Disparate Impact Ruling Creates Opportunities

Although the original intent of the Fair Housing Act (Act) was to provide equal housing opportunities for protected citizens, the nation's neighborhoods are increasingly segregated into two groups, further perpetuating the prophecy of the 1967 Kerner Commission Report of "two societies, one black, one white—separate and unequal."

Signed into law days after the death of Martin Luther King in 1968, the Act prohibits individuals and entities from refusing to sell or rent housing to any individual because of race. While the purpose of the Act was to equalize access to housing, the law has had questionable impact on eradicating racial isolation. According to a 2012 report by Gary Orfield, John Kucsera, and Genevieve Siegel-Hawley, the typical black or Latino today attends school with almost double the share of low-income students in their schools than the typical white or Asian student.

However, a U.S. Supreme Court decision this summer may make it easier for developers around the nation to build low-income housing in high-income neighborhoods. In a 5-4 decision, the Court paved the way for disparate impact to be challenged under the Fair Housing Act. Disparate impact is when a policy that may appear to be neutral has a discriminatory effect on a group based on race, sex, age or disability. These claims often use statistical models to prove disparity, rather than behaviors of unequal treatment. The Supreme Court ruled that discrimination doesn't have to be intended, and disparate impact claims are cognizable under the Act.

This regulatory principle has been hotly debated. The Obama administration issued a U.S. Department of Housing and Urban Development (HUD) regulation officially providing for a disparate impact theory of liability under the Act in February 2013. However, in 2014, the D.C. Circuit Court ruled that the policy rules be abandoned as the Act only permits claims based on intentional discrimination.

Yet, on June 25, 2015, the Supreme Court upheld the ruling. Justice Anthony Kennedy, who wrote the 24-page majority opinion, wrote that although the language of the Act does not expressly allow for disparate impact claims, “recognition of disparate-impact claims is consistent with the FHA’s central purpose of ending discriminatory practices in housing.” 

The justice wrote, "These unlawful practices include zoning laws and other housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification."

The issue landed in the U.S. Supreme Court when The Inclusive Communities Project (ICP) alleged that the Texas Department of Housing and Community Affairs (TDHCA) disproportionately allocated low-income housing tax credits (LIHTC) to developers of properties in areas highly populated by minorities, resulting in a disparate impact on the availability of low-income housing in minority areas versus non-minority areas in violation of the Act.

The decision came despite arguments from developers and housing associations, fearing that disparate impact will make affordable housing less competitive and more expensive, while having minimal effect in the fight against segregation.

In the majority opinion, Kennedy specified, “The Act 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.”

The court provided further limitations and protection for defendants on the application of the theory, recognizing that businesses must be given “leeway to state and explain the valid interest served by their policies,” and should be able “to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” 

The court was clear that disparate impact claims that rely on statistical disparity alone “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The court suggested, “it seems difficult to say as a general matter that a decision to build low-income housing in a blighted inner-city neighborhood instead of a suburb is discriminatory, or vice versa.”  The ruling went on to state that business development decisions are dependent upon a variety of market, economic and demographic issues. The court held that “it may also be difficult to establish causation because of the multiple factors that go into investment decisions about where to construct or renovate housing units."

Supporters of the disparate impact theory perceive the court’s decision as a major victory toward providing affordable housing in affluent neighborhoods, ultimately giving protected groups a chance to move into areas with better schools and lower crime.

The disparate impact decision affirms the original intent of the Act: Implicit discrimination is just as subversive as explicit discrimination. But given that the decision was not unanimous, the application of disparate impact will be revealed through its interpretation in the lower courts as the issue continues to evolve.  

Regardless, the decision is a clear signal to developers to think carefully about site selection, and to put more effort into writing policies that explain the reasons why they are building in the locations they choose. 

The TDHCA case is now back at the Fifth Circuit for further proceedings. If the Fifth Circuit sends the case back to the District Court, the court will review the facts in light of the Supreme Court's decision. If this happens, TDHCA would likely have stronger arguments to combat a claim of disparate impact than it did when ICP first filed its complaint in the District Court. Those in the affordable housing industry will be paying close attention to this case as it moves back down through the courts.

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