The U.S. Department of Housing and Urban Development (HUD) is seeking feedback on a proposed rule to amend the HUD interpretation of the Fair Housing Act’s disparate impact standard.
The proposed rule as amended (and submitted to the federal register today) would provide more appropriate guidance on what constitutes unlawful disparate impact to better reflect the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project.
Essentially, the new rule would shift the burden of proof in Fair Housing cases from the defendant, who currently must show that there was no other way to avoid disparate impact on protected classes, to the plaintiff by way of a new, five-step “burden-shifting framework.
“The proposed new burden-shifting framework provides … that a plaintiff’s allegations that a specific, identifiable, policy or practice has a discriminatory effect must plead facts supporting five elements,” HUD says in its proposal.
“It is insufficient to identify a program as a whole without explaining how the program itself causes the disparate impact as opposed to a particular element of the program,” the agency states. “Plaintiffs must identify the particular policy or practice that causes the disparate impact. Plaintiffs will likely not meet the standard, and HUD will not bring a disparate impact claim, alleging that a single event – such as a local government’s zoning decision or a developer’s decision to construct a new building in one location instead of another – is the cause of a disparate impact, unless the plaintiff can show that the single decision is the equivalent of a policy or practice.
“In unusual cases, a plaintiff may still be able to succeed at identifying a one-time decision, if the plaintiff can establish that the one-time decision is in fact a policy or practice,” the proposal states.
The proposed new framework would include the following five elements:
The first proposed element would require a plaintiff to plead that the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.
The second proposed element would require a plaintiff to allege a robust causal link between the challenged policy or practice and a disparate impact on members of a protected class.
The third proposed element would require a plaintiff to allege that the challenged policy or practice has an adverse effect on members of a protected class.
The fourth proposed element would require a plaintiff to allege that the disparity caused by the policy or practice is significant.
The fifth proposed element would require a plaintiff to allege that the complaining party’s alleged injury is directly caused by the challenge policy or practice. another – is the cause of a disparate impact, unless the plaintiff can show that the single decision is the equivalent of a policy or practice.
“There is a lack of affordable housing in America today,” says HUD Secretary Ben Carson, in a statement. “This proposed rule is intended to increase legal clarity and promote the production and availability of housing in all areas while making sure every person is treated fairly under the law.
“As we have shown time and again, we will challenge any practice that discriminates against people that the law protects,” Carson adds. “At the end of the day, this rule not only increases Americans’ access to fair and affordable housing, but also permits businesses and local governments to make valid policy choices.”
Interestingly, the proposed rule could potentially shift some of the liability in cases where discrimination is determined to have occurred to the software vendors which provide automated loan origination and underwriting systems.
The rule provides that, “where a plaintiff identifies an offending policy or practice that relies on an algorithmic model, a defending party may defeat the claim by: (i) identifying the inputs used in the model and showing that these inputs are not substitutes for a protected characteristic and that the model is predictive of risk or other valid objective: (ii) showing that a recognized third party, not the defendant, is responsible for creating or maintaining the model; or (iii) showing that a neutral third party has analyzed the model in question and determined it was empirically derived, its inputs are not substitutes for a protected characteristic, the model is predictive of risk or other valid objective, and is a demonstrably and statistically sound algorithm.”
HUD further proposes the establishment of a three-step framework by which software vendors can defend themselves by proving that their models achieve “legitimate objectives.”
HUD says the amended rule has no impact on determinations of intentional discrimination.
In its 2015 decision, the Supreme Court upheld the use of a “disparate impact” theory to establish liability under the Fair Housing Act for business policies and local ordinances even if the policy or ordinance is neutral – in intent and application – if it disproportionately affects a protected class without a legally sufficient justification.
At the time it was implemented, some housing experts said that the passage of the rule was actually a win for lenders, in that it provided greater clarity with regard to the circumstances under which borrowers might bring class-action lawsuits.
The proposed changes to the rule – particularly the shift of burden from the defendant to the plaintiff – has enraged some housing groups, including the National Community Reinvestment Coalition (NCRC).
“HUD’s proposal makes it far more difficult for those injured by stealth discriminatory policies to prove discrimination,” says Jesse Van Tol, CEO of the NCRC, in a statement. “The bar was already set high and HUD‘s proposal would put it in the stratosphere – it really strains credulity.
“More housing and credit decisions are also moving into black boxes and outside of any real oversight or the ability of consumers to effectively challenge the underlying information,” Van Tol says. “Proprietary algorithms are proliferating, in loan underwriting for example, and HUD’s proposal will make it even harder to challenge outcomes from those systems even when the impact on consumers and borrowers is clearly discriminatory.
“In addition, HUD’s proposal is irresponsible,” he adds. “It is inconsistent with HUD’s legal obligation to affirmatively further fair housing, by creating an overly broad exemption to discriminatory practices that affect liability for the home insurance market.”