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Locke Lord QuickStudy: Will HUD’s New “Disparate Impact” Rule Stand in the Biden Administration?‎

Locke Lord LLP
December 18, 2020

On October 26, 2020, the U.S. Department of Housing and Urban Development adopted a new rule bolstering the requirements for establishing disparate impact liability, signaling a marked shift in the government’s prior approach to evaluating claims under the Fair Housing Act.1  The implementation of this rule follows the Supreme Court’s 2015 ruling in Tex. Dep’t of Housing & Cmty. Affairs et al. v. The Inclusive Communities Project, Inc. et al., 135 S. Ct. 2507 (2015) (“ICP I").  In ICP I, the Supreme Court recognized the viability of disparate impact claims for the first time since the Act was signed into law in 1968, an issue of national importance for FHA litigants.  The Court also, however, explicitly required that litigants demonstrate a robust causal connection in the first instance to support a prima facie case.

The FHA prohibits discrimination in the sale or rental of any dwelling based on race, color, national origin, religion, sex, familial status, and disability.  The more common FHA claim involves allegations of direct discrimination, also known as disparate treatment, supported by evidence of discriminatory intent.  In ICP I, the Supreme Court recognized that facially neutral policies that nonetheless have a disproportionately negative effect on a protected class can also violate the FHA.  However, the Court arguably impugned the burden-shifting framework HUD had previously adopted.  The Court specifically noted that such claims required careful analysis, cautioning that mere racial imbalances are insufficient to establish a prima facie case of disparate impact.  Rather, in order to shift the burden to a defendant, showing a causal connection between a statistical disparity and the challenged policy, at the outset, is now of paramount importance.

Prior to ICP I, in 2013, HUD adopted a rule entitled “Implementation of the Fair Housing Act’s Discriminatory Effects Standard,” which formalized HUD’s longstanding interpretation of disparate impact liability under the FHA.2  Under this standard, a plaintiff had to show a prima facie case of disparate impact discrimination by showing that a challenged practice caused a discriminatory effect.  If the plaintiff articulated this prima facie case, the defendant then had to show that the challenged practice was necessary to achieve one or more substantial, legitimate, nondiscriminatory interests.  If the defendant met its burden, the plaintiff was only then charged with showing that the defendant’s interests could be served by another practice that had a less discriminatory effect.  However, the burden-shifting framework outlined in the 2013 Rule, as suggested by HUD, proved simplistic and otherwise failed to provide clarity regarding the requirements at the pleadings stage of a disparate impact claim.  Indeed, a litigant could often articulate a plausible prima facie case relying solely on a purported statistical disparity.

What ICP I recast, then, is the threshold of sufficiency for an FHA claimant’s prima facie case.  According to this interpretation, no longer will perfunctory allegations of a statistical disparity or any related correlation shift the burden to a defendant.  Rather, plaintiff must first allege facts demonstrating “robust causality” – a concept that may lend itself to further clarification, but which nonetheless underscores a marked shift from the initial, more permissive showing required under the 2013 Rule and prior case law.  Alternatively stated, under ICP I, a claimant must now state facts affirming a causal connection between the purported racial imbalance and the challenged policy before a defendant is ever compelled to defend it. 

In promulgating the 2019 Proposed Rule, HUD was explicit concerning its intent to replace the existing burden-shifting standard with a brand new one, aiming to have it align more closely with ICP I.3  Indeed, in the section codified at 24 C.F.R. § 100.500(b), HUD introduced several new requirements a claimant must meet to establish a prima facie case.  Among other things, a claimant must identify a “specific, identifiable” discriminatory policy or practice that is “arbitrary, artificial and unnecessary” to achieve a valid objective.4  HUD would also require a claimant to allege a “robust causal link” between the challenged policy along with a “disproportionate” impact on a protected class.  HUD further mandates that any disparity be shown to be both “significant” and directly caused by the challenged policy.5  The Rule also outlines defenses that may be asserted to rebut a prima facie case of disparate impact, among other changes.6  Aside from non-substantive revisions, HUD adopted the proposed changes to the Rule.7

The question remains as to whether the incoming Biden Administration will let HUD’s wholly reframed disparate impact rule stand, modify the rule or withdraw it altogether.  However, the public response to the Proposed Rule was ferocious, with HUD receiving over 45,000 comments prior to its adoption – enhancing the prospect of its reassessment next year.8  Many commentators fear the Rule, left unchallenged, will erect insurmountable obstacles for claimants seeking to prosecute disparate impact claims.  Many others are concerned that courts will expressly adopt these new standards, in the absence of the Supreme Court further clarifying the concept of “robust causality.”  Fair housing advocates are already pushing for the incoming Administration to swiftly revisit this Rule.  Additionally, many public officials, including some serving on the U.S. House Financial Services Committee, have been advocating for a renewed regulatory focus on fair housing and lending in the new Administration.

Whichever approach the Biden Administration adopts concerning the new HUD rule, it will do so at a time of accelerated digitization of the financial services marketplace.  Indeed, artificial intelligence has some potential, if utilized without sufficient safeguards, to introduce new frontiers in disparate impact liability.  These developments implicate not only fair lending in the mortgage space, but touch more broadly on auto lending as well as access to credit and insurance services.  The next few years will provide ample opportunity for continued debate surrounding the continued viability of disparate impact after ICP I.

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1. See HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard, 85 Fed. Reg. 60288 (Sept. 24, 2020).
2. See Implementation of the Fair Housing Act’s Discriminatory Effects Standard, 73 Fed. Reg. 11460 (Feb. 15, 2013).
3. See HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard, 84 Fed. Reg. 42854 (Aug. 19, 2019).
4. 
Id. at 42862.
5. Id.
6. 
Id. at 42863.
7. See generally, HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard, 85 Fed. Reg. 60288 (Sept. 24, 2020).
8. See id. at 60289.

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