment not be addressed in a robust fashion. What we are talking about here is whether or not designing a process to yield a specific outcome is what this country should have. And I would suggest to you that the 14th Amendment says, no. Mrs. Beatty. We probably just have a little difference of opinion and I notice I only have--I am over. So maybe off-line, we can have another discussion. Thank you, Mr. Chairman. Chairman McHenry. I thank my colleague. Without objection, Mr. Garrett, a member of the full Financial Services Committee but not a member of the subcommittee, will have 5 minutes to ask his questions. Mr. Garrett. I thank the Chair. And I thank the panel. So at the end of the day, we are trying to achieve that goal of fair treatment for everyone. Let me start then with Mr. Marcus. You write in your testimony that, ``Potential defendants would be forced to demonstrate a business necessity for a policy, and that might not have nondiscriminatory rationales, but adverse impacts on some groups.'' By doing that, of course, you shift the burden of proof from the prosecutor to the defendant, which effectively erases our system in this government of innocent until proven guilty standard, I would suggest. Can you tell me how you think this burden shifting will affect the housing industry per se, and business practices as well as our judiciary system as a whole? Mr. Marcus. Their effects are already there. In terms of the judicial system as a whole--and I might add the civil rights enforcement system in particular--it shifts our focus away from where, I believe it should be, which is treating people differently based on their race, color, ethnicity so on and so forth. In terms of the housing market, again, it takes the focus away from nondiscrimination and towards eliminating disparities that may have other reasons whatsoever. Mr. Marcus. With due respect, I don't think I would say for me that the goal should be fair treatment for everyone, if we are talking about anti-discrimination laws. There are lots of ways in which practices may be fair or unfair, but not necessarily illegal and not necessarily discriminatory. And given the peculiar evils of discrimination, and given the narrow resources, I believe that those who are combating discrimination should be focused on discrimination, and the goal of eliminating bias, animus, things of that sort. Mr. Garrett. So, the answer to my question is that the burden is shifted then in this situation from who is actually trying to prove it to who is actually having to defend it. So the burden is no longer on the State or the prosecutor, if you will, in order to prove that there was this wrong being done. Now it is on the business entity or the individuals to prove that it was done right. Isn't that an unfair shifting of that burden? And how do you prove that, if you are in that entity? Mr. Marcus. It may be, but then it may be-- Mr. Garrett. Yes, yes, true, but you have to prove a business's necessity, I think is-- Mr. Marcus. Yes. To me the concern is not just a shifting of the burden, but also that the way in which the burden is defined may make it difficult or impossible, even for innocent, nondiscriminatory entities to defend themselves. Mr. Garrett. But is--and that is interesting, that is why it is interesting, because does that mean because there is not an identifiable standard as to what the adverse impact effect would be? Mr. Marcus. The standards differ slightly. But if the entity has to show that there wasn't a nondiscriminatory alternative that lack the same disparities-- Mr. Garrett. Yes. Mr. Marcus. --then they simply--they are put in a position where they are not even allowed to demonstrate their innocence. Mr. Garrett. Right. Mr. Marcus. The question isn't innocence or guilt, the question isn't discrimination or nondiscrimination, the question is whether there is simply a different process that could have led to a different outcome. Mr. Garrett. Exactly. I think that is important. Mr. Kirsanow, you were just getting into the end of Mr. Rothfus' questions, here, that the impact--that the goal--that the laudable goal that we may all have here, on both sides of the aisle, may not actually be achieved at the end of the day by the intentions that some Members may have here. You were just getting that at the end of Mr. Rothfus' questions, when you said, if you do a regression analysis and you could see how it actually does impact upon certain groups of people. Can you just elaborate on that-- Mr. Kirsanow. It is the law of unintended consequences. And what we found at the Civil Rights Commission-- Mr. Garrett. Law of unintended consequences, right. Mr. Kirsanow. Right, if you take a look at a number of the studies out there, again, these may be well-intended initiatives. But good intentions are not necessarily good results. Mr. Garrett. Okay. Mr. Kirsanow. And when you look at some of the results, both in terms of mortgage lending, credit, and in terms of employment, what happens when the potential charged party attempts to avoid liability by getting numbers right, and thereby possibly changing or lowering