Justice Antonin Scalia said the case against disparate impact "would be stronger if there had been no court of appeals that had favored" the legal theory.
Justice Antonin Scalia said the case against disparate impact "would be stronger if there had been no court of appeals that had favored" the legal theory. Bloomberg News

WASHINGTON — The industry may be hoping the Supreme Court kills the unpopular "disparate impact" theory via a pivotal Texas case argued here Wednesday, but some of the justices' statements left analysts skeptical that the legal basis used in fair lending cases will end.

Observers said they were thrown off in their predictions of which way the court would go, particularly after hearing Justice Antonin Scalia — one of the panel's more conservative justices — suggest that it is hard to ignore other courts' validations of disparate impact.

"I think your case would be stronger if there had been no court of appeals that had favored disparate impact," Scalia told Scott Keller, the solicitor general of Texas.

The high court heard arguments in the case between the state's Department of Housing and Community Affairs and the Inclusive Communities Project. The group has argued that the state — while not doing it intentionally — discriminated against minorities by making available tax credits that incentivized them to stay in low-income housing.

Regulators have claimed "disparate impact" is established theory proving discriminatory actions in fair housing and lending cases even if discrimination was unintentional. In some instances, statistics showing unfavorable pricing on loans in predominantly minority areas have been used to point to discrimination.

Banks have strongly objected, saying the term was never stated in the 1968 Fair Housing Act. The industry hopes the Supreme Court will narrow or eliminate its use.

But Scalia's comments seem to have surprised some industry representatives.

"It's a lot less clear now than what I thought it was going to be in terms of where the justices are headed," said Lynn Calkins, head of Holland & Knight's litigation group in Washington. "It seems like Scalia is less decided than he often comes across."

Calkins added that she is still "optimistic that the high court is going to recognize disparate impact is not included in the original drafting of the Fair Housing Act."

Yet Scalia joined other justices from the court's more liberal wing in pointing to evidence that disparate impact can be linked to established law.

"There's been disparate impact for 40 years. Now, let me be fair. Maybe it's only 35. And it's universally against you. And as far as I can tell, the world hasn't come to an end," Justice Stephen Breyer told Keller. "And why, when something is so well established throughout the United States, should this court come in and change it?"

Keller argued that the legal concerns with the way the theory is being used — particularly by the Department of Housing and Urban Development — "are stark."

"The plain text of the statute is clear," Keller said. "Constitutional avoidance compels that interpretation, and the purposes of the Fair Housing Act would be undermined by extending disparate-impact liability to this degree."

But Justice Sonia Sotomayor noted that 10 different courts "had already said there was disparate impact."

Scalia said the court must not only read what the original Fair Housing Act said in 1968, but how subsequent amendments in 1988 affect its reading.

"If you read those two provisions together, it seems to be an acknowledgment that there is such a thing as disparate impact," Scalia said. "However, it will not apply in these areas that the 1988 amendment says. We don't just look at each little piece when it was serially enacted and say what did Congress think in '68? What did it think in '72? We look at the law. And the law includes the '68 act and the '88 amendments. And I find it hard to read those two together in any other way than there is such a thing as disparate impact."

For their part, consumer advocates were buoyed by Scalia's statements, which were seen as unexpectedly strengthening their position. Some consumer groups rallied on the Supreme Court steps Wednesday.

"The advocates are hopeful, particularly with regard to Scalia's remarks," said Nikitra Bailey, executive vice president at the Center for Responsible Lending.

At the same time, however, Scalia seemed to indicate that racial disparity based on statistics does not necessarily mean discrimination.

"Racial disparity is not racial discrimination," he said. "The fact that the NFL is largely black players is not discrimination. Discrimination requires intentionally excluding people of a certain race."

Although the Texas case is not specifically about lending, observers said the ruling will have a profound effect on lenders, regardless of what the court decides.

There are three routes the Supreme Court could take: it could decide in favor of disparate impact being used; it could specify when the theory can and cannot be cited; or it could ban disparate impact altogether.

"Thus, even without a flat prohibition on future use of the disparate impact theory in housing cases, the reasoning underlying the court's decision may well preclude its continuing use in lending cases," said Andrew Sandler, chairman and executive partner of BuckleySandler LLP.

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