The settlement of a New Jersey housing-bias lawsuit scuttles a U.S. Supreme Court showdown that might have shielded lenders from discrimination suits pressed by the Obama administration.

The Supreme Court had been set to hear arguments next month in the case, a clash between the town of Mount Holly and residents who sued over the redevelopment of a predominantly minority neighborhood. The Mount Holly town council yesterday approved settlement of the dispute.

The accord averts the prospect of a watershed change in the scope of the 1968 Fair Housing Act and a separate law the administration has used against lenders. The court was considering requiring proof of intentional discrimination and barring “disparate impact” claims, which focus on the effect of a disputed policy without requiring evidence of intent.

President Barack Obama’s administration is relying on disparate-impact arguments in suits over housing and auto loans. Bank of America Corp., Wells Fargo & Co. and SunTrust Banks Inc. have agreed to pay at least $480 million to settle claims since December 2011. The U.S. Consumer Financial Protection Bureau has embraced the disparate-impact approach under the Equal Credit Opportunity Act.

The settlement is a missed opportunity for lenders, said Camden Fine, president of the Independent Community Bankers of America, which represents smaller lenders. He said legal uncertainty over disparate impact is “creating havoc among lenders.”

‘Solid Lenders’

“The government is using these issues as clubs to force otherwise solid lenders to do the government’s bidding on whatever social outcome they want,” Fine said in an e-mail. “This has got to stop or the very people they are purportedly trying to help will find it more and more difficult to get credit.”

Civil-rights advocates said they feared the court would invalidate the disparate-impact approach, changing the law across the country.

The Supreme Court under Chief Justice John Roberts has cut back legal protections for racial minorities in other contexts. In June, a divided court struck down a core part of the 1965 Voting Rights Act, which opened the polls to millions of Southern blacks.

Given those rulings, “I wouldn’t be too eager to have this bench decide a disparate-impact housing claim,” said Elizabeth Wydra, a lawyer with the Washington-based Constitutional Accountability Center, which filed a brief backing disparate- impact claims.

Appeals Courts

Eleven courts of appeals have ruled on the issue, and all have said the Fair Housing Act allows disparate-impact claims.

The high court will have another opportunity to take up the issue. The insurance industry in June sued to challenge a Department of Housing and Urban Development rule that interprets the Fair Housing Act as allowing such claims.

The settlement marks the second time the high court has agreed to rule on the issue, only to see a case disappear. A dispute involving St. Paul, Minnesota, was scuttled in 2012 when the city dropped its appeal at the Obama administration’s urging.

The housing case stems from an effort by Mount Holly to redevelop what it said was a blighted, high-crime area. Known as the Gardens, the neighborhood was originally built to provide homes for returning World War II veterans and their growing families. In more recent years, the Gardens was the only predominantly black and Hispanic area in town, with 75 percent minority residents in 329 residential units.

Vacant Lots

The town began buying homes in the Gardens, in most cases paying $30,000 to $50,000, until only 70 remained in private hands. The redevelopment effort has since stalled, even as the town has destroyed scores of homes and accumulated $18 million in debt. No new houses have been built, and the remaining structures now form a patchwork amid vacant lots.

A group of current and former residents sued, claiming the effort had a disparate impact on minorities. A federal appeals court said the case could go forward.

Under the settlement announced yesterday, the township can proceed with development of the area in exchange for the construction of 44 “emerging market” homes in the neighborhood. Twenty of them will be offered to current residents at no extra expense.

“The clients wanted to be able to stay in the community once it was revitalized,” Olga Pomar, the lead lawyer for the plaintiffs, said during a conference call. “The township has agreed that no one will have to move until a new unit is available for them.”

The Supreme Court case is Township of Mount Holly v. Mount Holly Gardens Citizens in Action, 11-1507.

With assistance from Sophia Pearson in federal court in Philadelphia, Carter Dougherty in Washington and Edvard Pettersson in Federal court in Los Angeles. Editors: Laurie Asseo, Michael Shepard