Federal Register, Volume 88 Issue 62 (Friday, March 31, 2023)

[Federal Register Volume 88, Number 62 (Friday, March 31, 2023)]
[Rules and Regulations]
[Pages 19450-19500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05836]

[[Page 19449]]

Vol. 88

Friday,

No. 62

March 31, 2023

Part III

Department of Housing and Urban Development

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24 CFR Part 100

Reinstatement of HUD's Discriminatory Effects Standard; Final Rule

Federal Register / Vol. 88 , No. 62 / Friday, March 31, 2023 / Rules
and Regulations

[[Page 19450]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

[Docket No. FR-6251-F-02]
RIN 2529-AB02

Reinstatement of HUD's Discriminatory Effects Standard

AGENCY: Office of the Assistant Secretary for Fair Housing and Equal
Opportunity, U.S. Department of Housing and Urban Development (HUD).

ACTION: Final rule.

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SUMMARY: The Fair Housing Act prohibits discrimination in the sale,
rental, or financing of dwellings and in other housing-related
activities. This prohibition extends to practices with an unjustified
discriminatory effect, regardless of whether there was an intent to
discriminate. In 2013, HUD published a rule which formalized a burden-
shifting test for determining whether a given practice has an
unjustified discriminatory effect. In 2020, HUD published a rule that
would have altered the standards set forth in the 2013 rule. However, a
preliminary injunction prevented the 2020 rule from ever going into
effect. On June 25, 2021, HUD published a proposed rule to recodify the
2013 rule. After considering public comments, HUD in this final rule
reinstates and maintains the 2013 rule and rescinds the 2020 rule.

DATES: Effective: May 1, 2023.

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, or telephone number 202-402-3330 (this is not a toll-free
number). HUD welcomes and is prepared to receive calls from individuals
who are deaf or hard of hearing, as well as individuals with speech or
communication disabilities. To learn more about how to make an
accessible telephone call, please visit: https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION:

I. Background

The Fair Housing Act and Its Goals

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 because of race, color, religion, sex (including sexual
orientation and gender identity), disability, familial status, or
national origin.\1\ Through the Act, Congress expressed its intent to
eradicate discrimination and proclaimed that ``[i]t is the policy of
the United States to provide, within constitutional limitations, for
fair housing throughout the United States.'' \2\ The Act's protections
are meant to be ``broad and inclusive.'' \3\ Congress passed the Act in
the wake of the assassination of Dr. Martin Luther King, Jr.,
recognizing that ``residential segregation and unequal housing and
economic conditions in the inner cities'' were ``significant,
underlying causes of the social unrest'' \4\ and that both open and
covert race discrimination were preventing integrated communities.\5\
As the Supreme Court reiterated more recently, the Act's expansive
purpose is to ``eradicate discriminatory practices within a sector of
the Nation's economy'' and to combat and prevent segregation and
discrimination in housing.\6\ Congress considered the realization of
this policy ``to be of the highest priority.'' \7\
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\1\ 42 U.S.C. 3601-3619, 3631. This preamble uses the term
``disability'' to refer to what the Act and its implementing
regulations term a ``handicap.'' See, e.g., Hunt v. Aimco Props.,
L.P., 814 F.3d 1213, n.1 (11th Cir. 2016) (noting the term
disability is generally preferred over handicap).
\2\ 42 U.S.C. 3601.
\3\ Trafficante v. Metro. Life Ins. Co., 409 U.S. 205, 209
(1972).
\4\ Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys.
Project, Inc., 576 U.S. 519, 529 (2015) (citing Report of the
National Advisory Commission on Civil Disorders 91 (1968) (Kerner
Commission Report).
\5\ Id. at 529 (citing Kerner Commission Report).
\6\ Id. at 539.
\7\ Trafficante, 409 U.S. at 211 (1972).
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The Act gives HUD the authority and responsibility for
administering and enforcing the Act, including the authority to conduct
formal adjudications of complaints and to promulgate rules to interpret
and carry out the Act.\8\ Through that authority, HUD promulgates this
rule.
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\8\ See 42 U.S.C. 3608(a), 3612, 3614a. The Supreme Court has
recognized HUD's rulemaking authority in the specific context of
this rule. See Inclusive Cmtys. Project, 576 U.S. at 527-28, 542;
see also id. at 566-67 (Alito, J., dissenting) (``Congress also gave
[HUD] rulemaking authority and the power to adjudicate certain
housing claims'').
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Discriminatory Effects Law Under the Fair Housing Act Prior to HUD's
2013 Rule

HUD's 2013 rule, titled ``Implementation of the Fair Housing Act's
Discriminatory Effects Standard'' (``2013 Rule''), broke no new ground,
but instead largely codified longstanding judicial and agency consensus
regarding discriminatory effects law. Courts had long found that
discrimination under the Act may be established through evidence of
discriminatory effects, i.e., facially neutral practices with an
unjustified discriminatory effect. Indeed, before HUD's issuance of the
2013 Rule, all federal courts of appeals to have addressed the question
had held that liability under the Act could be established by a showing
that a neutral policy or practice either has a disparate impact on a
protected group or creates, perpetuates, or increases segregation, even
if such a policy or practice was not adopted for a discriminatory
purpose.\9\ As the Sixth Circuit explained, the Act ``proscribes not
only overt discrimination but also practices that are fair in form, but
discriminatory in operation.'' \10\
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\9\ See, e.g., Graoch Assocs. # 33, L.P. v. Louisville/Jefferson
Cnty. Metro Hum. Rels. Comm'n, 508 F.3d 366, 378 (6th Cir. 2007)
(citing Arthur v. City of Toledo, 782 F.2d 565, 575 (6th Cir.
1986)); Hallmark Developers, Inc. v. Fulton Cnty., 466 F.3d 1276,
1286 (11th Cir. 2006) (citing Hous. Investors, Inc. v. City of
Clanton, Ala., 68 F. Supp. 2d 1287, 1298 (M.D. Ala. 1999));
Huntington Branch, NAACP v. Town of Huntington, 844 F.2d 926, 937
(2nd Cir. 1988) (citing Metro Hous. Dev. Corp. v. Vill. of Arlington
Heights, 558 F.2d 1283, 1290 (7th Cir. 1977), aff'd, 488 U.S. 15
(1988) (per curium); Betsey v. Turtle Creek Assocs., 736 F.2d 983,
987 n.3 (4th Cir. 1984) (citing Metro Hous. Dev. Corp v. Vill. of
Arlington Heights, 558 F.2d 1283, 1290 (7th Cir. 1977)); Metro.
Hous. Dev. Corp. v. Vill. of Arlington Heights, 558 F.2d 1283, 1290
(7th Cir. 1977) (citing Trafficante v. Metro. Life Ins. Co., 409
U.S. 205, 209-10 (1972)); United States. v. City of Black Jack, 508
F. 2d 1179, 1184-86 (8th Cir. 1974).
\10\ Graoch Assocs. #33, L.P., 508 F.3d at 374 (quoting Griggs
v. Duke Power Co., 401 U.S. 424, 431 (1971) (a Title VII case)).
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Consistent with this judicial consensus, HUD has for decades
concluded that facially neutral practices that have an unjustified
discriminatory effect on the basis of a protected characteristic,
regardless of intent, violate the Act.\11\ For example, in 1994, HUD,
along with nine other agencies and the Department of Justice, issued a

[[Page 19451]]

joint policy statement that recognized disparate impact liability under
the Act.\12\ Although there had been some minor variation in the
application of the discriminatory effects framework prior to the 2013
Rule, HUD and the federal appellate courts were largely in agreement.
HUD has always used a three-step burden-shifting approach,\13\ as did
many federal courts of appeals prior to the 2013 Rule.\14\
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\11\ 78 FR 11460, 11461 (Feb. 15, 2013) (citing, e.g., HUD v.
Twinbrook Vill.Apts., HUDALJ Nos. 02-00-0256-8, 02-00-0257-8, 02-00-
0258-8, 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.'').
\12\ 78 FR 11460, 11461 (citing 1994 Joint Policy Statement on
Discrimination in Lending, 59 FR 18266, 18269 (Apr. 15, 1994)).
\13\ See, e.g., HUD v. Pfaff, 1994 WL 592199, at *8 (HUD ALJ
Oct. 27, 1994); 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); Twinbrook Vill. Apts., HUDALJ
Nos. 02-00-0256-8, 02-00-0257-8, 02-00-0258-8, 2001 WL 1632533, at
*17 (HUD ALJ Nov. 9, 2001); see also 1994 Joint Policy Statement on
Discrimination in Lending, 59 FR. 18266, 18269 (Apr. 15, 1994)
(applying three-step test without specifying where the burden lies
at each step).
\14\ See, e.g., Oti Kaga, Inc. v. S. Dakota Hous. Dev. Auth.,
342 F.3d 871, 883 (8th Cir. 2003); Lapid-Laurel v. Zoning Bd. of
Adjustment, 284 F.3d 442, 466-67 (3d Cir. 2002); Huntington Branch
NAACP v. Town of Huntington, 844 F.2d 926, 939 (2d Cir. 1988).
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HUD's 2013 Discriminatory Effects Rule

In February 2013, after notice and public comment, and considering
decades of case law, HUD published the 2013 Final Rule.\15\ The 2013
Rule ``formalize[d] [HUD's] long-held recognition of discriminatory
effects liability under the Act and, for purposes of providing
consistency nationwide, formalize[d] a burden-shifting test for
determining whether a given practice has an unjustified discriminatory
effect, leading to liability under the Act.'' \16\ In promulgating the
2013 Rule, HUD noted the Act's ``broad remedial intent;'' \17\ HUD's
prior positions, including that discriminatory effects liability was
``imperative to the success of civil rights law enforcement;'' \18\ and
the consistent application of discriminatory effects liability in the
four previous decades (with minor variations) by HUD, the Department of
Justice, nine other federal agencies, and federal courts.\19\
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\15\ 78 FR 11459.
\16\ 78 FR 11460.
\17\ See also 2011 Notice of Proposed Rulemaking, 76 FR 70922
(Nov. 16, 2011) (``In keeping with the `broad remedial intent' of
Congress in passing the Fair Housing Act, and consequently the Act's
entitlement to a `generous construction' HUD . . . has repeatedly
determined that the Fair Housing Act is directed to the consequences
of housing practices, not simply their purpose.'') (citing Havens
Realty Corp v. Coleman, 455 U.S. 363, 380 (1982); City of Edmonds v.
Oxford House, Inc., 514 U.S. 725, 731-732 (1995) (internal citations
removed)).
\18\ 78 FR 11460, 11461 (citing 126 Cong. Rec. 31,166-31,167
(1980) (statement of Sen. Mathias reading into the record letter of
HUD Secretary)).
\19\ 78 FR 11460, 11461-62.
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Among other things, the 2013 Rule codified a three-part burden-
shifting framework consistent with frameworks on which HUD and courts
had long relied: (1) The plaintiff or charging party is first required
to prove as part of the prima facie showing that a challenged practice
caused or predictably will cause a discriminatory effect; (2) if the
plaintiff or charging party makes this prima facie showing, the
defendant or respondent must then prove that the challenged practice is
necessary to achieve one or more substantial, legitimate,
nondiscriminatory interests of the defendant or respondent; and (3) if
the defendant or respondent meets its burden at step two, the plaintiff
or charging party may still prevail by proving that the substantial,
legitimate, nondiscriminatory interests supporting the challenged
practice could be served by another practice that has a less
discriminatory effect.\20\
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\20\ 78 FR 11460, 11482; see, e.g., Inclusive Cmtys. Project,
Inc., 576 U.S. at 527 (overviewing the 2013 Rule's burden shifting
framework).
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The 2015 Inclusive Communities Supreme Court Decision

In 2015, the Supreme Court confirmed that the Act provides for
discriminatory effects liability in Texas Department of Housing and
Community Affairs v. Inclusive Communities Project, Inc.\21\ The State
of Texas presented two questions to the Court (1) Whether disparate-
impact claims are cognizable under the Act, and (2) if they are, what
standards and burdens of proof should apply,\22\ but the Court declined
to consider the second question.\23\ On the first question, the Court
found that disparate-impact claims are cognizable, concluding that
Congress's use of the phrase ``otherwise make unavailable'' in Section
804(a) of the Act and the term ``discriminate'' in Section 805(a) are
each parallel to language that the Court had previously held to provide
for discriminatory effects liability under other civil rights
statutes.\24\
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\21\ Inclusive Cmtys. Project, Inc. 576 U.S. at 519, 519, 532-
35.
\22\ See Petition for a Writ of Certiorari, in Tex. Dep't of
Hous. & Cmty. Affairs et al., v. Inclusive Cmtys. Project, Inc., 573
U.S. 991, 2014 U.S. S. Ct. Briefs LEXIS 1848, at *9; See Questions
Presented in, https://www.supremecourt.gov/qp/13-01371qp.pdf.
\23\ Inclusive Cmtys. Project, Inc., 573 U.S. 991 (2014), 2014
U.S. LEXIS 4912 at *1 (``Petition for writ of certiorari to the
United States Court of Appeals for the Fifth Circuit granted limited
to Question 1 presented by the petition.''); See also Questions
Presented in, Inclusive Cmtys Project, Inc., 573 U.S. 991.
\24\ Inclusive Cmtys. Project, Inc., 576 U.S. at 534 (citing
Griggs v. Duke Power Co., 401 U.S. 424 (1971); Bd. of Educ. v.
Harris, 444 U.S. 130 (1979); Smith v. City of Jackson, 544 U.S. 228,
233 (2005).
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In reaching this holding, the Court explained that from its first
decision to recognize disparate impact liability, in Griggs v. Duke
Power Co., it ``put important limits'' on the scope of liability.\25\
For example, with respect to employment discrimination claims under
Title VII of the Civil Rights Act of 1964, Griggs explained that an
employer can justify a practice that has a disparate impact with a
``business necessity'' defense, such that Title VII ``does not prohibit
hiring criteria with a `manifest relationship' to job performance.''
\26\ Similarly, after holding that the Act provided for disparate
impact liability, the Inclusive Communities Court noted that, under the
Act, ``disparate-impact liability has always been properly limited in
key respects . . .' '' \27\ Quoting Griggs, the Court explained that it
has always been true that disparate impact liability under the Act
``mandates the `removal of artificial, arbitrary, and unnecessary
barriers,' not the displacement of valid governmental policies.'' \28\
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\25\ Inclusive Cmtys. Project, Inc., 576 U.S. at 531.
\26\ Id. (quoting Griggs, 401 U.S. at 431-32).
\27\ Id. at 540.
\28\ Id. (quoting Griggs, 401 U.S. at 431).
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The Court then sketched out some of these long-standing limitations
on the scope of disparate-impact liability, including: (1) The
requirement that ``housing authorities and private developers [have]
leeway to state and explain the valid interest served by their policies
. . . analogous to the business necessity standard under Title VII;''
and (2) the requirement that a ``claim that relies on a statistical
disparity must fail if the plaintiff cannot point to a defendant's
policy or policies causing that disparity.'' \29\
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\29\ Id. at 541, 542.
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HUD's 2016 Notice: Application of the Fair Housing Act's Discriminatory
Effects Standard to Insurance

In 2016, HUD published a document (``2016 Notice'') supplementing
its response to certain comments concerning homeowners' insurance
received during rulemaking for the 2013 Rule in accordance with the
district court's decision in Property Casualty Insurers Association of
America (PCIAA) v. Donovan.\30\ In that Notice, HUD stated, among other
things, that ``[a]fter careful reconsideration of the insurance
industry comments in accordance with the court's decision . . . HUD has
determined that categorical exemptions or safe harbors for insurance
practices are unworkable and inconsistent with the broad fair

[[Page 19452]]

housing objectives and obligations embodied in the Act'' and that
``commenters' concerns regarding application of the discriminatory
effects standard to insurance practices can and should be addressed on
a case-by-case basis.'' \31\
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\30\ 81 FR 69012-13.
\31\ Id.
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HUD's 2020 Disparate Impact Rule

On June 20, 2018, HUD published an Advance Notice of Proposed
Rulemaking (``ANPRM''), inviting public comment on ``what changes, if
any'' to the 2013 Rule were necessary as a result of Inclusive
Communities.\32\ HUD then published a Notice of Proposed Rulemaking on
August 19, 2019 (``2019 Proposed Rule'') proposing to change the 2013
Rule.\33\
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\32\ 83 FR 28560.
\33\ 84 FR 42854.
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In response to the 2019 Proposed Rule, HUD received approximately
45,000 comments, most of which opposed the proposed changes and many of
which raised significant legal and policy concerns with the 2019
Proposed Rule. Commenters objected that the proposed changes did not
align with case law, created problematic defenses and made
discriminatory effects claims effectively impossible to plead and prove
in many instances, thus contravening the core holding of Inclusive
Communities.\34\ On September 24, 2020, HUD published a final rule
titled ``HUD's implementation of the Fair Housing Act's Disparate
Impact Standard'' (``2020 Rule''), which, among other things removed
the definition of discriminatory effect, added demanding pleading
elements that made it far more difficult to initiate a case, altered
the burden-shifting framework, created new defenses, and limited
available remedies in disparate impact claims.\35\
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\34\ See, e.g., 85 FR 60317, 60319 (overview of some of the
comments making these points).
\35\ 85 FR 60288.
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Massachusetts Fair Housing Ctr. v. HUD Order Staying Implementation of
the 2020 Rule

Following publication of the 2020 Rule, HUD was sued in three
separate federal courts--: Massachusetts Fair Housing Ctr., et al. v.
HUD, No. 3:20-cv-11765 (D. Mass.); Nat'l Fair Hous. All., et al. v.
HUD, No. 3:20-cv-07388 (N.D. Cal.); Open Cmtys., et al. v. HUD, No.
3:20-cv-01587 (D. Conn.). The plaintiffs in each case contended that
the 2020 Rule was invalid because it was inconsistent with the Act and
its promulgation violated the Administrative Procedure Act (``APA'').
Prior to the effective date of the 2020 Rule, the U.S. District Court
for the District of Massachusetts in Massachusetts Fair Housing Ctr. v.
HUD issued a preliminary injunction staying the implementation and
postponing the effective date of the 2020 Rule.\36\ Because of this
preliminary injunction, the 2020 Rule never took effect, and the 2013
Rule remained in effect.
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\36\ Mass. Fair Hous. Ctr. v. United States HUD, 496 F. Supp. 3d
600, 611 (D. Mass. Oct. 25, 2020).
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In its order, the district court preliminarily found that many
significant changes made by the 2020 Rule were likely not supported by
Inclusive Communities or other case law. Similarly, the court concluded
that the 2020 Rule did not appear to bring the clarity to the
discriminatory effects framework that it was intended to foster, but
rather introduced new concepts that had never been part of disparate
impact case law without fully explaining their meaning. In support of
its conclusions, the court identified numerous provisions in the 2020
Rule as problematic, including Sec. 100.500(b) (``requiring at `the
pleadings stage,' among other things, that plaintiffs `sufficiently
plead facts to support' . . . `[t]hat the challenged policy or practice
is arbitrary, artificial, and unnecessary to achieve a valid interest
or legitimate objective such as a practical business, profit, policy
consideration, or requirement of law' ''); Sec. 100.500(c)(2)
(permitting defendants to `` `rebut a plaintiff's allegation under
(b)(1) . . . that the challenged policy or practice is arbitrary,
artificial, and unnecessary by producing evidence showing that the
challenged policy or practice' merely `advances a valid interest' '')
(emphasis in original); Sec. 100.500(c)(3) (requiring ``at the third
step of the burden-shifting framework that the plaintiff prove `a less
discriminatory policy or practice exists that would serve the
defendant's identified interest (or interests) in an equally effective
manner without imposing materially greater costs on, or creating other
material burdens for, the defendant' '' (emphasis in original)); Sec.
100.500(d)(1) and (d)(2)(iii) (``conflating of a plaintiff's prima
facie burden and pleading burden''); and Sec. 100.500(d)(2)(i) (the
outcome prediction defense).\37\
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\37\ Id. at 605-07, n.2, 610-11.
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The district court found that the ``practical business, profit,
policy consideration'' language, the ``outcome prediction'' defense,
changes to the third element of the burden-shifting framework, and the
conflating of a plaintiff's prima facie burden and pleading burden, ran
the risk of ``effectively neutering'' discriminatory effects liability
under the Act, and were all likely unsupported by Inclusive Communities
or other judicial decisions.\38\ The district court also stated that
the 2020 Rule's use of ``new and undefined terminology altered the
burden-shifting framework, and perplexing defenses'' accomplished ``the
opposite of clarity'' and were likely ``arbitrary and capricious.''
\39\ The court stated that ``[t]here can be no doubt that the 2020 Rule
weakens, for housing discrimination victims and fair housing
organizations, disparate impact liability under the Fair Housing Act. .
. . In addition, the 2020 Rule arms defendants with broad new defenses
which appear to make it easier for offending defendants to dodge
liability and more difficult for plaintiffs to succeed. In short, these
changes constitute a massive overhaul of HUD's disparate impact
standards, to the benefit of putative defendants and to the detriment
of putative plaintiffs.'' \40\
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\38\ Id. at 611.
\39\ Id.
\40\ Id. at 607.
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HUD's Reconsideration of the 2020 Rule and the 2021 Notice of Proposed
Rulemaking

