HUD’s Proposed Rule Is a Direct Assault on the Supreme Court’s Decision in Inclusive Communities

By: Morgan Williams, General Counsel, National Fair Housing Alliance

The Trump administration is trying to achieve with its proposed Disparate Impact Rule what conservatives were not able to achieve in the Inclusive Communities Supreme Court decision – upend the disparate impact doctrine. The U.S. Department of Housing and Urban Development’s (HUD) proposal is a brazen attempt to gut a 45-year-old protection against housing discrimination.  Under the proposal, victims of discrimination will face a drastically higher burden to prove a disparate impact claim under the Fair Housing Act, making it virtually impossible to succeed, while big banks and insurance companies will be afforded new defenses that shield their profits at the expense of everyday Americans.

HUD’s Purpose for Amending the Disparate Impact Rule are Spurious and Cut Against the Supreme Court’s Inclusive Communities Decision

HUD Secretary Dr. Ben Carson asserts that these proposed changes are needed to comport with the 2015 Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, upholding disparate impact.  But in truth the changes unravel the Court’s holding.  In fact, the rule runs counter to four decades of federal court decisions on the issue, Congress’ intent in passing the Fair Housing Act, and the federal regulatory agencies’ longstanding guidance on standards for fair lending practices.

HUD also suggests that the proposed changes are needed to reduce claimed economic burden to private citizens, local governments, banks, lenders, insurance companies, and others in the housing industry.  It points to hollow assertions that disparate impact liability creates added costs that are ultimately borne by renters and insurance consumers and may result in less availability of insurance products and access to credit.

There is no truth to these assertions.  The Inclusive Communities decision stands for the fundamental proposition that disparate impact liability under the Fair Housing Act serves a critical “continuing role in moving the Nation toward a more integrated society.”  Furthermore, the Court stated that The Fair Housing Act “must play an important part in avoiding the Kerner Commission’s grim prophecy that ‘[o]ur Nation is moving toward two societies, one black, one white—separate and un-equal.’”  The Supreme Court recognized the stubborn and persistent need for civil rights protections to counteract today’s segregated and unequal neighborhoods—unfortunately, the current administration does not.

HUD’s proposed rule radically departs from the Supreme Court’s decision in Inclusive Communities, and several elements of HUD’s proposed five-part pleading standard merit special attention.

The proposed rule says that a victim of discrimination must plead that a challenged practice is “arbitrary, artificial, and unnecessary” to achieve a valid interest or legitimate objective.  The disparate impact standard already affords housing providers and servicers accused of discrimination the opportunity to defend their practices by identifying a valid business justification or public policy purpose. HUD’s proposed changes turn this reasonable defense on its head: instead, the victims of discrimination themselves will face the burden to show that a big bank or insurance company’s policy does not advance any valid interest.  Plaintiffs will have to support this allegation even before the defendant is required to explain its policy. This is a nearly impossible standard to meet, as nearly all policies have some plausible justification–sometimes however, those justifications, once tested through the discovery process, turn out to be unsupported. HUD’s proposed rule would cut off those inquiries cold.

The proposed rule says that there must be a “robust causal link” between the challenged practice and the discriminatory effect on members of a protected class.  Again, the existing standard already requires victims to prove that a challenged practice caused or predictably will cause a discriminatory effect.  Further, the proposed rule indicates that the identified discriminatory disparity must not only be significant, but “material,” a term unsupported by and untethered to existing caselaw.  These terms are undefined in the proposed rule, but HUD threatens to fundamentally redefine the disparate impact standard—inconsistent with longstanding caselaw and the three-part burden shifting framework outlined in Inclusive Communities—to ultimately shield housing industry actors and their policies from civil rights liability associated with the unjustified impacts of those policies on communities of color, women, people with disabilities, and other protected communities.

There is no basis for these new standards in the Inclusive Communities decision.  The Supreme Court in Inclusive Communities acknowledged that the vestiges of de jure residential segregation remain today, deriving from policies such as racially restrictive covenants, steering by real-estate agents that directs potential buyers toward homes in racially homogeneous areas, and discriminatory lending practices, often referred to as redlining, that preclude African Americans families from purchasing homes in affluent areas.  Because these practices remain intertwined with the country’s economic and social life, the Court found that the Fair Housing Act was enacted to eradicate discrimination from a sector of our Nation’s economy.  HUD’s proposed rule thwarts this purpose.