standards is, that it can have a negative outcome at the back end. That minorities are the ones actually holding the bucket at the end. Where you have greater number of minorities who are fired, because they have been hired under standards for which necessarily under that particular job, they couldn't comply with, or credit histories, where they couldn't necessarily sustain a particular mortgage. One of the reasons--one of the reasons, not the exclusive, you may have a higher foreclosure rate or a higher default rate, is because standards were changed or modified to avoid disparate impact liability. Mr. Garrett. So, we are hurting the people we are trying to help eventually. Thank you. Chairman McHenry. We will now recognize Mr. Heck for 5 minutes. Mr. Heck. Thank you, Mr. Chairman, and I hope to not use all 5 minutes. Is any one of you arguing that there is a material difference to the victim between intentional discrimination or unconscious discrimination, or discrimination that is the consequence of ``unfortunate policies?'' Does any one of you believe that the material impact to the victim is different? Mr. Kirsanow. Yes. I do believe there is a significant material impact to the-- Mr. Heck. No, no, no. That wasn't my question, sir. My question is, do you believe there is a material difference to the victim-- Mr. Kirsanow. Yes. Mr. Heck. --between these forms of discrimination? Mr. Kirsanow. Absolutely. Because where a victim is living in a country where outcomes are determined by race, there is a material difference. Where you have a disparate impact standard, or any other kind of standard that yields outcome, based not on content of character, based not on neutral characteristics, but on race, then you have a real impact. Mr. Heck. I feel like we are speaking different languages. My question is if I am, for example, a person of color, and I am unable to procure the housing because I am a person of color, whether that is the lenders' intent or not, it seems to me the impact on me is the same. Mr. Kirsanow. I would disagree. Again, if you are living in a country that doesn't honor the equal protection clause, the impact on you is different. Mr. Parker. May I interject? Mr. Heck. Absolutely, please. Mr. Parker. If you are a single woman who is evicted from your apartment because there is a policy of evicting someone who is the victim of a crime, or there is a crime in the apartment, spousal abuse, it doesn't matter that the policy was not implemented out of animus. The fact is that single mother, who is the victim of abuse, is now homeless. And the idea that the Fair Housing Laws would not be able to assist that woman, would not be able to assist a veteran who is not able to meet a full-time employment status, but could afford to live in an apartment, the idea that they are unprotected by the Fair Housing Act is a serious undercutting of that Act. Mr. Heck. Mr. Marcus, here is part of what I have heard you say. You have decried discrimination, evidently, especially the blatant and intentional forms, those are quotes. I have heard you discount the use of disparate impacts, either from some legal question, which I don't understand, given the cumulative case law. And that, if unfortunate policies or unconscious discrimination yield disparate impacts, it is harder to determine and therefore we shouldn't use scarce resources to prosecute or litigate? Mr. Marcus. Yes. I think that there is a huge difference between being told you can't live here because I don't like people like you, versus being told you can't live here because the apartment is unavailable. I think that there is a very distinct and peculiar harm that one faces if one is the subject of discrimination. To amplify, yes, I have argued that civil rights enforcement should focus on intentional and even unconscious discrimination. Mr. Heck. But not unfortunate policies that yield disparate impacts, and therefore may be, in fact, discriminatory, because we have scarce resources? Mr. Marcus. No, the latter, I would--the latter I would go after if they are discriminatory, meaning that they are motivated by intentional discrimination or unconscious discrimination. And I think that there are times when it is difficult to ferret it out, the discrimination, using different treatment. And that is why I have indicated that I think that disparate impact theories could be used, but I have argued for an affirmative defense of good faith. Mr. Heck. In which case, in my 10 seconds remaining, I wish to strongly associate myself with the comments of Mrs. Beatty and to suggest, sir, that if you believe that as deep down as we who are asking questions of this nature do, then I would have thought that you would have led and ended all of your comments with an argument for increased resources to ferret out discrimination, which should not exist in this country. I yield back the balance of my time, which I don't have. Chairman McHenry. We will now recognize the ranking member of the subcommittee, Mr. Green, for the final questioning of the day. Mr. Green. Thank you, Mr. Chairman, and let me move quickly to this