Massachusetts federal court stays effective date and enjoins enforcement of HUD final rule revising FHA disparate impact standards; 2 other lawsuits filed challenging rule

Ballard Spahr LLP

Ballard Spahr LLP

On October 25, a Massachusetts federal district court entered a preliminary injunction staying and postponing the effective date of the final rule issued by HUD last month (“2020 Rule”) revising its 2013 Fair Housing Act disparate impact standards (“2013 Rule”).  The order also enjoins HUD from enforcing the 2020 Rule and keeps the 2013 Rule in place until further order of the court.  The 2020 Rule would have become effective on October 24, the date that was 30 days after its publication in the Federal Register on September 24, 2020.

The court’s order stays and postpones the 2020 Rule’s effective date pending entry of final judgment on the Administrative Procedure Act (APA) claims of the Massachusetts Fair Housing Center and Housing Works, Inc. in their lawsuit filed against HUD on September 28.  The Massachusetts lawsuit is one of three lawsuits challenging the 2020 Rule under the APA.

In Inclusive Communities, the U. S. Supreme Court ruled that disparate impact claims are cognizable under the FHA.  Such claims allege that a policy or practice that is neutral on its face nevertheless violates the FHA because it has a discriminatory effect on a prohibited basis.  The FHA prohibits discrimination based on characteristics such as race, sex, disability, and familial status.  Discrimination claims can be brought under the FHA against lenders, landlords, and others involved in real estate transactions

In their complaint, the Massachusetts plaintiffs contend that contrary to HUD’s assertion that the 2020 Rule “merely brings the 2013 Rule into alignment with the Supreme Court’s decision in Inclusive Communities,” the 2020 Rule “is directly contrary to Inclusive Communities; introduces novel pleading and proof requirements, and new defenses, which upset accepted practice and undermine enforcement of the FHA.”  More specifically, the plaintiffs allege:

  • Under the 2020 Rule, to state a claim that “a specific, identifiable policy or practice” has a discriminatory effect on a protected class, a plaintiff must sufficiently plead facts to support five elements.  It then permits a defendant, at the pleadings stage, to establish that the plaintiff has failed to sufficiently plead facts to support any of the required elements.  This, in effect, “requires a plaintiff, without the benefit of discovery, not only to meet the overwhelming demands of the 2020 Rule’s new five-part pleadings requirements, but also to anticipate in their complaint every practical, profit-oriented, policy consideration or requirement of law a defendant might invoke in defense of its discriminatory policy or practice….None of the new elements that a plaintiff must allege under the 2020 Rule’s pleading provisions is required by or consistent with the FHA or Inclusive Communities.”
  • The 2020 Rule “invents broad and unjustifiable new defenses” by allowing a defendant to rebut a plaintiff’s allegation that the challenged policy or practice is “arbitrary, artificial and unnecessary” by producing evidence showing that the challenged policy or practice “advances a valid interest.”  In contrast, the 2013 Rule requires a defendant to show that the interest is “substantial, legitimate, [and] non-discriminatory.”  In addition, even if a plaintiff survives a motion to dismiss at the pleadings stage, the 2020 Rule allows a defendant to “still escape liability by demonstrating that the discriminatory policy or practice is intended to predict an outcome, the prediction represents a valid interest, and the outcome predicted by the policy or practice does not or would not have a disparate impact on protected classes compared to similarly situated individuals not part of the protected class.”
  • The 2020 Rule requires a plaintiff to prove “not only that a practice with less discriminatory effects exists, but also that the alternative practice serves the defendant’s identified interest ‘in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.’”  By “[r]equiring a victim to identify an alternative that is least costly or burdensome to defendants introduces a profit defense to justify discriminatory practices—a result completely at odds with the language and history of the FHA and civil rights law in general.”  HUD has not offered adequate justification “to drastically rewrite the 2013 Rule and create these heightened burdens of proof, which are inconsistent with decades of HUD’s own policies, guidance and decisions,” and has failed to “meaningfully consider the adverse impact of the 2020 Rule on access to fair housing.”

