Wrestling with Disparate Impact

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Fair Housing Developments A Year After Supreme Court’s Decision

In June 2015, the U.S. Supreme Court affirmed that policies and practices that have an unintentionally discriminatory impact on minorities and other protected persons – referred to as “disparate impact” liability – could constitute violations of the Fair Housing Act (“FHAct”). Texas Dept. of Comm. Affairs v. The Inclusive Communities Project, Inc., __ U.S. __, 135 S. Ct. 2507 (2015). Since that time, agencies and courts have wrestled with the consequences of that decision. In some instances, agencies have seen the decision as expanding the scope of possible liability for housing providers, while courts have so far applied it sparingly, to address the so-called “heartland” of disparate impact cases involving barriers to housing integration.  One year in, the Inclusive Communities decision has thus far resulted in more concerns and less certainty.

Inclusive Communities: Limited Approval of Disparate Impact under the FHAct
While most federal courts recognized that policies or practices that unintentionally have a discriminatory impact on protected classes could violate the FHAct, the Supreme Court had never addressed the issue. In 2014, it decided to accept the Inclusive Communities case, in which the plaintiffs asserted that the Texas agency that awarded Low-Income Housing Tax Credits used allocation policies that tended to concentrate tax credits in economically disadvantaged and minority-concentrated neighborhoods, making it more difficult for those minorities to locate affordable housing in “high opportunity” neighborhoods, with better schools and employment opportunities and lower minority concentrations. According to the plaintiffs, the Texas agency’s allocation policies had a disparately harmful impact on housing choices for minorities.

In his narrow 5-4 majority opinion, Justice Anthony Kennedy explained that while the FHAct does recognize disparate impact liability, it should be used sparingly, stressing the need to observe “safeguards” to prevent possible “abusive” results. These safeguards include requiring plaintiffs to satisfy “robust causality requirements,” to show that the challenged practice actually caused the alleged discriminatory effect. Mere statistics are not sufficient to prove causation, he said, suggesting that causation wouldn’t be satisfied where discriminatory impacts resulted from multiple causes.

Justice Kennedy also adopted a “burden-shifting” approach, explaining that, if a plaintiff successfully showed that the challenged policy was the cause of the alleged harm, the defendant should be allowed to demonstrate, as a defense, that the policy was adopted to accomplish a legitimate goal. If the defendant presented a legitimate policy defense, the burden would finally switch back to the plaintiff to show that the defendant could have adopted a less-discriminatory approach to accomplish the same goal.

Kennedy stressed that it was not permissible to use disparate impact to put housing providers into a “double bind,” where any choice they made would lead to liability. Instead, Justice Kennedy argued that disparate impact should focus primarily on eliminating “artificial, arbitrary, and unnecessary barriers” to housing opportunities and should not be used to merely second-guess decisions by public agencies and private providers.

In the months following the Inclusive Communities decision, commentators presented divergent views of the decision. HUD and many housing advocates argued that the decision represented a resounding affirmation of existing disparate impact law previously established by the federal courts. Other commentators focused on Justice Kennedy’s concerns about potentially “abusive” uses of disparate impact, the need to impose safeguards to prevent those abuses, and the ultimate goal to eliminate artificial and unnecessary barriers to housing. The divergent position of commentators is reflected by actions taken by HUD and by the courts.

HUD: Inclusive Communities threatens crime screening practices
HUD wasted little time seizing the initiative offered by the Supreme Court’s Inclusive Communities decision.

Anticipating the Supreme Court’s scrutiny of disparate impact liability, HUD had already adopted its own regulations for establishing disparate impact claims under the FHAct, reflecting a burden-shifting approach similar to the one adopted by the Supreme Court. (See 24 CFR §100.500.)

Likewise, shortly after the Supreme Court’s action, HUD announced a broad “Affirmatively Further Fair Housing” (“AFFH”) initiative, under which public housing agencies (“PHAs”) and other grantees of HUD funding must develop detailed plans to encourage affordable housing in those “high opportunity” areas on which the Inclusive Communities decision focused. The AFFH initiative appears to arise from HUD’s unhappy experience in litigation with Westchester County, New York, an affluent suburban community that resisted developing affordable housing – which, presumably, would attract minority renters. The AFFH proposal directs PHAs and other HUD grantees to use sophisticated statistical analyses to identify obstacles to affordable housing, and to incorporate those initiatives in their planning process, including extensive public participation. The AFFH initiative is not directly tied to the Inclusive Communities decision – in its public announcements, HUD has taken pains to point out that, long before the Supreme Court’s action, the FHAct required HUD grantees to affirmatively further fair housing – but it has similar goals: breaking down artificial barriers to affordable housing to increase housing opportunities for the FHAct’s protected classes.

