Fair Lending: HUD to Reinstate Lower Bar for Proving Disparate Impact

Financial Services Law

On June 25, the Department of Housing and Urban Development (HUD) published in the Federal Register a proposal to rescind its own 2020 disparate impact rule (2020 Rule). In its place, HUD is proposing to recodify and restore the Obama-era discriminatory effects standard (2013 Rule). If promulgated as proposed, this reversal will place a lower bar for pleading and proving Fair Housing Act (FHA) cases filed administratively with HUD and in federal court by private plaintiffs.

What Happened

The FHA and the Equal Credit Opportunity Act (ECOA) make it unlawful to discriminate because of race, color, religion, sex and national origin, as well as (depending on the statute) certain other prohibited bases. Both apply to mortgage transactions, but the ECOA extends more broadly to other credit transactions.

Disparate impact theory is one of three methods of proving lending discrimination under both statutes. The theory is controversial because it allows a regulator or plaintiff to show a fair lending violation in a facially neutral practice that is applied uniformly to all applicants but has a discriminatory effect on a prohibited basis. Courts were split over whether disparate impact was even a cognizable theory of liability under the FHA until the U.S. Supreme Court answered that question affirmatively with a high-profile 5-4 decision. Texas Dept. of Housing and Comm. Affairs v. Inclusive Comm. Project, Inc., 576 U.S 519 (2015).

While some of the language in the Court’s majority opinion suggested a more restrictive use of disparate impact theory, the Court did not consider the validity of HUD’s 2013 Rule. Nonetheless, HUD, under former secretary Ben Carson, used that restrictive language to craft and support its 2020 Rule, which was set to become effective in late October 2020.  Under the new rule, a plaintiff could not move past the pleading stage on a disparate impact theory of liability without sufficiently pleading facts to support five different elements:

  • That the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective;
  • That the policy or practice has a disproportionately adverse effect on members of a protected class;
  • That there is a “robust causal link” between the policy or practice and the adverse effect;
  • That the alleged disparity is “significant;” and
  • That there is a “direct relation” between the injury and the injurious conduct alleged.

House Financial Services Committee Chairwoman Maxine Waters was one of many voices on the Democratic side of the aisle criticizing the 2020 Rule at the time. The rule was challenged in federal district court and was preliminarily stayed in October 2020, before the rule took effect. In his first week in office, President Biden issued a memorandum on discriminatory housing practices and policies that called on HUD to reexamine the rule. The Biden Administration then declined to appeal the stay of the 2020 rule. With all of this prologue, it came as no surprise when HUD formally proposed the replacement of the 2020 Rule with the 2013 Rule.

Why It Matters

None of this comes as a surprise. The restoration of the 2013 Rule is a significant piece in HUD’s strategy to aggressively pursue fair lending enforcement, but it is only one of many pieces.

First, if Housing Secretary Marcia Fudge succeeds in rescinding the 2020 Rule and replacing it with the 2013 Rule, both the government and private plaintiffs will have a much easier path for establishing disparate impact liability.

Second, enforcement will move to the center stage as Secretary Fudge reactivates HUD’s enforcement wing, with the President’s blessing. The day before the publication of the proposed rule, President Biden nominated Dave Uejio (who has already emphasized the importance of “racial equity” as Acting Director of the CFPB) to be Assistant Secretary for Fair Housing and Equal Opportunity at HUD.

Third, the CFPB and the Department of Justice will be part of the equation because they too prosecute fair lending actions.

The public comment period for the proposed HUD rule will remain open until August 24. If the rule becomes final, it will, of course, be subject to legal challenge. Manatt Financial Services will be discussing the possible consequences of HUD’s proposed rule in two upcoming webinars:

If you need assistance in preparing for or responding to this aggressive enforcement environment, please contact any of the authors or the Manatt professional with whom you work.



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