American Bar Association Consumer Financial Services Committee Newsletter
May.14.2021
For over forty years, courts took the lead on interpreting the Fair Housing Act’s (“FHA’s”) prohibition on discriminatory housing practices, including home mortgage lending. While different administrations have varied as to whether the Supreme Court’s disparate impact theory from the Griggs v. Duke Power employment discrimination case should be used to establish discrimination under the FHA, courts generally were willing to extend disparate impact to housing as well. Over decades of real-world experience, federal courts created a burden-shifting test to determine whether a housing provider engaged in discrimination.
During the Obama administration, several FHA disparate impact cases began moving through federal appeals courts and toward the Supreme Court, threatening to give the Court the opportunity to narrow or eliminate the use of disparate impact under the FHA.[i] In response, the Obama administration’s Department of Housing and Urban Development (“HUD”) worked with the Department of Justice to promulgate HUD’s first disparate impact rule in 2013. During the next eight years, both presidential administrations and the Supreme Court have swung the pendulum of what disparate impact means back and forth several times. In a market where housing is built to last for decades and thirty years is a standard term for a home mortgage loan, these oscillating views of disparate impact have created challenges for consumers, housing advocates, mortgage lenders, home builders, and local governments establishing housing polices for American families.
The Obama administration’s 2013 HUD Rule did more than preserve decades of disparate impact precedent—it sought to make it significantly easier for plaintiffs to succeed in court. Under the 2013 HUD Rule, a plaintiff bringing a disparate impact claim must allege that a practice “actually or predictably results in a disparate impact . . . or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”[ii] Notably, the plaintiff need not allege the specific practice at issue. The defendant may rebut the disparate impact claim by establishing that the claimed practice is “necessary to achieve one or more substantial, legitimate, nondiscriminatory interests.”[iii] A plaintiff nevertheless can prevail on a disparate impact claim, however, by proving that there is a less discriminatory alternative that serves the defendant’s interests—critically, the less discriminatory alternative need not be as effective as the practice chosen by the defendant, nor must the defendant have been aware of the less discriminatory alternative in advance.[iv]
Two years later, the Supreme Court shifted the disparate impact pendulum away from plaintiffs and housing advocates in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Justice Kennedy’s opinion stated 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” and imposed a “robust causality requirement” to protect defendants “from being held liable for racial disparities they did not create.”[v] Recognizing that the housing market is complicated, Justice Kennedy endorsed the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.”[vi] Before rejecting a defendant’s business justification for a practice, a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.”[vii] While the Inclusive Communities opinion did not look to the 2013 HUD Rule for guidance in the ruling, the Court also did not specifically strike down the 2013 HUD Rule.
Criticism of the 2013 HUD Rule’s stark differences with the Inclusive Communities standards led HUD to revisit its disparate impact rule. Under the Trump Administration’s 2020 HUD Rule, the pendulum swung further towards defendants in FHA disparate impact litigation. Attempting to codify the Inclusive Communities standards, the 2020 HUD Rule requires a plaintiff to identify a “specific, identifiable policy or practice” that has a discriminatory effect—including that the policy or practice is “arbitrary, artificial, and unnecessary,” that there is a “robust causal link” between the policy and the alleged discriminatory effects, and that the disparity is “significant.”[viii] To rebut a plaintiff’s allegations, a defendant can demonstrate that its policy or practice “advances a valid [business] interest.”[ix] Following a rebuttal, a plaintiff must prove that “a less discriminatory policy or practice exists that would serve the defendant’s identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.”[x]
Potentially reversing these developments, however, a federal district court in Massachusetts stayed implementation of the 2020 HUD Rule nationwide late last year. The court held that the plaintiffs’ argument that the 2020 HUD Rule was arbitrary and capricious under the Administrative Procedure Act[xi] was “likely meritorious” and issued a nationwide preliminary injunction against the rule.[xii] As such, the 2013 HUD Rule—which was never explicitly rejected by Inclusive Communities, but almost certainly should be read in a modified manner as a result of Justice Kennedy’s opinion in that case—reverted to being the controlling disparate impact rule under the FHA.
Under the Biden Administration, we expect to see a further swing away from lenders and housing providers, and towards plaintiffs and housing advocates. During his first week in office, President Biden ordered Acting HUD Secretary Matt Ammon to “reexamine” the 2020 HUD Rule and consider the effect changing the 2013 HUD Rule “had on HUD’s statutory duty to ensure compliance with the Fair Housing Act.”[xiii] And a few weeks later, Ammon and the Department of Justice withdrew the appeal of the preliminary injunction in the Massachusetts litigation, thereby allowing the permanent injunction to stay in place.[xiv]
For forty years, courts have established the boundaries of disparate impact through litigation. While imperfect, the accumulation of precedents across a variety of judges, communities, and real-world scenarios generated a body of disparate impact law that offered a degree of reliability for communities, lenders, and consumers. There is no question that disparate impact law should prevent invidious, intentional discrimination hiding under the guise of neutral criteria, but the past decade’s shifts risk discouraging well-intentioned, facially neutral housing policies for fear that there could be a statistical correlation that a lender or housing provider cannot adequately rebut. Because a mortgage loan is not just a debt—it pays for a home and allows families to build intergenerational wealth—and community investment in housing can last for decades, a piecemeal approach to disparate impact that changes with each election cycle creates challenges for lenders in particular and the housing market more broadly.
[i] See, e.g., Adam Serwer, MSNBC, Mount Holly Settlement Spares Fair Housing Act—For Now (Nov. 13, 2013), https://www.msnbc.com/msnbc/mount-holly-settlement-spares-fair-housing-act-for-now-msna212256 (describing Department of Justice efforts to prevent Supreme Court review by arranging for settlements in FHA cases in St. Paul, M.N. and Mount Holly, N.J.).
[ii] Implementation of the Fair Housing Act’s Discriminatory Effects Standard, 78 Fed. Reg. 11460, 11482 (Feb. 15, 2013) (final rule).
[iii] Id.
[iv] Id.
[v] Texas Dep’t of Housing and Comty. Affairs v. Inclusive Cmtys. Project, Inc., 576 U.S. 519 (2015).
[vi] Id.
[vii] Id.
[viii] HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard, 85 Fed. Reg. 60288, 60332 (Sept. 24, 2020).
[ix] Id.
[x] Id. at 60333.
[xi] Pub. L. 79–404.
[xii] Massachusetts Fair Housing Ctr. v. U.S. Dep’t of Hous. and Urban Dev., CV 20-11765-MGM, 2020 WL 6390143 (D. Mass. Oct. 25, 2020).
[xiii] Memorandum from The White House Briefing Room to the Secretary of Housing and Urban Development (Jan. 26, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/26/memorandum-on-redressing-our-nations-and-the-federal-governments-history-of-discriminatory-housing-practices-and-policies/.
[xiv] Consent Mot. to Voluntarily Dismiss Appeal, Massachusetts Hous. Ctr., et al. v. U.S. Dep’t of Hous. and Urban Dev., et al., No. 21-1003 (Feb. 9, 2021), ECF No. 117702915.