In a 5-4 ruling, the U.S. Supreme Court determined that actions with a discriminatory effect are unlawful under Fair Housing Act, regardless of intent.

The much-awaited decision comes in the Texas Department of Housing
and Community Affairs (TDHCA) v. Inclusive Communities Project (ICP) case involving low-income housing tax credits (LIHTCs).

The case began several years ago when ICP brought a disparate-impact claim under the Fair Housing Act against TDHCA, alleging the department had caused continued segregated housing patterns by allocating too many housing tax credits to developments in predominantly black inner-city neighborhoods and too few in predominantly white suburban neighborhoods.

Disparate impact is when a policy that may appear to be neutral has a discriminatory effect on a group based on race, sex, age, or disability. These claims often use statistics to make their case.

Texas then countersued, arguing that the Fair Housing Act only prohibits explicit discrimination.

In a case closely watched by Fair Housing Act advocates and the LIHTC industry, the Supreme Court ruled that discrimination doesn't have to be intended, and disparate-impact claims are cognizable under the Act.

Led by Justice Anthony Kennedy, the majority included Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Dissenting were Clarence Thomas, Samuel Alito, John Roberts, and Antonin Scalia.

Many observers had predicted the decision would be close, with Kennedy as the key swing vote.

What the decision means

Civil rights advocates cheered the decision, which upholds a key tool used to fight housing discrimination.

In many ways, the cheers came with a sigh of relief. Some civil rights leaders were worried about the issue going to the courts, fearing the use of disparate impact in housing cases could be struck down.

In his opinion, Kennedy tries to finds a balance in the use of disparate impact.

“If the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system,” writes Kennedy.

In joining with the liberal justices, he attempts to come up with a plan where the evidence for disparate impact will be harder to produce, so the number of cases would be narrowed to those that are most egregious, says Michael Skojec, a partner at the Ballard Spahr law firm.

“He’s coming up with a framework for a narrower disparate impact as a way to keep it but make it work better,” says Skojec.

Whether Kennedy has been able to narrow the issue in any clear way remains to be seen.

The case is an important one for the LIHTC industry. TDHCA and other state housing agencies have had their own approaches and their own qualified allocation plans (QAPs) to award LIHTCs to developers.

Kennedy even says that it’s important to give housing agencies and developers “leeway to state and explain the valid interest served by their policies.”

Industry leaders were still digesting the decision Thursday.  And, much still needs to be interpreted.

“As anticipated, the decision is very consequential for the affordable housing industry,” says Mark Shelburne, senior manager, public policy, at Novogradac & Co. “While the court recognized the concept of disparate impact, it also stated that the Fair Housing Act ‘is not an in­strument to force housing authorities to reorder their priorities. Rather, the Fair Housing Act aims to ensure that those priorities can be achieved without arbitrarily creating discriminatory effects or perpetuating segregation.’ What this means in specific circumstances will depend on further interpretation.”

The issue has been a difficult one for many developers and housing associations, who urged the top court to conclude that the Fair Housing Act does not recognize disparate impact.

They have been worried that the use of disparate-impact liability would mean that established practices could be at risk of violating the Fair Housing Act. For example, they say there are state and municipal laws that encourage or require criminal background checks of prospective tenants. In addition, apartment owners who participate in federal housing programs are required to refuse admission to tenants who have records of crime or drug use or engage in criminal activity while tenants.

“I’m disappointed that the Supreme Court took the view that the Fair Housing Act does represent disparate impact because I think there are good reasons to argue that it doesn’t,” says Harry Kelly, a partner at Nixon Peabody. Kelly, who filed an amicus brief on behalf of several housing associations opposed to the existence of disparate impact under the Act, was sharing his own opinions and not speaking on behalf of any group.

However, the decision recognizes that while disparate impact can be a useful tool for fighting discrimination, it has built-in problems that Justice Kennedy was concerned about, according to Kelly.

He says the decision could change QAPs going forward.

“One of the things that Kennedy seems to suggest is that at the time a state agency or a local agency is adopting a policy that could have a disparate impact it should among other things include in the policy an express examination of disparate-impact issues and explain that here is the reason we are adopting this policy,” Kelly says.

That kind of statement could help housing finance agencies explain their policies, according to Kelly.

For the LIHTC industry, the court decision raises big questions about where housing tax credit developments should be located. Will the decision push states to award credits in more predominantly white neighborhoods?

Terri Ludwig, president and CEO of Enterprise Community Partners, said she believes LIHTC properties can and should be located in different locations.

“As a result of the Supreme Court’s decision, some states could prioritize more housing credit properties in high-opportunity neighborhoods over properties that revitalize distressed communities often located in urban centers,” she said in a statement. “However, in the Supreme Court’s decision, it is very clear that investing in both high-opportunity and distressed communities serves the public good. Enterprise strongly supports distributing federal resources in a manner that allows low-income people to make housing choices that are best for themselves and their families. Public policy should support preservation, community revitalization, and mobility so that each individual or family can choose the community in which they want to live.”

Changes in Texas

TDHCA, which allocates approximately $60 million in federal LIHTCs each year, has made several changes to its QAP since the lawsuit.

In 2012, TDHCA incorporated two key changes to its QAP outlined in the department’s Proposed Remedial Plan presented to and accepted by the U.S. District Court of the Northern District of Texas. These included:

  • The introduction of a High Opportunity Index scoring criteria, defined as a census tract with a poverty rate of below 15% (with the exception of two regions of the state, where the rate may be higher); and
  •  The introduction of an Educational Excellence scoring criteria, defined as a development site located within the attendance zone of a public school with an academic rating of recognized or exemplary (or comparable rating) by the Texas Education Agency.

TDHCA in the 2014 QAP developed a more robust scoring criteria regarding Community Revitalization Plans, allowing applicants in certain urban areas of the state to request points for developments proposed for an area targeted for revitalization under a plan adopted by the municipality or county in which the development will be located and which meets specific language in the QAP, if no points are selected under the Opportunity Index, according to the agency.