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HUD Issues Final Disparate-Impact Rule Under the Fair Housing Act

On September 24, 2020, HUD issued a final rule revising the disparate-impact standard issued by HUD in 2013 under the Fair Housing Act (“FHA”). The final rule intends to align HUD’s disparate-impact standard with the U.S. Supreme Court’s ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507 (2015) (“Inclusive Communities”). The final rule is effective as of October 26, 2020.

HUD initiated a revision to its 2013 disparate-impact rule in response to the Supreme Court’s decision in Inclusive Communities, which rendered the 2013 rule inconsistent. Inclusive Communities was a landmark Fair Housing case where the Supreme Court held that claims under the theory of disparate-impact are cognizable under the FHA. In Inclusive Communities the Supreme Court did not rely for its holding on HUD’s 2013 disparate-impact rule, but rather undertook its own analysis of the FHA. While acknowledging disparate-impact claims are cognizable under the FHA, the Supreme Court emphasized that “disparate-impact liability must be limited so… regulated entities are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” Inclusive Communities, 135 S. Ct. at 2518. The Court further explained that limitations on disparate-impact are “necessary to protect potential defendants against abusive disparate-impact claims.” Id. at 2524.

HUD’s final rule provides that a disparate-impact liability may be established under the FHA based on a specific policy’s or practice’s discriminatory effect on members of a protected class under the FHA even if the specific policy or practice was not motivated by a discriminatory intent. Importantly, to bring the claim the Plaintiff must sufficiently plead facts that show each of the following 5 elements:

  1. That the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law;
  2. That the challenged policy or practice has a disproportionately adverse effect on members of a protected class;
  3. That there is a robust causal link between the challenged policy or practice and the adverse effect on members of a protected class, meaning that the specific policy or practice is the direct cause of the discriminatory effect;
  4. That the alleged disparity caused by the policy or practice is significant; and
  5. That there is a direct relation between the injury asserted and the injurious conduct alleged.

While the final rule requires the plaintiff to allege element (1) it does not require the plaintiff to prove it as part of its prima facie case. The final rule places the initial burden of proof on the plaintiff only with respect to elements (2) to (5) above by the preponderance of the evidence. The final rule does not say that the plaintiff must also prove element (1) for its prima facie case. Rather, the final rule states that a defendant “may rebut” a plaintiff’s allegation that the challenged policy or practice advances a valid interest and is therefore not arbitrary. The final rule suggest (although not explicitly states) that if the plaintiff can prove elements (2) to (5) then the challenged policy or practice will be per se arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law, and it will then be the defendant’s burden to rebut this per se showing.

If the defendant provides proof to rebut element (1), then the plaintiff must prove by the preponderance of the evidence either that the interest advanced by the defendant is not valid or that a less discriminatory policy or practice exists that would serve the defendant’s identified interest in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.

The final rule also outlines several defenses that are available to defendant. Of note, is the defendant showing that the policy or practice is a productive model (e.g. a predictive model used to develop underwriting practices or lending policy). If the policy or practice itself is used to predict an outcome, then the prediction must represent a valid interest of the defendant and that the outcome predicted cannot have disparate-impact on protected classes under the FHA. However, the final rule states that this defense is not adequate if the plaintiff can show that an alternative, less discriminatory policy or practice would result in the same outcome without imposing materially greater costs or burdens for the defendant.

Lastly, the final rule states that in enforcement actions based solely on disparate-impact theory, HUD will seek only equitable remedies, unless there are proven financial damages, in which case it will seek compensatory damages or restitution. Nevertheless, HUD reserved the right to impose civil money penalties for violators of the disparate-impact rule against persons who have repeated violation of the FHA, if such violations occurred within five years of the disparate-impact violation.

Takeaways

The final rule appears to raise the bar for plaintiffs to bring disparate-impact claims under the FHA. However, whether the final rule is consistent with the Supreme Court ruling in Inclusive Communities, is questionable. Especially, the final rule’s failure to affirmatively require the plaintiff to prove element (1) above, as the other elements, appears to be at odds.

As the Supreme Court stated in Inclusive Communities, “a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” Inclusive Communities, 135 S. Ct. at 2523. In this writer’s opinion, the requirement to point to a policy or practice causing disparate-impact, mandates a showing that the policy or practice is an “artificial, arbitrary, and unnecessary barrier[].” Id. at 2524. As without such showing, a policy or practice cannot be contrary to disparate-impact requirements. Id.

If you have any questions regarding compliance with HUD’s disparate-impact rule, FHA or fair lending in general¸ please contact Solomon Maman.

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