By James T. Bork, J.D., LL.M.
On June 25, 2015, the Supreme Court upheld the application of disparate-impact under the Fair Housing Act (FHA) in Texas Department of Housing & Community Affairs v. The Inclusive Communities Project, Inc. But the decision also described limitations on its application.
This case marks the third time the disparate-impact/FHA issue has reached the Supreme Court. In early 2012, the parties to Magner v. Gallagher agreed to have their case dismissed two weeks prior to oral argument before the Justices. The key issue there was whether the FHA made it illegal for local governments to enforce housing codes in a way that had a negative impact on minorities, even though enforcement was not motivated by intentional bias. In late 2013, the parties to Township of Mount Holly v. Mount Holly Gardens Citizens settled that case three weeks before it was to be argued. The issue in this second case was whether the FHA prohibits official housing policies that are not the result of intentional bias, but which nonetheless have a negative impact on racial minorities and/or others protected by the law.
In the instant case, a Texas-based nonprofit corporation, assisting low-income families in obtaining affordable housing, brought FHA disparate-impact claims against the Texas Department of Housing and Community Affairs. The non-profit group alleged that the department “caused continued segregated housing patterns by its disproportionate allocation” of federal tax credits for housing, “granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.” Accordingly, the non-profit maintained that the department was required to “modify its selection criteria in order to encourage the construction of low-income housing in suburban communities.” Writing for the majority, Justice Kennedy stated that a plaintiff who brings a disparate-impact claim essentially "challenges practices that have a disproportionately adverse effect on minorities" and "are otherwise unjustified by a legitimate rationale.”
No impact on issues apart from FHA. It is important to note that the focus of the Court's decision is limited to an interpretation of the FHA, and in no way affects an insured institution's obligations with respect to the Equal Credit Opportunity Act, Regulation B—Equal Credit Opportunity (12 CFR Part 1002), and lending discrimination issues. It does not require the alteration or adjustment of any fair lending policies or standards that financial institution lenders currently observe.
ECOA and Regulation B. Disparate-impact analysis, in the form of the "effects test," has been part of creditors' Equal Credit Opportunity compliance obligations since at least as long ago as the Federal Reserve Board's most recent full revision of Regulation B in 2003. (See 68 FR 13144, March 18, 2003) The current relevant text of the Consumer Financial Protection Bureau's version of the regulation is identical to the Fed's. In particular, §1002.6(a) states that "The legislative history of the [Equal Credit Opportunity] Act indicates that the Congress intended an 'effects test' concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co. and Albemarle Paper Co. v. Moody to be applicable to a creditor's determination of creditworthiness." (citations omitted)
Even though it is well understood that the effects test is synonymous with disparate-impact, the Commentary to Regulation B spells it out. "Congressional intent that this doctrine [i.e., the effects test] apply to the credit area is documented in the Senate Report … and in the House Report … . The Act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. … " (Commentary to §1002.6(a)-2)
The regulators' guidance for their respective examiners leaves no doubt that a finding of disparate-impact can be the basis of an ECOA or FHA violation. As stated in the Fed's Consumer Compliance Handbook, the Federal Deposit Insurance Corporation's Compliance Examination Manual, and the CFPB's Supervision and Examination Manual, "… evidence of discriminatory intent is not necessary to establish that a lender's adoption or implementation of a policy or practice that has a disparate-impact is in violation of the [FHA] or ECOA."
Interagency policy statements. Regulatory guidance during the past 20+ years has recognized that disparate-impact theory is a legitimate element of fair lending analysis. The 1994 Interagency Policy Statement on Discrimination in Lending from eight federal agencies recognizes that "Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited basis, disproportionately and adversely affect a person's access to credit."
A basic premise of the federal regulators' 2013 Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule rests on the fact that disparate-impact analysis is a settled issue in the context of fair lending. The 2013 guidance sheds light on the question of whether a lender that originates only Qualified Mortgages might be liable under the disparate-impact doctrine for violations of the ECOA and Regulation B.
As readers will recall, the regulators determined that a financial institution's decision to offer only mortgage loans that meet the criteria for Qualified Mortgages under the CFPB's Ability-to-Repay rule should not, by itself, constitute a fair lending violation under the disparate-impact, or effects test, doctrine. But aside from the specifics of that issue, it is important to note that the 2013 Interagency Guidance affirms the continued validity of the 1994 Interagency Policy Statement, including its remarks on the disparate-impact doctrine. (See also CFPB Bulletin 2012-4: "… the CFPB reaffirms that the legal doctrine of disparate-impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.")
Summary of analysis. The foregoing analysis shows that banks' compliance obligations regarding disparate-impact theory flow primarily from sources that are separate from the Fair Housing Act and which are not affected by the Court's decision. Those obligations remain firmly in place, and would have remained in place even if the Court's dissenters had prevailed.
HUD regulation. Disparate-impact analysis under the FHA is supported by the Department of Housing and Urban Development's regulation codified at 24 CFR Part 100–Discriminatory Conduct Under the Fair Housing Act. Subpart G of the regulation, added by an amendment published at 78 FR 11459 (Feb. 15, 2013), codifies the disparate-impact theory that is (according to the final rule analysis published in the Federal Register) recognized by all the federal financial regulatory and enforcement agencies, as well as every federal appellate court that had ruled on the issue. That section states that "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." (24 CFR §100.500(a))
On June 25, 2015, the Supreme Court upheld the application of disparate-impact under the Fair Housing Act (FHA) in Texas Department of Housing & Community Affairs v. The Inclusive Communities Project, Inc. But the decision also described limitations on its application.
