by Lotstein Legal (www.lotsteinlegal.com)
On November 16, HUD published a proposed rule in the Federal Register (page 70921) to implement the Fair Housing Act’s discriminatory effects standards. The summary states that “HUD… has long interpreted the Act to prohibit housing practices with a discriminatory effect, even where there has been no intent to discriminate.” In a nutshell, disparate impact is the finding of statistical variations amongst protected classes (discriminatory effects) that are allegedly the result of the application of a policy where all parties were admittedly treated the same.
Until recently, disparate treatment had been the dominant grounds for enforcement under fair lending. Disparate treatment examines the actual acts of lenders identifying rules, guidelines or behaviors that outwardly and intentionally treat one group of people differently from others. The emphasis on disparate impact is a shift to the measure of the effects of outwardly neutral policies, and will likely have significant ramifications on the industry in terms of self assessment practices alone, if not in terms of remedies and penalties.
To add to the debate on the regulation, on November 7, the U.S. Supreme Court granted cert. to Magner v. Gallagher which arose from an Eighth Circuit decision regarding disparate impact of city housing code enforcement. The case seeks clarification as to whether disparate impact is given standing under the Fair Housing Act. HUD’s proposed rule is uniquely timed, proposing to establish the discriminatory effect standard by regulation while the Supreme Court is simultaneously considering whether such doctrine is in fact contemplated by the statute.
The proposed regulation outlines the shift in the burden of proof that occurs under the application of disparate impact theory in a three step process.
| Burden of Proof | Proof to be Established |
|---|---|
| Complainant | Discriminatory effect exists. |
| Defendant | Challenged practice has “legally sufficient justification” meaning that it is necessary to a legitimate nondiscriminatory interest of the Defendant. |
| Complainant | An alternative practice is less discriminatory. |
In most cases, the initial discriminatory effect will be established through HMDA reporting data, although a particular practice must also be correlated to that effect. The greatest risk to the industry lies in the establishment of precedent that will sweep the entire industry with liability.
The proposed rule defines a legally sufficient justification as a housing practice that serves a legitimate, nondiscriminatory interest of the party, where such interests cannot be served by alternative practices which result in less discriminatory effects. With one final twist, the proposed rule precludes the reliance upon legally sufficient justification in the defense of cases which claim intentional acts of discrimination. Eliminating a course of defense is no small matter. HUD would no doubt argue that they have no unjust intentions by doing so, as they are legitimately creating the definition for use in discriminatory effects cases and not for use in discriminatory treatment cases. But, one is left begging the question, does HUD really understand all of the unintentional effects of denying this defense?