Special Issue: Q&A on the High Court’s Ruling on Disparate Impact Liability

July 28, 2015

In this Special Issue, Fair Housing Coach spotlights the new Supreme Court ruling on fair housing law and what it may mean for your community.

In this Special Issue, Fair Housing Coach spotlights the new Supreme Court ruling on fair housing law and what it may mean for your community.

At stake: whether you could be liable for discrimination—even if it’s unintentional—because your policies or practices have a negative effect on minorities or other people protected under fair housing law. Everyone agrees that federal fair housing law covers intentional discrimination, but there were lingering questions about whether it also applies to what’s known as “disparate impact” discrimination—housing practices that appear to be neutral, but have an unfair effect on members of protected classes.

In late June, the Supreme Court resolved the question once and for all by ruling that the law does indeed cover such claims.

It was a big surprise, particularly among court watchers who had predicted the opposite result. But the ruling didn’t change the law, since that’s what most federal courts—and HUD—have been saying all along. Nevertheless, it could shake things up by triggering increased scrutiny—and legal challenges—by federal enforcement officials and private fair housing advocates against multifamily housing communities for housing practices thought to have a disparate impact on protected groups.

In this issue, we’ll explain what disparate impact is, what the Court decided, and how it might affect your community. It’s still early, but we’ve polled our fair housing experts to get some sense of where things may be headed and what practical steps you can take to avoid potential fair housing claims based on disparate impact.

Coach’s Tip: If you’d like to read the Supreme Court decision on disparate impact, Texas Department of Housing And Community Affairs v. Inclusive Communities Project, Inc., it’s available on the Court’s website at http://www.supremecourt.gov/opinions/14pdf/13-1371_m64o.pdf.

WHAT DOES THE LAW SAY?

The federal Fair Housing Act (FHA) prohibits discrimination in housing “because of” race, color, religion, sex, national origin, familial status, or disability. The FHA applies to multifamily housing communities as well as many others in the real estate industry, including developers, lending institutions, and property insurers. It also applies to state and local laws and policies affecting residential housing.

Q: What Does Disparate Impact Mean?

A: In a nutshell, disparate impact claims focus on the effects of your actions—not your intent. In a disparate impact case, the claim is that your policies had the effect of discriminating based on race or some other protected class—even if there’s no proof that you intended to discriminate.

Disparate impact claims are far from the typical fair housing case. Much more common are fair housing claims based on intentional discrimination—what’s known as “disparate treatment”—that is, purposely treating people differently because of their race, color, religion, sex, national origin, familial status, or disability.

The FHA clearly bans intentional discrimination. An obvious example is refusal to rent to racial or ethnic minorities, but it’s also unlawful to engage in more subtle forms of intentional discrimination, such as misrepresenting availability or quoting higher rent charges to members of protected classes. In disputes such as these, the focus is on intent—why the community acted the way it did.

In contrast, fair housing claims based on disparate impact aren’t so much concerned with your intent, but on the effects, of your policies or practices. These types of claims challenge policies that appear to be neutral but have an unfair discriminatory effect on members of protected groups. Most rely on statistical evidence to show that the policy has a significantly adverse or disproportionate effect on members of a protected class. Since the focus is on the effects of the policy, not its intent, the community may be liable for adopting or enforcing the policy even if there was no intent to discriminate based on race or other protected class.

For multifamily housing communities, disparate impact claims often involve challenges to policies that act as an artificial barrier to housing. Disputes over occupancy standards, for example, often rely on disparate impact claims: For years, courts have ruled that overly restrictive occupancy policies violate fair housing law because of their disparate impact on larger households, which are more likely to be families with children.

Q: What Was the Supreme Court Case About?

A: The dispute was about where housing for low-income persons should be constructed in Dallas, Texas—that is, whether it should be built in the inner city or the suburbs.

A fair housing organization sued state officials, claiming that the way they allocated federal tax credits for low-income housing violated fair housing law because of its disparate impact on racial minorities. Using statistical evidence, the group alleged that state officials caused continued segregated housing patterns by disproportionately allocating the tax credits—granting too many to developments in predominantly black inner-city areas and too few in predominantly white suburbs.

Q: What Did the Supreme Court Decide?

