Pub. 5 2015 Issue 3

By Justin M. Long and Patrick R. Hanchey, Bracewell & Giuliani LLP The Use of Disparate Impact Theory in Banking After Supreme Court Decision O N JUNE 25, 2015, THE UNITED STATES SUPREME COURT UP- HELD THE USE OF THE “DISPARATE IMPACT” THEORY IN fair housing cases in a 5-4 decision in the case of Texas Department of Hous- ing & Community Affairs v. Inclusive Community Project, Inc. et al. Private party plaintiffs and govern- mental agencies alike have, for years, used the disparate impact theory to establish racial discrimination liability on bankers, lenders, housing authori- ties, and others within the lending industry. The theory is controversial because a party can be found liable of discrimination without having any intent to discriminate or without having knowledge that its actions or practices could be viewed as discriminatory. For example, setting a minimum loan amount has been claimed by govern- ment agencies in some instances to create a disparate impact. While the policy is neutral on its face, it has the potential to disproportionately impact those with lower incomes, resulting in fewer loans to minorities. Many within the industry were hope- ful that the Court would use Inclusive Community to finally put an end to the theory’s use – those hopes were dashed. The Court’s decision is viewed as a victory in the eyes of governmental agencies such as the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), the Department of Justice’s (DOJ) civil rights division, and the Department of Housing and Urban Development. In the past, the CFPB and the FDIC have aggressively used the disparate impact theory to pursue discrimination claims against creditors in various industries (including housing and auto finance). Although Inclusive Community did not directly involve financial institu- tions, the Court’s decision serves as guidance for banks, other creditors and their regulators with respect to lending 18 www.azbankers.org