District Court Dismisses Disparate Impact Claim of Inclusive Communities

A federal court in Texas recently dismissed a housing discrimination claim that was based on alleged disparate impact under the Fair Housing Act (FHA), the latest in a series of decisions applying landmark U.S. Supreme Court guidance.

The U.S. District Court for the Northern District of Texas dismissed claims filed against the Texas Department of Housing and Community Affairs (TDHCA) in the fair housing case, The Inclusive Communities Project, Inc. v. The Texas Department of Housing and Community Affairs. The August 26, 2016, decision represents the culmination of several years of litigation, including last year's U.S. Supreme Court decision that found that disparate impact is a cognizable claim under the FHA.

As discussed in prior Ballard Spahr alerts, The Inclusive Communities Project (ICP) originally filed a disparate impact claim under the FHA, alleging that the allocation process used by TDHCA to award low-income housing tax credits (LIHTC) had a disparate impact on racial minorities. The district court initially ruled in favor of ICP, finding that ICP made a prima facie showing that TDHCA's policy violated the FHA. Following the district court's original opinion, the U.S. Department of Housing and Urban Development (HUD) issued regulations establishing a three-step burden-shifting approach for disparate impact claims brought under the FHA. On appeal, the Fifth Circuit Court of Appeals adopted HUD's approach and reversed the district court decision, remanding the case to the district court to apply HUD's burden-shifting framework to ICP's claims and TDHCA's defenses.

After granting certiorari, the U.S. Supreme Court in June 2015 held that disparate impact claims were cognizable under the FHA, but did not rule on the merits of ICP's claims. Following the burden-shifting analysis of the HUD regulations, the Supreme Court also emphasized that to successfully assert a disparate impact claim, plaintiffs must demonstrate a robust causality between the challenged practice and the disparity.

On remand, the district court reconsidered whether ICP indeed made a prima facie showing of disparate impact in light of the guidance from the Supreme Court decision. The district court last week held that ICP’s claims of disparate impact failed under the current standards for a number of reasons.

First, the court ruled, ICP failed to identify a specific, facially neutral policy that caused the disparate racial impact, as required by the first prong of the burden-shifting analysis. ICP challenged TDHCA's exercise of discretion in its LIHTC awards, but the court held that it could not rely on a generalized policy of discretion (even when considered cumulatively) to prove disparate impact. Absent a specific TDHCA policy, the court could not determine whether the practice actually created a barrier to fair housing or devise an adequate race-neutral remedy to alleviate the alleged disparities.

Next, the district court held that ICP's claim failed because it was, in essence, a complaint for disparate treatment, despite the disparate impact language. Relying on prior case law, the court found that because ICP challenged the results of TDHCA's subjective discretion rather than the existence of the discretion itself, the claim should be dismissed.

Lastly, the district court found that ICP's claim failed to show a robust causal connection between TDHCA's use of discretion in awarding LIHTCs and statistical disparities between LIHTC awards in different areas. ICP could not prove that TDHCA's use of discretion, and not other factors such as federal legislative action, actually caused the statistical disparities throughout the years evaluated.

The outcome of this case reflects an ongoing trend in federal and state court decisions applying the new Supreme Court "safeguards" against "abusive disparate impact claims." Almost all plaintiffs have experienced multiple difficulties making a prima facie case of disparate impact liability under the FHA and have seen their claims dismissed.

- the Consumer Financial Services and Housing Groups


Eighth Circuit Clarifies Spokeo Ruling to Require Injury-in-Fact to Satisfy Article III Standing

In a victory to the defense bar, the U.S. Court of Appeals for the Eighth Circuit has published the first appellate opinion to apply the principles the U.S. Supreme Court articulated in Spokeo, Inc. v. Robins regarding Article III standing. In Braitberg v. Charter Communications, Inc., the Eighth Circuit demonstrated the breadth and impact of Spokeo by holding the plaintiff lacked standing to sue because he alleged only a violation of Cable Communications Policy Act. He did not allege he suffered any harm as a result.

In Braitberg, the plaintiff brought suit under the Cable Communications Policy Act, which requires cable operators to destroy personally identifiable information if the data is no longer necessary for the purpose for which it was collected. Relying on the Spokeo decision, the panel concluded that plaintiff had not established standing because he merely alleged the retention of information lawfully obtained, without a further disclosure, access or misuse that could have harmed him. The panel rejected the plaintiff’s arguments that customers place value on the privacy of their personal information and the defendant’s failure to destroy his information deprived him of the full value of the services he purchased.

While circuits will continue to grapple with the full impact of the Spokeo decision, the Eighth Circuit has provided both some clarity and also ammunition to the defense bar against the assertion of bare technical statutory violations. The Eighth Circuit itself will be deciding another case likely to hinge on Spokeo relating to the Michigan's Video Rental Privacy Act and the selling of customer data without consent—we will wait to see if this decision is consistent with Braitberg

At the very least, this decision sends a warning to plaintiffs’ and class counsel that a bare technical violation will likely not confer Article III standing under Spokeo. Instead, plaintiffs must be prepared to demonstrate a tangible injury-in-fact.