Based on the these allegations, the plaintiffs claim that the 2020 Rule violates the APA and should be vacated for the following reasons:

  • The 2020 Rule “is contrary to law” because it is inconsistent with the FHA’s text and undermines its core purposes.
  • The 2020 Rule is “arbitrary and capricious” for reasons that include HUD’s failure to provide a “reasoned justification for its decisions to abandon the 2013 Rule” or “take adequate account of the adverse impact of its 2020 Rule would have on the ability of aggrieved parties to prosecute valid housing and lending discrimination claims” and because HUD’s “purported reliance on Inclusive Communities as the basis for its radical departure from the 2013 Rule is a pretext.”
  • The 2020 Rule was adopted without adequate notice and comment because HUD replaced the “algorithmic model” defense in its proposal of the 2020 Rule with a “new and entirely different,” “outcome prediction” defense in the 2020 Rule “without giving the public notice of, or any opportunity to comment on, the ‘outcome prediction’ defense that was first announced when the 2020 Rule was published.”

In granting the plaintiffs’ motion for a preliminary injunction and stay of the 2020 Rule’s effective date, the district court found that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that that the 2020 Rule is arbitrary and capricious in violation of the APA.  It pointed to language in the first of the five elements that a plaintiff must plead facts to support for the plaintiff to state a claim that “a specific, identifiable policy or practice” has a discriminatory effect on a protected class.  That element requires a plaintiff to sufficiently plead facts to support “that the challenged policy is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.”

According to the court, the language “ ‘such as a practical business, profit, policy consideration’—is not, as far as the court is aware, found in any judicial decision.”  The court stated further:

The same is true as to other important provisions in the 2020 Rule, including the new “outcome prediction” defense, the requirement at the third step of the burden-shifting framework that the plaintiff prove “a less discriminatory practice exists that would serve the defendant’s identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant”; and the conflating of a plaintiff’s prima facie burden and pleading burden….These significant alternations, which run the risk of effectively neutering disparate impact liability under the Fair Housing Act, appear inadequately justified. (emphasis included).

In addition to citing the need to bring disparate impact standards into alignment with Inclusive Communities, HUD also indicated that the changes were needed to provide greater clarity to the public.  The court stated that HUD’s second explanation “appear[s] arbitrary and capricious” and agreed with the plaintiffs that “the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity.”

It is noteworthy, however, that although the court agreed that the plaintiffs had shown a substantial likelihood of success on the merits based on the provisions in the 2020 Rule referenced above, it rejected the plaintiffs’ argument that there was no judicial support for the 2020 Rule’s requirement that a plaintiff must plead facts showing “[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.”  The court observed that, as pointed out by HUD, the “arbitrary, artificial, and unnecessary” language comes directly from Inclusive Communities.

Finally, the court found that the plaintiffs had demonstrated a significant risk of irreparable harm if the injunction was not issued.  According to the court, “the 2020 Rule’s massive changes pose a real and substantial threat of imminent harm to [the plaintiffs’] mission by raising the burdens, costs, and effectiveness of disparate impact liability.  Moreover, because the APA does not provide for monetary damages, these harms are not recoverable if the 2020 Rule is allowed to go into effect but later vacated.”

The court also found that the balance of harms and public interest supported a preliminary injunction.  It stated that HUD had not “identified any particularized risks of harm the government or the public would face should an injunction issue, especially given the existence of the 2013 Rule, which has been and continues to be workable, for both sides, in the realm of disparate impact litigation.”  In addition, the court concluded that it was in the public interest “to require agencies to adequately justify significant changes to its regulations, particularly changes that weaken anti-discrimination provisions.”

The two other lawsuits challenging the 2020 Rule under the APA were filed on October 22 by housing groups in federal district courts in California and a Connecticut federal district court.  Like the Massachusetts lawsuit, these lawsuits call into question the premise that Inclusive Communities required the changes made by the 2020 Rule and allege that the 2020 Rule’s pleading and burden-shifting standard is arbitrary, capricious, and contrary to law.  Unlike the other complaints, the Connecticut complaint also alleges that the provision in the 2020 Rule that curtailed HUD’s discretion to seek monetary penalties is arbitrary, capricious, and contrary to law.

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.

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