Texas Housing Case Tests Civil-Rights Doctrine

Supreme Court Case Could Weaken Fair-Housing Enforcement by Requiring Proof That Discrimination Was Intentional

By Robbie Whelan and Jess Bravin / The Wall Street Journal    

Jan. 20, 2015 10:33 p.m. ET

DALLAS—Demetria Johnson, a 32-year-old beautician, used to sleep on a couch at her cousin’s apartment in Pleasant Grove, a low-income neighborhood in south Dallas. When she came home from work, she said, she was often greeted by drunks in the parking lot and the occasional sound of gun shots.

On a wait list for her own place at the time, the single mother of four worried about her luck of the draw. “My next house doesn’t have to be the biggest house or the nicest house,” she said. “I just want somewhere nice and clean and peaceful.”

But for years, real-estate developers have built the vast majority of this city’s government-subsidized, low-income housing in poor, minority communities where land is relatively inexpensive and local opposition is limited.

That pattern has long come under attack by housing advocates who argue that developers who receive subsidies should be held to account, in part by building more low-income housing in the city’s wealthier, predominantly white communities.

On Wednesday, the Supreme Court will take up the matter when it hears oral arguments about whether the current system for doling out tax subsidies promotes racial segregation and violates the Fair Housing Act of 1968—a civil-rights landmark signed by President Lyndon Johnson a week after the assassination of the Rev. Martin Luther King Jr.

The suit began in 2008 as a Dallas housing dispute brought by advocacy group the Inclusive Communities Project Inc. against the Texas Department of Housing and Community Affairs. It has since blossomed into one of the weightiest housing lawsuits in a generation.

An array of industry and conservative groups are backing Texas in its effort to roll back Fair Housing Act enforcement. Civil-rights organizations, along with 17 states and more than 20 large cities and counties, are siding with Inclusive Communities.

“Housing lies at the fulcrum of civil rights,” because where one lives affects opportunities for education, employment, health care, recreation and other aspects of life, says John Relman, an attorney representing the National Fair Housing Alliance, an advocacy group that filed a brief in the case backing Inclusive Communities.

If the state wins, it can continue to give subsidies to developers erecting housing in mostly-black areas without fear of discrimination lawsuits. If the advocates prevail, the state would be indirectly forced to figure out some way to allocate more funds to build low-income housing in majority-white neighborhoods.

The Supreme Court case centers on a controversial doctrine used to enforce civil-rights law known as “disparate impact.” It holds that to prove that a policy is discriminatory, one must only show that its results disproportionately affect one group of people—even if the discrimination wasn’t intentional.

Federal agencies have relied on disparate impact for decades to prove discrimination in buying, selling, lending, renting and zoning of real estate. The justices must ultimately rule whether the application of disparate impact should apply under the Fair Housing Act.

The Supreme Court’s decision is expected before July. A ruling in favor of the state could have broad implications, potentially spilling over into civil-rights enforcement in employment, education and other areas, such as banking and insurance practices.

For example, Countrywide, SunTrust and Wells Fargo have all reached settlements with the Justice Department in the last two years related to allegations that they charged higher fees and interest rates to minority borrowers. A ruling that quashes disparate impact could create an opening for the courts to revisit disparate impact’s use in cases against lenders and in employment and education law as well. Financial services and other industries have rallied behind Texas’ position.

Housing advocates and some federal officials worry about the outcome. That’s because the Supreme Court—which has been scrutinizing and sometimes rolling back civil-rights laws and practices that it believes overly burden other interests—will look harshly on disparate impact.

But the state, and some developers, argue that they are just trying to balance competing federal rules and policies, some of which incentivize them to build low-income housing in poor neighborhoods.

“The developer is not going to build in high-income areas because they’re not going to make any money,” says Bill Fisher, president of Sonoma Housing Advisors, which has built 7,000 units of tax credit housing over the last two decades, more than half of it in Dallas. On the flip side, he says, “We might complain so much…that we’ll advocate ourselves right out of business.”

If the high court overturns disparate impact, it would have come full circle on the issue. The Supreme Court actually laid out disparate impact in 1971, when it unanimously held that the 1964 Civil Rights Act permitted suits against employment practices that were race-neutral on paper, but disproportionately harmed minorities in practice.

That case involved a North Carolina power plant that had explicitly barred blacks from better jobs until racial discrimination was outlawed by the Civil Rights Act. The company then imposed new requirements—a high school diploma and IQ test scores—for the better jobs, which, in a state that had shortchanged black schools for generations, effectively disqualified many African-Americans. The court ruled that the company’s new requirements were discriminatory.

“Good intent or absence of discriminatory intent does not redeem…mechanisms that operate as ‘built-in headwinds’ for minority groups,” Chief Justice Warren Burger wrote. But, he added, practices that disproportionately harm minorities can be upheld if justified by “business necessity.”

Applying that precedent, 11 federal appeals courts have adopted similar approaches to Fair Housing Act suits. In 2013, the U.S. Department of Housing and Urban Development issued regulations codifying disparate-impact analysis to housing.

In general, a plaintiff arguing disparate impact must show that a challenged practice disproportionately harms minorities. The burden then shifts to the defendant, which must demonstrate that the practice is necessary to achieve its goals. The plaintiff then gets a chance to rebut that claim by suggesting less discriminatory approaches that would work just as well.

