[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
-----------------------------------------------------------------------
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]]
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\2\ See nn. 12, 28, supra, discussing HUD administrative
decisions and federal court rulings.
---------------------------------------------------------------------------
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.)
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.)
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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