On January 26, 2021, President Biden issued a Memorandum ordering
the Department to ``take all steps necessary to examine the effects of
the [2020 Rule], including the effect that amending the [2013 Rule] has
had on HUD's statutory duty to ensure compliance with the Fair Housing
Act'' and ``take any necessary steps . . . to implement the Fair
Housing Act's requirements that HUD administer its programs in a manner
that . . . furthers . . . HUD's overall duty to administer the Act [ ]
including by preventing practices with an unjustified discriminatory
effect.'' \41\
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\41\ See 86 FR 7487, 7488.
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Consistent with the President's Memorandum, HUD began a process to
reconsider the 2020 Rule. On June 25, 2021, after reviewing prior
public comments on the previous rulemakings described above, HUD's
responses to those comments, HUD's 2016 supplemental explanation
regarding the 2013 Rule's applicability to the insurance industry,
legal precedent including Inclusive Communities, the Massachusetts Fair
Housing Center court's order, and HUD's own experience with
discriminatory effects cases over 40 years, HUD promulgated a proposed
rule titled ``Reinstatement of HUD's Discriminatory Effects Standard''
(``proposed rule'') that proposed to recodify the 2013 Rule.\42\ The
proposed

[[Page 19453]]

rule advocated returning to the 2013 Rule because HUD believed that the
2013 Rule established a workable framework that was more consistent
with existing case law and the purpose of the Act than the 2020 Rule.
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\42\ 86 FR 33590.
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As HUD described in the proposed rule, in HUD's experience, the
2013 Rule set a more appropriately balanced standard for pleading,
proving, and defending a fair housing case alleging that a policy or
practice has a discriminatory effect. HUD believed that the 2013 Rule
provided greater clarity about what each party must show by relying on
concepts that have a long history in judicial and agency precedent and
that it appropriately balanced the need to ensure that frivolous claims
do not go forward with a realistic understanding of the practical
challenges to litigating these claims. With regard to the 2020 Rule,
HUD's experience investigating and prosecuting discriminatory effects
cases informed its views that many of the points made by commenters and
the District Court in Massachusetts Fair Housing Center were, in HUD's
opinion, correct. In particular, the changes the 2020 Rule made, such
as amending pleading standards, changing the burden shifting framework,
and adding defenses, all operated to tip the scales in favor of
respondents, introduced unnecessary confusion, may have precluded
otherwise valid claims, and, at worst would have made discriminatory
effects liability a practical nullity.
HUD further stated its belief that the 2013 Rule was more
consistent with the Act's purpose; prior case law under the Act,
including Inclusive Communities; other civil rights authorities,
including the Equal Credit Opportunity Act and Title VII; and HUD's
prior interpretations of the Act. In its 2020 Rule, HUD noted that the
rule was intended to better reflect Inclusive Communities, but HUD now
believes that the 2020 Rule was itself inconsistent with the holding of
Inclusive Communities, which maintained the fundamentals of long-
established disparate-impact precedent rather than changing them.
Moreover, based on HUD's experience investigating and litigating
discriminatory effects cases, HUD believed that the practical effect of
the 2020 Rule's amendments was to severely limit HUD's and plaintiffs'
use of the discriminatory effects framework in ways that would
substantially diminish that frameworks' effectiveness in accomplishing
the purposes that Inclusive Communities articulated.
By comparison, in HUD's experience, the 2013 Rule provided a
workable and balanced framework for investigating and litigating
discriminatory effects claims that is consistent with the Act, HUD's
own guidance, Inclusive Communities, and other jurisprudence.
HUD noted that Inclusive Communities heavily relied on Griggs,
which is the foundation of Title VII disparate impact jurisprudence, to
illustrate the well-settled principles of disparate impact under the
Act, and HUD believed Inclusive Communities to be fully supportive of
the 2013 Rule. Inclusive Communities explained that in Griggs, ``[w]hat
is required by Congress [in Title VII cases] is the removal of
artificial, arbitrary, and unnecessary barriers to employment when the
barriers operate invidiously to discriminate on the basis of racial or
other impermissible classification.'' \43\ Quoting from its
foundational decision in Griggs, the Supreme Court in Inclusive
Communities observed that ``[d]isparate impact liability mandates the
`removal of artificial, arbitrary, and unnecessary barriers,' not the
displacement of valid governmental policies.'' \44\ HUD proposed that
this quotation from a seminal decision of longstanding disparate impact
doctrine is properly read as maintaining existing law, not changing it.
HUD highlighted that Inclusive Communities explicitly stated,
``disparate-impact liability has always been properly limited in key
respects'' (emphasis added), making clear that the Court was not adding
additional pleading or proof requirements or calling for a significant
departure from pre-existing precedent under the Act and Title VII.\45\
Furthermore, HUD stated that reading Inclusive Communities to support a
heightened pleading standard is contradicted by the fact that the
``heartland'' cases cited by the Court would not have survived a motion
to dismiss under that standard because plaintiffs in those cases did
not have specific facts to plausibly allege that a policy or practice
was arbitrary, artificial, or unnecessary until after discovery.\46\
Finally, HUD explained that because Inclusive Communities considered a
judgment reached after discovery and bench trial, the Court had no
occasion or opportunity to consider the proper pleading standards for
cases brought under the Act. The parties did not brief or argue such
questions to the Court, making it particularly unlikely that the Court
intended to reach them.
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\43\ Inclusive Cmtys. Project, Inc., 576 U.S. at 578.
\44\ Id. at 540.
\45\ Id.
\46\ See, e.g., Town of Huntington, NY v. Huntington Branch,
NAACP, 488 U.S. 15 (1988); United States v. City of Black Jack, 508
F.2d 1179, 1184, 1187-88 (8th Cir. 1974) (specific facts produced
during the case supported the court's determination that the policy
was one of those ``artificial, arbitrary, and unnecessary''
practices that is properly invalidated under disparate impact
doctrine); Greater New Orleans Fair Hous. Action Ctr. v. St. Bernard
Parish, 641 F. Supp. 2d 563, 567-568 (E.D. La. 2009) (relying on
information gathered after the pleadings to find disparate impact).
---------------------------------------------------------------------------

For these reasons and others, HUD proposed that Inclusive
Communities' quotation of Griggs' decades-old ``artificial, arbitrary,
and unnecessary'' formulation would be best construed as maintaining
continuity with longstanding disparate-impact jurisprudence, as
reflected in the 2013 Rule.\47\ HUD stated in the proposed rule its
belief that other changes the 2020 Rule made would create problems that
could be cured by a return to the 2013 Rule. For example, the 2020 Rule
eliminated the 2013 Rule's definition of ``discriminatory effect,''
stating that the definition was unnecessary because it ``simply
reiterated the elements of a disparate impact claim.'' \48\ In
eliminating this definition, the 2020 Rule erased ``perpetuation of
segregation'' as a recognized type of discriminatory effect distinct
from disparate impact, which was contrary to well established
precedent. HUD proposed to reaffirm that perpetuation of segregation
remains, as it always had been, a basis for contending that a policy
has an unlawful discriminatory effect.
---------------------------------------------------------------------------

\47\ 86 FR 33594-5.
\48\ 84 FR 42858.
---------------------------------------------------------------------------

HUD described how the 2020 Rule also eliminated from the Act's
prohibitions policies or practices that could ``predictably result[] in
a disparate impact on a group of persons,'' i.e., those for which the
disparate impact has not yet manifested but will predictably do so. HUD
noted, as it stated in 2013, that the Act prohibits discrimination that
is predictable because it defines an ``aggrieved person'' as any person
who ``believes that such person will be injured by a discriminatory
housing practice that is about to occur.'' \49\ HUD noted that courts
have found that predictable discriminatory effects may violate the Act:
``[t]o 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

[[Page 19454]]

effect.'' \50\ HUD stated in the proposed rule that the 2020 Rule did
not adequately explain how the Act and case law construing it can be
read to require waiting until harm is inflicted before an action with
predictable discriminatory effects can be challenged, nor did HUD
perceive that any such explanation would be availing, given the plain
language of the Act and the case law interpreting it.
---------------------------------------------------------------------------

\49\ 42 U.S.C. 3602(i)(2).
\50\ See Inclusive Cmtys. Project, Inc., 576 U.S. at 539-40
(describing City of Black Jack, 508 F.2d at 1184 as ``at the
heartland of disparate-impact liability'').
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In addition, in the 2021 proposed rule, HUD recognized and agreed
with concerns that the 2020 Rule created new and confusing defenses at
both the pleading and post-pleading stage, including the new defense
allowing a defendant to show that the challenged policy or practice is
``reasonably necessary to comply with a third-party requirement.'' \51\
The 2020 Rule's preamble stated that this defense would not require a
showing that the challenged policy is the only way to comply with such
a requirement, only that the policy serves that purpose. In the 2021
proposed rule, HUD stated that this new defense was inconsistent with
the Act, which specifies that state and local laws requiring or
permitting discriminatory housing practices are invalid. HUD expressed
its concern that the defense would preclude many otherwise proper
discriminatory effects claims, because, for example, a plaintiff may
not have any practical means of knowing whether some other party's
policies also contributed to the defendant's practice. HUD reasoned
that nothing in Inclusive Communities suggests this defense is
required, let alone reasonable, for the agency to create.
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\51\ 24 CFR 100.500(d)(1); 85 FR 60333.
---------------------------------------------------------------------------

HUD noted further in the proposed rule that the 2020 Rule also
created a new ``outcome prediction'' defense which HUD believed would
in practice exempt most insurance industry practices (and many other
housing-related practices that rely on outcome predictions, such as
lending practices) from liability under a disparate impact
standard.\52\ In the proposed rule, HUD stated that it considered this
defense to be inconsistent with HUD's repeated finding, including in
the 2020 Rule, that ``a general waiver of disparate impact law for the
insurance industry would be inappropriate.'' HUD reconsidered the
defense and explained in the proposed rule that it believed the defense
was unclear and would suggest that comparators be used, which were, in
HUD's experience, inappropriate. HUD stated that at the very least, the
defense would introduce unnecessary confusion into the doctrine.
---------------------------------------------------------------------------

\52\ 24 CFR 100.500(d)(2)(i), 85 FR 60319, 60333.
---------------------------------------------------------------------------

In the proposed rule, HUD explained that the 2020 Rule
inappropriately limited remedies in discriminatory effects cases in
three respects. It specified that ``remedies should be concentrated on
eliminating or reforming the discriminatory practice so as to eliminate
disparities between persons in a particular protected class and other
persons.'' It prohibited HUD in administrative proceedings from
pursuing anything but ``equitable remedies'' except that ``where
pecuniary damage is proved, HUD will seek compensatory damages or
restitution.'' And it restricted HUD from seeking civil penalties in
discriminatory effects cases unless the respondent had been adjudged
within the last 5 years to have committed intentional unlawful housing
discrimination under the Act. In the proposed rule, HUD proposed that
these limitations have no basis in law and run contrary to public
interest and the purpose of the Act. While the 2020 Rule cited
Inclusive Communities as supporting these limitations, HUD noted that
no part of Inclusive Communities suggested such limitations. Moreover,
HUD viewed these limitations as in conflict with the plain language of
the Act, which provides in all cases for a wide variety of remedies,
including injunctive relief, actual damages, punitive damages, and
civil penalties. HUD clarified that whereas Congress explicitly has
limited the remedies available in disparate impact cases under Title
VII, it has chosen not to do so in cases brought under the Act.
In sum, HUD stated in the proposed rule that it believed that the
2013 Rule would be preferable to the 2020 Rule. It believed the 2013
Rule would be more consistent with judicial precedent construing the
Fair Housing Act, including Inclusive Communities, as well as the Act's
broad remedial purpose. Based on its experience interpreting and
enforcing the Act, HUD also believed the 2020 Rule, if put into effect,
threatened to limit the effectiveness of the Act's discriminatory
effects doctrine in ways that are inconsistent with the doctrine
continuing to play its critical role in ``moving the Nation toward a
more integrated society.'' \53\ Furthermore, HUD stated that it
believed that the 2013 Rule provided clarity, consistency, and a
workable, balanced framework, recognized by the Supreme Court, under
which to analyze discriminatory effects claims, and under which HUD
could better ensure it has the tools to further its ``duty to
administer the Act [ ] including by preventing practices with an
unjustified discriminatory effect.'' \54\
---------------------------------------------------------------------------

\53\ Inclusive Cmtys. Project, Inc., 576 U.S. at 547.
\54\ 86 FR 33594.
---------------------------------------------------------------------------

II. This Final Rule

HUD received 10,113 comments in response to the proposed rule. HUD
reviewed and carefully considered these comments and, as explained in
the responses to the comments below, HUD has decided to recodify the
2013 Rule. HUD has confirmed that the concerns it expressed in the
proposed rule are consistent with the public comments received in
response to the proposed rule, HUD's previous rulemakings and notices,
and relevant discriminatory effects case law under the Act, including
cases using the 2013 Rule and the 2020 Rule.
HUD continues to believe that, as compared to the 2020 Rule, the
2013 Rule more accurately describes discriminatory effects law in a
manner that is consistent with both the Act and the Supreme Court's
ruling in Inclusive Communities. As in the 2013 Rule, this final rule
does not impose any new liability, but merely provides a consistent,
nationwide framework for determining whether a given practice has an
unjustified discriminatory effect, leading to liability under the Act.
HUD believes the 2013 Rule best aligns with Fair Housing Act
jurisprudence and is most consistent with the Act's remedial purposes.
As described in greater detail below, HUD believes that the 2013
standard is consistent with and was implicitly endorsed by Inclusive
Communities.
Moreover, even if the 2020 Rule were a permissible approach to
discriminatory effects law and HUD had no doubts about the legality or
appropriateness of the 2020 Rule under the Act, HUD would recodify the
2013 Rule as an exercise of the discretion Congress gave HUD to make
rules under the Act.\55\ The 2013 Rule's framework is practical and, in
contrast to the novel and complicated 2020 Rule, has worked well in
discriminatory effects cases. The 2013 Rule's framework adequately
balances the interests of plaintiffs \56\ and defendants and encourages
the latter to seek a less discriminatory alternative

[[Page 19455]]

when a policy or practice causes a discriminatory effect, without
imposing an excessive burden on their substantial, legitimate, non-
discriminatory interests. As described in greater detail below, HUD
declines to create any exemptions or safe harbors in this rule or to
proscribe specific conduct that per se has an unjustified
discriminatory effect. As Inclusive Communities recognized in affirming
that discriminatory effects claims are cognizable under the Act, ``the
[Fair Housing Act] must play an important part in avoiding the Kerner
Commission's grim prophecy that `[o]ur Nation is moving toward two
societies, one black, one white--separate and unequal.' '' \57\ For the
reasons discussed in HUD's 2013 Rule, in the proposed rule, and below
in response to the public comments, HUD rescinds the 2020 Rule and
recodifies the 2013 Rule.
---------------------------------------------------------------------------

\55\ See generally 42 U.S.C. 3614a.
\56\ In the HUD administrative hearing process, HUD is referred
to as the charging party and the housing providers who are alleged
to have violated the Act are referred to as respondents. See 24 CFR
100.500. Rather than repeat those terms throughout this preamble,
HUD uses the terms plaintiff and defendant to include the charging
party and respondent.
\57\ Inclusive Cmtys. Project, Inc., 576 U.S. at 519, 546
(quoting Report of the National Advisory Commission on Civil
Disorders 91 (1968) (Kerner Commission Report at 1).
---------------------------------------------------------------------------

HUD adopts one amendment made by the 2020 Rule to HUD's general
fair housing regulations at Sec. 100.70(d)(5). This amendment provides
additional illustrations of prohibited activities under the Fair
Housing Act generally, though it is not specific to discriminatory
effects cases. HUD proposed keeping these additional examples in the
proposed rule and received no public comments specifically opposing
these additions. In this final rule's amendatory instructions, HUD
includes instructions to ``republish'' Sec. 100.70(d)(5) without
change from the 2020 Rule to clearly show that HUD is adopting this
language in this final rule.

