[Federal Register Volume 78, Number 32 (Friday, February 15, 2013)]
[Rules and Regulations]
[Pages 11460-11482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03375]



[[Page 11459]]

Vol. 78

Friday,

No. 32

February 15, 2013

Part IV





Department of Housing and Urban Development





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24 CFR Part 100





Implementation of the Fair Housing Act's Discriminatory Effects 
Standard; Final Rule

  Federal Register / Vol. 78 , No. 32 / Friday, February 15, 2013 / 
Rules and Regulations  

[[Page 11460]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

[Docket No. FR-5508-F-02]
RIN 2529-AA96


Implementation of the Fair Housing Act's Discriminatory Effects 
Standard

AGENCY: Office of the Assistant Secretary for Fair Housing and Equal 
Opportunity, HUD.

ACTION: Final rule.

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SUMMARY: Title VIII of the Civil Rights Act of 1968, as amended (Fair 
Housing Act or 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.\1\ HUD, which is statutorily charged with the 
authority and responsibility for interpreting and enforcing the Fair 
Housing Act and with the power to make rules implementing the Act, has 
long interpreted the Act to prohibit practices with an unjustified 
discriminatory effect, regardless of whether there was an intent to 
discriminate. The eleven federal courts of appeals that have ruled on 
this issue agree with this interpretation. While HUD and every federal 
appellate court to have ruled on the issue have determined that 
liability under the Act may be established through proof of 
discriminatory effects, the statute itself does not specify a standard 
for proving a discriminatory effects violation. As a result, although 
HUD and courts are in agreement that practices with discriminatory 
effects may violate the Fair Housing Act, there has been some minor 
variation in the application of the discriminatory effects standard.
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    \1\ This preamble uses the term ``disability'' to refer to what 
the Act and its implementing regulations term a ``handicap.'' Both 
terms have the same legal meaning. See Bragdon v. Abbott, 524 U.S. 
624, 631 (1998).
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    Through this 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. This final rule also adds 
to, and revises, illustrations of discriminatory housing practices 
found in HUD's Fair Housing Act regulations. This final rule follows a 
November 16, 2011, proposed rule and takes into consideration comments 
received on that proposed rule.

DATES: Effective Date: March 18, 2013.

FOR FURTHER INFORMATION CONTACT: Jeanine Worden, Associate General 
Counsel for Fair Housing, Office of General Counsel, U.S. Department of 
Housing and Urban Development, 451 7th Street SW., Washington, DC 
20410-0500, telephone number 202-402-5188. Persons who are deaf, are 
hard of hearing, or have speech impairments may contact this phone 
number via TTY by calling the Federal Relay Service at 800-877-8399.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of Regulatory Action

    Need for the Regulation. This regulation is needed to formalize 
HUD's long-held interpretation of the availability of ``discriminatory 
effects'' liability under the Fair Housing Act, 42 U.S.C. 3601 et seq., 
and to provide nationwide consistency in the application of that form 
of liability. HUD, through its longstanding interpretation of the Act, 
and the eleven federal courts of appeals that have addressed the issue 
agree that liability under the Fair Housing Act may arise from a 
facially neutral practice that has a discriminatory effect. The twelfth 
court of appeals has assumed that the Fair Housing Act includes 
discriminatory effects liability, but has not decided the issue. 
Through four decades of case-by-case application of the Fair Housing 
Act's discriminatory effects standard by HUD and the courts, a small 
degree of variation has developed in the methodology of proving a claim 
of discriminatory effects liability. This inconsistency threatens to 
create uncertainty as to how parties' conduct will be evaluated. This 
rule formally establishes a three-part burden-shifting test currently 
used by HUD and most federal courts, thereby providing greater clarity 
and predictability for all parties engaged in housing transactions as 
to how the discriminatory effects standard applies.
    How the Rule Meets the Need. This rule serves the need described 
above by establishing a consistent standard for assessing claims that a 
facially neutral practice violates the Fair Housing Act and by 
incorporating that standard in HUD's existing Fair Housing Act 
regulations at 24 CFR 100.500. By formalizing the three-part burden-
shifting test for proving such liability under the Fair Housing Act, 
the rule provides for consistent and predictable application of the 
test on a national basis. It also offers clarity to persons seeking 
housing and persons engaged in housing transactions as to how to assess 
potential claims involving discriminatory effects.
    Legal Authority for the Regulation. The legal authority for the 
regulation is found in the Fair Housing Act. Specifically, section 
808(a) of the Act gives the Secretary of HUD the ``authority and 
responsibility for administering this Act.'' (42 U.S.C. 3608(a)). In 
addition, section 815 of the Act provides that ``[t]he Secretary may 
make rules (including rules for the collection, maintenance, and 
analysis of appropriate data) to carry out this title. The Secretary 
shall give public notice and opportunity for comment with respect to 
all rules made under this section.'' (42 U.S.C. 3614a.) HUD also has 
general rulemaking authority, under the Department of Housing and Urban 
Development Act, to make such rules and regulations as may be necessary 
to carry out its functions, powers, and duties. (See 42 U.S.C. 
3535(d).)

B. Summary of the Major Provisions

    This 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, 
nondiscriminatory 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, 
nondiscriminatory interest could be served by a practice that has a 
less discriminatory effect.
    This rule also adds and revises illustrations of practices that 
violate the Act through intentional discrimination or through a 
discriminatory effect under the standards outlined in Sec.  100.500.

C. Costs and Benefits

    Because the rule does not change decades-old substantive law 
articulated by HUD and the courts, but rather formalizes a clear, 
consistent, nationwide standard for litigating discriminatory effects 
cases under the Fair Housing Act,\2\ it adds no additional costs to 
housing providers and others engaged in housing transactions. Rather,

[[Page 11461]]

the rule will simplify compliance with the Fair Housing Act's 
discriminatory effects standard and decrease litigation associated with 
such claims by clearly allocating the burdens of proof and how such 
burdens are to be met.
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    \2\ See nn. 12, 28, supra, discussing HUD administrative 
decisions and federal court rulings.
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II. Background

    The Fair Housing Act was enacted in 1968 (Pub. L. 90-284, codified 
at 42 U.S.C. 3601-3619, 3631) to combat and prevent segregation and 
discrimination in housing, including in the sale or rental of housing 
and the provision of advertising, lending, and brokerage services 
related to housing. The Fair Housing Act's ``Declaration of Policy'' 
specifies that ``[i]t is the policy of the United States to provide, 
within constitutional limitations, for fair housing throughout the 
United States.'' \3\ Congress considered the realization of this policy 
``to be of the highest priority.'' \4\ The Fair Housing Act's language 
prohibiting discrimination in housing is ``broad and inclusive;'' \5\ 
the purpose of its reach is to replace segregated neighborhoods with 
``truly integrated and balanced living patterns.'' \6\ In commemorating 
the 40th anniversary of the Fair Housing Act and the 20th anniversary 
of the Fair Housing Amendments Act, the House of Representatives 
reiterated that ``the intent of Congress in passing the Fair Housing 
Act was broad and inclusive, to advance equal opportunity in housing 
and achieve racial integration for the benefit of all people in the 
United States.'' \7\ (See the preamble to the November 16, 2011, 
proposed rule at 76 FR 70922.)
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    \3\ 42 U.S.C. 3601.
    \4\ Trafficante v. Metro. Life Ins. Co., 409 U.S. 205, 211 
(1972) (internal citation omitted).
    \5\ Id. at 209.
    \6\ Id. at 211.
    \7\ H. Res. 1095, 110th Cong., 2d Sess., 154 Cong. Rec. H2280-01 
(April 15, 2008) (2008 WL 1733432).
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    The Fair Housing Act gives HUD the authority and responsibility for 
administering and enforcing the Act,\8\ including the authority to 
conduct formal adjudications of Fair Housing Act complaints \9\ and the 
power to promulgate rules to interpret and carry out the Act.\10\ In 
keeping with the Act's ``broad remedial intent,'' \11\ HUD, as the 
following discussion reflects, has long interpreted the Act to prohibit 
practices that have an unjustified discriminatory effect, regardless of 
intent. (See also the preamble to the November 16, 2011, proposed rule 
at 76 FR 70922-23.)
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    \8\ See 42 U.S.C. 3608(a).
    \9\ See 42 U.S.C. 3610, 3612.
    \10\ See 42 U.S.C. 3614a.
    \11\ Havens Realty Corp. v. Coleman, 455 U.S. 363, 380 (1982).
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    In formal adjudications of charges of discrimination under the Fair 
Housing Act over the past 20 years, HUD has consistently concluded that 
the Act is violated by facially neutral practices that have an 
unjustified discriminatory effect on the basis of a protected 
characteristic, regardless of intent.\12\ In one such formal 
adjudication, the Secretary of HUD reviewed the initial decision of a 
HUD administrative law judge and issued a final order stating that 
practices with an unjustified discriminatory effect violate the Act. In 
that case, the Secretary found that a mobile home community's occupancy 
limit of three persons per dwelling had a discriminatory effect on 
families with children.\13\ When the housing provider appealed the 
Secretary's order to the United States Court of Appeals for the Tenth 
Circuit, the Secretary of HUD defended his order, arguing that 
statistics showed that the housing policy, while neutral on its face, 
had a discriminatory effect on families with children because it served 
to exclude them at more than four times the rate of families without 
children.\14\ Similarly, on appeal of another final agency decision 
holding that a housing policy had a disparate impact on families with 
children,\15\ the Secretary of HUD, in his brief defending the decision 
before the United States Court of Appeals for the Ninth Circuit, 
discussed in detail the text and legislative history of the Act, as 
well as prior pronouncements by HUD that proof of discriminatory intent 
is not required to establish liability under the Act.\16\
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    \12\ See, e.g., HUD v. Twinbrook Village Apts., No. 02-00025600-
0256-8, 2001 WL 1632533, at *17 (HUD ALJ Nov. 9, 2001) (``A 
violation of the [Act] may be premised on a theory of disparate 
impact.''); HUD v. Carlson, No. 08-91-0077-1, 1995 WL 365009 (HUD 
ALJ June 12, 1995) (``A policy or practice that is neutral on its 
face may be found to be violative of the Act if the record 
establishes a prima facie case that the policy or practice has a 
disparate impact on members of a protected class, and the Respondent 
cannot prove that the policy is justified by business necessity.''); 
HUD v. Ross, No. 01-92-0466-18, 1994 WL 326437, at *5 (HUD ALJ July 
7, 1994) (``Absent a showing of business necessity, facially neutral 
policies which have a discriminatory impact on a protected class 
violate the Act.''); HUD v. Carter, No. 03-90-0058-1, 1992 WL 
406520, at *5 (HUD ALJ May 1, 1992) (``The application of the 
discriminatory effects standard in cases under the Fair Housing Act 
is well established.'').
    \13\ HUD v. Mountain Side Mobile Estates P'ship, No. 08-92-0010-
1, 1993 WL 307069 (HUD Sec'y July 19, 1993), aff'd in relevant part, 
56 F.3d 1243 (10th Cir. 1995).
    \14\ Brief for HUD Secretary as Respondent, Mountain Side Mobile 
Estates P'ship v. HUD, No. 94-9509 (10th Cir. 1994).
    \15\ HUD v. Pfaff, No. 10-93-0084-8, 1994 WL 592199, at *17 (HUD 
ALJ Oct. 27, 1994), rev'd on other grounds, 88 F.3d 739 (9th Cir. 
1996).
    \16\ Brief for HUD Secretary as Respondent, Pfaff v. HUD, No. 
94-70898 (9th Cir. 1996).
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    HUD has interpreted the Act to include discriminatory effects 
liability not only in formal adjudications, but through various other 
means as well. In 1980, for example, Senator Charles Mathias read into 
the Congressional Record a letter that the Senator had received from 
the HUD Secretary describing discriminatory effects liability under the 
Act and explaining that such liability is ``imperative to the success 
of civil rights law enforcement.'' \17\ In 1994, HUD joined with the 
Department of Justice and nine other federal regulatory and enforcement 
agencies in approving and adopting a policy statement that, among other 
things, recognized that disparate impact is among the ``methods of 
proof of lending discrimination under the * * * [Fair Housing] Act.'' 
\18\ In this Policy Statement on Discrimination in Lending (Joint 
Policy Statement), HUD and the other regulatory and enforcement 
agencies recognized that ``[p]olicies and practices that are neutral on 
their face and that are applied equally may still, on a prohibited 
basis, disproportionately and adversely affect a person's access to 
credit,'' and provided guidance on how to prove a disparate impact fair 
lending claim.\19\
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    \17\ 126 Cong. Rec. 31,166-31,167 (1980) (statement of Sen. 
Mathias reading into the record letter of HUD Secretary).
    \18\ Policy Statement on Discrimination in Lending, 59 FR 18266, 
18269 (Apr. 15, 1994) (``Joint Policy Statement'').
    \19\ Id.
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    Additionally, HUD's interpretation of the Act is further confirmed 
by regulations implementing the Federal Housing Enterprises Financial 
Safety and Soundness Act (FHEFSSA), in which HUD prohibited Fannie Mae 
and Freddie Mac from engaging in mortgage purchase activities that have 
a discriminatory effect in violation of FHEFSSA.\20\ In addressing a 
concern for how the impact theory might operate under FHEFFSA, HUD 
explained that ``the disparate impact (or discriminatory effect) theory 
is firmly established by Fair Housing Act case law'' and concluded that 
this Fair Housing Act disparate impact law ``is applicable to all 
segments of the housing marketplace, including the GSEs'' (government-
sponsored enterprises).\21\ In

[[Page 11462]]

promulgating this regulation, HUD also emphasized the importance of the 
Joint Policy Statement, explaining that ``[a]ll the Federal financial 
regulatory and enforcement agencies recognize the role that disparate 
impact analysis plays in scrutiny of mortgage lending'' and have 
``jointly recognized the disparate impact standard as a means of 
proving lending discrimination under the Fair Housing Act.'' \22\
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    \20\ See 24 CFR 81.42 (2012).
    \21\ The Secretary of HUD's Regulation of the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac), 60 FR 61846, 61867 (Dec. 1, 1995).
    \22\ Id.
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    Consistent with its longstanding interpretation of the Act, over 
the past two decades, HUD has regularly issued guidance to its staff 
that recognizes the discriminatory effects theory of liability under 
the Act. For instance, HUD's Assistant Secretary for Fair Housing and 
Equal Opportunity (FHEO) issued a memorandum in 1993 instructing HUD 
investigators to be sure to analyze complaints under the disparate 
impact theory of liability.\23\ HUD's 1995 Title VIII Complaint Intake, 
Investigation and Conciliation Handbook (Enforcement Handbook), which 
set forth guidelines for investigating and resolving Fair Housing Act 
complaints, emphasized to HUD's enforcement staff that disparate impact 
is one of ``the principal theories of discrimination'' under the Fair 
Housing Act and required HUD investigators to apply it when 
appropriate.\24\ HUD's 1998 version of the Enforcement Handbook, which 
is currently in effect, also recognizes the discriminatory effects 
theory of liability and requires HUD investigators to apply it in 
appropriate cases nationwide.\25\
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    \23\ Memorandum from the HUD Assistant Secretary for Fair 
Housing & Equal Opportunity, The Applicability of Disparate Impact 
Analysis to Fair Housing Cases (Dec. 17, 1993).
    \24\ HUD, No. 8024.1, Title VIII Complaint Intake, Investigation 
& Conciliation Handbook at 7-12 (1995).
    \25\ HUD, No. 8024.1, Title VIII Complaint Intake, Investigation 
& Conciliation Handbook at 2-27 (1998) (``a respondent may be held 
liable for violating the Fair Housing Act even if his action against 
the complainant was not even partly motivated by illegal 
considerations''); id. at 2-27 to 2-45 (HUD guidelines for 
investigating a disparate impact claim and establishing its 
elements).
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    In 1998, at Congress's direction, HUD published in the Federal 
Register previously-internal guidance from 1991 explaining when 
occupancy limits may violate the Act's prohibition of discrimination 
because of familial status, premised on the application of disparate 
impact liability.\26\ More recently, HUD posted on its Web site 
guidance to its staff and others discussing how facially neutral 
housing policies addressing domestic violence can have a disparate 
impact on women in violation of the Act.\27\
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    \26\ See 63 FR 70256 (Dec. 18, 1998) (publishing ``Keating 
Memo'' regarding reasonable occupancy standards); Quality Housing 
and Work Responsibility Act of 1998, Public Law 105-276, 112 Stat. 
2461, Sec.  589 (Oct. 21, 1998) (requiring publication of Keating 
Memo).
    \27\ Memorandum from HUD Office of Fair Housing & Equal 
Opportunity, Assessing Claims of Housing Discrimination Under the 
Fair Housing Act & the Violence Against Women Act 5-6 (Feb. 9, 
2011). http://www.hud.gov/offices/fheo/library/11-domestic-violence-memo-with-attachment.pdf.
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    Although several of the HUD administrative decisions, federal court 
holdings, and HUD and other federal agency public pronouncements on the 
discriminatory effects standard just noted were discussed in the 
preamble to HUD's November 16, 2011, proposed rule, HUD has described 
these events in the preamble to this final rule to underscore that this 
rule is not establishing new substantive law. Rather, this final rule 
embodies law that has been in place for almost four decades and that 
has consistently been applied, with minor variations, by HUD, the 
Justice Department and nine other federal agencies, and federal courts. 
In this regard, HUD emphasizes that the title of this rulemaking, 
``Implementation of the Fair Housing Act's Discriminatory Effects 
Standard,'' indicates that HUD is not proposing new law in this area.
    As discussed in the preamble to the proposed rule (76 FR 70921, 
70923), all federal courts of appeals to have addressed the question 
agree that liability under the Act may be established based on a 
showing that a neutral policy or practice has a discriminatory effect 
even if such a policy or practice was not adopted for a discriminatory 
purpose.\28\ There is minor variation, however, in how evidence has 
been analyzed pursuant to this theory. For example, in adjudications, 
HUD has always used a three-step burden-shifting approach,\29\ as do 
many federal courts of appeals.\30\ One federal court of appeals 
applies a multi-factor balancing test,\31\ other courts of appeals 
apply a hybrid between the two,\32\ and one court of appeals applies a 
different test for public and private defendants.\33\
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    \28\ See, e.g., Graoch Assocs. #33, L.P. v. Louisville/Jefferson 
Cnty. Metro Human Relations Comm'n, 508 F.3d 366, 374-78 (6th Cir. 
2007); Reinhart v. Lincoln Cnty., 482 F.3d 1225, 1229 (10th Cir. 
2007); Hallmark Developers, Inc. v. Fulton County, Ga., 466 F.3d 
1276, 1286 (11th Cir. 2006); Charleston Hous. Auth. v. U.S. Dep't of 
Agric., 419 F.3d 729, 740-41 (8th Cir. 2005); Langlois v. Abington 
Hous. Auth., 207 F.3d 43, 49-50 (1st Cir. 2000); Simms v. First 
Gibraltar Bank, 83 F.3d 1546, 1555 (5th Cir. 1996); Jackson v. 
Okaloosa Cnty., Fla., 21 F.3d 1531, 1543 (11th Cir. 1994); Keith v. 
Volpe, 858 F.2d 467, 484 (9th Cir. 1988); Huntington Branch, NAACP 
v. Town of Huntington, 844 F.2d 926, 937-38 (2d Cir. 1988), aff'd, 
488 U.S. 15 (1988) (per curiam); Resident Advisory Bd. v. Rizzo, 564 
F.2d 126, 148 (3d Cir. 1977); Betsey v. Turtle Creek Assocs., 736 
F.2d 983, 987-89 & n.3 (4th Cir. 1984); Metro. Hous. Dev. Corp. v. 
Vill. of Arlington Heights, 558 F.2d 1283, 1290-91 (7th Cir. 1977); 
United States. v. City of Black Jack, 508 F.2d 1179, 1184-86 (8th 
Cir. 1974).
    \29\ See, e.g., HUD v. Twinbrook Village Apts., No. 02-00025600-
0256-8, 2001 WL 1632533, at *17 (HUD ALJ Nov. 9, 2001); HUD v. 
Pfaff, 1994 WL 592199, at *8 (HUD ALJ Oct. 27, 1994) rev'd on other 
grounds, 88 F.3d 739 (9th Cir. 1996); HUD v. Mountain Side Mobile 
Estates P'ship, 1993 WL 367102, at *6 (HUD ALJ Sept. 20, 1993); HUD 
v. Carter, 1992 WL 406520, at *6 (HUD ALJ May 1, 1992); see also 
Joint Policy Statement, 59 FR 18269.
    \30\ See, e.g., Charleston, 419 F.3d at 740-42; Langlois, 207 
F.3d at 49-50; Huntington Branch, 844 F.2d at 939.
    \31\ See, e.g., Metro. Hous. Dev. Corp., 558 F.2d at 1290 
(applying a four-factor balancing test).
    \32\ See, e.g., Graoch, 508 F.3d at 373 (balancing test 
incorporated as elements of proof after second step of burden-
shifting framework); Mountain Side Mobile Estates v. Sec'y HUD, 56 
F.3d 1243, 1252, 1254 (10th Cir. 1995) (incorporating a three-factor 
balancing test into the burden-shifting framework to weigh 
defendant's justification);.
    \33\ The Fourth Circuit has applied a four-factor balancing test 
to public defendants and a burden-shifting approach to private 
defendants. See, e.g., Betsey v. Turtle Creek Assocs., 736 F.2d 983, 
989 n.5 (4th Cir. 1984).
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    Another source of variation in existing law is in the application 
of the burden-shifting test. Under the three-step burden-shifting 
approach applied by HUD and the courts, the plaintiff (or, in 
administrative adjudications, the charging party) first must make a 
prima facie showing of either a disparate impact or a segregative 
effect. If the discriminatory effect is shown, the burden of proof 
shifts to the defendant (or respondent) to justify its actions. If the 
defendant (or respondent) satisfies its burden, the third step comes 
into play. There has been a difference of approach among the various 
appellate courts and HUD adjudicators as to which party bears the 
burden of proof at this third step, which requires proof as to whether 
or not a less discriminatory alternative to the challenged practice 
exists. All but one of the federal courts of appeals that use a burden-
shifting approach place the ultimate burden of proving that a less 
discriminatory alternative exists on the plaintiff,\34\ with some 
courts analogizing to the burden-shifting framework established for 
Title VII of the Civil Rights Act of 1964 (Title VII), which addresses 
employment discrimination.\35\ The remaining court of appeals places 
the burden on the

