HUD’s proposal is the latest attempt by the Trump administration to roll back the Obama administration’s extensive use of the disparate impact theory in housing and financial services enforcement. Under this theory, a program can be found to be discriminatory if it has a disproportionate effect on a protected class, even if the defendant did not intend to discriminate.
The 1968 Fair Housing Act makes it unlawful to discriminate in the sale, rental, or financing of homes because of race, color, national origin, religion, sex, familial status, or disability. HUD has the authority to enforce the Act against lenders, housing developers, homeowner insurance companies, real estate professionals, and other participants in the home buying or renting process.
HUD’s current disparate impact regulation (adopted in 2013) formalized the Obama Administration’s policy that a disparate impact claim based on a statistical disparity is allowable under the Fair Housing Act. It established a three-part burden-shifting test for determining whether the program has an unjustified discriminatory effect:
After HUD issued its current disparate impact rule, the U.S. Supreme Court held by a 5-4 decision in Texas Department of Housing and Community Affairs vs. Inclusive Communities Project (2015) that disparate impact claims may be brought under the Fair Housing Act, but stated that a plaintiff must show that the defendant’s practice or policy actually caused a statistical disparity. Essentially, all lower courts have since taken this position. HUD states in its proposed rule that it is attempting to bring its regulation in alignment with this Supreme Court decision.
HUD’s proposed rule would replace the Obama administration’s three-step “burden-shifting” approach with a five-step threshold that plaintiffs must meet to prove unintentional discrimination. Plaintiffs would need to prove the following:
Defendants would only have the burden of proving that their programs are not discriminatory if plaintiffs could meet that five-part test.
HUD’s proposed rule also makes it more difficult for plaintiffs to advance disparate impact claims when a scoring model (risk assessment algorithm) is used.
When the defendant uses its scoring model, the rule allows a defendant to prevail if it can show that it (or a neutral third party) reviewed the material factors in the model; that the model was empirically derived; that none of the material factors is a “substitute” or “close proxy” for a protected characteristic; and that the model as a whole is predictive of credit risk or another valid objective.
When the defendant uses a scoring model of a third party that determines industry standards (such as the automated underwriting systems of Fannie Mae or Freddie Mac), the rule relieves the defendant from liability if it can show that it did not determine the inputs and methods within the model and that it is using the model as intended by the third party.
On a separate front, the Consumer Financial Protection Bureau (CFPB) is considering a regulation to revamp its approach towards disparate impact claims under the Equal Credit Opportunity Act (ECOA), which makes it unlawful for any creditor to discriminate against any credit applicant. The CFPB under former Director Richard Cordray often used the disparate impact theory when exercising its supervisory and enforcement authority under the ECOA.
But the CFPB’s Fall 2018 Rulemaking Agenda hinted at future ECOA rule-making activity “in light of recent
Supreme Court case law”—an apparent reference to Inclusive Communities.
Comments on HUD’s proposed disparate impact rule are due on October 18, 2019.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.
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