On August 1, 2019, the US Department of Housing and Urban Development (HUD) issued a notice of proposed rulemaking (the “Proposed Rule”) seeking public comment on amendments to its “disparate impact” regulation under the Fair Housing Act (FHA). The Proposed Rule was published in the Federal Register on August 20, 2019, and comments are due by October 18, 2019.

The FHA prohibits discrimination in housing based on race, color, religion, sex, disability, familial status, or national origin. In 2013, HUD promulgated a rule setting forth the requirements for a disparate impact claim under the FHA (the “2013 Rule”). The 2013 Rule provided that liability may be established under the FHA when a challenged practice actually or predictably results in a disparate impact on a protected class of persons — even if the practice was not motivated by a discriminatory intent — and established a burden-shifting framework for determining when a housing policy or practice with a discriminatory effect violates the FHA. Under the 2013 Rule, the plaintiff has the initial burden of showing that a practice has a disparate effect on a protected class, and then the burden shifts to the defendant to prove that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests. Even if the defendant satisfies such burden of proof, the plaintiff may still prevail by proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

In 2015, the Supreme Court decided Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Inclusive Communities), which upheld the use of disparate impact analysis to establish liability under the FHA, without proof of intentional discrimination, if an identified business practice has a disproportionate effect on certain groups of individuals and the practice is not grounded in sound business considerations. The Court’s decision, however, held that a disparate impact claim cannot be sustained solely by evidence of a statistical disparity and imposed a number of safeguards designed “to protect potential defendants against abusive disparate-impact claims.” The majority opinion emphasized, in particular, the plaintiff’s burden to establish a “robust” causal connection between the challenged practice and the alleged disparate impact on a protected class.

HUD has now issued the Proposed Rule expressly to conform the 2013 Rule to the Inclusive Communities decision; as stated in the preamble, the proposed amendments are “intended to bring HUD’s disparate impact rule into closer alignment with the analysis and guidance provided in Inclusive Communities as understood by HUD.” The HUD press release accompanying the Proposed Rule adds: “The HUD proposed disparate impact rule provides a framework for establishing legal liability for facially neutral practices that have unintended discriminatory effects on classes of persons protected under the Fair Housing Act.”

To this end, HUD has proposed to replace the 2013 Rule’s disparate impact analytical structure with a revised burden-shifting framework under which a plaintiff raising a disparate impact claim would, initially, be required to plead that the policy or practice in question was “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.” In accordance with this standard, the Proposed Rule requires a plaintiff to show that a specific, identifiable policy or practice caused the discriminatory effect and to allege five elements set forth in the Proposed Rule with respect to the specific policy or practice. If the plaintiff makes this prima facie case, the burden shifts to the defendant to rebut the disparate impact claim. The Proposed Rule identifies a number of defenses that may be used by defendants and, in particular, provides three methods by which a defendant could defeat a claim based on its use of an algorithmic model. The Proposed Rule’s revised burden-shifting framework is highly complex, and it will undoubtedly undergo further refinement before issuance of the final regulation.

It is important to note, however, that the Proposed Rule would only apply to actions under the FHA and not to disparate impact claims under other fair lending laws, in particular under the Equal Credit Opportunity Act (ECOA). During the Obama administration, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice used disparate impact analysis in bringing or threatening numerous ECOA actions against lenders, based solely on statistical lending patterns and despite the absence of supporting language in the statute. In 2018, the CFPB indicated that it was reexamining its use of disparate impact theory under the ECOA “in light of Inclusive Communities and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.” While it remains unclear whether the CFPB will formally adopt a revised disparate impact policy under the ECOA, it is possible that the CFPB will choose to follow the approach taken by HUD in the Proposed Rule.