How Disparate Impact Ruling Affects Lenders’ Daily Operations
The Supreme Court’s recent ruling that the disparate impact theory of liability can be applied to the Fair Housing Act means mortgage lenders must be even more vigilant in their ongoing testing and evaluation of business practices that could be interpreted as even unintentional discrimination.
Among other things, the Fair Housing Act makes it illegal to “refuse to sell or rent, to deny or otherwise make unavailable a dwelling to a person…or to discriminate against any person making certain real estate transactions because of race or other protected characteristic.”
The Court, which split 5-4 on the case, ruled that the language in the Department of Housing and Urban Development’s Fair Housing Act, including the phrase to “otherwise make unavailable” indicated that neutral policies and/or practices that cause discriminatory effects could be subject to action, even if intent to discriminate isn’t found.
In a disparate treatment case, a lender accused of discrimination would only need to provide (not prove) that a practice or policy that has a discriminatory effect had a legitimate, nondiscriminatory reason. As long as a plaintiff could not prove the policy or practice was a pretext for discrimination, the lender prevails.
In a disparate impact case, the burden on the lender is far greater. Instead of having the burden to articulate a legitimate reason, a plaintiff merely needs to show that a seemingly-neutral policy caused discrimination. Once that is shown, the burden shifts to the lender to prove that the practice in question is a business necessity.
A business necessity is a practice that serves the legitimate employment goals of the lender in a significant way. Importantly, in describing the business necessity defense, the Court noted that businesses need to be free to make “practical business choices and profit-related decisions that sustain a vibrant and dynamic free enterprise system.”
Yet, even if a lender meets this burden, the plaintiff might still prevail by showing that other practices would serve the lender’s interest with less of a discriminatory effect.
Ultimately, what this means for lenders is that regular regression testing is essential. A lender with disparate lending patterns will have to prove that any challenged practices are necessary, and such practices were put into place due to a lack of less-discriminatory alternatives available to reach the same goal.
Lenders should also immediately review their pricing policies; the discretion given to loan officers in pricing; pricing exception policies; and branch, loan officer and manager compensation practices.
Obviously, lenders who do not have statistically significant lending disparities do not have to worry about disparate impact claims, but they cannot thumbnail such conclusions or merely rely upon shortcuts.
Lenders must perform regular regression analyses consistent with those performed by the Equal Employment Opportunity Commission, and should do so at corporate, branch and regional levels.
Moreover, lenders should carefully examine the reasons why they maintain certain pricing and compensation practices and ensure they can explain their necessity, even if no disparity exists.
Many lenders will need to consider placing additional controls in place so as to ensure their policies and practices are not unnecessarily broad.
Beyond the compliance concerns, lenders should consider how this decision could impact day-to-day business. In many respects, larger institutions will need to be more careful about pricing and compensation. Even small numerical disparities can give rise to statistically significant disparities given the overall volume of business.
The bandwidth of a standard deviation (the test that measures the disparity) gets smaller the larger the number of data points.
Smaller lenders in fact, could actually benefit because the smaller number of files likely provide a slightly greater degree of flexibility. Since pricing will likely need to be flatter across the board, lenders that are capable of providing more personalized service and faster decision-making will have an advantage.
Relationships with referral sources and overall reputation for service will be key as the pricing distinctions become blurred.
Overall, the Supreme Court’s decision will significantly affect the lending industry and lenders should carefully evaluate their compliance, origination, pricing and compensation strategies.
Developers: Beware of Disparate Impact After Supreme Court Ruling
Following the Supreme Court’s decision in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, state agencies and real estate developers should carefully consider the effects of their low-income housing allocation decisions on minority communities and be prepared to justify their actions in a racial context. In the case, the United States Supreme Court held, in a 5-4 decision, that disparate impact claims may be brought under the Fair Housing Act (FHA).
Fair Housing Act
FHA §804(a) provides that it shall be unlawful:
“To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise to make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin” (emphasis added).
