DEVELOPMENTS IN FAIR HOUSING AND DISPARATE IMPACT HARRY J. KELLY, ESQ NARPM BROKER/OWNER RETREAT LAS VEGAS, NEVADA | APRIL 12, 2016

FAIR HOUSING ACT – BACKGROUND —Passed: 1968 —Multiple late amendments that expanded number of protect classes —Prohibits housing discrimination “because of” race, color, religion, national origin, sex, familial status, handicap (disability) 2

FAIR HOUSING ACT – BACKGROUND Two Primary Theories of Liability: —Intentional Discrimination – most common Definition: Individual of a protected group is shown to have been intentionally singled out and treated less favorably than others similarly situated  Example: “No [ ] Need Apply” 3

FAIR HOUSING ACT – BACKGROUND Two Primary Theories of Liability: —Disparate Impact – less common, does not require evidence of intentional misconduct 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  Example: 2-person/bdrm occupancy standard has harsher impact on families with minor children 4

SIGNIFICANCE OF DISPARATE IMPACT —Need not show intent for disparate impact claims —Theory imported from employment and other areas of law —Claims based on statistics and expert analysis that suggest a rental housing policy has a discriminatory effect on a protected class —But statistics don’t establish liability: If plaintiff makes out claim, courts look to defendant to show there is some legitimate grounds for action/policy 5

SIGNIFICANCE OF DISPARATE IMPACT By definition, disparate impact is used to attack policies or practices that are neutral on their face but that have allegedly disproportionate impact on minorities —Due to socioeconomic realities in US, 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 6

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT ( ) PLAINTIFF: Nonprofit that sought to develop affordable housing in “high opportunity” areas —“High Opportunity”: areas with higher median incomes and educational opportunities, generally lower concentration of minority residents 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 7

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT ( ) District court applied statistics and used burden-shifting: —Found that LIHTC housing was disproportionately allocated to minority communities: 92.29% of LIHTC units in Dallas in census tracts with less that 50% Caucasian residents. —Court concluded that concentration of LIHTC units in minority communities made it more difficult for plaintiff to develop housing in non-minority areas —Texas agency did not contest disparity, so plaintiff made out “prima facie” case of disparate impact 8

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT ( ) —Texas agency contended that it was forced to follow IRS rules that required most LIHTCs to be awarded to lowest-income tenants in “qualified census tracts” —Court accepted that agency’s goals were bona fide and legitimate, but that it had not demonstrated that there were no less discriminatory alternatives to advance those interests 9

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT ( ) On appeal, Fifth Circuit upheld district court finding of liability for disparate impact —Court acknowledged that Fifth Circuit had not attempted to set legal standard for showing disparate impact —Fifth Circuit remanded the case to district court to apply the burden-shifting analysis developed in HUD regulations (to be discussed) —Concurring opinion: Insufficient evidence of disparate impact shown 10

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT ( ) Fall 2014: Supreme Court accepts certiorari petition to review Fifth Circuit’s decision Limits to one issue: Does Fair Housing Act recognize disparate impact liability? —Texas agency argued that express language of Fair Housing Act only attacks discrimination “because of” protected class status, and does not address “effects” of discrimination “because of” implies intentional conduct —Recent SCOTUS decisions on other federal antidiscrimination statutes seem to turn on express language of the statute. —Does disparate impact lead to improper race- based quotas? 11

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION (5-4) Upholds the existence of disparate impact under the Fair Housing Act —Disparate impact is consistent with past SCOTUS decisions Griggs and Smith support disparate impact if statute refers to consequences of action, not just mindset of actors —“Making unavailable... because of … race” includes having the effect of making unavailable. —1988 amendments to FHAct presume that disparate impact exists 12

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION But recognizes 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. —Said the Court 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” 13

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION Recommends “safeguards” to protect “against abusive disparate impact claims” —Stresses “Robust Causality Requirement” Mere statistical disparity is not sufficient to support disparate impact, “racial imbalance does not, without more, establish a prima facie case...” 14

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION Safeguards: —Causation requirement: As part of its prima facie case, plaintiff must demonstrate that the challenged practice is the cause of the disparate impact Without a causality requirement, providers will start adopting racial quotas to avoid DI liability, which is suspect for equal protection reasons. Suggests that if multiple causes for disparity, no negative disparate impact One time decision to build/not build may not be a “policy” at all 15

