It has been a busy few weeks for the U.S. Supreme Court with the release of several much-anticipated decisions. In today's post, we review an under-the-radar, but extremely important, opinion— Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc.
The financial services industry has been concerned for some time about the developing law surrounding the theory of ‘disparate impact' in extending credit. In discrimination statutes, there are generally two theories of liability: disparate treatment and disparate impact. Disparate treatment occurs when a party intentionally discriminates. Disparate impact, on the other hand, occurs when a party employs facially neutral policies, but the effect results in discrimination—in other words, unintentional discrimination.
So, what happens if a creditor's decision-making process has the ‘effect' of discriminating against a protected class, even if the discrimination is completely unintentional? That is, when the application of the credit extension criteria has the effect of discrimination, does such action violate the Equal Credit Opportunity Act (ECOA)? The ECOA's accompanying Regulation B specifically references disparate impact, but for years, creditors have questioned whether this theory of liability is really supported by law.
We are getting awfully close to an answer. In late June, the Supreme Court released its 5-4 decision authored by Justice Kennedy holding that disparate impact claims are cognizable under the Fair Housing Act (FHA). While this case did not involve the ECOA, the rationale for the decision may support a disparate impact claim under ECOA (although we note that the ECOA's language is materially different from the language of the FHA).
The Court's view is that the language of the FHA (like the EEOA) is “results oriented” applying not just to the intended action but the results of the action. So, if housing criteria applied by a housing department have a disproportionately adverse effect on minorities, it is suspect. The majority opinion of the Court did note that a disparate impact claim based solely on statistical disparity will fail if the plaintiff cannot demonstrate a policy causing the disparity. There must be causation attached to the disparate impact.
What should the financial services industry expect in the aftermath of this case? First, we anticipate the CFPB will continue to look for disparate impact in its supervision and enforcement power. Having received tacit approval from the Supreme Court, expect to see more allegations of disparate impact from the CFPB. And, of course, the door is now open for plaintiff attorneys to try to demonstrate a causal connection between policy criteria and the disparate effect in housing.
We want to emphasize that this was a public housing case, not a case dealing with credit extension under the ECOA. And, the Court's reasoning and opinion are very dependent upon the language of the FHA– that differs significantly from the language of the ECOA.
Nevertheless, it certainly looks as if disparate impact is here to stay.