Supreme Court

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The Impact of Disparate Impact

”It would be paradoxical to construe the FHA [Fair Housing Act] to impose onerous costs on actors who encourage revitalizing dilapidated housing in the Nation’s cities merely because some other priority might seem preferable.”

That’s from a recent ruling by the U.S. Supreme Court in Texas Department of Housing and Community Affairs (DHCA) v. Inclusive Communities Project, Inc—affirming that allegations of Fair Housing Act (FHA) violations can be supported by evidence of disparate impact. In this particular case as Jennifer Schwartz, Assistant Director for Tax Policy and Advocacy at the National Council of State Housing Agencies (NCSHA) summarizes it, the plaintiff alleges that “Texas DHCA had caused continued segregated housing patterns by allocating a disproportionate amount of the state’s Housing Credits [federal low income housing tax credits] to developments in predominantly black inner-city areas.”

What impact will the decision have on the affordable housing industry; e.g. decisions about which projects to pursue and which neighborhoods to develop? And how is it going to affect state housing agencies in their requirements and priorities?

Answers to such questions, experts emphasize, will probably emerge from the majority opinion’s—written by Associate Justice Anthony Kennedy —complex prescription for identifying and verifying disparate impact. As Schwartz emphasizes, “The opinion noted limits to disparate impact liability for affordable housing purposes, stating ‘Here, the underlying dispute involves a novel theory of liability that may, on remand [return of the case to a lower court to be retried], be seen simply as an attempt to second-guess which of two reasonable approaches a housing authority should follow in allocating tax credits for low-income housing. An important and appropriate means of ensuring that disparate impact liability is properly limited is to give housing authorities and private developers leeway to state and explain the valid interest their policies serve….’”

Indeed, the real-world effect of the Supreme Court decision may very well be to increase the burden on plaintiffs who claim specific government programs have disparate impact.

Most people seem to agree that the most immediate effect, says Andrea Ponsor, an attorney who serves as Policy Director for the Local Initiatives Support Corporation, “may be that some states revisit their qualified allocation plans (QAP) with an eye towards preferences that shift some funds to developments in higher opportunity neighborhoods.”

At the heart of this are two broadly supported goals that may conflict with one another: revitalization (including historic preservation) of communities that have, in the court’s words, “long suffered the harsh consequences of segregated housing patterns,” and fair housing practices that combat, or at least do not strengthen, discriminatory patterns (which could involve many protected classes, such as people with disabilities).

“The majority opinion,” says Ponsor, “acknowledges that revitalizing low income communities is a legitimate concern for communities and not inherently contradictory to fair housing goals. We hope that this acknowledgment of the legitimate interest in both mobility and revitalization will be part of any changes to qualified allocation plans and local housing strategy. Families should be able to make choices that include the choice to move to a new neighborhood and to stay and enjoy the revitalization of their own neighborhoods.”

Adds Sharon Geno, who leads the Government-Assisted Housing Team at the Washington, DC office of the law firm Ballard Spahr, “While the Supreme Court did uphold disparate impact in the Fair Housing context, Justice Kennedy’s opinion also reiterated that this is a very fact-specific determination and there are circumstances where additional affordable housing investments in impacted communities are not only permitted, but beneficial to low income minority residents. It is hard to say how this will play out in future disparate impact cases, but I do think it provides some comfort to developers, lenders and investors who see the benefits that affordable housing can bring to historically minority communities.”

The Supreme Court decision, moreover, does not occur in a vacuum. “How LIHTC is allocated under the QAP is also a consideration under HUD’s new Affirmatively Furthering Fair Housing rules that require state and local government recipients of HUD assistance to work with their communities to create plans to take ‘meaningful action’ to further fair housing goals,” says Ponsor. “This may also trigger some changes to the QAP and/or to the ways a state uses LIHTC with HUD funds. This is a higher standard than just not discriminating—the rule provides a framework for carrying out the recipient’s duty to work to overcome patterns of segregation and to foster inclusive communities.”

Another unknown is what impact, if any, the focus on variables, like “high opportunity communities” and “fair housing” principles, will have on allocation of affording housing tax credits to rural communities.

Ultimately, of course, no one knows with much confidence what will happen as a result of Texas v Inclusive Communities, or even what will turn out to be most important. “We’ve discussed this,” says one official at a large state’s Housing Agency, “and all we can say at this time is that we are evaluating its potential impact.” When such a situation exists, a time-tested principle called Occam’s Razor states that the simplest explanation for events is the most likely to be true. Thus, the most important sentence in the majority opinion may be nine words yet to receive much attention, “Entrepreneurs must be given latitude to consider market factors.”