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION Legitimate Policy as Defense —Business must be given “leeway to state and explain the valid interest served by their policies.” Recommends that housing providers in adopting a policy, make a statement explaining legitimate basis for their policy. 16

TEXAS DEPT. OF HOUS. AND COMM. AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT - DECISION HIGHLIGHTS OF KENNEDY’S MAJORITY OPINION —A policy is not contrary to DI requirements unless it creates artificial, arbitrary and unnecessary barriers Does he intend this as a separate test that Plaintiffs must meet? —Burden on Plaintiff to show less discriminatory but equally effective alternative

FRAMEWORK FOR FUTURE OF DISPARATE IMPACT: HUD DISPARATE IMPACT REGULATION (24 CFR SEC ) In 2013, HUD adopted new regulations imposing rules to establish disparate impact liability in Fair Housing Act cases: —Definition: A practice has a discriminatory impact where It actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns of race, color, religion, sex, handicap, familial status, or national origin. 18

HUD DISPARATE IMPACT REGULATION Three-Step Burden Shifting Approach: 1.The plaintiff/complainant must make a prima facie showing of either a disparate impact or a segregative effect. 2.If the discriminatory impact is shown, the burden of proof shifts to the respondent to show “legally sufficient justification.” 3.If the respondent satisfies the burden, then the charging party/plaintiff may still establish liability by proving that these substantial, legitimate, nondiscriminatory interests could be served by another practice that has a less discriminatory effect. 19

HUD DISPARATE IMPACT REGULATION “Legally Sufficient Justification” A practice or policy found to have a discriminatory effect may still be lawful if it has a “legally sufficient justification.” —A legally sufficient justification exists where the challenged practice: is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent; and those interests could not be served by another practice that has a less discriminatory effect. —A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. 20

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 address safeguards or include safe harbors? —Does HUD rule satisfy Kennedy’s “robust causality requirement”? —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.

FUTURE OF DISPARATE IMPACT —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 —Courts will test extent of “safeguards” Some courts will view Inclusive Communities as essentially a vindication of disparate impact generally Others may find grounds to challenge DI claims on basis of lack of causation, legitimate purpose, burden of proof 22

FUTURE OF DISPARATE IMPACT —“Pseudo-protected classes” Effectively, expansion of disparate impact will result in expansion of unofficial 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 —Congress: Pressure to carve out exceptions and safe harbors from disparate impact? 23

FUTURE OF DISPARATE IMPACT Examples of future kinds of challenges: —Residency Preference —Drug/crime screening policies (discussed below) —Rental decisions based on source or type of income/income multipliers —Credit Screening —House rules (such as those affecting families) In all of these cases, providers may have sound, non-discriminatory reasons to impose neutral standards, but those standards may have disproportionately harmful impacts on protected classes 24

POST-ICP DECISIONS Post-Inclusive Communities, courts focus on applying safeguards to disparate impact cases: —ICP v. TDHCA: on remand, court will apply HUD DI rule, but will reexamine initial prima facie determination —ICP v. Treasury (“ICP II”): ICP challenges Federal agencies for failure to promote pro-fair housing policies —City of Los Angeles v. Wells Fargo: predatory lending case dismissed because City could not prove causation; DI focuses on removal of barriers, does not require positive action —City of Miami v. Bank of America: recognizes City has standing, but on remand, district court dismisses

POST-ICP DECISIONS Other cases show potential scope of DI issues: —Source of Income: Viens v. Great American Insurance (settled) - Insurer agrees not insure properties based on source of income —Preferences: Winfield v. City of New York (pending) - challenges policy of reserving 50% of new affordable units for neighborhood residents; claims preference has disparate impact on ability of minorities to move to non- minority areas:

POST-ICP DECISIONS Other cases show potential scope of DI issues: —Code Enforcement: Ellis v. City of Minneapolis - DI alleged from code enforcement practices; City has legitimate basis, lack of causation shown. Counts dismissed but plaintiffs allowed to amend complaint pursuant to ICP decision