A: The dispute boiled down to a single legal question—whether the FHA allows disparate impact claims. For decades, the courts have ruled federal fair housing law covers both disparate treatment and disparate impact claims, but recent court challenges brought it all into question and the Supreme Court—as the highest court in the country—had never decided the issue.

In a split 5-4 decision, the Court ruled that the FHA does indeed apply to disparate impact claims. It was a surprise to many who thought that the Court might rule that the FHA covers only intentional discrimination. But the majority said that allowing disparate impact claims was in line with the FHA’s central purpose: to eliminate housing discrimination. These unlawful practices include zoning and other housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification.

Nevertheless, the Court stressed that there are key limits to liability for disparate impact claims to address constitutional concerns and to protect potential defendants—including multifamily housing communities—against abusive disparate impact claims. For example, the Court said that to challenge a policy, it isn’t enough to point to statistical differences. There has to be proof that the policy caused those statistical differences.

Another important limit was to give housing authorities and developers leeway to explain the valid interests served by their policies. The FHA was aimed at removing “artificial, arbitrary, and unnecessary barriers” to housing—not to force local governments to change their priorities. Rather, the FHA aims to ensure that those priorities can be achieved without arbitrarily creating discriminatory effects or perpetuating segregation.

The case was sent back for further proceedings, but the Court suggested that it be seen simply as an attempt to second-guess which of two reasonable approaches a housing authority should follow in exercising its sound discretion in allocating tax credits for low-income housing.

Q: Does the Ruling Apply to Housing Communities?

A: The facts of the Supreme Court case involved allocation of tax credits by government officials, but the Court’s ruling—that the FHA allows disparate impact claims—applies equally to the operations and policies of multifamily housing communities.

That’s nothing new: The Court essentially upheld what courts around the country have been saying for decades—that fair housing law covers disparate impact claims. It means that owners and managers, like the officials in the Supreme Court case, could be liable under fair housing law for policies that have the effect of discriminating against protected classes, even without proof of an intent to discriminate.

And the Court’s emphasis on the limitations of disparate impact liability reflect how the courts have handled disparate impact claims—including defenses based on the housing provider’s legitimate, nondiscriminatory business interests. Despite initial proof that a policy has a statistical disparity, the party challenging a policy based on disparate impact must show that the community’s legitimate interests may be satisfied by a more tailored, less discriminatory approach—before there can be a finding of discrimination.

Q: What Are HUD’s Rules on Disparate Impact?

A: The ruling is also in line with HUD’s reading of the law—though the Court stopped short of endorsing HUD’s disparate impact rule, known as the “discriminatory effects” standard. The rule, issued by HUD in 2013, formally recognizes disparate impact liability and establishes national standards for determining whether a housing practice violates the FHA as the result of discriminatory effect.

The regulations state that liability may be established under the FHA based on a practice’s discriminatory effect, even if the practice was not motivated by a discriminatory intent. A practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons, or creates, increases, reinforces, or perpetuates segregated housing patterns, because of race, color, religion, sex, handicap, familial status, or national origin.

Even if a practice has a discriminatory effect, it may still be lawful if supported by a “legally sufficient justification.” The regulations explain that a legally sufficient justification exists where the challenged practice:

  • Is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant; and
  • Those interests could not be served by another practice that has a less discriminatory effect.

Q: How Will the Court’s Decision Affect Housing Communities?

A: It’s still early, but our fair housing experts expect that the Court’s decision will lead to increased enforcement activity by federal officials at HUD and the Justice Department, and by private fair housing organizations, aimed at housing practices believed to have a disparate impact on protected groups.

That’s particularly true for the lending and insurance industries, and for municipalities. In recent years, federal officials have been actively pursuing disparate impact claims in disputes over lending policies and land-use ordinances.

Meanwhile, multifamily housing communities should expect increased scrutiny into certain housing policies believed to have a discriminatory effect on protected classes. Of most pressing concern: policies governing criminal background screenings, Section 8 vouchers, and treatment of domestic violence victims. Fair housing advocates have long argued that these seemingly neutral policies have an unjustified discriminatory effect on racial and ethnic minorities, women, families with children, and individuals with disabilities, all of whom are protected under federal fair housing law.

Q: Does the Court’s Ruling Outlaw Criminal Background Checks?