This case marks the third time the disparate-impact/FHA issue has reached the Supreme Court. In early 2012, the parties to Magner v. Gallagher agreed to have their case dismissed two weeks prior to oral argument before the Justices. The key issue there was whether the FHA made it illegal for local governments to enforce housing codes in a way that had a negative impact on minorities, even though enforcement was not motivated by intentional bias. In late 2013, the parties to Township of Mount Holly v. Mount Holly Gardens Citizens settled that case three weeks before it was to be argued. The issue in this second case was whether the FHA prohibits official housing policies that are not the result of intentional bias, but which nonetheless have a negative impact on racial minorities and/or others protected by the law.
In the instant case, a Texas-based nonprofit corporation, assisting low-income families in obtaining affordable housing, brought FHA disparate-impact claims against the Texas Department of Housing and Community Affairs. The non-profit group alleged that the department “caused continued segregated housing patterns by its disproportionate allocation” of federal tax credits for housing, “granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.” Accordingly, the non-profit maintained that the department was required to “modify its selection criteria in order to encourage the construction of low-income housing in suburban communities.” Writing for the majority, Justice Kennedy stated that a plaintiff who brings a disparate-impact claim essentially "challenges practices that have a disproportionately adverse effect on minorities" and "are otherwise unjustified by a legitimate rationale.”
No impact on issues apart from FHA. It is important to note that the focus of the Court's decision is limited to an interpretation of the FHA, and in no way affects an insured institution's obligations with respect to the Equal Credit Opportunity Act, Regulation B—Equal Credit Opportunity (12 CFR Part 1002), and lending discrimination issues. It does not require the alteration or adjustment of any fair lending policies or standards that financial institution lenders currently observe.
ECOA and Regulation B. Disparate-impact analysis, in the form of the "effects test," has been part of creditors' Equal Credit Opportunity compliance obligations since at least as long ago as the Federal Reserve Board's most recent full revision of Regulation B in 2003. (See 68 FR 13144, March 18, 2003) The current relevant text of the Consumer Financial Protection Bureau's version of the regulation is identical to the Fed's. In particular, §1002.6(a) states that "The legislative history of the [Equal Credit Opportunity] Act indicates that the Congress intended an 'effects test' concept, as outlined in the employment field by the Supreme Court in the cases of Griggs v. Duke Power Co. and Albemarle Paper Co. v. Moody to be applicable to a creditor's determination of creditworthiness." (citations omitted)
Even though it is well understood that the effects test is synonymous with disparate-impact, the Commentary to Regulation B spells it out. "Congressional intent that this doctrine [i.e., the effects test] apply to the credit area is documented in the Senate Report … and in the House Report … . The Act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. … " (Commentary to §1002.6(a)-2)
The regulators' guidance for their respective examiners leaves no doubt that a finding of disparate-impact can be the basis of an ECOA or FHA violation. As stated in the Fed's Consumer Compliance Handbook, the Federal Deposit Insurance Corporation's Compliance Examination Manual, and the CFPB's Supervision and Examination Manual, "… evidence of discriminatory intent is not necessary to establish that a lender's adoption or implementation of a policy or practice that has a disparate-impact is in violation of the [FHA] or ECOA."
Interagency policy statements. Regulatory guidance during the past 20+ years has recognized that disparate-impact theory is a legitimate element of fair lending analysis. The 1994 Interagency Policy Statement on Discrimination in Lending from eight federal agencies recognizes that "Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited basis, disproportionately and adversely affect a person's access to credit."
A basic premise of the federal regulators' 2013 Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule rests on the fact that disparate-impact analysis is a settled issue in the context of fair lending. The 2013 guidance sheds light on the question of whether a lender that originates only Qualified Mortgages might be liable under the disparate-impact doctrine for violations of the ECOA and Regulation B.
As readers will recall, the regulators determined that a financial institution's decision to offer only mortgage loans that meet the criteria for Qualified Mortgages under the CFPB's Ability-to-Repay rule should not, by itself, constitute a fair lending violation under the disparate-impact, or effects test, doctrine. But aside from the specifics of that issue, it is important to note that the 2013 Interagency Guidance affirms the continued validity of the 1994 Interagency Policy Statement, including its remarks on the disparate-impact doctrine. (See also CFPB Bulletin 2012-4: "… the CFPB reaffirms that the legal doctrine of disparate-impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.")
Summary of analysis. The foregoing analysis shows that banks' compliance obligations regarding disparate-impact theory flow primarily from sources that are separate from the Fair Housing Act and which are not affected by the Court's decision. Those obligations remain firmly in place, and would have remained in place even if the Court's dissenters had prevailed.
HUD regulation. Disparate-impact analysis under the FHA is supported by the Department of Housing and Urban Development's regulation codified at 24 CFR Part 100–Discriminatory Conduct Under the Fair Housing Act. Subpart G of the regulation, added by an amendment published at 78 FR 11459 (Feb. 15, 2013), codifies the disparate-impact theory that is (according to the final rule analysis published in the Federal Register) recognized by all the federal financial regulatory and enforcement agencies, as well as every federal appellate court that had ruled on the issue. That section states that "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." (24 CFR §100.500(a))
James T. Bork, J.D., LL.M., is a Senior Banking Compliance Analyst with Wolters Kluwer Financial Services. Prior to joining WKFS, he practiced law for several years with a focus on financial institutions, consumer banking issues, commercial lending, and business law. He was also Assistant General Counsel and Senior Compliance Attorney at a billion dollar institution. Jim has written articles and spoken on regulatory and compliance developments affecting financial institutions. He received his law degree in 1989 and earned a Master of Laws degree (LL.M.) in banking law in 1993 from the Morin Center for Banking and Financial Law at Boston University School of Law.
This article previously appeared in the Banking and Finance Law Daily.
