On June 25, 2015, the U.S. Supreme Court, in the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, upheld the use of the contentious "disparate impact" legal theory in cases alleging fair-lending discrimination. The high court, in a surprise decision held by a 5-4 vote that the Fair Housing Act of 1968 (FHA) can be read to prohibit policies that adversely affect minority groups even when that was not the stated goal of the policy. The state of Texas, whose housing department was fighting a fair-housing claim, contended that the FHA required that plaintiffs prove intentional discrimination, and that mere reliance on statistics showing that decisions and practices have discriminatory effects was an insufficient basis for an actionable claim under the FHA.
Justice Anthony Kennedy, writing for the court, traced the history of racial discrimination and housing discrimination that pervaded American cities through most of the 20th century, and the difficulty of reversing entrenched racial isolation. "In light of the longstanding judicial interpretation of the FHA to encompass disparate-impact claims and congressional reaffirmation of that result, residents and policymakers have come to rely on the availability of disparate-impact claims… The court acknowledges the Fair Housing Act’s continuing role in moving the nation toward a more integrated society.”
The case centered on housing in Texas. The Inclusive Communities Project, a non-profit group, alleged the Texas housing agency, in violation of the FHA, disproportionately allocated tax credits to properties in Dallas areas already heavily populated by minorities, instead of allocating in a way that created an equal number of low-income assisted units in non-minority areas of the city. The Texas housing agency countersued, arguing that the FHA does not prohibit implicit discrimination, only explicit discrimination.
The high court's decision bolsters efforts by law enforcement authorities and the Consumer Financial Protection Bureau, which have brought legal cases alleging fair-lending violations by lenders despite claims that no discrimination was intended. Yet the ruling is a blow to lenders and industry advocates who say disparate impact unfairly penalizes financial institutions that are not aware, and never intended, that their credit policies may have a disproportionate effect on minority neighborhoods.
While the true impact of the court’s decision is not yet known, financial institutions and mortgage lenders should, at a minimum, critically review their lending policies and procedures to determine whether discretionary (and potentially discriminatory) pricing is allowed. Federal regulators have consistently demonstrated that financial institutions that allow for discretionary pricing without adequate, written justifications are ripe for remedial enforcement action.
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