Disparate Impact and the NAR Code of Ethics

In my previous post on the topic of the new NAR speech code regulations, I pointed out something I thought was problematic:

In addition, the Committee recommends changing the definition of “Public Trust” with these changes:

The Committee recommends that the definition of “public trust” be expanded to include all discrimination against the protected classes under Article 10 of the Code of Ethics and all fraud.

At present, the definition of “public trust” includes demonstrated misappropriation of client or customer funds or property, willful discrimination, or fraud resulting in substantial economic harm. This recommendation would expand the definition to include all discrimination against the protected classes under Article 10, and all fraud.

The term is defined in the Code of Ethics and Arbitration Manual, to be used by local REALTOR Associations when imposing discipline or arbitrating disputes.

Removing the all-important word “willful” from discrimination is quite a big deal. So is removing the “substantial economic harm” requirement from discrimination and from fraud.

So far, we haven’t talked much about this change to the Code of Ethics; we’ve been too busy talking about the “hate speech” part of the changes. I’d like to change that, because I sort of think this is a bigger deal than the “hate speech” stuff.

As far as I can tell, with the changes to the definition of Public Trust as above, REALTORS are now subject to disparate impact analysis for unintentional discrimination. I think that’s kind of a big deal. So let’s explore that.

Note that because of the nature of this post, just about everything is speculation and hypothesis. That is unfortunately unavoidable when looking at this particular topic, but our goal here is not to answer questions, but to raise them for further thought.

Willful Discrimination

We might as well begin by understanding “willful discrimination” which was what the Code of Ethics used to prohibit. The great advantage is that most human beings understand what “willful discrimination” means, but since lawyers will get involved, here’s a legal definition of “willful” from the Department of Justice:

The term “willfully” means no more than that the forbidden act was done deliberately and with knowledge, and does not require proof of evil intent. An act is done “willfully” if done voluntarily and intentionally and with the specific intent to do something the law forbids. There is no requirement that the government show evil intent on the part of a defendant in order to prove that the act was done “willfully.”  [Case citations removed]

Yes, this is in the context of criminal prosecution… but a Code of Ethics hearing is kinda sorta criminal-ish in nature. Whatever could I mean, since a Code violation is obviously not a crime?

What I mean is that civil cases are about disagreement between two parties, like “You owe me money!” and “No, I don’t!” It’s a dispute between two individuals. Criminal cases are about someone violating a law, and the issue is whether the accused did or did not violate that law. An ethics hearing is not a dispute between two REALTORS; it’s an inquiry into whether a REALTOR did or did not violate the Code of Ethics. Hence, it’s more like a criminal trial and less like a civil lawsuit.

Anyhow, since the Association is trying to figure out whether a REALTOR has or has not violated the Code, the key concept for us around “willful” is “deliberately and with knowledge.” The “knowledge” here means that the person knew or should have known that what they were doing was in fact forbidden.

Previously, in order to be found guilty of violating the Code’s prohibition on discrimination, the REALTOR had to act deliberately knowing that what she was doing was discriminatory. So treating white buyers and black buyers differently is clearly deliberate and with knowledge. Telling every buyer about schools is deliberate, and the REALTOR should have known better, but it may not have been animated by some kind of animus. Stupid, but not evil. Still an ethics violation, though, but the penalty might be more required education on fair housing, rather than expulsion.

If you tripped and fell and your handwritten notes about a school district fell out of your hands to be picked up by the buyer… well, under previous rules, you’re not in violation because there was no deliberate action.

After these changes, neither deliberate action nor knowledge apply. The simple fact of discrimination is enough. A REALTOR can, it seems, violate the Code of Ethics for entirely unintentional discrimination.

Which brings us to….

Disparate Impact

The concept of disparate impact really came out of employment law, but has since been applied to housing. The Wikipedia definition might as well serve here:

A violation of Title VII of the 1964 Civil Rights Act may be proven by showing that an employment practice or policy has a disproportionately adverse effect on members of the protected class as compared with non-members of the protected class.

After the Supreme Court ruling in Texas Department of Housing and Community Affairs v The Inclusive Communities Project, violations of fair housing laws can also be proven by showing disparate impact as well. A key sentence in that decision, as highlighted by the National Low Income Housing Coalition reads:

Recognition of disparate impact liability under the Fair Housing Act also plays a role in uncov­ering discriminatory intent: It permits plaintiffs to coun­teract unconscious prejudices and disguised animus that escape easy classification as disparate treatment

This is not the place to get into all the nitty gritty about statistics alone, opportunity to cure, etc. but suffice to say that a plaintiff can’t just show statistics; they have to be able to point to some kind of “neutral” rule or policy or practice that has some kind of a causal relationship to the disparate impact.

Disparate Impact as Applied to REALTOR Practices

As far as I can tell, by prohibiting unintentional discrimination, NAR could only mean that disparate impact analysis will be part and parcel of what the Code of Ethics requires. As the Pennsylvania Association of Realtors wrote recently in light of these changes:

The third major change is to update the definition of a “public trust” ethics violation. The current definition says that a violation of the public trust is one that involves a finding of “willful discrimination” or “fraud resulting is substantial economic harm.” The new definition would apply more broadly to any ethics finding of discrimination or fraud, without those modifiers.

So what does that actually mean? The short answer is, nobody knows just yet, but let’s explore this by asking some questions and raising hypotheticals. I’ll give you my take on them, which may very well be wrong because nobody knows yet.