III. Public Comments

General Comments in Support

Commenters generally supported the proposed rule, which would
reinstate the 2013 Rule. Commenters stated that the proposed rule is
consistent with President Biden's memorandum directing agencies to
redress America's history of housing discrimination and the 1994
interagency fair lending guidance under the Act and the Equal Credit
Opportunity Act. Commenters also stated that the proposed rule is an
important and appropriate exercise of HUD's rulemaking authority.
Among the supportive comments were those stating that the proposed
rule: is appropriately broad, inclusive, and will be instrumental in
ensuring optimal compliance with the Act and in challenging covert or
latent discrimination that can be intentionally or unintentionally
embedded in facially neutral policies and practices; is critical for
ensuring equal opportunity under the Act; would help secure equal
opportunity in a wide variety of housing areas, including in land use
and zoning, affordable and public housing, environmental permitting,
air quality, and utility burdens; would be effective in protecting
against housing discrimination based on all of the Act's protected
characteristics, as well as related groups such as persons without
English language proficiency or who are survivors of domestic violence
or sexual assault; would advance sustainable homeownership and
affordable housing programs; would benefit both real estate
professionals and consumers; may prevent segregated housing patterns
that might otherwise result from covert and illicit stereotyping; is
essential to challenging blanket refusals to accept Housing Choice
Vouchers, which are disproportionately used by people of color,
households with children, and persons with disabilities; and would
address de facto and de jure discrimination in housing policies,
construction, and tenancy.
Commenters noted that the proposed rule's burden-shifting framework
is consistent with long-standing case law, including Inclusive
Communities, and well-established agency practice. Commenters explained
that the proposed rule contains the traditional burden shifting
framework for disparate impact claims, which was endorsed by the
Supreme Court in Inclusive Communities and is consistent with the
framework for disparate impact claims under Title VII and the Equal
Credit Opportunity Act.
Commenters stated that out of more than 40 federal appellate and
district court decisions in disparate-impact fair housing cases
following Inclusive Communities, very few, other than Inclusive
Communities Project v. Lincoln Prop. Co.,\58\ found any inconsistency
between the 2013 Rule and the Supreme Court's Inclusive Communities
decision. Commenters pointed to Avenue 6E Investments, LLC v. City of
Yuma,\59\ which cited the 2013 Rule as authority for the proper burden-
shifting framework without noting any inconsistencies between that rule
and Inclusive Communities, and Mhany Mgmt., Inc. v. Cnty. of
Nassau,\60\ which found that the Supreme Court implicitly endorsed the
2013 Rule's framework in Inclusive Communities.\61\ Commenters also
noted that the court in Mhany Mgmt., Inc. v. Cnty. of Nassau, as well
as numerous other cases successfully utilized the 2013 Rule's burden
shifting framework to reach decisions.
---------------------------------------------------------------------------

\58\ Inclusive Communities Project v. Lincoln Prop. Co, 920 F.3d
890 (5th Cir. 2019).
\59\ Avenue 6E Investments, LLC v. City of Yuma, 818 F.3d 493,
510 (9th Cir. 2016).
\60\ Mhany Mgmt., Inc. v. Cnty. of Nassau. 819 F.3d 581, 618-20
(2d Cir. 2016).
\61\ Avenue 6E Investments, LLC v. City of Yuma, 818 F.3d 493,
510 (9th Cir. 2016); Mhany Mgmt., Inc. v. Cnty. of Nassau, 819 F.3d
581, 618-20 (2d Cir. 2016).
---------------------------------------------------------------------------

Commenters supporting the proposed rule stated that it provides a
clear, simple, and effective standard that would promote consistency
between judicial and administrative venues and throughout the housing
industry. Commenters explained that this standard would maintain
continuity for regulated entities and enable them to better comply with
the Act, since this regulatory framework has been in place since 2013.
Commenters described the framework as pragmatic, fostering fair and
sound business practices and finding the appropriate balance between
fair housing concerns and business necessities.
Commenters expressed support for the burden-shifting framework,
describing it as clear, easy to follow, practical, and striking the
appropriate balance between competing interests. Commenters stated that
the 2013 Rule settled the law on several important issues, including
whether the burden-shifting framework is appropriate and which party
bears the burden of demonstrating the business necessity for a
particular policy and the existence of a less discriminatory
alternative. A commenter noted that the 2013 Rule is a fair and
accurate codification of longstanding jurisprudence of discriminatory
effects liability under the Act and posed no significant departure from
previous HUD interpretation or the weight of judicial authority.
Commenters noted that plaintiff's burden under the proposed rule is not
easy to meet, which eliminates the danger of an onslaught of groundless
litigation. A commenter described the proposed rule as balancing the
need to prevent frivolous claims from moving forward with a process
that allows potentially meritorious claims to be substantiated or
disproved. A commenter compared the proposed rule's three-tiered
framework to the 2020 Rule's five-tiered test, noting that the former
provides a clear way to challenge policies that may unnecessarily
restrict housing, while the latter is vague and allows discrimination
to continue unchallenged. Comments also stated that the 2020 Rule
conflicted with decades of legal precedent, including

[[Page 19456]]

the Supreme Court's decision in Inclusive Communities and that
discriminatory effects claims that sought to challenge neutral policies
that actually caused discrimination would not survive under the test
contained in the 2020 Rule.

General Comments in Opposition

Other commenters generally opposed the proposed rule, suggesting
that HUD withdraw it and retain the 2020 Rule. A commenter stated that
the 2020 Rule thoroughly explained its reasoning and was consistent
with Inclusive Communities. Another commenter described the proposed
rule as unclear and overly burdensome. Commenters also suggested that
the proposed rule lacks limitations on how and where it applies, thus
adding a new layer of complexity and uncertainty to discriminatory
effects law. A commenter stated that the proposed rule would harm the
people it purports to benefit by applying a complex, court-created
legal framework to a public policy issue and requiring all issues to be
resolved in expensive litigation in federal court. Another commenter
stated that the proposed rule will not create a uniform mechanism to
resolve discriminatory effects disputes but will instead encourage
courts to develop alternative approaches to handling such cases. A
commenter stated that HUD and others have used the 2013 Rule to bully
housing providers into expanding access to housing even if landlords
cite legitimate business reasons for restricting housing based on
certain admission or occupancy policies.
HUD Response: HUD disagrees with the commenters who opposed the
proposed rule. As discussed in the preamble to the proposed rule and
elsewhere in this preamble, HUD believes that this final rule
establishes the appropriate, balanced framework for assessing claims of
discriminatory effects and is entirely consistent with Inclusive
Communities and long-standing judicial precedent. In contrast, HUD
finds that the 2020 rule, if retained, would limit liability in a
manner inconsistent with the Act's purpose and judicial precedent. HUD
further believes that some of the standards announced in the 2020 rule
might lead some courts to develop alternative approaches to assessing
discriminatory effects claims that are inconsistent with the text and
broad remedial purposes of the Act. HUD believes that the framework in
the proposed rule sets out a consistent nationwide approach to
evaluating discriminatory effects claims and adopts the majority view
of judicial opinions interpreting the Act. As a result, this final rule
affords housing providers the opportunity to maintain policies and
practices so long as they do not have an unjustified discriminatory
effect because of a protected characteristic. And it does not require
allegations of discriminatory effects to be resolved in federal court.
Rather, housing providers may avoid potential litigation and liability
by reviewing their policies and practices to ensure that they do not
have an unjustified discriminatory effect. The discriminatory effects
framework is not intended to force housing providers to take any
particular course of action but rather to ensure that an important goal
of the Act--to safeguard fair housing throughout the country--is
accomplished.

General Comments Concerning Clarity

Issue: Commenters disagreed about the clarity that would result
from setting aside the 2020 Rule. A commenter stated that the 2020 Rule
should be retracted because it created a legal landscape in which HUD,
other federal regulators, and courts would have different standards for
analyzing discriminatory effects claims, and because it created
confusion that would disadvantage housing discrimination victims.
However, other commenters asked HUD to retain the 2020 Rule so as to
avoid confusion and uncertainty because different forms of the rule
have been promulgated and retracted over the last several years. A
commenter stated that HUD should recognize the practical implications
of repeatedly and drastically changing policies and justification for
those policies and requested that HUD solidify clear and consistent
long-term standards in order to minimize confusion and uncertainty for
federal funding recipients. The commenter said it makes little sense to
change procedures with each new administration and that reinstating the
2013 Rule will provoke litigation and disputes between courts rather
than provide clarity. Another commenter noted a particular concern
about confusion for businesses and damage to their ability to know and
comply with the law since litigation concerning the 2020 Rule is
pending.
HUD Response: HUD agrees with the commenters who stated that the
2020 Rule introduced a new standard that is incompatible with the
standards used by courts and other federal regulators, creating
confusion and uncertainty. In contrast, this final rule will provide
clarity consistent with well-established judicial and agency
interpretations of the Act by eliminating the novel and undefined
standards introduced by the 2020 Rule. HUD also notes that the 2020
Rule never went into effect and has never been enforced by HUD. HUD has
considered potential reliance interests and believes that no
significant reliance was created by the 2020 rule, because unlike a
regulation that even briefly governed conduct or supplied benefits, the
2020 Rule never did so. While HUD proposed revising the rule in 2019
and subsequently issued a final rule in 2020, the 2013 Rule, which is
recodified in this final rule, is and has been the only promulgated
rule governing the standard for discriminatory effects liability that
has ever taken effect since the Act became law in 1968. HUD agrees that
the 2020 Rule introduced a new standard that is incompatible with the
Act and with the standards used by courts and other federal regulators.
Had HUD used the 2020 Rule, while other federal agencies and courts
used rules analogous to the 2013 Rule or created their own rules in
response to Inclusive Communities, there would be substantial confusion
in discriminatory effects jurisprudence. HUD believes that it is
important that those affected by or accused of discrimination know what
standard governs their housing related activities and that that
standard does not unnecessarily vary depending on the forum in which a
case is decided. Having differing standards would increase litigation
costs for the parties and likely result in the dismissal of claims in
some forums that are upheld in others. Restoring the 2013 Rule will
help ensure the consistency of federal discriminatory effects law and
will avoid the confusion caused by the 2020 Rule.
This final rule sets out a usable and uniform framework that is
fully consistent with the requirements established by courts, as well
as the text and purpose of the Act.

Comments Concerning Harmony Between Other State and Federal Civil
Rights Statutes

Issue: A commenter noted that the Rule will bring HUD's regulations
back into conformity with state civil rights laws.
HUD Response: HUD acknowledges that many state courts and agencies
that interpret and enforce civil rights laws utilize a burden-shifting
framework that is similar to this final rule and that HUD's 2020 Rule
created confusion and conflicting standards.\62\ HUD believes that it
is important for plaintiffs to have

[[Page 19457]]

access to consistent relief in state and federal jurisdictions.
---------------------------------------------------------------------------

\62\ See e.g., Tetro v. Elliott Popham Pontiac, Oldsmobile,
Buick, & GMC Trucks, Inc., 173 F.3d 988, 993 (6th Cir. 1999)
(explaining that state civil rights statute is interpreted
consistently with analysis used for federal civil rights statute).
---------------------------------------------------------------------------

Issue: Commenters applauded the rule for being consistent with
other civil rights laws and their discriminatory effects liability
frameworks, including Title VII and ECOA. A commenter also noted that
courts, including the Supreme Court in Inclusive Communities, have
often drawn on Title VII's jurisprudence when interpreting the Act and
vice versa because of the similarities between the statutes' texts,
structures, purposes, and dates of enactment. The commenter expressed
support for the rule because it aligns with judicial precedent that
interprets the Act and Title VII similarly. The commenter also stated
that the proposed rule furthers the principle that language that is
similar across statutes should be given similar meaning.
HUD Response: HUD agrees that the rule is consistent with other
civil rights laws and their discriminatory effects liability
frameworks, including Title VII of the Civil Rights Act of 1964, as
amended (Title VII),\63\ and the Equal Credit Opportunity Act
(ECOA).\64\ HUD acknowledges that courts have generally interpreted
these statutes consistently and agrees that HUD should do the same to
promote consistency and clarity, particularly for entities whose
actions must be compliant with both ECOA and the Act.
---------------------------------------------------------------------------

\63\ 78 FR 11468-11471.
\64\ Id.
---------------------------------------------------------------------------

HUD notes that the preamble to the 2013 Rule explained in great
detail how its framework operates harmoniously with other civil rights
laws, including Title VII and ECOA, and best effectuated the important
goals of the Fair Housing Act.\65\ As HUD noted in the 2013 Rule, the
discriminatory effects framework borrowed from Title VII and Griggs is
the fairest and most reasonable approach for resolving disparate impact
claims, in part because it does not require either party to prove a
negative, and it provides the parties the opportunity to obtain
adequate information in discovery to meet their burdens.\66\
---------------------------------------------------------------------------

\65\ Id.
\66\ 78 FR 11474.
---------------------------------------------------------------------------

Comments Concerning Massachusetts Fair Housing Center

Issue: Commenters stated that although the district court in
Massachusetts Fair Housing Center[hairsp] \67\ stayed implementation of
the 2020 Rule, it did not require HUD to totally abandon the 2020 Rule.
The commenters stated that the decision primarily addressed three
elements of the 2020 Rule--the outcome prediction defense, the
requirement that plaintiffs present an equally effective alternative,
and the conflation of the plaintiff's prima facie burden and their
pleading burden. The commenters also stated that the court acknowledged
the requirement that a plaintiff must plead that a challenged policy is
``arbitrary, artificial, and unnecessary to achieve a valid interest or
legitimate objective,'' may have some grounding in case law. The
commenters also stated that the court did not address the 2020 Rule's
recognition that the Act does not and cannot supplant state laws
concerning insurance, or its codification of Inclusive Communities'
guidance on remedies.
---------------------------------------------------------------------------

\67\ Mass. Fair Hous. Ctr. v. United States HUD, 496 F. Supp. 3d
600, 603 (D. Mass. Oct. 25, 2020).
---------------------------------------------------------------------------

Other commenters stated that Massachusetts Fair Housing Center
criticized the 2020 Rule for introducing onerous pleading standards,
defenses that lacked precedent in case law, for conflicting with the
remedial purpose of the Act, and for likely being arbitrary and
capricious.
HUD Response: While the Massachusetts Fair Housing Center court
enjoined HUD from implementing or enforcing the 2020 Rule in any manner
and ordered HUD to ``preserve the status quo pursuant to the
regulations in effect as of the date of this Order,'' \68\ HUD is not
basing its decision to abandon the 2020 Rule and recodify the 2013 Rule
on the Massachusetts Fair Housing Center order. Rather, HUD declines to
retain any part of the 2020 Rule's substantive disparate impact
language based on its own interpretation of and decades of experience
in implementing the Act. HUD also finds other aspects of the 2020 Rule
that the court left unaddressed or uncriticized to be equally
troublesome.
---------------------------------------------------------------------------

\68\ Id. at 612.
---------------------------------------------------------------------------

Comments Concerning Inclusive Communities

Issue: Commenters supported reinstatement of the 2013 Rule because
it is consistent with Inclusive Communities. Commenters stated that the
Court cited the 2013 Rule with approval, noting each step in the 2013
Rule's burden-shifting framework without critique. Commenters also
noted that multiple courts since Inclusive Communities, including
courts of appeals, have read Inclusive Communities as affirming or
implicitly adopting the 2013 Rule's burden-shifting test and have
applied the 2013 Rule's framework.\69\ A commenter pointed out that the
district court in Inclusive Communities stated on remand that, ``[a]s a
result of the Fifth Circuit's decision adopting the HUD regulations,
and the Supreme Court's affirmance (without altering the burden-
shifting approach), the following proof regimen now applies to ICP's
disparate impact claim under the [Act].'' \70\ A commenter also cited
multiple district court decisions that have incorporated the language
of Inclusive Communities when applying the 2013 Rule's framework.\71\
Another commenter noted that Inclusive Communities endorsed
``heartland'' cases,\72\ all of which used burden shifting frameworks
consistent with the proposed rule. Commenters also stated that the 2020
Rule did not meaningfully address MHANY Management, Inc., de Reyes v.
Waples Mobile Home Park Limited Partnership,

[[Page 19458]]

or Avenue 6E Investments, LLC v. City of Yuma, which found that the
2013 Rule remained valid after Inclusive Communities. A commenter added
that in Property Casualty Insurance Association of America v.
Carson,\73\ a lawsuit directly challenging the validity of the 2013
Rule, the district court held that Inclusive Communities affirmed HUD's
burden-shifting approach and did not identify any aspect of the
approach that required correction.
---------------------------------------------------------------------------

\69\ See. e.g., Mhany Mgmt., Inc. v. Cnty. of Nassau at 618-20;
Oviedo Town Ctr. II, L.L.L.P. v. City of Oviedo, 759 F. App'x 828,
834-35 (11th Cir. 2018); de Reyes v. Waples Mobile Home Park L.P.,
903 F.3d 415, 426 n.6, 428 (4th Cir. 2018); see also Nat'l Fair
Hous. All. v. Travelers Indem. Co., 261 F. Supp. 3d 20, 29-30
(D.D.C. 2017); Nat'l Fair Hous. All. v. Bank of Am., N.A., 401 F.
Supp. 3d 619, 631-632 (D. Md. 2019); See, e.g., River Cross Land
Co., LLC v. Seminole Cty., 2021 WL 2291344, at *66-69, 72-73, 75-76
(M.D. Fla. June 4, 2021); Jones v. City of Faribault, No. 18-1643
(JRT/HB), 2021 U.S. Dist. LEXIS 36531, at *48-49 (D. Minn. Feb. 18,
2021); Conn. Fair Hous. Ctr. v. CoreLogic Rental Prop. Sols., LLC,
478 F. Supp. 3d 259, 296 (Aug. 7, 2020) (and related decisions, see
CoreLogic, No. 3:17-cv-705 (VLB), 2020 WL 401776 (D. Conn. Jan. 24,
2020)); Borum v. Brentwood Vill., LLC, 2020 U.S. Dist. LEXIS 54840,
at *13 (D.D.C. Mar. 30, 2020); NFHA v. Deutsche Bank Nat'l Trust,
2019 WL 5963633 (N.D. Ill. Nov. 13, 2019); Yellowstone Women's First
Step House Inc. v. City of Costa Mesa, 2019 U.S. Dist. LEXIS 221209,
at *4 (C.D. Cal. Nov. 4, 2019); Mass. Fair Hous. Ctr., 496 F. Supp.
3d at 611.
\70\ Inclusive Cmtys. Project, Inc. v. Tex. Dep't of Hous. &
Cmty. Affairs, 2015 WL 5916220 at *3 (N.D. Tex. 2015).
\71\ Prince George's Cty. v. Wells Fargo & Co., 397 F. Supp. 3d
752, 766 (D. Md. 2019); Fortune Soc'y v. Sandcastle Hous. Dev. Fund
Corp., 388 F. Supp. 3d 145, 172-173 (E.D.N.Y. 2019); Conn. Fair
Hous. Ctr. v. Corelogic Rental Prop. Sols., LLC, 369 F. Supp. 3d
362, 377-78 (D. Conn. 2019); Nat'l Fair Hous. All. v. Fannie Mae
(``Fannie Mae''), 294 F. Supp. 3d 940, 947 (N.D. Cal. 2018); Paige
v. N.Y.C. Hous. Auth., 2018 U.S. Dist. LEXIS 137238, at *9 (S.D.N.Y.
Aug. 14, 2018); R.I. Comm'n for Hum. Rights v. Graul, 120 F. Supp.
3d 110, 123-24 (D.R.I. 2015); Price v. Country Brook Homeowners
Ass'n, 2021 U.S. Dist. LEXIS 228914, at *5-6 (S.D. Ohio Nov. 30,
2021); Pickett v. City of Cleveland, No. 1:19 CV 2911, 2020 U.S.
Dist. LEXIS 259242, at *9 (N.D. Ohio Sep. 29, 2020); Winfield v.
City of N.Y., No. 15CV5236-LTS-DCF, 2016 U.S. Dist. LEXIS 146919, at
*18-19 (S.D.N.Y. Oct. 24, 2016); Alexander v. Edgewood Mgmt. Corp.,
Civil Action No. 15-01140 (RCL), 2016 U.S. Dist. LEXIS 145787, at
*6-7 (D.D.C. July 22, 2016).
\72\ See e.g. United States v. City of Black Jack, Mo., 508 F.2d
1179, 1184 (8th Cir. 1974); Huntington Branch, NAACP v. Huntington,
844 F.2d 926, 937 (2nd Cir. 1988); Greater New Orleans Fair Housing
Action Center v. St. Bernard Parish, 641 F. Supp. 2d 563, 567-568
(E.D. La. 2009).
\73\ Prop. Cas. Insurers Ass'n of Am. v. Carson, 2017 WL
2653069, at *8-9 (N.D. Ill. June 20, 2017) (finding that HUD's 2013
adoption of the 3-step burden-shifting framework was a reasonable
interpretation of the Act and that ``in short, the Supreme Court in
Inclusive Communities . . . did not identify any aspect of HUD's
burden-shifting approach that required correction.'')
---------------------------------------------------------------------------