Secretary Carson himself asserted in 2017 that the existing disparate impact standards are wholly consistent with the Inclusive Communities decision when HUD filed a brief defending against an insurance trade group lawsuit alleging disparate impact liability should not apply to the insurance industry.  Then, HUD asserted that the Supreme Court’s enumerated limitations on the application of disparate impact liability have long been part of the standard and “do not give rise to new causes of action, nor do they conflict with the [existing] Rule.  Indeed, nothing in Inclusive Communities casts any doubt on the validity of the [existing] Rule.” The complete reversal of position that Dr. Carson has now taken with his proposed rule, driven by spurious arguments of certain lending and insurance industry representatives, has no legitimate basis in the court’s decision.  In contrast, HUD’s proposed rule is fundamentally at odds with Inclusive Communities.

 HUD’s Proposal Will Eliminate the Ability to Bring Heartland and Other Important Disparate Impact Cases Approved By the Supreme Court

The Supreme Court made clear that disparate impact is a critical tool under the Fair Housing Act and that the right to bring disparate-impact claims is “consistent with the central purpose of the [Fair Housing Act].”   Justice Kennedy, in the Court’s majority decision, highlighted the importance of the disparate impact standard by noting how essential it was in what the Court regarded as “heartland” cases of discrimination.  The Court pointed to unlawful practices including exclusionary zoning laws and other housing restrictions that function unfairly to bar people of color from certain neighborhoods and that deny property owners their rights to construct certain types of housing.  The Trump administration’s proposal would make it impossible to bring these prototypical cases, sanctioned by the Court.

The Court identified three “heartland” cases in particular: United States v. City of Black Jack, Missouri, 508 F.2d 1179 (8th Cir. 1974); Town of Huntington, N.Y. v. Huntington Branch, NAACP, 488 U.S. 15, 18, (1988); and Greater New Orleans Fair Housing Action Center v. St. Bernard Parish, 641 F. Supp. 2d 563, 569, 577–578 (ED La. 2009).  Though these types of cases have expanded equal housing opportunities for millions of people, HUD’s proposed rule aims to eliminate the ability to challenge the discriminatory practices these cases struck down.

In Black Jack, the United States Department of Justice sued the City of Black Jack, Missouri, a newly incorporated town outside of St. Louis, alleging that the City had violated the Fair Housing Act by adopting a zoning ordinance that prohibited the construction of a townhouse development for low-income residents.  After the Department of Justice filed its lawsuit, the City of Black Jack asserted rationales for its policies claiming the ban was justified by concerns over traffic control, school overcrowding, and devaluation of adjacent single-family homes.  On a robust record, the appellate court determined that there was no factual basis for the asserted justifications and found in favor of the plaintiffs.  The Eighth Circuit noted that “[t]o establish a prima facie case of racial discrimination, the plaintiff need prove no more than that the conduct of the defendant actually or predictably results in racial discrimination; in other words that it has a discriminatory effect.”

The proposed rule threatens to reverse this procedural posture and thus make a claim such as the one brought by the plaintiffs in Black Jack effectively impossible.  The evidence the proposed rule requires at the outset to plead a case would most likely be obtainable only after discovery and impossible to meet in the pleading stage.   For example, stating facts that allege that the policy is “arbitrary, artificial, and unnecessary” as the proposed rule requires would be difficult or impossible for the plaintiff at the outset.  Virtually all policies, on their face, have some plausible justification that cannot credibly be disputed without a record.  The extensive factual record in Black Jack, including testimony and cross-examination, bears this out.  Under the proposed rule, the effort of the United States in Black Jack to prevent discriminatory exclusionary zoning would have been stymied by the requirements that plaintiffs plead with supporting facts, at the outset, that a policy is arbitrary, artificial, and unnecessary.

In Huntington, a local branch of the NAACP and two black residents challenged an ordinance in the town of Huntington, New York that restricted the development of multifamily housing projects to the town’s designated “urban renewal area” where a large portion of the residents were people of color compared with the rest of the town.  The Town of Huntington initially gave seven reasons for refusing to permit multi-family zoning, including divergent program goals, zoning classification issues, traffic concerns, parking limitations, inadequate recreation areas, and unit layout issues. The Second Circuit considered, but rejected, an approach where the plaintiff would have to challenge the Town’s purported justifications in order to make a prima facie case of discrimination. The Second Circuit noted that “Congress intended … broad application of the anti-discrimination provisions” in the Fair Housing Act, and thus the “legislative history of the Fair Housing Act, although sparse, argues persuasively against so daunting a prima facie standard.”  With the burden of providing and supporting justifications on the town, the Second Circuit concluded that all of Huntington’s purported justifications were inadequate.