A: Not according to our fair housing experts—as long as the community’s policies on criminal background screenings are narrowly tailored to serve legitimate business interests.

Nevertheless, communities with overbroad policies—banning anyone who was ever arrested or convicted of a crime, no matter what the offense or when it happened—could be accused of violating fair housing law based on the discriminatory effects of such policies on racial and ethnic minorities. Advocacy groups have long argued that relying on criminal background checks to exclude individuals from housing has a disparate impact on African Americans and Hispanics. That argument has gained traction when it comes to employment discrimination—leading to federal, state, and local initiatives to restrict the use of criminal background checks in the employment process.

So far, HUD has not yet formally addressed the issue under federal fair housing law, but there are indications that it’s on the agency’s radar. In its regulations on disparate impact, HUD declined to specifically address criminal background checks, stating that whether any discriminatory effect resulting from a housing provider’s use of criminal arrest or conviction records to exclude people from housing is supported by a legally sufficient justification depends on the facts of a particular situation. Nevertheless, it stated, “HUD believes it may be appropriate to explore the issue more fully and will consider issuing guidance for housing providers and operators.”

When those guidelines may be issued and what they may say is anyone’s guess, but now’s the time to review your policies on criminal background checks to avoid fair housing problems.

In general, a conventional housing community may adopt a reasonable criminal background policy that’s related to its substantial, legitimate, nondiscriminatory interests in protecting residents’ safety and preventing criminal activity on its property. But beware of overly broad policies that exclude anyone with a criminal record without considering whether it’s an arrest or conviction, the severity of the offense, or how long ago it occurred.

Be careful in using arrest, as opposed to conviction, records, and set reasonable limits about the age and type of criminal activity that would disqualify an applicant from living there. The more severe and recent the crime, the more likely it will hold up against a disparate impact claim.

Coach’s Tip: Find out about any applicable state or local laws affecting use of criminal background checks. Some states limit use of certain criminal history in housing decisions, and a handful of local governments have added fair housing protections to individuals based on arrest and conviction records.

Q: Does the Court’s Ruling Affect Policies on Section 8 Vouchers?

A: The Court’s disparate impact ruling is likely to spark renewed attention on communities that exclude individuals with housing subsidies, most notably Section 8 housing vouchers. Despite its name change to the Housing Choice Voucher program, many still use “Section 8” to refer to the federal government’s major housing program that assists low-income families, the elderly, and disabled individuals to afford housing in the private market.

Many state and local governments have added fair housing protections based on source of income, including Section 8 housing vouchers, but the FHA doesn’t provide similar protections. And since federal law doesn’t require private communities to participate in the program, many communities have policies against accepting prospects who intend to pay their rent with Section 8 housing vouchers.

Nevertheless, fair housing advocates have raised concerns about the discriminatory effects of such policies. A few years ago, the National Fair Housing Alliance called attention to the issue, arguing that discrimination against voucher holders disproportionately affects low-income women and families, people of color, and people with disabilities.

It’s too soon to tell how the Court’s ruling will affect the debate over Section 8 housing vouchers. For now, private communities may choose not to accept Section 8 housing vouchers, absent state or local source-of-income laws requiring them to do so. Review your policies in light of all applicable laws, and ask your attorney to keep you posted on proposals to add or expand fair housing protections based on source of income, including housing subsidies.

Q: Does the Court’s Ruling Affect Treatment of Domestic Violence Victims?

A: The Court’s disparate impact ruling may focus attention on policies intended to prevent crime in multifamily housing communities. Policies that punish victims of domestic violence based on the actions of their abusers may lead to fair housing trouble for discriminating against women. 

In 2011, HUD took the position that facially neutral housing policies addressing domestic violence can have a disparate impact on women in violation of federal fair housing law. According to HUD, domestic violence survivors may pursue a federal fair housing claim based on sex if they face housing discrimination because of their history or the acts of their abusers. Since statistics show that women are overwhelmingly the victims of domestic violence, HUD reasoned that discrimination against domestic violence survivors is almost always discrimination against women. Consequently, HUD says that domestic violence survivors who are denied housing, evicted, or deprived of assistance based on the violence in their homes may be entitled to protection under the FHA provisions banning sex discrimination.

