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Preliminary Analysis of HUD’s Final Disparate Impact Rule

As reported in Memo on September 8, an advance version of HUD’s final changes to the 2013 Disparate Impact Rule was obtained by a fair housing advocate late Friday, September 4. As of this issue of Memo, the final rule has not been informally announced by HUD or published in the Federal Register. The final rule is designed to make it virtually impossible for people experiencing various forms of discrimination to challenge the policies and practices of businesses, governments, and housing providers. HUD’s drastic changes to the 2013 rule discards the well-crafted and time-tested three-part burden shifting standard (see background section below), replacing it with a set of tests that place the burden on people in the Fair Housing Act’s protected classes who are experiencing housing discrimination. In addition to this Memo article, NLIHC has issued a more detailed analysis of the final Disparate Impact Rule.

Disparate impact allows people to show that a housing policy or program has a discriminatory impact on them because of their race, national origin, sex, disability, family status (have children), or religion—even if the policy or program appears on its face to apply to everyone equally. HUD’s final rule tips the scale in favor of businesses, governments, and housing providers accused of discrimination, shifting the burden of proof to victims of discrimination.

Specific Problems with the Final Rule

Omission of Perpetuation of Segregation Theory

The final rule removes a clause designed to address the core problem that the Fair Housing Act intended to eliminate: segregation. This action, along with HUD’s suspension of the Affirmatively Furthering Fair Housing rule and attempt to suspend the Small Area FMR Rule, marks an abdication of HUD’s responsibility to eradicate housing segregation—much of which is the result of federal policies from previous decades.

Virtually Insurmountable Barriers to Presenting a Disparate Impact Case

The first step in the 2013 rule’s three-step burden shifting standard called for the plaintiff (i.e., the party alleging disparate impact) to prove that a challenged practice caused or predictably will cause a discriminatory effect. This first step under the 2013 rule had already proven to be a formidable obstacle for many plaintiffs.

HUD’s new rule [at Section (b)] requires a plaintiff to allege disparate impact based on facts supporting five new required elements. This dramatically increases the standard needed to move the case along the legal process before the plaintiff has the benefit of obtaining from the defendant information needed to present a sufficiently robust challenge.

The first element requires people experiencing a discriminatory policy or practice to demonstrate that it “is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law” (emphasis added). By comparison, the 2013 rule placed the burden on the defendant. Note the use of the word “profit” without an adjective, implying that an unreasonable profit is valid. Excessive profit would trump consideration of a less discriminatory policy or practice that still resulted in reasonable profits.

The four other elements are:

  • The policy or practice has a disproportionately adverse effect on members of a protected class.
  • There is a robust causal link between the policy or practice and the adverse effect on members of a protected class, meaning the specific policy or practice is the direct cause of the discriminatory effect.
  • The disparity is significant.
  • There is a direct relation between the injury asserted and the injurious conduct alleged.

Overwhelming Burdens on Plaintiffs to Prove Discriminatory Effect

If a plaintiff overcomes the obstacles presented during the early stage above, the final rule at [at Section (c)] erects yet more obstacles.

The first paragraph requires a plaintiff to prove by the preponderance of the evidence, each of the four elements bulleted above—for which the plaintiff has already “sufficiently” provided facts at the previous stage. Notably, the word “preponderance” is only used for the plaintiff, further placing a thumb on the scale in favor of the defendant.

The second paragraph allows a defendant to rebut a plaintiff’s allegation that the policy or practice is “arbitrary, artificial, and unnecessary” by producing evidence showing that the policy or practice advances the defendant’s valid interest. Note again the defendant merely has to produce evidence (not a “preponderance” of evidence). The final rule places the burden on those experiencing the harmful impact of a defendant’s policy or practice.

The third paragraph erects yet another obstacle. If a defendant rebuts a plaintiff’s assertion that the plaintiff has proved the four elements bulleted above, the plaintiff must prove by the preponderance of the evidence either:

  • The interest advanced by the defendant is not valid, or
  • That a less discriminatory policy or practice exists that would serve the defendant’s interest in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.

The third step in the 2013 rule’s burden shifting standard called for the plaintiff to identify alternative policies or practices that the defendant could use that would still meet the defendant’s interests, but in a less discriminatory manner. In comparison, the final rule requires the plaintiff to prove “by the preponderance of evidence” either that the defendant’s discriminatory policy or practice is “valid” yet again, or that a less discriminatory policy or practice works just as well as the discriminatory practice and does not cost much or entail much effort on the part of the defendant. In other words, preventing or eliminating discrimination against people protected by the Fair Housing Act should be cost free. In addition, the heavy weight placed on the plaintiff by the final rule forces the plaintiff (not the defendant who has far more knowledge of their own operations and options available to it) to guess the justifications a defendant might pose and then refute them.

One of the listed defenses the proposed rule offered to defendants included models or algorithms that businesses use to implement policies and practices. The final rule does not mention models or algorithms. Instead it camouflages the same harmful policies and practices, allowing a defendant to rely on a policy or practice intended to predict the occurrence of an outcome.

Finally, the new rule provides the insurance industry major cover, stating at Section (e) that “Nothing in this section is intended to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.”

Background on Disparate Impact

For more than 45 years, HUD interpreted the Fair Housing Act to prohibit housing policies or practices that have a discriminatory effect, even if there was no apparent intent to discriminate. Of the 13 U.S. Courts of Appeals, 11 have had disparate impact cases before them, and all have upheld disparate impact and applied a “burden shifting standard.” Because there were minor variations in how the courts and HUD applied the concept of discriminatory effects over the years, HUD published a Disparate Impact Rule on February 15, 2013. That final regulation established uniform standards for determining when a housing policy or practice with a discriminatory effect violates the Fair Housing Act.

The three-step burden shifting standard in the current rule is simple:

  1. The plaintiff (the party alleging disparate impact) has the burden of proving that a policy or practice caused or predictably will cause a discriminatory effect.
  2. If the plaintiff satisfies that burden of proof, the burden shifts to the defendant (the business, government, or other entity) to prove that the challenged policy or practice is necessary to achieve one or more of the defendant’s substantial, legitimate, nondiscriminatory interests.
  3. If the defendant satisfies the above burden of proof, then the burden shifts again to the plaintiff to prove that the defendant’s substantial, legitimate, nondiscriminatory interests could be served by another policy or practice that has a less discriminatory effect.

The advance version of the final Disparate Impact Rule is at: https://bit.ly/354th5S

NLIHC’s more detailed analysis of the final Disparate Impact Rule is at: https://bit.ly/32eGmYu

NLIHC’s October 8, 2019 comment letter regarding the proposed Disparate Impact Rule is at: https://bit.ly/2p8Fof5

More about disparate impact is on page 7-8 of NLIHC’s 2020 Advocates’ Guide.