DISPARATE IMPACT DEVELOPMENTS AFTER THE INCLUSIVE COMMUNITIES DECISION NATIONAL AFFORDABLE HOUSING MANAGEMENT ASSOCIATION OCTOBER 26, 2015

Transcription

1 DISPARATE IMPACT DEVELOPMENTS AFTER THE INCLUSIVE COMMUNITIES DECISION NATIONAL AFFORDABLE HOUSING MANAGEMENT ASSOCIATION OCTOBER 26, 2015 HARRY J. KELLY, ESQUIRE NIXON PEABODY MICHAEL W. SKOJEC, ESQUIRE BALLARD SPAHR 1

2 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES Two Primary Theories of Liability under Fair Housing Act (FHAct): Disparate Treatment (Intentional Discrimination): most common; requires direct/implied evidence of intent Definition: Individual of a protected group is shown to have been singled out and treated less favorably than others similarly situated Disparate Impact (nonintentional discrimination): less common, requires statistical proof of different impact on protected class Definition: a policy or practice which is neutral on its face but has a statistically significant negative effect on a group of persons protected by the non-discrimination law 2

3 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES Disparate Impact No need to show intent for disparate impact claims Claims based on statistics and expert analysis that suggest a policy/practice has a discriminatory effect on a protected class But statistics alone don t establish liability o If plaintiff makes out claim, courts look to defendant to show there is some legitimate grounds for policy/practice 3

4 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES By definition, disparate impact attacks policies or practices that are neutral on their face but that have allegedly disproportionate impact on minorities Due to socioeconomic realities in U.S., almost any policy or practice may have a disparate impact on protected classes As a result, disparate impact may expose housing providers to liability for otherwise normal operations and policies E.g., 2-person per bedroom occupancy standards 4

5 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES Texas Dept. of Hous. And Comm. Affairs v. Inclusive Communities Project ( ) Claim: Texas agency that allocated low income housing tax credits (LIHTC) used criteria that resulted in concentration of LIHTC development in minority communities, making it harder for minorities to locate affordable housing in non-minority communities Promotes patterns of segregation, makes it more difficult for minorities to find housing in high opportunity areas 5

6 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES District court used burden-shifting approach: Found that statistics showed disparate impact: LIHTC housing was disproportionately allocated to minority communities: 92.29% of LIHTC units in Dallas in census tracts with less that 50% Caucasian residents. Agency had bona fide and legitimate reasons for allocation policies (following IRS rules), but Agency did not demonstrate it used least discriminatory alternatives available Held: Agency violated FHAct 6

7 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES US SUPREME COURT: JUSTICE KENNEDY S MAJORITY OPINION (5-4) IN INCLUSIVE COMMUNITIES Determines that FHAct includes disparate impact liability But warns that broad application of DI can have unintended and adverse consequences that actually result in opposite of what Congress intended and frustrate legitimate decisions by government entities and housing providers. Recognized that disparate impact liability has always been properly limited in key respects. Needs to allow practical business choices and profit-related decisions that sustain a vibrant and dynamic free enterprise system 7

8 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES HIGHLIGHTS OF KENNEDY S MAJORITY OPINION Recommends safeguards to protect against abusive disparate impact claims : 1. Mere statistical disparity is not sufficient to support disparate impact Racial imbalance does not, without more, establish a prima facie case Robust causality requirement As part of its prima facie case, plaintiff must demonstrate that the challenged practice is the cause of the disparate impact Suggests that if multiple causes for disparity, no disparate impact liability exists. Court said that a single decision to build/not build not a policy and no DI claim 8

9 DISPARATE IMPACT AFTER INCLUSIVE COMMUNITIES 3. Legitimate Policy as Defense Business must be given leeway to state and explain the valid interest served by their policies. Recommends that, when making policy decisions, housing providers explain legitimate basis for their policy. 4. Disparate impact should focus solely on removal of artificial, arbitrary and unnecessary barriers 5. Providers cannot use racial quotas to avoid DI liability because violates equal protection clause 6. Burden on Plaintiff to show less discriminatory alternative 9

10 INCLUSIVE COMMUNITIES CONTINUES Congress: Pressure to carve out exceptions and safe harbors from disparate impact? Not likely. Lower Federal courts wrestling with details of how to prove disparate impact claims (burden of proof, amount of impact required, etc.) lots of ways claims being brought Remand of Texas v. Inclusive Communities - Must reconsider statistical proof and prima facie case because now must closely scrutinize and must look for robust causality Inclusive Communities v. U.S. Dept. of Treasury - Administration of LIHTC projects perpetuates racial segregation (like Texas Dept. of Housing practices) - Defendants: fundamental fallacy of claim that FHA requires federal agencies to take specific actions to regulate the racial characteristics of housing locations - Amended Complaint to be tested using Supreme Court factors 10

