The US Supreme Court finally weighed in today on whether the disparate impact theory may be used to prove housing discrimination and ruled that such claims are viable under the Fair Housing Act (FHA), 42 U.S.C. §§ 3601 et seq. This means plaintiffs only need to show the discriminatory effect of a particular business practice without evidence of discriminatory intent. Courts have routinely recognized that the FHA permits claims based on disparate impact.

In a 5-4 decision authored by Justice Kennedy, the Supreme Court cited the statutory purpose and results-oriented language of the FHA and also pointed to the Supreme Court’s interpretation of cases decided under Title VII and the ADEA to support its decision. Lenders will likely view the Supreme Court’s decision as an unexpected loss, but the decision may, in part, benefit the banking and mortgage lending industries. The Supreme Court emphasized that disparate impact liability “must be limited”.

The decision cautions courts to avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision. The limitations on disparate-impact liability discussed here are also necessary to protect potential defendants against abusive disparate-impact claims. (p. 21)

Before rejecting a business justification, the Supreme Court instructed there must be a determination that a plaintiff has shown that there is “an available alternative … practice that has less disparate impact and serves the [business entity’s] legitimate needs.’” Justice Kennedy broadly reasoned that “antidiscrimination laws must be construed to encompass disparate-impact claims when their text refers to the consequences of actions and not just to the mindset of actors, and where that interpretation is consistent with statutory purpose.”

The Supreme Court explained that “disparate-impact liability has always been properly limited in key respects that avoid the serious constitutional questions that might arise under the FHA, for instance, if such liability were imposed based solely on a showing of a statistical disparity.” Disparate-impact liability, the Supreme Court held, “mandates the ‘removal of artificial, arbitrary, and unnecessary barriers,’ not the displacement of valid governmental policies.”

The case before the Supreme Court concerned whether a Texas Agency violated the FHA by disproportionately awarding low-income housing tax credits to developers who own properties in poor, minority-dominated neighborhoods. When considering the underlying issues of the case before it, the Court held that disparate-impact liability “does not mandate that affordable housing be located in neighborhoods with any particular characteristic.”

In response to a disparate-impact claim that relies on a statistical disparity, the Supreme Court said the claim must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity. A robust causality requirement ensures that racial imbalance alone does not establish a prima facie case of disparate impact. Such a requirement “protects defendants from being held liable for racial disparities they did not create.” The Court also noted that these limits on disparate impact liability also protect against the “serious constitutional questions” that would arise if governmental or private entities are forced to use “numerical quotas” in an effort to comply with the FHA. Therefore, a “plaintiff who fails to allege facts at the pleading stage or produce statistical evidence demonstrating a causal connection cannot make out a prima facie case of disparate impact.”

The decision is expected to reinforce and bolster the administration’s ongoing efforts to regulate the banking and mortgage industries based on the perceived discriminatory effect of their lending practices, even without a showing of evidence or intent. In the days and weeks to come, the industry will dissect and analyze the opinion, including the lengthy dissenting opinions by Justices Thomas and Alito. The takeaway for now, however, is that fair lending policies should remain a top priority for lenders, with testing becoming a critical factor in light of the Court’s decision.