The Supreme Court of the United States (SCOTUS) delivered several important decisions in June of this year (2015). One of those decisions has a direct impact on the rental housing industry – specifically, the tenant screening process.
In Texas Department of Housing and Community Affairs(The Department) v. The Inclusive Communities Project, Inc.(ICP), the court held that business practices that (even if unintentionally) have a disproportionate (or disparate) impact on protected group can form the basis of a Fair Housing Act (FHA) claim.
The case went something like this:
ICP alleged that The Department fostered “…segregated housing patterns by allocating too many tax credits to housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.”
Relying on statistical evidence, the District Court decided in favor of plaintiff ICP, ruling that they succeeded in establishing that The Department’s allocation practices had a disparate impact based on race; and that while those practices met the business necessity test, The Department failed to show there were no less discriminatory ways to allocate tax credits.
The case was appealed. “The Fifth Circuit affirmed the notion that ostensibly benign business practices can form the basis of Fair Housing Act claims, but reversed the lower courts ruling – remanding the case on the merits. Specifically, the appeals court found that the lower court had improperly required The Department to prove there were no less discriminatory alternatives – when that burden should have fallen on the ICP to prove that there were, in fact, less discriminatory ways to allocate tax credits.
That decision was appealed to the Supreme Court who held that “The judgment of the Court of Appeals for the Fifth Circuit is affirmed, and the case is remanded for further proceedings consistent with this opinion.”
By affirming the Fifth Circuit’s judgment, the Supreme Court removed any doubt as to whether an ostensibly neutral business practice can form the basis of fair housing claims if that practice has a Discriminatory Effect (to use HUD’s language) on protected groups.
Further, SCOTUS embraced HUD’s interpretation of the Fair Housing Act and the “burden shifting framework” outlined in their Discriminatory Effects Standard. Once “disparate impact” is established (statistically) – the burden shifts to the defendant to establish business necessity. “Once a defendant satisfies its burden at step two, the burden shifts again to the plaintiff – who can argue that there are less discriminatory alternatives to achieve the same legitimate business purposes.
There are many ways a landlord can get into trouble. The most obvious, perhaps, is indiscriminate use of criminal records data. There is considerable precedent for this in the Equal Employment Opportunity realm. Use of arrest records is clearly high risk behavior. So too is a blanket policy that denies tenancy based on any and all criminal convictions – regardless of the nature of the offence and when it occurred.
Extrapolation… use of credit scores for purposes other than lending is getting a lot of attention these days, as well. There is little doubt that doing so has a disparate impact on protected groups. It may also be true that there is a correlation between low credit scores and failing to fulfill the terms of a rental agreement – or negative automobile loss experience, to site another example. But it can be argued that there are more direct (and less discriminatory) ways to measure such risk – putting landlords (and insurance companies) at greater risk should a disparate impact claim be brought.
What We Know
- There is little doubt that use of credit scores has a disparate impact on protected groups.
- There is equally little doubt that there is a correlation between low scores and a failure to fulfill the terms of a rental agreement – providing the defendant (landlord) a business necessity argument.
- BUT… there are other less discriminatory ways to measure that risk – such as focusing on focusing on the credit detail (versus a score) – by looking for things like rental collections & civil judgments (in this case evictions). AND… of course, there are rental verifications… contacting former landlords to confirm the applicant’s history of paying rent on time and otherwise complying with the terms of the lease.
The Good News!
Well-written criteria combined with adequate controls (compliance), will:
- Mitigate the risk of disparate impact claims;
- Increase the number of approvals;
- Improve occupancy; and
- Increase NOI.