Other commenters opposed the proposed rule, stating that it is
inconsistent with Inclusive Communities. In support of this, commenters
noted that the 2013 Rule preceded Inclusive Communities and stated that
the 2013 Rule does not adequately incorporate the holdings of that
case. Commenters requested that HUD retain the 2020 Rule or incorporate
additional language from the Inclusive Communities decision into this
final rule. Commenters stated that although Inclusive Communities
mentioned the 2013 Rule, it did not endorse the rule. Others stated
that the 2013 Rule does not align with the Supreme Court's caution
against injecting racial considerations into every housing decision and
perpetuating race-based considerations rather than moving beyond them.
A commenter said that compliance with the rule, as opposed to Inclusive
Communities, will lead to costly litigation. Commenters noted that the
Supreme Court specifically limited the scope of Inclusive Communities
to the first question presented (whether disparate impact claims were
cognizable under the Act) so references to the 2013 Rule cannot be
viewed as approving the 2013 framework. Commenters further stated that
the Court in Inclusive Communities did not state that the 2013 Rule
incorporates the appropriate limits of disparate impact liability.
Another commenter stated that courts, such as the court in Woda
Cooper Dev., Inc. v. City of Warner Robins, Civ. No. 5:20-CV-159 (MTT),
2021 WL 1093630, *1, at *7 (M.D. Ga. Mar. 22, 2021), have struggled to
apply the 2013 Rule's framework in the wake of Inclusive Communities,
with some choosing to ignore the rule entirely. The commenter stated
that Inclusive Communities identified a number of safeguards to prevent
abusive disparate impact cases but did not provide detailed
explanations of those safeguards or guidance on how courts should apply
those safeguards. The commenter urged HUD to elaborate on those
safeguards in the final rule.
HUD Response: HUD agrees with the commenters who stated that the
2013 Rule is consistent with the Inclusive Communities holding. The
Court in Inclusive Communities did not call into question the 2013
Rule's framework for analyzing discriminatory effects claims, nor did
it suggest that HUD should make any modifications to that framework. To
the contrary, the Court cited HUD's 2013 Rule several times with
approval.\74\ For instance, the Court noted that the burden-shifting
framework of Griggs and its progeny, adopted by HUD in the 2013 Rule
and retained in this final rule, adequately balanced the interests of
plaintiffs and defendants by giving housing providers the ability ``to
state and explain the valid interest served by their policies.'' \75\
The Court also discussed the history of HUD's promulgation of the 2013
Rule, noted that lower courts had relied on it, and repeatedly cited
its three-part burden shifting test.\76\ Notably, other courts have
recognized these findings and relied on the 2013 Rule's burden shifting
framework without difficulty since Inclusive Communities was
decided.\77\ Moreover, HUD agrees that Inclusive Communities'
discussion approving the holdings of the ``heartland cases'' supports
reinstating the 2013 Rule.\78\ HUD also agrees that the 2020 Rule did
not adequately address the well-considered and thorough reasoning of
MHANY Mgmt., de Reyes, and Avenue 6E Investments, LLC, each of which
found that the 2013 Rule remained valid after Inclusive
Communities.\79\
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\74\ Inclusive Cmtys. Project, 576 U.S. at 527, 535-536, 541.
\75\ Id. at 541.
\76\ Id. at 527-28.
\77\ Supra at n.69. See also Robert G. Schwemm, Housing
Discrimination Law and Litigation Sec. 10:5 (August 2022) (``[t]he
basic structure and language of the HUD and Inclusive Communities
standards are nearly identical'' and ``th[e] slight semantic
variation [in the second step of the burden shifting framework] may
not signal any real substantive difference . . .''; de Reyes v.
Waples Mobile Home Park L.P., 903 F.3d 415 fn4 (4th Cir. 2018)
(while not relying on the 2013 Rule, the court noted that ``[t]he
HUD regulation is similar to the framework the Supreme Court
ultimately adopted in Inclusive Communities, and indeed, some courts
believe the Supreme Court implicitly adopted the HUD framework
altogether'').
\78\ Inclusive Cmtys. Project, Inc., 576 U.S. at 519, 539; See
e.g. Huntington v. Huntington Branch, NAACP, 488 U.S. at 16-18;
United States v. City of Black Jack, Mo., 508 F.2d 1179, 1184, 1187-
88 (8th Cir. 1974) (specific facts produced during the case
supported the court's determination that the policy was one of those
``artificial, arbitrary, and unnecessary'' practices that is
properly invalidated under disparate impact doctrine.); Greater New
Orleans Fair Hous. Action Ctr. v. St. Bernard Par., 641 F. Supp. 2d
563, 567-568 (E.D. La. 2009) (relying on information gathered after
the pleadings to find illegal disparate impact).
\79\ See, e.g., de Reyes v. Waples Mobile Home Park Ltd. P'ship,
903 F.3d 415, 424, 432 n.10 (4th Cir. 2018) (noting that ``[i]n
Inclusive Communities, the Supreme Court explained that an FHA
disparate-impact claim should be analyzed under a three-step,
burden-shifting framework [and proceeding to outline the same
framework as under the 2013 Rule]; further disagreeing that the HUD
regulation and guidance conflict with Inclusive Communities and
cannot be relied upon, and thus ``afford[ing] the HUD regulation and
guidance the deference it deserves'') (citations omitted); MHANY
Mgmt. Inc. v. Cnty. of Nassau, 819 F.3d 581, 618-619 (2d Cir. 2016)
(deferring to HUD's [2013] regulation, noting that ``the Supreme
Court implicitly adopted HUD's [burden shifting] approach [in 24 CFR
100.500(c)]''); Avenue 6E Invs., LLC v. City of Yuma, 818 F.3d 493,
512-513 (9th Cir. 2016) (citing Inclusive Communities and the 2013
Rule at 100.500(c) for the same proposition); Nat'l Fair Hous.
Alliance v. Travelers Indem. Co., 261 F. Supp. 3d 20, 29 (D.D.C.
2017) (citing Inclusive Communities and HUD's 2013 Rule at
100.500(c) as standing for the same proposition); Prop. Cas.
Insurers Ass'n of Am. v. Carson, 2017 WL 2653069, at *8-9 (N.D. Ill.
June 20, 2017) (finding that HUD's 2013 adoption of the three-step
burden-shifting framework was a reasonable interpretation of the Act
and that ``in short, the Supreme Court in Inclusive Communities . .
. did not identify any aspect of HUD's burden-shifting approach that
required correction.''); Burbank Apartments Tenant Ass'n v. Kargman,
474 Mass. 107, 126-27 (Mass. 2016) (explaining that it was following
the ``burden-shifting framework laid out by HUD and adopted by the
Supreme Court in [Inclusive Communities].'').
---------------------------------------------------------------------------

HUD disagrees with the commenters who stated that the 2020 Rule
should be retained because it is consistent with and incorporates the
``safeguards'' described in Inclusive Communities. As discussed above,
in Inclusive Communities, the Court did not express any disapproval of
the 2013 Rule's framework or specify that it lacked any safeguards.
Rather, the Court observed that ``disparate-impact liability has always
been properly limited in key respects,'' making clear that it was not
calling for any significant departure from pre-existing precedent under
the Act or the 2013 Rule.\80\ HUD believes that had the Court intended
to overhaul disparate impact jurisprudence, the Court would have done
so expressly, rather than citing the 2013 Rule favorably. Moreover, HUD
notes that the Court declined to accept certiorari on the proper
standard for assessing disparate impact cases.\81\And, as noted above,
multiple courts have since read Inclusive Communities as affirming or
endorsing the 2013 Rule's burden-

[[Page 19459]]

shifting framework.\82\ Even if the Court did not endorse the 2013 Rule
in Inclusive Communities, it did not discard or significantly alter
preexisting disparate impact jurisprudence. The 2013 Rule adopts the
majority view of preexisting law. HUD believes that to the extent that
some courts have attempted to impose limitations greater than those
described in the 2013 Rule, they have misread Inclusive Communities.
Moreover, the 2013 Rule did not inject racial considerations into
housing decisions, and nothing in Inclusive Communities indicates that
the Court believed the Rule improperly did so. Accordingly, HUD
continues to believe that the burden-shifting test articulated in the
2013 Rule is the most appropriate framework for litigating
discriminatory effects claims consistent with the Act and Inclusive
Communities.
---------------------------------------------------------------------------

\80\ See Inclusive Cmtys. Project, 576 U.S. at 540 (emphasis
added).
\81\ Inclusive Cmtys. Project, Inc., 573 U.S. 991 (2014), 2014
U.S. LEXIS 4912 at *1 (``Petition for writ of certiorari to the
United States Court of Appeals for the Fifth Circuit granted limited
to Question 1 presented by the petition.''); See also Questions
Presented in, Inclusive Cmtys Project, Inc., 573 U.S. 991.
\82\ See, e.g., Prop. Cas. Insurers Ass'n, 2017 WL 2653069, at
*9 (N.D. Ill. June 20, 2017) (``[T]he Supreme Court in Inclusive
Communities expressly approved of disparate-impact liability under
the FHA and did not identify any aspect of HUD's burden-shifting
approach that required correction.''); MHANY Mgmt., Inc.,)
(explaining that in Inclusive Communities, ``[t]he Supreme Court
implicitly adopted HUD's approach''); de Reyes v. Waples Mobile Home
Park Limited Partnership, 903 F.3d 415 (4th Cir. 2018); See Oviedo
Town Ctr. II, L.L.L.P. v. City of Oviedo, 759 F. App'x 828, 834-35
(11th Cir. 2018) (citing Schwarz v. City of Treasure Island, 544
F.3d 1201 (11th Cir. 2008)); Nat'l Fair Hous. All. v. Bank of Am.,
N.A., 401 F. Supp. 3d 619, 631-632 (D. Md. 2019) (explaining that
the Supreme Court in Inclusive Communities ``[h]ew[ed] closely to
regulations promulgated by HUD in 2013'').
---------------------------------------------------------------------------

Issue: Commenters cited Lincoln Property, Oviedo, River Cross Land
Co., County of Cook, Ill. v. Wells Fargo & Co, and Nat'l Fair Hous.
All. v. Travelers Indem. Co. as evidence that several courts have held
that the 2013 Rule was inconsistent with Inclusive Communities.\83\ By
contrast, other commenters stated that out of more than 40 federal
appellate and district court decisions in disparate impact cases
following Inclusive Communities,\84\ only Lincoln Property, an
appellate decision, and district courts bound by Lincoln Property,
found any inconsistency between the 2013 Rule and Inclusive
Communities.\85\
---------------------------------------------------------------------------

\83\ Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co., 920
F.3d 890, 902 (5th Cir. 2019); Oviedo Town Ctr, II, L.L.P. v. City
of Oviedo, Florida, 759 Fed. App'x 828, 833-35 (11th Cir. 2018) (per
curiam); River Cross Land Co., LLC v. Seminole Cty., 2021 WL
2291344, at *22-24 (M.D. Fla. June 4, 2021); Cnty. of Cook, Ill. v.
Wells Fargo & Co., 314 F. Supp. 3d 975, 990 (N.D. Ill. 2018); Nat'l
Fair Hous. All. v. Travelers Indem. Co., 261 F. Supp. 3d 20, 22
(D.D.C. 2017).
\84\ See, e.g., de Reyes v. Waples Mobile Home Park Ltd. P'ship,
903 F.3d 415 (4th Cir. 2018); MHANY Mgmt. Inc. v. Cnty, of Nassau,
819 F.3d 581 (2d Cir 2016); Avenue 6E Invs., LLC v. City of Yuma,
818 F.3d 493 (9th Cir. 2016); Prince George's Cnty. v. Wells Fargo &
Co., (397 F. Supp. 3d 752, 766 (D. Md. 2019); Fortune Soc'y v.
Sandcastle Hous. Dev. Fund Corp., 388 F. Supp. 3d 145, 172-173
(E.D.N.Y. 2019); Conn. Fair Hous. Ctr. v. Corelogic Prop. Sols.
LLC,, 369 F. Supp. 3d 362, 377-78 (D. Conn. 2019); National Fair
Hous All. v. Fed. Nat'l Mortg. Ass'n, 294 F. Supp. 3d 940, 947 (N.D.
Cal 2018); City of Philadelphia v. Wells Fargo & Co., No. 17-cv-
2203, 2018 WL 424451, at *4 (E.D. Pa. Jan. 16, 2018); Paige v. New
York City Hous. Auth., No. 17-cv-7481, 2018 WL 3863451, at *3-4
(S.D.N.Y. Aug. 14, 2018); Rhode Island Comm'n for Hum. Rights v.
Graul, 120 F. Supp. 3d 110, 123-24 (D.R.I. 2015); Sams v. Ga West
Gate LLC, No. cv-415-282, 2017 WL 436281, at *5 (S.D. Ga. Jan. 30,
2017); Winfield v. City of New York, No. 15-cv-5236, 2016 WL
6208564, at *5 (S.D.N.Y. Oct. 24, 2016); Alexander v. Edgewood Mgmt.
Corp., No. 15-01140, 206 WL 5957673, at *2-3 (D.D.C. July 25, 2016);
Hall v. Philadelphia Hous. Auth., No. 17-5753, 2019 WL 1545183, at
*5 & n.5 (E.D. Pa. Apr. 9, 2019); Jackson v. Tryon Park Apartments,
Inc., No. 6:18-cv-06238, 2019 WL 331635, at *1 (W.D.N.Y. Jan. 25,
2019); Johnson v. Johnson, No. 4:18-CV-04138-RAL, 2018 WL 5983508,
at *2 (D.S.D. Nov. 14, 2018); Ekas v. Affinity Prop. Mgmt., No.
3:16-cv-1636, 2017 WL 7360366, at *3 (D. Ore. Dec. 7, 2017); Alms
Residents Ass'n v. U.S. Dep't of Hous. & Urban Dev., No. 1:17-cv-
605, 2017 WL 4553401, at *11 (S.D. Ohio Oct. 12, 2017); Oviedo Town
Ctr. II, L.L.L.P. v. City of Oviedo, No. 6:16-cv-1005, 2017 WL
3621940, at *4 (M.D. Fla. Aug. 23, 2017), aff'd, 759 Fed. App'x 828
(11th Cir. ); National Fair Housing. Alliance v. Travelers Indem.
Co., 261 F. Supp. 3d 20, 29 (D.D.C. 2017); Prop. Cas. Insurers
Assoc. v. Carson, 2017 WL 2653069 at *9 (N.D. Ill. June 20, 2017)
(``[T]he Supreme Court in Inclusive Communities expressly approved
of disparate-impact liability under the FHA and did not identify any
aspect of HUD's burden-shifting approach that required
correction''); Martinez v. Optimus Props., LLC, Nos. 2:16-cv-08598-
SVW-MRW, 2017 WL 1040743, at *2 (C.D. Cal. Mar. 14, 2017); Borum v.
Brentwood Vill., LLC, 218 F. Supp. 3d 1, 21-22 (D.D.C. 2016);
Khodeir v. Sayyed, No. C 15-8763, 2016 WL 5817003, at *6 (S.D.N.Y.
Sept. 28, 2016); Crossroads Residents Organized for Stable and
Secure ResiDencieS v. MSP Crossroads Apartments LLC, No. C 16-233,
2016 WL 3661146, at *8 (D. Minn. July 5, 2016); Azam v. City of
Columbia Heights, No. C No. 14-1044, 2016 WL 424966, at *10 (D.
Minn. Feb. 3, 2016).
\85\ See Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co.,
920 F.3d 890, 902 (5th Cir. 2019). For district court decisions
bound by Lincoln Prop., see, e.g., Treece v. Perrier Condominium
Owners Ass'n, Inc., --F. Supp. 3d--, No. 17-10153, 2021 WL 533720
(E.D. La. Feb. 12, 2021); Inclusive Cmtys. Project, Inc. v.
Heartland Community Ass'n, 399 F. Supp. 3d 657 (N.D. Tex. 2019).
---------------------------------------------------------------------------

HUD Response: HUD disagrees that the cases the commenters cited
compel the conclusion that this rule is inconsistent with Inclusive
Communities. As HUD has previously stated on many occasions, including
in the preamble to the 2020 Rule, the 2013 Rule is consistent with
Inclusive Communities.\86\ The vast majority of courts to consider this
issue subsequent to Inclusive Communities, including at least three
federal appellate courts, have agreed.\87\ Multiple courts have
specifically read Inclusive Communities to have affirmed or endorsed
the 2013 Rule's burden-shifting framework.\88\ For example, in River
Cross, one of the decisions commenters characterized as demonstrating
incompatibility between the 2013 Rule and Inclusive Communities, the
court in fact recognized that Inclusive Communities

[[Page 19460]]

approvingly cited the 2013 Rule, applied the 2013 Rule, and found it to
be easily reconciled with Inclusive Communities.\89\ HUD has determined
that the small number of courts that reached contrary conclusions
misinterpreted the scope of the Inclusive Communities holding, and HUD
declines to adopt the minority views of these courts.
---------------------------------------------------------------------------

\86\ See 85 FR 60299 (noting that the 2013 Rule is one but not
the only ``permissible interpretation of disparate impact liability
under the FHA''). See also Defendants' Opposition to Plaintiff's
Motion for Leave to Amend Complaint, Prop. Cas. Ins. Assoc. of Am.
v. Carson and the U.S. Dep't of Hous. and Urb. Dev., No. 1:13-cv-
08564 (2017); Defendants' Memorandum in Support of Their Motion for
Summary Judgment and in Opposition to Plaintiffs' Motion for Summary
Judgment, Am. Ins. Assoc. v. U.S. Dep't of Hous. and Urb. Dev. et
al., No. 1:13-cv-00966 (RJL) (D.D.C. 2016).
\87\ See, e.g., de Reyes v. Waples Mobile Home Park Ltd. P'ship,
903 F.3d 415, 424, 432 n.10 (4th Cir. 2018) (noting that ``[i]n
Inclusive Communities, the Supreme Court explained that an FHA
disparate-impact claim should be analyzed under a three-step,
burden-shifting framework [and proceeding to outline the same
framework as under the 2013 Rule]; further disagreeing that the HUD
regulation and guidance conflict with Inclusive Communities and
cannot be relied upon, and thus ``afford[ing] the HUD regulation and
guidance the deference it deserves'') (citations omitted); MHANY
Mgmt. Inc. v. Cnty. of Nassau, 819 F.3d 581, 618-619 (2d Cir. 2016)
(deferring to HUD's [2013] regulation, noting that ``the Supreme
Court implicitly adopted HUD's [burden shifting] approach [in 24 CFR
100.500(c)]''); Avenue 6E Invs., LLC v. City of Yuma, 818 F.3d 493,
512-513 (9th Cir. 2016) (citing Inclusive Communities and the 2013
Rule at 100.500(c) for the same proposition); Nat'l Fair Hous.
Alliance v. Travelers Indem. Co., 261 F. Supp. 3d 20, 29 (D.D.C.
2017) (citing Inclusive Communities and HUD's 2013 Rule at
100.500(c) as standing for the same proposition); Prop. Cas.
Insurers Ass'n of Am. v. Carson, 2017 WL 2653069, at *8-9 (N.D. Ill.
June 20, 2017) (finding that HUD's 2013 adoption of the 3-step
burden-shifting framework was a reasonable interpretation of the Act
and that ``in short, the Supreme Court in Inclusive Communities . .
. did not identify any aspect of HUD's burden-shifting approach that
required correction.''); Burbank Apartments Tenant Ass'n v. Kargman,
474 Mass. 107, 126-27 (Mass. 2016) (explaining that it was following
the ``burden-shifting framework laid out by HUD and adopted by the
Supreme Court in [Inclusive Communities].'').
\88\ See, e.g., MHANY Mgmt. Inc. v. Cnty. of Nassau, 819 F.3d
581, 618 (2d Cir 2016) (``the Supreme Court implicitly adopted HUD's
approach''); 6E Invs., LLC v. City of Yuma, 818 F.3d 493, 512-513
(9th Cir. 2016) (citing the 2013 Rule in describing the three-prong
analytical structure set forth in Inclusive Communities); Nat'l Fair
Hous. Alliance v. Travelers Indem. Co., 261 F. Supp. 3d 20, 20
(D.D.C. 2017) (stating that the Supreme Court ``carefully explained
that disparate-impact liability has always been properly limited''
and that ``disparate-impact liability under the FHA can be proven
under a burden-shifting framework analogous to that used in
employment discrimination cases.'') (internal citations and
quotations omitted); Prop. Cas. Insurers Ass'n of Am. v. Carson,
2017 WL 2653069, at *8-9 (N.D. Ill. June 20, 2017) (finding that
HUD's 2013 adoption of the 3-step burden-shifting framework a
reasonable interpretation of the Act, finding that ``in short, the
Supreme Court in Inclusive Communities . . . did not identify any
aspect of HUD's burden-shifting approach that required
correction.''); Burbank Apartments Tenant Ass'n v. Kargman, 474
Mass. 107, 126-27 (Mass. 2016) (explaining that it was following the
``burden-shifting framework laid out by HUD and adopted by the
Supreme Court in [Inclusive Communities].''); Jackson v. Tryon Park
Apartments, Inc., No. 6:18-CV-06238 EAW, 2019 U.S. Dist. LEXIS
12473, at *11 (W.D.N.Y. Jan. 25, 2019) (noting that ``the Supreme
Court's 2015 Inclusive Communities Project ruling uph[eld] [HUD's
2013] regulation'').
\89\ River Cross Land Co., LLC v. Seminole Cty., 2021 WL
2291344, at *66-69, 72-73, 75-76 (M.D. Fla. June 4, 2021).
---------------------------------------------------------------------------

