The Obama administration’s disparate impact on taxpayers

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A federal agency has agreed to pay out on a preposterous discrimination claim. The settlement will cost taxpayers “only” $62 million, but it displays, once again, the Obama administration’s partiality to bogus legal theories and its willingness to use taxpayer money to pander to left-wing advocacy organizations. This pre-election payoff deserves serious scrutiny.

On July 6, the Department of Housing and Urban Development (HUD) announced it would pay an additional $62 million to some New Orleans residents whose houses were destroyed by Hurricane Katrina to settle a lawsuit. The plaintiffs were African-American homeowners in New Orleans and several ACORN-style organizations such as the Greater New Orleans Fair Housing Action Center and the National Fair Housing Alliance. They claimed black homeowners were discriminated against in payouts under the federal “Road Home” program, which allocated $11 billion for rebuilding communities and resettling displaced residents after the hurricane. According to the complaint, it is “the largest housing redevelopment program in United States history.” It has already paid nearly $9 billion to New Orleans residents in four parishes, but that was not enough according to the plaintiffs in the lawsuit.

Under the terms of the original program, qualifying residents could be awarded up to $150,000 toward rebuilding their homes. But in a straightforward application of standard insurance industry practices, grant recipients would receive the lower of either the pre-Katrina fair market value of their home or the actual cost of damages to their property.

The plaintiffs claimed this HUD standard was racially discriminatory. Why? They alleged that since homes in predominantly African-American neighborhoods in New Orleans generally had lower property values, black residents tended to receive lower amounts of federal payouts than other homeowners. Thus, other homeowners were supposedly more likely to receive their damage costs than African-Americans who would most often receive their pre-storm home value. HUD has now agreed with the plaintiffs’ claim that this had a racially “discriminatory impact on African-American homeowners” because they faced larger gaps than white families between the grant amount and the cost to rebuild (where the cost to rebuild exceeded what their homes were worth before the damage).

This is an unjustified (and ridiculous) settlement. If you have an accident in your 10-year-old automobile, your insurance company is liable for the cost of repairing the car up to the pre-accident value of the car. It would be foolish and reckless underwriting for the company to be liable for the total cost of repairs if they exceed the fair market value before the accident. One can obtain actual replacement insurance coverage for many different kinds of property, but such policies are specially underwritten and cost extra.

Yet the Obama administration has now agreed to use public funds to pay off a nonexistent legal liability. This settlement shows the Obama administration’s unwillingness to mount a vigorous attack on the legal theory of “disparate impact.” After all, its own Justice Department is using strained versions of that dubious legal stratagem to attack employers, educators, police departments and lending institutions. Just last week, Investor’s Business Daily reported that DOJ has launched a witch hunt against supposedly biased banks, forcing them to relax their mortgage standards for minorities with poor credit. DOJ cannot show any actual discrimination against minorities, just that requiring good credit or an unwillingness to count welfare benefits as income will have a “disparate impact” on certain minorities.

The Obama administration has already collected over $20 million from banks too scared to battle the government. An additional 60 banks are under investigation, despite the fact that the Supreme Court has never recognized that disparate impact claims can be brought under the Fair Housing Act. Of course, it was these types of discriminatory government policies (that minorities should be held to lower lending standards) pushed by DOJ, the Federal Reserve and other federal agencies that contributed to the mortgage meltdown that fragmented our economy.

The Washington Post reports that the “vast majority” of this settlement will be awarded to homeowners in Orleans Parish, which is over 60% black. So more taxpayer money will go to a predominantly African-American parish to repair homes as restitution for supposedly lower real estate prices, even when those funds exceed the pre-Katrina value of the homes. Under this dubious and unsound standard, towns and parishes with depressed home prices due to nearby highways, airports or prisons should also be granted extra funds for rebuilding. Or taxpayers whose homes had lower values because they neglected to keep up their residences should have the government making up all of the missing maintenance investments they never bothered to make.

The fact of the matter is that there was nothing discriminatory about HUD’s original grant standard. This is a lawsuit the government could have easily won. Instead, HUD is settling a frivolous discrimination claim, although its own press release about the proposed settlement interestingly never even mentions African-Americans or discrimination. Instead, it frames the settlement as new funding to help residents for whom the original grants were insufficient.

Besides providing support for “disparate impact” discrimination claims, this settlement is also a thinly veiled effort to win votes and obtain disproportionate aid for African-American homeowners at the expense of taxpayers and other needy New Orleans residents. This follows in the same vein as the notorious Pigford settlement, which gave “restitution” to alleged victims of racial discrimination over loans made by the Department of Agriculture to black farmers. Since its inception, the Pigford claims process has used taxpayer funds to pay tens of thousands of fraudulent claims, providing large sums to claimants who have never even been near a farm but who are political supporters of the president.

There was no basis for the claim that there was any racial discrimination in the literally billions of dollars granted to homeowners in New Orleans by U.S. taxpayers. But using race, in this case as in many others, was an easy way to win attention and action from an administration that has put alleged (and nonexistent) racial “inequity” front and center in its policies. The HUD settlement is nothing more and nothing less than a political payoff calculated to use public funds to entrench a dubious legal theory and a racial spoils system that will help the Obama administration appease its supporters in 2012.

Hans A. von Spakovsky is a Senior Legal Fellow at The Heritage Foundation and a former Counsel to the Assistant Attorney General for Civil Rights at the Justice Department. Alex Ingram is member of the Young Leaders’ Program at Heritage.