HUD Issues Aggressive New Fair Housing Rule

The U.S. Department of Housing and Urban Development (“HUD”) has finally issued its much-debated disparate impact rule. HUD argues that the rule—which it plans to apply retroactively—is simply a codification of its existing position that the Fair Housing Act authorizes disparate impact claims. But the rule goes well beyond that. It articulates a burden-shifting framework that places significant new legal burdens onto defendants, and it “clarifies” the standard for “business justification” that HUD had originally proposed into a test that courts have affirmatively rejected.

THE NEW RULE

HUD is charged with interpreting and enforcing the Fair Housing Act (“FHA”). The new rule adds a provision entitled “Prohibiting Discriminatory Effects” to HUD's existing FHA regulations.1 Under the new provision, a defendant may be liable for practices with a discriminatory effect unless there is a legally sufficient justification. The showings and burdens of proof unfold as follows:

1) “Discriminatory Effect”: The government and private plaintiffs may challenge any practice that (i) “actually” or “predictably results” in a “disparate impact” on protected classes of individuals or (ii) “creates, increases, reinforces, or perpetuates segregated housing patterns.” Thus, plaintiffs need not allege any intent to discriminate or any disparate treatment of borrowers. They need only allege that some neutral, non-discriminatory policy will have a disparate impact or “perpetuate” preexisting “segregated housing patterns.”

2) Business Justification: The defendant then has the burden of proving that the challenged practice is “necessary to achieve one or more substantial, legitimate, nondiscriminatory interests.” (In its proposed rule, HUD had provided a different standard—that the challenged practice “has a necessary and manifest relationship to a legitimate business interest.”)

3) “Less Discriminatory” Alternatives: Even if the defendant meets its burden under the second step, the plaintiff can still prevail by showing that the defendant's interests “could be served” by some other, theoretical practice “that has a less discriminatory effect.”

This type of back and forth is a trademark of disparate impact analysis. Somewhat confusingly, however, the rule combines the second and third steps under the notion of a “legally sufficient justification,” but then splits the burden of proof as noted above. If a defendant meets its burden under step 2, and a plaintiff fails to meet its burden under step 3, then there is a legally sufficient justification and the practice with the discriminatory effect is not actionable. Each party's showing must be supported by evidence and may not be “hypothetical or speculative.”

The rule applies to a broad range of housing activity. For example, it applies not only to approval or denial of loan applications, but also to the alleged failure to provide equalinformation regarding the availability of loans orapplication requirements; thetype of loan, . . . loan...