In light of the views of a majority of courts and HUD's experience
applying the Act, HUD finds that the Fifth Circuit's conclusions in
Lincoln Property do not require it to change course.\90\ In that case,
the majority of a divided panel acknowledged that Inclusive Communities
reviewed and affirmed the Fifth Circuit's earlier judgment in that
case, remanding to the trial court to apply the 2013 Rule's burden-
shifting framework, and that the Court did not explicitly call into
question the 2013 Rule's requirements. Nonetheless, the Lincoln
Property court found that because the Supreme Court in Inclusive
Communities had not explicitly stated that it was adopting the 2013
Rule's framework, whether the Court accepted the framework or modified
it remained unresolved.\91\ The court construed language from Inclusive
Communities as calling for courts to make it more difficult to plead a
discriminatory effects claim in some fashion, but acknowledged that
Inclusive Communities provided no clear direction as to how it was thus
changing the law. While acknowledging that other appellate courts had
interpreted Inclusive Communities to have ``implicitly adopted the 2013
framework,'' the panel's review of certain passages from Inclusive
Communities and of subsequent decisions from the Fourth, Eighth, and
Eleventh Circuits \92\ led the panel to conclude simply that Inclusive
Communities ``announce[d] a more demanding test than that set forth in
the HUD regulation'' but ``did not clearly delineate its meaning or
requirements.'' \93\ Finding no consensus even among those who believed
Inclusive Communities made some change, it concluded that the claim at
issue in that case was not properly pleaded under any of several
possible standards it could apply, making it unnecessary to state with
more specificity how, in its view, Inclusive Communities had changed
the law.
---------------------------------------------------------------------------

\90\ Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co., 920
F.3d 890 (5th Cir. 2019).
\91\ Id. at 902.
\92\ Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co., 920
F.3d 890, 902-05 (5th Cir. 2019) (citing de Reyes v. Waples Mobile
Home Park Ltd. P'ship, 903 F.3d 415 (4th Cir. 2018); Ellis v. City
of Minneapolis, 860 F.3d 1106, 1114 (8th Cir. 2017); Oviedo Town
Ctr. II, L.L.P. v. City of Oviedo, 759 Fed. App'x 828 (11th Cir.
2018)) (pinpoint citations omitted).
\93\ See Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co.,
920 F.3d 890, 902 (5th Cir. 2019).
---------------------------------------------------------------------------

HUD believes Lincoln Property's language concerning a more
demanding standard is not a reason to change the standard it
promulgated in 2013. As stated earlier, HUD disagrees that anything in
Inclusive Communities is inconsistent with the 2013 Rule's requirements
for discriminatory effects claims. Rather, HUD agrees with the Fourth
Circuit that the 2013 Rule ``is similar to the framework the Supreme
Court ultimately adopted in Inclusive Communities,'' and with its
observation that ``some courts believe the Supreme Court implicitly
adopted the HUD framework altogether.'' \94\ But even if the Fifth
Circuit were correct in identifying inconsistencies between the 2013
Rule and Inclusive Communities, Lincoln Property does not provide
persuasive reasoning for HUD to modify the 2013 Rule, because the court
only found ambiguity in the law after Inclusive Communities rather than
specifying the way in which HUD needed to change course. Additionally,
the other circuit courts that have analyzed the robust causation
discussion in Inclusive Communities have either defined it in a way
that is consistent with this final rule or were similarly non-specific
in explaining robust causality's meaning.\95\
---------------------------------------------------------------------------

\94\ Reyes, 903 F.3d at 424 n.4 (collecting cases).
\95\ See de Reyes v. Waples Mobile Home Park Ltd. P'ship, 903
F.3d 415, 424-27 (4th Cir. 2018) (explaining that identifying policy
that causes disparity establishes robust causation); Ellis v. City
of Minneapolis, 860 F.3d 1106, 1111 (8th Cir. 2017) (quoting
Inclusive Cmtys., but not defining robust causation beyond
identifying the connection between a challenged policy and a
disparate impact); Oviedo Town Ctr. II, L.L.L.P. v. City of Oviedo,
759 F. App'x 828, 834-36 (11th Cir. 2018) (plaintiff must make
statistical showing sufficient to connect challenged policy and
disparate impact)
---------------------------------------------------------------------------

HUD notes that, while acknowledging that other appellate courts had
interpreted Inclusive Communities to have ``implicitly adopted the 2013
framework,'' the Fifth Circuit panel's review of certain passages from
Inclusive Communities as well as subsequent decisions from the Fourth,
Eighth, and Eleventh Circuits,\96\ led the panel to conclude that
Inclusive Communities ``undoubtedly announce[d] a more demanding test
than that set forth in the HUD regulation.'' \97\ HUD believes that in
two of these decisions, the courts gave more deference to the 2013 Rule
than the commenters recognized.\98\ Additionally, in the district court
decisions cited by the commenters, and in Lincoln Property's progeny,
HUD believes that the courts misread Inclusive Communities as creating
heightened pleading standards.\99\ Even Lincoln Property only requires
a plaintiff to plausibly demonstrate a robust causal connection between
a discriminatory practice and an alleged disparate impact.\100\ HUD
adopts the view of courts that found Inclusive Communities endorsed the
2013 Rule's framework.
---------------------------------------------------------------------------

\96\ Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co., 920
F.3d 890, 902-05 (5th Cir. 2019) (citing de Reyes v. Waples Mobile
Home Park Ltd. P'ship, 903 F.3d 415 (4th Cir. 2018); Ellis v. City
of Minneapolis, 860 F.3d 1106, 1114 (8th Cir. 2017); Oviedo Town
Ctr. II, L.L.P. v. City of Oviedo, 759 Fed. App'x 828 (11th Cir.
2018)) (pinpoint citations omitted).
\97\ See Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co.,
920 F.3d 890, 902 (5th Cir. 2019).
\98\ River Cross Land Co., LLC v. Seminole Cty., 2021 WL
2291344, at *66-69, 72-73, 75-76 (M.D. Fla. June 4, 2021); Oviedo
Town Ctr. II, L.L.L.P. v. City of Oviedo, No. 6:16-cv-1005, 2017 WL
3621940, at *4 (M.D. Fla. Aug. 23, 2017) (utilizing 2013 Rule to
analyze disparate impact claim)
\99\ For example, the pleading standards used in Oviedo Town
Ctr, II, L.L.P. v. City of Oviedo, Florida, 759 Fed. App'x at 833-
35, and River Cross Land Co., LLC v. Seminole Cty., 2021 WL 2291344,
at *22-24, are not inconsistent with the 2013 Rule. In addition,
both Cnty. of Cook, Ill. v. Wells Fargo & Co., 314 F. Supp. 3d 975,
990 (N.D. Ill. 2018) and Nat'l Fair Hous. All. v. Travelers Indem.
Co., 261 F. Supp. 3d at 22, incorrectly relied on dicta when they
stated that Inclusive Communities created higher pleading standards
in disparate impact cases.
\100\ Inclusive Cmtys. Project, Inc. v. Lincoln Prop. Co., 920
F.3d at 899 (5th Cir. 2019).
---------------------------------------------------------------------------

HUD also notes that Lincoln Property--a suit between private
parties--was decided without the benefit of input from HUD on what
effect, if any, Inclusive Communities had on Fair Housing Act disparate
impact claims. As the agency to which Congress has delegated the
responsibility to interpret and enforce the Fair Housing Act, HUD
believes that its reasonable reading of any ambiguities in the meaning
of the Act following Inclusive Communities is entitled to
deference.\101\ Thus, to the extent Lincoln Property identified such an
ambiguity and came to conclusions that conflict with those HUD has
reached, HUD declines to adopt the court's conclusions. Any risk that
litigants in the Fifth Circuit would be subject to a different standard
than litigants elsewhere is created by the Lincoln Property decision,
not by HUD's promulgation of this rule.
---------------------------------------------------------------------------

\101\ National Cable & Telecommunications Assn. v. Brand X
internet Services, 545 U.S. 967, 980 (2005) (holding that agency
interpretation of statute can override prior judicial interpretation
when the statute is ambiguous and agency interpretation is
reasonable).

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[[Page 19461]]

In short, HUD does not believe that the cases cited by the
commenters support revisions to the rule.
Issue: Commenters stated that the proposed rule conflicts with what
they characterized as Inclusive Communities' holding that a ``robust
causality requirement . . . protects defendants from being held liable
for racial disparities they did not create.'' Some commenters asked HUD
to expressly add a robust causality requirement to the final rule,
while others asked HUD to retain the 2020 Rule, stating that it
appropriately reflected Inclusive Communities' robust causality
requirement.
Some commenters urged HUD to adopt the view that, in stating that
disparate impact claims may not be established simply by demonstrating
a ``statistical disparity'' in outcomes, Inclusive Communities held
that such claims must meet a higher causation standard than in the
proposed rule. Other commenters stated that the proposed rule does not
require proximate cause or a direct link between the policy and the
discriminatory effect, which, they said, Inclusive Communities
requires. Commenters said that if plaintiffs are not required to
establish ``robust causality'' or ``direct proximate cause,''
defendants would be liable in cases where discrimination does not
actually exist. Commenters also stated that without an explicit robust
causality requirement, race will be used in a pervasive way, leading to
the use of numerical quotas and raising constitutional questions.
Commenters stated that the requirement is necessary so that regulated
entities can make practical business choices and profit-related
decisions. A commenter suggested revising the proposed rule to provide
that to establish robust causality, the plaintiffs have the burden of
proving that a challenged practice is the sole and proximate cause, or
reasonably predicted cause, of a discriminatory effect.
Commenters who supported the proposed rule said that it
incorporates Inclusive Communities' protections for defendants who may
fear liability for disparities their policies did not create.
Commenters noted that the proposed rule does not permit liability based
on statistical disparities alone.
HUD Response: The 2013 Rule and this final rule contain a robust
causality requirement by requiring the plaintiff to prove at the first
step of the framework that a challenged practice caused or predictably
will cause a discriminatory effect. As discussed above, in HUD's view,
the framework in this final rule, which includes the requirement that
the challenged practice causes a discriminatory effect, is consistent
with Inclusive Communities. The Inclusive Communities Court did not
announce a heightened causality requirement for disparate impact
liability, a requirement which would find no support in the statutory
text or case law. Rather, in considering a district court opinion where
the trial court had found a violation of the Act without ever requiring
the plaintiff to identify a causal link between a specific policy and
the challenged disparate impact, the Court merely reiterated that
plaintiffs must identify a causal link between the challenged practice
and the alleged disparate impact that is sufficiently robust to permit
that connection to be scrutinized at each stage of the case. The 2013
Rule, and this final rule require exactly that. The 2013 Rule and this
final rule do not use the precise words ``robust causality'' and (as
explained elsewhere in this preamble) nothing in Inclusive Communities
requires these words. What Inclusive Communities requires is that a
court's examination of causality be robust. Both the 2013 Rule and this
final rule implicitly incorporate this requirement by requiring a
plaintiff to link a specific practice to a current or predictable
disparity. Ultimately, the error identified both by the Fifth Circuit
and then by the Supreme Court in Inclusive Communities came from the
district court's failure to fully apply the 2013 Rule's framework, not
the 2013 Rule's framework itself. Through its framework this rule
ensures that, as required by Inclusive Communities, defendants are not
held liable for racial disparities they did not create.\102\ The rule
thus already requires a showing of causation, not just correlation,
between the policy or practice and the disparate impact, and so is
fully consistent with Inclusive Communities.
---------------------------------------------------------------------------

\102\ See Inclusive Cmtys. Project, Inc., 576 U.S. at 519, 542
(describing robust causality as requiring that a plaintiff draw a
connection between the defendant's challenged policy causing the
alleged disparity, noting that this ensures that racial imbalance
does not, without more, establish a prima facie case of disparate
impact and thus protects defendants from being held liable for
racial disparities they did not create.)
---------------------------------------------------------------------------

HUD also believes that the rule's burden-shifting framework does
not preclude businesses from making business and profit-motivated
choices, even if they cause a discriminatory effect, so long as they do
not create an unjustified discriminatory effect. Once a plaintiff meets
its burden of proving that a policy causes a disparate impact because
of a protected characteristic, the burden then shifts to the defendant
to prove that the policy is necessary to serve the defendant's
substantial, legitimate, nondiscriminatory interest. This safeguard
allows housing providers and others to make practical business choices
and profit-related decisions. The third step of the framework then
shifts the burden back to the plaintiff to prove that an alternative
policy would have a less discriminatory effect than the challenged
policy. This rule balances the interests of the parties by allowing
defendants to implement policies that meet their needs, as long as
there is no unjustified discriminatory effect, while providing
plaintiffs the opportunity to identify policies that serve those needs
with less discriminatory effects based on protected characteristics.
HUD notes further that although the 2013 Rule has been in effect
for ten years--with similar judicial precedent effective even longer,
it is unaware of any case applying the 2013 Rule in a manner that would
impose quotas.
Issue: Commenters requested that HUD include in the final rule a
requirement that plaintiffs plead that the challenged policy is
``artificial, arbitrary, and unnecessary'' in addition to the
traditional elements of a disparate impact claim, as the 2020 Rule did.
Commenters stated that Inclusive Communities required this additional
element when the Court stated that ``[d]isparate-impact liability
mandates the `removal of artificial, arbitrary, and unnecessary
barriers' '' to ``avoid the serious constitutional questions that might
arise under the Act, for instance, if such liability were imposed based
solely on a showing of a statistical disparity.'' \103\ Another
commenter explained that the district court in Massachusetts Fair
Housing Center did not invalidate the ``arbitrary, artificial, and
unnecessary'' language in the 2020 Rule, but rather noted that it came
from Inclusive Communities and other case law, like Ellis v. City of
Minneapolis, 860 F.3d 1106, 1112 (8th Cir. 2017).
---------------------------------------------------------------------------

\103\ Id. at 540.
---------------------------------------------------------------------------

Other commenters disagreed, stating that if such a requirement were
added to the rule, it would be impossible to challenge discriminatory
policies absent facts showing discriminatory intent, thus negating
Inclusive Communities' holding that violations of the Act may be
established through proof of disparate impact. The commenters explained
that pleading that a policy is ``artificial'' is essentially pleading
that a policy is pretextual--a showing required in cases alleging
intentional discrimination, not discriminatory effects. Commenters also
noted that the phrase ``artificial, arbitrary, and

[[Page 19462]]

unnecessary'' originated in Griggs and pointed out that in applying
this phrase in Fair Housing Act cases, courts have applied it
consistent with the 2013 Rule's burden shifting framework, essentially
using it as short-hand for the three-step framework, not as a separate,
independent element. As examples, these commenters cited City of Black
Jack,\104\ which Inclusive Communities describes as a heartland case,
as well as Graoch Assocs. #33, L.P. v. Louisville/Jefferson Cty. Metro
Human Relations Comm'n.\105\ A commenter stated that the three-step
burden-shifting framework, and especially the defense at the second
step--that the policy was necessary to achieve a legitimate interest--
already ensures that as the Inclusive Communities Court described,
``disparate-impact liability mandates the `removal of artificial,
arbitrary, and unnecessary barriers,' not the displacement of valid
governmental policies.''
---------------------------------------------------------------------------

\104\ City of Black Jack, 508 F.2d at 1184-1185.
\105\ Graoch Assocs. #33, L.P., 508 F.3d 366, 374-75 (6th Cir.
2007) (``We use the burden-shifting framework described above--and
especially the final inquiry considering the strength of the
plaintiff's statistical evidence and the strength of the defendant's
business reason--to distinguish the artificial, arbitrary, and
unnecessary barriers proscribed by the FHA from valid policies and
practices crafted to advance legitimate interests.'').
---------------------------------------------------------------------------

HUD Response: HUD declines to add an ``artificial, arbitrary, and
unnecessary'' pleading standard or substantive element to this final
rule. As previously explained, HUD does not construe Inclusive
Communities to require the agency to add specific elements or pleading
standards for disparate impact cases that go beyond what ``has always''
been required.\106\ Rather, when the Inclusive Communities Court quoted
Griggs' decades-old formulation that disparate impact claims require
the removal of artificial, arbitrary, and unnecessary barriers, it did
so as part of restating the safeguards and requirements that it found
(and HUD agrees) have always been a part of disparate impact
jurisprudence. In this context, the Court quoted Griggs' short-hand
formulation for the type of policy that traditionally has been held to
create an unjustified discriminatory effect at the end of the burden
shifting analysis. HUD believes that Inclusive Communities, following
Griggs as well as earlier Fair Housing Act cases, went on to describe
policies invalidated by longstanding precedent as either ``arbitrary''
or ``artificial'' as a shorthand for those found to violate the Fair
Housing Act under traditional jurisprudence.\107\ HUD does not believe
this language, when read in context, is best read to require the agency
to impose a requirement for plaintiffs and the charging party to plead
and prove, in addition to the traditional elements, that policies are
artificial and arbitrary and unnecessary. HUD notes, moreover, that the
source of this language is Griggs, a decades-old case at the bedrock of
disparate impact jurisprudence, and notes that Griggs did not require
plaintiffs to establish that the practice at issue met each of these
three descriptors, let alone that such evidence be pleaded in a
complaint. In addition, HUD believes that reading Inclusive Communities
or other cases to support a heightened pleading standard for
plaintiffs, such as in the 2020 Rule, is contradicted by the fact that
the ``heartland'' cases cited favorably by the Court would not have
survived a motion to dismiss under that standard because plaintiffs in
those cases did not allege facts that would plausibly support a claim
that a policy or practice was arbitrary, artificial, and unnecessary to
the extent those terms are construed as requiring more than
satisfaction of the traditional elements. Simply put, in HUD's
experience implementing the Fair Housing Act, plaintiffs likely would
not have had access to such facts until after discovery.\108\ HUD
further believes that adding such a standard would also conflict with
the text and broad remedial purpose of the Act which provides ``within
constitutional limitations, for fair housing throughout the United
States.'' \109\ HUD thus concludes that a heightened pleading and proof
standard would frustrate the clearly expressed intent to use the
maximum allowable power under the law to secure equal housing
opportunity. Finally, HUD observes that Inclusive Communities did not
specify how courts and agencies should apply a new pleading and proof
standard, nor did it come close to clearly stating that it intended to
create new elements. To the extent that leaves ambiguity in the law, as
a matter of policy, HUD believes it is preferable to retain existing
standards that have decades of case law and administrative actions
specifying their content rather than impose ones that are undefined and
untested.
---------------------------------------------------------------------------

\106\ Inclusive Cmtys, 576 U.S. at 540.
\107\ Inclusive Cmtys. Project, 576 U.S. at 539-541.
\108\ Supra at n. 78.
\109\ 42 U.S.C. 3601.
---------------------------------------------------------------------------

Comments on Bank of America

Issue: Commenters stated that the proposed rule is inconsistent
with Bank of America Corp. v. City of Miami,\110\ a 2017 Supreme Court
case which held that ``proximate cause under the [Act] requires some
direct relation between the injury asserted and the injurious conduct
alleged.'' A commenter suggested that HUD add the phrase ``some direct
relation'' to the proposed rule's burden of proof standard. Another
commenter suggested revising the proposed rule to provide that in order
to establish a ``robust causal link,'' the plaintiffs have the burden
of proving that a challenged practice is the sole and proximate cause,
or reasonably predicted cause, of a discriminatory effect.'' Another
commenter suggested that HUD state that the causation analysis must
consider whether a practice is too remote to give rise to liability.
---------------------------------------------------------------------------

\110\ 137 S. Ct. 1296 (2017).
---------------------------------------------------------------------------

HUD Response: HUD believes that it is not required to add language
to this rule to ensure consistency with Bank of America. In that case,
which involved a municipality suing a lender on the theory that
predatory lending practices had caused foreclosures which in turn
eventually led to damages to the municipality such as reduced tax
revenues, the Supreme Court held that, because actions for damages
under the Act are akin to tort actions, such suits are ``subject to the
common-law requirement that loss is attributable to the proximate
cause, and not to any remote cause.'' \111\ The Court declined to
further explain the proximate cause requirement as applied to Fair
Housing Act claims and did not suggest that such a requirement would
otherwise alter analyses under the Act. For example, HUD believes that
Bank of America has no impact on the ability of organizational
plaintiffs to prove standing by tracing their injuries to the
challenged policy.\112\
---------------------------------------------------------------------------

\111\ Id. at 1305.
\112\ Havens Realty Corp. v. Coleman, 455 U.S. 363 (1982).
---------------------------------------------------------------------------

HUD believes, although the Bank of America decision was in the
context of a disparate impact claim, it is not inherently specific to
and does not create an additional burden for disparate impact claims.
To the contrary, HUD believes that the proximate cause requirement Bank
of America described for standing applies to all Fair Housing Act
cases, not just disparate-impact claims, and so HUD does not believe it
is appropriate to add a proximate-cause requirement to the regulatory
requirements that are specific to disparate-impact claims. More
broadly, this rule does not purport to address the requirements for
Fair Housing Act standing, and neither Bank of America nor any other
case requires HUD to add such considerations to this rule. Accordingly,
HUD believes that

[[Page 19463]]

adding the suggested language to this final rule, which purports only
to set out the framework for analyzing the merits of disparate impact
claims, is unnecessary. Nothing in this rule creates a conflict with
Bank of America or bars a court from applying its requirements. This
rule simply does not touch on that subject matter.
HUD additionally observes that, in its view, Bank of America
applies to claims such as the one in that case that involve unusual
claims in which the policy challenged has an unusually attenuated
connection to the alleged harm to the plaintiff. HUD does not construe
Bank of America as having a larger impact on longstanding principles of
Fair Housing Act standing.

