Pub. 6 2015 Issue 3

www.wvbankers.org 12 West Virginia Banker Avoiding “Disparate Impact” Liability After The Supreme Court’s Decision in InclusiveCommunities By Sandra Murphy and Floyd Boone, Bowles Rice LLP T he Fair Housing Act (“FHA”) and the Equal Credit Oppor- tunity Act (“ECOA”), prohibit banks from discriminating against customers on the basis of various personal charac- teristics (e.g., race, gender, marital status, etc.). For years, it has been debated whether these statutes can be violated without proof that a bank intended or was motivated to discriminate based upon a prohibited personal characteristic. On the one hand, federal bank regulators and plaintiffs’ lawyers have argued that the statutes do not require proof of intentional discrimination and may be vio- lated where a challenged policy or practice has a greater negative impact on members of a protected group. On the other hand, the banking industry has argued that both statutes require proof of intentional discrimination. On June 25, 2015, the United States Supreme Court ruled in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. (“Inclusive Communities”) upheld the dis- parate impact theory of liability under the FHA. The Supreme Court found that a FHA violation may be established based upon a lending policy or practice that cannot be justified by a legiti- mate rationale that has a disparate impact on members of one or more protected groups. The Supreme Court’s decision, however, does not address two critical questions: (1) whether the Court’s ruling is also applicable to the ECOA; and (2) what options are available to banks to comply with the FHA and the ECOA. The issue of whether the Court’s ruling applies to ECOA is especially important because the FHA’s impact on banks is generally limited to mortgage lending, while ECOA applies much more broadly to credit in general. The FHA and Inclusive Communities The FHA provides: “[i]t shall be unlawful for any person or other entity whose business includes engaging in real estate-re- lated transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” Before Inclusive Communities, the banking community and many others argued that although the FHA clearly prohibits intentional discrimination motivated by a borrower’s race, religion, sex, disability, family status, or national origin, it does not prohibit practices or policies adopted without discriminatory intent that merely have a greater impact on members of protected groups. Inclusive Communities, however, settles once and for all that a regulator or plaintiff may establish a FHA violation by showing that a challenged lending practice or policy has a disparate-impact on members of a protected group and that the challenged lending practice or policy is not justified by a legitimate rationale. Regulators or plaintiffs pursuing a “disparate-impact” theory of discrimination will generally produce statistical evidence show- ing that a challenged lending practice or policy negatively affects members of a protected group disproportionately. Under Inclusive Communities, to avoid liability, a banking institution will then have to prove that the challenged lending practice or policy is necessary to achieve a “valid interest.” According to the Court, policies that will violate the FHA will generally be those that create “artificial, arbitrary, and unnecessary barriers.” ECOA and the Likely Impact of Inclusive Communities Although the FHA is limited to “real estate-related transactions,” ECOA generally makes its unlawful for creditors to discriminate against credit applicants, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. Although there are credible legal arguments that the Supreme Court’s construction of the FHA in the Inclusive