[[Page 11463]]

defendant to show that no less discriminatory alternative to the 
challenged practice exists.\36\ HUD's administrative law judges have, 
at times, placed this burden of proof concerning a less discriminatory 
alternative on the respondent and, at other times, on the charging 
party.\37\
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    \34\ Compare Mt. Holly Gardens Citizens in Action, Inc. v. Twp. 
of Mount Holly, 658 F.3d 375, 382 (3d Cir. 2011) (burden of proving 
less discriminatory alternative ultimately on plaintiff), and 
Gallagher v. Magner, 619 F.3d 823, 834 (8th Cir. 2010) (same), and 
Graoch, 508 F.3d at 373-74 (same), and Mountain Side Mobile Estates, 
56 F.3d at 1254 (same), with Huntington Branch, 844 F.2d at 939 
(burden of proving no less discriminatory alternative exists on 
defendant).
    \35\ See, e.g., Graoch, 508 F.3d at 373 (``[C]laims under Title 
VII and the [Fair Housing Act] generally should receive similar 
treatment'').
    \36\ Huntington Branch, 844 F.2d at 939.
    \37\ Compare, e.g., HUD v. Carter, 1992 WL 406520, at *6 (HUD 
ALJ May 1, 1992) (respondent bears the burden of showing that no 
less discriminatory alternative exists), and HUD v. Twinbrook 
Village Apts., 2001 WL 1632533, at *17 (HUD ALJ Nov. 9, 2001) 
(same), with HUD v. Mountain Side Mobile Estates P'ship, 1993 WL 
367102, at *6 (charging party bears the burden of showing that a 
less discriminatory alternative exists), and HUD v. Pfaff, 1994 WL 
592199, at *8 (HUD ALJ Oct. 27, 1994) (same).
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    Through this rulemaking and interpretative authority under the Act, 
HUD formalizes its longstanding view that discriminatory effects 
liability is available under the Act and establishes uniform standards 
for determining when a practice with a discriminatory effect violates 
the Fair Housing Act.

III. The November 16, 2011, Proposed Rule

    On November 16, 2011, HUD published a proposed rule in the Federal 
Register (76 FR 70921) addressing the discriminatory effects theory of 
liability under the Act. Specifically, HUD proposed adding a new 
subpart G to 24 CFR part 100, which would formalize the longstanding 
position held by HUD and the federal courts that the Fair Housing Act 
may be violated by a housing practice that has a discriminatory effect, 
regardless of whether the practice was adopted for a discriminatory 
purpose, and would establish uniform standards for determining when 
such a practice violates the Act.
    In the proposed rule, HUD defined a housing practice with a 
``discriminatory effect'' as one that ``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, perpetuating, or increasing 
segregated housing patterns on the basis of race, color, religion, sex, 
handicap, familial status, or national origin.''
    A housing practice with a discriminatory effect would still be 
lawful if supported by a ``legally sufficient justification.'' HUD 
proposed that a ``legally sufficient justification'' exists where the 
challenged housing practice: (1) Has a necessary and manifest 
relationship to one or more legitimate, nondiscriminatory interests of 
the respondent or defendant; and (2) those interests cannot be served 
by another practice that has a less discriminatory effect.
    Consistent with its own past practice and that of many federal 
courts, HUD proposed a burden-shifting framework for determining 
whether liability exists under a discriminatory effects theory. Under 
the proposed burden-shifting approach, the charging party or plaintiff 
in an adjudication first bears the burden of proving that a challenged 
practice causes a discriminatory effect. If the charging party or 
plaintiff meets this burden, the burden of proof shifts to the 
respondent or defendant to prove that the challenged practice has a 
necessary and manifest relationship to one or more of its legitimate, 
nondiscriminatory interests. If the respondent or defendant satisfies 
this burden, the charging party or plaintiff may still establish 
liability by demonstrating that the legitimate, nondiscriminatory 
interest can be served by another practice that has a less 
discriminatory effect.
    In the proposed rule, HUD explained that violations of various 
provisions of the Act may be established by proof of discriminatory 
effects, including 42 U.S.C. 3604(a), 3604(b), 3604(f)(1), 3604(f)(2), 
3605, and 3606 (see 76 FR 70923 n.20), and that discriminatory effects 
liability applies to both public and private entities (see 76 FR 70924 
n.40).
    HUD also proposed to revise 24 CFR part 100 to add examples of 
practices that may violate the Act under the discriminatory effects 
theory.

IV. Changes Made at the Final Rule Stage

    In response to public comment, a discussion of which is presented 
in the following section, and in further consideration of issues 
addressed at the proposed rule stage, HUD is making the following 
changes at this final rule stage:

A. Changes to Subpart G

    The final rule makes several minor revisions to subpart G in the 
proposed rule for clarity. The final rule changes ``housing practice'' 
to ``practice'' throughout proposed subpart G to make clear that the 
standards set forth in subpart G are not limited to the practices 
addressed in subpart B, which is titled ``Discriminatory Housing 
Practices.'' The final rule replaces ``under this subpart'' with 
``under the Fair Housing Act'' because subpart G outlines evidentiary 
standards for proving liability under the Fair Housing Act. The final 
rule also replaces the general phrase ``prohibited intent'' with the 
more specific ``discriminatory intent.''
    The final rule slightly revises the definition of discriminatory 
effect found in proposed Sec.  100.500(a), without changing its 
meaning, to condense the definition and make it more consistent with 
terminology used in case law. Proposed Sec.  100.500(a) provided that 
``[a] housing practice has a discriminatory effect where it 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, perpetuating, or 
increasing segregated housing patterns on the basis of race, color, 
religion, sex, handicap, familial status, or national origin.'' Final 
Sec.  100.500(a) provides that ``[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.''
    To clarify ``legally sufficient justification'' and in particular, 
what HUD meant in the proposed rule by ``a necessary and manifest 
relationship to one or more legitimate, nondiscriminatory interests,'' 
HUD is revising the definition found in proposed Sec.  100.500(b) to 
read as follows: ``(1) A legally sufficient justification exists where 
the challenged practice:
    (i) Is necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests of the respondent, with respect to claims 
brought under 42 U.S.C. 3612, or defendant, with respect to claims 
brought under 42 U.S.C. 3613 or 3614; and (ii) Those interests could 
not be served by another practice that has a less discriminatory 
effect. (2) A legally sufficient justification must be supported by 
evidence and may not be hypothetical or speculative * * *.'' This 
revision to the definition of ``legally sufficient justification'' 
includes changing ``cannot be served,'' the phrasing used in the 
proposed rule, to ``could not be served.''
    This revised definition of ``legally sufficient justification'' 
also appears in Sec.  100.500(c)(2) and, in essentially the same form, 
in Sec.  100.500(c)(3). The final rule also replaces the word 
``demonstrating'' with ``proving'' in Sec.  100.500(c)(3) in order to 
make clear that the burden found in that section is one of proof, not 
production.
    In addition to these changes, the final rule makes several minor 
corrections to Sec.  100.500. The final rule substitutes ``42

[[Page 11464]]

U.S.C. 3610'' with ``42 U.S.C. 3612'' in Sec.  100.500(c)(1) because 
the procedures for a formal adjudication under the Act are found in 42 
U.S.C. 3612. Also in Sec.  100.500(c)(1), the final rule changes 
``proving that a challenged practice causes a discriminatory effect'' 
to ``proving that a challenged practice caused or predictably will 
cause a discriminatory effect.'' This edit is required for consistency 
with the Fair Housing Act and Sec.  100.500(a), which prohibit actions 
that predictably result in discrimination.
    The final rule further corrects proposed Sec.  100.500(c)(1) and 
(2) to replace ``complainant'' with ``charging party'' because in cases 
tried before HUD administrative law judges, the charging party--and not 
the complainant--has the same burden of proof as a plaintiff in court. 
Under the provisions of the Act governing adjudication of 
administrative complaints, an aggrieved person may file a complaint 
with the Secretary alleging a discriminatory housing practice, or the 
Secretary may file such a complaint,\38\ but it is the Secretary who 
issues the charge of discrimination and prosecutes the case before the 
Administrative Law Judge, on behalf of the aggrieved person.\39\ Any 
aggrieved person may intervene as a party in the proceeding,\40\ in 
which case the intervener would bear the same burden of proof as the 
charging party or a plaintiff in a judicial action.
---------------------------------------------------------------------------

    \38\ 42 U.S.C. 3610(a)(1)(A).
    \39\ 42 U.S.C. 3610(g)(2)(A), 3612.
    \40\ 42 U.S.C. 3612(c).
---------------------------------------------------------------------------

B. Changes to Illustrations

    The illustrations added in this rule, as well as the existing 
illustrations in part 100, represent HUD's interpretation of conduct 
that is illegal housing discrimination under the Fair Housing Act. 
Liability can be established for the conduct illustrated in part 100 
through evidence of intentional discrimination, or based on 
discriminatory effects pursuant to the standards set forth in subpart 
G, depending on the nature of the potential violation.
    In order to make clear that the Fair Housing Act violations 
illustrated in part 100 may be proven through evidence of intentional 
discrimination or discriminatory effects, as the evidence permits, and 
that any potential discriminatory effects violation must be assessed 
pursuant to the standards set forth in Sec.  100.500, the final rule 
amends paragraph (b) of Sec.  100.5 to add at the end the following 
sentence: ``The illustrations of unlawful housing discrimination in 
this part may be established by a practice's discriminatory effect, 
even if not motivated by discriminatory intent, consistent with the 
standards outlined in Sec.  100.500.''
    The final rule revises the illustrations of discriminatory housing 
practices in the proposed rule, rephrasing them in more general terms. 
The language of the added illustrations, which in the proposed rule 
included paraphrasing the definition of discriminatory effect from 
subpart G, is revised to eliminate the paraphrasing, which is 
unnecessary after the addition to paragraph (b) of Sec.  100.5. This 
revision is also intended to eliminate any potential negative 
implication from the proposed rule that the existing illustrations in 
part 100 could not be proven through an effects theory. In addition to 
this general streamlining of the illustrations in the proposed rule, 
the final rule makes the following specific revisions to the 
illustrations.
    In order to avoid redundancy in HUD's Fair Housing Act regulations, 
this final rule eliminates proposed Sec.  100.65(b)(6). The substance 
of proposed Sec.  100.65(b)(6), which covers ``Providing different, 
limited, or no governmental services such as water, sewer, or garbage 
collection'' is already captured by existing Sec.  100.65(b)(4), which 
prohibits ``Limiting the use of privileges, services, or facilities 
associated with a dwelling,'' and existing Sec.  100.70(d)(4), which 
prohibits ``Refusing to provide municipal services * * * for dwellings 
or providing such services differently.''
    In response to public comment, the final rule adds ``enacting'' and 
``ordinance'' to Sec.  100.70(d)(5). These changes confirm that an 
ordinance is one type of land-use decision that is covered by the Act, 
under a theory of intentional discrimination or discriminatory effect, 
and that land-use decisions may discriminate from the moment of 
enactment. This final rule therefore revises proposed Sec.  
100.70(d)(5) to give the following as an illustration of a prohibited 
practice: ``Enacting or implementing land-use rules, ordinances, 
policies, or procedures that restrict or deny housing opportunities or 
otherwise make unavailable or deny dwellings to persons because of 
race, color, religion, sex, handicap, familial status, or national 
origin.'' The final rule removes ``cost'' and ``terms or conditions'' 
from proposed Sec.  100.120(b)(2) and adds them to Sec.  100.130. This 
revision is not intended to make any substantive changes to HUD's 
interpretation of the Act's coverage, but rather is for organizational 
purposes only: Sec.  100.120 addresses discrimination in the making and 
provision of loans and other financial assistance, while Sec.  100.130 
addresses discriminatory terms or conditions. Other minor streamlining 
changes are made to existing Sec.  100.120(b). Accordingly, this final 
rule revises Sec.  100.120(b) to read as set forth in the regulatory 
text of the rule.
    The final rule amends existing Sec.  100.130(b)(2) to add ``or 
conditions'' and the term ``cost'' to the list of potentially 
discriminatory terms or conditions of loans or other financial 
assistance. It also adds new Sec.  100.130(b)(3), which, in response to 
a public comment, illustrates that servicing is a condition of loans or 
other financial assistance covered by section 805.\41\ Because, as 
noted above, at the final rule stage ``terms and conditions'' is 
removed from proposed Sec.  100.120(b)(2), new Sec.  100.130(b)(3) also 
addresses the provision of loans or other financial assistance with 
terms or conditions that have a discriminatory intent or effect. As a 
result of these changes, new Sec.  100.130(b)(3) reads as follows: 
``Servicing of loans or other financial assistance with respect to 
dwellings in a manner that discriminates, or servicing of loans or 
other financial assistance which are secured by residential real estate 
in a manner that discriminates, or providing such loans or financial 
assistance with other terms or conditions that discriminate, because of 
race, color, religion, sex, handicap, familial status, or national 
origin.''
---------------------------------------------------------------------------

    \41\ 42 U.S.C. 3605. Discrimination in residential mortgage 
servicing may also violate section 804 of the Act, 42 U.S.C. 3604.
---------------------------------------------------------------------------

V. The Public Comments

    The public comment period for the November 16, 2011, proposed rule 
closed on January 17, 2012. Ninety-six public comments were received in 
response to the proposed rule. Comments were submitted by a wide 
variety of interested entities, including individuals, fair housing and 
legal aid organizations, state and local fair housing agencies, 
Attorneys General from several States, state housing finance agencies, 
public housing agencies, public housing trade associations, insurance 
companies, mortgage lenders, credit unions, banking trade associations, 
real estate agents, and law firms.\42\ This section of the preamble, 
which addresses significant issues raised in the public

[[Page 11465]]

comments, organizes the comments by subject category, with a brief 
description of the issue (or set of related issues) followed by HUD's 
response.
---------------------------------------------------------------------------

    \42\ All public comments on this rule can be found at 
www.regulations.gov, specifically at http://www.regulations.gov/#!searchResults;rpp=50;po=0;dktid=HUD-2011-0138.
---------------------------------------------------------------------------

    Many comments were received in support of the rule generally and in 
support of the proposed discriminatory effects standard in particular. 
This summary does not provide a response to comments that expressed 
support for the proposed rule. Supportive comments included statements 
asserting that the rule: advances the goals of the Fair Housing Act; 
offers a well-reasoned standard for analyzing discriminatory effects 
claims; provides a national standard for courts, housing providers, 
municipalities and the financial and insurance industries; provides 
clarity to housing providers, housing seekers, and others; will 
decrease litigation by clarifying the burdens of proof; and will help 
address a lack of adequate housing for older persons even though age is 
not a protected characteristic under the Act because older persons may 
be affected by practices with a discriminatory effect based on 
disability. Commenters stated that the rule is particularly necessary 
to maintain protections against discriminatory and abusive practices in 
the mortgage industry, as the Fair Housing Act covers activities in 
residential real estate-related transactions that may not be covered by 
the Equal Credit Opportunity Act (ECOA).\43\ A commenter stated that 
the rule's flexible standard is appropriate, as no rigid formula fits 
the variety of practices that exist in a rapidly evolving housing 
market.
---------------------------------------------------------------------------

    \43\ ECOA prohibits any creditor from discriminating in credit 
transactions on the basis of race, color, national origin, religion, 
age, sex, marital status, or public assistance program 
participation. See 15 U.S.C. 1691(a). By comparison, Section 805 of 
the Fair Housing Act prohibits any person whose business includes 
engaging in residential-related transactions from discriminating in 
such transactions on the basis of race, color, religion, sex, 
disability, familial status, or national origin. See 42 U.S.C. 3605.
---------------------------------------------------------------------------

    Several commenters supported discriminatory effects liability under 
the Act in general, stating that it is widely agreed that 
discriminatory effects analysis is critically important to vigorous 
enforcement of the Fair Housing Act, and that the rule is consistent 
with HUD's longstanding interpretation and the interpretation of the 
federal courts of appeals. Commenters in support of the importance of 
the effects test proffered the following: if the effects approach were 
no longer available, ``the proverbial door to equal housing opportunity 
will be slammed in the face of many victims''; the effects analysis is 
particularly important with respect to the protection of persons with 
disabilities and in familial status cases; municipal land use decisions 
are more likely to have a discriminatory effect on minorities when they 
unreasonably attempt to restrict affordable housing; the effects 
analysis is important to environmental justice investigations; the 
discriminatory effects standard encourages housing providers to develop 
creative ways to achieve their economic objectives while promoting 
diversity; the effects standard gives HUD and fair housing advocates 
the tools to reveal the effects of racism, poverty, disability 
discrimination, and adverse environmental conditions on the health and 
well-being of individuals protected by the law; the rule provides 
practical administrative guidance for HUD attorneys and administrative 
law judges, as well as for the state and local fair housing agencies 
that share responsibility with HUD for adjudicating fair housing 
complaints; and the disparate impact standard is important in 
addressing discrimination in lending and denial of access to credit, 
which are often the results of neutral policies that have a disparate 
impact on protected groups.
    Some commenters supported the proposed rule's allocation of the 
burden of proof, stating that the rule is practical and supported by 
longstanding precedent, and that it provides clear guidance to housing 
providers and government agencies in adopting rules and policies and an 
objective method for courts to evaluate discriminatory effect claims. A 
commenter stated that the perpetuation of segregation theory of effects 
liability is supported by the legislative history of Title VIII and the 
obligation to affirmatively further fair housing found in 42 U.S.C. 
3608(d).
    Following are the remaining issues raised by the public comments 
and HUD's responses.

