WASHINGTON, May 22(Reuters) - If the state of Texas prevails in a civil rights case about to be decided by the U.S. Supreme Court, landlords and developers will have an easier time defending themselves in housing discrimination lawsuits.
But the biggest beneficiary of a win for Texas could well be Wall Street.
The case alleges that the way Texas allocates low-income housing credits violates the 1968 Fair Housing Act, an issue with little direct connection to banking. But trade groups representing banks and other financial services companies hope that the high court will set a legal precedent in its ruling that could also be used to defend against lending discrimination lawsuits.
The U.S. Chamber of Commerce and at least a dozen other business groups have submitted friend-of-the-court briefs supporting Texas's position in the case.
At the heart of the dispute is a legal theory known as "disparate impact," which has long been criticized by business groups. The theory allows minorities and others, including the disabled and the elderly, to prove illegal discrimination simply by showing that a practice has the effect of discriminating against them, even if they cannot prove intentional discrimination.
In the pending case, Texas Dept. of Housing and Community Affairs v. The Inclusive Communities Project, civil rights groups are alleging that the state's allocation of low-income housing credits discriminates against minorities. Texas has countered that it awards credits without regard to race, and that the Fair Housing Act should apply only to cases of intentional discrimination.
Business groups see parallels between the housing law and the similarly worded Equal Credit Opportunity Act of 1974, which empowers the U.S. Consumer Financial Protection Bureau to bring lending discrimination actions against financial services companies. The Fair Housing Act covers home mortgages but not other types of lending.
A sweeping ruling in the case, which could be decided as soon as next week, would provide a weapon for business groups to attack the consumer bureau.
Jess Sharp, who works on lending issues at the Chamber of Commerce, said that if the court throws out disparate impact theory under the Fair Housing Act, "it severely undercuts" the consumer bureau's argument that it can be used to enforce the fair lending law.
A spokesman for the bureau declined to comment.
DEPLOYED FOR DECADES
Disparate impact theory has been widely employed for decades under both the housing and lending laws to extract huge payouts from banks, developers and other businesses and require them to change their conduct. Proving disparate impact is much easier than showing intentional discrimination.
The U.S. Justice Department, citing both the housing and the lending laws, used the disparate impact theory in cases arising from the 2008 housing crash. In 2012, Wells Fargo agreed to a $175 million settlement over claims it discriminated against black and Hispanic customers by, among other things, steering them toward subprime mortgages.
The Consumer Financial Protection Bureau, relying on the Equal Credit Opportunity Act, recently used disparate impact theory in its series of probes into auto lending pricing polices. The bureau said various lenders unfairly calculated interest rates on car loans, leading Hispanics and Asians to pay more than whites. In December 2013, Ally Financial Inc agreed to pay $98 million to settle one investigation.
The Supreme Court has not weighed in on the use of disparate impact theory under either law.
The Mortgage Bankers Association and other lenders said in a friend of the court brief backing Texas filed in November that they abhor discrimination but that disparate impact theory "allows challenges to legitimate business practices."
The banks say they use neutral criteria when assessing risk, and while that might result in certain groups being treated more favorably, it does not mean the practice is unfair.
Civil rights groups such as the National Association for the Advancement of Colored People say the business community is overstating the economic burden of disparate impact theory.
When the Texas case was argued on Jan. 21, the nine justices appeared closely divided along ideological lines, with liberals voicing support for the theory and conservatives opposed. Based on the questions asked from the bench, conservative Antonin Scalia could be the deciding vote. (Reporting by Lawrence Hurley; Editing by Amy Stevens, Noeleen Walder and Sue Horton)