HUD Issues Final ‘Discriminatory Effects’ Rule

by Ballard Spahr LLP
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The Department of Housing and Urban Development has issued a final rule that provides that if a practice has a "discriminatory effect," HUD or a private plaintiff can establish liability under the Fair Housing Act (FHA), even if there is no discriminatory intent. The rule contains a three-part burden-shifting test for determining when a practice with a "discriminatory effect" violates the FHA.

According to the rule, a facially neutral practice has a "discriminatory effect" where "it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin." A practice found to have a discriminatory effect can still be legal if it has a "legally sufficient justification." This term means that the practice is necessary for the respondent or defendant to achieve a "substantial, legitimate, nondiscriminatory" interest, and such interest "could not be served by another practice that has a less discriminatory effect." 

The rule allocates the burdens of proof as follows:

  • HUD or the private plaintiff must first prove that a practice "caused or predictably will cause a discriminatory effect."
  • The burden then shifts to the respondent or defendant to prove that the practice is necessary to achieving a "substantial, legitimate, nondiscriminatory" interest.
  • If such an interest is proved, to establish liability, HUD or the private plaintiff must prove that such interest "could be served by another practice that has a less discriminatory effect."

The final rule will be effective 30 days after its publication in the Federal Register. HUD indicated that the rule will apply to pending and future cases, describing it in the supplementary information as "not a change in HUD’s position but rather a formal interpretation of the Act that clarifies the appropriate standards for proving a violation under an effects theory."

Unlike HUD’s proposal issued in November 2011, the final rule specifically provides that servicing is covered by the FHA’s prohibition against discriminatory terms or conditions. In the supplementary information, HUD makes clear that the "substantial, legitimate, nondiscriminatory" standard for justifying a practice is not to be interpreted more leniently than a "business necessity" standard.

In addition, the agency describes a "substantial" interest as "a core interest of the organization that has a direct relationship to the function of that organization." HUD also rejects a commenter’s request for the final rule to state that a less discriminatory alternative practice must be "equally effective" in serving a company’s interest as the challenged practice.

In an April 2012 bulletin, the Consumer Financial Protection Bureau confirmed that it intends to apply a disparate impact test in exercising its supervisory and enforcement authority under the Equal Credit Opportunity Act (ECOA) and Regulation B. The U.S. Department of Justice also continues to assert disparate impact claims under the ECOA and FHA.

HUD’s final rule could soon be tested by the U.S. Supreme Court, if the Court grants the petition for certiorari in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. The case involves a claim that a redevelopment plan violated the FHA because it had a disparate impact on minorities, and the petition focuses on the purely legal question of whether such claims are permissible under the FHA. The petition was filed on June 11, 2012, and on October 29, 2012, the Supreme Court invited the Solicitor General to file a brief expressing the views of the federal government.

Should the Supreme Court agree to hear the Mount Holly case, HUD may argue that its final rule is entitled to the deference accorded to federal agencies. In its May 2012 decision in Freeman v. Quicken Loans, however, the court rejected HUD’s argument that its interpretation of the Real Estate Settlement Procedures Act was entitled to deference, largely because the statute’s plain language did not support HUD’s interpretation. The Supreme Court may similarly reject HUD’s interpretation of the FHA, given that, despite HUD’s arguments to the contrary in the supplementary information, the FHA’s text does not provide support for disparate impact claims.

On March 27, 2013, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, "HUD's FHA ‘Discriminatory Effects’ Final Rule–What It Means for Fair Lending Litigation and Enforcement." More information on the webinar and a link to register can be found here.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of CFPB examinations), litigators who defend against claims of fair lending violations, and attorneys who likewise understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance. The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, Fair Lending Task Force Leader Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

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