A. Validity of Discriminatory Effects Liability Under the Act

    Issue: Some commenters opposed the rule because, in their view, the 
Act's text cannot be interpreted to include liability under a 
discriminatory effects theory. Commenters stated that the Fair Housing 
Act does not include an effects standard because it does not use the 
phrase ``adversely affect,'' as in Title VII, the Age Discrimination in 
Employment Act (ADEA), or the Americans with Disabilities Act. One of 
these commenters stated that the Fair Housing Act does not include any 
of the words in other statutes that have been interpreted as giving 
rise to disparate impact claims, such as ``affect'' and ``tend to.'' A 
commenter found the ``otherwise make unavailable or deny'' language in 
the Fair Housing Act unpersuasive evidence that Congress intended the 
Act to include an effects test because it is a catchall phrase at the 
end of a list of prohibited conduct, and it must be read as having a 
similar meaning as the specific items on the list.
    Some commenters stated that the Act's prohibition of certain 
practices ``because of,'' ``on account of,'' or ``based on'' a 
protected classification necessitates a showing of discriminatory 
intent. A commenter stated that ``because of'' and ``on account of,'' 
as used in every provision of the Act, require evidence of intent 
because the same phrases are used in two provisions of the Act that 
cannot plausibly be interpreted to employ discriminatory effects 
liability. In this regard, this commenter pointed to 42 U.S.C. 3631, 
which uses the phrase ``because of'' to create criminal liability for 
specific fair housing violations, and 42 U.S.C. 3617, which uses the 
phrase ``on account of'' to ban coercion and intimidation of those 
exercising fair-housing rights.
    Other commenters expressed support for a rule setting out the 
discriminatory effects theory of liability. Some of these commenters 
stated that Congress intended that such liability exist and that the 
text of the Act readily supports this position. Commenters stated that 
discriminatory effects liability best effectuates Congress's broad, 
remedial intent in passing the Fair Housing Act and the Act's stated 
purpose of providing for fair housing, within constitutional 
limitations, throughout the country. Commenters pointed out, through 
examples of neutral practices with discriminatory results that they 
have encountered, that an effects theory of liability continues to be 
vital in achieving the Act's broad goal. Commenters stated that, 
consistent with HUD's interpretation of the Act, federal courts have 
unanimously held that liability may be established by proof of 
discriminatory effects.
    HUD Response: As the preamble to the proposed rule and this final 
rule make clear, both HUD and the federal courts have long interpreted 
the Fair Housing Act to prohibit actions that have an unjustified 
discriminatory effect, regardless of whether the action was motivated 
by a discriminatory intent. Section 804(a) of the Act makes it unlawful 
``[t]o refuse to sell or rent after the making of a bona fide offer, or 
to refuse to negotiate for the sale or rental of, or otherwise make 
unavailable or deny, a dwelling to any person because of race, color, 
religion, sex,

[[Page 11466]]

familial status, or national origin.'' \44\ Similarly, section 
804(f)(1) makes it unlawful ``[t]o discriminate in the sale or rental, 
or to otherwise make unavailable or deny, a dwelling to any buyer or 
renter because of a handicap.'' \45\ This ``otherwise make unavailable 
or deny'' formulation in the text of the Act focuses on the effects of 
a challenged action rather than the motivation of the actor. In this 
way, the provisions are similar to the ``otherwise adversely affect'' 
formulation that the Supreme Court found to support disparate impact 
liability under Title VII and the ADEA.\46\ And, indeed, the federal 
courts have drawn the analogy between Title VII and the Fair Housing 
Act in interpreting the Act to prohibit actions that have an 
unjustified discriminatory effect, regardless of intent.\47\
---------------------------------------------------------------------------

    \44\ 42 U.S.C. 3604(a).
    \45\ 42 U.S.C. 3604(f)(1).
    \46\ See Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971) 
(holding that Title VII includes a disparate impact standard); Smith 
v. City of Jackson, Miss., 544 U.S. 228, 235 (2005) (affirming that 
the holding in Griggs represented the best reading of Title VII's 
text); id. at 240 (holding that section 4(a)(2) of the ADEA includes 
a disparate impact standard); see also Nat'l Cmty. Reinvestment 
Coalition v. Accredited Home Lenders Holding Co., 573 F. Supp. 2d 
70, 78 (D.DC 2008) (holding that the Fair Housing Act encompasses 
disparate impact liability because, among other reasons, language in 
the Act is analogous to language in the ADEA found by the Supreme 
Court to include disparate impact).
    \47\ See Resident Advisory Bd. v. Rizzo, 564 F.2d 126, 146 (3d 
Cir. 1977) (``[I]n Title VIII cases, by analogy to Title VII cases, 
unrebutted proof of discriminatory effect alone may justify a 
federal equitable response.''); Graoch, 508 F.3d at 374 (quoting 
Griggs, 401 U.S. at 431) (``The Supreme Court held that Title VII, 
which uses similar language [to Title VIII], `proscribes not only 
overt discrimination but also practices that are fair in form, but 
discriminatory in operation.' The same analysis justifies the 
existence of disparate-impact liability under the FHA.'').
---------------------------------------------------------------------------

    In addition, many of the Fair Housing Act's provisions make it 
unlawful ``to discriminate'' in certain housing-related transactions 
based on a protected characteristic.\48\ ``Discriminate'' is a term 
that may encompass actions that have a discriminatory effect but not a 
discriminatory intent.\49\ HUD's extensive experience in administering 
the Fair Housing Act and in investigating and adjudicating claims 
arising under the Act, which is discussed in this preamble and that of 
the proposed rule,\50\ informs its conclusion that not only can the 
term ``discriminate'' be interpreted to encompass discriminatory 
effects liability, but it must be so interpreted in order to achieve 
the Act's stated purpose to provide for fair housing to the extent the 
Constitution allows.\51\ Indeed, as far back as 1980, the HUD Secretary 
explained to Congress why discriminatory effects liability under the 
Fair Housing Act is ``imperative to the success of civil rights 
enforcement.'' \52\ Only by eliminating practices with an unnecessary 
disparate impact or that unnecessarily create, perpetuate, increase, or 
reinforce segregated housing patterns, can the Act's intended goal to 
advance equal housing opportunity and achieve integration be 
realized.\53\ In keeping with the broad remedial goals of the Fair 
Housing Act,\54\ HUD interprets the term ``discriminate,'' as well as 
the language in sections 804(a) and 804(f)(1) of the Act, to encompass 
liability based on the results of a practice, as well as any intended 
effect.
---------------------------------------------------------------------------

    \48\ See 42 U.S.C. 3604(b), 3604(f)(1), 3604(f)(2), 3605, and 
3606.
    \49\ See, e.g., Alexander v. Choate, 469 U.S. 287, 299 (1985) 
(assuming without deciding that section 504 of the Rehabilitation 
Act of 1973, which prohibits ``subject[ing] to discrimination'' 
otherwise qualified handicapped individuals, ``reaches at least some 
conduct that has an unjustifiable disparate impact upon the 
handicapped''); Board. of Ed. v. Harris, 444 U.S. 130, 140-41 (1979) 
(concluding that the term ``discrimination,'' as used in the 1972 
Emergency School Aid Act, was ambiguous and proscribed actions that 
had a disparate impact).
    \50\ See supra nn. 12-27; preamble to the November 16, 2011, 
proposed rule at 76 FR 70922-23.
    \51\ In enacting the Fair Housing Act, Congress expressed its 
desire to provide, within constitutional limitations, for fair 
housing throughout the United States. See 42 U.S.C. 3601.
    \52\ See 126 Cong. Rec. 31,166-31,167 (1980) (statement of Sen. 
Mathias) (reading into the record letter of HUD Secretary).
    \53\ See supra nn. 3-7; infra nn. 65-69.
    \54\ See supra note 11.
---------------------------------------------------------------------------

    The ``because of'' phrase found in sections 804 and 805 of the Act 
\55\ and similar language such as ``on account of'' or ``based on'' 
does not signal that Congress intended to limit the Act's coverage to 
intentional discrimination. Both section 703(a)(2) of Title VII \56\ 
and section 4(a)(2) of the ADEA \57\ prohibit certain actions ``because 
of'' a protected characteristic, yet neither provision requires a 
finding of discriminatory intent.\58\ Moreover, the fact that the 
phrases ``on account of'' and ``because of'' appear in sections 817 and 
831 of the Fair Housing Act \59\ does not preclude finding 
discriminatory effects liability under the Act's other substantive 
provisions using the same language because, as discussed above, HUD 
bases its interpretation of those other provisions on other language 
not found in sections 817 and 831, such as the phrase ``otherwise make 
unavailable or deny a dwelling'' and the term ``discriminate.''
---------------------------------------------------------------------------

    \55\ 42 U.S.C. 3604 and 3605.
    \56\ 42 U.S.C. 2000e-2(a)(2).
    \57\ 29 U.S.C. 623(a)(2).
    \58\ See Meacham v. Knolls Atomic Power Lab., 554 U.S. 84, 96 
(2008) (explaining that, ``in the typical disparate-impact case'' 
under the ADEA, ``the employer's practice is `without respect to 
age' and its adverse impact (though `because of age') is 
`attributable to a nonage factor' ''); Resident Advisory Bd. v. 
Rizzo, 564 F.2d 126, 147 (3d Cir. 1977) (``[T]he `because of race' 
language is not unique to Sec.  3604(a): that same language appears 
in Title VII of the Civil Rights Act of 1964, 42 U.S.C. Sec.  2000e-
2(h), yet a prima facie case of Title VII liability is made out when 
a showing of discriminatory effect (as distinct from intent) is 
established.'').
    \59\ 42 U.S.C. 3617 and 3631.
---------------------------------------------------------------------------

    HUD's interpretation is confirmed by the fact that the Act's text 
contains three exemptions that presuppose that the Act encompasses an 
effects theory of liability. For one, section 805(c) of the Act allows 
``a person engaged in the business of furnishing appraisals of real 
property to take into consideration factors other than race, color, 
religion, national origin, sex, handicap, or familial status.'' \60\ If 
the Act prohibited only intentional discrimination, it would not be 
unlawful to ``take into consideration factors other than'' protected 
characteristics in the first instance, and this exemption would be 
superfluous. Second, section 807(b)(1) of the Act states that 
``[n]othing in this title limits the applicability of any reasonable 
local, State, or Federal restrictions regarding the maximum number of 
occupants permitted to occupy a dwelling.'' \61\ Since ``the number of 
occupants permitted to occupy a dwelling'' is not a protected 
classification under the Act, this provision makes sense only as 
authorizing occupancy limits that would otherwise violate the Act based 
on an effects theory.\62\ Indeed, in 1991, HUD issued a memorandum to 
its staff explaining when occupancy limits would violate the Act based 
on disparate impact liability, and Congress later directed HUD to 
publish these guidelines in the Federal Register. \63\ Third, section 
807(b)(4) of the Act states that ``[n]othing in this title prohibits 
conduct against a person because such person has been convicted by any 
court of competent jurisdiction of the illegal manufacture or 
distribution of a controlled substance.'' \64\ As with the two 
exemptions discussed above, this provision would be wholly unnecessary 
if the Act prohibited only intentional discrimination.
---------------------------------------------------------------------------

    \60\ 42 U.S.C. 3605(c).
    \61\ 42 U.S.C. 3607(b)(1).
    \62\ See City of Jackson, 544 U.S. at 238-39 (explaining that 
the ADEA's provision that allows an employer ``to take any action 
otherwise prohibited * * * where the differentiation is based on 
reasonable factors other than age discrimination'' would be ``simply 
unnecessary'' if the ADEA prohibited only intentional 
discrimination).
    \63\ See supra note 26.
    \64\ 42 U.S.C. 3607(b)(4).

---------------------------------------------------------------------------

[[Page 11467]]

    The legislative history of the Act informs HUD's interpretation. 
The Fair Housing Act was enacted after a report by the National 
Advisory Commission on Civil Disorders, which President Johnson had 
convened in response to major riots taking place throughout the 
country, warned that ``[o]ur Nation is moving toward two societies, one 
black, one white--separate and unequal.'' \65\ The Act's lead sponsor, 
Senator Walter Mondale, explained in the Senate debates that the broad 
purpose of the Act was to replace segregated neighborhoods with ``truly 
integrated and balanced living patterns.'' \66\ Senator Mondale 
recognized that segregation was caused not only by ``overt racial 
discrimination'' but also by ``[o]ld habits'' which became ``frozen 
rules,'' \67\ and he pointed to one such facially neutral practice--the 
``refusal by suburbs and other communities to accept low-income 
housing.'' \68\ He further explained some of the ways in which federal, 
state, and local policies had formerly operated to require segregation 
and argued that ``Congress should now pass a fair housing act to undo 
the effects of these past'' discriminatory actions.\69\
---------------------------------------------------------------------------

    \65\ Report of the National Advisory Commission on Civil 
Disorders 1 (1968).
    \66\ 90 Cong. Rec. 3422 (1968).
    \67\ 114 Cong. Rec. 3421 (1968).
    \68\ Id. at 2277.
    \69\ Id. at 2669.
---------------------------------------------------------------------------

    Moreover, in the approximately 20 years between the Act's enactment 
in 1968 and its amendment in 1988, the nine federal courts of appeals 
to address the issue held that the Act prohibited actions with a 
discriminatory effect.\70\ Congress was aware of this widespread 
judicial agreement when it significantly amended the Act in 1988.\71\ 
At that time, the House Committee on the Judiciary specifically 
rejected an amendment that would have provided that ``a zoning decision 
is not a violation of the Fair Housing Act unless the decision was made 
with the intent to discriminate.'' \72\ Instead of adding this intent 
requirement to the Act, Congress chose to maintain the Act's operative 
text barring discrimination and making unavailable or denying housing, 
to extend those prohibitions to disability and familial status, and to 
establish the exemptions discussed above that presuppose the 
availability of a discriminatory effects theory of liability.\73\ The 
failed attempt in 1988 to impose an intent requirement on the Act 
followed five other failed attempts, in 1980,\74\ 1981,\75\ 1983,\76\ 
1985,\77\ and 1987.\78\
---------------------------------------------------------------------------

    \70\ See, e.g., Huntington Branch, NAACP v. Town of Huntington, 
844 F.2d 926, 935-36 (2d Cir.), aff'd, 488 U.S. 15 (1988); Hanson v. 
Veterans Admin., 800 F.2d 1381, 1386 (5th Cir. 1986); Arthur v. City 
of Toledo, 782 F.2d 565, 574-75 (6th Cir. 1986); United States v. 
Marengo Cnty. Comm'n, 731 F.2d 1546, 1559 n.20 (11th Cir. 1984); 
Smith v. Clarkton, 682 F.2d 1055, 1065 (4th Cir. 1982); Halet v. 
Wend Inv. Co., 672 F.2d 1305, 1311 (9th Cir. 1982); Resident 
Advisory Bd. v. Rizzo, 564 F.2d 126, 146 (3d Cir. 1977); Metro. 
Hous. Dev. Corp. v. Vill. of Arlington Heights, 558 F.2d 1283, 1290 
(7th Cir. 1977), cert. denied, 434 U.S. 1025 (1978); United States 
v. City of Black Jack, 508 F.2d 1179, 1184-85 (8th Cir. 1974).
    \71\ See, e.g., H.R. Rep. No. 100-711, at 2182 (1988) (citing 
courts of appeals decisions in discussing a policy that could have a 
``discriminatory effect'' on minority households ``[b]ecause 
minority households tend to be larger''); 134 Cong. Rec. 23711-12 
(1988) (Statement of Sen. Kennedy) (noting unanimity of courts of 
appeals as to the disparate impact test); Fair Housing Amendments 
Act of 1987: Hearings Before the Subcomm. on the Constitution of the 
S. Comm. on the Judiciary, 100th Cong., 1st Sess. 529-557 (1987) 
(testimony of Prof. Robert Schwemm, Univ. of Ky. Law Sch.) 
(discussing ``strong consensus'' in federal courts of appeals that 
the Fair Housing Act prohibited disparate impact discrimination).
    \72\ See H.R. Rep. No. 100-711, at 89-91 (1988) (dissenting 
views of Rep. Swindall).
    \73\ See Fair Housing Amendments Act of 1988, Pub. L. 100-430, 
102 Stat. 1619 (1988).
    \74\ H.R. Rep. No. 96-865, at 2 (1980) (The Act ``effectively 
proscribed housing practices with the intent or effect of 
discriminating on account of race, color, national origin, or 
religion.''); 126 Cong. Rec. 31,164 (1980) (explaining that the 
addition of an intent requirement ``would make a radical change in 
the standard of proof in title VIII cases'') (statement of Sen. 
Bayh).
    \75\ 127 Cong. Rec. 22,156 (1981).
    \76\ 129 Cong. Rec. 808 (1983).
    \77\ S. 139, 99th Cong. Sec.  6(e) (1985).
    \78\ 133 Cong. Rec. 7180 (1987).
---------------------------------------------------------------------------

    Issue: Two commenters stated that, when promulgating regulations 
implementing the Fair Housing Amendments Act of 1988, HUD stated in the 
preamble that the ``regulations are not designed to resolve the 
question of whether intent is or is not required to show a violation'' 
of the Act.\79\ A commenter faulted HUD for failing to explain what the 
commenter perceived as a change in its official interpretation of the 
Act, and urged HUD to eliminate disparate impact liability from the 
rule. Some commenters stated that President Reagan, when signing the 
Fair Housing Amendments Act of 1988, expressed his opinion that the 
amendment ``does not represent any congressional or executive branch 
endorsement of the notion, expressed in some judicial opinions, that 
[Fair Housing Act] violations may be established by a showing of 
disparate impact or discriminatory effects of a practice that is taken 
without discriminatory intent.'' \80\ Some commenters also stated that, 
in 1988, the United States Solicitor General submitted an amicus brief 
to the U.S. Supreme Court in Huntington Branch, NAACP v. Town of 
Huntington asserting that a violation of the Fair Housing Act requires 
a finding of intentional discrimination.\81\
---------------------------------------------------------------------------

    \79\ 54 FR 3232, 3235 (Jan. 23, 1989).
    \80\ Remarks on Signing the Fair Housing Amendments Act of 1988, 
24 Weekly Comp. Pres. Doc. 1140, 1141 (Sept. 13, 1988).
    \81\ See Brief for United States as Amicus Curiae, Town of 
Huntington v. Huntington Branch, NAACP, 488 U.S. 15 (1988) (No. 97-
1961).
---------------------------------------------------------------------------

    HUD Response: While HUD chose not to use the regulations 
implementing the Fair Housing Amendments Act of 1988 to opine formally 
on whether a violation under the Act may be established absent 
discriminatory intent, it has never taken the position that the Act 
requires a finding of intentional discrimination. On the contrary, 
through formal adjudications and various other means, including other 
regulations, interpretive guidance, and statements to Congress, HUD has 
consistently construed the Act as encompassing discriminatory effects 
liability.\82\ HUD's prior interpretations of the Act regarding the 
discriminatory effects standard are entitled to judicial deference.\83\ 
Neither President Reagan's signing statement nor the Solicitor 
General's amicus brief in Huntington Branch affects or overrides the 
longstanding, consistent construction of the Act by HUD, the agency 
with delegated authority to administer the Act and to promulgate rules 
interpreting it. Moreover, the Department of Justice both before and 
after Huntington Branch has taken the position that the Fair Housing 
Act includes discriminatory effects liability.\84\
---------------------------------------------------------------------------

    \82\ See, e.g., nn. 12-27, supra.
    \83\ See, e.g., United States v. Mead Corp., 533 U.S. 218, 230 & 
n.12 (2001) (Chevron deference is warranted for formal 
adjudications).
    \84\ See United States. v. City of Black Jack, 508 F.2d 1179, 
1184-86 (8th Cir. 1974); see also Brief for the United States as 
Amicus Curiae, Magner v. Gallagher, 132 S. Ct. 1306 (2012) (No. 10-
1032).
---------------------------------------------------------------------------

