On January 21, the U.S. Supreme Court held oral argument in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., a case in which, as we previously reported here and here, the Petitioner has challenged the applicability of a so-called “disparate impact” theory of liability under the Fair Housing Act (FHA).  While Supreme Court observers will often tell you not to place too much weight on justices’ comments during oral argument as a predictor of the outcome, there were a few exchanges worthy of mention.

Before delving into the oral argument, and by way of background, the challenged disparate impact liability does not arise from intentional acts of discrimination.  Rather, disparate impact refers to what plaintiffs or regulators consider statistically-significant disparities between outcomes in a protected group versus outcomes among non-protected groups or the general population.  In other words, under disparate impact a court looks at the effects of a facially neutral policy.  Once a disparity is discovered, the defendant is given an opportunity to explain the reasons for the policy, and, if a legitimate reason for the policy is articulated, the plaintiff must then come forth with an alternative that vindicates the goals of the policy without creating the disparate impact.

It is also important to note that this case should be watched equally closely by other industries not involved in housing.  While the FHA, most notably 42 U.S.C. § 3605, has direct application to members of the mortgage industry, many believe that any decision in Tex. Dept. of Housing will apply equally to disparate impact claims brought under the Equal Credit Opportunity Act, which has broad application in the financial sector.  It is under ECOA that the Consumer Financial Protection Bureau has used disparate impact in its most aggressive efforts to regulate and reform indirect auto lending.  That said, some justices during oral argument seemed to focus their analysis of whether the text of the FHA permitted effects-based disparate impact claims through the phrase “or otherwise make unavailable,” which appears in several subsections of 42 U.S.C. § 3604.  No similar language appears in ECOA.

When discussing the text of the FHA, justices’ reactions, as one might expect, were mixed.  Some fixated on the fact that the FHA prohibits discrimination “because of” protected characteristics, which implies a rationale-focused, rather than effects-focused, inquiry.  Others looked at 1988 amendments passed by Congress that explicitly limited an effects-based review under certain circumstances, and seemed to conclude that the amendments would make little sense if, generally, the FHA did not permit an effects-base disparate impact theory of liability at all.  Justice Scalia asked questions on both sides of this debate, leading some to wonder whether the normally conservative justice would uphold disparate impact.

Several comments during oral argument also addressed the ambiguity of the statute and the level of deference afforded regulations from the Department of Housing and Urban Development interpreting the FHA to permit disparate impact liability.  At one point, Justice Breyer expressed extreme skepticism at the idea that the text of the FHA unambiguously prohibits disparate impact liability, when ten federal circuit courts had held the opposite.  Such remarks could bolster the idea that HUD’s authority to promulgate regulations under the FHA means that its regulations permitting disparate impact should be afforded deference.  But later, Justice Alito expressed concern at the timing of such regulations, and suggested that a different rule should apply when a federal agency promulgates regulations “to manipulate the decisions of this Court[.]”

Several of the justices also were concerned with the possibility of remedies based on race or other characteristics, which they indicated would be forbidden under prior precedent.  Chief Justice Roberts also made the point several times that what is considered a policy that negatively affects a protected class is unclear, which could lead to scenarios where defendants are punished no matter what policies they institute.

Overall, the vote may rest with Justice Kennedy, often seen as the most moderate member of the Court.  During oral argument, Justice Kennedy asked a single question, prompted by Chief Justice Robert’s discussion of the possible Catch-22 disparate impact could create.  After the Solicitor General acknowledged the possibility that, when “Community A wants the development to be in the suburbs,” and Community B “wants it to be in the poor neighborhood,” both communities could run afoul of the first step in the disparate impact analysis, Justice Kennedy remarked, “[T]hat seems very odd to me.”

In the end, the financial services industry should continue to stay tuned.  It is still unclear how the Supreme Court will rule, and so industry participants should not make any decisions based on an assumption that disparate impact is likely to be struck down.