Mortgage Industry Group Sues NJ Over Allegedly Unconstitutional Disparate Impact Regulations

A mortgage industry trade association filed a lawsuit against New Jersey officials over the state’s new disparate impact regulations which allegedly require lenders to unconstitutionally consider a person’s protected characteristics as part of lending and business decisions instead of prohibiting discrimination based on such characteristics.

The New Jersey Law Against Discrimination prohibits discrimination in, among other areas, housing and housing finance.  In late-December 2025, the New Jersey Division on Civil Rights adopted regulations to codify the applicability of disparate impact liability for such claims (as previously discussed here).  The regulations were announced by the state as the most comprehensive state-level disparate impact rules in the country and include provisions on what constitutes disparate impact liability, applicable burdens of proof, and evidence which could be used to prove or disprove claims.

The trade association filed suit in the U.S. District Court for the District of New Jersey asking the court to declare the regulations unlawful and to enjoin their enforcement.  The complaint asserts that the regulations’ overly broad scope and wording violates the U.S. Constitution’s equal protection requirement; violates federal laws, such the Fair Housing Act and the Equal Credit Opportunity Act; and oversteps constitutional limitations on disparate impact liability set by the U.S Supreme Court.  Among other things, the regulations:

• Provide that a facially neutral practice which was adopted with no discriminatory intent can still violate the regulations if it actually or predictably results in a disproportionately negative effect on members of a protected class;
• Create liability even if a plaintiff cannot show that an entity’s policy caused a disparity among the entity’s own applicants or customers or within any relevant qualified population;
• Allow claims based on disparities which are not substantial or statistically significant; and
• Can target policies that have not yet been implemented or taken effect.

If a disparity is shown, the burden shifts to the defendant entity to rebut it by showing that the targeted policy is necessary to achieve a substantial, legitimate, nondiscriminatory interest—meaning a core interest of the entity that has a direct relationship to the function of that entity—and effectively carries out that interest.

In the context of federal law, the burden would then shift back to the complainant to show that there is a less discriminatory alternative means of achieving the same interest.  However, under the New Jersey regulations applicable to housing and housing finance, the burden remains on the defendant to also disprove that there is no less discriminatory alternative.  The defendant must prove a negative, and must do so based on empirical evidence, such as by identifying what policy or practice options it considered and how it decided to select the policy or practice it chose.  The state also rejected an amendment which would require that the less discriminatory alternative be equally effective as the challenged policy, such that an entity could still be liable even where the alternative would require more labor, time, and resources, or would be less efficient or more costly, than the challenged practice.

While the U.S. Supreme Court affirmed the applicability of disparate impact under the Fair Housing Act, it also noted constitutional risks if it causes race to be used and considered in a pervasive and explicit manner requiring businesses to evaluate the racial outcomes of their policies and make decisions because of those outcomes.  According to the suit, however, the NJ regulations essentially require entities to adopt actively race-conscious policies and balance demographic groups—otherwise, lenders cannot assure themselves of the legality of their practices.  The complaint asserts that the regulations thus require conduct which violates the U.S. Constitution and go beyond what is permitted under other federal fair housing and fair lending laws.