Are You Discriminating In Your Screening and Don't Even Know It?

Chances are, you’ve never heard of the term ‘Disparate Impact’. Two seemingly convoluted words that, when put together, have devastating effects for housing providers like you and me. Disparate Impact is a relatively new thorn in the side of multifamily housing operators that, up until this point, has only affected truly bad actors (which is why you’ve probably never heard of it). However, recent policy changes and court cases have signaled that the flood gates are opening and operationally innocent housing providers are at risk of serious lawsuits by opportunistic trial lawyers. My apologies to the trial attorneys in the audience, but you know I’m right!

But let’s back up, what exactly is Disparate Impact? As simple as I can make it, Disparate impact refers to business and housing practices that adversely affect one group of people of a protected class more than another. In other words, you (as a business owner) are disproportionally discriminating against a protected class because of your policies.

On the surface, this policy has merit. Business owners and housing providers have long been held to a standard that they may not discriminate against protected classes just because one doesn't like them.

But Disparate Impact is different.

There is a qualifier that makes this policy detrimental to people in our business. The qualifier states that businesses can still be held liable even if the rules applied by employers or landlords are "formally neutral". This means that if, by no fault or intention, your practices creates a discriminatory act, you are guilty of discrimination.

Perhaps an example might help illustrate this point a bit better. Many on BiggerPockets (and the industry as a whole) have the policy that they won’t allow felons into their rental property or they won’t accept credit scores below a certain number. These policies create a safer environment for their tenants and less headaches for their management overall. Good thing, right? After all, the only discriminating you’re trying to do is against bad tenants who are going to cost you money.

Well, according to legal experts, both of these business practices could create a disparate impact. Let me explain. If the majority of felons or people with low credit scores happen to be a specific race, which is a protected class, your policy (in practice) discriminates against them. All it would take is one trial lawyer to sue you on behalf of a client and you would, most likely, be liable. Now, there are some special carve outs for the most violent crimes (murder & rape) but many felonies could still be considered discriminatory. This is an extremely broad example that assumes quite a bit, but the point stands. Also, it’s a good time to mention that I’m no legal expert, just someone who has seen the impact on businesses first-hand.

I have been told that this isn’t a problem for landlords because this policy has been around for a while now and no one is getting these massive class-action suits. I disagree for the simple reason that the only reason small operators aren’t feeling the pinch yet comes down to money. Ask any of the large property management companies (and I mean top three in any MSA) and they are already aware of Disparate Impact, if not a victim of targeted lawsuits already. Lawyers and victims are targeting the biggest and most lucrative management companies/landlords first.

Make no mistake though, as soon as there’s blood in the water, there will be more lawsuits and will eventually trickle down to smaller operators. Because many operators choose to pay an out of court settlement rather than fight frivolous lawsuits, this has the potential to be easy money for opportunistic ‘victims’.

Perhaps the worst part? The Department of Housing and Urban Development (HUD) hasn’t issued updated and clear instructions as to proper housing practice. It’s likely that Dr. Ben Carson will address this soon, but it’s not slowing the deluge of law suits that are coming.

It’s important to balance my position with a dose of compassion as well; the entire multifamily industry should be committed to equal housing opportunity for all without regard to race, religion, color, sex, national origin, familial status, or disability. Landlords practicing discriminatory policies should feel the wrath of customers, tenants, and other landlords summarily putting them out of business! 

However, this policy is only undermining housing providers' otherwise valid policies to ensure safe and decent housing for residents. It is my opinion that the vast majority of Disparate Impact claims are about money and I believe it will ultimately hurt the people it’s intended to protect. 

What do you think? Have you ever heard of Disparate Impact?