Fair Housing’s Disparate Impact
By Scott M. Drucker, Esq., General Counsel, Arizona Association of REALTORS®
Source: Arizona REALTOR® Magazine – April 2013, ©Arizona Association of REALTORS®
“As we’ve learned over the years, housing discrimination comes in many forms. Discrimination doesn’t have to be intentional in order to have a damaging effect.” Those were the words Department of Housing and Urban Development (HUD) Secretary Shaun Donovan uttered shortly following HUD’s February 8, 2013 issuance of a final rule intended to formalize the national standard for determining how and when housing practices violate the Fair Housing Act (FHA) as a result of discriminatory effect.
Addressing “disparate impact” or unintended discriminatory effects claims, the final rule enacted by HUD provides guidance as to how a housing provider that engages in a facially neutral (unbiased) practice can nonetheless violate fair housing laws. The rule, therefore, better enables plaintiffs and governmental agencies to challenge housing or lending practices that have a disparate impact – even under circumstances in which the practice is facially non-discriminatory and not motivated by bias or prejudice. According to the rule, impact of this nature results when a neutral practice actually or predictably: (1) results in a disparate impact on a group of persons on the basis of race, color, religion, sex, handicap, familial status, or national origin; or (2) has the effect of creating, perpetrating, or increasing segregated housing patterns on the basis of race, color, religion, sex, handicap, familial status or national origin.
In its final rule, which can be found here, HUD created a three-step burden-shifting system to determine liability under the FHA. First, HUD or the private plaintiff must establish that the housing practice caused or predictably will cause a discriminatory effect on a protected class. Once a disparate impact of this nature is proven, the burden shifts to the defendant to show that the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. Any such justification must be supported by actual evidence and not be hypothetical or speculative. HUD defines a “substantial” interest as “a core interest of the organization that has a direct relationship to the function of that organization.” Finally, if such an interest is established by the defendant, HUD or the private plaintiff must prove that those same interests cannot be served by another practice that has a less discriminatory effect. If the complaining party is ultimately able to establish a practice that achieves the same interests in a less prejudicial manner, a defendant may be guilty of fair housing violations even though there is no evidence of discriminatory intent.
EXAMPLE: A lending institution maintains a policy by which it does not extend loans for single family residences for less than $60,000. The policy has been in place for eight years and does not take race, color, religion, sex, handicap, familial status or national origin into account. While the policy is therefore neutral on its face, it has been found that the policy disproportionately excludes minority applicants from consideration because of the home values in certain areas in which the minority applicants predominantly live. After discovering this disparate impact, the new rule will require the lender to prove that its lending policy is justified by a substantial business necessity. Factors relevant to the lender’s justification may include cost and profitability. If the lender is able to establish a substantial, legitimate, nondiscriminatory interest in its policy, a fair housing violation may still be found if the complaining party is able to establish that an alternative lending practice could serve the same purpose with a less discriminatory effect.
The final rule became effective on March 18. It applies to a broad range of housing activity including, but not limited to, the approval of loan applications, the provision of information regarding the availability of loans and housing options, the servicing of loans, and the approval and provision of homeowners insurance. So when a practice results in the denial of a housing related service (i.e. refusal to rent an apartment or approve a mortgage loan) or unfavorable terms and conditions under which that service is available to members of protected classes, it will violate the FHA unless the practice serves a substantial, legitimate, and nondiscriminatory interest that cannot be similarly served by a less discriminatory practice.
With the new rule in place, it is expected that private individuals, HUD and other fair housing enforcement agencies will be able to more effectively realize the objectives of the FHA by eliminating housing discrimination and creating strong, sustainable, inclusive communities and quality affordable homes for all. To the extent that this rule helps clarify objective, and non-discriminatory policies and practices, it should prove widely beneficial.
