Reed Smith Client Alerts

On November 3, 2014, Judge Richard J. Leon of the U.S. District Court for the District of Columbia, issued a scathing opinion striking down a regulation promulgated by the U.S. Department of Housing and Urban Development (“HUD”) on disparate impact discrimination in housing. The plaintiff in this case, American Insurance Association, Inc., challenged HUD’s promulgation of the disparate impact rule, which provides for liability based on disparate impact under the Fair Housing Act (“FHA”). The plaintiff claimed that HUD violated the Administrative Procedures Act (“APA”), 5 U.S.C. § 551 et seq., by exceeding its statutory authority when it expanded the scope of the FHA to recognize not only disparate treatment claims (i.e., intentional discrimination), but also disparate impact claims (i.e., facially neutral practices with discriminatory effects).

HUD’s Action Under the Administrative Procedures Act The court reviewed HUD’s interpretation of the FHA through the lens of the well-settled Chevron analysis for deference to agency rulemaking. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Under the Chevron analysis, if the intent of Congress is clear as to a specific issue, then the court will not consider agency interpretation of the statute, “for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron at 842-843. However, if the court determines that a statute is silent or ambiguous on the specific issue, then the court will consider whether the agency’s interpretation is based on a permissible construction of the statute. Chevron at 843.

In determining whether the statute was plain on its face, and therefore without need for HUD’s assistance, the court began with the language of the statute. HUD argued that Congress’ intent to recognize claims based on disparate impact under the FHA could be found in the language of the statute. In response, the court undertook a pointed analysis of the words Congress used in the FHA, specifically, “refuse,” “make,” “deny,” and “discriminate.” The court noted: “The use of these particular verbs is telling, and indicates that the statute is meant to prohibit intentional discrimination only. When Congress intends to expand liability to claims of discrimination based on disparate impact, it uses language focused on the result or effect of particular conduct, rather than the conduct itself.” The court found no such “effects-based language” present in the FHA.

HUD attempted to draw comparisons between the FHA and other federal statutes that the court noted do provide for claims based on disparate impact. The court flatly rejected this argument: “It takes hutzpah (bordering on desperation) for defendants to argue that [the FHA] more closely resembles the statutory language in the disparate-impact provisions of Title VII and the ADEA, both of which contain explicit effects-focused language that is conspicuously lacking in [the FHA].” In rejecting HUD’s argument that the statute needs agency clarification, the court stressed: “The fact that this type of effects-based language appears nowhere in the text of the FHA is, to say the least, an insurmountable obstacle to the defendants’ position regarding the plain meaning of the [FHA].”

After failing to persuade the court that the plain language of the statute demands application of the disparate impact test, and failing to successfully analogize the FHA to other federal statutes that do allow for disparate impact, HUD resorted to legislative intent. The court proceeded to note that the ADA and Title VII, which according to the court do provide for disparate impact claims, were enacted not long after Congress amended the FHA in 1988. According to the court: “These two statutes powerfully demonstrate that Congress knows how to craft statutory language providing for disparate-impact liability when it intends to do so.” The court found that comparable language was absent from the FHA.

Judicial Treatment HUD also argued that previous holdings of other Federal Circuit Courts that recognized disparate-impact liability under the FHA preclude the court in the current case from finding that the FHA unambiguously prohibits disparate treatment only. The court offered two bases for rejecting this contention. First, the court noted: “The Supreme Court itself has made clear that a statute is not ambiguous simply because there is a lack of judicial consensus as to its proper meaning, and judges cannot cause a clear test to become ambiguous by ignoring it.” Second, the court noted that while the majority of the other circuit courts of appeal have held that the FHA does allow for the use of the disparate impact test, none of those circuits has recognized disparate impact subsequent to the Supreme Court’s decision in Smith v. City of Jackson, 544 U.S. 228 (2005), which made it clear that an inquiry into the availability of disparate impact liability turns on the presence, or absence, of effects-based language. The court was also careful to note that while a majority of the other federal appellate circuits have upheld the applicability of disparate impact test, the D.C. Circuit is not one of those circuits.

In closing, the court issued its most pointed commentary of the decision:

This is, yet another example of an Administrative Agency trying desperately to write into law that which Congress never intended to sanction. While doing so might have been more understandable – and less troubling – prior to the Supreme Court’s decision in Smith, in its aftermath it is nothing less than an artful misunderstanding of Congress’s intent that is, frankly, too clever by half. Defendants, of course, were somehow hoping that a favorable Chevron analysis would muster the judicial deference necessary to salvage their much desired Rule. But alas, it did not. Fortunately for us all, however, the Supreme Court is now perfectly positioned in Texas Department of Housing to finally address this issue in the not-so-distant future.

“Perfectly Positioned” Judge Leon’s mention of Texas Department of Housing at the close of his opinion is a reference to Inclusive Communities Project v. Texas Department of Housing, 747 F.3d 275 (5th Cir. 2014), cert. granted (Oct. 2, 2014), where the Supreme Court agreed to consider whether disparate impact claims are cognizable under the FHA. This case represents the third opportunity since 2011 that the Supreme Court has had to definitively settle the question of whether the FHA contemplates disparate impact discrimination. The Supreme Court previously granted certiorari in two similar cases, one in the Eighth Circuit, Magner v. Callagher, 132 S.Ct. 548 (2011), and the other in the Third Circuit, Township of Mt. Holly v. Mt. Holly Gardens Citizens in Action, Inc., 133 S.Ct. 2824 (2013).

Judge Leon describes the issue as being “perfectly positioned” for a definitive Supreme Court decision because, unlike the prior two cases pending before the Court – which were settled before the Court could resolve the issue – the governmental litigant in Inclusive Communities v. Texas Department of Housing is unlikely to succumb to the same sort of pressures that were applied in the prior two cases. Unlike the other two cases, which involved two decidedly “blue states,” and involved municipalities that could be influenced by pressure from the Justice Department, Inclusive Communities v. Texas Department of Housing involves the state of Texas, a litigant that will be considerably more difficult to influence in avoiding a Supreme Court ruling. The fact that on November 4, 2014, Texans elected Republicans to the offices of governor and attorney general only confirms this reality.

In view of the recent mid-term election results, where the Republicans have gained control of both houses of Congress, the timing for proponents of the disparate impact test under the FHA could not be worse. Had the issue been addressed legislatively in the early years of the Obama administration, where the Democrats controlled the White House and Congress, the FHA could have been amended to explicitly address disparate impact, thereby avoiding the Supreme Court showdown that is now almost certain to take place.

Mark S. Melodia is a member of the Global Regulatory Enforcement Group, resident in the firm’s Princeton and New York offices. Mark regularly represents banks and non-bank financial institutions in complex consumer financial litigation matters.

Travis P. Nelson is a member of the Financial Services Regulatory Group, resident in the firm’s Princeton and New York offices. Travis is formerly an Enforcement Counsel at the Office of the Comptroller of the Currency and regularly represents financial institutions in regulatory compliance, enforcement, and litigation matters involving consumer financial services issues, including fair lending.


Client Alert 2014-298