Disparate Impact’s Impact: Understanding HUD’s New Fair Housing Rule Governor’s Housing Conference Baltimore, Maryland September 27, 2013 Harry J. Kelly, Panelist

2 Disparate Impact’s Impact Overview ›At Federal level, three primary laws affect discrimination in housing: – Fair Housing Act: Prohibits discrimination on the basis of race, color, national origin, religion, sex, disability and familial status in various real-estate/housing transactions – Section 504: Prohibits discrimination against persons with disabilities in programs that receive Federal financial assistance – Americans With Disabilities Act (ADA): Prohibits discrimination against persons with disabilities, including in places of public accommodation

3 Disparate Impact’s Impact Establishing Fair Housing Liability ›It is relatively easy to prove discrimination where there is evidence of obvious intent to discriminate – For example, a sign that says “No _____ Need Apply” ›This is Disparate Treatment discrimination: someone in a protected class is intentionally singled out for adverse treatment. ›After 40+ years of experience with fair housing law at State and Federal levels, thousands of fair housing cases are still filed each year, but instances of overt intentional discrimination are less common now, and are more likely to be identified and remedied.

4 Disparate Impact’s Impact Establishing Fair Housing Liability ›But what happens when acts that do not show obvious intent to discriminate have a discriminatory effect? ›Problem arises in two situations: – Pretext: Innocent-looking action that masks discriminatory intent – Neutral rules that have inadvertent discriminatory effect Should someone be punished if they did not intend to violate fair housing rules? ›Disparate Impact: A policy that appears neutral on its face but that, as applied, has a harsher impact on someone in a protected class than on general public

5 Disparate Impact’s Impact HUD’s Final Disparate Impact Rule ›If a disparate impact standard is going to be used to assess liability, it must do a couple of things: – First, there has to be some way to establish that someone in a protected class is disproportionately hurt by the challenged practice – Second, there has to be a mechanism to assess whether there is a legitimate excuse or justification for the challenged practice Otherwise, any practice that has a disproportionate impact would violate fair housing laws ›System needs to distinguish “valid” from “invalid” impacts

6 Disparate Impact’s Impact HUD’s Final Disparate Impact Rule ›Uses a balance-shifting test to determine whether a violation has occurred – Step One: Plaintiff bears initial burden of showing if the policy or practice has a disparate impact on someone in a protected class – Step Two: Burden shifts to defendant to show if there is a legally sufficient justification for the challenged practice Must show substantial, legitimate, nondiscriminatory interest and No less discriminatory alternative – Step Three: Burden shifts to Plaintiff to show no less discriminatory alternative

7 Disparate Impact’s Impact HUD’s Final Disparate Impact Rules ›Why is it important? – Allows liability without finding of actual intent to discriminate Liability is based on effects of a policy or practice, not on whether there was an intent to discriminate In other words, “clean heart” is not necessarily a defense – HUD rule will apply to all cases within its regulatory realm – Courts will look to HUD view because it is “expert” – Important to understand HUD’s rule, because disparate impact is used in many areas of anti-discrimination law

8 Disparate Impact’s Impact HUD’s Final Disparate Impact Rule ›Does it work? – No clear indication in Fair Housing Act that Congress intended to impose liability based solely on effect (vs. intentional conduct) – Does it prevent firms from undertaking reasonable actions that may have a disparate impact (tighter credit policies) – How much impact is sufficient to impose liability? – Should impact also be qualitatively harsher on protected classes? – Does HUD’s new rule permit housing providers to adopt flexible rules that reduce disparate impacts?

9 Disparate Impact’s Impact Disparate Impact analysis can apply to almost any policy or practice that has a disproportionate impact on a protected class Let’s look at some of the controversial areas where Disparate Impact analysis is having an impact today:

10 Disparate Impact’s Impact Criminal Background Checks ›Private owners of multifamily housing perform various checks before admitting new tenants – Is it permissible to screen tenants on the basis of criminal history/conduct? ›Some groups contend that screening on this basis has a harsher impact on protected classes than on others – US Government itself requires owners of HUD- insured/assisted housing to perform criminal background checks ›Owners should be able to show legitimate purpose but strict “no-record” standards may not satisfy less discriminatory alternative component

11 Disparate Impact’s Impact Source of Income ›Fair Housing Act does not include economic status as a protected class ›In some areas, groups claim that discrimination on the basis of source of income (such as Section 8 assistance) has a disparate impact on persons in a protected class – In this case, disparate impact is being used to create a new protected class (persons who receive alternative income) – Justified? Congress eliminated “take-one, take-all” requirement in 1990s ›Some states/cities prohibit discrimination on the basis of the source of income (alimony, Section 8, public assistance)

12 Disparate Impact’s Impact Low income housing tax credits ›Inclusive Communities case (Texas) shows problems posed by disparate impact analysis – Plaintiff wanted to develop LIHTC properties in non- minority areas – Texas agency allocates LIHTCs using Federal standards, resulting in more LIHTC housing in minority areas. – Court ruled: Plaintiff showed disparate impact on minorities Defendant showed legitimate justification, but did not show that no less discriminatory alternative available Plaintiff won

13 Disparate Impact’s Impact Low income housing tax credits ›Inclusive Communities suggests following Federal rules may not prevent liability, but it should not be over-dramatized ›Several factors should limit its reach: – State agency did not mount effective defense to showing of disparate impact In a different case, numbers might lead to different result – Court did not give weight to many steps that agency took expressly to reduce disparate impacts Did steps amount to a “less discriminatory alternative”? – Does not mean local focus by community developer is invalid

14 Disparate Impact’s Impact Future of Disparate Impact ›HUD’s new rule may not be the last word: – While courts have applied disparate impact in housing cases for many years, it remains controversial Typically, we do not impose liability without intent or at least violation of some well-established duty Supreme Court has scrutinized Federal anti- discrimination laws closely to determine whether they in fact allow for disparate impact liability.

15 Disparate Impact’s Impact Future of Disparate Impact: ›Magner and Mount Holly cases – In these cases, city governments attempted to enforce public building/health codes or to redevelop blighted areas – Residents argued that these policies had a disparate impact on minorities in these areas Essentially argued that enforcement activities were pretexts for discriminatory conduct – Supreme Court is considering Mt. Holly case now and may decide by June 2014 whether Fair Housing Act recognizes disparate impact liability

16 Disparate Impact’s Impact Lessons to Learn: ›Before adopting any policy or practice, you need to ask: Is it likely that policy or practice will have a harsher impact on persons in a protected class? Is there a legally sufficient justification for the policy or practice? Is there a less discriminatory alternative that would meet the same practical goals?

17 Disparate Impact’s Impact Contact Information: Harry J. Kelly, Esq. Nixon Peabody LLP 401 Ninth Street, N.W., Suite 900 Washington, D.C. Phone: