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Fair Housing and the Disparate Impact Theory

November 25, 2014
The federal government maintains a policy of providing “for fair housing throughout the United States.”[1] In 1968, the U.S. Congress enacted the Fair Housing Act, a civil rights law that established this policy, as well as specific provisions to enable its enforcement.[2] The law prohibits discrimination in the sale or rental of housing, as well as the financing of housing, because of a person’s race, color, religion, sex, handicap, familial status, or national origin.[3] Over the last forty years, federal courts refined the law’s meaning, clarifying or construing its ambiguities. In the 1970s, debate centered on whether the law barred facially neutral practices or policies—that is, actions that proceeded without intent to discriminate—that disproportionately impact individuals belonging to one of the law’s protected classes. After eleven of twelve federal circuits held that the law supported a disparate impact theory, this interpretation has again in recent years come under fire. The current debate highlights contemporary tensions between the federal government’s civil rights priorities and the practices of private lenders, insurers, and housing providers.

By Colin McGrath, Penn Law ’18

In the most recent of four cases to challenge the disparate impact theory, American Insurance Association v. the United States Department of Housing and Urban Development, the American Insurance Association and the National Association of Mutual Insurance Companies argue that regulations HUD promulgated in 2013, by adopting a disparate impact theory, exceed the agency’s statutory authority.[4]

The industry’s argument goes straight to the text of the law. The Fair Housing Act makes it unlawful to refuse to sell or rent housing “because of race, color, religion, sex, handicap, familial status, or national origin.”[5] It also forbids discrimination in any “real estate-related transaction” because of a person’s protected characteristic.[6] The insurers, pointing to the law’s use of the term “because,” argue that the Fair Housing Act required a showing of discriminatory intent for a violation to occur. The government counters that the word “because” refers not to the act of discriminating, but rather refers to a discriminatory outcome that would not occur but for a protected characteristic. Lost in the parsing of statutory language is any analysis of what, as a matter of policy, would be the right outcome for society.

The insurance industry, lenders, and state housing finance agencies have found the disparate impact standard irksome. In a case involving the award of tax credits for low-cost housing, the American Bankers Association filed an amicus brief, arguing that disparate impact creates “compliance difficulties and pressures businesses to consider prophylactic measures to minimize risk that may run counter to the purpose of the Act.”[7] The industry argues that “generally-accepted credit assessment standards, which themselves raise no inference of discrimination, may produce differential results that can be correlated with factors such as race or national origin.”[8] In other words, while a lender may adopt a debt-to-income requirement for racially neutral actuarial purposes, the requirement may fall disproportionately on a protected class, exposing the insurer to legal liability under the Fair Housing Act.

Similarly, creditors raised concerns about fair lending liability in response to the Consumer Financial Protection Bureau’s “ability-to-pay rule” (ATR), promulgated in 2013, requiring that lenders ensure that loan recipients have a “reasonable ability” to repay the loan. An article in the Review of Banking and Financial Law noted that the ATR could stand in conflict with the Fair Housing Act: whites who apply for a loan may fare better than minority applicants with respect to many factors that the ATR asked lenders to consider. Lenders for example must consider an applicant’s employment status, and in 2011 whites experienced an unemployment rate of 7.9 percent while unemployment for African Americans sat at 15.8 percent.[9] In an Interagency Statement, the CFPB and other regulatory agencies noted that the ATR would not, “absent other factors, elevate a supervised institution’s fair lending risk.” Because the ATR did not “dictate precisely how creditors should balance such factors,” creditors should “evaluate fair lending risk as they would for other types of product selections.”[10]

The disparate impact theory, however, is a crucial element in federal civil rights enforcement efforts. The Fair Housing Act, like other federal civil rights legislation, has relatively weak provisions to enable regulatory action enforcing the law.[11] The civil rights laws that Congress passed in the 1960s instituted a regime that relied on private actors to enforce their statutory rights. Compromise, the price of the law’s enactment, gave rise to this enforcement structure. The version of the law that Senator Walter Mondale originally introduced authorized HUD to “investigate [complaints], hold evidentiary hearings, and issue enforcement orders.”[12] Senate minority leader Everett Dirksen, who was positioned to block the bill’s passage in the Senate, agreed to offer his support for the bill only if it granted no enforcement mechanism to HUD.[13]

As a result, the bill that passed into law enabled two types of enforcement action. First, private actors could bring legal action in response to discriminatory conduct. Second, the Attorney General received authority to bring a civil action when the Untied States identified a “pattern or practice” of discriminatory conduct in violation of the law.[14] This provided the government its most robust opportunity for enforcing the law. Disparate impact theory has proven useful in pattern or practice suits: it has helped racial minorities and low-income families gain access residential communities that historically used facially neutral policies to maintain a predominantly white population.[15]

