Federal Appeals Court Dismisses LIHTC Case

Published by Mark Shelburne on Friday, January 3, 2020 - 12:00am

On Dec. 30, 2019 the Fifth Circuit Court of Appeals dismissed a lawsuit involving the low-income housing tax credit (LIHTC) that began in 2014 when the Inclusive Communities Project (ICP), a Dallas-based nonprofit, sued the U.S. Department of Treasury and Office of the Comptroller of the Currency (OCC) over their administration of the LIHTC and regulation of investors.

Prior Litigation

Several years earlier ICP initiated a separate but conceptually related claim against the Texas Department of Housing and Community Affairs (TDHCA). This litigation became very high-profile because of reaching the U.S. Supreme Court. The holding in what’s known as the “Texas case” did not specifically relate to LIHTCs. Rather the outcome was to recognize the existence of disparate impact as a form of liability under the Fair Housing Act. Upon remand a lower court found in favor of TDHCA on the LIHTC-related aspects.

Current Action

By contrast, the case against Treasury and OCC has direct bearing on the LIHTC program. ICP’s allegation is that the agencies have a duty to regulate with regard to affirmatively further fair housing (AFFH). More specifically, that

  • Treasury should issue AFFH rules governing qualified allocation plans (QAPs), and
  • OCC should evaluate whether equity investments made by covered financial institutions comply with fair housing.

The potential results of ICP prevailing are impossible to discern, but the effects could be consequential. A difficulty LIHTC allocating agencies might face in adapting their policies, including challenges to whether they meet the increased federal expectations. Another is the potential for Treasury to include other mandates, such as Davis-Bacon wage standards, in new AFFH rules.

One of ICP’s activities is racial integration, which involves placing low-income minority households into higher-income neighborhoods. The LIHTC program requirement to accept Section 8 Housing Choice Vouchers means the properties are a natural fit. However, ICP claims that there are not enough LIHTC homes outside of minority-concentrated areas. They further allege the reason is Treasury and OCC not carrying out their AFFH mandates and that this failure causes damages.

So far the courts have not been moved. In February 2019 a lower court found in favor of Treasury and OCC on several grounds. The December decision was an appeal from this ruling.

(Note that accusations that the LIHTC is exacerbating segregation are highly debatable. Much, if not all of the research making statements to that effect is based on fundamentally flawed analysis.)

Recent Ruling

The appellate court concluded the changes ICP sought were insufficiently related to the harm it asserted had occurred. Even if Treasury and OCC imposed new AFFH mandates, there is no way to assess whether such actions would cause the desired changes to LIHTC allocation. In the court’s words:

Because it’s unclear what effect any Treasury action—whether ex ante regulation or ex post enforcement—would have on the conduct of project sponsors or investors, it’s similarly uncertain that granting ICP the relief it wants would remedy its injuries. ICP’s injuries are most directly caused by the location of LIHTC housing units in the Dallas metro. But ICP hasn’t shown how it is likely that the remedies it seeks will result in (1) LIHTC units being sited in non-minority-concentrated areas, (2) LIHTC units becoming part of concerted community revitalization plans, or (3) the building of specific LIHTC projects for which it pays developers incentive payments.

The opinion went on to say “the chain of causation as to OCC is even more attenuated.” The reasons are equity investors are not responsible for the location of LIHTC properties, and OCC-regulated institutions are a merely a subset of these investors.

Consequences

At this time, ICP has not announced whether it will appeal, and even if it does there is a chance the Supreme Court would not accept it.

Regardless of whether the litigation continues, QAPs will continue to further fair housing considerations. LIHTC allocating agencies are actively implementing the National Council of State Housing Agencies Recommended Practices in Housing Credit Administration, including to reduce local barriers to development and promote opportunities for LIHTC residents.