Luxury Real Estate

I think there is a strong case to be made that an agent or a brokerage that specializes in luxury real estate is likely in violation after disparate impact analysis, especially if they have a rule or a policy about the kinds of homes they list and sell. For example, suppose Elite REALTORS (made up name) lists only those homes in the top 10% by price in a given market. That rule likely has disparate impact, as fewer non-white and non-married (marital status is a protected class) people will own such luxury homes.

Elite REALTORS would have to be found guilty of discrimination, and reported to the state licensing authorities.

Requiring Mortgage Preapproval

The common practice of requiring that buyers be preapproved for mortgages is probably safe, despite the disparate impact it will have on Black and Hispanic buyers, because the broker or REALTOR can likely point to a business necessity justification. There’s no point in showing houses that someone can’t afford, is there? Of course, if you only require preapproval for non-white buyers, as some agents on Long Island did, then you have a disparate treatment problem, not a disparate impact problem.

But that’s a good example of the difference between disparate treatment and disparate impact. The latter does not require “deliberately and with knowledge.” You can be completely blind as to race, gender, sexual orientation, etc. etc. and still be in violation because of disparate impact.

Not Working with Renters

I’m not sure how this one would go, but I do think a case can be made that a REALTOR who refuses to work with renters might be in violation after a disparate impact analysis. An important factor might be if said REALTOR does work with high-end renters who are only renting for a short term while scouting a new city before purchasing, but doesn’t work with the run of the mill long-term renters. That’s a harder thing to justify.

Lack of Diversity

It’s unclear to me how this would go, but I could see a claim going forward against a brokerage or a team because they do not have enough agents who speak a different language or are of different ethnicities. If you’re a brokerage in Houston, and you only have one Spanish speaking agent in the office, you might very well be in violation.

It doesn’t matter that you have zero intention to discriminate against anybody; the simple fact that you only have one Spanish-speaking agent means you cannot offer your services to as many Hispanics as might want your services. Disparate impact, therefore, discrimination.

Requirement to Market in Non-White Communities?

A question I have is whether a REALTOR violates the Code if she works in a predominantly white area and fails to advertise in predominantly mixed areas.

For example, suppose you work mostly in Garden City, which is 91% white. You have a listing there, and you put it into the MLS and do what you’ve always done.

But you do not proactively market that property in Hempstead, which is 95% minority, and you do not proactively market yourself or your brokerage in Hempstead.

Are you guilty of discrimination? I don’t know, but I think a case could be made that the new Code requires proactive steps in order to avoid unintentional discrimination.

MLS & Association

It is clear that the changes to the Code are specifically intended to go outside of real estate practice, to reach into personal social media, personal behavior, etc. Well, at a minimum, then, this new prohibition of discrimination should reach into employment and leadership practices of MLSs and Associations.

In particular, you might take a long hard look at some of your rules and policies regarding volunteer leadership. For example, suppose an Association has a rule that to be a Board member, one must be a Broker In Charge with at least 7 years of experience. (This is a real rule I have personally seen.) I think that is likely a violation (age is a protected category) based on disparate impact analysis. Depending on your demographics, it might be a violation for race, ethnicity, national origin, sexual orientation, etc. as well.

Or another common rule is something like, “1 seat to Large Brokerage, 1 seat to Mid-size Brokerage, 1 seat to Small Brokerage” or something along those lines. That could be a problem depending on the demographics of your MLS or Association.

Again, disparate impact is not concerned with the intent of a rule or practice, only with the result. On that basis, if your MLS or Association Board is lily-white, or all-straight, or mostly male, or what-have-you… you might have a Code of Ethics problem on your hands depending on what kinds of requirements, rules, and policies you have in place for leadership and what your demographics looks like.

Finally… Enforcement

I genuinely believe that disparate impact is one of the murkiest areas of the law. There are very few bright lines, and lots and lots of confusion and it depends and fact-based analysis and confusion. Judges with decades of experience have trouble trying to figure out whether a neutral rule or business practice is or is not a violation of various laws.

It’s one thing to ask a Grievance Committee to make decisions on whether a REALTOR’s Instagram post was or was not hate speech, or harassing speech. That’s tricky enough, but I think the difficulty there is nothing compared to doing disparate impact analysis on a REALTOR’s business practices. But that is exactly what the Grievance Committee will have to do going forward.

I imagine there will be fairly extensive training required, far more than has ever been provided before to those members who have to serve in this new role. It’s not just about common sense now; it’s about understanding disparate impact, and honestly, very few people do. I’m not sure that I do, for example, and I have a law degree from NYU.

What might make more sense is to kick all discrimination-related cases up to the State Association, to a specialized Committee with a permanent legal counsel who could advise on disparate impact analysis. Or perhaps all the way up to NAR itself for those cases.

However y’all do it, I wish you the best of luck.

Wrapping Up

As you all know, I thought these changes were a mistake, although they came from a really great place. Pure intent, murky results. Sounds a lot like disparate impact analysis, doesn’t it? Well, the deal is done; the changes are now official policy of NAR. Now, everyone just has to deal with the consequences, intended and otherwise.

One of the more difficult consequence is exactly around that issue of unintended consequences. The changes to the Code regarding discrimination now opens the door wide to disparate impact, rather than disparate treatment, analysis… which is opaque, uncertain, and murky. “I never meant to hurt you” is no longer a valid excuse; the fact of the hurt is all that matters.

Or… well, these are private rules of a private organization… maybe it’s not too late to walk this change back? Just think about it a bit more, and do so deliberately and with knowledge.

-rsh

 

 

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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