In recent years, the Supreme Court twice granted writ of certiorari on the question of whether the Fair Housing Act supports a disparate impact theory. In each case, the private parties settling before the Court could hear arguments.[16] Given its demonstrated interest in the question, the Supreme Court may likely grant certiorari on a recent petition from the Texas Department of Housing and Community Affairs.[17] The agency appealed a decision in the Fifth Circuit, which held that facially neutral practices in the allocation of low-income housing tax credit awards could give rise to liability when most developments were located in minority-concentration neighborhoods.[18]

But the courts may not provide the best venue for resolving the conflict between federal civil rights enforcement and the industries involved in the sale and rental of housing. If the industry prevails, the response will be crude, requiring a showing of discriminatory intent that leaves the Fair Housing Act inoperable outside cases involving egregious or obvious conduct; few zoning boards will be so careless as to state on record that a land-use restriction has the purpose of denying minorities access to a neighborhood. And if the government prevails, insurers and lenders will remain caught between actuarial concerns and fair lending laws. A better solution may be achieved at the administrative level, with HUD working with the housing industry to refine the government’s regulations. The parties should seek a standard that remains sensitive to discriminatory conduct while enabling the industry to use sound actuarial practices.


[1] 42 U.S.C. § 3601.

[2] Pub. L. 90-284, § 801 (1968).

[3] 42 U.S.C. §§ 3601-3605.

[4] Mt. Holly Gardens Citizens in Action, Inc. v. Twp. of Mount Holly, 658 F.3d 375, 377 (3d Cir. 2011); Gallagher v. Magner, 619 F.3d 823, 828 (8th Cir. 2010); Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. & Cmty. Affairs, 747 F.3d 275 (5th Cir. 2014); American Insurance Association v. United States Dep’t of Hous. & Urb. Dev., No. 1:13-cv-966-RJL (D.D.C. filed June 26, 2013).

[5] 42 U.S.C. § 3604(a).

[6] 42 U.S.C. § 3605

[7] Brief for the American Bankers Ass’n et al. as Amici Curiae Supporting Petition for a Writ of Certiorari, Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. & Cmty. Affairs, 747 F.3d 275 (5th Cir. 2014), petition for cert. filed, No. 13-1371 (U.S. May 13, 2014)at 14.

[8] Id.

[9] Nicholas Cassidy, “The Fair Housing Act, Disparate Impact, and the Ability-to-Repay: A Compliance dilemma for Mortgage Lenders,” Review of Banking and Financial Law, Spring 2013, (32) 431 at 452.

[10] “Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards Rule,” Oct. 22, 2013, http://files.consumerfinance.gov/f/201310_cfpb_guidance_qualified-mortgage-fair-lending-risks.pdf.

[11] See, Stephen B. Burbank, Sean Farhang & Herbert M. Kritzer, Private Enforcement of Statutory and Administrative Law in the United States (and Other Common Law Countries) 19-21 (U. Pa. L. Sch., Pub. Law Research Paper No. 11-08, 2011).

[12] Michael H. Schill and Samantha Friedman, “The Fair Housing Amendments Act of 1988: The First Decade,” Cityscape 4, no. 3 (1999): 2.

[13] George R. Metcalf, Fair Housing Comes of Age (New York: Greenwood Press, 1988), 80-81.

[14] 42 U.S.C. § 3614.

[15] See, e.g., United States v. City of Black Jack, Missouri, 508 F.2d 1179 (8th Cir. 1974), cert. denied, 422 U.S. 1042 (1975); Kennedy Park Homes Ass’n v. City of Lackawanna, N. Y., 436 F.2d 108 (2d Cir. 1970), cert. denied, 401 U.S. 1010 (1971). See also, Metro. Hous. Dev. Corp. v. Vill. of Arlington Heights, 558 F.2d 1283, 1285 (7th Cir. 1977).

[16] See Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. & Cmty. Affairs, 3:08-CV-0546-D, 2014 WL 2815683 (N.D. Tex. June 23, 2014) (noting that the Supreme Court did not hear arguments in Twp. of Mount Holly, N.J. v. Mt. Holly Gardens Citizens in Action, Inc., 133 S. Ct. 2824 (2013) and Magner v. Gallagher, 132 S. Ct. 548 (2011)).

[17] The District Court in Texas, noting the Supreme Court’s willingness to address the disparate impact question, issued a stay on proceedings pending the Supreme Court’s disposition on granting certiorari. Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. & Cmty. Affairs, 3:08-CV-0546-D, 2014 WL 2815683 (N.D. Tex. June 23, 2014)

[18] Inclusive Communities Project, Inc. v. Texas Dep’t of Hous. & Cmty. Affairs, 747 F.3d 275 (5th Cir. 2014).

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