B. Definition of Discriminatory Effect, Sec.  100.500(a)

    In order to make it more concise and more consistent with 
terminology used in case law without changing its substance, this final 
rule slightly revises the definition of ``discriminatory effect.''
    Proposed Sec.  100.500(a) provided that ``A housing practice has a 
discriminatory effect where it 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, perpetuating, or increasing segregated 
housing patterns on the basis of race, color, religion, sex, handicap, 
familial status, or national origin.''
    Final Sec.  100.500(a) provides that ``[a] practice has a 
discriminatory effect where it actually or predictably results in a 
disparate impact on a group of

[[Page 11468]]

persons or creates, increases, reinforces, or perpetuates segregated 
housing patterns because of race, color, religion, sex, handicap, 
familial status, or national origin.''
    Commenters raised a number of issues with respect to the definition 
of ``discriminatory effect.''
    Issue: Two commenters requested that HUD expand the definition of 
``housing practice'' to include the language from the preamble to the 
proposed rule that provided examples of facially neutral actions that 
may result in a discriminatory effect, ``e.g. laws, rules, decisions, 
standards, policies, practices, or procedures, including those that 
allow for discretion or the use of subjective criteria,'' to make clear 
that the Act does not apply only to housing ``practices.''
    HUD Response: The Act and HUD regulations define ``discriminatory 
housing practice'' broadly as ``an act that is unlawful under section 
804, 805, 806, or 818.'' \85\ As HUD explained in the preamble to the 
proposed rule, any facially neutral actions, e.g., laws, rules, 
decisions, standards, policies, practices, or procedures, including 
those that allow for discretion or the use of subjective criteria, may 
result in a discriminatory effect actionable under the Fair Housing 
Act. Given the breadth of the definition of ``discriminatory housing 
practice,'' and the examples provided in the preamble to the proposed 
rule, HUD does not agree that it is necessary to provide those examples 
in the text of the regulation. The final rule does, however, replace 
``housing practice'' with ``practice'' in order to make clear it 
applies to the full range of actions that may violate the Fair Housing 
Act under an effects theory.
---------------------------------------------------------------------------

    \85\ 42 U.S.C. 3602(f); 24 CFR 100.20.
---------------------------------------------------------------------------

    Issue: A commenter stated that, in light of the Supreme Court's 
decision in Wal-Mart Stores, Inc. v. Dukes,\86\ HUD should ``remove 
those aspects of the proposed rule that would give rise to disparate 
impact liability based on the exercise of discretion.''
---------------------------------------------------------------------------

    \86\ 131 S. Ct. 2541 (2011).
---------------------------------------------------------------------------

    HUD Response: HUD does not agree that the Supreme Court's decision 
in Wal-Mart means that policies permitting discretion may not give rise 
to discriminatory effects liability under the Fair Housing Act. The 
opinion in Wal-Mart did not address the substantive standards under the 
Fair Housing Act but instead addressed the issue of class certification 
under Title VII. Moreover, even in that context, the opinion in Wal-
Mart does not shield policies that allow for discretion from liability 
under Title VII. On the contrary, the Supreme Court confirmed that an 
employer who permits his managers to exercise discretion may be liable 
under Title VII pursuant to a disparate impact theory, ``since an 
employer's undisciplined system of subjective decision-making can have 
precisely the same effects as a system pervaded by impermissible 
intentional discrimination.'' \87\
---------------------------------------------------------------------------

    \87\ Id. at 2554 (internal brackets and quotation omitted).
---------------------------------------------------------------------------

    Issue: Some commenters asked HUD to remove the word ``predictably'' 
from the proposed definition. One commenter made this request out of 
concern that such a definition would make good faith compliance with 
the Act difficult, and another because claims based on a predictable 
impact are too speculative. Another commenter expressed support for the 
inclusion of ``predictably'' in the definition because discrimination 
cases often involve members of a protected class who predictably would 
be impacted by the challenged practice. As an example, the commenter 
stated that a challenge to a zoning or land use ordinance might focus 
on persons who would be excluded from residency by application of the 
ordinance.
    HUD Response: HUD agrees with the latter commenter that the Act is 
best interpreted as prohibiting actions that predictably result in an 
unjustified discriminatory effect. HUD's interpretation is supported by 
the plain language of the Fair Housing Act, which defines ``aggrieved 
person'' as any person who ``believes that such person will be injured 
by a discriminatory housing practice that is about to occur,'' \88\ and 
which specifically authorizes HUD to take enforcement action and ALJs 
and courts to order relief with respect to discrimination that ``is 
about to occur.'' \89\ Moreover, courts interpreting the Fair Housing 
Act have agreed that predictable discriminatory effects may violate the 
Act.\90\
---------------------------------------------------------------------------

    \88\ 42 U.S.C. 3602(i).
    \89\ See 42 U.S.C. 3610(g)(2)(A); 3612(g)(3); 3613(c)(1); 
3614(d)(1)(A).
    \90\ See, e.g., Pfaff v. HUD, 88 F.3d at 745 (`` `Discriminatory 
effect' describes conduct that actually or predictably resulted in 
discrimination.''); United States. v. City of Black Jack, 508 F.2d 
at 1184 (``To 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.'').
---------------------------------------------------------------------------

    Issue: A commenter requested that the preamble or the text of the 
final rule make clear that reasonable data, such as data from the U.S. 
Census Bureau, data required by the Home Mortgage Disclosure Act 
(HMDA), and HUD data on the occupancy of subsidized housing units, can 
be used to demonstrate that a practice predictably results in a 
discriminatory effect.
    HUD Response: The purpose of the rule, as identified in the 
November 16, 2011, proposed rule, is to formalize a long-recognized 
legal interpretation and establish a uniform legal standard, rather 
than to describe how data and statistics may be used in the application 
of the standard. The appropriate use of such data is discussed in other 
federal sources, including the Joint Policy Statement.
    Issue: Several commenters expressed concern that the proposed rule 
did not explain the degree to which a practice must disproportionately 
impact one group over another. A few commenters expressed the opinion 
that, in order for a practice to violate the Act, the practice must 
result in a significant or non-trivial discriminatory effect. A 
commenter wrote that members of a protected class must be impacted in a 
manner that is ``meaningfully different'' from any impact on other 
individuals. Another commenter suggested defining a disparate impact as 
a 20 percent difference between the relevant groups. Another stated 
that the impact should be ``qualitatively different.'' A commenter 
wrote that, in the lending context, a disparate impact should not exist 
where statistics only show that a protected class, on an aggregate 
basis, has not received as many loans as the general population. 
Another commenter stated concern that the rule would allow small 
statistical differences in the pricing of loans to be actionable.
    HUD Response: As stated in the response to the preceding issue, 
this rule concerns the formalization of a long-recognized legal 
interpretation and burden-shifting framework, rather than a 
codification of how data and statistics may be used in the application 
of the standard. To establish a prima facie case of discriminatory 
effects liability under the rule, the charging party or plaintiff must 
show that members of a protected class are disproportionately burdened 
by the challenged action, or that the practice has a segregative 
effect. Whether a particular practice results in a discriminatory 
effect is a fact-specific inquiry. Given the numerous and varied 
practices and wide variety of private and governmental entities covered 
by the Act, it would be impossible to specify in the rule the showing 
that would be required to demonstrate a discriminatory effect in each 
of these contexts. HUD's decision not to codify a significance 
requirement for pleading purposes is consistent with the Joint

[[Page 11469]]

Policy Statement,\91\ the statutory codification of the disparate 
impact standard under Title VII,\92\ and the Consumer Financial 
Protection Bureau's interpretation of the disparate impact standard 
under ECOA.\93\
---------------------------------------------------------------------------

    \91\ See Joint Policy Statement, 59 FR 18,266, 18,269 (Apr. 15, 
1994) (defining ``disparate impact'' as ``a disproportionate adverse 
impact'' on applicants from a protected group).
    \92\ See 42 U.S.C. 2000e-2(k)(1)(A)(i) (complaining party must 
demonstrate ``that a respondent uses a particular employment 
practice that causes a disparate impact'').
    \93\ See 12 CFR part 1002, Supp. I, Official Staff Commentary, 
Comment 6(a)-2 (discriminatory effect may exist when a creditor 
practice ``has a disproportionately negative impact on a prohibited 
basis'').
---------------------------------------------------------------------------

    Issue: Two commenters stated that, in order to establish a prima 
facie case of discriminatory effect liability, a charging party or 
plaintiff should have to identify a specific practice and show that the 
alleged discriminatory effect is caused by that specific practice, with 
a commenter referring to Wards Cove Packing Co. v. Atonio, 490 U.S. 642 
(1989), in support of this position.
    HUD Response: HUD addressed this issue at the proposed rule stage, 
and its analysis is not changed in this final rule. Under this rule, 
the charging party or plaintiff has the burden of proving that a 
challenged practice causes a discriminatory effect.\94\ In HUD's 
experience, identifying the specific practice that caused the alleged 
discriminatory effect will depend on the facts of a particular 
situation and therefore must be determined on a case-by-case basis. 
Moreover, as recognized in the employment context under Title VII, the 
elements of a decision-making process may not be capable of separation 
for analysis,\95\ in which case it may be appropriate to challenge the 
decision-making process as a whole. For example, in a reverse redlining 
case, there may be multiple acts or policies which together result in a 
discriminatory effect.\96\
---------------------------------------------------------------------------

    \94\ See 24 CFR 100.500(c); see also 76 FR 70925.
    \95\ See 42 U.S.C. 2000e-2(k)(1)(B)(i) (``[T]he complaining 
party shall demonstrate that each particular challenged employment 
practice causes a disparate impact, except that if the complaining 
party can demonstrate to the court that the elements of a 
respondent's decisionmaking process are not capable of separation 
for analysis, the decisionmaking process may be analyzed as one 
employment practice'').
    \96\ See, e.g., Hargraves v. Capital City Mortg. Corp, 140 F. 
Supp. 2d 7, 20-22 (D.D.C. 2000) (finding that ``predatory lending'' 
in African American neighborhoods, which included exorbitant 
interest rates, lending based on the value of the asset rather than 
a borrower's ability to repay, profiting by acquiring the property 
through default, repeated foreclosures, and loan servicing 
procedures with excessive fees, could disparately impact African 
Americans).
---------------------------------------------------------------------------

    Issue: Commenters expressed concern with the definition of 
``discriminatory effect'' because it included a practice that has ``the 
effect of creating, perpetuating, or increasing segregated housing 
patterns'' based on protected class. A commenter asked that 
``segregation'' be removed from the proposed definition. Another 
commenter expressed concern that this portion of the definition would 
extend liability beyond the factual circumstances of the cases HUD 
cited as examples in the proposed rule's preamble because, according to 
the commenter, most of those cases raised at least a suggestion of 
intentional discrimination. A commenter stated that ``perpetuating'' 
should be more clearly defined so that the rule states, for example, 
whether the term requires an attempt to segregate further, or merely a 
practice that continues existing patterns of segregation. Another 
commenter expressed the related opinion that ``not explicitly fostering 
integration'' should never form the basis for liability under the Act.
    HUD Response: As discussed in the preambles to both the proposed 
rule and this final rule, the elimination of segregation is central to 
why the Fair Housing Act was enacted.\97\ HUD therefore declines to 
remove from the rule's definition of ``discriminatory effects'' 
``creating, perpetuating, or increasing segregated housing patterns.'' 
\98\ The Fair Housing Act was enacted to replace segregated 
neighborhoods with ``truly integrated and balanced living patterns.'' 
\99\ It was structured to address discriminatory housing practices that 
affect ``the whole community'' as well as particular segments of the 
community,\100\ with the goal of advancing equal opportunity in housing 
and also to ``achieve racial integration for the benefit of all people 
in the United States.'' \101\ Accordingly, the Act prohibits two kinds 
of unjustified discriminatory effects: (1) harm to a particular group 
of persons by a disparate impact; and (2) harm to the community 
generally by creating, increasing, reinforcing, or perpetuating 
segregated housing patterns.\102\ Recognizing liability for actions 
that impermissibly create, increase, reinforce, or perpetuate 
segregated housing patterns directly addresses the purpose of the Act 
to replace segregated neighborhoods with ``truly integrated and 
balanced living patterns.'' For example, the perpetuation of 
segregation theory of liability has been utilized by private developers 
and others to challenge practices that frustrated affordable housing 
development in nearly all-white communities and thus has aided attempts 
to promote integration.\103\
---------------------------------------------------------------------------

    \97\ See nn. 6-7, 65-69 and accompanying text, supra; 76 FR 
70922.
    \98\ As discussed in the ``Definition of Discriminatory Effect'' 
section, the final rule amends the definition of ``discriminatory 
effect'' to make it more concise and more consistent with 
terminology used in case law, but its substance is unchanged.
    \99\ Trafficante, 409 U.S. at 211 (citing 114 Cong. Rec. 3422 
(Feb. 20, 1968) (statement of Senator Mondale)).
    \100\ Trafficante, 409 U.S. at 211 (citing 114 Cong. Rec. 2706 
(1968) (Statement of Senator Javits)).
    \101\ H.R. Res. 1095, 110th Cong., 154 Cong. Rec. H2280-01 
(April 15, 2008).
    \102\ See, e.g., Graoch, 508 F.3d at 378 (there are ``two types 
of discriminatory effects which a facially neutral housing decision 
can have: The first occurs when that decision has a greater adverse 
impact on one racial group than on another. The second is the effect 
which the decision has on the community involved; if it perpetuates 
segregation and thereby prevents interracial association it will be 
considered invidious under the Fair Housing Act independently of the 
extent to which it produces a disparate effect on different racial 
groups.''); Huntington Branch, 844 F.2d at 937 (``the discriminatory 
effect of a rule arises in two contexts: adverse impact on a 
particular minority group and harm to the community generally by the 
perpetuation of segregation * * * recognizing this second form of 
effect advances the principal purpose of Title VIII to promote, 
open, integrated residential housing patterns.'') (internal 
citations and quotation marks omitted); Metro. Housing Dev. Corp. v. 
Village of Arlington Heights, 558 F.2d at 1290 (``There are two 
kinds of racially discriminatory effects which a facially neutral 
decision about housing can produce. The first occurs when that 
decision has a greater adverse impact on one racial group than on 
another. The second is the effect which the decision has on the 
community involved; if it perpetuates segregation and thereby 
prevents interracial association it will be considered invidious 
under the Fair Housing Act independently of the extent to which it 
produces a disparate effect on different racial groups.'') (internal 
citations omitted); Hallmark Developers, Inc. v. Fulton County, 386 
F. Supp. 2d 1369, 1383 (N.D. Ga. 2005) (``Of course there are two 
kinds of racially discriminatory effect which can be produced by a 
facially neutral decision. If the decision or action perpetuates 
segregation and thereby prevents interracial association it will be 
considered invidious under the Fair Housing Act independently of the 
extent to which it produces a disparate effect on different racial 
groups.'') (internal citations omitted).
    \103\ See, e.g., Huntington Branch, 844 F.2d at 937; Arlington 
Heights, 558 F.2d at 1291; Black Jack, 508 F.2d at 1184-86; 
Summerchase Ltd. Pshp. I, et al. v. City of Gonzales, et al., 970 F. 
Supp. 522, 527-28 (M.D. La. 1997); Dews, 109 F. Supp. 2d at 567-68.
---------------------------------------------------------------------------

    Moreover, every federal court of appeals to have addressed the 
issue has agreed with HUD's interpretation that the Act prohibits 
practices with the unjustified effect of perpetuating segregation.\104\ 
In one such case, for example, the court of appeals held that a zoning 
ordinance that prevents the construction of multifamily housing in 
areas that are primarily white may violate the Act by ``reinforcing 
racial

[[Page 11470]]

segregation in housing.'' \105\ For consistency with the terminology 
used in this case law, the final rule adds the term ``reinforces'' to 
the definition of ``discriminatory effect.''
---------------------------------------------------------------------------

    \104\ See supra note 28.
    \105\ Huntington Branch, 844 F.2d at 937-38.
---------------------------------------------------------------------------

    In response to the comment regarding the facts of the cases HUD 
cited as examples in the proposed rule's preamble, HUD notes that those 
cases \106\ are not exhaustive and therefore should not be viewed as 
the only ways that a violation of the Act may be established based on a 
discriminatory effects theory. Moreover, even if the facts of a 
particular case suggest intentional discrimination, in many instances 
both an intent to discriminate and a discriminatory effect may exist, 
and a charging party or plaintiff may bring a claim alleging either or 
both intent and effect as alternative theories of liability. 
Regardless, as explained throughout this preamble, and in case law, 
discriminatory intent is not required for a violation of the Act under 
an effects theory.
---------------------------------------------------------------------------

    \106\ See 76 FR 70925.
---------------------------------------------------------------------------

C. Legally Sufficient Justification, Sec.  100.500(b)(1)

    In response to comments, this final rule slightly revises the first 
prong of ``legally sufficient justification,'' as provided in the 
November 16, 2011, proposed rule, which is required to sustain a 
practice with a discriminatory effect under the Act.
    Proposed Sec.  100.500(b)(1) provided: ``A legally sufficient 
justification exists where the challenged housing practice: (1) Has a 
necessary and manifest relationship to one or more legitimate, 
nondiscriminatory interests of the respondent * * * or defendant.''
    Final Sec.  100.500(b)(1) provides: ``A legally sufficient 
justification exists where the challenged practice: (1) Is necessary to 
achieve one or more substantial, legitimate, nondiscriminatory 
interests of the respondent * * * or defendant * * * A legally 
sufficient justification must be supported by evidence and may not be 
hypothetical or speculative.''
    Comments were received with respect to proposed Sec.  
100.500(b)(1), some agreeing with the standard as stated; some 
recommending that Sec.  100.500(b)(1) set either a higher or lower 
standard of proof for defendants and respondents; and some suggesting 
that HUD provide definitions for certain terms or use slightly 
different terms to make the regulatory provision easier to understand 
and apply.
1. Substantial, Legitimate, Nondiscriminatory Interests, Sec.  
100.500(b)(1)
    Issue: Although some commenters supported the use of the phrase 
``legitimate, nondiscriminatory interest,'' a commenter asked that the 
final rule provide a definition of the phrase to ensure that the 
standard is applied uniformly. Commenters stated that the word 
``substantial'' or ``clearly'' should modify the phrase 
``nondiscriminatory interests,'' reasoning that justifying 
discrimination with an interest that may be of little or no importance 
to the defendant or respondent would run contrary to Congress's goal of 
providing for fair housing within constitutional limitations.
    HUD Response: HUD agrees that, in order to effectuate the Fair 
Housing Act's broad, remedial goal, practices with discriminatory 
effects cannot be justified based on interests of an insubstantial 
nature. Accordingly, HUD is making clear in this final rule that any 
interest justifying a practice with a discriminatory effect must be 
``substantial.'' A ``substantial'' interest is a core interest of the 
organization that has a direct relationship to the function of that 
organization. The requirement that an entity's interest be substantial 
is analogous to the Title VII requirement that an employer's interest 
in an employment practice with a disparate impact be job related.\107\ 
HUD uses the more general standard of substantiality because there is 
no single objective, such as job-relatedness, against which every 
practice covered by the Fair Housing Act could be measured. The 
determination of whether goals, objectives, and activities are of 
substantial interest to a respondent or defendant such that they can 
justify actions with a discriminatory effect requires a case-specific, 
fact-based inquiry.
---------------------------------------------------------------------------

    \107\ See 42 U.S.C. 2000e-2(k)(1)(A)(i).
---------------------------------------------------------------------------

    The word ``legitimate,'' used in its ordinary meaning, is intended 
to ensure that a justification is genuine and not false,\108\ while the 
word ``nondiscriminatory'' is intended to ensure that the justification 
for a challenged practice does not itself discriminate based on a 
protected characteristic. HUD and federal courts interpreting the Fair 
Housing Act have been applying these concepts without incident.\109\
---------------------------------------------------------------------------

    \108\ See, e.g., Legitimate Definition, Merriam-Webster's 
Dictionary, http://www.merriam-webster.com/dictionary/necessary 
(last visited Mar. 15, 2012) (defining ``legitimate'' as ``neither 
spurious nor false'').
    \109\ See, e.g., Darst-Webbe Tenant Ass'n Bd. v. St. Louis Hous. 
Auth., 417 F.3d 898, 902 (8th Cir. 2005) (defendant must prove that 
challenged action is necessary to achieve ``legitimate, non-
discriminatory policy objectives''); Charleston Hous. Auth. v. U.S. 
Dept. of Agric. 419 F.3d 729 (same).
---------------------------------------------------------------------------

