Alert February 19, 2013

HUD Adopts Disparate Impact Rule

HUD has issued its final rule implementing the disparate impact standard for liability under the Fair Housing Act. The disparate impact theory posits an alternative basis for liability under the FHA, distinct from disparate treatment, which requires proof of intent to discriminate. Under the disparate impact theory, a housing practice violates the FHA if it results in an unjustified, discriminatory effect, regardless of whether there was an intent to discriminate. HUD has long taken the position in administrative and judicial proceedings that the FHA contemplates liability based on a showing of disparate impact upon protected classes of persons, and every federal court to have considered the issue has ruled that liability under the FHA may be established through proof of discriminatory effect. A housing practice has a discriminatory effect if it "actually or predictably results in a disparate impact on a group of persons on the basis of race, color, religion, sex, handicap, familial status, or national origin or has the effect of creating, perpetuating or increasing segregated housing patterns on the basis of race, color, religion, sex, handicap, familial status or national origin." Whether or not a given practice has a "discriminatory effect" will always be a fact-specific inquiry.

The disparate impact theory of housing discrimination operates under a burden shifting framework. To establish a prima facie case of discriminatory effects liability under the rule, the plaintiff must establish that members of a protected class are disproportionately burdened by the challenged action, or that the practice has a segregative effect. If the plaintiff proves a prima facie case, the burden shifts to the defendant to prove that the challenged practice is necessary to achieve one or more of its "substantial, legitimate, nondiscriminatory interests." HUD explains that the "substantial, legitimate, nondiscriminatory interests" standard is equivalent to the "business necessity" standard previously required under HUD policy in evaluating disparate impact claims, but the more general "interests" standard was drafted to be broader and thereby encompass the full range of conduct subject to regulation under the FHA. If the defendant satisfies this burden, the plaintiff must prove that the "substantial, legitimate, nondiscriminatory interest" could be served by a practice that has a less discriminatory effect.

HUD emphasizes that its adoption of this rule does not create any new law, but instead merely clarifies the legal standards for application of the burden shifting analysis under the disparate impact theory of liability. However, the adoption of the final rule is nonetheless significant, as it elevates the disparate impact theory of FHA liability to official HUD policy. Unresolved, however, is the interrelationship between the threshold for "substantial, legitimate, nondiscriminatory interests" sufficient to rebut disparate impact liability under the FHA, and enhanced prudential standards for lending and underwriting practices mandated by other aspects of financial industry reform under the Dodd-Frank Act, which in some circumstances would mandate more stringent lending standards in markets presenting higher credit risk. Such questions will likely be resolved on a "facts and circumstances" basis as issues arise in future proceedings.