A win for disparate impact, but not a total loss for lenders

August 24, 2015

Screen-shot-2011-04-13-at-7.57.17-PMThe financial services industry was optimistic when the U.S. Supreme Court agreed to review Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc., to decide whether the Fair Housing Act actually authorized discrimination claims based on race-neutral policies or practices that had a “disparate impact” on racial minorities or other protected classes.

And there was reason for hope.

Although every federal Circuit Court to address the question had found that a disparate impact cause of action existed under the FHA, the fact that there was no circuit split was viewed as a good thing — why else would the court grant certiorari on a question where the circuit courts were unanimous if not to reverse?

But things started turning the wrong way after oral arguments in the case, and Justice Antonin Scalia’s questions raised the possibility of whether he might provide an unexpected vote in support of an interpretation of the FHA as including disparate impact.

Even after the argument, most still predicted the disparate impact theory, at least under the FHA, would be dealt a blow — the more common question asked was whether the court would do so in a narrow ruling or in one that might have a broader effect on disparate impact claims under other statues, such as ECOA.

When the court finally issued its decision, it was one of the few big cases this term where most

prognosticators got it wrong.

In a 5-4 decision written by Justice Anthony Kennedy, the court affirmed the 5th Circuit and said the FHA does authorize disparate impact claims.

Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc., No. 13-1371, 135 S.Ct. 2507 (U.S. June 25, 2015).

(WestlawNext users: Click here for the opinion.)

As the dust settled, Bob Driscoll  undertook to explain what happened, and how the financial services industry might go forward from here.

“For those inclined to take on disparate impact itself in the ECOA context, having seen the FHA

battle come to conclusion, there is some hope,” Driscoll remarked in an article for Consumer Financial Services Law Report.

The high court’s textual analysis of the FHA found that the catch-all term “otherwise make unavailable” was the key phrase of Section 804(a) of the FHA that signaled Congressional desire to prohibit policies and practices that had the effect of creating a disparity.

Driscoll said this broadened the provision from a prohibition of intentional discrimination only. ECOA contains no similar language, and thus the textual argument that ECOA does not authorize disparate impact cases may still have some vitality (although the opinion creates other hurdles for such an argument).

While disparate impact skeptics or defendants may still feel the sting of defeat, Driscoll said a focus on what the Texas Department of Housing case is — rather than what it might have been — may be cause for muted optimism.

Robert N. Driscoll leads McGlinchey Stafford LLP’s Washington, D.C., office and serves as co-chair of the firm’s government investigations and white collar defense practices.  Driscoll represents corporations, governmental entities, and individuals in judicial proceedings and investigations by executive branch agencies and the Consumer Financial Protection Bureau. Reach him at rdriscoll@mcglinchey.com.