I. INTRODUCTION
The U.S. Department of Housing and Urban Development (HUD) has issued a final rule to formalize the national standards for determining whether a housing practice violates the Fair Housing Act as the result of discriminatory effect. The Act prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. Through the final 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. The final rule became effective on March 18, 2013.
II. BURDEN-SHIFTING TEST
The final rule formally establishes the three-part “burden shifting” test for determining when a practice with a discriminatory effect violates the Fair Housing Act. Under this 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, non-discriminatory interest could be served by the practice that has a less discriminatory effect.
III. IMPORTANT DEFINITIONS
A. Discriminatory Effect
A practice has a discriminatory effect where it actually or predictably results in a 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.
B. Legally Sufficient Justification
A legally sufficient justification exists where the challenged practice:
1. Is necessary to achieve one or more substantial, legitimate, non-discriminatory interests of the respondent or defendant; and 2. Those interests could not be served by another practice that has a less discriminatory effect.
A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.
IV. LIABILITY
Liability for a practice that has an unjustified discriminatory effect may attach to either public or private parties. The final rule applies to pending and future cases.
V. ILLUSTRATIONS
The final rule provides that “[t]he illustrations of unlawful housing discrimination may be established by a practice’s discriminatory effect, even if not motivated by discriminatory intent.” The final rule also provides new illustrations of specific practices with discriminatory effects, including:
The Department of Housing and Urban Development (HUD) has finalized its revised standard for bringing “disparate impact” claims under the Fair Housing Act (FHA). 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.
VII. Elements of a Disparate Impact Claim-Pleadings
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:
(1) The challenged policy is artificial, arbitrary, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law;
(2) There is a robust causal link between the challenged policy and a disparate impact on members of a protected class that shows the specific practice is the direct cause of the alleged discriminatory effect;
(3) The challenged policy has a disproportionately adverse effect on members of a protected class;
(4) The alleged disparity caused by the specific policy is significant; and
(5) There is a direct relation between the injury asserted and the injurious conduct alleged.
At the “pleading stage,” the plaintiff will be required to “sufficiently plead facts to support each of” the five elements.
VIII. BURDENS OF PROOF
The final rule sets out the burdens of proof as follows:
(1) The plaintiff must prove by a preponderance of the evidence each of the five elements listed above;
(2) The defendant may then rebut the first element (that the policy or practice is arbitrary, artificial and unnecessary) by producing evidence showing that the policy or practice "advances a valid interest (or interests) and is therefore not arbitrary, artificial and unnecessary.”
(3) If the defendant rebuts the plaintiff's assertion of a claim, either the plaintiff must prove by a preponderance of the evidence that the interest is not valid, or that a less discriminatory alternative exists that would serve the defendant's interest "in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant."
IX. DEFENSES
A. Pleading Stage
The defendant may establish that the plaintiff has failed to sufficiently plead facts to support an element of a prima facie case, including by showing that the defendant's policy or practice was reasonably necessary to comply with the third – party requirement, such as a:
1. Federal, state, or local law;
2. Binding or controlling court, arbitral, administrative order or opinion; or
3. Binding or controlling regulatory administrative or government guidance or requirement
B. Post–Pleadings Stage
The defendant may establish that the plaintiff has failed to meet the burden of proof to establish a discriminatory effects claim by demonstrating any of the following:
1. The policy or practice is intended to predict an occurrence of an outcome, the prediction represents a valid interest, and the outcome predicted by the policy or practice does not or would not have a disparate impact on protected classes compared to similarly situated individuals not part of the protected class. However, this defense is inadequate if the plaintiff shows that a less discriminatory alternative would result in the same outcome, without imposing materially greater costs on, or other material burdens on the defendant.
2. The plaintiff has failed to establish that a policy or practice has a discriminatory effect.
3. The defendant's policy or practice is reasonably necessary to comply with the third party requirement, such as a: (a) federal, state or local law (b) binding or controlling court, arbitral administrative order or opinion; or (c) binding or controlling regulatory, administrative, or government guidance or requirement.
X. Remedies – damages and penalties
In cases where liability is based solely on a discriminatory effect theory, remedies should be concentrated on eliminating or reforming the discriminatory practice so as to eliminate disparities between persons in a particular protected class and other persons. In administrative proceedings based solely on discriminatory effect theory, HUD will seek only equitable remedies, provided that where pecuniary damages are proved, HUD will seek compensatory damages or restitution and provided further that HUD may pursue civil money penalties in discriminatory effect cases only where the defendant has previously been adjudged, within the last five years, to have committed unlawful housing discrimination under the Fair Housing Act.