The Supreme Court of the United States recently ruled on a case that may have a profound impact on a number of Americans. No, not that one, or that one. We’re talking about the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project (ICP). Not quite the sizzle of other recent cases, but the effect it could have on businesses involved in real estate and mortgage lending is significant. The ruling in this case held that disparate impact claims are recognized under the Fair Housing Act. Unless you’ve been following this case closely, you probably don’t know what disparate impact is or what the significance of it is (until recently I counted myself in that group as well). Let’s start by defining disparate impact and understanding how it applies to housing.
What is Disparate Impact?
The Fair Housing Act “prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions based on race, color, national origin, religion, sex, familial status, and disability”. The simple interpretation of this is that it is illegal to intentionally discriminate against (or have policies that discriminate against) a person when it comes to housing. Disparate impact is the idea that a policy can have a discriminatory effect even if it wasn’t created with an intent to discriminate. Simply, it is the theory that an individual or organization can be held liable for unintentional discrimination when it comes to housing or mortgage lending. This means that if someone can show statistical evidence of discrimination against a protected class, they can bring an anti-discrimination lawsuit against your business. You then have to prove in a court of law that there is an important business objective to the policy that is causing the disparate impact. If that sounds like guilty until proven innocent to you, then you have a good understanding of the new ruling.
Can you give me an example?
Laurie Goodman, director of the Housing Finance Policy Center gives a good explanation as it relates to the mortgage industry:
“You can only hold a business responsible for what they can control. For example, if a lender applies uniform underwriting standards to all applicants, it will likely result in more mortgage denials for black and Hispanic applicants than for white applicants, because there is a difference in income, wealth and credit experience between the groups. Businesses certainly have a responsibility to support, and at the minimum, not to stand in the way of government programs that push for greater equality of opportunity. But that is different than the disparate impact doctrine, which could hold the private sector guilty of discrimination if their policies resulted in a differential impact on different racial and ethnic groups, despite the fact that these groups have differences in income, wealth and credit experience.”
So let’s be reasonable.
If someone brought a disparate impact suit for the above reason, the mortgage lender could show that there is an important business objective to requiring a minimum credit score in determining whether an applicant is eligible for a loan. It would be easy to show historical data proving a higher rate of default for customers with lower credit scores which negatively affects the profitability of the business. The business could feel confident they would win this suit, but the issue is the fact that they would have to defend that suit in the first place, and that is what has business owners nervous. One more example is the case of Magner v. Gallagher. In this case, Multi-family property owners in the city of St. Paul argued that the city’s housing code which requires that landlords to maintain minimum maintenance standards for all structures and premises for basic equipment and facilities for light, ventilation, heating and sanitation; for safety from fire; for crime prevention; for space, use and location; and for safe and sanitary maintenance of all structures and premises caused them to raise rents and decrease the number of units available to African-American tenants (which were the majority of people renting their properties currently). A district court granted a summary judgement for the City (Magner), but the Eighth Circuit held the respondents (Gallagher) should be allowed to proceed to trial because they presented sufficient evidence of a disparate impact on African-Americans. Yes, the court just ruled that policies put in place to require landlords to maintain adequate living standards in their apartments in St. Paul were discriminatory under disparate impact. This case was later settled, but it just goes to show how crazy disparate impact cases could be. A policy whose sole goal was to provide better and safer living conditions for tenants could be made illegal because it theoretically discriminated against the tenants it was trying to help.
So now what?
No one is really sure. It could turn out to not really be that big of a deal, or we could see a flood of lawsuits. It is possible that if you own an apartment complex in a neighborhood that is 20% African-American, and only 5% of your tenants are African-American, then you could be slapped with a disparate impact lawsuit. In the case that was before the Supreme Court, it was concluded that disparate impact was established based on the fact that the Housing Department approved low-income housing credits for 49.7% of units in neighborhoods that were 90 – 100% non-Caucasian while it only approved credits for 37.4% of units in neighborhoods that were 90 – 100% Caucasian. The ICP asserted that the allocation of these credits caused “continued segregated housing patterns by its disproportionate allocation of tax credits, granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods”. You can’t be sued on statistics alone, there has to be some evidence to suggest that the statistical discrepancy is caused by a policy you have in place. That being said, the lack of evidence does not preclude someone from filing a disparate impact suit, it just means the case will be dismissed if the party bringing the suit can’t prove that “a challenged practice caused or predictably will cause a discriminatory effect”. All we know for sure is that the boundaries of this law and its definitions will most likely be tested in the courts over the next few years. If anything, it should be interesting.