Supreme Court Rules FHA Encompasses Disparate Impact Claims

On June 25, the U.S. Supreme Court held in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. that a state’s “Qualified Allocation Plan” (QAP) implemented by an allocating agency violates the Fair Housing Act if it “disparately impacts” a protected minority even though the allocating agency did not intend to discriminate. The 5-4 decision allows complaints to be brought under the Fair Housing Act based on “disparate impact,” when a policy that appears to be neutral, or have no intent to discriminate, has an adverse effect or impact on a protected class. Justice Anthony Kennedy wrote the opinion, and was joined by Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan.

In response to the ruling, HUD Secretary Julián Castro stated, “The Supreme Court has made it clear that HUD can continue to use this critical tool to eliminate the unfair barriers that have deferred and derailed too many dreams. Working with our partners on the ground, we will continue to do all we can to build a housing market that treats all Americans with basic dignity and respect.”

Under a disparate impact theory of liability, a person or entity may be held liable for discriminatory conduct under the Fair Housing Act (FHA) without any showing of actual intent to discriminate. To make out a basic case, all that is necessary is statistical evidence that a policy or practice had a harsher effect–a “disparate impact”–on a class protected by the FHA.

Background

In 2008, the Inclusive Communities Project Inc. (ICP) lodged its disparate impact claim under the FHA, accusing the Texas Department of Housing and Community Affairs of disproportionately allocating tax credits to sites or “Qualified Census Tracts” (QCTs) that qualified for an increased level of credit and which were frequently predominantly minority neighborhoods. ICP demanded an injunction requiring the department to allocate low-income housing tax credits in the Dallas metropolitan area in a manner that creates as many low-income housing tax credit-assisted units in nonminority census tracts as there are in minority census tracts.

ICP’s theory was that the construction of a disproportionate number of LIHTC units in minority neighborhoods at best maintained current levels of segregation and did not further integration as required by the FHA. In its view, integration would be furthered by constructing more units in higher opportunity neighborhoods with good schools and responsive governments, and avoiding allocations to areas with high crime rates. These standards put forth by ICP intend to shift LIHTC developments to suburban locations and away from urban core neighborhoods, which appear to be linked with unresponsive governments, high crime, and poor schools.

Qualified Allocation Plans

A QAP lays out the criteria by which a state housing finance agency will select applicants to whom it will award tax credits. Each state must develop a QAP. The QAP also lists all deadlines, application fees, restrictions, standards, and requirements.

A QAP may contain either preferences or set-asides in order to ensure that its priorities are met. With preferences, a housing finance agency awards extra points when scoring applications to proposals that meet certain desired characteristics. Set-asides are funds specifically allocated to certain kinds of projects. Three mandatory preferences are:

• Projects serving the lowest income tenants;
• Projects obligated to serve qualified tenants for the longest periods; and
• Projects that are located in qualified census tracts (as defined in subsection (d)(5)(C)) and the development of which contributes to a concerted community revitalization plan [26 U.S.C. §42(m)(1)(B)(ii)].

Furthermore, a QAP must, by statute, include the following eight selection criteria:

• Project location;
• Housing needs characteristics;
• Project characteristics, including whether the project includes the use of existing housing as part of a community revitalization plan;
• Sponsor characteristics;
• Tenant populations with special housing needs;
• Public housing waiting lists;
• Tenant populations of individuals with children; and
• Projects intended for eventual tenant ownership [26 U.S.C. §42(m)(1)(C)(i)-(viii)].

These preferences and selection criteria do not identify integration or racial composition. The facts that a disproportionate number of the lowest income tenants may reside in predominantly minority neighborhoods, that those neighborhoods have both the greatest housing needs and the largest population of families on public housing waiting lists, and that these neighborhoods may attract a disproportionate share of LIHTCs aren’t surprising.

Safeguards Detailed in Opinion

It’s important to note that while the majority opinion firmly upholds the concept of “disparate impact,” it also attempted to reign in a broad application of disparate impact liability. The safeguards outlined in the opinion if implemented by lower courts may make it more difficult to bring disparate impact cases.

“Robust causality requirement.” The opinion is clear that disparate impact claims cannot be based solely on statistical disparities. The opinion states, “A statistical disparity must fail if the plaintiff cannot point to defendant’s policy or policies causing that disparity.” The opinion also points out that causation is not easy to prove “because of the multiple factors that go into investment decisions about where to construct or renovate housing units.”

Adoption of policies that address legitimate goals. The opinion affirmed that government agencies and housing providers can defeat a disparate impact claim by demonstrating a legitimate, nondiscriminatory purpose. The opinion stated that the Fair Housing Act “does not put housing authorities 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.”

Arbitrary, artificial, and unnecessary barriers. A prior Supreme Court decision in Griggs v. Duke Power Co. stated that “governmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The majority opinion repeated this concept that had been included in disparate impact analysis in the courts for many years. To demonstrate disparate impact, a plaintiff should be required to show affirmatively not only that a practice has a discriminatory effect, but also that it raises “artificial, arbitrary, and unnecessary barriers.”

What to Expect

In the wake of this decision, state housing agencies are likely to review the scoring criteria used in their QAPs and applications in an effort to balance the competing goals of community revitalization of urban cores and diversification of suburban communities. Agencies may ultimately decide that reducing investment in urban core neighborhoods in favor of increasing investment in affluent suburbs may well not reflect optimal housing and in a broader perspective, community development policy.

However, agencies will probably have to offer an explanation for the interests being served by each criterion. While site location is undoubtedly important, other factors, including impact over time, racial composition of project tenants, historical trends in neighborhood racial composition, and the impact of new investment in high-poverty neighborhoods will probably also be considered. All of these factors may be considered by allocating agencies through a methodology that furthers integration without establishing racial quotas.