There is a litigation feedback loop between regulators and activists that both furthers the aims and fills the coffers of Democrats and aligned groups. Incoming Trump administration officials need to understand the pattern if they’re going to break the circuit.

Here’s how it works in the civil rights context: Congress passes a law forbidding some form of discrimination. Activists develop a strained theory of liability that goes well beyond anything Congress intended. They bring a test case, the Justice Department gets involved, and, facing a twin onslaught, the defendant settles. That precedent is then used to achieve the next milestone, with the settlement money flowing back to the activists to keep the cycle going.

This pattern was on full display recently when DOJ announced that it was suing mortgage lender Rocket Mortgage for alleged bias by a third-party appraiser, who worked for another third-party, who had been contracted by Rocket. There is a general legal doctrine that principals are responsible for the acts of their agents, but, here, the appraiser was neither an employee nor an agent of Rocket.

Moreover, Rocket is legally barred from getting involved in appraisals. Federal law prohibits lenders from attempting to influence the “independent judgment of the appraiser.” The rule was put in place following the 2008 housing crash to prevent lenders from collusively inflating valuations to facilitate deals.

Nowhere in DOJ’s 47-page discrimination complaint does it suggest a motive for Rocket Mortgage to encourage a low-ball appraisal, because none is plausible. Indeed, the whole logic of Dodd-Frank’s appraisal reforms is that lenders want higher valuations. Nothing in DOJ’s complaint suggests Rocket was acting for any reason other than good faith compliance with the rules on appraiser independence.

Rocket is simply the victim of discrimination law’s expanding universe. In late 2021, under President Biden, the Department of Housing and Urban Development began investigating the appraisers’ standard setting body for setting rules that resulted in unequal outcomes across groups. Disparate impact liability is controversial, but at least HUD was targeting the appraisers themselves.

Then, in 2022, activist lawyers sued loandepot.com advancing the novel theory that a lender is liable for the work of appraisers who are neither its employees nor its agents. DOJ filed a supporting brief.

In response to the claim that the lender’s hands are tied, DOJ claimed that the statute does not prohibit influencing the appraisal for purposes of complying with antidiscrimination law.

But nothing in the statutory text suggests a discrimination exception.

First, the law states that lenders may not intervene for the “purpose of causing the appraised value . . . to be based on any factor other than the independent judgment of the appraiser.” Lender pressure to alter an appraisal, even to rectify suspected discrimination, plainly has the purpose of overriding the appraiser’s independent judgment.

Secondly, the statute provides a specific and different remedy when a lender suspects discrimination: “refer the matter to the applicable State appraiser certifying and licensing agency.”

Lenders may ask appraisers to consider “additional, appropriate property information,” but it is not mandatory. DOJ is trying to convert a discretionary option into an affirmative command to cure the claimed bad acts of an entity that is neither your agent nor your employee and to do so at the risk of crossing the line into impermissible influence. It is perfectly reasonable for lenders to conclude that it is not worth the risk.

After DOJ got involved, the case settled. Loandirect.com did not admit wrongdoing, but it was a milestone, and the plaintiffs and their lawyers collected undisclosed damages enabling them to continue the march. The case against Rocket is the next step, aiming to establish firmly that lenders are liable for the actions of independent appraisers.

This cycle is not new. The same activist law firm previously sued Westchester County on the novel theory that it was required to take steps like changing zoning laws as a condition of receiving federal funds. There as here, not only is there no such requirement, there is a specific statute prohibiting it. Nevertheless, the Obama Justice Department joined the case and forced a $62.5 million settlement in which the activists and their attorneys collected S10 million.

Activist litigation can be lucrative for lawyers, and it helps DOJ get headlines and hefty fines. But it can also be intellectually dishonest, corrode respect for the law, and, in the case of appraisal independence, ignore the hard-learned lessons of the housing crisis.

The incoming administration should be aware of this cycle so that it can be in a better position to restore the original meaning of the enforcement statutes, roll back excesses, and turn off the spigot that funds them.

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