DISPARATE IMPACT DEVELOPMENTSAFTER THE INCLUSIVE COMMUNITIES

DECISION

NATIONAL AFFORDABLE HOUSING MANAGEMENT ASSOCIATION

OCTOBER 26, 2015

HARRY J. KELLY, ESQUIRE MICHAEL W. SKOJEC, ESQUIRENIXON PEABODY BALLARD SPAHR

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

Two Primary Theories of Liability under Fair Housing Act

(FHAct):

Disparate Treatment (Intentional Discrimination): most

common; requires direct/implied evidence of intent

— Definition: Individual of a protected group is shown to

have been singled out and treated less favorably than

others similarly situated

Disparate Impact (nonintentional discrimination): less

common, requires statistical proof of different impact on

protected class

— Definition: a policy or practice which is neutral on its face

but has a statistically significant negative effect on a group

of persons protected by the non-discrimination law

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

Disparate Impact

•No need to show intent for disparate impact claims

•Claims based on statistics and expert analysis that

suggest a policy/practice has a discriminatory effect on

a protected class

•But statistics alone don’t establish liability

o If plaintiff makes out claim, courts look to defendant to show

there is some legitimate grounds for policy/practice

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

By definition, disparate impact attacks policies or practices that are neutral on their face but that have allegedly disproportionate impact on minorities

—Due to socioeconomic realities in U.S., almost any policy or practice may have a disparate impact on protected classes

As a result, disparate impact may expose housing providers to liability for otherwise “normal” operations and policies

—E.g., 2-person per bedroom occupancy standards

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

Texas Dept. of Hous. And Comm. Affairs v.

Inclusive Communities Project (2014-2015)

—Claim: Texas agency that allocated low income

housing tax credits (LIHTC) used criteria that resulted

in concentration of LIHTC development in minority

communities, making it harder for minorities to locate

affordable housing in non-minority communities

• Promotes patterns of segregation, makes it more difficult for

minorities to find housing in “high opportunity areas”

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

District court used burden-shifting approach:

—Found that statistics showed disparate impact:

• LIHTC housing was disproportionately allocated to minority communities: 92.29% of LIHTC units in Dallas in census tracts with less that 50% Caucasian residents.

—Agency had bona fide and legitimate reasons for allocation policies (following IRS rules), but …

—Agency did not demonstrate it used least discriminatory alternatives available

—Held: Agency violated FHAct

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

US SUPREME COURT: JUSTICE KENNEDY’S MAJORITY OPINION (5-4) IN INCLUSIVE COMMUNITIES

Determines that FHAct includes disparate impact liability

But warns that broad application of DI can have unintended and adverse consequences that actually result in opposite of what Congress intended and frustrate legitimate decisions by government entities and housing providers.

— Recognized that “disparate impact liability has always been properly limited in key respects.”

— Needs to allow “practical business choices and profit-related decisions that sustain a vibrant and dynamic free enterprise system”

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION

Recommends “safeguards” to protect “against abusive disparate impact claims”:

1. Mere statistical disparity is not sufficient to support disparate impact

“Racial imbalance does not, without more, establish a prima facie case. . .”

2. “Robust causality requirement”

• As part of its prima facie case, plaintiff must demonstrate that the challenged practice is the cause of the disparate impact

Suggests that if multiple causes for disparity, no disparate impact liability exists.

Court said that a single decision to build/not build not a “policy” and no DI claim

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DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES

3. Legitimate Policy as Defense

— Business must be given “leeway to state and explain the valid interest served by their policies.”

• Recommends that, when making policy decisions, housing providers explain legitimate basis for their policy.

4. Disparate impact should focus “solely” on removal of “artificial, arbitrary and unnecessary barriers”

5. Providers cannot use racial quotas to avoid DI liability because violates equal protection clause

6. Burden on Plaintiff to show less discriminatory alternative

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Congress: Pressure to carve out exceptions and safe harbors from disparate

impact? Not likely.

Lower Federal courts wrestling with details of how to prove disparate impact

claims (burden of proof, amount of impact required, etc.) – lots of ways claims

being brought

Remand of Texas v. Inclusive Communities

- Must reconsider statistical proof and prima facie case because now must closely

scrutinize and must look for robust causality

Inclusive Communities v. U.S. Dept. of Treasury

- Administration of LIHTC projects perpetuates racial segregation (like Texas Dept. of

Housing practices)

- Defendants: fundamental fallacy of claim that FHA requires federal agencies to take

specific actions to regulate the racial characteristics of housing locations

- Amended Complaint to be tested using Supreme Court factors10

INCLUSIVE COMMUNITIES CONTINUES

LOCAL GOVERNMENTS POLICIES SECOND-GUESSED

Ellis v. City of Minneapolis

Landlords brought action for City enforcement of health and safety codes

Claim dismissed because City demonstrated legitimate government interest and Plaintiffs failed to articulate causation between City policy and racial disparity

Plaintiffs amended complaint

Winfield v. City of New York

— City have 50% community preference in new affordable housing

— Claim that perpetuates segregation and has disparate impact on City residents

— Amended Complaint, and Motion to Dismiss pending

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INSURERS UNDERWRITING CHALLENGED

