Banking and Finance Law Daily HUD finalizes update to disparate impact rule
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Wednesday, September 9, 2020

HUD finalizes update to disparate impact rule

By J. Preston Carter, J.D., LL.M.

HUD finalized the revision to its "disparate impact rule" to reflect a 2015 Supreme Court ruling that instituted new standards for establishing such claims.

The Department of Housing and Urban Development has revised the "disparate impact" rule under the Fair Housing Act, which provides a framework for establishing legal liability for facially neutral practices that have unintended discriminatory effects on classes of persons protected under the Fair Housing Act. The final rule is intended to better reflect the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., which affirmed that disparate impact claims are cognizable under the Fair Housing Act but raised the bar for establishing these claims.

According to HUD, it believes that Inclusive Communities makes it particularly important for courts to scrutinize whether each element of a prima facie disparate impact claim is sufficiently pled before allowing a claim to proceed, given the constitutional and prudential considerations that Inclusive Communities outlined and HUD has articulated. HUD also believes allowing a defendant to demonstrate that a plaintiff has not pled the prima facie element of connecting the disparate impact with actions the defendant has taken is appropriate at the pleading stage.

The final rule revises the burden-shifting test for determining whether a given practice has an unjustified discriminatory effect. It provides that, at the pleading stage, to state a discriminatory effects claim based on an allegation that a specific, identifiable policy or practice has a discriminatory effect, a plaintiff must sufficiently plead facts to support each of the following 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.

At the pleading stage, the defendant may establish that a plaintiff has failed to sufficiently plead facts to support an element of a prima facie case by showing that the defendant’s policy or practice was reasonably necessary to comply with a third-party requirement, such as a: federal, state, or local law; binding or controlling court, arbitral, administrative order or opinion; or binding or controlling regulatory, administrative, or government guidance or requirement.

The final rule includes as defenses that a defendant could utilize to rebut the plaintiff’s case, not only that the plaintiff had failed to plead a prima facie case, but also that the defendant’s discretion was materially limited, or that the defendant’s use of a risk assessment algorithm was non-discriminatory.

HUD states that the final rule also establishes a uniform standard for determining when a housing policy or practice with a discriminatory effect violates the Fair Housing Act and provides greater clarity of the law for individuals, litigants, regulators, and industry professionals.

press release from Americans for Financial Reform states that the final rule "drastically limits the opportunities to challenge housing policies that perpetuate systemic racism by excluding people of color and other groups from housing opportunities." It says the final rule places a drastically higher burden on victims of discrimination by creating multiple new hurdles to prove a disparate impact claim under the Fair Housing Act and that it encourages the use of algorithms, even if companies know that they have a discriminatory effect.

In its press release, the National Community Reinvestment Coalition says the final rule places limitations on the use of the disparate impact standard in Fair Housing Act complaints and imposes pleading and burden of proof requirements for plaintiffs that will make it very difficult, if not impossible, to challenge discriminatory policies and practices. Jesse Van Tol, CEO of the NCRC, wrote, "If the rule was written honestly, it would simply state that HUD is no longer recognizing disparate impact at all."

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