United States: HUD To Evaluate Disparate Impact Discrimination Standard

On May 10, 2018, the US Department of Housing and Urban Development (HUD) announced that it will seek public comment on its disparate impact regulation, which establishes liability under the Fair Housing Act (FHA) for a policy or practice that results in a discriminatory effect, even if the policy or practice was not motivated by a discriminatory intent.¹ Specifically, HUD stated that it will seek comment on whether the regulation is consistent with the US Supreme Court's decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. __, 2015 WL 2473449 (2015), in which the Court approved of the use of a disparate impact standard in FHA cases, but did not rely on or apply HUD's then-recently promulgated disparate impact regulation. Notably, HUD is in the process of defending a complaint—filed in the US District Court for the District of Columbia by two insurance industry trade associations—which claims that HUD's disparate impact regulation is unlawful as applied to insurers' underwriting and rating practices and inconsistent with the Court's decision in Inclusive Communities. In connection with the litigation, HUD has notified the court of its plans to solicit public comment and review the substance of its disparate impact regulation for consistency with the Inclusive Communities decision.

As discussed further below, HUD's disparate impact regulation was adopted, somewhat controversially, during the Obama Administration. It seems clear that HUD's announcement that it will seek comment on the regulation reflects the Trump Administration's dissatisfaction with the approach taken in the regulation. Indeed, the Treasury Department recommended in its October 2017 report published in response to President Trump's Executive Order on Core Principles for Regulating the US Financial System that HUD "reconsider" its use of the disparate impact standard—particularly as applied to insurers.²

The disparate impact standard has been used by HUD, as well as the federal banking agencies, the Consumer Financial Protection Bureau (CFPB) and the US Department of Justice (DOJ), to allege unfair lending practices by banks, nonbank mortgage and consumer lenders, indirect purchasers of loans, loan servicers, and insurers under both the FHA and the Equal Credit Opportunity Act (ECOA) (together with its implementing Regulation B) in connection with the agencies' review of lender underwriting practices and loan portfolios. Accordingly, changes to HUD's disparate impact regulation could have a significant effect on the potential fair lending liability of financial institutions.

HUD's Disparate Impact Regulation

HUD's disparate impact regulation was finalized in 2013, at which time the vast majority of federal courts of appeals had agreed that the FHA prohibits any practice that produces a discriminatory effect, regardless of discriminatory intent, but had taken various different approaches to determining liability under an "effects" standard. According to HUD, the disparate impact regulation was necessary to "formalize [HUD's] long-held recognition of discriminatory effects liability under the [FHA]" and to provide "consistency nationwide."³

HUD's current regulation establishes a burden-shifting framework for adjudicating disparate impact claims under the FHA, pursuant to which the charging federal agency or private plaintiff has the initial burden of demonstrating that a challenged practice caused, or predictably will cause, a discriminatory effect. A practice is deemed to have a discriminatory effect if 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.⁴ In many instances, the charging agency's or plaintiff's burden is satisfied upon a showing of evidence of statistical disparities that occur on a protected-class basis. Once this burden has been satisfied, the defendant must then prove that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant. If the defendant is successful, the charging agency or plaintiff may nonetheless prevail if it can demonstrate that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.⁵

Inclusive Communities

As we have previously reported, in Inclusive Communities, the Court affirmed a lower court ruling that disparate impact discrimination claims are cognizable under the FHA. At the same time, the Court opined that disparate impact liability is properly limited in certain cases, such as in instances where a disparate impact claim is based solely on a showing of a statistical disparity.⁶ The Court determined that plaintiffs seeking to establish a disparate impact theory of liability under a burden-shifting framework must be able to demonstrate a "robust causality" between a challenged practice and an alleged disparity, noting that "a disparate impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant's policy or policies causing that disparity."⁷

On remand, the US District Court for the Northern District of Texas dismissed the plaintiff's complaint, concluding that the plaintiff had failed to demonstrate a prima facie case of disparate impact.⁸ Referencing the Supreme Court's analysis, the court concluded that the plaintiff had "failed to point to a specific, facially neutral policy that purportedly caused a racially disparate impact" and could not establish a "robust" causal connection between the challenged practice (i.e., the discretionary allocation of low-income housing tax credits by the Texas Department of Housing and Community Affairs) and the alleged statistical disparity. The court noted that the plaintiff's evidence did not demonstrate that the defendant's exercise of discretion caused the disparity, in part because the evidence did not account for other potential causes of the disparity, such as the actions of Congress and state legislators, real estate developers and local community groups.

Conclusion

In connection with its recent announcement, HUD indicated that the agency remains committed to challenging any practice that discriminates against protected classes of individuals; however, HUD's pending review of its disparate impact regulation apparently reflects a shift in priorities to focus future enforcement efforts on practices that evidence intentional discrimination rather than those that produce a discriminatory effect.

Arnold & Porter will be closely monitoring the public comment process on behalf of our clients for further insights into HUD's pending review and future enforcement priorities. Arnold & Porter's Financial Services practice group has extensive experience in counseling bank and nonbank lenders on enforcement, supervision, litigation, governance and compliance issues relating to fair lending and routinely represents these clients before the federal banking agencies, HUD, the CFPB, and DOJ.

Footnotes

1. Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed. Reg. 11,460 (Feb. 15, 2013) (codified at 24 C.F.R. § 100.500).

2. US Department of the Treasury, A Financial System That Creates Economic Opportunities: Asset Management and Insurance at 110 (Oct. 2017).

3. 78 Fed. Reg. at 11,460.

4. 24 C.F.R. § 100.500(a).

5. Id. § 100.500(c).

6. Inclusive Communities, Slip Op. at 18 (internal citations omitted).

7. Id. at 19-20.

8. Inclusive Communities Project, Inc. v. Texas Dep't of Hous. & Cmty. Affairs, No. 3:08-CV-0546-D, 2016 WL 4494322, at *1 (N.D. Tex. Aug. 26, 2016).

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