February has certainly been a big month for federal agencies to issue long-awaited final rules. The latest agency to throw its hat into the ring is the U.S. Department of Housing and Urban Development, which recently codified its long standing position that liability under the Fair Housing Act may be proven by disparate impact without any discriminatory intentions. This final rule provides additional support to potential government and private plaintiffs seeking to challenge “facially neutral” practices as violations of the Fair Housing Act. We have previously blogged about the different types of liability related to discrimination in lending here. This rulemaking comes at a time when lenders have already begun to reexamine how they will structure their residential mortgage lending activities in the face of the CFPB’s new qualified mortgage rules. (See our DechertOnPoints for more information on the new QM/ATR rule and the additional proposal).
In its final rule, HUD set out a three pronged burden-shifting formula to determine whether FHA liability has been triggered. First, the plaintiff has a burden to demonstrate that a practice has a discriminatory effect. There is no requirement that the plaintiff prove discriminatory intent. Second, the burden shifts to the defendant to prove it had a legally sufficient justification for the challenged practice, which will require a showing that the challenged practice is (i) necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant, and (ii) those interests could not be served by another practice that has a less discriminatory effect. Third, the burden shifts back to the plaintiff, who may prevail by showing that another practice with a less discriminatory effect could be used.
HUD downplayed concerns that complying with the QM rule could cause lenders to be at greater risk of fair lending litigation on the grounds that their new rule does not change the substantive law recognizing discriminatory effects liability. Nonetheless, the banking industry is strongly opposed to this rule. HUD did not provide any comfort or safe harbors and instead chose to leave the question of “sufficient justification” to the courts. This rule will only compound the concerns lenders must sort through as they work to develop underwriting practices to comply with the QM/ATR rules. Patrick Dolan, Robert Ledig, Thomas Vartanian and CrunchedCredit’s own Ralph Mazzeo have provided a summary and analysis of HUD’s new rule on behalf of Dechert’s Finance and Real Estate Group and Financial Services Group, which can be found here.