    Issue: Commenters requested that ``legitimate, nondiscriminatory 
interests'' be replaced or equated with ``business necessity.'' This 
would, in their view, be consistent with judicial interpretations of 
the Fair Housing Act, with HUD's regulations governing Fannie Mae and 
Freddie Mac, and with the Joint Policy Statement. Commenters stated 
that the Joint Policy Statement is well established and provides a 
clear, predictable standard to covered entities. Several commenters 
expressed concern that the proposed standard requiring a ``legitimate'' 
justification was weaker than, and would be interpreted as requiring 
less than, the ``business necessity'' standard.
    HUD Response: In its adjudications under the Fair Housing Act, HUD 
has required respondents to prove that their challenged practices are 
justified by business necessity.\110\ The other federal regulatory and 
enforcement agencies involved in the investigation of lending 
discrimination have taken the same approach.\111\ The ``substantial, 
legitimate, nondiscriminatory interest'' standard found in Sec.  
100.500(b)(1) is equivalent to the ``business necessity'' standard 
found in the Joint Policy Statement. The standard set forth in this 
rule is not to be interpreted as a more lenient standard than 
``business necessity.'' HUD chooses not to use the phrase ``business 
necessity'' in the rule because the phrase may not be easily understood 
to cover the full scope of practices covered by the Fair Housing Act, 
which applies to individuals, businesses, nonprofit organizations, and 
public entities. Using the phrase ``business necessity'' might confuse 
litigating parties and the courts as to how the term might apply, for 
example, to a nonprofit organization that provides housing or housing-
related services, or to a branch of state or local government carrying 
out its functions. The standards in Sec.  100.500 apply equally to 
individuals, public entities, and for-

[[Page 11471]]

profit and nonprofit private entities because, as discussed below, 
neither the text of the Act nor its legislative history supports 
drawing a distinction among them. Accordingly, HUD has chosen 
terminology that, while equivalent to its previous guidance in the 
Joint Policy Statement, applies readily to all covered entities and all 
covered activities.
---------------------------------------------------------------------------

    \110\ See, e.g., 1998 Enforcement Handbook at 2-30 (instructing 
HUD investigators that a respondent's policy must be justified by a 
``business necessity''); HUD v. Carlson, 1995 WL 365009, at *14 (HUD 
ALJ June 12, 1995) (``The Respondent has the burden to overcome the 
prima facie case by establishing a business necessity for the 
policy.''); Joint Policy Statement, 59 FR at 18269 (requiring a 
challenged policy or practice to be ``justified by `business 
necessity' '').
    \111\ See Joint Policy Statement, 59 FR at 18269.
---------------------------------------------------------------------------

    Issue: Some commenters expressed concern that the term 
``legitimate'' allows for subjective review of a proffered 
justification.
    HUD Response: HUD and courts have reviewed justifications proffered 
by covered entities for many years. While the review is very fact 
intensive, it is not subjective. Whether an interest is ``legitimate'' 
is judged on the basis of objective facts establishing that the 
proffered justification is genuine, and not fabricated or 
pretextual.\112\ HUD and courts have engaged in this inquiry for 
decades without encountering issues related to the subjectivity of the 
inquiry. HUD therefore believes that concerns about subjective reviews 
of proffered justifications are not warranted.
---------------------------------------------------------------------------

    \112\ See note 109, supra.
---------------------------------------------------------------------------

    Issue: A commenter requested that the final rule expressly state 
that increasing profits, minimizing costs, and increasing market share 
qualify as legitimate, nondiscriminatory interests. Similarly, another 
commenter asked that the final rule codify examples of tenant screening 
criteria such as rental history, credit checks, income verification, 
and court records that would be presumed to qualify as legally 
sufficient justifications.
    HUD Response: HUD is not adopting these suggestions because the 
Fair Housing Act covers many different types of entities and practices, 
and a determination of what qualifies as a substantial, legitimate, 
nondiscriminatory interest for a given entity is fact-specific and must 
be determined on a case-by-case basis. Accordingly, the final rule does 
not provide examples of interests that would always qualify as 
substantial, legitimate, nondiscriminatory interests for every 
respondent or defendant in any context.
2. Relationship Between Challenged Practice and Asserted Interest, 
Sec.  100.500(b)(1)
    Issue: Several commenters expressed concern with HUD's use of the 
term ``manifest'' in the proposed requirement that the challenged 
practice have a ``necessary and manifest relationship'' to one or more 
legitimate, nondiscriminatory interests of the respondent or defendant. 
Commenters expressed uncertainty about what the term was intended to 
mean and how it would be interpreted by HUD or by federal courts. Two 
commenters expressed concern that the term ``manifest'' may involve a 
subjective evaluation and others did not understand the evidentiary 
concept embodied in the term. A commenter urged HUD to make clear in 
the language of the final rule, in addition to the preamble, that a 
justification may not be hypothetical or speculative.
    HUD Response: In the proposed rule, the term ``manifest'' was used 
to convey defendants' and respondents' obligation to provide evidence 
of the actual need for the challenged practices, instead of relying on 
speculation, hypothesis, generalization, stereotype, or fear. HUD 
recognizes that some commenters were confused by the term ``manifest.'' 
In response to these concerns, HUD is replacing the term ``manifest'' 
in the final rule with the requirement, added in Sec.  100.500(b)(2), 
that ``a legally sufficient justification must be supported by evidence 
and may not be hypothetical or speculative.'' This language is intended 
to convey that defendants and respondents, relying on a defense under 
Sec.  100.500(b)(1), must be able to prove with evidence the 
substantial, legitimate, nondiscriminatory interest supporting the 
challenged practice and the necessity of the challenged practice to 
achieve that interest. This language is consistent with HUD's 
longstanding application of effects liability under the Fair Housing 
Act, is easy to understand, can be uniformly applied by federal and 
state courts and administrative agencies, and is unlikely to cause 
confusion or unnecessary litigation about its meaning. HUD notes that 
this language is also consistent with the application of the standard 
by other federal regulatory and enforcement agencies under both the 
Fair Housing Act and ECOA,\113\ with the approach taken under Title 
VII,\114\ and with the approach taken by a number of federal courts 
interpreting the Fair Housing Act.\115\
---------------------------------------------------------------------------

    \113\ See Joint Policy Statement, 59 FR at 18269 (``The 
justification must be manifest and may not be hypothetical or 
speculative.'')
    \114\ See 42 U.S.C. 2000e-2(k)(1)(A)(i) (the respondent must 
``demonstrate that the challenged practice is job related for the 
position in question and consistent with business necessity'') 
(emphasis added).
    \115\ See, e.g., Charleston Hous. Auth. v. U.S. Dep't of Agric., 
419 F.3d 729, 741 (8th Cir. 2005) (the challenged housing practice 
must have a ``manifest relationship'' to the defendant's 
objectives); Resident Advisory Bd. v. Rizzo, 564 F.2d at 149 (``a 
justification must serve, in theory and practice, a legitimate, bona 
fide interest of the Title VIII defendant'') (emphasis added); 
Huntington Branch, NAACP v. Town of Huntington, 844 F.2d at 938, 
aff'd, 488 U.S. 15 (1988) (per curiam) (same).
---------------------------------------------------------------------------

    Issue: A commenter suggested that the phrase ``necessary and 
manifest'' should be defined.
    HUD Response: As discussed above, HUD has removed the word 
``manifest'' in the final rule in order to avoid any potential 
confusion. Thus, Sec.  100.500(b)(1) is slightly revised at this final 
rule stage to state that a respondent or defendant seeking to defend a 
challenged practice with a discriminatory effect must prove that the 
practice ``is necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests'' of the respondent or defendant. In the 
proposed rule, as well as this final rule, HUD uses ``necessary'' in 
its ordinary, most commonly used sense.
    Issue: Some commenters suggested that HUD remove the word 
``necessary'' to make the standard found in Sec.  100.500(b)(1) 
consistent with the Title VII standard set out in the Supreme Court's 
opinion in Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989). 
Commenters suggested various standards without the word ``necessary,'' 
including requiring that the challenged practice have ``a legitimate 
business purpose,'' that the challenged practice have ``a legitimate 
nondiscriminatory purpose,'' or that the challenged practice be 
``rationally related to a legitimate, nondiscriminatory goal.''
    HUD Response: HUD declines to adopt the commenters' suggestion to 
remove ``necessary'' from the rule. HUD's substantial experience in 
administering the Fair Housing Act confirms that requiring a challenged 
practice with a discriminatory effect to be necessary best effectuates 
the broad, remedial goal of the Act. Indeed, in 1994 HUD and ten other 
federal agencies notified lenders of the requirement to justify the 
discriminatory effect of a challenged lending practice under the Fair 
Housing Act and ECOA by showing that the practice is necessary to their 
business.\116\ Moreover, in 1997, HUD

[[Page 11472]]

promulgated a regulation recognizing that section 805 of the Act \117\ 
does not prevent consideration, in the purchasing of loans, of factors 
that are necessary to a business.\118\ In addition, in 1988 the House 
Committee on the Judiciary, in advancing a bill amending the Fair 
Housing Act, recognized that liability should not attach when a 
justification is necessary to the covered entity's business.\119\ HUD's 
view is also consistent with Congress's 1991 enactment of legislation 
codifying that, in the employment context, a practice that has a 
disparate impact must be consistent with ``business necessity'' and 
must also be ``job related.'' \120\ HUD also notes that a similar 
necessity requirement is found in ECOA, which requires that a 
challenged practice ``meets a legitimate business need.'' \121\ HUD's 
final rule therefore uses language that is consistent with its 
longstanding interpretation of the Fair Housing Act, comparable to the 
protections afforded under Title VII and ECOA, and fairly balances the 
interests of all parties.
---------------------------------------------------------------------------

    \116\ See Joint Policy Statement, 59 FR 18,269 (the second step 
of a disparate impact analysis under the Fair Housing Act and ECOA 
is to ``determine whether the policy or practice is justified by 
`business necessity.' '') id. (giving an example of a policy that 
may violate the Fair Housing Act and ECOA since ``the lender is 
unlikely to be able to show that the policy is compelled by business 
necessity''); see also Office of the Comptroller of the Currency, 
Federal Depository Insurance Corporation, Federal Reserve Board, 
Office of Thrift Supervision, National Credit Union Administration, 
The Interagency Fair Lending Examination Procedures app. at 28, 
August 2009, available at http://www.ffiec.gov/pdf/fairappx.pdf.
    \117\ 42 U.S.C. 3605.
    \118\ See 24 CFR 100.125(c); cf. Darst-Webbe Tenant Ass'n Bd. v. 
St. Louis Hous. Auth., 417 F.3d, at 902 (the challenged practice 
must be ``necessary to the attainment of '' the defendant's 
objectives) (internal citation omitted); see also Affordable Hous. 
Dev. Corp. v. City of Fresno, 433 F.3d 1182, 1195 (9th Cir. 2006) 
(describing the Eighth Circuit's approach as ``sound'').
    \119\ H.R. Rep. No. 100-711, at 2191 (1988) (``The Committee 
does not intend that those purchasing mortgage loans be precluded 
from taking into consideration factors justified by business 
necessity.'').
    \120\ See 42 U.S.C. 2000e-2(k)(1)(A).
    \121\ 12 CFR part 1002, Supp. I, Official Staff Commentary, 
Comment 6(a)(2).
---------------------------------------------------------------------------

    Issue: A commenter expressed concern that requiring a ``necessary'' 
relationship may interfere with loss mitigation efforts, including 
those under the Home Affordable Modification Program (HAMP) and Home 
Affordable Refinance Program (HARP)--federal programs that encourage 
mortgage servicers to offer modifications of loans or refinances--
because such efforts are voluntary and participation in them may not be 
perceived as ``necessary.''
    HUD Response: Since at least the date of issuance of the Joint 
Policy Statement in 1994, lenders have been on notice that they must 
prove the necessity of a challenged practice to their business under 
both the Fair Housing Act and ECOA. This requirement has not prevented 
lenders or servicers from engaging in effective loss mitigation 
efforts. The mere fact that a policy is voluntarily adopted does not 
preclude it from being necessary to achieve a substantial, legitimate, 
nondiscriminatory interest. By formalizing the process of proving 
business necessity in a rule that clearly allocates the burdens of 
proof among the parties, HUD is not changing substantive law, but 
merely clarifying the contours of an available defense so that lenders 
may rely upon it with greater clarity as to how it applies.
    Issue: A commenter expressed the concern that requiring a 
respondent or defendant to prove necessity would subject the respondent 
or defendant to unnecessary and possibly frivolous investigations and 
litigation. Another commenter took the opposite position, stating that 
the rule would not create excessive litigation exposure for respondents 
or defendants because numerous procedural mechanisms exist to dispose 
of meritless cases. A commenter stated that, at the second stage of the 
burden-shifting analysis, a defendant should have the opportunity to 
demonstrate not only a legally sufficient justification, but also that 
the charging party or plaintiff did not satisfy its prima facie case 
because the challenged practice did not result in a discriminatory 
effect.
    HUD Response: Given how the discriminatory effects framework has 
been applied to date by HUD and by the courts, HUD does not believe 
that the rule will lead to frivolous investigations or create excessive 
litigation exposure for respondents or defendants. As discussed above, 
since at least 1994, when the Joint Policy Statement was issued, 
lenders have known that they must prove the necessity of a challenged 
practice to their business. Moreover, HUD believes that promulgation of 
this rule--with its clear allocation of burdens and clarification of 
the showings each party must make--has the potential to decrease or 
simplify this type of litigation. For example, with a clear, uniform 
standard, covered entities can conduct consistent self-testing and 
compliance reviews, document their substantial, legitimate 
nondiscriminatory interests, and resolve potential issues so as to 
prevent future litigation. A uniform standard is also a benefit to 
entities operating in multiple jurisdictions. To the extent that the 
rule results in more plaintiffs being aware of potential effects 
liability under the Fair Housing Act, it should have the same impact on 
covered entities, resulting in greater awareness and compliance with 
the Fair Housing Act. Additionally, as a commenter noted, the Federal 
Rules of Civil Procedure provide various means to dispose of meritless 
claims, including Rules 11, 12, and 56. Moreover, a respondent or 
defendant may avoid liability by rebutting the charging party's or 
plaintiff's proof of discriminatory effect.\122\ If the fact-finder 
decides that the charging party or plaintiff has not proven that the 
challenged practice resulted in a discriminatory effect, liability will 
not attach.
---------------------------------------------------------------------------

    \122\ See, e.g., Dothard v. Rawlinson, 433 U.S. 321, 331 (1977) 
(Title VII case explaining that a defendant is ``free to adduce 
countervailing evidence of his own'' in order to discredit a 
plaintiff's evidence of disparate impact).
---------------------------------------------------------------------------

    Issue: A commenter expressed concern that, under the proposed rule, 
a legally sufficient justification under Sec.  100.500(b)(1) may not be 
hypothetical or speculative but a discriminatory effect under Sec.  
100.500(a) may be, creating an imbalance in the burden of proof in 
favor of the charging party or plaintiff.
    HUD Response: This comment indicates a misunderstanding of what 
Sec.  100.500 requires. Requiring the respondent or defendant to 
introduce evidence (instead of speculation) proving that a challenged 
practice is necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests in order to benefit from the defense to 
liability is not different in kind from requiring the charging party or 
plaintiff to introduce evidence (not speculation) proving that a 
challenged practice caused or will predictably cause a discriminatory 
effect. As discussed in this preamble, the language of the Act makes 
clear that it is intended to address discrimination that has occurred 
or is about to occur, and not hypothetical or speculative 
discrimination.

D. Less Discriminatory Alternative, Sec.  100.500(b)(2)

    Some comments were received with respect to Sec.  100.500(b)(2) of 
the proposed rule. With that provision, HUD proposed that a practice 
with a discriminatory effect may be justified only if the respondent's 
or defendant's interests cannot be served by another practice with a 
less discriminatory effect. In response to these comments, the final 
rule makes one slight revision to the proposed provision by 
substituting ``could not be served'' for ``cannot be served.''
    Issue: A commenter requested that HUD replace ``cannot be served'' 
with ``would not be served'' because, under the Supreme Court's 
analysis in Wards Cove, a plaintiff cannot prevail by showing that a 
less discriminatory alternative could in theory serve the defendant's 
business interest. This commenter also stated that, in order for 
liability to attach, a less discriminatory alternative must have been 
known to and rejected by the respondent or

[[Page 11473]]

defendant. Other commenters stated that, in order for liability to 
attach, the alternative practice must be equally effective as the 
challenged practice, or at least as effective as the challenged 
practice, with some of these commenters pointing to Wards Cove in 
support of this position. A number of other commenters, on the other 
hand, cited to Fair Housing Act case law for the proposition that 
liability should attach unless the less discriminatory alternative 
would impose an undue hardship on the respondent or defendant under the 
circumstances of the particular case.
    HUD Response: HUD agrees that a less discriminatory alternative 
must serve the respondent's or defendant's substantial, legitimate 
nondiscriminatory interests, must be supported by evidence, and may not 
be hypothetical or speculative. For greater consistency with the 
terminology used in HUD's (and other federal regulatory agencies') 
previous guidance in the Joint Policy Statement,\123\ the final rule 
replaces ``cannot be served'' with ``could not be served.'' A 
corresponding change of ``can'' to ``could'' is also made in Sec.  
100.500(c)(3) of the final rule. HUD does not believe the rule's 
language needs to be further revised to state that the less 
discriminatory alternative must be ``equally effective,'' or ``at least 
as effective,'' in serving the respondent's or defendant's interests; 
the current language already states that the less discriminatory 
alternative must serve the respondent's or defendant's interests, and 
the current language is consistent with the Joint Policy Statement, 
with Congress's codification of the disparate impact standard in the 
employment context,\124\ and with judicial interpretations of the Fair 
Housing Act.\125\ The additional modifier ``equally effective,'' 
borrowed from the superseded Wards Cove case, is even less appropriate 
in the housing context than in the employment area in light of the 
wider range and variety of practices covered by the Act that are not 
readily quantifiable. For a similar reason, HUD does not adopt the 
suggestion that the less discriminatory alternative proffered by the 
charging party or plaintiff must be accepted unless it creates an 
``undue hardship'' on the respondent or defendant. The ``undue 
hardship'' standard, which is borrowed from the reasonable 
accommodation doctrine in disability law, would place too heavy a 
burden on the respondent or defendant.
---------------------------------------------------------------------------

    \123\ See Joint Policy Statement, 59 FR at 18269 (``Even if a 
policy or practice that has a disparate impact on a prohibited basis 
can be justified by business necessity, it still may be found to be 
discriminatory if an alternative policy or practice could serve the 
same purpose with less discriminatory effect.'')
    \124\ See 42 U.S.C. 2000e-2(k)(1)(A)(i) (``the concept of 
`alternative employment practice' '' under Title VII ``shall be in 
accordance with the law as it existed on June 4, 1989''); Albemarle 
Paper Co. v. Moody, 422 U.S. 405, 425 (1975) (``[I]t remains open to 
the complaining party to show that other tests or selection devises, 
without a similarly undesirable racial effect, would also serve the 
employer's legitimate interest.'').
    \125\ See, e.g., Darst-Webbe, 417 F.3d at 906 (``plaintiffs must 
offer a viable alternative that satisfies the Housing Authority's 
legitimate policy objectives while reducing the [challenged 
practice's] discriminatory impact''); Huntington, 844 F.2d at 939 
(analyzing whether the ``[t]own's goal * * * can be achieved by less 
discriminatory means''); Rizzo, 564 F.2d at 159 (it must be analyzed 
whether an alternative ``could be adopted that would enable [the 
defendant's] interest to be served with less discriminatory 
impact.'').
---------------------------------------------------------------------------

    In addition, HUD does not agree with the commenter who stated that 
Wards Cove requires the charging party or plaintiff to show that, prior 
to litigation, a respondent or defendant knew of and rejected a less 
discriminatory alternative,\126\ or that Wards Cove even governs Fair 
Housing Act claims. HUD believes that adopting this requirement in the 
housing context would be unjustified because it would create an 
incentive not to consider possible ways to produce a less 
discriminatory result. Encouraging covered entities not to consider 
alternatives would be inconsistent with Congress's goal of providing 
for fair housing throughout the country.
---------------------------------------------------------------------------

    \126\ See Wards Cove Packing Co., Inc. v. Atonio, 490 U.S. 642, 
660-61 (1989).
---------------------------------------------------------------------------

    Issue: Two commenters expressed concern that, under the proposed 
rule's language, the discriminatory effect of an alternative would be 
considered but a lender's concerns such as credit risk would be 
irrelevant.
    HUD Response: HUD believes these commenters' concerns will not be 
realized in practice because a less discriminatory alternative need not 
be adopted unless it could serve the substantial, legitimate, 
nondiscriminatory interest at issue. The final rule specifically 
provides that the interests supporting a challenged practice are 
relevant to the consideration of whether a less discriminatory 
alternative exists. As stated in Sec.  100.500(c)(3), the charging 
party or plaintiff must show that the less discriminatory alternative 
could serve the ``interests supporting the challenged practice.'' Thus, 
if the lender's interest in imposing the challenged practice relates to 
credit risk, the alternative would also need to effectively address the 
lender's concerns about credit risk.