In the wake of the Court’s ruling on disparate impact liability, it’s a good time to check your policies to ensure that they don’t directly or indirectly exclude victims of domestic violence or otherwise treat them unfairly. Your community could face a discrimination complaint, for example, if your policy automatically requires eviction of anyone involved in violent or criminal acts, including the victim of a domestic violence incident.

Coach’s Tip: Make sure that your policy complies with state and local laws aimed at protecting domestic violence victims. A few have added fair housing protections banning discrimination against domestic violence victims, but many more offer specific provisions to safeguard victims of domestic violence, for example, by shielding them from eviction based on alleged criminal activity or other lease violations if the incidents are related to domestic abuse.

Q: How Does the Court’s Ruling Affect Occupancy Standards?

A: Well before the Court issued the ruling on disparate impact liability, communities have been vulnerable to discrimination claims based on overly restrictive occupancy standards.

Fair housing law doesn’t prevent communities from maintaining reasonable occupancy policies as long as they are applied consistently. But communities have faced fair housing claims based on familial status because of the disparate impact of these seemingly neutral policies may have on families with children.

As a general rule of thumb, HUD has said that two people per bedroom is a reasonable occupancy standard, though there may be exceptions based on various factors, including the size and configuration of the unit, the age of the children, and any state or local restrictions.

Review your occupancy standards, and look for any rules that restrict occupancy below HUD’s two-person-per-bedroom standard, which could draw the attention of fair housing advocates in the wake of the Court’s ruling.

Coach’s Tip: Don’t forget to check applicable state and local laws, which may trump HUD’s general rule. Some state and local occupancy standards are based on square footage, while others allow more than two people per bedroom or don’t count very young children under the general two-persons-per-bedroom standard. If state or local occupancy laws permit more than two people per bedroom, then you must comply with those laws—or risk triggering a fair housing complaint.

Q: What Does the Court’s Decision Mean for Student Housing Providers?

A: The Court’s ruling could potentially have a meaningful impact on student housing, according to fair housing expert, Eric Luskin, Senior Vice President at The Scion Group LLC, a national student housing advisor, owner, and operator. Federal fair housing law applies to student housing both on and off campus—so that means that disparate impact applies too.

In particular, Luskin raises concerns about policies affecting whether—or where—students with children may live in student housing facilities. Fair housing law prohibits discrimination based on familial status, so it applies to any student who is the parent (or with legal custody of) a child under age 18. Policies that exclude students with children from student housing—or allow them in only certain buildings—could trigger a fair housing claim for intentional discrimination based on familial status. Charges alleging violation of familial status protection for on-campus housing have been rare, but that could change with the disparate impact ruling.

And, based on disparate impact, even neutral policies that have the effect of discriminating against students with children could invite a fair housing challenge. Luskin says he’s heard from some schools that they do not discriminate against students with children per se, but since all residents must be enrolled and minor children are not enrolled, the child cannot live in campus housing and therefore a student who desires to live with her child is automatically ineligible. With the Supreme Court’s ruling in June, such a stance may invite a disparate impact claim, he says.

Coach Sources

F. Willis Caruso, Esq.: Professor and Co-Executive Director, The John Marshall Law School Fair Housing Legal Support Center and Clinic, 321 South Plymouth Court, Chicago, IL 60604; (312) 786-9842; 6Caruso@jmls.edu.

Avery S. Friedman, Esq.: Avery Friedman & Associates, 701 The City Club Bldg., 850 Euclid Ave., Cleveland, OH 44114; (216) 621-9282; avery@lawfriedman.com.

Nadeen W. Green, Esq.: Senior counsel, For RentMedia Solutions™, 294 Interstate N. Pkwy., Ste. 100, Atlanta, GA 30339; (770) 801-2406; nadeen.green@forrent.com.

Eric D. Luskin, CPM: Senior Vice President, The Scion Group LLC, 444 North Michigan Ave., Ste. 2600, Chicago, IL 60611; (312) 704-5100; eluskin@thesciongroup.com.

Theresa L. Kitay, Esq.: Attorney at Law, 578 Washington Blvd., Ste. 836, Marina del Rey, CA 90292; (310) 578-9134; tkitay@kitaylaw.net.

 

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