Discriminatory Effects as Applied to Insurance \113\
---------------------------------------------------------------------------

\113\ Many of the issues raised by commenters regarding the
application to insurance in response to the proposed rule were also
raised in commenting on the 2013 rule. HUD's 2016 Supplemental
Responses covers these issues in depth. ``Application of the Fair
Housing Act's Discriminatory Effects Standard to Insurance.'' 81 FR
69012. In considering these comments, HUD has reviewed the 2016
Supplemental Responses and believes the responses made there
continue to accurately reflect HUD's interpretation of
discriminatory effects law.
---------------------------------------------------------------------------

Issue: Commenters asked HUD to exempt homeowners insurance--in
whole or in part, as well as risk-based pricing and underwriting in
particular--from liability for any unjustified discriminatory effects,
advancing a number of reasons. Among other things, commenters stated
that the fundamental nature of insurance does not allow discriminatory
effects liability; such claims cannot succeed as a matter of law; and
the McCarran-Ferguson Act \114\ bars claims. A commenter said that
applying the rule to insurers is unnecessary because there have been no
allegations or findings of unlawful discriminatory effects against an
insurer prior to or since 2013. Other commenters disagreed, stating
that HUD should not create exceptions for any industry, including
insurance, because such categorical exemptions are unworkable and
inconsistent with the Act's purpose, which is broad and inclusive.
Commenters also stated that exemptions would allow some discriminatory
practices to go uncorrected.
---------------------------------------------------------------------------

\114\ 15 U.S.C. 1011 et.seq.
---------------------------------------------------------------------------

HUD Response: HUD declines to provide an exemption for the
insurance industry in whole or in part. HUD responds below to the
specific reasons commenters advanced for exempting homeowners
insurance. However, as a threshold matter, HUD lacks the authority to
create exemptions that are not in the text of the Act. When Congress
passed the Act in 1968 and amended it in 1988, it established
exemptions for certain practices but not for insurance.\115\
Furthermore, courts have routinely applied the Act to insurers and have
found that discriminatory effects liability applies to insurers under
the Act.\116\ Moreover, nothing in this rule precludes insurers from
raising a defense based on the McCarran-Ferguson Act \117\ or from
arguing that claims cannot succeed as a matter of law in particular
cases. What HUD is declining to do, and what it believes it has no
authority to do, is provide a single industry or a set of specific
practices a blanket exemption from liability from all claims regardless
of whether those claims otherwise would satisfy the rule's (and the
Act's) requirements.
---------------------------------------------------------------------------

\115\ See Sierra Club v. EPA, 719 F.2d 436, 453 (D.C. Cir. 1983)
(``The agency relies on its general authority under section 301 of
the Act to `prescribe such regulations as are necessary to carry out
[its] functions under [the Act]' . . . . EPA's construction of the
statute is condemned by the general rule that when a statute lists
several specific exceptions to the general purpose, others should
not be implied.''); see, e.g., Colorado Pub. Int. Rsch. Grp., Inc.
v. Train, 507 F.2d 743, 747 (10th Cir. 1974) rev'd on other grounds,
426 U.S. 1 (1976) (``Another cardinal rule of statutory construction
is that where the legislature has acted to except certain categories
from the operation of a particular law, it is to be presumed that
the legislature in its exceptions intended to go only as far as it
did, and that additional exceptions are not warranted.''); Nat. Res.
Def. Council, Inc. v. Costle, 568 F.2d 1369, 1377 (D.C. Cir. 1977)
(courts cannot manufacture a ``revisory power'' granting agency
authority to act ``inconsistent with the clear intent of the
relevant statute''); Alabama Power Co. v. Costle, 636 F.2d 323, 357
(D.C. Cir. 1979) (``[T]here exists no general administrative power
to create exemptions to statutory requirements based upon the
agency's perceptions of costs and benefits.''); see also Graoch, 508
F.3d at 375. (``[n]othing in the text of the FHA instructs us to
create practice-specific exceptions.'').
\116\ See Ojo v. Farmers Group, Inc., 600 F.3d 1205, 1208 (9th
Cir. 2010) (finding that the Act applies to insurers; NAACP v. Am.
Fam. Mut. Ins. Co., 978 F.2d 287, 297-301 (7th Cir. 1992) (finding
that the Act applies to insurers); Nationwide Mut. Ins. Co. v.
Cisneros, 52 F.3d 1351, 1355-1360 (6th Cir. 1995) (finding that
HUD's interpretation of the Act as applying to insurers was
reasonable); 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); see also Dehoyos v. Allstate Corp., 345 F.3d 290, 293
(5th Cir. 2003) (affirming a district court's denial of a motion to
dismiss allegations that a credit scoring system used by an insurer
had an unjustified discriminatory effect because it resulted in
higher rates for non-white customers); Nat'l Fair Hous. All. v.
Travelers Indem. Co., 261 F. Supp. 3d 20, 22 (D.D.C. 2017) (denying
a motion to dismiss allegations that defendant's policy of declining
to insure properties where landlords accept Section 8 vouchers has
an unjustified discriminatory effect); Viens v. Am. Empire Surplus
Lines Ins. Co., 113 F. Supp. 3d 555, 558 (D. Conn. 2015) (denying
motion to dismiss allegations that defendant insurer's insurance
underwriting criteria that charge higher premiums or deny coverage
to landlords who rent apartments to tenants receiving Section 8
housing assistance has an unjustified discriminatory effect); Nat'l
Fair Hous. All. v. Prudential Ins. Co. of Am, 208 F. Supp. 2d 46,
50, 60-61, 63 (D.D.C. 2002) (denying a motion to dismiss allegations
that certain of defendant's minimum underwriting requirements for
certain types of coverages, such as a ``replacement cost'' policy
had an unjustified discriminatory effect).
\117\ The McCarran-Ferguson Act specifically 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.'' 15 U.S.C. 1012(b). As interpreted by
the Supreme Court in Humana v. Forsyth, McCarran-Ferguson applies
only when a particular application of a federal law directly
conflicts with a specific state insurance regulation, frustrates a
declared state policy, or interferes with a State's administrative
regime. Humana v. Forsythe, 525 U.S. 299, 310 (1999) (``When federal
law does not directly conflict with state regulation, and when
application of the federal law would not frustrate any declared
state policy or interfere with a State's administrative regime, the
McCarran-Ferguson Act does not preclude its application.'').
---------------------------------------------------------------------------

As further explained above and below, the Fair Housing Act was
intended to have a very broad impact on housing and communities across
the country. The plain text, purpose, and structure purpose, structure,
and plain language of the Act make clear that the Act was intended to
apply to all sectors of the housing industry so that each would have
common duties under the Act. For example, the plain text of the Act
does not refer to an actor, but rather a prohibited action, meaning
that all actors in all sectors of the housing industry are subject to
the Act.\118\ With regard to purpose, the Act was enacted to replace
segregated neighborhoods with ``truly integrated and balanced living
patterns.'' \119\ It was structured to address discriminatory housing
practices that affect ``the whole community'' as well as particular
segments of the community,\120\ with the goal of advancing equal
opportunity in housing, and to ``achieve racial integration for the
benefit of all people in the United States.'' \121\
---------------------------------------------------------------------------

\118\ E.g. 42. U.S.C. 3604(a) (``it shall be unlawful to 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'' a
protected trait); NAACP v. American Family Mut. Ins. Co., 978 F.2d
287, 298 (7th Cir. 1992) (noting that Congress banned an outcome
while not saying who the actor is and holding that the Act applies
to insurers); see also Ojo v. Farmers Group Inc., 600 F.3d 1205,
1208 (9th Cir. 2010) (deferring to HUD's reasonable interpretation
of the statutory language that the Act applies to insurance).
\119\ Trafficante, 409 U.S. at 211 (citing 114 Cong. Rec. 3422
(Feb. 20, 1968) (statement of Senator Mondale)).
\120\ Trafficante, 409 U.S. at 211 (citing 114 Cong. Rec. 2706
(1968) (Statement of Senator Javits)).
\121\ H.R. Res. 1095, 110th Cong., 154 Cong. Rec. H2280-01
(April 15, 2008).

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

[[Page 19464]]

The Supreme Court in Inclusive Communities similarly noted that the
Act ``was enacted to eradicate discriminatory practices within a sector
of our Nation's economy'' and discussed that the viability of disparate
impact claims is ``consistent'' with the Act's ``central purpose.''
\122\ In order to ``eradicate'' discriminatory practices within the
housing sector, as the Court acknowledged was the purpose of the Act,
it would logically flow that the Act was intended to apply to all
sectors of the housing industry. Notably, the court used strong
language, saying the purpose was to ``eradicate,'' rather than weaker
language like ``reduce'', making clear that the Act was meant to reach
all sectors, otherwise eradication would not be possible. Nor did the
Court suggest that any portion of the housing sector was not reached by
the Act.
---------------------------------------------------------------------------

\122\ Inclusive Cmtys. Project, Inc., 576 U.S. at 539.
---------------------------------------------------------------------------

In HUD's experience, insurance plays a significant role in the
housing industry and in securing equal opportunity in housing in
communities nationwide. Home seekers must be able to access mortgage
insurance and homeowners insurance in order to become home owners.
Multifamily housing owners and managers must be able to obtain property
and hazard insurance in order to obtain financing and manage the risks
of their operations. These examples show how different sectors of the
housing economy interact, and how the exclusion of one sector of the
housing economy from the Act's coverage would pose a barrier to equal
opportunity in housing. In its fair housing investigations, HUD has
encountered housing providers who will not rent to individuals with
disabilities because of insurance-related concerns.\123\ HUD is also
aware that multifamily housing providers face barriers obtaining
insurance when they attempt to lease to low-income families, including
people of color and individuals with disabilities who use voucher
programs to pay rent.\124\ Because of the pivotal role insurance plays
in all types of housing, an exemption or safe harbor would undermine
and be contrary to the Act's broad purposes.
---------------------------------------------------------------------------

\123\ See. e.g. Charge, HUD v. McClendon, No. 09-04-1103-8,
(2005), https://www.hud.gov/sites/documents/DOC_14391.PDF (alleging
that landlord ``informed Complainant that she needed to seek housing
elsewhere at a place for persons with moderate to severe
disabilities because the property insurance only covered mild
disabilities''); HUD v. Twinbrook Vill. Apts., HUDALJ Nos. 02-00-
0256-8, 02-00-0257-8, 02-00-0258-8, 2001 HUD ALJ LEXIS 82, (HUD ALJ
Nov. 9, 2001) (respondent requested that complainants obtain
insurance to cover any liability resulting from injury associated
with ramps installed to make unit accessible).
\124\ See e.g. Nat'l Fair Hous. All. v. Travelers Indem. Co.,
261 F. Supp. 3d 20, 22 (D.D.C. 2017) (denying motion to dismiss
allegations that defendant's policy of declining to insure
properties with Section 8 voucher tenants has an unjustified
discriminatory effect); Viens v. Am. Empire Surplus Lines Ins. Co.,
113 F. Supp. 3d 555, 558 (D. Conn. 2015) (denying motion to dismiss
allegations that defendant insurer's underwriting criteria charging
higher premiums or denying coverage to landlords who rent to tenants
receiving Section 8 housing assistance has an unjustified
discriminatory effect).
---------------------------------------------------------------------------

Even if HUD had authority to exempt insurance categorically, HUD
finds that such an exemption for a single industry would neither be
workable nor consistent with the purpose of the Act. HUD makes this
determination for the reasons it stated in its 2016 Supplemental Notice
regarding this subject, some of which is reiterated here, as well as
for the following additional reasons. Congress has stated that the Act
is intended to provide for fair housing throughout the United
States,\125\ and the Supreme Court has recognized the Act's broad
remedial purpose.\126\ The Act's prohibitions on discrimination in
housing are intended to eliminate segregated living patterns and move
the nation toward a more integrated society.\127\ Among other things,
the Act requires HUD to affirmatively further fair housing in all of
its housing-related programs and activities,\128\ one of which is the
administration and enforcement of the Act.\129\ HUD finds that
wholesale exemptions for insurance practices would contravene the text
and purposes of the Act, and, as explained further below, would also
likely be overbroad in most if not all instances, as such an exemption
would allow some practices with unjustified discriminatory effects to
go uncorrected. HUD also finds that wholesale exemptions also would be
likely to immunize potential intentional discrimination in the
insurance market, because as the court in Inclusive Communities stated,
``disparate-impact liability under the [Fair Housing Act] also plays a
role in uncovering discriminatory intent.'' \130\ As the Court found in
that case, the availability of disparate-impact claims, ``permits
plaintiffs to counteract unconscious prejudices and disguised animus
that escape easy classification as disparate treatment.'' \131\
---------------------------------------------------------------------------

\125\ See 42 U.S.C. 3601.
\126\ See Havens Realty Corp., 455 U.S. at 380 at 209
(recognizing Congress's ``broad remedial intent'' in passing the
Act); Trafficante,409 U.S. at 209 (recognizing the ``broad and
inclusive'' language of the Act); see also Inclusive Cmtys. Project
Inc., 576 U.S. at 539 (describing the ``central purpose'' of the Act
as ``to eradicate discriminatory practices within a sector of our
Nation's economy'').
\127\ Inclusive Cmtys. Project, Inc., 576 U.S. at 546-47; 114
Cong. Rec. 2276, 3422 (1968) (Statement of Sen. Mondale) (the
purpose of the Act was to replace ``ghettos'' with ``truly
integrated and balanced living patterns.''); 114 Cong. Rec. 2276,
9559 (1968) (Statement of Congressman Celler) (there is a need to
eliminate the ``blight of segregated housing''); 114 Cong. Rec.
2276, 9591 (1968) (Statement of Congressman Ryan) (the Act is a way
to ``achieve the aim of an integrated society'').
\128\ 42 U.S.C. 3608(e)(5).
\129\ See, e.g., 42 U.S.C. 3608 (the Secretary's administrative
responsibilities under the Act), 3609 (education, conciliation,
conferences, and reporting obligations to further the purposes of
the Act), 3610 (investigative authority), 3611 (subpoena power),
3612 (administrative enforcement authority), 3614a (rulemaking
authority), 3616 (authority to cooperate with state and local
agencies in carrying out the Secretary's responsibilities under the
Act), 3616a (authority to fund of state and local agencies and
private fair housing groups to eliminate discriminatory housing
practices prohibited by the Act).
\130\ Inclusive Cmtys. Project, Inc., 576 U.S. at 540.
\131\ Id.
---------------------------------------------------------------------------

HUD notes that multiple court decisions have long found
discriminatory effects claims against insurance practices to be
actionable.\132\ And even if the commenters were correct that the
industry's practices generally will not give rise to discriminatory
effects liability, that fact does not provide a sufficient
justification for exempting the entire industry from liability in all
circumstances, even where there is a practice with an unjustified
discriminatory effect. Especially in light of the broad remedial
purposes of the Act, HUD finds that the final rule strikes the
appropriate balance for insurance industry practices. Furthermore, HUD
notes that some types of discrimination are more difficult than others
to prove, and this is particularly true when individuals who are denied
a service or quoted a particular price for a service in a residential
real estate-related transaction would typically have no way of knowing
the specific reasons for a denial or pricing decision. Simply because
claims are difficult to prove and may not end up in litigation does not
mean that the underlying conduct can

[[Page 19465]]

or should be exempted from regulation in all instances.
---------------------------------------------------------------------------

\132\ See Dehoyos, 345 F.3d at 293 (affirming a district court's
denial of a motion to dismiss allegations that a credit scoring
system had an unjustified discriminatory effect because it resulted
in higher rates for non-white customers); see also Nat'l Fair Hous.
All. v. Travelers Indem. Co., 261 F. Supp. 3d 20, 22 (D.D.C. 2017)
(denying a motion to dismiss allegations that defendant's policy of
declining to insure properties where landlords accept Section 8
vouchers has an unjustified discriminatory effect); Viens, 113 F.
Supp. 3d at 558 (denying motion to dismiss allegations that
defendant insurer's insurance underwriting criteria that charge
higher premiums or deny coverage to landlords who rent apartments to
tenants receiving Section 8 housing assistance has an unjustified
discriminatory effect); Nat'l Fair Hous. All. v. Prudential Ins. Co.
of Am, 208 F. Supp. 2d 46, 50, 48-49, 60-61 (D.D.C. 2002) (denying a
motion to dismiss allegations that certain of defendant's minimum
underwriting requirements for certain types of coverages, such as a
``replacement cost:'' policy had an unjustified discriminatory
effect).
---------------------------------------------------------------------------