E. Allocations of Burdens of Proof in Sec.  100.500(c)

    In the proposed rule, HUD set forth a burden-shifting framework in 
which the plaintiff or charging party would bear the burden of proving 
a prima facie case of discriminatory effect, the defendant or 
respondent would bear the burden of proving a legitimate, 
nondiscriminatory interest for the challenged practice, and the 
plaintiff or charging party would bear the burden of proving that a 
less discriminatory alternative exists.
    Issue: Some commenters stated that the plaintiff or charging party 
should bear the burden of proof at all stages of the proceedings, 
either citing Wards Cove in support of this position or reasoning that, 
in our legal system, the plaintiff normally carries the burden of 
proving each element of his claim. Other commenters asked HUD to modify 
Sec.  100.500(c)(3) in order to place the burden of proving no less 
discriminatory alternative on the defendant or respondent. Those 
recommending that the burden allocation be modified in this way 
reasoned that the respondent or defendant is in a better position to 
bear this burden because of greater knowledge of, and access to, 
information concerning the respondent's or defendant's interests and 
whether a less discriminatory alternative could serve them. Several 
commenters stated that this is particularly true in the context of 
government decisions, as complainants and plaintiffs will generally be 
outside the political decision-making process, and in the context of 
insurance and lending decisions, where proprietary information and 
formulas used in the decision making process may be vigorously 
protected.
    Commenters stated that complainants and plaintiffs may not have the 
capacity to evaluate possible less discriminatory alternatives. Some 
commenters also pointed out that assigning this burden to the 
respondent or defendant may avoid intrusive and expensive discovery 
into a respondent's or defendant's decision-making process, and would 
incentivize entities subject to the Act to consider less discriminatory 
options when making decisions. Commenters also stated that courts have 
placed this burden of proof on the defendant, others have placed it on 
the party for whom proof is easiest, and reliance on Title VII is 
inappropriate because of the unique nature of less discriminatory 
alternatives in Fair Housing Act cases.
    HUD Response: HUD believes that the burden of proof allocation in 
Sec.  100.500(c) is the fairest and most

[[Page 11474]]

reasonable approach to resolving the claims. As the proposed rule 
stated, this framework makes the most sense because it does not require 
either party to prove a negative. Moreover, this approach will ensure 
consistency in applying the discriminatory effects standard while 
creating the least disruption because, as discussed earlier in this 
preamble, HUD and most courts utilize a burden-shifting framework,\127\ 
and most federal courts using a burden-shifting framework allocate the 
burdens of proof in this way.\128\ In addition, HUD notes that this 
burden-shifting scheme is consistent with the Title VII discriminatory 
effects standard codified by Congress in 1991.\129\ It is also 
consistent with the discriminatory effects standard under ECOA,\130\ 
which borrows from Title VII's burden-shifting framework.\131\ There is 
significant overlap in coverage between ECOA, which prohibits 
discrimination in credit, and the Fair Housing Act, which prohibits 
discrimination in residential real estate-related transactions.\132\ 
Thus, under the rule's framework, in litigation involving claims 
brought under both the Fair Housing Act and ECOA, the parties and the 
court will not face the burden of applying inconsistent methods of 
proof to factually indistinguishable claims. Having the same allocation 
of burdens under the Fair Housing Act and ECOA will also provide for 
less confusion and more consistent decision making by the fact finder 
in jury trials.
---------------------------------------------------------------------------

    \127\ See supra notes 29-33.
    \128\ See supra notes 34, 35.
    \129\ See 42 U.S.C. 2000e-2(k).
    \130\ ECOA prohibits discrimination in credit on the basis of 
race and other enumerated criteria. See 15 U.S.C. 1691.
    \131\ See S. Rep. No. 94-589, at 4-5 (1976) (``[J]udicial 
constructions of antidiscrimination legislation in the employment 
field, in cases such as Griggs v. Duke Power Company, 401 U.S. 424 
(1971), and Albemarle Paper Co. v. Mood, [422 U.S. 405 (1975)], are 
intended to serve as guides in the application of [ECOA], especially 
with respect to the allocations of burdens of proof.''); 12 CFR 
1002.6(a) (``The legislative history of [ECOA] indicates that the 
Congress intended an `effects test' concept, as outlined in the 
employment field by the Supreme Court in the cases of Griggs v. Duke 
Power Co., 401 U.S. 424 (1971) and Albemarle Paper Co. v. Moody, 422 
U.S. 405 (1975), to be applicable to a creditor's determination of 
creditworthiness.''); 12 CFR part 1002, Supp. I, Official Staff 
Commentary, Comment 6(a)-2 (``Effects test. The effects test is a 
judicial doctrine that was developed in a series of employment cases 
decided by the Supreme Court under Title VII of the Civil Rights Act 
of 1964 (42 U.S.C. 2000e et seq.), and the burdens of proof for such 
employment cases were codified by Congress in the Civil Rights Act 
of 1991 (42 U.S.C. 2000e-2).'').
    \132\ See Joint Policy Statement, 59 FR 18266. Indeed, the Joint 
Policy Statement analyzed the standard for proving disparate impact 
discrimination in lending under the Fair Housing Act and under ECOA 
without any differentiation. See 59 FR 18269.
---------------------------------------------------------------------------

    With respect to expressed concerns about the ability of plaintiffs 
or complainants to demonstrate a less discriminatory alternative, 
plaintiffs in litigation in federal courts may rely on Rule 26(b)(1) of 
the Federal Rules of Civil Procedure for the discovery of information 
``that is relevant to any party's claim or defense,'' \133\ and parties 
in an administrative proceeding may rely on Rule 26(b)(1) and a similar 
provision in HUD's regulations.\134\ The application of those standards 
would plainly provide for the discovery of information regarding the 
alternatives that exist to achieve an asserted interest, the extent to 
which such alternatives were considered, the reasons why such 
alternatives were rejected, and the data that a plaintiff or 
plaintiff's expert could use to show that the defendant did not select 
the least discriminatory alternative. An appropriately tailored 
protective order can be issued by the court to provide access to 
proprietary information in the context of cases involving confidential 
business information, such as those involving insurance or lending, 
while providing to respondents and defendants adequate protection from 
disclosure of this information. Moreover, as noted above, in 
administrative adjudications, it is the charging party, not non-
intervening complainants, who bear this burden of proof.
---------------------------------------------------------------------------

    \133\ Fed. R. Civ. P. 26(b)(1).
    \134\ See 24 CFR 180.500(b) (``parties may obtain discovery 
regarding any matter, not privileged, that is relevant to the 
subject matter involved in the proceeding'').
---------------------------------------------------------------------------

F. Application of Discriminatory Effects Liability

    Comments were received with respect to how the discriminatory 
effects standard would be applied and how it might impact covered 
entities. These comments expressed varying concerns, including the 
retroactivity of the rule, its application to the insurance and lending 
industries, and its impact on developing affordable housing.
    Issue: A commenter stated that each of the cases listed in the 
proposed rule as examples of practices with a segregative effect 
involved a government actor, while another commenter asked HUD to 
clarify whether liability may attach to private parties.
    HUD Response: Liability for a practice that has an unjustified 
discriminatory effect may attach to either public or private parties 
according to the standards in Sec.  100.500, because there is nothing 
in the text of the Act or its legislative history to indicate that 
Congress intended to distinguish the manner in which the Act applies to 
public versus private entities.\135\
---------------------------------------------------------------------------

    \135\ See 42 U.S.C. 3602(f) (defining ``discriminatory housing 
practice'' as ``an act that is unlawful under section 804, 805, 806, 
or 818,'' none of which distinguish between public and private 
entities); see also Nat'l Fair Hous. Alliance, Inc. v. Prudential 
Ins. Co. of Am., 208 F. Supp. 2d 46, 59-60 & n.7 (D.D.C. 2002) 
(applying the same impact analysis to a private entity as to public 
entities, and noting that a ``distinction between governmental and 
non-governmental bodies finds no support in the language of the 
[Act] or in [its] legislative history'').
---------------------------------------------------------------------------

    Issue: A commenter expressed the opinion that the Fair Housing Act 
does not grant HUD the power to promulgate retroactive rules, and 
therefore HUD should make clear that the final rule applies 
prospectively only.
    HUD Response: This final rule embodying HUD's and the federal 
courts' longstanding interpretation of the Act to include a 
discriminatory effects standard will apply to pending and future cases. 
HUD has long recognized, as have the courts, that the Act supports an 
effects theory of liability. This rule is not a change in HUD's 
position but rather a formal interpretation of the Act that clarifies 
the appropriate standards for proving a violation under an effects 
theory. As such, it ``is no more retroactive in its operation than is a 
judicial determination construing and applying a statute to a case in 
hand.'' \136\
---------------------------------------------------------------------------

    \136\ Pope v. Shalala, 998 F.2d 473, 483 (7th Cir. 1993) 
(quoting Manhattan General Equip. Co. v. Comm'r, 297 U.S. 129, 135 
(1936)).
---------------------------------------------------------------------------

    Issue: A commenter stated that the most appropriate remedy for a 
violation of the Act under an effects theory is declaratory or 
injunctive relief. This commenter expressed the opinion that the use of 
penalties or punitive damages generally does not serve the underlying 
purpose of the Fair Housing Act to remedy housing discrimination.
    HUD Response: HUD disagrees with the commenter. The Fair Housing 
Act specifically provides for the award of damages--both actual and 
punitive--and penalties.\137\
---------------------------------------------------------------------------

    \137\ See 42 U.S.C. 3612-14.
---------------------------------------------------------------------------

    Issue: Commenters from the insurance industry expressed a number of 
concerns about the application of the proposed rule to insurance 
practices. Some commenters stated that application of the disparate 
impact standard would interfere with state regulation of insurance in 
violation of the McCarran-Ferguson Act (15 U.S.C. 1011-1015) or the 
common law ``filed rate doctrine.'' Some commenters stated that HUD's 
use of Ojo v. Farmers Group, Inc., 600 F.3d 1205 (9th Cir. 2010), in 
the preamble of the proposed rule was not appropriate.

[[Page 11475]]

    HUD Response: HUD has long interpreted the Fair Housing Act to 
prohibit discriminatory practices in connection with homeowner's 
insurance,\138\ and courts have agreed with HUD, including in Ojo v. 
Farmers Group.\139\ Moreover, as discussed above, HUD has consistently 
interpreted the Act to permit violations to be established by proof of 
discriminatory effect. By formalizing the discriminatory effects 
standard, the rule will not, as one commenter suggested, ``undermine 
the states' regulation of insurance.'' The McCarran-Ferguson Act 
provides that ``[n]o Act of Congress shall be construed to invalidate, 
impair, or supersede any law enacted by any State for the purpose of 
regulating the business of insurance * * * unless such Act specifically 
relates to the business of insurance.'' McCarran-Ferguson does not 
preclude HUD from issuing regulations that may apply to insurance 
policies. Rather, McCarran-Ferguson instructs courts on how to construe 
federal statutes, including the Act. How the Act should be construed in 
light of McCarran-Ferguson depends on the facts at issue and the 
language of the relevant State law ``relat[ing] to the business of 
insurance.'' Because this final rule does not alter the instruction of 
McCarran-Ferguson or its application as described in Ojo v. Farmers 
Group, it will not interfere with any State regulation of the insurance 
industry.
---------------------------------------------------------------------------

    \138\ See, e.g., 24 CFR 100.70(d)(4) (Mar. 15, 1989) (defining 
``other prohibited sale and rental conduct'' to include ``refusing 
to provide * * * property or hazard insurance for dwellings or 
providing such * * * insurance differently'' because of a protected 
class); 53 FR 44,992, 44,997 (Nov. 7, 1988) (preamble to proposed 
regulations stating that ``discriminatory refusals to provide * * * 
adequate property or hazard insurance * * * has been interpreted by 
the Department and by courts to render dwellings unavailable'').
    \139\ See Ojo v. Farmers Group, Inc., 600 F.3d at 1208; NAACP v. 
American Family Mut. Ins. Co., 978 F.2d 287, 297-301 (7th Cir. 
1993); Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1355-1360 
(6th Cir. 1995). But see Mackey v. Nationwide Ins. Cos., 724 F.2d 
419, 423-25 (4th Cir. 1984) (pre-Fair Housing Amendments Act and 
regulations pursuant thereto holding that Act does not cover 
insurance).
---------------------------------------------------------------------------

    Issue: Some commenters stated that liability for insurance 
practices based on a disparate impact standard of proof is 
inappropriate because insurance is risk-based and often based on a 
multivariate analysis. A commenter wrote that ``to avoid creating a 
disparate impact, an insurer would have to charge everyone the same 
rate, regardless of risk,'' or might be forced to violate state laws 
that require insurance rates to be actuarially sound estimates of the 
expected value of all future costs associated with an individual risk 
transfer.
    HUD Response: HUD believes that these concerns are misplaced. 
First, they presume that once a discriminatory effect is shown, the 
policy at issue is per se illegal. This is incorrect. Rather, as Sec.  
100.500 makes clear, the respondent or defendant has a full opportunity 
to defend the business justifications for its policies. This ``burden-
shifting framework'' distinguishes ``unnecessary barriers proscribed by 
the [Act] from valid policies and practices crafted to advance 
legitimate interests.'' \140\ Thus, even if a policy has a 
discriminatory effect, it may still be legal if supported by a legally 
sufficient justification.
---------------------------------------------------------------------------

    \140\ Graoch, 508 F.3d at 374-75.
---------------------------------------------------------------------------

    Issue: Some commenters asked HUD to exempt insurance pricing from 
the rule, exempt state Fair Access to Insurance Requirements (``FAIR'') 
plans, or establish safe harbors for certain risk-related factors.
    HUD Response: Creating exemptions or safe harbors related to 
insurance is unnecessary because, as discussed above, insurance 
practices with a legally sufficient justification will not violate the 
Act. Moreover, creating exemptions beyond those found in the Act would 
run contrary to Congressional intent.\141\
---------------------------------------------------------------------------

    \141\ See Graoch, 508 F.3d at 375 (``we cannot create 
categorical exemptions from [the Act] without a statutory basis'' 
and ``[n]othing in the text of the FHA instructs us to create 
practice-specific exceptions'').
---------------------------------------------------------------------------

    Issue: Another commenter stated that the ``burden of proof issues'' 
are difficult for insurers because they do not collect data on race and 
ethnicity and state insurance laws may prohibit the collection of such 
data.
    HUD Response: The burden of proof is not more difficult for 
insurers than for a charging party or plaintiff alleging that an 
insurance practice creates a discriminatory effect. The charging party 
or plaintiff must initially show the discriminatory effect of the 
challenged practice using appropriate evidence that demonstrates the 
effect. If the charging party or plaintiff makes that showing, the 
burden shifts to the insurer to show that the challenged practice is 
necessary to achieve one or more of its substantial, legitimate, 
nondiscriminatory interests.
    Issue: A commenter expressed concern that the rule may create 
strict liability for entities complying with contractual obligations 
set by third parties, including the federal government.
    HUD Response: The commenter misconstrues the discriminatory effects 
standard, which permits a defendant or respondent to defend against a 
claim of discriminatory effect by establishing a legally sufficient 
justification, as specified in Sec.  100.500.
    Issue: Another commenter expressed concern that the citation to 
Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251 (D. Mass. 2008), 
in the preamble to the proposed rule suggested that liability could 
exist under the Act for the neutral actions of third parties and that 
such liability would be inconsistent with the Supreme Court's decision 
in Meyer v. Holley, 537 U.S. 280 (2003). This commenter requested that 
HUD revise the proposed rule to articulate the standard set forth in 
Meyer.
    HUD Response: HUD does not agree with the commenter's suggestion. 
HUD recognizes that pursuant to Meyer, liability under the Act for 
corporate officers is determined by agency law. The proposed rule cited 
Miller as an example of how a lender's facially neutral policy allowing 
employees and mortgage brokers the discretion to price loans may be 
actionable under the Fair Housing Act. The decision in Miller is not 
inconsistent with the Supreme Court's ruling on agency in Meyer, and 
therefore HUD does not believe that the final rule needs to be revised 
in response to this comment.
    Issue: Several commenters expressed concern that adoption of the 
proposed discriminatory effects standard would lead to lawsuits 
challenging lenders' use of credit scores, other credit assessment 
standards, or automated underwriting. A commenter stated that a 
lender's consideration of credit score or other credit assessment 
standards such as a borrower's debt-to-income ratio may have a 
disparate impact because of demographic differences. This commenter 
cited studies which indicate that borrowers who live in zip codes with 
a higher concentration of minorities are more likely to have lower 
credit scores and fewer savings. A commenter stated that credit scores 
are often used as the determining factor in a lender's origination 
practices and that certain underwriting software and investor 
securitization standards require a minimum credit score. The commenter 
further stated that HUD's Federal Housing Administration (FHA) program 
has recognized the value of credit scores in setting underwriting 
standards for FHA insured loans. According to the commenter, lenders 
have little ability or desire to override credit score standards, 
because manual underwriting is time consuming and staff-intensive. 
Another commenter expressed concern that, even if a lender was 
successful in defending its credit risk assessment practices under the 
burden-shifting approach, the lender would have to defend an expensive 
lawsuit and suffer harm to its reputation.

