According to an early release by national media outlets, the Department of Housing and Urban Development (“HUD”) has proposed an update to its “disparate impact" rule which would set a new standard for bringing disparate impact claims under the Fair Housing Act (“FHA”). The HUD disparate impact rule update would require plaintiffs to meet a five-step threshold to prove unintentional discrimination, bringing the claims process more in line with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, 576 U.S. ___ (2015) (“Inclusive Communities”) and codifying HUD’s position that its rule does not impede on the states’ regulation of insurance. Although the Court held that plaintiffs were only required to show that a policy had a discriminatory effect on a protected class, and not that the discrimination was intentional, it also required, among other things, that a plaintiff show through statistical evidence a “robust causal” connection between a discriminatory effect and the alleged facially neutral policy or practice.
The proposed new burden-shifting framework outlined in Section 100.500 of HUD’s proposal includes five distinct elements:
In drafting the proposed rule, HUD also acknowledged the growing use of algorithmic models to assess a consumer’s creditworthiness, and provided defenses to allegations of disparate impact claims for the financial services institutions that employ these technologies:
HUD intends to solicit further comments and collect more industry expertise related to the nature and use of algorithmic models so as to adapt to the evolution of technology in financial services applications.
Financial services providers should closely monitor this proposed rule as well as other proposed rulemaking agendas by HUD and other agencies, including the Consumer Financial Protection Bureau (“CFPB”). Since October 2017, the CFPB has hinted at future rulemaking activity with regard to the Equal Credit Opportunity Act (“ECOA”) concerning the disparate impact doctrine in light of Inclusive Communities. While the CFPB has yet to put forth a revised rule or informal guidance, financial services providers and regulators are interested to see whether the CFPB reexamines disparate impact theory through informal guidance or through proposed rulemaking. If the CFPB pursues the latter route, a finalized rule might be binding on other federal agencies as the authoritative interpretation of ECOA – and potentially outlast any changes in leadership at the agency. If the CFPB proceeds with its proposed rulemaking with regard to ECOA, it is likely to follow HUD’s lead and carefully define and limit the elements of disparate impact claim.
Once HUD officially publishes this proposed rule in the Federal Register, a comment period of 60 days will commence. Please let us here at BCLP know if you would like guidance in submitting a comment or on potential implications of the proposed rule.