HUD’s Disparate Impact Rule Changes Could Hinder Housing Development

Published by Mark Shelburne on Wednesday, August 7, 2019 - 12:00am

In June 2018 the Department of Housing and Urban Development (HUD) requested comments on amendments to the disparate impact rule issued under the previous administration. The request explained the purpose is to align its provisions with the U.S. Supreme Court’s 2015 decision in the Texas Department of Housing and Community Affairs v. Inclusive Communities Project case. Last week Politico reported that HUD has circulated its proposed changes to other federal officials.

Meaning and Significance of Disparate Impact

The enactment of the Fair Housing Act in 1968 codified a federal prohibition against discrimination based on protected class status. The 2015 Supreme Court decision conclusively established that the law covers actions taken without an intent to discriminate, but instead because of their effect. Essentially all lower courts already had taken this position.

The outcome was important for several reasons, including developers responding to “not in my backyard,” or NIMBY, impediments. These take the form of local land use controls delaying or preventing construction and are all too common in the multifamily sector.

Apartment developers have several options to overcome NIMBY, including fair housing litigation. However proving intentional discrimination is not always possible. In those circumstances, the basis of a challenge is on the action’s effect. Such claims were difficult to make before the Supreme Court ruling. The decision led to optimism about changes to zoning practices and quickly contributed to legal successes.

Proposed Rule Changes

The majority opinion addressed the disparate impact rule issued under President Obama, but also made its own interpretations of the Fair Housing Act. The current administration says these statements necessitate amendments. HUD’s interpretation of fair housing mandates were among the changes many saw as possible when HUD Secretary Ben Carson took office.

The disparate impact rule now in effect uses a three-step, burden-shifting process:

  1. The plaintiff must prove the action “actually or predictably results in a disparate impact,” meaning it has a discriminatory effect based on protected class status.
  2. If the plaintiff meets this test, the defendant must demonstrate a legally sufficient justification by showing the practice is “necessary to achieve one or more substantial, legitimate, nondiscriminatory interests.” The justification may not be merely hypothetical or speculative, but rather must be supported by evidence.
  3. Finally, the plaintiff still has an opportunity to prevail by showing there is an alternative with “a less discriminatory effect.”

The new rule proposes a very different process. Plaintiffs would need to prove the following by a preponderance of evidence that is not “remote or speculative”:

  • the policy or practice is “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective”;
  • a “robust causal link” showing the policy or practice is the direct cause of the discriminatory effect;
  • the alleged disparity has an “adverse effect” on members of a protected class;
  • the alleged disparity is “significant”; and
  • a “direct link” between the disparate impact and the complaining party’s alleged injury.

In addition to arguing against plaintiff’s charges above, a defendant can explain how its discretion is “materially limited” by a third party. Defendants also may demonstrate that an identified alternative policy or practice would not serve its interest “in an equally effective manner without imposing materially greater costs” or creating other burdens.

Consequences for Developers

The widely held consensus among experts is these amendments would make disparate impact cases more difficult to prove. (The rule does not cover claims based on intentional discrimination.) Whether this consequence is problematic may be debatable in some contexts, but the effect on developers is clear.

A step before brining almost any lawsuit or administrative claim is attempting to negotiate a settlement. The results depend on the parties’ perception of their relative strengths and risks. If one side assesses less of a threat, it will offer less favorable terms or not settle at all.

A reduced chance of losing to a disparate impact claim means localities would be more willing to use zoning to impede or prevent housing development. Such an outcome is indisputably problematic, and actually contrary to HUD’s recently stated goals.

The rule is not final, and in fact has not yet been published in the Federal Register. Therefore the Obama-era process still applies. Even if a new rule goes forward, it may be different than the current proposal.