[[Page 11476]]

    Commenters from the lending industry also stated that the rule may 
have a chilling effect on lending in lower income communities. A 
commenter stated that the rule will create uncertainty in a skittish 
market, so lenders will be cautious about lending in lower income 
communities for fear of a legal challenge. Some of these commenters 
reasoned that underwriting requirements and risk requirements pursuant 
to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 
Dodd-Frank Act (Pub. L. 111-203, approved July 21, 2010)), such as 
ability to repay, down payment requirements, and qualified residential 
mortgages, may result in a disparate impact because of demographic 
differences. Another commenter explained that the rule would eliminate 
in-portfolio mortgage loans at community banks, which provide mortgage 
credit to borrowers who may not qualify for a secondary market 
transaction.
    HUD Response: HUD does not believe that the rule will have a 
chilling effect on lending in lower income communities or that it will 
encourage lawsuits challenging credit scores, other credit assessment 
standards, or the requirements of the Dodd-Frank Act. As discussed 
above, the rule does not change the substantive law; eleven federal 
courts of appeals have recognized discriminatory effects liability 
under the Act and over the years courts have evaluated both meritorious 
and non-meritorious discriminatory effects claims challenging lending 
practices.\142\ As HUD has reiterated, the rule formalizes a 
substantive legal standard that is well recognized by both courts and 
participants in the lending industry for assessing claims of 
discriminatory effects. Indeed, in the lending context, at least since 
the issuance of the Joint Policy Statement nearly 18 years ago, non-
depository lenders, banks, thrifts, and credit unions have been on 
notice that federal regulatory and enforcement agencies, including HUD 
and the Department of Justice, may apply a disparate impact analysis in 
their examinations and investigations under both the Fair Housing Act 
and ECOA. The regulations and Staff Commentary implementing ECOA also 
explicitly prohibit unjustified discriminatory effects.\143\ Thus, 
neither a chilling effect nor a wealth of new lawsuits can be expected 
as a result of this rule. Rather, HUD anticipates that this rule will 
encourage the many lenders and other entities that already conduct 
internal discriminatory effects analyses of their policies to review 
those analyses in light of the now uniform standard for a legally 
sufficient justification found in Sec.  100.500. Indeed, lender 
compliance should become somewhat easier due to the rule's clear and 
nationally uniform allocation of burdens and clarification of the 
showings each party must make.
---------------------------------------------------------------------------

    \142\ Compare Ramirez v. GreenPoint Mortg. Funding, Inc., 633 F. 
Supp. 2d 922, 927-28 (N.D. Cal. 2008) (holding that the Act permits 
disparate impact claims and finding that plaintiffs adequately pled 
a specific and actionable policy that had a disparate impact on 
members of a protected class); Miller v. Countrywide Bank, N.A., 571 
F. Supp. 2d 251, 258 (D. Mass. 2008) (denying defendants motion to 
dismiss and finding that plaintiffs adequately pled a specific and 
actionable policy, a disparate impact, and facts raising a 
sufficient inference of causation); and Hoffman v. Option One Mortg. 
Corp., 589 F. Supp. 2d 1009, 1011-12 (N.D. Ill. 2008) (holding that 
the Actpermits disparate impact claims and finding that plaintiffs 
adequately pled a specific and actionable policy, a disparate 
impact, and facts raising a sufficient inference of causation), with 
Ng v. HSBC Mortgage Corp., No. 07-CV-5434, 2010 WL 889256, *12 
(E.D.N.Y. Mar. 10, 2010) (dismissing plaintiff's claim of disparate 
impact discrimination and finding that the claim was ``alleged with 
little more than buzzwords and conclusory labels'').
    \143\ See 12 CFR 1002.6(a); 12 CFR part 1002, Supp. I, Official 
Staff Commentary, Comment 6(a)-2 ; see also Consumer Financial 
Protection Bureau Bulletin 2012-04 (Apr. 18, 2012) (``CFPB reaffirms 
that the legal doctrine of disparate impact remains applicable as 
the Bureau exercises its supervision and enforcement authority to 
enforce compliance with the ECOA.'').
---------------------------------------------------------------------------

    Issue: Some commenters expressed concern that faced with the threat 
of disparate impact liability, lenders might extend credit to members 
of minority groups who do not qualify for the credit.
    HUD Response: The Fair Housing Act does not require lenders to 
extend credit to persons not otherwise qualified for a loan. As 
discussed previously, the final rule formalizes a standard of liability 
under the Act that has been in effect for decades. HUD is unaware of 
any lender found liable under the discriminatory effects standard for 
failing to make a loan to a member of a minority group who did not meet 
legitimate nondiscriminatory credit qualifications.
    Issue: Several other commenters expressed a concern that 
discriminatory effects liability might have a chilling effect on 
efforts designed to preserve or develop affordable housing, including 
pursuant to HUD's own programs, because much of the existing affordable 
housing stock is located in areas of minority concentration. A 
commenter stated that resources designed to support the development of 
affordable housing will be ``deflect[ed]'' away so as to respond to 
claims of disparate impact discrimination. Another commenter requested 
that HUD issue guidance to the affordable housing industry as they 
administer HUD programs.
    Other commenters expressed concern about potential liability for 
administrators of the federal Low Income Housing Tax Credit (LIHTC) 
program. These commenters reasoned that the concentration of affordable 
housing stock in low-income areas, combined with federal requirements 
and incentives which encourage the deployment of tax credits in low-
income communities, may result in discriminatory effects liability for 
agencies administering the LIHTC program. Several commenters asked HUD 
to specify in the final rule that the mere approval of LIHTC projects 
in minority areas alone does not establish a prima facie case of 
disparate impact under the Act or that locating LIHTC projects in low-
income areas is a legally sufficient justification to claims of 
disparate impact discrimination. A commenter requested that HUD provide 
guidance to such agencies.
    HUD Response: HUD does not expect the final rule to have a chilling 
effect on the development and preservation of affordable housing 
because, as discussed above, the rule does not establish a new form of 
liability, but instead serves to formalize by regulation a standard 
that has been applied by HUD and the courts for decades, while 
providing nationwide uniformity of application. The rule does not 
mandate that affordable housing be located in neighborhoods with any 
particular characteristic, but requires, as the Fair Housing Act 
already does, only that housing development activities not have an 
unjustified discriminatory effect.
    Concerns of a chilling effect on affordable housing activities are 
belied by the prevalence of cases where the discriminatory effects 
method of proof has been used by plaintiffs seeking to develop such 
housing \144\ and even by the less frequent instances where

[[Page 11477]]

agencies administering affordable housing programs have been 
defendants.\145\ Rather than indicating a chilling effect, existing 
case law shows that use of the discriminatory effects framework has 
promoted the development of affordable housing, while allowing due 
consideration for substantial, legitimate, nondiscriminatory interests 
involved in providing such housing. Moreover, recipients of HUD funds 
already must comply with a variety of civil rights requirements. This 
includes the obligation under Title VI of the Civil Rights Act of 1964 
and its applicable regulations to refrain from discrimination, either 
by intent or effect, on the basis of race, color, or national origin; 
the obligation under the Fair Housing Act to affirmatively further fair 
housing in carrying out HUD programs; and HUD program rules designed to 
foster compliance with the Fair Housing Act and other civil rights 
laws. As discussed throughout this preamble, allegations of 
discriminatory effects discrimination must be analyzed on a case-by-
case basis using the standards set out in Sec.  100.500. HUD will issue 
guidance addressing the application of the discriminatory effects 
standard with respect to HUD programs.
---------------------------------------------------------------------------

    \144\ See, e.g., Huntington Branch, 844 F.2d at 926 (reversing 
district court and finding Fair Housing Act violations based on 
discriminatory effect of town's refusal to rezone site for 
affordable housing); Greater New Orleans Fair Hous. Action Ctr. v. 
St. Bernard Parish, 648 F. Supp. 2d 805 (E.D. La. 2009) (finding 
parish's subversion of attempts to develop affordable housing had a 
discriminatory effect in violation of the Fair Housing Act); Dews v. 
Town of Sunnyvale, 109 F. Supp. 2d 526 (N.D. Tex. 2000) (finding 
that developer established Fair Housing Act violation based on 
Town's rejection of development application under discriminatory 
effects method); Sunrise Dev. v. Town of Huntington, 62 F. Supp. 2d 
762 (E.D.N.Y. 1999) (finding the plaintiff had established prima 
facie case of discriminatory effect and granting preliminary 
injunction requiring town to consider plaintiff's zoning 
application); Summerchase Ltd. Pshp. I v. City of Gonzales, 970 F. 
Supp. 522 (M.D. La. 1997) (denying defendant's motion for summary 
judgment on developer's claim that parish's denial of building 
permits for affordable housing development had a discriminatory 
effect in violation of the Fair Housing Act).
    \145\ Compare, e.g., In re Adoption of 2003 Low Income Housing 
Tax Credit Qualified Allocation Plan, 369 N.J. Super. 2 (N.J. Sup. 
Ct. App. Div. 2004) with Inclusive Cmtys. Project, Inc. v. Tex. 
Dep't of Hous. & Cmty. Affairs, 749 F. Supp. 2d 48 (N.D. Tex. 2010).
---------------------------------------------------------------------------

    Issue: Like commenters who requested ``safe harbors'' or exemptions 
for the insurance and lending industries, some commenters requested 
that the proposed rule be revised to provide ``safe harbors'' or 
exemptions from liability for programs designed to preserve affordable 
housing or revitalize existing communities. A commenter requested that 
the final rule provide safe harbors for state and local programs that 
have legitimate policy and safety goals such as protecting water 
resources, promoting transit orientated development, and revitalizing 
communities. Other commenters requested safe harbors or exemptions for 
entities that are meeting requirements or standards established by 
federal or state law or regulation, such as the Federal Credit Union 
Act, the Dodd-Frank Act, HAMP and HARP, or by government-sponsored 
enterprises or investors.
    HUD Response: HUD does not believe that the suggested safe harbors 
or exemptions from discriminatory effects liability are appropriate or 
necessary. HUD notes that, in seeking these exemptions, the commenters 
appear to misconstrue the discriminatory effects standard, which 
permits practices with discriminatory effects if they are supported by 
a legally sufficient justification. The standard thus recognizes that a 
practice may be lawful even if it has a discriminatory effect. HUD 
notes further that Congress created various exemptions from liability 
in the text of the Act,\146\ and that in light of this and the Act's 
important remedial purposes, additional exemptions would be contrary to 
Congressional intent.
---------------------------------------------------------------------------

    \146\ See, e.g., 42 U.S.C. 3603(b)(1) (exempting from most of 
section 804 of the Act an owner's sale or rental of his single-
family house if certain conditions are met).
---------------------------------------------------------------------------

    Issue: Several commenters expressed concern that in complying with 
the new Dodd-Frank Act mortgage reforms, including in determining that 
consumers have an ability to repay, a lender necessarily ``will face 
liability under the Proposed Rule.''
    HUD Response: HUD reiterates that the lender is free to defend any 
allegations of illegal discriminatory effects by meeting its burden of 
proof at Sec.  100.500. Moreover, if instances were to arise in which a 
lender's efforts to comply with the Dodd-Frank Act were challenged 
under the Fair Housing Act's discriminatory effects standard of 
liability, those same activities most likely would be subject to a 
similar challenge under ECOA and Regulation B, which also prohibit 
lending practices that have a discriminatory effect based on numerous 
protected characteristics.\147\ The Dodd-Frank Act created the Consumer 
Financial Protection Bureau to combat both unfair and deceptive 
practices and discriminatory practices in the consumer financial 
industry, and it gave the Consumer Financial Protection Bureau 
authority to enforce ECOA.\148\ See Dodd-Frank Act sections 1402-1403 
(enacting section 129B of the Truth in Lending Act ``to assure that 
consumers are offered and receive residential mortgage loans on terms 
that reasonably reflect their ability to repay the loans and that are 
understandable and not unfair, deceptive or abusive,'' and, as part of 
that section, requiring the Consumer Financial Protection Bureau to 
create regulations that prohibit ``abusive or unfair lending practices 
that promote disparities among consumers of equal credit worthiness but 
of different race, ethnicity, gender, or age''); see also Dodd-Frank 
Act section 1013(c) (establishing the Consumer Financial Protection 
Bureau's Office of Fair Lending and Equal Opportunity to provide 
enforcement of fair lending laws, including ECOA, and coordinate fair 
lending efforts within the Bureau and with other federal and state 
agencies); id. section 1085 (transferring regulatory authority for ECOA 
to the Consumer Financial Protection Bureau).
---------------------------------------------------------------------------

    \147\ See 15 U.S.C. 1691 et seq; 12 CFR part 1002.
    \148\ See 12 U.S.C. 5491 et seq.
---------------------------------------------------------------------------

G. Illustrations of Practices With Discriminatory Effects

    Consistent with HUD's existing Fair Housing Act regulations, which 
contain illustrations of practices that violate the Act, the proposed 
rule specified additional illustrations of such practices. The November 
16, 2011, rule proposed to add illustrations to 24 CFR 100.65, 100.70 
and 100.120. The final rule revises these illustrations in the manner 
described below.
    Because the illustrations in HUD's existing regulations include 
practices that may violate the Act based on an intent or effects 
theory, and proposed Sec.  100.65(b)(6) describes conduct that is 
already prohibited in Sec.  100.65(b)(4)--the provision of housing-
related services--and Sec.  100.70(d)(4)--the provision of municipal 
services--this final rule eliminates proposed Sec.  100.65(b)(6). This 
will avoid redundancy in HUD's Fair Housing Act regulations, and its 
elimination from the proposed rule is not intended as a substantive 
change.
    Commenters raised the following issues with respect to the proposed 
rule's illustrations of discriminatory practices.
    Issue: A commenter stated that the examples specified by the 
proposed rule describe the types of actions that the commenter's 
``clients encounter regularly.'' Examples of potentially discriminatory 
laws or ordinances cited by commenters include ordinances in largely 
white communities that establish local residency requirements, limit 
the use of vouchers under HUD's Housing Choice Voucher program, or set 
large-lot density requirements. Commenters suggested that language 
should be added to proposed Sec.  100.70(d)(5), which provides, as an 
example, ``[i]mplementing land-use rules, policies or procedures that 
restrict or deny housing opportunities in a manner that has a disparate 
impact or has the effect of creating, perpetuating, or increasing 
segregated housing patterns'' based on a protected class. Commenters 
stated that this example should include not just the word 
``implementing,'' but also the words ``enacting'' ``maintaining,'' and/
or ``applying'' because the discriminatory effect of a land-use 
decision may occur from the moment of enactment. A commenter suggested 
that the word ``ordinances'' should be added to the example to make 
clear that the Act applies to all types of exclusionary land-use 
actions.

[[Page 11478]]

    HUD Response: HUD reiterates that the illustrations contained in 
HUD's regulations are merely examples. The scope and variety of 
practices that may violate the Act make it impossible to list all 
examples in a rule. Nevertheless, HUD finds it appropriate to revise 
proposed Sec.  100.70(d)(5) in this final rule in order to confirm that 
a land-use ordinance may be discriminatory from the moment of 
enactment. The final rule therefore changes ``[i]mplementing land-use 
rules, policies, or procedures * * * '' to ``[e]nacting or implementing 
land-use rules, ordinances, policies, or procedures * * * .'' It is not 
necessary to add ``maintaining'' or ``applying'' to Sec.  100.70(d)(5) 
because the meaning of these words in this context is indistinguishable 
from the meaning of ``implementing.''
    Because the illustrated conduct may violate the Act under either an 
intent theory, an effects theory, or both, HUD also finds it 
appropriate to replace ``in a manner that has a disparate impact or has 
the effect of creating, perpetuating, or increasing segregated housing 
patterns'' because of a protected characteristic with ``otherwise make 
unavailable or deny dwellings because of'' a protected characteristic. 
As discussed in the ``Validity of Discriminatory Effects Liability 
under the Act'' section above, the phrase ``otherwise make unavailable 
or deny'' encompasses discriminatory effects liability. This revised 
language, therefore, is broader because it describes land-use decisions 
that violate the Act because of either a prohibited intent or an 
unjustified discriminatory effect. The final rule makes a similar 
revision to each of the illustrations so they may cover violations 
based on intentional discrimination or discriminatory effects.
    Issue: A commenter requested that HUD add as an example the 
practice of prohibiting from housing individuals with records of 
arrests or convictions. This commenter reasoned that such blanket 
prohibitions have a discriminatory effect because of the 
disproportionate numbers of minorities with such records. The commenter 
stated further that HUD should issue guidance on this topic similar to 
guidance issued by the Equal Employment Opportunity Commission. Another 
commenter expressed concern that the rule would restrict housing 
providers from screening tenants based on criminal arrest and 
conviction records. This commenter also asked HUD to issue guidance to 
housing providers on appropriate background screening.
    HUD Response: Whether any discriminatory effect resulting from a 
housing provider's or operator's use of criminal arrest or conviction 
records to exclude persons from housing is supported by a legally 
sufficient justification depends on the facts of the situation. HUD 
believes it may be appropriate to explore the issue more fully and will 
consider issuing guidance for housing providers and operators.
    Issue: Several commenters suggested revisions to proposed Sec.  
100.120(b)(2), which specifies as an example ``[p]roviding loans or 
other financial assistance in a manner that results in disparities in 
their cost, rate of denial, or terms or conditions, or that has the 
effect of denying or discouraging their receipt on the basis of race, 
color, religion, sex, handicap, familial status, or national origin.'' 
These commenters stated that proposed Sec.  100.120(b)(2) does not 
contain language concerning the second type of discriminatory effect, 
i.e., creating, perpetuating or increasing segregation. They urged HUD 
to add language making clear that the provision of loans or other 
financial assistance may result in either type of discriminatory 
effect.
    In addition, several commenters asked HUD to clarify that mortgage 
servicing with a discriminatory effect based on a protected 
characteristic may violate the Act.
    HUD Response: As discussed above, proposed Sec.  100.120(b)(2) is 
revised in the final rule to cover both intentional discrimination and 
discriminatory effects. HUD also agrees that residential mortgage 
servicing is covered by the Act. It is a term or condition of a loan or 
other financial assistance, covered by section 805 of the Act.\149\ 
Accordingly, the final rule adds a Sec.  100.130(b)(3), which provides 
an illustration of discrimination in the terms or conditions for making 
available loans or financial assistance, in order to show that 
discriminatory loan servicing (and other discriminatory terms or 
conditions of loans and other financial assistance) violate the Act's 
proscription on ``discriminat[ing] * * * in the terms or conditions of 
[a residential real estate-related transaction].''
---------------------------------------------------------------------------

    \149\ 42 U.S.C. 3605. Discrimination in residential mortgage 
servicing may also violate Sec.  804 of the Act. 42 U.S.C. 3604.
---------------------------------------------------------------------------

    Issue: A commenter expressed concern that the language in proposed 
Sec.  100.120(b)(2) would allow for lawsuits based only on statistical 
data produced under HMDA.
    HUD Response: HUD and courts have recognized that analysis of loan 
level data identified though HMDA may indicate a disparate impact.\150\ 
Such a showing, however, does not end the inquiry. The lender would 
have the opportunity to refute the existence of the alleged impact and 
establish a substantial, legitimate, nondiscriminatory interest for the 
challenged practice, and the charging party or plaintiff would have the 
opportunity to demonstrate that a less discriminatory alternative is 
available to the lender.
---------------------------------------------------------------------------

    \150\ See City of Memphis and Shelby Cnty. v. Wells Fargo, N.A., 
No. 09-2857-STA, 2011 U.S. Dist. LEXIS 48522 at *45 (W.D. Tenn. May 
4, 2011); Mayor and City Council of Baltimore v. Wells Fargo Bank, 
N.A., No. JFM-08-62, 2011 U.S. Dist. LEXIS 44013 (D. Md. April 22, 
2011); Steele v. GE Money Bank, No. 08-C-1880, 2009 U.S. Dist. LEXIS 
11536 (N.D. Ill. Feb. 17, 2009); Taylor v. Accredited Home Lenders, 
Inc., 580 F. Supp. 2d 1062 (S.D. Cal. 2008).
---------------------------------------------------------------------------

    Issue: A commenter stated that HUD should not add any of the new 
examples unless the final rule makes clear that the specified practices 
are not per se violations of the Act, but rather must be assessed 
pursuant to the standards set forth in Sec.  100.500. According to the 
commenter, the new examples may be misconstrued because they state only 
the initial finding described in Sec.  100.500.
    HUD Response: HUD agrees that, when a practice is challenged under 
a discriminatory effects theory, the practice must be reviewed under 
the standards specified in Sec.  100.500. The final rule therefore adds 
a sentence to the end of Sec.  100.5(b), which makes clear that 
discriminatory effects claims are assessed pursuant to the standards 
stated in Sec.  100.500.

