A Texas-based nonprofit has filed a lawsuit against the Treasury Department, claiming that the federal agency’s administration of the low-income housing tax credit (LIHTC) program is perpetuating racial segregation.

The Inclusive Communities Project (ICP) of Dallas also names the Office of the Comptroller of the Currency (OCC) as a defendant in the lawsuit. The group claims both federal agencies violated their duties to further fair housing under the Fair Housing Act.

“Defendants’ willingness to accept and condone racial segregation in their programs is a cause of the racially segregated locations of 19,511 LIHTC non-elderly units in 50 percent or greater minority census tracts in the city of Dallas (97 percent of such units in the city),” according to the suit.

As a result, families in the segregated LIHTC units are disproportionately located in areas plagued by high rates of crime and poverty, according to ICP, an organization focused on fair housing issues. The group filed a similar suit against the Texas Department of Housing and Community Affairs (TDHCA) several years ago.

Michael Daniel, attorney for ICP, declined to comment on the group’s latest legal move.

The case could be very troubling for the LIHTC industry. The housing credit is widely considered the nation’s most successful and vital program for the production and preservation of affordable housing, and program supporters worry that the case could unintentionally harm—instead of improve—the program.

The suit details the location of LIHTC properties in Dallas, but it also includes some national figures.

From 1995 to 2002, 41 percent of LIHTC units in the United States were in tracts with more than 50 percent minority population. Widening that window to 2006, the percentage increased to 44 percent, according to the suit.

ICP’s claims are based on the disparate impact theory of liability in which statistics are used to show that racial minorities are harmed by the policies, says Michael W. Skojec, a partner at the Ballard Spahr law firm. No intentional discrimination has to be proven.

The Department of Housing and Urban Development recently issued a new rule that formalized the use of the disparate impact theory under the Fair Housing Act, according to Skojec. This rule could again be tested if the court hears the ICP case.

The LIHTC industry will be watching to see what effects the lawsuit may have on the program. The earlier TDHCA case has had a serious impact on housing development in certain census tracts, says Sharon Wilson Geno, a partner at Ballard Spahr and leader of the firm’s government-assisted housing practice.

She worries that the Treasury suit “creates angels and devils in a scenario where we should all be working together.”

One of the underpinnings of the LIHTC program has been the ability of participants to select investments based largely on real estate fundamentals, she says, noting that overlaying more regulations could make the program less palatable to investors.

The lawsuit could also push state housing agencies that allocate LIHTCs to be “more conservative and less forward thinking” about affordable housing sites,” Geno says.

No one anticipates that this will be an easy case.

“I think there is going to be a battle,” says Skojec. “It will be a hard one to settle.”

Connect with Donna Kimura, deputy editor of Affordable Housing Finance, on Twitter @DKimura_AHF.