Washington Watch

ICBA staff 090611, Lilly Thomas

Disparate Opinions

Supreme Court upholds disparate impact theory of anti-discrimination law

By Lilly Thomas

While the U.S. Supreme Court closed out its latest session with a string of landmark decisions, none was more important to the financial services industry than its ruling upholding the disparate-impact theory of anti-discrimination law. In a 5-4 split decision, the high court ruled that defendants can be held liable for neutral practices that have a disparate impact on certain classes even when there is no intent to discriminate.

The ruling was a setback for the financial services industry, which has held that the Fair Housing Act of 1968 is limited to cases of intentional discrimination. Nevertheless, the case was not an outright win for disparate-impact advocates, with the court limiting the application of the theory and directing courts to examine plaintiff cases with care. Absent Congress actively changing the law, however, the Supreme Court has issued a decisive opinion that sets an important precedent on the disparate-impact issue for community banks and the rest of the financial services industry.

The case

The case in question—Texas Department of Housing and Community Affairs v. Inclusive Communities Project—centered on the interpretation of the Fair Housing Act, which protects consumers from discrimination when they are renting, buying or securing financing for any housing. The act expressly prohibits discrimination on the basis of  race, color, religion, sex, handicap, familial status or national origin Disparate-impact proponents, which include the U.S. Department of Housing and Urban Development, say that even neutral policies that nevertheless have a disparate impact on protected classes violate the law. In other words, the question before the court was whether a defendant can be found guilty of discrimination without intending to discriminate.

ICBA has long disputed the legality of the disparate-impact theory. In an amicus brief supporting the petitioners, ICBA and a coalition of other financial trade groups argued that the act is limited to cases of intentional discrimination. ICBA has repeatedly noted that validating disparate-impact claims would impose an additional obligation on lenders to consider such factors as race or national origin in individual credit decisions, which is specifically precluded by the law.

Additionally, allowing disparate-impact claims would encourage frivolous lawsuits based on statistical data alone that could cause reputational damage, serious business disruption and extraordinary financial expense—even when a lender eventually prevails. Finally, the plain language of the act contains no recognition of disparate-impact liability.

Despite this, the court ruled that disparate-impact claims are valid. In the case, which involved allocation of affordable housing tax credits, the court found that the history of the act in Congress and the courts supported the disparate-impact interpretation. In the majority opinion, Justice Anthony Kennedy wrote that the Fair Housing Act covers the “the consequences of actions and not just the mindset of actors.”

Nuanced ruling

While the high court upheld the disparate-impact theory of liability, it also limited how the theory can be applied in court so companies can make the practical and profit-motivated business choices that sustain the free-enterprise system. The majority opinion made clear that disparate-impact cases cannot rely on statistics alone and that the accuser must also cite the specific policy that causes the disparate result.

According to the ruling, defendants have a good defense against disparate-impact claims if they have legitimate public interest or business reasons for their policies. The burden then shifts to the plaintiff to show there was a less discriminatory alternative that would achieve the same goal.

To prevent “abusive” disparate-impact claims, the court laid out a three-step framework to be used by courts and government agencies to determine valid claims. In the first step, a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity. Second, policies do not raise disparate-impact concerns unless they are “artificial, arbitrary and unnecessary barriers,” the court found, which allows defendants to use policies that achieve legitimate objectives. Finally, the third step requires plaintiffs to show that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.

Next steps

The court’s three-part test imposes clear limitations on the use of the disparate-impact doctrine, but ICBA remains committed to opposing the theory. Earlier this year, the House approved two separate ICBA-advocated amendments prohibiting the use of federal funds to implement, administer or enforce the disparate-impact theory by federal agencies. The Supreme Court ruling will only intensify congressional debate over the theory, and ICBA will continue working with lawmakers to advance legislation that would ensure federal laws truly support fair and equitable mortgage lending.

The bottom line is that community banks remain fully committed to fair lending and have strong compliance systems in place. While the court’s ruling may promote litigation that can cause reputational damage to even nondiscriminatory institutions, the three-part test required by the court poses considerable barriers to abusive disparate-impact claims.


Lilly Thomas (lilly.thomas@icba.org) is ICBA vice president and senior regulatory counsel.