HUD finds that the concerns raised by the insurance industry do not
outweigh these fundamental considerations. This rule sets out a
framework by which liability under the Act may be determined; liability
arises only for those insurance practices that actually or predictably
result in a discriminatory effect and lack a legally sufficient
justification. The framework takes into account any defendant's
legitimate interest in the challenged practice--including an insurance
defendant. As discussed below, HUD finds that any conflict with a
specific state insurance law can and should be addressed on a case-by-
case basis in the context of that state law.
In sum, the case-by-case approach set out in this final rule
appropriately weighs the relevant factors, which include HUD's
obligation to enforce the Act, the diversity of potential
discriminatory effects claims, the variety of insurer business
practices, and the differing insurance laws of the states, as they
currently exist or may exist in the future. Given these considerations,
HUD believes that it would be impossible for the agency to define the
scope of insurance practices covered by an exemption with enough
precision to avoid case-by-case disputes over its application.
Accordingly, HUD has determined that categorical exemptions or safe
harbors for insurance practices are unworkable and inconsistent with
HUD's statutory mandate.
Issue: Commenters stated that if HUD does not provide an exemption
for insurance practices, insurers would be forced to evaluate whether
their practices lead to segregation and to learn what statistical
disparities are permissible.
HUD Response: HUD disagrees. Any obligation to evaluate practices
comes from the language of the Act itself, not this final rule. As
explained above, this final rule does not impose any new liability upon
insurers, so it will not require insurers to start new reviews of their
practices. Any such obligation to review their practices arose long
before the 2013 Rule was promulgated and originates from the statutory
language.\133\ Judicial precedent applying disparate impact analysis to
insurance companies long predates the 2013 Rule, let alone this
rule.\134\ Any costs entities may now choose to incur will not be due
to any new requirement, and in any case will simply be the ordinary
costs of complying with any preexisting statute, administrative
practice, and case law governing nondiscrimination in housing and
housing-related practices. In any event, evaluating and re-evaluating
current practices are not unreasonably burdensome activities for a
business or industry to undertake. As explained elsewhere, many other
industries, such as lending, engage in risk-based practices and show
that it is possible to consistently evaluate and re-evaluate their
policies and practices to endeavor to avoid those that may cause
unjustified discriminatory effects. Yet those industries have not
suffered the dire consequences that the insurance industry claims it
will suffer. HUD does not believe the insurance industry stands on
different footing from other industries in that respect such as to
warrant differential treatment.
---------------------------------------------------------------------------

\133\ 42 U.S.C. 3601 et. seq.; see, e.g., Dehoyos v. Allstate
Corp., 345 F.3d 290, 293 (5th Cir. 2003); see also Owens v.
Nationwide Mut. Ins. Co., Civ. No. 3:03-CV-1184-H, 2005 U.S. Dist.
LEXIS 15701, at *44-53 (N.D. Tex. Aug. 2, 2005); Nat'l Fair Hous.
All. v. Prudential Ins. Co. of Am, 208 F. Supp. 2d 46, 60-61 (D.D.C.
2002); Nat'l Fair Hous. All. v. Travelers Indem. Co., 261 F. Supp.
3d 20, 22 (D.D.C. 2017).
\134\ See Dehoyos, 345 F.3d 290, 293 (5th Cir. 2003) (affirming
a district court's denial of a motion to dismiss allegations that a
credit scoring system had an unjustified discriminatory effect
because it resulted in higher rates for non-white customers); see
also Nat'l Fair Hous. All. v. Travelers Indem. Co., 261 F. Supp. 3d
20, 22 (D.D.C. 2017) (denying a motion to dismiss allegations that
defendant's policy of declining to insure properties where landlords
accept Section 8 vouchers has an unjustified discriminatory effect);
Viens, 113 F. Supp. 3d 555, 558 (D. Conn. 2015) (denying motion to
dismiss allegations that defendant insurer's insurance underwriting
criteria that charge higher premiums or deny coverage to landlords
who rent apartments to tenants receiving Section 8 housing
assistance has an unjustified discriminatory effect); Nat'l Fair
Hous. All. v. Prudential Ins. Co. of Am, 208 F. Supp. 2d 46, 50, 48-
49, 60-61 (D.D.C. 2002) (denying a motion to dismiss allegations
that certain of defendant's minimum underwriting requirements for
certain types of coverages, such as a ``replacement cost:'' policy
had an unjustified discriminatory effect).
---------------------------------------------------------------------------

Issue: Commenters, citing NAACP v. Am. Family Mut. Ins. Co.,\135\
asked HUD to exempt all homeowners insurance practices from liability
for unjustified discriminatory effects, stating that the Act covers
only insurance practices that make housing unavailable, thus
effectively precluding homeownership. Homeowners insurance practices,
they stated, do not make housing unavailable. In addition, citing
Southend Neighborhood Improvement Assoc. v. St. Clair,\136\ commenters
stated that section 804(b)'s prohibition against discrimination in the
provision of services in connection with the sale or rental of a
dwelling applies only to services generally provided by governmental
units, such as police and fire protection or garbage collection, not
insurance.
---------------------------------------------------------------------------

\135\ NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, (7th
Cir. 1992).
\136\ Southend Neighborhood Improvement Assoc. v. St. Clair, 743
F.2d 1207 (7th Cir. 1984).
---------------------------------------------------------------------------

HUD Response: HUD declines to exempt homeowners insurance from
liability for the reasons stated previously and explained more fully
below. Neither NAACP nor Southend Neighborhood Improvement Ass'n
support such an exemption. The commenters are incorrect in stating that
insurance practices cannot make housing unavailable or that the Act
only covers insurance practices that make housing unavailable. A
discriminatory practice that precludes a person from obtaining
homeowners or renters insurance may indeed make housing unavailable to
that person, as insurance is usually required as a condition for
obtaining a mortgage or a lease. Moreover, while section 804(a)
prohibits discrimination that ``make[s] unavailable'' a dwelling, other
provisions in the Act may prohibit insurance practices, including
pricing, regardless of whether they make housing unavailable.\137\ For
example, section 805(a) \138\ prohibits discrimination in the ``terms
or conditions'' of ``residential real estate-related transactions,''
and section 804(b) \139\ prohibits discrimination in the ``terms,
conditions or privileges of sale or rental of a dwelling or in the
provision of services . . . in connection therewith.'' Indeed, since
1989, HUD's fair housing regulations have specifically prohibited
``[r]efusing to provide . . . property or hazard insurance for
dwellings or providing such . . . insurance differently'' because of a
protected characteristic.\140\

[[Page 19466]]

Courts have applied the Act's provisions to various insurance
practices, including insurance pricing,\141\ marketing and claims
processing, irrespective of whether the discriminatory conduct occurred
when the unit became available or in conjunction with or subsequent to
the acquisition of a dwelling.\142\
---------------------------------------------------------------------------

\137\ Depending on the circumstances, discriminatory insurance
practices can violate 42 U.S.C. 3604(a), (b), (c), (f)(1), (f)(2),
3605, and 3617. See, e.g., Cisneros, 52 F.3d at 1360 (holding that
HUD's interpretation that section 3604 of the Act prohibits
discriminatory insurance underwriting is reasonable); Nevels v. W.
World Ins. Co., 359 F. Supp. 2d 1110, 1119-23 (W.D. Wash 2004)
(recognizing that sections 3604(f)(1), 3604(f)(2), 3605 and 3617 of
the Act cover insurance practices); Nat'l Fair Hous. All. v.
Prudential Ins. Co. of Am., 208 F. Supp. 2d at 55-58 (holding that
sections 3604(a), 3604(b), and 3605 of the Act prohibit
discriminatory insurance underwriting practices); Owens v.
Nationwide Mut. Ins. Co., Civ. No. 3:03-CV-1184-H, 2005 U.S. Dist.
LEXIS 15701, at *16-17 (N.D. Tex. Aug. 2, 2005) (holding that
section 3604 of the Act prohibits discriminatory insurance
practices); Francia v. Mount Vernon Fire Ins. Co., No. CV084032039S,
2012 Conn. Super. LEXIS 665, at *24-25 (Conn. Super. Ct. Mar. 6,
2012) (relying on section 3604(c) to interpret an analogous state
law as prohibiting a discriminatory statement in an insurance
quote).
\138\ 42 U.S.C. 3605(a).
\139\ 42 U.S.C. 3604(b).
\140\ 24 CFR 100.70(d)(4) (emphasis added). As used in this
regulation, the phrase ``property or hazard insurance for
dwellings'' includes insurance purchased by an owner, renter, or
anyone else seeking to insure a dwelling. 42 U.S.C. 3602(b)
(defining ``dwelling'' without reference to whether the residence is
owner- or renter-occupied).
\141\ See, e.g., NAACP, 978 F.2d at 301 (``Section 3604 of the
Fair Housing Act applies to discriminatory denials of insurance, and
discriminatory pricing, that effectively preclude ownership of
housing because of the race of the applicant.''); Dehoyos, 345 F.3d
at 293 (holding that a claim alleging discriminatory insurance
pricing was not barred by McCarran-Ferguson).
\142\ See, e.g., Franklin v. Allstate Corp., No. C-06-1909 MMC,
2007 U.S. Dist. LEXIS 51333, at *17-19 (N.D. Cal. July 3, 2007)
(applying the Act to claims processing); Burrell v. State Farm &
Cas. Co., 226 F. Supp. 2d 427 (S.D.N.Y. 2002) (same); see also Owens
v. Nationwide Mut. Ins. Co., Civ. No. 3:03-CV-1184-H, 2005 U.S.
Dist. LEXIS 15701, at *17 (N.D. Tex. Aug. 2, 2005) (Insurance
practices are covered by the Act ``whether the insurance is sought
in connection with the maintenance of a previously purchased home or
with an application to purchase a home.''); Lindsey v. Allstate Ins.
Co., 34 F. Supp. 2d 636, 643 (W.D. Tenn. 1999) (``It would seem odd
to construe a statute purporting to promote fair housing as
prohibiting discrimination in providing property insurance to those
seeking a home, but allowing that same discrimination so long as it
takes place in the context of renewing those very same insurance
policies.'').
---------------------------------------------------------------------------

In addition, HUD finds that the commenters have misconstrued the
referenced cases. HUD notes, for example, that NAACP did not hold that
the Act only prohibits insurance practices that effectively preclude
homeownership; rather, the court, in considering whether the Act
prohibited intentional insurance redlining practices, concluded that it
did, and affirmed HUD regulations which ``include, among the conduct
prohibited by section 3604: `Refusing to provide . . . property or
hazard insurance for dwellings or providing such . . . insurance
differently because of race.' '' \143\ In that case, the plaintiff
brought suit under both section 804(a), asserting that the insurer made
housing unavailable, and section 804(b), asserting that the insurer
discriminated in the provision of services in connection with the sale
or rental of a dwelling.\144\ The Seventh Circuit, in discussing the
viability of plaintiff's claims, stated that Sec. 804 ``applies to
discriminatory denials of insurance, and discriminatory pricing, that
effectively preclude ownership of housing because of the race of the
applicant.'' \145\ The court could not read section 804(b) as requiring
a showing that housing was otherwise made unavailable as that language
is not present in section 804(b); rather it is in section 804(a).
Accordingly, the court's quote cannot be read as applying to the
section 804(b) claim especially because it was talking about the
plaintiff's claims generally, including its section 804(a) claim, which
has the ``make unavailable'' language. Thus, NAACP cannot be fairly
read to hold that the Act only applies when insurance practices make
housing unavailable.
---------------------------------------------------------------------------

\143\ NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 290,
300 (7th Cir. 1992).
\144\ Id. at 297.
\145\ Id. at 301.
---------------------------------------------------------------------------

Furthermore in NAACP, the Seventh Circuit also clarified its
earlier statement regarding governmental services in Southend
Neighborhood Improvement Ass'n.\146\ In NAACP, the court stated, ``[w]e
once suggested in passing, [in Southend] that `service' in section 3604
means `services generally provided by governmental units,' but the
subject was not before us--and the suggestion that section [804] is
limited to governments is hard to reconcile with another plain-
statement principle requiring Congress to be especially clear if it
wants to regulate the conduct of state and local governments. . .So it
is hard to understand section [804] as restricted to garbage collection
and like services.'' \147\
---------------------------------------------------------------------------

\146\ Id. at 299.
\147\ Id.
---------------------------------------------------------------------------

Issue: Commenters stated that an exemption for insurance practices
is warranted because the judicial and legislative branches have not
specifically authorized HUD to become involved in insurance.
HUD Response: Congress authorized HUD to interpret and enforce the
Act, and as discussed above, provided no exemption for insurance
practices.\148\ As also discussed above, courts have routinely applied
the Act to insurance practices and have found that, as with other
housing-related practices, insurers may be liable for practices that
create discriminatory effects under the Act.\149\ In promulgating this
final rule, HUD is exercising the authority Congress gave it.\150\ Any
liability originates from the Act itself, not HUD or the rule.
---------------------------------------------------------------------------

\148\ 42 U.S.C. 3610; 42 U.S.C 3612; 42 U.S.C 3614a (HUD has the
authority to make rules to carry out the Act).
\149\ See Dehoyos, 345 F.3d at 293 (affirming a district court's
denial of a motion to dismiss allegations that a credit scoring
system had an unjustified discriminatory effect because it resulted
in higher rates for non-white customers); see also Nat'l Fair Hous.
All. v. Travelers Indem. Co., 261 F. Supp. 3d 20, 22 (D.D.C. 2017)
(denying a motion to dismiss allegations that defendant's policy of
declining to insure properties where landlords accept Section 8
vouchers has an unjustified discriminatory effect); Viens, 113 F.
Supp. 3d at 558 (denying motion to dismiss allegations that
defendant insurer's insurance underwriting criteria that charge
higher premiums or deny coverage to landlords who rent apartments to
tenants receiving Section 8 housing assistance has an unjustified
discriminatory effect); Nat'l Fair Hous. Alliance v. Prudential Ins.
Co. of Am, 208 F. Supp. 2d 46, 50, 48-49, 60-61 (D.D.C. 2002)
(denying a motion to dismiss allegations that certain of defendant's
minimum underwriting requirements for certain types of coverages,
such as a ``replacement cost:'' policy had an unjustified
discriminatory effect).
\150\ 42 U.S.C. 3614a.
---------------------------------------------------------------------------

Fundamental Nature of Insurance
Issue: Commenters requested an exemption for insurance practices
because of the fundamental nature of the industry, alleging that the
proposed rule would fundamentally and problematically alter insurance
practices. Commenters said that the foundation of the business of
insurance is the ability to classify insurance policyholders by risk
and that insurers make decisions based on actuarial and business
principles that group policyholders for the purpose of treating those
with similar risk profiles similarly. Commenters stated that the
industry is predicated on setting rates and making underwriting
decisions based on relevant, mathematical, and objective risk factors
that accurately predict loss. Commenters said that risk-based pricing
has been a bedrock principle of state insurance regulation for more
than 150 years, acting as a primary tool for ensuring rates are
adequate, not excessive, not unfairly discriminatory, accurately
predictive of risk, and protective of the solvency of insurers.
Commenters stated that the insurance market functions best when each
insured pays a rate that accurately reflects the cost of providing
insurance to similarly-situated policy holders. Commenters stated that
although professional underwriters routinely avoid or exclude risks for
which they lack expertise, underwriting judgment, or actuarial data,
they still are required to consider similar factors bearing on risk of
loss and do not consider protected traits.
Commenters noted that risk-based pricing is the primary tool to
ensure that rates are not unfairly discriminatory, as defined by state
insurance codes. Commenters stated that in the context of insurance,
unfair discrimination means treating similar risks in a dissimilar
manner, which is different from discrimination under the Act. They
stated that a rate is unfairly discriminatory if the premium
differences do not correspond to expected losses and average expenses.
Commenters stated that the proposed rule would force insurers to
eliminate

[[Page 19467]]

actuarially sound risk-based practices, which is central to the
effective determination of insurance premiums, in favor of substitutes
that are less effective at furthering an insurer's legitimate,
nondiscriminatory interests. A commenter stated that the proposed rule
would penalize insurers for relying on sound risk factors that
disproportionately affect a protected class, because they would be held
liable for disparities they did not create. A commenter stated that the
rule will require uniform rates, regardless of risk. Commenters
disagreed with the proposed framework's case-by-case analysis. For
example, commenters stated that insurers implement polices accounting
for risk factors through actuarially sound methodologies, and that it
would be impossible for a plaintiff to identify a less discriminatory
alternative because any alternative would necessarily correspond to a
different risk than the factor at issue, identified through actuarially
sound methodology. As a result, if the plaintiff's alternative was
adopted, the risk challenged in the lawsuit would no longer be
reflected in the price of insurance, resulting in overcharging low-risk
customers and likely driving them from the markets.
Other commenters disagreed, stating that the proposed rule
appropriately applies to insurance. A commenter stated that application
of the 2013 Rule and 2016 Supplement \151\ to insurance is consistent
with sound actuarial practices because it accommodates underwriting
decisions that satisfy the shifting burden framework. Commenters
explained that ratemaking, though largely actuarially based, can
incorporate elements of non-actuarially based subjective judgments.
Commenters cited ratemaking, price optimization, and credit scoring as
examples of insurance practices that are not entirely risk-based.
Commenters further noted that consideration of these non-purely risk-
based factors had not led to the demise of the industry. A commenter
indicated that over the past few decades, the insurance industry has
removed barriers that restrict homeowners insurers from writing
policies in communities of color and, in response to disparate-impact
challenges, some insurers have refined underwriting and pricing systems
to eliminate arbitrary barriers to the availability of adequate
homeowners coverage, resulting in business growth. Commenters concluded
that subjecting insurers to disparate impact liability does not
``threaten the fundamental nature of the insurance industry.''
Commenters noted that other risk-based industries, such as mortgage
lending, are subject to liability for unjustified discriminatory
effects under the Act and have not had to forego risk-based analysis to
avoid liability under the Act.
---------------------------------------------------------------------------

\151\ On October 5, 2016, HUD issued supplemental responses to
insurance industry comments in accordance with the court's decision
in Property Casualty Insurers Association of America (PCIAA) v.
Donovan, which upheld the rule's burden-shifting framework for
analyzing discriminatory effects claims as a reasonable
interpretation of the Fair Housing Act, but that HUD had not
adequately explained why case-by-case adjudication was preferable to
using its rulemaking authority to provide exemptions or safe harbors
related to homeowners insurance. 81 FR 69012; Prop. Cas. Insurers
Ass'n of Am. v. Donovan (PCIAA), 66 F. Supp. 3d 1018, 1049-54 (N.D.
Ill. 2014).
---------------------------------------------------------------------------

HUD Response: HUD disagrees that the fundamental nature of
insurance warrants the exemptions requested by some commenters, whose
comments were premised upon the faulty assumption that the proposed
rule generally prohibits risk-based practices. It does not. This final
rule does not declare any activity per se unlawful. It merely provides
a framework for determining if a particular policy or practice causes
an unjustified and unlawful discriminatory effect. HUD recognizes that
risk-based decision making is an important aspect of sound insurance
practices, and nothing in this final rule prohibits insurers from
making decisions that are in fact risk-based. Under the framework
established by this rule, practices that actually are risk-based, and
for which no less discriminatory alternative exists, will not give rise
to discriminatory effects liability. The rule simply requires that if
an insurer's practices are having a discriminatory effect and ``an
adjustment . . . can still be made that will allow both [parties']
interests to be satisfied,'' the insurer must make that change.\152\
---------------------------------------------------------------------------

\152\ Avenue 6E Invs., LLC, 818 F.3d at 513.
---------------------------------------------------------------------------

Risk-based decision making is not unique to insurance, and
discriminatory effects liability has proven workable in other contexts
involving complex risk-based decisions, such as mortgage lending,
without the need for exemptions or safe harbors. Indeed, all businesses
covered by the Act make risk-based decisions. For example, landlords
assess risk when they select tenants, set rental rates, and decide
whether to require deposits. The Act requires that such risk-based
determinations not be based on protected characteristics, in whole or
in part. Moreover, some states specifically provide for discriminatory
effects liability against insurers under state laws, further
undermining the claim that providing for such liability as a matter of
federal law threatens the fundamental nature of the industry.\153\
---------------------------------------------------------------------------

