In a decision certain to have major repercussions for the banking industry, the Supreme Court on Thursday upheld the use of disparate impact theories of liability – that is, suits that claim a law or practice has a discriminatory effect, even absent showing of any discriminatory intent – under the Fair Housing Act, which prohibits various forms of discrimination in housing.  In a 5-4 decision authored by Justice Anthony Kennedy, the court upheld a court of appeals decision in a case alleging that the Texas Department of Housing and Community Affairs had contributed to “segregated housing patterns by allocating too many tax credits to housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.”  The Supreme Court’s decision approved the approach to the issue taken by the courts of appeals, which had uniformly endorsed the disparate impact theory.

Although long advocated by consumer groups, disparate impact claims threaten financial institutions whose lending policies are facially neutral and not motived by any discriminatory intent but which allegedly have a disproportionate effect on high-minority areas.  Although today’s decision emphasized that FHA plaintiffs must prove a causal connection between a challenged policy or practice and a discriminatory effect, the decision portends increased federal scrutiny into alleged FHA violations and will no doubt encourage private-party litigation as well.  Attorney General Loretta Lynch indicated in a statement that “Bolstered by this important ruling, the Department of Justice will continue to vigorously enforce the Fair Housing Act with every tool at its disposal — including challenges based on unfair and unacceptable discriminatory effects.”