On June 25, 2015, a 5-4 majority of the U.S. Supreme Court ruled that the Fair Housing Act (“FHA”) permits discrimination claims brought under a disparate impact theory of liability. Justice Kennedy authored the majority opinion in the much-anticipated decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. – a case previously reported on several times in Troutman Sanders’ Consumer Financial Services Law Monitor Blog here, here and here.
Under disparate impact, a defendant may be held liable for discriminating against a protected group without any evidence of intent or motivation to discriminate. Rather, disparate impact arises when a plaintiff proves that a neutral policy results in a disparate, negative impact on the protected group. Plaintiffs typically attempt to prove such impacts by showing statistical disparities in situations involving arbitrary policies that perpetuate segregation or discriminatory effects.
Prior to the ruling, some onlookers thought the Court may strike down disparate impact under its prior ruling in Smith v. City of Jackson, 544 U.S. 228 (2005), in which a plurality of the Court held that language in the Age Discrimination in Employment Act (“ADEA”) similar to the key provision of the FHA did not give rise to an effects-based theory of liability, and required a finding of discriminatory intent.
The Court in Tex. Dept. of Housing, however, found that the FHA’s language prohibiting acts that “otherwise make unavailable” housing opportunities to protected groups endorses disparate impact, because it “refers to the consequences of an action rather than the actor’s intent.”
The Court, however, did stress that abuse of disparate impact theory could lead to grave constitutional concerns, whereby entities are second-guessed for legitimate business decisions. The Court thus warned that “[c]ourts must . . . examine with care whether a plaintiff has made out a prima facie case of disparate impact and prompt resolution of these cases is important. A plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact.” The Court also made clear that “policies are not contrary to the disparate-impact requirement unless they are artificial, arbitrary and unnecessary barriers.”
In the instant case, the Court described the plaintiffs’ claim as a “novel theory of liability” that was unlike the “heartland of disparate-impact suits targeting artificial barriers to housing.” Furthermore, the Court indicated that the plaintiffs will likely face difficulties on remand and will need to show the case is not merely “an attempt to second-guess which of two reasonable approaches a housing authority should follow in the sound exercise of its discretion.”
It also remains to be seen whether the Court’s opinion applies to disparate impact liability under the Equal Credit Opportunity Act (“ECOA”), which has driven both private litigation and regulatory enforcement actions against major lenders in recent years. The scope of liability for discrimination under 15 U.S.C. § 1691(a) of ECOA does not include the language the Court focused on in the FHA to hold that disparate impact is a viable theory under FHA. Instead, ECOA only holds liable entities that discriminate “on the basis of race, color, religion, national origin, sex or marital status, or age,” or “because” the applicant’s income derives from public assistance or the applicant has exercised rights under the statute. (Emphasis added). Arguably, under the Court’s logic and its prior opinion in Smith, there is a viable claim that disparate impact cannot stand under ECOA. Needless to say, however, financial institutions of all sizes need to focus more carefully than ever on their fair lending compliance.
Troutman Sanders’ Financial Services Litigation team is a nationwide leader in defending financial institutions against fair lending claims brought by private litigants or regulators, and in providing fair lending compliance advice.