HUD Finalizes Rule to Align ‘Disparate Impact’ Rule with Court Ruling

The Department of Housing and Urban Development today finalized its revised standard for bringing “disparate impact” claims under the Fair Housing Act. Proposed last summer, the final rule conforms HUD’s 2013 disparate impact rule with the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, which recognized disparate impact analysis to demonstrate discrimination claims under the FHA but added key limitations to ensure the burden of proof in disparate impact cases is with the plaintiffs.

To do this, the final rule adds five elements that must be included in disparate impact claims under the FHA. Specifically, plaintiffs will be required to plead that: a challenged practice is arbitrary, artificial and unnecessary to achieve a valid or legitimate objective; a “robust causal link” between the challenged policy or practice and the disparate impact; the challenged policy or practice has a harmful effect on a protected class; the disparity is significant; and finally, there is a direct relation between the injury and the challenged policy or practice.

The final rule also provides methods for defendants to rebut disparate impact claims. For example, at the pleading stage of a claim, defendants may argue that the plaintiffs have failed to plead one of the elements above or show that a challenged policy or practice is required to comply with a binding third-party requirement such as law (also available at the merits stage). At the merits stage of a claim, a defendant may defeat a claim by demonstrating that the practice or policy is intended to predict an outcome, that the prediction represents a valid interest, and that the outcome predicted does not or would not have a disparate impact on a protected class.

However, the final rule provides that this defense is not adequate if the plaintiff demonstrates that an alternative, less discriminatory policy or practice would result in the same outcome as the challenged policy or practice, without imposing materially greater costs or burdens on the defendant. This defense is provided as an alternative to the proposed defense relying on a sound algorithmic model, which was removed from the final rule for being “unnecessarily broad” and because HUD anticipates that there will be “further development in the law in the emerging technology area of algorithms, artificial intelligence, machine learning and similar concepts,” and thus it would be “premature at this time to directly address algorithms.”

In cases where fair housing liability is based solely on disparate impact, the final rule states that “remedies should be concentrated on eliminating or reforming the discriminatory practice.” HUD said it will only pursue civil money penalties in disparate impact cases where the defendant has been determined in the previous five years to have violated the FHA. Last fall, ABA and other trade groups—which said the proposal had struck “the appropriate balance” envisioned by Inclusive Communities—urged HUD to clarify that punitive damages and civil penalties are not proper remedies in disparate impact cases.