And FHA §805(a) provides:
“It shall be unlawful for any person or other entity whose business includes engaging in real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin” (emphasis added).
The Question of Disparate Impact
Although the Supreme Court long ago ruled that a 14th Amendment Equal Protection Clause claim requires a showing of discriminatory intent, the Court had not addressed the question of whether a claim can be brought under the FHA on the basis of “disparate impact,” namely to challenge practices that have a “disproportionately adverse effect on minorities” and are otherwise unjustified by a legitimate rationale.
In TDHCA v. ICP, ICP alleged that low-income housing tax credit (LIHTC) allocation decisions by TDHCA, the state credit allocating agency, caused continued segregated housing patterns by allocating too many LIHTCs for housing in predominantly black, inner-city areas and too few for housing in predominantly white, suburban neighborhoods. ICP contended that TDHCA must change its LIHTC allocation selection criteria to encourage the construction of low-income housing in suburban communities. Even though such suburban housing would be available for general public use and not be “race-favored,” by promoting a deconcentration of poverty it presumably would assist in desegregating housing and providing housing and other opportunities for protected classes.
The Court, which focused on statutory interpretation (e.g., “to make available” and “because of”) and on cases in the employment and age discrimination areas, held that the FHA allows disparate impact claims.
Implications for Low-Income Housing Development
Importantly, the Court’s decision acknowledges that race may need to be considered in some circumstances to comply with the FHA. Although the Court noted that remedial orders in disparate impact cases should be designed, when possible, to eliminate racial disparities through race-neutral means, it also acknowledged that “race may be considered in certain circumstances” and that awareness of race in attempting to address the ills of racial segregation does not “doom that endeavor at the outset.” This acknowledgement eliminated concerns that the Court would declare disparate impact analysis unconstitutional under the Fourteenth Amendment.
The Court also stated that disparate impact liability is limited in key respects, and that housing authorities and private developers have leeway to explain the valid interests served by their policies: “The FHA does not decree a particular vision of urban development and it does not put housing authorities and private developers in a double bind of liability, subject to suit whether they choose to rejuvenate a city core or to promote new low-income housing in suburban communities.”
It is important to note that TDHCA v. ICP held only that disparate impact can be the basis of a FHA claim, and not that any particular action must be taken by anyone. The Court does, however, highlight the need for agencies and developers to consider the effects of allocation decisions on minority communities and to justify their actions in a racial context.
The case now will proceed to settlement or to a trial on the issue of whether there were less discriminatory alternatives for allocating LIHTCs, in which the burden of proof is on the plaintiff. The Court may also re-examine whether ICP made a case of disparate impact and whether federal LIHTC law concerning allocations tied TDHCA’s hands such that there is no liability.
Some of the issues concerning LIHTCs and geographic desegregation were discussed in Callison, “Achieving Our Country: Low-Income Housing Tax Credits and Geographic Desegregation,” published in the Southern California Journal of Law & Social Justice in 2010. For a copy, contact the author.
In Fair Housing Act Case, Supreme Court Backs ‘Disparate Impact’ Claims
Supreme Court upholds a key tool fighting discrimination in the housing market
By Emily Badger June 25
AFP PHOTO / KAREN BLEIER / FILESKAREN BLEIER/AFP/Getty Images
Civil rights groups and the Obama administration won a major victory Thursday as the Supreme Court upheld a tool that advocates argue is essential to fighting housing discrimination and patterns of segregation that have persisted in America for decades.
In the 5-4 decision written by Justice Anthony Kennedy, the court ruled that the 1968 Fair Housing Act prevents more than just intentional discrimination in the housing market. The court said the law can also prohibit seemingly race-neutral policies that have the effect of disproportionately harming minorities and other protected groups, even if there is no overt evidence of bias behind them.
“The Court acknowledges,” Kennedy wrote, “the Fair Housing Act’s continuing role in moving the Nation toward a more integrated society.”