POST-ICP DECISIONS Other cases show potential scope of DI issues: —Source of Income/Regulatory Impacts: Burbank Tenants Assn. v. Kargman (SJC appeal)  At end of ELIHPA Use Agreement, owner decides not to renew Section 8 contract  Complies with all Federal and state requirements to opt out of Section 8 program  All tenants receive enhanced vouchers  Plaintiffs: Owner’s decision not to renew Section 8 contract has disparate impact on minority tenants, violated FHAct and state law  Lower court: Owner did not violate discrimination laws  Now pending in Massachusetts SJC

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) OGC announces guidance explaining how criminal background checks may have disparate impact on minorities Uses burden-shifting approach of HUD regulations 1.Does Crime Screening have a discriminatory effect? State/local data can be used to prove DI if available, but if not, National data can be used to demonstrate a disparate impact if there is no reason to believe national data is different from state/local data Citing national data, OGC says minorities face disproportionately higher rates of arrest or incarceration HUD data shows nothing about actual impact on housing opportunities 29

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) 2.Is Crime Screening necessary to achieve a substantial, legitimate, nondiscriminatory interest? Housing provider must be able to show that there is a legitimate reason to do this, and that the challenged policy actually achieves that interest. Must be able to show this policy actually protects tenants/property. Bald assertions without factual proof are not sufficient 30

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) OGC Guidance —Arrest records: Since arrest does not equal proof of unlawful conduct, there is no evidence that excluding people on the basis of arrests protects tenants/property 31

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) —Conviction records: Doesn’t dispute that conviction records prove individual engaged in criminal conduct. Housing providers that impose a flat “one-strike” policy cannot meet burden of proving policy achieves legitimate interest Housing provider with more tailored policy must still show that it meets a substantial, legitimate, nondiscriminatory interest  To satisfy that standard, policy must consider 32

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) Substantial, legitimate, nondiscriminatory interest —To satisfy that standard, policy must consider Nature of the crime involved “Severity” of crime “Recency” of crime —If you don’t address those issues, policy does not serve legitimate interest. 33

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) 3.Is there a less discriminatory alternative? Burden shifts back to HUD or plaintiff to show that same interest could be served by a less discriminatory alternative An “individualized assessment” of relevant mitigating factors beyond person’s criminal record may have a less discriminatory effect than categorical exclusions, such as:  Facts surrounding the criminal conduct  Age of person at time the event occurred  Tenant history before/after event  Evidence of rehabilitation Do crime checks after other tenant/financial screening? 34

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) Other Guidance: —FHAct does not prohibit denial of admission due to conviction for some drug offenses (§ 807(b)(4)) —Use of crime records for intentional discrimination is forbidden If you admit white persons with convictions but reject blacks with same records, that violates FHAct —OGC Guidance is totally silent about fact that it imposes crime/drug screening rules on HUD-assisted properties. 35

HUD OFFICE OF GENERAL COUNSEL GUIDANCE (APRIL 4, 2016) Questions/Comments: —Has HUD effectively created a rebuttable presumption that crime screening has DI? —How does proof of national arrest/conviction rates satisfy “robust causation” requirement of Inclusive Communities? —HUD never actually disputes that criminal records are relevant to safety —Is HUD putting duty to show less discriminatory alternative on the wrong party? 36

UPCOMING DECISIONS THAT WILL INTERPRET SUPREME COURT DECISION Questions/comments: —What happens if local government imposes restrictions on criminals living on a property – can we refuse to follow the local ordinance? Pressure from police? —Does this apply to eviction of existing tenants as well as screening of applicants? —Does “individualized assessments” make intentional discrimination claims more likely? —Is it really practical for owners that handle 100s of applications each month to do an individualized assessment? 37

WHAT TO DO NOW? —Follow developments and stay current on what the decision means as evolves Identify new types of disparate impact claims —Train employees to be sensitive to negative effects and to be consistently fair Be cautious about rules that focus on specific groups (like restricting children’s activities) Press HUD for rule changes and safe harbors 38

WHAT TO DO NOW? —Disparate Impact Analyses Review new/existing policies or practices Consider legitimate, nondiscriminatory reasons for changes Consider less discriminatory alternatives Document what and why  Not so much typical business decisions (like cable providers) but things like occupancy requirements, preferences and house rules

BEST PRACTICES TO AVOID DI CLAIMS WHO —Owners, managers, developers, investors, lenders, insurers, public agencies WHAT —Identify “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

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