- Alan S. Petlak, Lisa A. Lee, and Carol A. DiPrinzio


Ballard Spahr Partner Dee Spagnuolo Joins CFPB OMWI Director on Panel at ABA Meeting

Ballard Spahr Partner Dee Spagnuolo joined Director Stuart Ishimaru of the CFPB’s Office of Minority and Women Inclusion and other industry leaders for the panel discussion "Diversity and Dodd-Frank Section 342," on September 8, 2016, at the American Bar Association Business Law Section Annual Meeting in Boston.

The program included an informative discussion of the history of Section 342 of the Dodd-Frank Act, examined its effect on the industry, and provided guidance on how regulated entities might best comply with the Joint Diversity Standards issued in June 2015.

As part of his remarks, Director Ishimaru emphasized that, while the Standards themselves are not mandatory, regulated entities should follow their guidance because diversity and inclusion (D&I) policies and practices make "business sense." The Director noted that in an increasingly diverse world, D&I initiatives open opportunities in new markets and provide exposure to innovation and diversity of thought. With respect to organizational commitment to D&I, the Director encouraged the leadership at regulated entities to play an integral role in articulating and advancing their organizations’ D&I plans.

The panel also engaged in a thoughtful discussion about transparency with respect to a regulated entity’s successes and challenges in promoting D&I. Ms. Spagnuolo noted that annual reports submitted to regulators, such as the CFPB, may be subject to production under the Freedom of Information Act (FOIA). Director Ishimaru said  that FOIA should not deter an organization from sharing its annual reports with regulators because such reports are accessible through other means, such as discovery requests in litigation. The Director invited regulated entities to be more transparent about their D&I efforts and to increase communication with regulators, with their communities, and with their own workforce.

Finally, with respect to the definition of "diversity" set forth in the Joint Standards, which focuses on minorities and women, several panelists encouraged regulated entities to use a broader definition of "diversity" to include, for example, veterans, LGBTQ, or people with disabilities.  The Director concurred with that advice, but reminded entities to ensure that the representation of minorities and women is not lost in more expansive programs.

Ballard Spahr’s Diversity Team advises clients on the design and implementation of diversity and inclusion programs.

- Brian D. Pedrow and Suzanne O. Lufadeju


Did you know?

by Wendy Tran

Criminal Background Check Available for MU2 Individuals in NMLS

Criminal background checks are now available to MU2 individuals (direct owners/executive officers, indirect owners, qualifying individuals, and branch managers) through NMLS for 26 states. Specific requirements for criminal background check submissions will vary by state agencies. More information can be found here.

California Clarifies Exemptions Under FLL and RMLA

The California Department of Business Oversight adopted provisions clarifying which entities are not exempt from licensure:

  • A lender or broker that engages in the business of making or brokering consumer loans in California is not exempt from licensure under the Finance Lenders Law unless the lender or broker is a bank, trust company, savings and loan association, insurance premium finance agency, credit union, small business investment company, community advantage lender, California business and industrial development corporation when acting under federal law or other state authority, or a licensed pawnbroker when acting under the authority of that license.
  • A lender or broker that engages in the business of mortgage lending or servicing in California is not exempt from licensure under the Residential Mortgage Lending Act unless the lender or servicer is a bank, trust company, insurance company, or industrial loan company doing business under the authority of, in accordance with, a license, certificate or charter issued by the United States or any state, district, territory, or commonwealth of the U.S. that is authorized to transact business in California; a federally chartered savings and loan association, a federal savings bank, or a federal credit union that is authorized to transact business in California; or a savings or loan association, savings bank, or a credit union organized under the law of California or any other state that is authorized to transaction business in California.

These provisions become effective on September 28, 2016.

Texas Revises Provisions for Regulated Lenders

The Finance Commission of Texas revised provisions regarding regulated lenders, including, but not limited to, the following:

  • The definition of "amount financed" has been revised to mean the "amount calculated in accordance with Regulation Z, 12 C.F.R. § 1026.18(b)."
  • For proprietorships, applicants must disclose the name of any individual holding an ownership interest in the business and the name of any individual responsible for operating the business. If requested, the applicant must also disclose the names of the spouses of these individuals.
  • A licensee must now report to the Office of Consumer Credit Commissioner (OCCC) any information that would require a different answer than that given in the original license application within 30 calendar days after the licensee has knowledge of the information, if the information relates to any of the following: the names of principal parties; criminal history; actions by regulatory agencies; or court judgments.
  • Each applicant or licensee is now responsible for ensuring that all contact information on file with the OCCC is current and correct, including all mailing addresses, all phone numbers, and all email addresses. It is a best practice for licensees to regularly review contact information on file with the OCCC to ensure that it is current and correct.
  • A provision specifies that an applicant must pay the fee for processing fingerprints to a party designated by the Texas Department of Public Safety.
These provisions became effective on September 8, 2016.

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