notion that you have to have explicit authorization for a law or a standard to be implemented. My suspicion is that you would all agree that the Constitution of the United States of America does not call for judicial review. Is there anyone who differs with me in terms of judicial review that is not explicitly mentioned in the Constitution? And we all know, as first-year law students, that it is in the case of what? Marbury v. Madison. That is where it comes from. So you don't have to have explicit language for a court to recognize that a standard can be established. Next point, let's talk about this whole notion, it seems to me, from some of you, that courts are granting summary judgments, based upon numbers that are presented. There are no summary judgments being presented on some sort of regular basis, with reference to disparate impact. Mr. Parker, you are a practitioner, how many years you have been practicing law? Mr. Parker. Thirty-three. Mr. Green. And have you handled few or many cases of this type? Mr. Parker. Many cases. Mr. Green. Do you find that summary judgment is the usual circumstance wherein a defendant has given an affirmative defense by way of answer? Mr. Parker. No, I find that, in fact, that the plaintiff is at a disadvantage in many cases, that it is very difficult to bring and to prove these cases. Mr. Green. And do you also find that after disparate impact has been presented, a defendant still has the opportunity to refute the evidence that has been shown, such that the defendant can still prevail? Mr. Parker. They do have that opportunity, at least once. Mr. Green. And do you find that--at least once? Mr. Parker. Yes. Mr. Green. Do you find that even if the plaintiff then, the moving party presents additional evidence, the defendant still has an additional opportunity to refute the last evidence presented? Mr. Parker. That is correct. Mr. Green. So there is a system in place that the courts have recognized now for some 40 years, working efficaciously that there seems to be a desire to overturn. Can you quickly tell me, one more time, because you have said it to others, what would be the implications of eliminating the disparate impact standard, not theory, because it is now a standard? Mr. Parker. The impact of eliminating what has been a long- standing practice in the courts, in the agencies that enforce the law, would be to make it difficult, if not impossible, to show that policies which are unnecessary and unjustified have an impact on protected classes to the detriment of those classes. It would eliminate a whole class of cases, which affect an enormous number of people. Mr. Green. I marvel at how a good many people who are opposed to disparate impact also oppose testing. Testing is the methodology by which we can ascertain whether or not discrimination exists also. It seems that I am seeing a lot of consistency here. Opposed to testing, opposed to disparate impact, but opposed to invidious discrimination. How do you prove invidious discrimination other than a guy shows up with a white cape and a hood? How do you prove it? You have to have some tools available to you to deal with people who are intelligent. These people are not idiots. They understand the consequences of their actions. And many of them disguise their actions with clever policies. But the law wasn't intended just to deal with people who make intentional, overt manifestations. The law is also designed to deal with good people who set bad policies. Can you give an example of a good person who may have had a bad policy? Quickly, because I have a closing statement, Mr. Parker. Mr. Parker. Yes. One such policy might be, as I mentioned before, the policy that says you have to be employed in a full- time job to get an apartment. That would have an impact on someone who, because of disability-- Mr. Green. A veteran, for example. Mr. Parker. Right. Mr. Green. A veteran who has other sources of income. You should consider all sources of income in deciding to rent, not just a person having a full-time job. Because there are people who don't have full-time jobs who can afford the apartment that you are leasing. Mr. Parker. And everyone's interest is protected in that case. Mr. Green. Thank you. My closing comment is this. It has always been the intelligentsia that perpetrates. The ignorant may perpetuate, but it is the intelligentsia that perpetrates. It was the intelligentsia that gave us Dred Scott. It was the intelligentsia that gave us a lot of these laws that we find ourselves having to overturn. And in fact, we have overcome. So I would hope that this hearing will not allow us to find ourselves having to combat some rule or some law that eventually could overturn 40 years of progress. I yield back. Chairman McHenry. The gentleman yields back. I would like to thank our witnesses today. This hearing was very informative. Thank you for your time. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. This hearing is adjourned. [Whereupon, at 11:50 a.m., the hearing was adjourned.] A P P E N D I X November 19, 2013 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]