“People need to get over this idea that just because they weren’t trying to hurt people that they weren’t hurting people,” says Betsy Julian, a former official at the U.S. Department of Housing and Urban Development who now serves as president of the Inclusive Communities Project.

But critics say disparate impact distorts free-market decision making and burdens the housing industry with needless costs. For example, the risk of disparate-impact lawsuits has given housing providers and lenders an incentive to avoid practices or projects that, even inadvertently, may perpetuate segregation.

“The threat of the use of disparate impact—it tends to induce decision makers to engage in affirmative action, which sometimes looks to some people like reverse discrimination,” says George Rutherglen, a professor at the University of Virginia School of Law.

The Supreme Court seems to share that concern. Twice before it has agreed to hear challenges to disparate impact—only to see the cases settle. Many assume that the court’s conservatives are eager to scrutinize the doctrine, because they took the case despite unanimity among appellate courts that disparate-impact applies to the Fair Housing Act.

In 2012, the city of St. Paul., Minn., which was defending its code enforcement policies against a disparate impact challenge, dropped its appeal specifically to deny the justices a chance to invalidate the doctrine.

The court then took another disparate-impact appeal, only to see it vanish in 2013 when officials in Mount Holly, N.J., settled with low-income residents challenging a redevelopment project.

The Inclusive Communities Project’s original suit against Texas’ housing agency argues that the state discriminated by distributing federal tax credit subsidies almost entirely to buildings going up in neighborhoods with large African-American populations, which tended to be poorer.

The housing in question was built using money raised through the federal Low Income Housing Tax Credit program, a Reagan-era measure that allows private corporations to shield their earnings from taxes by investing in affordable housing developments. Those credits are allocated to certain projects by state housing agencies. In Texas, the state uses a points system to decide which properties get the go-ahead.

A federal-district court found in 2012 that the state was in violation of the Fair Housing Act, citing statistics from Inclusive Communities’ suit showing that as of 2008, 92.9% of Dallas units built under the program were in census tracts with more than 50% minority residents.

Inclusive Communities works with holders of Section-8 vouchers, another federal subsidy that pays a portion of a low-income tenant’s rent. Many Section-8 renters live in tax-credit buildings because their landlords are required by law to accept vouchers from qualified tenants.

The tax credits are awarded on a system that takes into account location, community support, feasibility, and a number of other factors. In some instances, community opposition is often a demerit on developers’ funding applications.

A bigger issue is financing: Developers typically build tax-credit projects in return for a fee, and the tax credit program itself offers more money to projects built in “qualified census tracts,” defined by the Internal Revenue Service as high-poverty areas. As a result, developers are incentivized to build in lower-income locales.

In a friend of the court brief, the Mortgage Bankers Association and other industry groups argue that “the risk of disparate-impact lawsuits…pressures the residential mortgage lending industry to arrive at particular outcomes and end numbers” such as making loans to borrowers based on racial factors rather than on typical underwriting criteria such as a borrower’s salary or credit score.

In other words, “it just pushes toward racial quotas,” says Paul Hancock, an author of the brief.

Many housing advocates disagree. “This case cuts to the core of what fair housing is all about,” adds John Henneberger, a housing advocate from Austin who last year won a MacArthur Foundation “Genius” award for his work. “It’s about integration, and about people being able to choose where they live.”

After the 2012 district court ruling, the state of Texas devised new criteria for handing out tax credits to developers, with the goal of awarding more allocations of tax credits in high-income areas. The advocates approved and the disputes calmed.

But then last May, Texas Attorney General Greg Abbott, urged on by Gov. Perry’s office, decided to raise the disparate impact issue with the Supreme Court.

The appeal, if successful, would be a major blow to the Obama administration, in part because in 2013, HUD finalized a rule supporting the use of the disparate impact approach in fair housing cases.

HUD declined to comment. But in its brief, the government argued that because “individual motives are difficult to prove directly…Congress has frequently permitted proof of only discriminatory impact as a means of overcoming discriminatory practices.”

Mr. Abbott’s office has sued the federal government more than 30 times, mainly on environmental issues, with mixed results.

“I wake up in the morning, I go to work, I sue Barack Obama and then I go home,” Mr. Abbott said in a stump speech during his 2014 gubernatorial campaign in October, echoing comments he has made since at least 2012.

Through a spokesman, Mr. Abbott, who was elected governor of Texas in November, declined to comment.

North Court Villas is located in Frisco, an affluent majority-white suburb north of Dallas. The 134-apartment project, built using tax credit financing, opened in November 2013 with 500 families on its waiting list. It features townhomes in dark brick with high-end kitchen appliances and a community center with a pool.

Neighbors to the development protested it at meetings of Frisco’s city council while it was still in the planning phase in 2010, arguing that it would drive down property values and increase crime.

None of that fazes Greg Briette, a 32-year-old father of two who earns about $2,500 a month from his job at a call center. He and his wife moved into North Court Villas last year, he says, since they wanted to live closer to their church, and because schools are better than in McKinney, a suburb to the east where they used to live.

“It felt pretty bad to serve this community—do things for the people who live here with our church, and live in another community, because we weren’t able to afford to live here,” he says. But he remained optimistic. “We always thought, ‘We’ll be in Frisco some day.’ ”

Write to Robbie Whelan at robbie.whelan@wsj.com and Jess Bravin at jess.bravin@wsj.com