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SCOTUS upholds 'disparate impact' theory in discrimination cases

In a loss for lenders and the mortgage industry, a divided U.S. Supreme Court on Thursday ruled that anti-discrimination lawsuits can be filed under federal law even if the accused party had no intent to discriminate.

The Court ruled 5-4 that federal agencies and fair-housing groups could continue the long-standing practice of using the theory of “disparate impact” to bring cases against lenders and other housing industry participants when their policies and practices, however color blind on the surface, produce discriminatory outcomes.

Federal agencies, for example, have used disparate impact theory in so-called redlining and discretionary pricing cases, where minorities have been denied home loans in higher numbers than whites or paid higher interest rates and fees.

Specifically, the Supreme Court ruled in the case of the Texas Department of Housing and Community Affairs vs. the Inclusive Communities Project. The Texas agency has been accused of disproportionately distributing tax credits for low-income housing projects in neighborhoods with high minority populations, thereby potentially keeping minorities out of wealthier white neighborhoods.

The decision, written by Justice Anthony Kennedy, was broad-based, however, and should end the debate on whether disparate-impact theory can be applied in Fair Housing Act cases.

“This was a 100 percent victory for the Fair Housing Act,” said Washington, D.C.-based attorney Stephen Dane, who specializes in fair housing litigation.  

“The decision is simply an endorsement of what fair-housing advocates and federal enforcement agencies have been using for over 40 years,” he said. “It really, quite frankly, didn’t need to be taken up by the Supreme Court.  Now that it has, the debate is over.”

In the opinion, however, Kennedy did underscore the limitations of the use of disparate-impact theory. He cautioned that courts should not interpret the liability “to be so expansive as to inject racial consideration into every housing decision.”

He also wrote that limitations are in place to protect defendants from “abusive disparate-impact claims” and orders from the courts that impose quotas and racial targets “might raise difficult constitutional questions.”  

Debate now shifts on disparate impact

Kirk Jensen, a partner with Washington, D.C.-based law firm Buckley Sandler said that he expects the debate to shift to how the theory is applied in discrimination cases. If defendants can prove that they had legitimate non-discriminatory reasons for their policy, he said, then the burden shifts on the plaintiffs to prove that there was a less discriminatory alternative.

“The debate about whether there is disparate impact under the Fair Housing Act is now over, but the debate about what the proper standards are for the burden shifting framework for disparate impact is ongoing,” he said.

“One thing that is clear from the court’s decision is that a mere statistical disparity should not give rise to disparate impact,” Jensen said. “There are a number of other factors that legitimately must be included in a disparate impact analysis, including whether or not market factors justify policies and procedures.”


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