 H. Other Issues

    Issue: A commenter requested that HUD examine the overall 
compliance burden of the regulation on small businesses, noting that 
Executive Order 13563 requires a cost-benefit analysis.
    HUD Response: In examining the compliance burden on small 
institutions, the governing authority is the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., which provides, among other things, that the 
requirements to do an initial and final regulatory flexibility analysis 
``shall not apply to any proposed or final rule if the head of the 
agency certifies that the rule will not, if promulgated, have a 
significant economic impact on a substantial number of small 
entities.'' Thus, the focus is on whether the rule--and not the 
underlying statute or preexisting administrative practice and case 
law--will have a significant economic impact. For this rule, the impact 
primarily arises from the Fair Housing Act itself, not only as 
interpreted by HUD, but also as interpreted by federal courts. Because 
this final rule provides a uniform burden-shifting test for determining

[[Page 11479]]

whether a given action or policy has an unjustified discriminatory 
effect, the rule serves to reduce regulatory burden for all entities, 
large or small, by establishing certainty and clarity with respect to 
how a determination of unjustified discriminatory effect is to be made.
    The requirement under the Fair Housing Act not to discriminate in 
the provision of housing and related services is the law of the nation. 
We presume that the vast majority of entities both large and small are 
in compliance with the Fair Housing Act. Furthermore, for the minority 
of entities that have, in the over 40 years of the Fair Housing Act's 
existence, failed to institutionalize methods to avoid engaging in 
illegal housing discrimination and plan to come into compliance as a 
result of this rulemaking, the costs will simply be the costs of 
compliance with a preexisting statute, administrative practice, and 
case law. Compliance with the Fair Housing Act has for almost 40 years 
included the requirement to refrain from undertaking actions that have 
an unjustified discriminatory effect. The rule does not change that 
substantive obligation; it merely formalizes it in regulation, along 
with the applicable burden-shifting framework.
    Variations in the well-established discriminatory effects theory of 
liability under the Fair Housing Act, discussed earlier in the 
preamble, are minor and making them uniform will not have a significant 
economic impact. The allocation of the burdens of proof among the 
parties, described in the rule, are methods of proof that only come 
into play if a complaint has been filed with HUD, a state or local 
agency or a federal or state court; that is, once an entity has been 
charged with discriminating under the Fair Housing Act. The only 
economic impact discernible from this rule is the cost of the 
difference, if any, between defense of litigation under the burden-
shifting test on the one hand, and defense of litigation under the 
balancing or hybrid test on the other. In all the tests, the elements 
of proof are similar. Likewise, the costs to develop and defend such 
proof under either the burden-shifting or balancing tests are similar. 
The only difference is at which stage of the test particular evidence 
must be produced. There would not, however, be a significant economic 
impact on a substantial number of small entities as a result of this 
rule.
    Executive Order 13563 (Improving Regulations and Regulatory Review) 
reaffirms Executive Order 12866, which requires that agencies conduct a 
benefit/cost assessment for rules that ``have an annual effect on the 
economy of $100 million or more or adversely affect in a material way 
the economy, a sector the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local or tribal 
governments or communities.'' As stated in Section VII of this preamble 
below, this rule is not ``economically significant'' within the meaning 
in Executive 12866, and therefore a full benefit/cost assessment is not 
required. This final rule does not alter the established law that 
facially neutral actions that have an unjustified discriminatory effect 
are violations of the Fair Housing Act. What this rule does is 
formalize that well-settled interpretation of the Act and provide 
consistency in how such discriminatory effects claims are to be 
analyzed.

VI. This Final Rule

    For the reasons presented in this preamble, this final rule 
formalizes the longstanding interpretation of the Fair Housing Act to 
include discriminatory effects liability and establishes a uniform 
standard of liability for facially neutral practices that have a 
discriminatory effect. Under this rule, liability is determined by a 
burden-shifting approach. The charging party or plaintiff in an 
adjudication first must bear the burden of proving its prima facie case 
of either disparate impact or perpetuation of segregation, after which 
the burden shifts to the defendant or respondent to prove that the 
challenged practice is necessary to achieve one or more of the 
defendant's or respondent's substantial, legitimate, nondiscriminatory 
interests. If the defendant or respondent satisfies its burden, the 
charging party or plaintiff may still establish liability by 
demonstrating that these substantial, legitimate, nondiscriminatory 
interests could be served by a practice that has a less discriminatory 
effect.

A. Discriminatory Effect--Subpart G

1. Scope
    This final rule adds a new sentence to the end of paragraph (b) in 
Sec.  100.5, which states: ``The illustrations of unlawful housing 
discrimination in this part may be established by a practice's 
discriminatory effect, even if not motivated by discriminatory intent, 
consistent with the standards outlined in Sec.  100.500.''
2. Discriminatory Effect Prohibited (Sec.  100.500)
    Consistent with HUD's November 16, 2011, proposed rule, this final 
rule adds a new subpart G, entitled ``Discriminatory Effect,'' to its 
Fair Housing Act regulations in 24 CFR part 100. Section 100.500 
provides that the Fair Housing Act may be violated by a practice that 
has a discriminatory effect, as defined in Sec.  100.500(a), regardless 
of whether the practice was adopted for a discriminatory purpose. The 
practice may still be lawful if supported by a legally sufficient 
justification, as defined in Sec.  100.500(b). The respective burdens 
of proof for establishing or refuting an effects claim are set forth in 
Sec.  100.500(c). Section 100.500(d) clarifies that a legally 
sufficient justification may not be used as a defense against a claim 
of intentional discrimination. It should be noted that it is possible 
to bring a claim alleging both discriminatory effect and discriminatory 
intent as alternative theories of liability. In addition, the 
discriminatory effect of a challenged practice may provide evidence of 
the discriminatory intent behind the practice. This final rule applies 
to both public and private entities because the definition of 
``discriminatory housing practice'' under the Act makes no distinction 
between the two.
3. Discriminatory Effect Defined (Sec.  100.500(a))
    Section 100.500(a) provides that a ``discriminatory effect'' occurs 
where a facially neutral practice actually or predictably results in a 
discriminatory effect on a group of persons protected by the Act (that 
is, has a disparate impact), or on the community as a whole on the 
basis of a protected characteristic (perpetuation of segregation). Any 
facially neutral action, e.g., laws, rules, decisions, standards, 
policies, practices, or procedures, including those that allow for 
discretion or the use of subjective criteria, may result in a 
discriminatory effect actionable under the Fair Housing Act and this 
rule. For examples of court decisions regarding policies or practices 
that may have a discriminatory effect, please see the preamble to the 
proposed rule at 76 FR 70924-25.
4. Legally Sufficient Justification (Sec.  100.500(b))
    Section 100.500(b), as set forth in the regulatory text of this 
final rule, provides that a practice or policy found to have a 
discriminatory effect may still be lawful if it has a ``legally 
sufficient justification.''
5. Burden of Proof (Sec.  100.500(c))
    Under Sec.  100.500(c), the charging party or plaintiff first bears 
the burden of proving its prima facie case: that is, that a practice 
caused, causes, or predictably will cause a discriminatory effect on a

[[Page 11480]]

group of persons or a community on the basis of race, color, religion, 
sex, disability, familial status, or national origin. Once the charging 
party or the plaintiff has made its prima facie case, the burden of 
proof shifts to the respondent or defendant to prove that the practice 
is necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests of the respondent or defendant. If the 
respondent or defendant satisfies its burden, the charging party or 
plaintiff may still establish liability by proving that these 
substantial, legitimate, nondiscriminatory interests could be served by 
another practice that has a less discriminatory effect.

B. Illustrations of Practices With Discriminatory Effects

    This final rule adds or revises the following illustrations of 
discriminatory housing practices:
    The final rule adds to Sec.  100.70 new paragraph (d)(5), which 
provides as an illustration of other prohibited conduct ``[e]nacting or 
implementing land-use rules, ordinances, policies, or procedures that 
restrict or deny housing opportunities or otherwise make unavailable or 
deny dwellings because of race, color, religion, sex, handicap, 
familial status, or national origin.''
    Section 100.120, which gives illustrations of discrimination in the 
making of loans and in the provision of other financial assistance, is 
streamlined, and paragraph (b)(2) now reads as set forth in the 
regulatory text of this final rule
    In Sec.  100.130, the final rule also amends paragraph (b)(2) and 
adds new paragraph (b)(3). The words ``or conditions'' is added after 
``terms,'' and ``cost'' is added to the list of terms or conditions in 
existing paragraph (b)(2). New paragraph (b)(3) includes servicing as 
an illustration of terms or conditions of loans or other financial 
assistance covered by section 805 of the Act: ``Servicing of loans or 
other financial assistance with respect to dwellings in a manner that 
discriminates, or servicing of loans or other financial assistance 
which are secured by residential real estate in a manner that 
discriminates, or providing such loans or financial assistance with 
other terms or conditions that discriminate, because of race, color, 
religion, sex, handicap, familial status, or national origin.''

VII. Findings and Certifications

Regulatory Review--Executive Orders 13563 and 12866

    Executive Order 13563 (``Improving Regulation and Regulatory 
Review'') directs agencies to propose or adopt a regulation only upon a 
reasoned determination that its benefits justify its costs, emphasizes 
the importance of quantifying both costs and benefits, of harmonizing 
rules, of promoting flexibility, and of periodically reviewing existing 
rules to determine if they can be made more effective or less 
burdensome in achieving their objectives. Under Executive Order 12866 
(``Regulatory Planning and Review''), a determination must be made 
whether a regulatory action is significant and therefore, subject to 
review by the Office of Management and Budget (OMB) in accordance with 
the requirements of the order. This rule was determined to be a 
``significant regulatory action'' as defined in section 3(f) of 
Executive Order 12866 (although not an economically significant 
regulatory action, as provided under section 3(f)(1) of the Executive 
Order).
    This rule formalizes the longstanding interpretation of the Fair 
Housing Act to include discriminatory effects liability, and 
establishes uniform, clear standards for determining whether a practice 
that has a discriminatory effect is in violation of the Fair Housing 
Act, regardless of whether the practice was adopted with intent to 
discriminate. As stated in the Executive Summary, the need for this 
rule arises because, although all federal courts of appeals that have 
considered the issue agree that Fair Housing Act liability may be based 
solely on discriminatory effects, there is a small degree of variation 
in the methodology of proof for a claim of effects liability. As has 
been discussed in the preamble to this rule, in establishing such 
standards HUD is exercising its rulemaking authority to bring 
uniformity, clarity, and certainty to an area of the law that has been 
approached by HUD and federal courts across the nation in generally the 
same way, but with minor variations in the allocation of the burdens of 
proof.\151\ A uniform rule would simplify compliance with the Fair 
Housing Act's discriminatory effects standard, and decrease litigation 
associated with such claims. By providing certainty in this area to 
housing providers, lenders, municipalities, realtors, individuals 
engaged in housing transactions, and courts, this rule would reduce the 
burden associated with litigating discriminatory effect cases under the 
Fair Housing Act by clearly establishing which party has the burden of 
proof, and how such burdens are to be met. Additionally, HUD believes 
the rule may even help to minimize litigation in this area by 
establishing uniform standards. With a uniform standard, entities are 
more likely to conduct self-testing and check that their practices 
comply with the Fair Housing Act, thus reducing their liability and the 
risk of litigation. A uniform standard is also a benefit for entities 
operating in multiple jurisdictions. Also, legal and regulatory clarity 
generally serves to reduce litigation because it is clearer what each 
party's rights and responsibilities are, whereas lack of consistency 
and clarity generally serves to increase litigation. For example, once 
disputes around the court-defined standards are eliminated by this 
rule, non-meritorious cases that cannot meet the burden under Sec.  
100.500(c)(1) are likely not to be brought in the first place, and a 
respondent or defendant that cannot meet the burden under Sec.  
100.500(c)(2) may be more inclined to settle at the pre-litigation 
stage.
---------------------------------------------------------------------------

    \151\ See, e.g., the extensive discussion of the various options 
in Graoch, 508 F.3d at 371-375.
---------------------------------------------------------------------------

    Accordingly, while this rule is a significant regulatory action 
under Executive Order 12866 in that it establishes, for the first time 
in regulation, uniform standards for determining whether a housing 
action or policy has a discriminatory effect on a protected group, it 
is not an economically significant regulatory action. The burden 
reduction that HUD believes will be achieved through uniform standards 
will not reach an annual impact on the economy of $100 million or more, 
because HUD's approach is not a significant departure from HUD's 
interpretation to date or that of the majority of federal courts. 
Although the burden reduction provided by this rule will not result in 
economically significant impact on the economy, it nevertheless 
provides some burden reduction through the uniformity and clarity 
presented by HUD's standards promulgated through this final rule and is 
therefore consistent with Executive Order 13563.
    The docket file is available for public inspection in the 
Regulations Division, Office of the General Counsel, Room 10276, 451 
7th Street SW., Washington, DC 20410-0500. Due to security measures at 
the HUD Headquarters building, please schedule an appointment to review 
the docket file by calling the Regulations Division at 202-708-3055 
(this is not a toll-free number). Individuals with speech or hearing 
impairments may access this number via TTY by calling the Federal Relay 
Service at 800-877-8339.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires

[[Page 11481]]

an agency to conduct a regulatory flexibility analysis of any rule 
subject to notice and comment rulemaking requirements, unless the 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities. For the reasons 
stated earlier in this preamble in response to public comment on the 
issue of undue burden on small entities, and discussed here, HUD 
certifies that this rule will not have significant economic impact on a 
substantial number of small entities.
    It has long been the position of HUD, confirmed by federal courts, 
that practices with discriminatory effects may violate the Fair Housing 
Act. As noted in the preamble to the proposed rule (76 FR 70921) and 
this preamble to the final rule, this long-standing interpretation has 
been supported by HUD policy documents issued over the last decades, is 
consistent with the position of other Executive Branch agencies, and 
has been adopted and applied by every federal court of appeals to have 
reached the question. Given, however, the variation in how the courts 
and even HUD's own ALJs have applied that standard, this final rule 
provides for consistency and uniformity in this area, and hence 
predictability, and will therefore reduce the burden for all seeking to 
comply with the Fair Housing Act. Furthermore, HUD presumes that given 
the over 40-year history of the Fair Housing Act, the majority of 
entities, large or small, currently comply and will remain in 
compliance with the Fair Housing Act. For the minority of entities that 
have, in the over 40 years of the Fair Housing Act's existence, failed 
to institutionalize methods to avoid engaging in illegal housing 
discrimination and plan to come into compliance as a result of this 
rulemaking, the costs will simply be the costs of compliance with a 
preexisting statute. The rule does not change that substantive 
obligation; it merely sets it forth in a regulation. While this rule 
provides uniformity as to specifics such as burden of proof, HUD's rule 
does not alter the substantive prohibitions against discrimination in 
fair housing law, which were established by statute and developed over 
time by administrative and federal court case law. Any burden on small 
entities is simply incidental to the pre-existing requirements to 
comply with this body of law. Accordingly, the undersigned certifies 
that this final rule will not have a significant economic impact on a 
substantial number of small entities.

Environmental Impact

    This final rule sets forth nondiscrimination standards. 
Accordingly, under 24 CFR 50.19(c)(3), this rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either: (i) Imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (ii) preempts 
state law, unless the agency meets the consultation and funding 
requirements of section 6 of the Executive Order. This final rule does 
not have federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This final rule does not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

List of Subjects in 24 CFR Part 100

    Civil rights, Fair housing, Individuals with disabilities, 
Mortgages, Reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, HUD amends 24 CFR part 
100 as follows:

 PART 100--DISCRIMINATORY CONDUCT UNDER THE FAIR HOUSING ACT

0
1. The authority citation for 24 CFR part 100 continues to read as 
follows:

    Authority:  42 U.S.C. 3535(d), 3600-3620.

Subpart A--General

0
2. In Sec.  100.5, add the following sentence at the end of paragraph 
(b):


Sec.  100.5  Scope.

* * * * *
    (b) * * * The illustrations of unlawful housing discrimination in 
this part may be established by a practice's discriminatory effect, 
even if not motivated by discriminatory intent, consistent with the 
standards outlined in Sec.  100.500.
* * * * *

Subpart B--Discriminatory Housing Practices

0
3. In Sec.  100.70, add new paragraph (d)(5) to read as follows:


Sec.  100.70  Other prohibited conduct.

* * * * *
    (d) * * *
    (5) Enacting or implementing land-use rules, ordinances, policies, 
or procedures that restrict or deny housing opportunities or otherwise 
make unavailable or deny dwellings to persons because of race, color, 
religion, sex, handicap, familial status, or national origin.

Subpart C--Discrimination in Residential Real Estate-Related 
Transactions

0
4. In Sec.  100.120, revise paragraph (b) to read as follows:


Sec.  100.120  Discrimination in the making of loans and in the 
provision of other financial assistance.

* * * * *
    (b) Practices prohibited under this section in connection with a 
residential real estate-related transaction include, but are not 
limited to:
    (1) Failing or refusing to provide to any person information 
regarding the availability of loans or other financial assistance, 
application requirements, procedures or standards for the review and 
approval of loans or financial assistance, or providing information 
which is inaccurate or different from that provided others, because of 
race, color, religion, sex, handicap, familial status, or national 
origin.
    (2) Providing, failing to provide, or discouraging the receipt of 
loans or other financial assistance in a manner that discriminates in 
their denial rate or otherwise discriminates in their availability 
because of race, color, religion, sex, handicap, familial status, or 
national origin.

0
5. In Sec.  100.130, revise paragraph (b)(2) and add new paragraph 
(b)(3) to read as follows:


Sec.  100.130  Discrimination in the terms and conditions for making 
available loans or other financial assistance.

* * * * *
    (b) * * *
    (2) Determining the type of loan or other financial assistance to 
be provided with respect to a dwelling, or fixing the amount, interest 
rate, cost, duration or other terms or conditions for a loan or

[[Page 11482]]

other financial assistance for a dwelling or which is secured by 
residential real estate, because of race, color, religion, sex, 
handicap, familial status, or national origin.
    (3) Servicing of loans or other financial assistance with respect 
to dwellings in a manner that discriminates, or servicing of loans or 
other financial assistance which are secured by residential real estate 
in a manner that discriminates, or providing such loans or financial 
assistance with other terms or conditions that discriminate, because of 
race, color, religion, sex, handicap, familial status, or national 
origin.

0
6. In part 100, add a new subpart G to read as follows:

Subpart G--Discriminatory Effect


Sec.  100.500  Discriminatory effect prohibited.

    Liability may be established under the Fair Housing Act based on a 
practice's discriminatory effect, as defined in paragraph (a) of this 
section, even if the practice was not motivated by a discriminatory 
intent. The practice may still be lawful if supported by a legally 
sufficient justification, as defined in paragraph (b) of this section. 
The burdens of proof for establishing a violation under this subpart 
are set forth in paragraph (c) of this section.
    (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. (1) A legally sufficient 
justification exists where the challenged practice:
    (i) Is necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests of the respondent, with respect to claims 
brought under 42 U.S.C. 3612, or defendant, with respect to claims 
brought under 42 U.S.C. 3613 or 3614; and
    (ii) Those interests could not be served by another practice that 
has a less discriminatory effect.
    (2) A legally sufficient justification must be supported by 
evidence and may not be hypothetical or speculative. The burdens of 
proof for establishing each of the two elements of a legally sufficient 
justification are set forth in paragraphs (c)(2) and (c)(3) of this 
section.
    (c) Burdens of proof in discriminatory effects cases. (1) The 
charging party, with respect to a claim brought under 42 U.S.C. 3612, 
or the plaintiff, with respect to a claim brought under 42 U.S.C. 3613 
or 3614, has the burden of proving that a challenged practice caused or 
predictably will cause a discriminatory effect.
    (2) Once the charging party or plaintiff satisfies the burden of 
proof set forth in paragraph (c)(1) of this section, the respondent or 
defendant has the burden of proving that the challenged practice is 
necessary to achieve one or more substantial, legitimate, 
nondiscriminatory interests of the respondent or defendant.
    (3) If the respondent or defendant satisfies the burden of proof 
set forth in paragraph (c)(2) of this section, the charging party or 
plaintiff may still prevail upon proving that the substantial, 
legitimate, nondiscriminatory interests supporting the challenged 
practice could be served by another practice that has a less 
discriminatory effect.
    (d) Relationship to discriminatory intent. A demonstration that a 
practice is supported by a legally sufficient justification, as defined 
in paragraph (b) of this section, may not be used as a defense against 
a claim of intentional discrimination.

    Dated: February 8, 2013.
John Trasvi[ntilde]a,
Assistant Secretary for Fair Housing and Equal Opportunity.
[FR Doc. 2013-03375 Filed 2-14-13; 8:45 am]
BILLING CODE 4210-67-P