The U.S. Supreme Court’s Decision in Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc.

In Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. ___, 2015 WL 2473449 (Jun. 25, 2015), the U.S. Supreme Court, in a 5-4 decision, held that disparate impact discrimination claims are cognizable under the Fair Housing Act, 82 Stat. 81, as amended, 42 U.S.C. § 3601 et seq. (the “FHA”). A disparate impact claim posits that a defendant’s policies or practices, while not intentionally discriminatory, have a “disproportionately adverse effect on minorities,” and are “otherwise unjustified by a legitimate rationale.” See Inclusive Communs., 2015 WL 2473449, at *3. A disparate impact claim typically is grounded in statistical evidence regarding the effects of the defendant’s policies or practices on a protected class. Id. at *15.

In prior decisions, the Court had found that disparate impact liability was contemplated in the area of employment discrimination under Title VII of the Civil Rights Act of 1964 (“Title VII”) and the Age Discrimination in Employment Act of 1967 (“ADEA”). The Court now has extended this reasoning to housing discrimination claims under the FHA. The decision is particularly relevant to the residential mortgage industry, where the FHA – along with the Equal Credit Opportunity Act, 15 U.S.C. 1691 et seq. (the “ECOA”) – are the basis for discrimination claims under federal law. The Inclusive Communities decision did not address the question of whether the ECOA similarly permits disparate impact claims. The decision could, however, support the conclusion that disparate impact claims may be brought under the ECOA as well.

Prior to the Inclusive Communities decision, every federal court of appeals to address the issue had found that the FHA was intended to open the door to claims based upon the use of disparate impact evidence. Thus, while disappointing to the industry, the Court’s decision does not change the existing law in this area. At the same time, the opinion includes a number of statements regarding the dangers of improper disparate impact litigation and the need for special vigilance by lower courts in guarding against such abuses. These statements can potentially aid defendants.

The Facts of the Case

The dispute in Inclusive Communities concerned the distribution of federal low-income housing tax credits. The plaintiff, the Inclusive Communities Project, Inc. (“ICP”), alleged that the Texas Department of Housing and Community Affairs (the “Department”) had distributed such credits in a discriminatory manner. ICP based its claim on a disparate impact theory, stating in its complaint that the Department had approved credits for 49.7% of applications in neighborhoods that were less than 10% Caucasian but only 37.4% of applications in areas that were 90-100% Caucasian, and that 92.9% of subsidized units in the City of Dallas were located in minority-majority neighborhoods. ICP claimed that these patterns perpetuated racial segregation in violation of the FHA, and brought claims under sections 804(a) and 805(a) of the FHA (42 U.S.C. §§ 3604(a) and 3605(a)).

The District Court ruled in favor of ICP, reasoning that ICP had proven a prima facie disparate impact case, and that “the Department ‘failed to meet [its] burden of proving that there are no less discriminatory alternatives’” for allocating the tax credits. See Inclusive Communs., 2015 WL 2473449, at *4. The Fifth Circuit Court of Appeals affirmed the District Court’s decision to the extent of agreeing that a disparate impact claim is permitted under the FHA, but reversed and remanded the decision because the District Court had improperly placed the burden of proving that less discriminatory alternatives exist on the defendant.

The Supreme Court’s Reasoning

The appeal to the Supreme Court was limited, at least ostensibly, to the narrow question of “whether disparate-impact claims are cognizable” under the FHA. See Inclusive Communs., 2015 WL 2473449, at *3. Regarding this issue, the Court affirmed the decision of the Fifth Circuit Court of Appeals. The majority opinion was authored by Justice Kennedy, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. Justices Thomas, Alito, Roberts and Scalia dissented.

The majority opinion was based on an interpretation of the intent and language of the FHA. The Court’s analysis relied in large part on comparisons to Title VII and ADEA. Referring to the Court’s prior disparate impact decisions in the area of employment discrimination, the Court articulated the overarching principle that “antidiscrimination laws must be construed to encompass disparate-impact claims when their text refers to the consequences of actions and not just to the mindset of actors, and where that interpretation is consistent with statutory purpose.” Id. at *8 (emphasis added). The Court held that the FHA satisfied this standard for three principal reasons.

