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Supreme Court Decision May Make It Easier for Borrowers to Sue for Discrimination
September 30, 2015
A recent decision of the Supreme Court of the United States may make it easier for borrowers to claim discrimination when denied a loan. In late June 2015, the Court addressed whether lawsuits brought under the Fair Housing Act (“FHA”)[1] required a plaintiff to show that the defendant intentionally discriminated against him or her. The Court held that the FHA does not require that. Its decision now allows lawsuits under the FHA if a housing policy has a discriminatory effect when it is implemented even if the people implementing it had no intent to discriminate. Commentators have been watching this issue for years and waiting for the Supreme Court’s decision as they believe it signals how courts may rule on discrimination claims brought under other statutes, such as the Equal Credit Opportunity Act, potentially challenging the way in which a bank makes loans.

At the heart of the issue is the language used in the FHA, which was enacted as part of the Civil Rights Act of 1968. It provides that it is unlawful “[t]o refuse to sell or rent . . . or to negotiate for the sale or rental, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.”

That language may seem simple enough. However, a dispute has grown over exactly how someone violates the FHA. One camp has argued that, in order to bring a lawsuit under the FHA, a plaintiff must show that a defendant specifically intended to discriminate against him or her. They focus on the FHA’s language that the defendant’s actions must have been taken “because of race, color, religion, sex, familial status, or national origin.” In other words, the defendant must have had a subjective intent to discriminate. They argue that anything short of this subjective intent cannot be a violation of the FHA.

Conversely, others have argued that the phrase “or otherwise make unavailable or deny” in the FHA could be satisfied where a defendant’s actions had a discriminatory effect, even without subjective intent to discriminate. These discriminatory effect claims have been called “disparate impact” claims. Commentators argue that plaintiffs bringing disparate impact claims have an easier time prevailing because they are not required to prove that the defendant intended to discriminate against them.

Courts addressing whether disparate impact claims may be brought under the FHA have been unable to agree. Some have ruled that such claims are permitted, while others have ruled that they are not. When this type of split occurs, all eyes look to the Supreme Court for guidance.

Unfortunately, the road to the Supreme Court has not been an easy one. It appeared that the Court would address this issue in 2010, when it was poised to decide the issue in the Gallagher v. Magner case arising out of housing code violations in St. Paul, Minnesota. However, the parties reached a settlement and dismissed their appeal before the Court had the opportunity to rule.

Three years later, in June 2013, the Supreme Court announced that it would address the case of Mt. Holly Gardens Citizens in Action, Inc. v. Twp. of Mt. Holly, which provided the Court another opportunity to decide whether the FHA allowed disparate impact claims. In that case, the township of Mount Holly, New Jersey declared a low-income neighborhood blighted and announced its intent to redevelop the neighborhood. The residents and several citizens’ action groups sued and argued a disparate impact theory, claiming that the redevelopment plan caused a discriminatory effect under the FHA (even though there was no proof that the township and redevelopers intended to discriminate). In November 2013, the parties announced that they had settled their case, and they withdrew their appeal.           

In October 2014, the Supreme Court once again sought to decide the issue when it announced that it would hear an appeal involving the distribution of the State of Texas’ federal low-income housing tax credits. The case, Texas Department of Housing and Community Affairs, et al. v. Inclusive Communities Project, Inc., et al., began in a Dallas federal court when the Inclusive Communities Project brought a lawsuit claiming that the way in which the State of Texas distributed low-income housing tax credits had a discriminatory effect (a disparate impact claim). Texas filed a motion to dismiss the case and argued that disparate impact claims are not permitted under the FHA. The Dallas federal court disagreed, holding that such claims are permitted and establishing factors that a plaintiff must prove to prevail on that claim.

The State of Texas appealed to the federal appeals court in New Orleans, which agreed with the Dallas court. The State of Texas then filed a petition with the Supreme Court, asking it to hear the case.

In October 2014, the Supreme Court agreed to hear the case, and in late June it finally was able to issue a decision as to whether disparate impact claims are permitted under the FHA. Relying on analogies from other federal statutes and the phrase in the FHA that prohibits conduct that “otherwise make[s] unavailable or den[ies]” housing, the Court held that disparate impact claims are permitted under the FHA. In other words, a plaintiff can file a lawsuit under the FHA and claim discrimination even when the defendant had no intent to discriminate and may have acted innocently.

Commentators warn that this ruling may signal that courts will take a more expansive view of discrimination claims under other statutes, such as the Equal Credit Opportunity Act, which could have a broad, negative effect on the banking industry. Looking to the Supreme Court’s decision under the FHA, courts may begin permitting plaintiffs to sue for a bank’s lending practices even when the bank had no intent to discriminate.
1The term “FHA” also is sometimes used to refer to the United States Federal Housing Administration and its program of insuring home mortgage loans to lower-income individuals. That government body and its insurance program are unrelated to the Fair Housing Act, which is the focus of this article and the Supreme Court decision discussed herein.

Consumer Finance Nicholas P. Mooney II