HUD Issues Standard for Disparate Impact Liability
by: Margaret Wright, Esq.
Implementation of the Fair Housing Act’s Discriminatory Effects Standard
The Department of Housing and Urban Development (HUD) has issued the Final Rule amending the Fair Housing Act to establish the method to be used when establishing liability under the discriminatory effects standard. The amendment formalizes the “burden-shifting test” of discriminatory effect and also adds and revises the illustrations of discriminatory housing practices included in the Fair Housing Act.
The effective date of the rule is March 18, 2013.
Under the Fair Housing Act, a finding of intentional discrimination is not needed in order to base liability on the discriminatory effects of a facially neutral policy or procedure. Previously, no formal standard existed to evaluate discriminatory effects; however most courts and HUD have adopted what is known as the “three-part burden-shifting test”. The Final Rule officially incorporates this three-part burden-shifting test into the Fair Housing Act in order to provide “greater clarity and predictability for all parties engaged in housing transactions as to how the discriminatory effects standard applies”. (78 FR 11460)
Prohibiting Discriminatory Effects
Legally Sufficient Justification
The Final Rule outlines that a practice or policy found to have a discriminatory effect is not necessarily a violation of the Act as long as there is a “legally sufficient justification.” A legally sufficient justification is defined as existing where the “challenged practice (i) is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests… and (ii) Those interests could not be served by another practice that has a less discriminatory effect”. The Final Rule requires that the legally sufficient justification must be based on evidence that is not speculative or hypothetical. However, if intentional discrimination is alleged legally sufficient justification may not be used as a defense. (78 FR 11482)
Three-step Burden-Shifting
The Final Rule implements the “three-step burden-shifting” approach to determining which party bears the burden of proof at each step of the process.
1. The plaintiff or charging party must first prove that the “challenged practice caused or predictably will cause a discriminatory effect” on a protected group. (78 FR 11482)
2. After the plaintiff or charging party has proven their prima facie case of disparate impact of perpetuation of segregation, the burden then shifts to the defendant to prove that there is legally sufficient justification for the challenged practice.
3. Once the defendant has proven the practice is necessary and legitimate, the burden shifts once again to the plaintiff or charging party to show that the defendant’s interests may be “served by another practice that has a less discriminatory effect.” (78 FR 11482) If the plaintiff or charging party can prove this last portion, the defendant will still be liable under the Act even though they have proven their legally sufficient justification.
Amended Prohibited Conduct
In addition to Subpart G, the proposed rule seeks to amend existing Fair Housing Act Section 100 to include further examples of prohibited conduct:
Section 100.70 Other prohibited conduct is amended to include the implementation of “land-use rules, ordinances, policies, or procedures that restrict or deny housing opportunities or otherwise make unavailable or deny dwellings to persons” based on prohibited factors. (78 FR 11481)
Section 100.120 Discrimination in the making of loan and in the provision of other financial assistance is amended to include further examples of prohibited practices such as “failing or refusing to provide any person information regarding the availability of loans or other financial assistance, application requirements, procedures or standards for review and approval of loans or financial assistance, or providing information which is inaccurate or different from that provided others” and “providing, failing to provide, or discouraging the receipt of loans or other financial assistance in a manner that discriminates in their denial rate or otherwise discriminates in their availability” because of race, color, religion, sex, handicap, familiar status or national origin. (78 FR 11481)
Section 100.130 Discrimination in the terms and conditions for making available loans or other financial assistance is amended to include determination of “the type of loan or other financial assistance to be provided,… or fixing the amount, interest rate, cost, duration or other terms or conditions” and “servicing of loans … in a manner that discriminates” because of race, color, religion, sex, handicap, familiar status or national origin. (78 FR 11482)
About the Author:
Margaret is Vice President and Senior Counsel at Bankers Advisory. She is a graduate of Stonehill College and earned her J.D. at Suffolk University Law School. She is admitted to the Massachusetts Bar and serves on the compliance committee of the Massachusetts Mortgage Bankers Association. She can be reached at margaret@bankersadvisory.com
Margaret Wright, JD, is regulatory compliance director with CLA. She is a graduate of Stonehill College and earned her juris doctor at Suffolk University Law School. She is admitted to the Massachusetts Bar.
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