First, the Court focused on the language of the statute. Section 804(a) of the FHA states that it is unlawful “[t]o 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 make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” See 42 U.S.C. § 3604 (emphasis added). The Supreme Court held that the phrase “otherwise make unavailable” “refers to the consequences of an action rather than the actor’s intent.” See Inclusive Communs., 2015 WL 2473449, at *9. The Court explained that the phrase is equivalent in function and purpose to Title VII and the ADEA’s language, “otherwise adversely affect.” Id. Section 805(a) of the FHA states that it is unlawful “to discriminate against any person in making available [a residential real estate-related transaction], or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” See 42 U.S.C. § 3605. The Court noted that it had previously “construed statutory language similar to § 805(a) to include disparate-impact liability.” See Inclusive Communs., 2015 WL 2473449 at *10 (citing Board of Ed. of City School Dist. of New York v. Harris, 444 U.S. 130, 140–141 (1979)).

Second, the Court noted that, in 1988, Congress enacted certain amendments to section 805 of the FHA (which only uses the term “discriminate” rather than “otherwise make unavailable”) and section 807 of the FHA. When Congress enacted these amendments, a number of Courts of Appeal already had concluded that the FHA encompassed disparate impact claims. However, the amendments did not prohibit such litigation. Thus, the Court found that Congress’s decision to amend the FHA “while still adhering to the operative language in §§ 804(a) and 805(a)” supported the conclusion that Congress “recogni[zed] that disparate-impact liability arose under § 805(a)” and generally “ratified disparate-impact liability” under the FHA. See Inclusive Communs., 2015 WL 2473449 at *11-12. The Court also reasoned that the substance of the amendments would have been superfluous if Congress had not agreed that disparate impact liability could exist under the FHA.

Third, the Court held that “[r]ecognition of disparate-impact claims is consistent with the FHA’s central purpose,” namely “to eradicate discriminatory practices within a sector of our Nation’s economy.” Id. at 12. Specifically, disparate impact litigation “permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.” Id. at *13.

Limitations on Disparate Impact Claims

The Inclusive Communities opinion also elaborates at length on the problem of “abusive disparate impact claims” (see Inclusive Communs., 2015 WL 2473449, at *15) and discusses the duties of lower courts in this regard, stating that “disparate-impact liability has always been properly limited in key respects.” Id. at *2. The Court’s observations on these limits should lend helpful support to a motion to dismiss an improper disparate impact claim.

First, the Court underscored that lower courts must “examine with care whether a plaintiff has made out a prima facie case of disparate impact,” and emphasized that “prompt resolution of these cases is important.” Id. As the Court explained, “[i]f the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purposes as well as the free-market system.” Id. at *15.

Second, the Court confirmed that a “showing of a statistical disparity” is insufficient for purposes of imposing disparate impact liability on a defendant. Id. at *2. If such a showing were sufficient, the Court held, disparate impact litigation would have the effect of imposing “racial quotas.” Id. The Court strongly emphasized the danger of quotas, stating disparate impact analysis, “[w]ithout adequate safeguards at the prima facie stage,” could “cause race to be used and considered in a pervasive way and ‘would almost inexorably lead’ governmental or private entities to use ‘numerical quotas,’ and serious constitutional questions then could arise.” Id. at *14.

Third, the Court held that an important aspect of a plaintiff’s prima facie burden in a disparate impact case is to show that the statistical disparity at issue was caused by defendant’s policies or practices, stating that “a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” Id. As the Court noted, “[a] robust causality requirement ensures that ‘[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact’ and thus protects defendants from being held liable for racial disparities they did not create.” Id. For instance, the Court noted, an apparent statistical disparity may be a consequence of the defendant’s compliance with other federal laws or regulations independent of the FHA, rather than policies or practices created by the defendant, in which case the case should be dismissed. Id. at *15. As the Court explained, the FHA “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.” Id. at *14. The Court also noted that “policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers’” and that “[c]ourts should avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision.” Id. at *15.

Fourth, even if a plaintiff makes out a prima facie disparate impact claim, the defendant may defeat that claim by showing that the underlying policy or practice is “necessary to achieve a valid interest.” Id. at *14. A valid interest may relate to, among other factors, “practical business choices and profit-related decisions.” Id. at *8. This burden-shifting framework “is analogous to the business necessity standard under Title VII” with respect to employment discrimination claims. Id. at *5. The Court explained this “valid interests” defense was necessary because “[e]ntrepreneurs must be given latitude to consider market factors” and “[z]oning officials . . . must often make decisions based on a mix of factors, both objective (such as cost and traffic patterns) and, at least to some extent, subjective (such as preserving historic architecture.” Id. at 14*.

Fifth, the Supreme Court noted that the burden lies with the plaintiff to prove that such a business justification is a pretext or otherwise should be rejected. To meet that burden, the plaintiff must show “that there is ‘an available alternative . . . practice that has less disparate impact and serves the [entity’s] legitimate needs.’” Id. at *8. It is insufficient for the plaintiff to simply “second-guess” the defendant’s policies or practices, as “[t]he FHA is not an instrument to force housing authorities [or other entities] to reorder their priorities.” Id. at *13.

