Federal Regulatory Update

Federal Regulatory Update

The Department of Housing and Urban Development (“HUD”) has issued the Fair Housing Act’s Discriminatory Effect Standards Final Rule (the “Rule”), 78 Federal Register 11460, effective March 18, 2013.  Although HUD and the courts are in agreement that practices with discriminatory effects may violate the Fair Housing Act (the ”Act”), there has been some minor variation between the federal courts of appeal in the application of the discriminatory effect standards.  Through the Rule, HUD formalizes its long-held recognition of discriminatory effects liability under the Act and, for purposes of providing consistency nationwide, formalizes a burden-shifting test for determining whether a given practice has an unjustified discriminatory effect, leading to liability under the Act.

 

By formalizing a three-part burden-shifting test for proving liability under the Act, the rule provides for consistent and predictable application of the test on a national basis.

 

 

Under the test, the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic.  If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, non-discriminatory interests.  If the respondent or defendant satisfies this burden, then the charging party or plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.

 

The Rule includes an illustration of a prohibited practice:  “Enacting or implementing land-use rules, ordinances, policies or procedures that restrict or deny housing opportunities or otherwise make unavailable or deny dwellings to persons because of race, color, religion, sex, handicap, familial status, or national origin.”

 

The servicing of mortgage loans was not overlooked.  A new section reads “Servicing of loans or financial assistance with respect to dwellings in a manner that discriminates, or servicing of loans or other financial assistance which is secured by residential real estate in a manner that discriminates, or providing such loans or financial assistance with other terms or conditions that discriminate, because of race, color, religion, sex, handicap, familial status, or national origin” is unlawful conduct.

 

HUD does not believe that the Rule will have a chilling effect on lending in lower income communities or that it will encourage lawsuits challenging credit scores, other credit assessment standards or the requirements of the Dodd-Frank Act.  According to HUD, the Rule does not change the substantive law; eleven federal courts of appeals have recognized discriminatory effects liability under the Act and over the years courts have evaluated both meritorious and non-meritorious discriminatory effects claims challenging lending practices.  The rule formalizes a substantive legal standard that is well recognized by courts and participants in the lending industry for assessing claims of discriminatory effects.

 

The illustrations of unlawful housing discrimination may be established by a practice’s discriminatory effect, even if not motivated by discriminatory intent.  A facially neutral practice actually or predictably results in a discriminatory effect on a group of persons protected by the Act (that is, has a disparate impact), or on the community as a whole on the basis of a protected characteristic (perpetuation of segregation).  Any facially neutral action, for example, laws, rules, decisions, standards, policies, practices, or procedures, including those that allow for discretion or the use of subjective criteria, may result in a discriminatory effect actionable under the Act and the Rule.

 

Practices prohibited in connection with a residential real estate-related transaction include, but are not limited to:

·        Failing or refusing to provide to any person information regarding the availability of loans or other financial assistance, application requirements, procedures or standards for the review and approval of loans or financial assistance, or providing information which is inaccurate or different from that provided to others because of race, color, religion, sex, handicap, familial status, or national origin; 

·        Providing, failing to provide, or discouraging the receipt of loans or other financial assistance in a manner that discriminates in their denial rate or otherwise discriminates in their availability because of race, color, religion, sex, handicap, familial status, or national origin.

 

Unlawful conduct includes, but is not limited to:

·        Determining the type of loan or other financial assistance to be provided with respect to a dwelling, or fixing the amount, interest rate, cost, duration, or other terms or conditions for a loan or other financial assistance for a dwelling which is secured by residential real estate because of race, color, religion, sex, handicap, familial status, or national origin. 

·        Servicing of loans or other financial assistance with respect to dwellings in a manner that discriminates, or servicing of loans or other financial assistance which are secured by residential real estate in a manner that discriminates, or providing such loans or financial assistance with other terms or conditions that discriminate, because of race, color, religion, sex, handicap, familial status, or national origin.

 

Liability may be established under the Act based on a practice’s discriminatory effect, even if the practice was not motivated by discriminatory intent.  The practice may still be lawful if supported by legally sufficient justification.  A practice has a discriminatory effect where it actually or predictably results in the disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.

 

A legally sufficient justification exists where the challenged practice:

·        Is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondents; and

·        Those interests could not be served by a practice that has a less discriminatory effect.

 

A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.  The charging party or plaintiff with respect to a claim has the burden of proving that a challenged practice caused or predictably will cause a discriminatory effect.  Once the charging party or plaintiff satisfies the burden of proof, the respondent or defendant has the burden of proving that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent or defendant.  If the respondent or defendant satisfies this burden of proof, the charging party or plaintiff may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.