United States

All we want for the holidays…is clarity on disparate impact claims


Will there be a proposal revising the rule in December?

In June 2018, the Department of Housing and Urban Development (HUD) issued an advance notice of proposed rulemaking (ANPR) requesting comments on whether they should revise the 2013 Fair Housing Act Disparate Impact Rule as a result of the Supreme Court’s 2015 Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (Inclusive Communities) decision.

Summary of the Disparate Impact Rule

The 2013 Disparate Impact Rule from HUD formalized its long-held interpretation that liability under the Fair Housing Act may arise when a practice has a discriminatory effect even if the practice is not, in and of itself, discriminatory. The rule formally creates a three-prong test for establishing liability that provides greater consistency in applying the discriminatory effects standard.

Disparate impact claims arise when a policy or practice has a disproportionately adverse effect on a prohibited basis. Under the Fair Housing Act, prohibited basis includes race, color, religion, national origin, sex, handicap or familial status.

Disparate impact claims focus on the consequences of a policy or practice rather than the intent of the policy or practice. The three-part test for supporting a disparate impact claim includes the following:

  1. Establishing whether a policy or practice creates an adverse effect that disproportionately affects members of a protected class
  2. Evaluating whether there is a substantial legitimate justification for the policy or practice
  3. Demonstrating whether there is an alternative approach that would achieve the same legitimate objective in a less discriminatory manner

Summary of the Inclusive Communities decision

In 2015, the Supreme Court heard a case (Inclusive Communities) alleging disparate impact claims. The Court held that disparate impact claims can be found under the Fair Housing Act. However, such claims cannot be based solely on statistical evidence of disparity without an analysis of causality and consideration of the valid interest served by the practice in question.

What is the next step?

The 2013 rule is the subject of a lawsuit originally filed in June 2013 by the American Insurance Association and National Association of Mutual Insurance Companies in the District of Columbia federal district court. In February 2017, the court granted, in part, a motion filed by HUD seeking a continuance of the oral argument to allow the Trump administration to install new HUD and Department of Justice officials and stayed the case pending further discussions between the parties. In October, the court entered a minute order continuing the stay until Dec. 18, 2018, to allow HUD to issue a Notice of Proposed Rulemaking in response to public comments received in connection with the ANPR.

The expectation is that HUD will issue a proposed revision to the Disparate Impact Rule prior to Dec. 18, 2018. The June 2018 ANPR specifically requested comments on the following:

  1. Whether the Disparate Impact Rule’s burden of proof standard for each of the three steps of its burden-shifting framework clearly assigns burdens of production and burdens of persuasion, and are such burdens appropriately assigned  
  2. Whether the second and third steps of the Disparate Impact Rule’s burden shifting framework are sufficient to ensure that only challenged practices that are artificial, arbitrary and unnecessary barriers result in disparate impact liability
  3. Whether the Disparate Impact Rule’s definition of ‘‘discriminatory effect’’ in conjunction with the burden of proof for stating a prima facie case strikes the proper balance in encouraging legal action for legitimate disparate impact cases while avoiding unmeritorious claims
  4. Whether to amend the Disparate Impact Rule to clarify the causality standard for stating a prima facie case under Inclusive Communities and other Supreme Court rulings.
  5. Whether the Disparate Impact Rule should provide defenses or safe harbors to claims of disparate impact liability
  6. Whether there are other revisions to the Disparate Impact Rule that could add to the clarity, reduce uncertainty, decrease regulatory burden, or otherwise assist the regulated entities and other members of the public in determining what is lawful

HUD is not the only agency considering rules clarifying disparate impact based on the Supreme Court ruling. In the preamble to the October semi-annual regulatory agenda, the Bureau of Consumer Financial Protection mentioned plans to reexamine the Equal Credit Opportunity Act (ECOA) requirements in light of the recent Supreme Court case. HUD’s rule focuses on requirements of the Fair Housing Act, which affects creditors who provide housing loans. A CFPB rulemaking on a disparate impact under the ECOA could have a significant impact on all creditors.