Unanswered Questions

The Inclusive Communities decision leaves a number of difficult questions unanswered with respect to the nature of disparate impact claims. Three such questions are likely to come front and center as lower courts grapple with the likely flood of disparate impact claims following the Inclusive Communities decision.

First, on a practical basis, how should a lower court go about determining whether the plaintiff has identified a relevant “statistical disparity” as part of the plaintiff’s prima facie case? For example, on a motion to dismiss or a motion for summary judgment, to what extent should a court consider the reliability of the plaintiff’s data, the soundness of the plaintiff’s statistical methodology, or whether the plaintiff has used proper control groups? In the absence of rigorous standards in connection with these issues, it will be difficult for lower courts to comply with the Supreme Court’s call for “prompt resolution of these cases.” See Inclusive Communs., 2015 WL 2473449, at *2. The Supreme Court did not determine the level of statistical significance is necessary to form the basis for a claim of this nature.¹

Second, will the Court’s reasoning determine the question of whether disparate impact claims are cognizable under the ECOA? The CFPB, which has enforcement authority over the ECOA, has by regulation taken the position that disparate impact claims are cognizable under the ECOA, based on policy considerations similar to those the Supreme Court relied on in Inclusive Communities. See 12 C.F.R. § 1002.6(a). In addition, the ECOA uses the term “discriminate” with the same accompanying language as section 805(a) of the FHA. On the other hand, the ECOA does not contain the phrase “otherwise make unavailable or deny” contained in section 804(a) of the FHA, or any similar language referring to the consequences of an action, which the Court relied heavily on in the Inclusive Communities case. Instead, the ECOA’s phrasing forbids a creditor to “discriminate against an applicant . . . on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract).” 15 U.S.C. § 1691(a)(1). In addition, the Court also relied upon amendments to the FHA by Congress which the Court found indicated Congress’s recognition of disparate-impact liability under section 805(a) (finding these amendments would not make sense if the FHA encompassed only disparate treatment claims). See Inclusive Communs., 2015 WL 2473449, at *11. There have been no similar amendments to the ECOA. In our view, it is almost certain that the current Supreme Court would recognize disparate impact claims based on the ECOA were the question to come before it.

It is important to note that the Consumer Financial Protection Bureau has stated clearly that it intends to enforce ECOA claims based upon the use of disparate impact evidence—and the other federal banking agencies and the Department of Justice concur in this view. See CFPB Bulletin 2012-04 (April 18, 2012). As a practical matter, this means that all categories of lenders, (i.e., consumer and business financing intermediaries) should continue monitoring internal fair lending practices utilizing statistical tools—with particular attention being placed on the exercise of discretionary lending determinations. Further, the establishment of a robust fair lending culture and related training has been shown to be an effective measure to ameliorate the imposition of damaging enforcement actions. Finally, it is very probable that the use of disparate impact analysis will increase for several sectors of the lending community, such as the residential housing industry. This is because the CFPB will soon adopt new HMDA and Regulation C amendments that will substantially increase the number of data points that will be of use when attempting to prove a fair lending claim based upon disparate impact.

Third, it is unclear how courts will interpret and apply the standard of review for disparate impact claims. In 2013, the Department of Housing and Urban Development (“HUD”) issued a final rule regarding prohibitions on discriminatory effects, implemented at 24 C.F.R. § 100.500. The HUD rule establishes that once a plaintiff makes a prima facie disparate impact claim, the defendant has the burden of proving that the challenged practice is necessary to achieve one or more substantial, legitimate nondiscriminatory interests. The Court’s opinion suggests that disparate impact claims should be carefully scrutinized at an early stage, and is potentially inconsistent with the HUD rule – while the HUD rule discusses a defendant demonstrating a “substantial, legitimate nondiscriminatory interest” to defeat a prima facie disparate impact claim, the Court’s opinion indicates that a defendant may defeat such a claim by showing that the underlying policy is “necessary to achieve a valid interest.” A “valid” interest appears to be a less demanding standard than a “substantial” interest. It remains to be seen exactly what standard federal district courts and courts of appeal will use and whether they will apply the level of scrutiny suggested by the Court; and the lack of clarity with respect to this issue may result in a number of inconsistent decisions.

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We trust that this discussion of the Inclusive Communities case is useful for planning and compliance purposes. We caution, however, that this discussion does not constitute legal advice—and we urge the reader to consult counsel on the important legal and risk management issues raised.

In that regard, Dorsey attorneys regularly practice in the fair lending arena, and are available to answer any questions that might arise.