Today, the U.S. Department of Housing and Urban Development (HUD) issued a final rule authorizing so-called "disparate impact" or "effects test" claims under the Fair Housing Act. The rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a "disparate impact" on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.
In its final rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the final rule states that the defendant would have the burden of showing that the challenged practice "is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative." As proposed, the defendant would have had the burden of proving that the challenged practice "has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests."
HUD explained in the rule's preamble that, although it declined to use the term "business necessity" in the second prong of the disparate impact analysis, the phrase "substantial, legitimate, nondiscriminatory interest" is "equivalent to the 'business necessity' standard found in the Joint Policy Statement. The standard set forth in this rule is not to be interpreted as a more lenient standard than 'business necessity.'" HUD also highlighted the removal of the word "manifest," which was replaced by the language "a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative." HUD noted that the revised language is "intended to convey that defendants and respondents . . . must be able to prove with evidence the substantial, legitimate, nondiscriminatory interest supporting the challenged practice and the necessity of the challenged practice to achieve that interest."
With respect to the less discriminatory alternative prong, HUD clarified in the preamble that the alternative must also serve the specified interest supporting the challenge. However, HUD declined to specify in the rule that the less discriminatory alternative must be "equally effective" as the challenged policy - which would have made the rule consistent with the legal standard set forth in the Supreme Court case Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989).
Other noteworthy aspects of the final rule include:
Notwithstanding HUD's view that the final rule merely clarifies the existing interpretation of the Fair Housing Act, we expect that this rule will pose substantial compliance challenges for financial institutions.