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The Trump Administration Tackles the Disparate Impact Theory

Aug 6, 2018 1:37:39 PM

It appears the new administration is moving away from the Obama administration’s disparate impact policies. How will that impact real estate?

Two public announcements in May—one by the U.S. Department of Housing and Urban Development (HUD), and the other by the Consumer Financial Protection Bureau (CFPB)—signal that the Trump Administration may retreat from the Obama administration’s disparate impact policies under the Fair Housing Act and Equal Credit Opportunity Act (ECOA).

The Disparate Impact Theory

The disparate impact theory allows a practice to be found discriminatory if it has a disproportionate effect on a protected class (race, color, religion, national origin, sex, disability, and familial status), even if the person or entity engaging in the practice does not intend to discriminate. It’s different from the theory of disparate treatment, which occurs when a person or entity treats someone unequally because of a protected characteristic (e.g., race or gender). Under this theory, the person or entity must intend to discriminate against a protected class.

Disparate Impact Under the Fair Housing Act

The Fair Housing Act was intended to protect buyers or renters from the seller or landlord discrimination in housing-related real estate transactions. HUD has the authority to enforce the Act against lenders, housing developers, homeowner insurance companies, real estate professionals, and other participants.

HUD's current disparate impact regulation, adopted in 2013, formalized the Obama Administration’s policy that a disparate impact claim is allowable under the Fair Housing Act. It established a three-part burden-shifting test for determining whether the practice has an unjustified discriminatory effect:

  • The plaintiff must show evidence of statistical disparities involving a protected class.
  • The defendant must then prove that the challenged practice is necessary to achieve a substantial, legitimate, and non-discriminatory interest.

After HUD issued the disparate impact rule, the U.S. Supreme Court held by a 5-4 decision in Texas Department of Housing and Community Affairs vs. Inclusive Communities Project (2015) that disparate impact claims might be brought under the Fair Housing Act. However, it also set rigorous standards to ensure that racial imbalance alone does not create a prima facie case, and stated that a disparate impact claim based upon a statistical disparity should fail if the plaintiff cannot show that the defendant's practice caused the disparity.  The Court left it to HUD to determine whether changes to its rule were necessary.

Inclusive Communities decision—a sign that the Trump Administration is reevaluating the Obama-era approach. It asked six specific questions, such as whether the rule’s three-step burden of proof standard appropriately assigns the burdens; whether the second and third steps are sufficient to ensure that only artificial, arbitrary and unnecessary practices are found to result in disparate impact; and whether the rule should provide defenses or safe harbors to claims of disparate impact liability. Comments are due on August 20.

Disparate Impact Under the ECOA

The ECOA makes it unlawful for any creditor to discriminate against any credit applicant. The law applies to any person who regularly participates in a credit decision, including banks, retailers, bankcard companies, finance companies, and credit unions.  The Dodd-Frank Act transferred rulemaking and enforcement authority under the ECOA to the CFPB.

Under former CFPB Director Richard Cordray, the CFPB reaffirmed its commitment to using the disparate impact theory when exercising its supervisory and enforcement authority under the ECOA and brought numerous cases based on the doctrine.  This approach was widely criticized by Cordray's critics, who argued that the statutory language of the ECOA only prohibits discriminatory treatment, not the disparate impact, of a practice.  The Supreme Court has never ruled on whether a claim based on disparate impact is valid under the ECOA.

Inclusive Communities decision.

Summary

Any future rulemaking by HUD or the CFPB to bring their regulations into closer alignment with the Inclusive Communities er the disparate impact theory. In any event, their May announcements indicate that this Administration may shift its enforcement focus to practices involving intentional discrimination as opposed to practices that create a discriminatory effect.

 

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