With a more specific eye on the Inclusive Communities decision, HUD’s Office of General Counsel (“OGC”) issued guidance earlier this year warning housing providers about the use of criminal records to screen prospective tenants. According to OGC, minorities are arrested and incarcerated in numbers disproportionate to the nation’s population generally. Thus, to the extent that owners screen prospective tenants on the basis of criminal backgrounds, they tend to disproportionately reject minorities – in other words, to disparately impact minorities. In its guidance, OGC makes several recommendations. First, they urge housing providers not to use arrest records to screen tenants, pointing out that a mere arrest, without an actual conviction, is not proof of any wrongdoing. While HUD appears to recognize that persons with records of criminal convictions pose a threat to the safety of tenants and staff, HUD urges owners to avoid “one-strike” rules that exclude anyone with a criminal history. Instead, HUD encourages owners and managers to consider the “nature, severity and recency” of criminal conduct, so that persons are not permanently denied housing. In other words, HUD urges housing providers to make distinctions between violent and nonviolent crimes, between felonies and misdemeanors, and between old and new violations.

In addition, applying its burden-shifting regulations, HUD urges owners to seek less discriminatory alternatives to strict crime screening rules, by making “individualized assesments” of applicants’ criminal history, including consideration of the applicant’s age when the crime was committed and whether there is evidence of later rehabilitation.

OGC’s crime screening guidance unleashed a furor among housing providers, many of whom use tough crime screening policies to exclude persons that they believe pose a threat to other tenants. They fear that by reducing scrutiny of incoming tenants, they will increase risks of crime, drug use and gang-related activity. They also point out that objective crime screening policies are race-neutral – in other words, people with criminal histories are rejected regardless of their race. They fear that to the extent they are compelled to make “individualized assessments,” the risk of bias, even unintentional bias, increases. It is an open question whether the OGC’s crime screening guidance will result in greater housing opportunities for persons with criminal backgrounds, or just more complication, time and expense for both housing providers and renters.

Courts Wrestle With Applying Disparate Impact Liability
It is too early to draw firm conclusions about how the federal courts are applying disparate impact in the year since Inclusive Communities was decided, but some themes appear to be emerging. Thus, courts seem to be receptive to disparate impact theory where local government agencies have adopted zoning and other permitting policies that make it difficult to develop affordable housing. (See, e.g., Long Island Hous. Servs. v. Nassau Cnty. Indus. Dev. Agency, 2015 U.S. Dist. LEXIS 161008, Case No. 14-cv-3307 (Dec. 1, 2015)). These cases reflect what Justice Kennedy referred to as the “heartland” of disparate impact, where local governments adopt policies that, intentionally or not, allegedly reduce housing opportunities for minorities. On the other hand, courts have been far more critical of attempts to interfere with facially-legitimate action by public agencies or private housing providers. For example, in Burbank Apts. Tenants Assn. v. Kargman, 48 N.E.3d 394 (Mass. 2016), tenants and other community members argued that an owner’s decision not to renew its property’s Section 8 contract had a disparate impact on minority residents of the property, even though the owner complied with all requirements to notify government agencies and the tenants about the nonrenewal decision.

The Massachusetts Supreme Judicial Court ultimately rejected the tenants’ claims, not on the basis of compliance with rules governing renewal decisions, but, following the Inclusive Communities decision, because of the lack of evidence that the decision not to renew the contract actually caused the injury alleged by the plaintiffs. Among other things, the court pointed out that there were actually more tenants eligible for Section 8 assistance after the Section 8 contract ended than before.

Courts have also applied Inclusive Communities to dismiss disparate impact claims relating to alleged predatory lending practices (Los Angeles v. Wells Fargo & Co., 2015 U.S. Dist. LEXIS 93451, Case No. 2:13-cv-09007-ODW(RZx) (July 17, 2015)) and strict code enforcement practices (Ellis v. Minneapolis, 2016 U.S. Dist. LEXIS 40750, Case No. 14-cv-3045 (March 28, 2016)). Heeding Justice Kennedy’s concerns, these cases strictly pressed plaintiffs to demonstrate that the injury they claimed was the result of the policies they challenged.

A Year Later: Aggressive Agencies and Skeptical Courts?
It is still too early to assess the final impact of Inclusive Communities. Apparently vindicated by the Supreme Court’s decision to recognize disparate impact, HUD has pursued an active fair housing agenda, including OGC’s warning to housing providers about the potentially discriminatory impacts of crime screening policies. On the other hand, courts appear to be more skeptical about disparate impact claims, requiring plaintiffs to satisfy Justice Kennedy’s “robust causality requirements” and looking for the “artificial, arbitrary, and unnecessary barriers” to housing opportunities on which he focused. HUD and the courts appear to be on divergent paths in applying Inclusive Communities, which only increases risks and uncertainties for housing providers and renters. It will be interesting to see whether agencies and courts – and owners and renters – can find more common ground in the future.

Updates from Inclusive Communities case from Harry J. Kelly