• Viens v. Great American Insurance

— Alleged that refused to insure landlords who leased to Section

8 voucher holders, motions to dismiss denied

— Consent Decree –

• For 3 years, not consider source of income in

underwriting, pricing and eligibility

• Pay plaintiffs and Relman, Dane law firm $475,000

• Jones v. Travelers Casualty

Similar kind of allegations and settled 7/1/15

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LENDERS DEFENDING CLAIMS

• City of Los Angeles v. Wells Fargo

— Alleged that lender targeted minority borrowers with worse

loan conditions and terms

— Judge applied Supreme Court decision and dismissed:

• City’s claim rests just on statistical disparity without

evidence of causation

• Loans helped minorities and promoted by HUD – legitimate

interest

• City of Miami v. Bank of America

Similar claims

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OTHER COURT CHALLENGES

• Burbank Apts. Tenant Assn. v. Khargman (Mass.

SJC)

Section 8 owner decides not to renew HAP Contract at

end of term

Owner provides all required notices to HUD/state

agencies

Current tenants protected by enhanced vouchers

Plaintiffs sue, alleging that nonrenewal violates FHAct

and Mass. laws, because non-renewal has a disparate

impact on present/future minority tenants

Lower court rejected plaintiffs’ claims; not on appeal to

Mass SJC

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COURT ACTION -- SUMMARY

— Cases show how disparate impact can be used to attack wide

range of policies

— While courts to date have applied Inclusive Communities to

narrow scope of disparate impact cases, recent cases are

looking at proof of each side’s case

— So far, courts have not identified “per se” violations or “safe

harbors”

• Unless that happens, expect more cases coming in every

facet of real estate development policies and property

management policies

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HUD DISPARATE IMPACT REGULATION

During pendency of earlier disparate impact cases, HUD

proposed and finalized a new regulation addressing proof of

disparate impact claims

— HUD rule adopts “balance-shifting” approach similar to district

court in Inclusive Communities:

• Plaintiff must identify policy or practice that has disparate impact

on protected class under FHAct

• If satisfied, Defendant must show “legally sufficient justification”

Practice is necessary to achieve one or more substantial,

legitimate, nondiscriminatory interests

Interest could not be served by less discriminatory practice

Justification must be supported by evidence, not speculative

• If satisfied, Plaintiff must show that those interests could be served

by another practice with a less discriminatory effect

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HUD DISPARATE IMPACT REGULATION

Where does Inclusive Communities leave the HUD regulation?

• HUD may view opinion as basic endorsement of its

regulation…

• But Kennedy is clearly concerned about need to

demonstrate causation and protect housing providers so

that legitimate and

“profit-motivated decisions” are not second-guessed

After Inclusive Communities, will HUD change rule to include

safeguards or safe harbors?

— HUD rule does not appear to require identifying a specific

policy and showing causation

— HUD rule required defendant to show no less discriminatory

practice but Court put burden on plaintiff to show available

alternative practice which is less discriminatory and serves

defendant’s legitimate needs.

INSURERS CHALLENGING HUD RULE

• Property Casualty Insurers v. HUD (N.D. Ill) -

— HUD disparate impact rule did not consider insurance industry concerns during rulemaking

— Federal law and states are to regulate insurance

— Court found HUD acted arbitrarily and capriciously in relying on future adjudications, rather than rulemaking; remanded to HUD

• American Insurance Assn. v. HUD (D.C. Dist.)

Same kind of allegations

Previously scathing criticism of HUD

Remanded to district court

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Inclusive Communities is good for litigants, but what practical guidance to

owners/managers?

— Expect swift increase in number of cases challenging multiple policies

and practices by housing providers, lenders, insurers, credit reporting

agencies that have prima facia disparate impact on protected classes

— Effectively expands number of “pseudo-protected classes” (high risk

borrowers, convicted felons, persons with non-wage income, etc.) who

can claim protections beyond those identified in Fair Housing Act,

because of correlation between their class and classes expressly

protected by Fair Housing Act

• Example: If use of credit scoring has disparate impact on protected classes,

persons with lower credits scores also effectively become “protected class”

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FUTURE OF DISPARATE IMPACT

FUTURE OF DISPARATE IMPACT

— Likely examples of future kinds of challenges for property management:

• Residency Preference

• Drug/crime screening policies

• Rental decisions based on source or type of income/income multipliers

• Credit Screening

• House rules (such as those affecting families/children)

— Previously seen DI claims for some of these

— These “inflection points,” where decisions are made about who receives/does not receive housing opportunity are focus of disparate impact claims

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BEST PRACTICES

Who: Owners, managers, developers, investors, public

agencies

What:

— Look at “Inflection Points” that extend/restrict housing

opportunities, such as:

• Admission criteria and occupancy standards

• Criteria for awarding benefits (tax credits/grants/etc.)

• Preferences

— Evaluate potential disparate impacts

• Assess other causes for any disparities

— Identify legitimate, nondiscriminatory interests

— Consider less discriminatory alternatives

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Questions

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Harry J. Kelly, Esq.

Nixon Peabody LLP

P: 202-585-8712

E: hkelly@nixonpeabody.com

Michael W. Skojec, Esq.

Ballard Spahr LLP

P: 410-528-5541

E: skojecm@ballardspahr.com