John Berteau

John Berteau
Associate General Counsel, Compliance Alliance

Fair housing impacted again

The Department of Housing and Urban Development (HUD) recently published a proposed rule to try to refine its disparate impact rule to be more in line with the philosophy of the current White House and the opinion of the U.S. Supreme Court.

Since being codified in 2013, the disparate impact rule has been the subject of much discussion and federal activity, particularly in the executive and judicial branches, although the original rule remains in place today in 24 CFR 100 as it was passed in 2013. What follows is a brief timeline of the disparate impact rule, the current burden-shifting test and the new proposed burden-shifting test.

Timeline

In February 2013, HUD published a final rule to formalize the disparate impact rule, HUD's long-held interpretation of discriminatory effects liability under the Fair Housing Act. HUD, in 2013, established a burden-shifting test for determining when a practice violates the Fair Housing Act and provides that liability may be established when a practice results in a disparate impact on a protected class of persons.

In June 2015, the U.S. Supreme Court ruled in Texas Housing v. Inclusive Communities that disparate impact claims are recognized under the Fair Housing Act and referenced HUD's disparate impact rule but did not rely on HUD's burden-shifting test to determine when a practice violated the Fair Housing Act. The Supreme Court, instead, as they often do, created their own burden-shifting test to make the determination.

In May 2017, in response to President Trump's "repeal two existing regulations for every new regulation" (Executive Order 13771), HUD published a notice inviting comments to help HUD identify any existing regulations that may be outdated, ineffective or burdensome. In response, HUD received numerous comments regarding the Inclusive Communities decision and HUD's Disparate Impact Rule.

In October 2017, and also in response to Executive Order 13771, the Treasury recommended in a report to the president that HUD reconsider its use of the Disparate Impact Rule as it applied to the insurance industry and to examine the rule for consistency with existing state insurance laws.

In June 2018, HUD published an Advance Notice of Proposed Rulemaking (ANPR) in response to the Inclusive Communities decision, comments submitted to HUD's May 2017 notice and the Treasury Department's recommendation. After receiving nearly 2,000 comments on the ANPR, HUD published a proposed rule on the Implementation of the Disparate Impact Standard in August.

In the new proposed rule, HUD submitted a new burden-shifting test more in accord with the Inclusive Communities decision. Under the current burden-shifting test to determine if a practice violates the Fair Housing Act:

  1. The plaintiff (consumer/HUD) must prove that the practice caused or will predictably cause a discriminatory effect;
  2. The defendant (financial institution) must prove that the practice is necessary to achieving a substantial, legitimate, nondiscriminatory interest;
  3. The plaintiff must prove that the interest could be served by another practice that has a less discriminatory effect.

Under the new proposed burden-shifting test:

  1. The plaintiff (consumer/HUD) bears the initial burden of alleging that the challenged policy or practice is arbitrary, artificial and unnecessary to achieve a valid interest or legitimate objective. Although the Inclusive Communities decision indicated that at this stage the plaintiff must allege facts that show the policy or practice is "arbitrary, artificial and unnecessary," the proposed rule states that if a plaintiff is unaware of the legitimate objective of the policy or practice, then simply identifying the policy or practice and stating that the policy or practice is arbitrary, artificial and unnecessary is sufficient at this stage. If the plaintiff sufficiently pleads their allegation, the burden shifts to the defendant.
  2. The defendant (financial institution) is given multiple options in the proposed rule by which they may rebut the plaintiff's claim:
    1. Assert that the plaintiff has not alleged sufficient facts to support their allegation.
    2. Show that the defendant's discretion is limited by a third party, such as a federal, state or local law, a court order or an administrative requirement.
    3. When the plaintiff alleges that the cause of the disparate impact is a model being used by the defendant:
      1. Show that the inputs used in the model are not substitutes for protected characteristics and that the model accurately predicts risk or achieves some other valid objective, which allows the defendant to prove that the model is not the actual cause of the disparate impact;
      2. Show that a third-party is responsible for creating or maintaining the model and not the plaintiff, proving that the model is the responsibility of a third-party, and if action is to be taken it would be better taken against the third-party, rather than the plaintiff; or
      3. Show that a neutral third-party has analyzed the model and has determined that the inputs used in the model are not substitutes for protected characteristics or that the model accurately predicts risk or achieves some other valid objective, which also allows the defendant to prove that the model is not the actual cause of the disparate impact.
  3. If the defendant cannot rebut the plaintiff's claim, the burden shifts back to the plaintiff to allege the existence of four elements, which if proven may lead to a finding that disparate impact has occurred:
    1. There is a robust causal link between the policy or practice and a disparate impact on members of a protected class that shows that the specific policy or practice is the direct cause of the disparate impact;
    2. The alleged disparity caused by the policy or practice has an adverse effect on members of a protected class (race, color, religion, sex, familial status or national origin);
    3. The alleged disparity caused by the policy or practice is significant, as a disparity that is not material will not be sufficient to establish disparate impact; and
    4. The plaintiff's injury (disparate impact) is directly caused by the policy or practice.

As of the publication of this article, the proposed rule has solicited approximately 300 comments, and the deadline for comments on the proposed rule is Oct. 18. The proposed rule, as it stands, seems to be more favorable to defendant financial institutions than impacted consumers, but the industry will have to wait until the final rule is published to determine for certain who is most affected.