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Understanding HUD’s Attack Against Investors and How to Respond

Recently, the Obama administration and Department of Housing and Urban Development (“HUD”) made a policy announcement of great concern to the real estate investor community.  The government announced that under the federal Fair Housing Act (“the Act”), landlords cannot deny housing based on a prospective tenant’s criminal history.

The historical legislation was passed in 1968 to combat a long and shameful history of housing discrimination by the private and public sectors.  The law prohibits discrimination in the sale and rental of, and lending for, residential real estate on the basis of membership in protected classes.  These classes predictably include race, color, sex, religion, national origin, familial status and later through an amendment to the law, disability.  Stiff penalties for violations may include fines as high as $70,000 for repeat offenders plus attorney fees.

The list of protected classes does not include convicted criminals.  The government’s argument in support of its broad interpretation of the law is that because the convicted criminal population so disproportionately consists of minorities, discriminating against criminals is effectively the same as racial discrimination.  It’s noteworthy that the Act does allow landlords to exclude convicted drug dealers.  This article shall pick apart the government’s argument and offer practical suggestions for landlords, sellers and private lenders in response to this sweeping government pronouncement.

The extension of the Act’s protection to criminals is not as radical as it may appear at first glance because of a recent U.S. Supreme Court precedent that no doubt inspired the government’s recent policy declaration.  In 2015, the Court ruled in the case of TX Dept. of Housing and Community Affairs vs. The Inclusive Communities Project (in a 5-4 opinion) that evidence of “disparate impact” of housing policies may be used to show a discriminatory effect, regardless of the intent of the actor.

The Court ruled in this case brought under the Act that the actual intent to discriminate against a member of a protected class is not required to prove a violation if a discriminatory impact is found.  Remarkably, throughout the 47-year life of the Act, the issue of the intent, or mental state, needed to make out illegal discrimination had not been decisively resolved.

Fast forward to last week and the government says that the Act protects convicted criminals against discrimination because criminal populations are disproportionately minority.   The courts, not HUD, have the final word on the interpretation of any law.  This policy declaration is a warning that HUD may file legal action for denying housing to criminals.

The main flaw in the government’s argument is that race is not the true correlation to criminal behavior, but rather, poverty.  Take the “live free or die” State of New Hampshire as a case study.  According to U.S. Census Bureau data from 2014, it’s among the whitest of states.  About 94% of the population is white, 1.5% African-American and 3.3% Hispanic.  According to the government’s logic, this lack of minorities should lead to sparsely-populated prisons overseen by the correctional equivalent of the Maytag repairman.

The reality is that New Hampshire’s prison population has grown in recent years at the fastest rate in the nation.  A U.S. Department of Justice study reported an 8.2% increase in 2014 (with another very white state, Nebraska, coming in second at 6.8%).  The NH prisoner population has been increasing since 2005.  If minorities are disproportionately represented in national inmate populations, then who is packing into NH’s prisons?  The answer is poor white people.

Poverty is clearly the most common denominator in relation to crime.  America’s historical disgrace has been that minorities are disproportionately poor and the poor are disproportionately convicted of crimes.  What and who are to blame are subject to debate.  Few would say (at least in polite company) that blacks and Hispanics are more genetically inclined to be criminals.  Some would argue that bad government policies have created these conditions of poverty and incarceration.  What’s undeniable is that the government has failed to cure the problem, regardless of the causes.

Now HUD is passing the problem down to investors and landlords to suffer the cycle of crime and poverty.  The government is effectively requiring landlords to do business with the worst financial risks because convicted criminals (outside of the white collar crime world) are most likely to be financially unstable.  The Act never intended to make poverty a protected class but that’s what HUD is doing now by failing to understand that poverty, not race, is most responsible for criminal behavior.

Of course, personal accountability and character are also important factors.  It would be irresponsible to suggest that poverty alone creates criminals as well as demeaning to the large majority of poor people who don’t commit crimes.  People with free will make bad choices that often lead to criminal records.  To force investors to accept tenants who under the best light, exercise poor judgment, and under the worst, are bad and dangerous people incapable of rehabilitation, is simply wrong and hypocritical.

To make matters worse, HUD has created liability for accepting dangerous tenants to avoid a discrimination action.  Imagine renting to a violent felon, possibly a sex-offender, in a multi-family property and the risk that creates for innocent neighbors, especially children.  There is little doubt that lawsuits will be filed against landlords for creating dangerous living conditions when predators act.

Investors need a game plan in response to the government policy.  It’s uncertain whether the courts will uphold HUD’s interpretation, but unless an investor wants to be a defendant in a test case, avoiding trouble is the safest course of action.

A good place to start is by reviewing tenant screening procedures.   Criminal record should not be an automatic disqualifier.  Landlords should screen prospective tenants based on finances.  Credit rating, rent payment history (including eviction filings), outstanding judgments, income, reserves and other financial data are all appropriate criteria to consider and unrelated to protected class status.  Because of the strong link between criminal history and poverty, applicants with a record are already likely to be financially unstable.  Landlords should avoid accepting a worse financial risk tenant with a clean record over a better one with a rap sheet.

For those who haven’t completely given up on the political process to get things right, lobbying should be done.   Congress can amend the Act to clarify that it does not protect convicted criminals as an extension of the racial protected class status, as HUD has interpreted.  On a more ambitious level, Congress can more broadly overhaul the Act to require the actual intent to discriminate, rather than only “disparate impact.” The Supreme Court was able to render its broad interpretation of the Act in the above-cited case because the law was unclear on the required mental state to discriminate.

National, state and local Real Estate Investor Associations should rally the rank and file to be heard as a unified voice.  On the local level, there is power in the compound effect of individual investors contacting their Congressional Representatives and Senators to demand action.   The investor community should take seriously the duty to speak out in response to this injustice and protect against the recent government attack on its livelihood.

Charles Castellon is the founder and managing attorney of Widerman Malek Celebration Law Office as well as a principal in Esquire Title Company and Common Wealth Trust Services.  Charles has been practicing law since 1992 and serves the investor community throughout Florida.

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