HUD's New Final Rule on Disparate Impact Provides Clarity and Greater Defenses for Housing Providers

The U.S. Department of Housing and Urban Development (HUD) recently released its final rule addressing the legal requirements for disparate impact cases brought under the Fair Housing Act (Final Rule). Although the Final Rule does not go as far as HUD's proposed rule (issued in August 2019), it includes changes to the disparate impact framework for which multifamily owners and managers had been advocating following the U.S. Supreme Court's 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc. (Inclusive Communities).

In Inclusive Communities, the Supreme Court held that disparate impact claims – claims that a policy or practice has a discriminatory effect – were viable under the Fair Housing Act. However, in doing so, the Supreme Court did not apply the HUD regulation addressing disparate impact claims. Instead, it undertook its own analysis. As a result, there was confusion and uncertainty about the governing legal standard.

The Final Rule modifies the existing 2013 HUD regulation addressing disparate impact claims. HUD's commentary on the Final Rule states that the changes were made to align the regulation with the disparate impact analysis applied in Inclusive Communities.

Specifically, the Final Rule:

• Modifies the burden-shifting framework and requires a plaintiff to make an initial showing in its complaint that a specific identifiable policy or practice has a discriminatory effect, and that the challenged policy or practice was "arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective"
• Requires that a plaintiff show that 1) a challenged policy or practice has a disproportionately adverse effect on members of a protected class, 2) the challenged policy or practice is the direct cause of the discriminatory effect, 3) the alleged disparity is significant and 4) there is a direct relation between the injury asserted and the injurious conduct alleged
• Allows a defendant to rebut allegations that the challenged policy or practice is arbitrary, artificial, and unnecessary by producing evidence showing that the challenged policy or practice advances a valid interest and is therefore not arbitrary, artificial, and unnecessary; if a defendant rebuts a plaintiff's assertion, the plaintiff must prove by a preponderance of the evidence either that the interest(s) advanced by the defendant is not valid or that a less discriminatory policy or practice exists that would serve the defendant's identified interest(s) in an equally effective manner without imposing materially greater costs or burdens on the defendant
• Establishes additional affirmative defenses to a disparate impact claim, including defenses that a policy or practice is reasonably necessary to comply with a third-party requirement or that a policy that predicts outcomes accurately assesses risk and is not overly restrictive on members of the protected class

The substantive impact of this Final Rule could be to allow operators greater flexibility in crafting their credit and criminal background screening policies and practices.

However, the procedural benefits are less clear. The new burden-shifting framework will need to be tested in litigation and is more favorable to defendants than the framework established by the 2013 HUD regulations. In particular, multifamily owners and managers may be more successful in moving to dismiss litigation challenging their policies or practices by citing this Final Rule if the allegations fail to assert that the challenged policies or practices do not advance valid business interests. As a practical matter, a resolution may still require a summary judgment filing or trial.

The rule goes into effect on Oct. 24, 2020.