The court was able to conclude disparate impact liability existed despite the town’s pretextual justifications only after a full bench trial revealed the town’s justifications were unsupported.  Under HUD’s new rule, however, claims such as those in Huntington would be dismissed out of hand.  In cases challenging discriminatory zoning ordinances—the very cases that Justice Kennedy says are at the “heartland” of the Federal Fair Housing Act—plaintiffs would be required to both identify the myriad justifications that a town can use to defend discriminatory zoning decisions, and then marshal enough facts to plausibly show that each justification was false, even when the town would be unable to support those reasons if pressed.

Nothing in the Inclusive Communities decision—in its holding or dicta—necessitates any reconsideration of the current Disparate Impact Rule.  But more, the standards detailed in HUD’s proposed rule are antithetical to the bedrock “heartland” cases acknowledged by the court.

HUD’s Proposal Will Undermine the Business Interests it is Proffered to Help

HUD’s proposal to change the current three-prong burden-shifting framework—established by decades of judicial precedent and reflected in the existing Disparate Impact Rule—to a five-tiered threshold that is impossible to meet would annihilate the right to bring disparate impact claims.

HUD’s new rule proposes a radical reimagining of the burden shifting framework, one that is at odds with Inclusive Communities and the broader line of disparate-impact cases from which it springs. Under the proposed rule, a plaintiff must not only allege facts plausibly connecting a policy or practice to a discriminatory effect, the plaintiff must also show that the practice is not necessary to “achieve a valid interest or legitimate objective.”  This process is not only illogical—a plaintiff may not know at the outset of a lawsuit what justifications the defense will later offer—it also contradicts the burden-shifting framework approved in Inclusive Communities.

Moreover, defenses and exemptions presented in the Trump administration’s proposal provide defendants with generous opportunities to skirt compliance.  The proposed rule suggests that a policy that is profitable could be immune from challenge for its discriminatory impact—with the burden on discrimination victims to show that a company can make at least as much money without discriminating.  HUD’s proposed rule also provides special exemptions for business practices that rely on statistics or algorithms, essentially proposing to immunize tech bias entirely.  Disparate impact is a critical tool to rein in discrimination in the use of algorithmic models—such as credit scoring, pricing, marketing, and automated underwriting systems.  These practices can have starkly discriminatory effects but can operate as a hidden box, making those discriminatory effects difficult to attribute to any person’s intentional discrimination.  HUD’s proposed rule would effectively safe harbor covert discrimination by algorithm.

As a consequence, the Trump administration’s proposal will work against the business interests of housing providers, lenders, and insurers.  Disparate impact doctrine has helped create the environment in which innovation can flourish.  It has fostered a data-driven culture that thrives on better information and fairer measurements, creating a marketplace for such innovations because alternatives that are proven to be effective but less discriminatory are adopted, thus enabling servicers to access a broader market.  Given America’s changing demographics, if corporations don’t take an analytical eye toward policies that result in disparate outcomes, companies will wind up impeding their own goals and business imperatives.

Moreover, industry players are subject to a range of regulatory requirements under other federal statutes and agency guidance, including the Equal Credit Opportunity Act, a longstanding interagency policy statement on discrimination in lending, interagency fair lending examination procedures, as well as state laws that have generally operated consistently with these federal authorities.  Existing HUD regulation provides clear standards for housing industry operators that is consistent with well-developed caselaw and other regulatory requirements, but the Trump administration’s proposal will set up a regulatory patchwork in which there will be one set of rules for HUD, another standard established by the courts, a different standard established by federal regulators in accordance with the interagency guidance and other federal statutes, and state law standards.

To support the Trump administration’s proposal, businesses will have to make attenuated arguments and take bizarre stances.  If the proposed rule is later overturned, companies’ stances on the proposed rule may ultimately impact the public reputation they work hard to build.  Consumers will not soon forget the weak and implausible claims companies will have to make in an effort to dismantle a key protection of the Fair Housing Act which has become a cornerstone of Dr. Martin Luther King, Jr.’s legacy.  In this day of consumer awakening, corporations must decide if they want to take positions that make it seem they believe they are above the law.  Taking a position that is far-reaching, well beyond what the Supreme Court clearly intended, puts industry squarely within this space.

There is also a broader context driving HUD’s proposal.  The vitriolic, dog whistle rhetoric that has swirled around the Trump campaign and presidency, infused in chants at rallies and underpinning the President’s most venomous tweets, has undermined this administration’s credibility in crafting civil rights policy.  Shrouded in its legalese and verbiage, HUD’s proposed disparate impact rule helps undo protections born out of the civil rights movement of the ‘60s, the women’s rights movement of the ‘70s, the movement for people with disabilities of the ‘80s, and other struggles for justice that the Supreme Court recognized in Inclusive Communities.  HUD’s proposed disparate impact rule is unconscionable and must be administratively dispensed with or ultimately disputed in court.