11 LOCAL GOVERNMENTS POLICIES SECOND-GUESSED Ellis v. City of Minneapolis Landlords brought action for City enforcement of health and safety codes Claim dismissed because City demonstrated legitimate government interest and Plaintiffs failed to articulate causation between City policy and racial disparity Plaintiffs amended complaint Winfield v. City of New York City have 50% community preference in new affordable housing Claim that perpetuates segregation and has disparate impact on City residents Amended Complaint, and Motion to Dismiss pending 11

12 INSURERS UNDERWRITING CHALLENGED Viens v. Great American Insurance Alleged that refused to insure landlords who leased to Section 8 voucher holders, motions to dismiss denied Consent Decree For 3 years, not consider source of income in underwriting, pricing and eligibility Pay plaintiffs and Relman, Dane law firm $475,000 Jones v. Travelers Casualty Similar kind of allegations and settled 7/1/15 12

13 LENDERS DEFENDING CLAIMS City of Los Angeles v. Wells Fargo Alleged that lender targeted minority borrowers with worse loan conditions and terms Judge applied Supreme Court decision and dismissed: City s claim rests just on statistical disparity without evidence of causation Loans helped minorities and promoted by HUD legitimate interest City of Miami v. Bank of America Similar claims 13

14 OTHER COURT CHALLENGES Burbank Apts. Tenant Assn. v. Khargman (Mass. SJC) Section 8 owner decides not to renew HAP Contract at end of term Owner provides all required notices to HUD/state agencies Current tenants protected by enhanced vouchers Plaintiffs sue, alleging that nonrenewal violates FHAct and Mass. laws, because non-renewal has a disparate impact on present/future minority tenants Lower court rejected plaintiffs claims; not on appeal to Mass SJC 14

15 COURT ACTION -- SUMMARY Cases show how disparate impact can be used to attack wide range of policies While courts to date have applied Inclusive Communities to narrow scope of disparate impact cases, recent cases are looking at proof of each side s case So far, courts have not identified per se violations or safe harbors Unless that happens, expect more cases coming in every facet of real estate development policies and property management policies 15

16 HUD DISPARATE IMPACT REGULATION During pendency of earlier disparate impact cases, HUD proposed and finalized a new regulation addressing proof of disparate impact claims HUD rule adopts balance-shifting approach similar to district court in Inclusive Communities: Plaintiff must identify policy or practice that has disparate impact on protected class under FHAct If satisfied, Defendant must show legally sufficient justification Practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests Interest could not be served by less discriminatory practice Justification must be supported by evidence, not speculative If satisfied, Plaintiff must show that those interests could be served by another practice with a less discriminatory effect 16

17 HUD DISPARATE IMPACT REGULATION Where does Inclusive Communities leave the HUD regulation? HUD may view opinion as basic endorsement of its regulation But Kennedy is clearly concerned about need to demonstrate causation and protect housing providers so that legitimate and profit-motivated decisions are not second-guessed After Inclusive Communities, will HUD change rule to include safeguards or safe harbors? HUD rule does not appear to require identifying a specific policy and showing causation HUD rule required defendant to show no less discriminatory practice but Court put burden on plaintiff to show available alternative practice which is less discriminatory and serves defendant s legitimate needs. 17

18 INSURERS CHALLENGING HUD RULE Property Casualty Insurers v. HUD (N.D. Ill) - HUD disparate impact rule did not consider insurance industry concerns during rulemaking Federal law and states are to regulate insurance Court found HUD acted arbitrarily and capriciously in relying on future adjudications, rather than rulemaking; remanded to HUD American Insurance Assn. v. HUD (D.C. Dist.) Same kind of allegations Previously scathing criticism of HUD Remanded to district court 18

19 FUTURE OF DISPARATE IMPACT Inclusive Communities is good for litigants, but what practical guidance to owners/managers? Expect swift increase in number of cases challenging multiple policies and practices by housing providers, lenders, insurers, credit reporting agencies that have prima facia disparate impact on protected classes Effectively expands number of pseudo-protected classes (high risk borrowers, convicted felons, persons with non-wage income, etc.) who can claim protections beyond those identified in Fair Housing Act, because of correlation between their class and classes expressly protected by Fair Housing Act Example: If use of credit scoring has disparate impact on protected classes, persons with lower credits scores also effectively become protected class 19

20 FUTURE OF DISPARATE IMPACT Likely examples of future kinds of challenges for property management: Residency Preference Drug/crime screening policies Rental decisions based on source or type of income/income multipliers Credit Screening House rules (such as those affecting families/children) Previously seen DI claims for some of these These inflection points, where decisions are made about who receives/does not receive housing opportunity are focus of disparate impact claims 20

21 BEST PRACTICES Who: Owners, managers, developers, investors, public agencies What: Look at Inflection Points that extend/restrict housing opportunities, such as: Admission criteria and occupancy standards Criteria for awarding benefits (tax credits/grants/etc.) Preferences Evaluate potential disparate impacts Assess other causes for any disparities Identify legitimate, nondiscriminatory interests Consider less discriminatory alternatives 21

22 Questions Harry J. Kelly, Esq. Nixon Peabody LLP P: E: Michael W. Skojec, Esq. Ballard Spahr LLP P: E: 22