Compliance Bulletin

HUD Formalizes Disparate Impact Rule
February 25, 2013

The Department of Housing And Urban Development (“HUD”) issued a final rule (“Rule”) formally adopting a policy of enforcing the Fair Housing Act (the “FHA”) (1) based on the “disparate impact” theory of liability.HUD asserts that it has long interpreted the FHA to prohibit practices that result in an unjustified discriminatory effect, regardless of whether there was an intent to discriminate, and that all of the federal circuit courts of appeal that have addressed this issue agree with this interpretation.  This position would appear to be consistent with that of the Consumer Financial Protection Bureau, which last April announced that it intends to apply a disparate impact test in exercising its supervisory and enforcement authority under the Equal Credit Opportunity Act (ECOA) and Regulation B (2)

HUD developed the Rule partly to establish a consistent federal enforcement standard. According to HUD, over decades the courts have applied the effects test in housing discrimination cases but have done so inconsistently. For example in some circuits, courts require the defendant to prove that there is no lesser discriminatory alternative that would serve the business purpose of a practice, while most courts place this burden on the plaintiff or charging party. 

The Rule sets out a three-part burden-shifting, discriminatory effects test. The plaintiff or other charging party first must prove that the challenged practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic (3).  If proven, then the burden shifts to the defendant or respondent to prove that the practice is necessary to achieve one or more of its “substantial, legitimate, nondiscriminatory interests” (4).  The Rule clarifies that a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative (5). If this burden is met, the plaintiff may still establish liability by proving that those legitimate interests can be served by a practice that has a less discriminatory effect (6). The result is that a person or entity may be found liable for discrimination without a showing of any discriminatory intent (7).

In its comments to the Rule, HUD explained that it declined to offer guidance on what practices would be deemed necessary to achieve a legitimate interest other than that a substantial interest is one that “is a core interest of the organization that has a direct relationship to the function of that organization.” Despite requests, HUD did not clarify whether increasing profits, managing costs, and growing market share constitute allowable interests. Instead, HUD notes unhelpfully that this inquiry must be determined on a case-by-case basis.  

HUD also notes that a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.  Moreover, a person may bring a claim alleging both discriminatory effect and discriminatory intent, and the discriminatory effect of a challenged practice may provide evidence of the discriminatory intent behind the practice. 

While the Rule does not formally become effective until 30 days after its February 15 publication date in the Federal Register, HUD asserts that it will apply to pending and future cases.  HUD describes the Rule as a formal interpretation of the FHA as opposed to a new rule.  Nevertheless the text of the FHA does not explicitly allow claims based on disparate impact, and HUD’s position has been challenged. Currently before the U.S. Supreme Court is a case called Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. In that case, residents of Mount Holly sued to stop an eminent domain action that would replace existing housing with new housing that is likely to be beyond the financial reach of the affected residents, who are mostly minorities.  A key issue in the case is whether the challenged redevelopment plan violates the FHA because it would have a deleterious, disparate impact on minorities. The Third Circuit Court held that the plaintiffs met their burden of proving discrimination under the FHA even though there was no evidence of discriminatory intent. The Supreme Court has not decided yet whether it will grant review.

(1) The FHA prohibits discrimination in the sale, rental, advertising, or the provision of related services in connection with a dwelling on the basis of race, color, religion, sex, disability, familial status, or national origin. 42 U.S.C. § 3604.  24 CFR § 100.5(a) provides: “It is the policy of the United States to provide, within constitutional limitations, for fair housing throughout the United States. No person shall be subjected to discrimination because of race, color, religion, sex, handicap, familial status, or national origin in the sale, rental, or advertising of dwellings, in the provision of brokerage services, or in the availability of residential real estate-related transactions.”

(2) CFPB Bulletin 2012-04 (Fair Lending) dated April 18, 2012 states: “Consistent with other federal supervisory and law enforcement agencies, the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement authority to enforce compliance with the ECOA and Regulation B.” See also the 1994 Interagency  Policy Statement on Discrimination in Lending adopted by, among others, the federal banking agencies and the U.S. Department of Justice.

(3) § 100.500(a): “A practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”

(4) § 100.500(b):(1): “A legally sufficient justification exists where the challenged practice: (i) Is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent, with respect to claims brought under 42 U.S.C. 3612, or defendant, with respect to claims brought under 42 U.S.C. 3613 or 3614.” 

(5) 24 CFR § 100.500(b)(2).

(6) 24 CFR § 100.500(b)(ii). § 100.500© sets forth the burden shifting rules.

(7) 24 CFR § 100.5(b) is amended by adding this sentence: “The illustrations of unlawful housing discrimination in this part may be established by a practice’s discriminatory effect, even if not motivated by discriminatory intent, consistent with the standards outlined in § 100.500.” § 100.500 states: “Liability may be established under the Fair Housing Act based on a practice’s discriminatory effect, as defined in paragraph (a) of this section, even if the practice was not motivated by a discriminatory intent.”

The information contained in this CBA Legal Notes is not intended to constitute, and should not be received as, legal advice.  Please consult with your counsel for more detailed information applicable to your institution.

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