He cautioned, though, that “disparate impact” claims don’t simply arise any time statistical disparities appear along racial lines in housing. It must be clear that housing policies caused that disparity, and that those policies don’t serve another valid goal.
The decision upholds a legal strategy that civil rights groups and the federal government have used for four decades to fight lending practices, local housing policies and zoning laws that have had the effect of limiting housing options available to minorities. Lower courts have repeatedly agreed that the Fair Housing Act allows such “disparate impact” claims, but the Supreme Court had not weighed in on the question until now.
As overt racial discrimination has receded from the housing market, civil rights lawyers and housing advocates have argued that “disparate impact” claims are vital to dismantling policies and practices that sound like they have little to do with race at all, such as zoning laws that bar multi-family apartment construction in wealthier white suburbs. If the Supreme Court had ruled that such claims couldn’t be made under the Fair Housing Act, civil rights groups argued that the landmark civil rights law would have lost much of its power.
“This really is the most we possibly could have hoped for,” said Betsy Julian, the president of the Inclusive Communities Project, the Texas nonprofit that brought the case. “We’re thrilled that ‘disparate impact’ as a principle was upheld. We’re also particularly gratified that the court appreciated that we are not a post-racial society when it comes to housing and that we have a ways to go.”
The ruling is a defeat for banks and developers who countered that the fear of disparate impact lawsuits might discourage them from trying to build affordable housing. Critics have also argued that “disparate impact” claims unfairly impugn the motives of banks, communities and developers who never intended to discriminate.
In his dissent, Justice Samuel A. Alito Jr. warned that the court “makes a serious mistake” in giving meaning to the Fair Housing Act that Congress never intended when it passed the law.
The case arose from a lawsuit filed by the Inclusive Communities Project against the Texas Department of Housing and Community Affairs over how it distributes tax credits for low-income housing. ICP argued that the state’s formula effectively ensured that low-income housing was primarily built in poor, minority neighborhoods, and seldom placed in white suburban ones. As a result, poorer, minority families in need of affordable housing had little option but to live in impoverished communities without access to good schools, jobs or opportunity.
“This is going to open up this issue all over the country,” said Myron Orfield, a law professor at the University of Minnesota. “The things that are happening in Texas are happening in every city in the Untied States. They’re all evading civil rights law by concentrating affordable housing in segregated neighborhoods, thus perpetuating segregation — which Justice Kennedy said they cannot do today.”
While the Texas case was winding its way through the courts, the Department of Housing and Urban Development, which is charged with enforcing the Fair Housing Act, issued a rule in 2013 explicitly interpreting the law to cover disparate impact claims. HUD Secretary Julian Castro in a statement Thursday called the ruling “another important step in the long march toward fulfilling one of our nation’s founding ideals: equal opportunity for all Americans.”
The White House, in a separate statement, said the decision “reflects the reality that discrimination often operates not just out in the open, but in more hidden forms,” such as predatory lending and exclusionary zoning.
The decision was expected to be a close one. The Supreme Court had twice previously tried to take up “disparate impact” cases to resolve the question, despite the agreement among lower courts. But both earlier cases settled before they reached the high court, to the relief of civil rights groups and administration officials who feared conservative justices were searching for a case to weaken the law.
The court’s four liberals sided in the case with Kennedy, while Alito was joined in his dissent by Antonin Scalia and John G. Roberts Jr. Clarence Thomas wrote a separate dissent.
In his rebuttal, Thomas wrote that racial imbalances don’t always disfavor minorities, pointing to instances in which minorities have dominated certain industries.
“And in our own country, for roughly a quarter-century now, over 70 percent of National Basketball Association players have been black,” Thomas wrote. “To presume that these and all other measurable disparities are products of racial discrimination is to ignore the complexities of human existence.”
The case is Texas Department of Housing and Community Affairs et al v. Inclusive Communities Project, Inc.
Emily Badger is a reporter for Wonkblog covering urban policy. She was previously a staff writer at The Atlantic Cities.
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