A lawsuit was recently filed alleging that the U.S. Department of Treasury (Treasury) and Office of Comptroller of the Currency (OCC) perpetuated racial segregation in the City of Dallas in their administration of the Low Income Housing Tax Credit (LIHTC) program. In Inclusive Communities Project v. United States Department of Treasury, et al., the plaintiff alleges that the agencies’ conduct violated their duty to affirmatively further fair housing under the Fair Housing Act.

The plaintiff, a group that assists low-income families eligible for Section 8 vouchers, claims that current LIHTC policies effectively foster poor, blighted, racially segregated neighborhoods in Dallas. The claims are based on the disparate impact theory of liability, in which the plaintiff uses statistics to show that racial minorities are harmed by the policies; no intentional discrimination has to be proven.

The LIHTC program encourages the investment of private equity in the development of affordable housing for low-income households. Although it is regulated by Treasury, it is administered by state and local housing credit agencies, which have broad latitude to establish methods for allocating tax credits. The OCC regulates national banks and has advised them that LIHTC projects are eligible public welfare investments that may generate attractive returns, spur additional commercial lending opportunities, and result in positive Community Reinvestment Act consideration for community development activities when the investment benefits the bank's assessment area or a broader statewide or regional area that includes the bank's assessment area.

The plaintiff argues that the manner in which Treasury regulates the LIHTC program and the OCC regulates national banks that invest in such projects violates the Fair Housing Act. The plaintiff alleges that the defendants have condoned continued racial segregation through their LIHTC program administration. As a result, according to the lawsuit, LIHTC non-elderly units are disproportionately located in minority census tracts plagued by problems that include high rates of crime, poverty, and unemployment, as well as adverse environmental conditions.

The plaintiff has been pursuing a similar lawsuit against the Texas Department of Housing and Community Affairs (TDHCA), alleging a disparate impact theory under the Fair Housing Act arising from TDHCA’s allocation of LIHTCs in Dallas. In June 2014, TDHCA filed a petition for writ of certiorari with the U.S. Supreme Court asking the Court to determine if disparate impact claims are cognizable under the Fair Housing Act. This came after a court found that TDHCA had discriminated, a decree was entered significantly altering the Texas LIHTC program statewide, and TDHCA appealed.

In an effort to clarify the issue of disparate impact, the U.S. Department of Housing and Urban Development (HUD) in 2013 issued a new rule that formalized the use of the disparate impact theory under the Fair Housing Act and created a burden-shifting test for proving such an impact. This HUD rule, and the broader question of whether disparate impact claims are cognizable under the Fair Housing Act, will be put to the test if the Court agrees to hear the TDHCA case.

Ballard Spahr will continue to monitor and report on any developments in both of these cases, as well as similar disparate impact and other significant Fair Housing Act cases.