\153\ Viens, 113 F. Supp. 3d at 573 n.20 (stating that
Connecticut ``provides a similar (albeit broader) protection against
housing discrimination as the [Act]'' and finding that McCarran-
Ferguson does not bar an FHA disparate impact claim against an
insurer related to a property located in Connecticut).; Jones v.
Travelers Cas. Ins. Co. of Am., Tr. of Proceedings Before the
Honorable Lucy H. Koh U.S. District Judge, No.5:13-cv-02390 LHK
(N.D. Cal. May 7, 2015), ECF No. 236 (holding that California law
complements the Act and denying an insurer's motion to for summary
judgement); Toledo Fair Hous. Ctr. v. Nationwide Mut. Ins. Co, 94
Ohio Misc. 2d at 157-159 (recognizing discriminatory effects
liability in homeowners insurance under state law in part because
the Superintendent of Insurance lacks ``primary jurisdiction'' over
such claims).
---------------------------------------------------------------------------

Unfortunately, the history of discrimination in the homeowners
insurance industry is long and well documented,\154\ beginning with
insurers overtly relying on race to deny insurance to persons of color
and evolving into more covert forms of discrimination.\155\ For
example,

[[Page 19468]]

minorities were denied access to insurance through property-location
and property-age restrictions, even when data demonstrated that such
restrictions were not justified by risk of loss.\156\ This history of
discrimination led to persons of color being unjustifiably denied
insurance policies or paying higher premiums.\157\ As described more
fully in other responses, HUD believes that discriminatory effects
liability continues to play an important role in preventing
unjustifiable discrimination, including in the insurance industry.
---------------------------------------------------------------------------

\154\ Although the discussion that follows focuses on race and
national origin discrimination because of their historic prevalence,
examples of discrimination in insurance against other protected
classes exist as well. See e.g., Nevels v. W. World Ins. Co., 359 F.
Supp. 2d 1110 (W.D. Wash. 2004) (disability).
\155\ See generally, Homeowners' Insurance Discrimination:
Hearings Before the S. Comm. on Banking, Housing and Urban Affairs,
103d Cong. (1994) [hereinafter 1994 Hearings]; Insurance Redlining
Practices: Hearings before the Subcom. on Commerce, Consumer
Protection & Competitiveness of the H. Comm. on Energy and Commerce,
103d Cong. (1993) [hereinafter Mar. 1993 Hearings]; Insurance
Redlining: Fact or Fiction: Hearing before the Subcom. On Consumer
Credit and Insurance of the H. Comm. on Banking, Finance & Urban
Affairs, 103d Cong. (1993) [hereinafter Feb. 1993 Hearing];
Insurance Redlining: Fact Not Fiction (Feb. 1979) [hereinafter
Comm'n on Civil Rights] (report of the Illinois, Indiana, Michigan,
Minnesota, Ohio and Wisconsin Advisory Committees to the U.S.
Commission on Civil Rights); President's National Advisory Panel on
Insurance in Riot-Affected Areas, Meeting the Insurance Crisis of
Our Cities (1968) [hereinafter Nat'l Advisory Panel]. Further, as
the 2016 Supplement stated at times, agents were given plainly
discriminatory instructions, such as ``'get away from blacks' and
sell to `good, solid premium-paying white people,''' or they simply
were told, ``We don't write Blacks or Hispanics.'' See 139 Cong.
Rec. 22,459 (1993) (statement of Rep. Joseph P. Kennedy, II); see
also, e.g., Nat'l Advisory Panel, at 116 (quoting an insurance
broker as explaining, ``No matter how good [a customer] is, they
[the insurers] take that into consideration, the fact he is a
Negro.''). Underwriting guidelines contained discriminatory
statements, such as listing ``population and racial changes'' among
``red flags for agents.'' Feb. 1993 Hearing at 19, 27 (statement of
Gregory Squires, Prof. U. Wis. Milwaukee). Minorities were offered
inferior products, such as coverage for repairs rather than
replacement, or were subject to additional hurdles during the quote
and underwriting process. 1994 Hearings at 15, 47-48 (statements of
Deval Patrick, DOJ Ass't Attorney Gen. for Civil Rights); id. at 18-
19, 51 (statements of Roberta Achtenberg, HUD Ass't Sec'y of Fair
Hous. & Equal Opportunity). Additionally, discrimination took the
form of insurers redlining predominantly minority neighborhoods and
disproportionately placing agents and offices in predominately white
neighborhoods. 1994 Hearings at 15, 47-48 (statements of Deval
Patrick, DOJ Ass't Attorney Gen. for Civil Rights); id. at 18-19, 51
(statements of Roberta Achtenberg, HUD Ass't Sec'y of Fair Hous. &
Equal Opportunity). Minorities also were denied access to insurance
through property-location and property-age restrictions, even when
data had demonstrated that such restrictions are not justified by
risk of loss. See, e.g., Comm'n on Civil Rights, at 34-39 (``The
greater the minority concentration of an area and the older the
housing, independent of fire and theft, the less voluntary insurance
is currently being written.''); 1994 Hearings, at 18 (statement of
Roberta Achtenberg, HUD Ass't Sec'y of Fair Hous. & Equal
Opportunity) (noting the ``disparate impact on minority
communities'' of property age and value requirements, and explaining
that ``47 percent of black households, but just 23 percent of white
households, live in homes valued at less than $50,000'' and that
``40 percent of black households compared to 29 percent of white
households live in homes build before 1950.'').; see also Transcript
of Proceedings Before the Hon. Lucy H. Koh at 29-33, Jones v.
Travelers Cas. Ins. Co. of Am, (N.D .Cal. 2015) (No.5:13-cv-02390)
ECF No. 236 (denying defendants motion for summary judgement on a
claim alleging that defendant's policy of failing to insure
properties that lease to Section 8 participants has an unlawful
discriminatory effect because plaintiffs have ``presented evidence
purportedly establishing a correlation between members of protected
classes and Section 8 tenants'' and that plaintiffs have presented
sufficient evidence that, presets a ``factual question for the trier
of fact as to whether [defendant] has legitimate, non-discriminatory
justifications.''); Nat'l Fair Hous. All. v. Travelers Indem. Co.,
261 F. Supp. 3d 20, 28-29 (D.D.C. 2017) (denying motion to dismiss
claim alleging that defendant's policy of refusing to insure
properties that are rented to Section 8 voucher holders had an
unlawful discriminatory effect). In addition, HUD, for example, has
issued charges against insurers for intentionally discriminating on
the basis of religion by imposing less favorable policy terms on
people of a particular religion, and on the basis of sex and
familial status when an insurer refused to issue a mortgage
insurance policy until the policyholder returned from maternity
leave.
\156\ See, e.g., Comm'n on Civil Rights, supra n. 155 at 34-39
(``The greater the minority concentration of an area and the older
the housing, independent of fire and theft, the less voluntary
insurance is currently being written.''); 1994 Hearings, supra n.
155, at 18 (statement of Roberta Achtenberg, HUD Ass't Sec'y of Fair
Hous. & Equal Opportunity) (noting the ``disparate impact on
minority communities'' of property age and value requirements, and
explaining that ``47 percent of black households, but just 23
percent of white households, live in homes valued at less than
$50,000'' and that ``40 percent of black households compared to 29
percent of white households live in homes build before 1950.'').
\157\ See, e.g., 139 Cong. Rec. 22,459 (1993) (statement of Rep.
Joseph P. Kennedy, II) (``[S]hocking anecdotal evidence was
supported by 12 years of data submitted by Missouri State Insurance
Commissioner Jay Angoff. . . . It shows that, in the cities of St.
Louis and Kansas City, low-income minorities had to pay more money
for less coverage than their white counterparts, despite the fact
that losses in minority areas were actually less than those in white
areas. This evidence directly challenges industry assertions that
minorities are too risky to insure.'').
---------------------------------------------------------------------------

Furthermore, HUD's long experience in administering the Act
counsels that discriminatory effects liability does not threaten the
fundamental nature of the insurance industry. Putting aside the length
of time insurers have been subject to discriminatory effects liability
under the statute itself, the industry has been subject to the 2013
Rule for ten years and the calamitous results commenters claimed would
come to pass have not occurred. HUD's position that discriminatory
effects liability applies to insurance dates back more than three
decades, as does the industry's concern that such liability makes it
``near impossible for an insurer to successfully defend himself.''
\158\ HUD has maintained for decades that remedying discrimination in
insurance, including in cases involving discriminatory effects claims,
requires examination of each allegedly discriminatory insurance
practice on a case-by-case basis, and HUD sees no reason to deviate now
from this longstanding approach.
---------------------------------------------------------------------------

\158\ Fair Housing Act: Hearings before the Subcom. on Civil and
Constitutional Rights of the H. Comm. on the Judiciary, 95th Cong.
20, 616 (1978) (statement of the Am. Ins. Ass'n.).
---------------------------------------------------------------------------

Based on its experience in administering and enforcing the Fair
Housing Act, HUD believes that a broad exemption would immunize a host
of potentially discriminatory insurance practices that do not involve
actuarial or risk-based calculations, such as marketing, claims
processing, and payment. In addition, a discriminatory effects claim
can challenge an insurer's underwriting policies as ``not purely risk-
based'' without infringing on the insurer's ``right to evaluate
homeowners insurance risks fairly and objectively.'' \159\ For example,
plaintiffs have challenged insurer policies that deny insurance to
landlords because they rent to Section 8 voucher holders.\160\ Even
practices such as ratemaking that are largely actuarially-based can
incorporate an element of non-actuarially-based subjective judgment or
discretion under state law. Indeed, many of the state statutes
referenced by commenters that mandate that rates be reasonable, not
excessive, not inadequate, or unfairly discriminatory, permit insurers,
in the very same section of the insurance code, to rely on ``judgment
factors'' in ratemaking. The example of price optimization practices,
which some states have started regulating, illustrates how non-
actuarial factors, such as price elasticity of market demand, can
impact insurance pricing in a manner similar to the pricing of products
in non-actuarial industries.\161\ The term ``price optimization'' can
refer to ``the process of maximizing or minimizing a business metric
using sophisticated tools and models to quantify business
considerations,'' such as ``marketing goals, profitability and
policyholder retention.'' \162\ The term ``price elasticity of demand''
refers to ``the rate of response of quantity demanded due to a price
change. Price elasticity is used to see how sensitive the demand for a
good is to a price change.'' \163\ Therefore, by using these practices,
insurers are already using factors unrelated to risk to help determine
price. Relying on factors unrelated to risk, therefore, has not doomed
their business model.
---------------------------------------------------------------------------

\159\ Nat'l Fair Hous. All. v. Prudential Ins. Co. of Am., 208
F. Supp. 2d 46, 60 (D.D.C. 2002).
\160\ Transcript of Proceedings Before the Hon. Lucy H. Koh at
29-33, Jones v. Travelers Cas. Ins. Co. of Am, (N.D.Cal. 2015)
(No.5:13-cv-02390) ECF No. 236 (denying defendants motion for
summary judgement on a claim alleging that defendant's policy of
failing to insure properties that lease to Section 8 participants
has an unlawful discriminatory effect because plaintiffs have
``presented evidence purportedly establishing a correlation between
members of protected classes and Section 8 tenants'' and that
plaintiffs have presented sufficient evidence that, presets a
``factual question for the trier of fact as to whether [defendant]
has legitimate, non-discriminatory justifications.''); Nat'l Fair
Hous. All. v. Travelers Indem. Co., 261 F. Supp. 3d 20, 28-29
(D.D.C. 2017) (denying motion to dismiss claim alleging that
defendant's policy of refusing to insure properties that are rented
to Section 8 voucher holders had an unlawful discriminatory effect).
\161\ Nat'l Ass'n of Ins. Comm'rs, Price Optimization White
Paper (Nov. 19, 2015) https://content.naic.org/sites/default/files/inline-files/committees_c_catf_related_price_optimization_white_paper.pdf
[hereinafter NAIC White Paper] at 9 ] 30 (``Price optimization has
been used for years in other industries, including retail and
travel. However, the use of model-driven price optimization in the
U.S. insurance industry is relatively new.'').
\162\ Id. at 4 ] 14(a) (discussing the responses of state
regulators to the rising increase in use of price optimization
practices by insurance providers).
\163\ Id. at 4 ] 14(f) (internal quotations omitted).
---------------------------------------------------------------------------

HUD likewise declines to craft a safe harbor for any specific risk-
based factor because it would be overbroad, foreclosing claims where
the plaintiff could prove the existence of a less discriminatory
alternative, such as an alternative risk-based practice.
For HUD to select a few factors for per se exemption as a matter of
law based on commenters' bare assertions about

[[Page 19469]]

their actuarial relevance, without data and without a full survey of
all factors utilized by the homeowners insurance industry, would also
be arbitrary. Even if such data were available and a full survey
performed, safe harbors for specific factors would still be overbroad
because the actuarial relevance of a given factor can vary by
context.\164\ In addition, while use of a particular risk factor may be
generally correlated with probability of loss, the ways in which an
insurer uses that factor may not be. Furthermore, the actuarial
relevance of any given factor may change over time as societal
behaviors evolve, new technologies develop, and analytical capabilities
improve.
---------------------------------------------------------------------------

\164\ For example, in some high-crime neighborhoods the higher-
than-average risk of loss from theft could be offset by a lower-
than-average risk of other losses, such as those caused by weather.
Therefore, the legitimacy of declining to issue insurance policies
in all locations with high crime rates would depend on other
features of those locations.
---------------------------------------------------------------------------

The Act's broad remedial purpose is ``to provide . . . for fair
housing throughout the United States.'' \165\ Thus, the Act plays a
``continuing role in moving the Nation toward a more integrated
society.'' \166\ Ensuring that members of all protected classes can
access insurance free from discrimination is necessary to achieve the
Act's objective because obtaining a mortgage for housing typically
requires obtaining insurance.\167\ Likewise, obtaining insurance may be
a precondition to securing a home in the rental market.\168\ Insurance
is also critical to maintaining housing because fire, storms, theft,
and other perils frequently result in property damage or loss that
would be too costly to repair or replace without insurance coverage.
---------------------------------------------------------------------------

\165\ 42 U.S.C. 3601; See Havens Realty Corp., 455 U.S. at 380
(recognizing Congress's ``broad remedial intent'' in passing the
Act); Trafficante, 409 U.S. at 209 (recognizing the ``broad and
inclusive'' language of the Act); see also Inclusive Cmtys. Project
Inc., 576 U.S. at 538 (describing the ``central purpose'' of the Act
as ``to eradicate discriminatory practices within a sector of our
Nation's economy'').
\166\ Inclusive Cmtys. Project Inc., 576 U.S. at 547.
\167\ NAACP, 978 F.2d at 297 (``No insurance, no loan; no loan,
no house; lack of insurance thus makes housing unavailable.'').
\168\ See, e.g., Or. Rev. Stat. 90.222(1) (``A landlord may
require a tenant to obtain and maintain renter's liability insurance
in a written rental agreement.'').
---------------------------------------------------------------------------

In light of the long, documented history of discrimination in the
homeowners insurance industry,\169\ including the use of ``risk
factors'' by insurers and regulators that were subsequently banned as
discriminatory \170\ and the non-actuarial or hybrid nature of many
insurance practices, HUD considers it inappropriate to craft any
exemptions or safe harbors for insurance practices. HUD's longstanding
case-by-case approach can adequately address any concerns and better
serves the Act's broad remedial purpose and HUD's statutory obligation
to affirmatively further fair housing, including by supporting fair
housing efforts undertaken by states.\171\
---------------------------------------------------------------------------

\169\ See sources cited supra note 155.
\170\ See sources cited supra note 155.
\171\ Cf. Crossroads Residents Organized for Stable and Secure
ResiDencieS, , 2016 U.S. Dist. LEXIS 86965 at *32 n.6 (declining to
adopt a per se rule that a certain category of disparate impact
claims could not be brought in part because ``HUD has indicated a
preference for case-by-case review of practices alleged to cause a
disparate impact'').
---------------------------------------------------------------------------

Issue: Commenters opposed the rule or requested an exemption
because they believe the rule would force insurers to consider
protected traits that are prohibited in the rating and underwriting
process and are not risk predictive, contrary to Inclusive Communities'
caution against injecting race into housing decisions. Commenters wrote
that insurance works best when it is blind to protected traits, as they
have no relationship to ratemaking or underwriting and that state
insurance law prohibits them from using such data to make decisions
concerning eligibility, underwriting, and pricing. Commenters also
stated that the rule will require insurers to charge different rates
for members of different protected classes but similar risk profiles,
violating state insurance laws and regulations and compromising
insurers' ability to set fair, accurate, and non-discriminatory rates
and reliably predict the probable financial consequences of risk.
Commenters stated that an insurer could be liable for considering a
protected trait or not considering the trait.
HUD Response: HUD disagrees that this final rule will force
insurers to consider protected traits of individuals in the rating and
underwriting process. Instead, to ensure compliance, a regulated entity
may wish to examine whether a facially neutral policy or practice
causes an unjustified discriminatory effect, as defined by the
regulation. This is no different from the analysis that any other
entity regulated by the Fair Housing Act, such as mortgage lenders and
housing providers, might want to perform to ensure compliance.
Inclusive Communities rejected the argument that such an analysis would
raise equal-protection concerns, reasoning that ``awareness of race''
can help ``local housing authorities [that] choose to foster diversity
and combat racial isolation with race-neutral tools.'' \172\ Such
awareness of the impact of facially neutral actions can also benefit
other housing providers and entities covered by the Act, including
insurers, to achieve the goals that many commenters stated they share,
i.e., achieving a more equitable and just society. This sort of
awareness of race (and other protected classes), combined with an
understanding of how its own policies, practices, and assessment tools
impact those protected classes, can inform the covered entity on
whether its approach actually or predictably results in a
discriminatory effect. HUD notes that awareness of protected traits and
the impact of policies based on protected traits is different from
considering or making decisions based upon a protected trait, which
would constitute discriminatory treatment. Commenters pointed to no
state law, and HUD knows of no state law, that prohibits insurers from
examining their own underwriting factors and practices to determine
whether these factors and practices unjustifiably cause a disparate
impact on protected classes or otherwise serve as a proxy for race.
This kind of self-examination is encouraged, generally, by this final
rule, is consistent with Inclusive Communities and the Act, and is
intended not to lead to liability under the Act but rather to protect
entities from liability.\173\ Indeed, lenders and others covered by the
Act regularly engage in such self-examination without threat to their
business models. In sum, the industry has been subject to the 2013 Rule
for ten years, and iterations of the same burden-shifting framework as
imposed by courts for even longer, and none of these dire outcomes
predicted by the industry have come to pass.
---------------------------------------------------------------------------

\172\ Inclusive Cmtys. Project Inc., 576 U.S. at 545.
\173\ See 24. CFR. 100.140 (discussing voluntary self-testing
conducted by lenders).
---------------------------------------------------------------------------

Issue: Commenters stated that prohibiting risk-based pricing and
underwriting, and forcing insurers to consider protected traits, would
lead to negative consequences. Commenters stated that the proposed rule
could lead to serious and damaging unintended consequences for the
industry including, interfering with underwriting; destabilizing
insurance coverage; threatening insurer solvency; distorting the
market; collapsing the industry; and increasing insurance costs and
premium rates, having a negative impact on policyholders and small
businesses. As another example, commenters stated that the inability to
rate risks will make it prohibitively expensive to insure high-risk
properties so insurers will withdraw specific lines of business or
insure only low-risk

[[Page 19470]]

properties. Commenters stated, citing to NAACP, that charging the same
rates to individuals posing different levels of risk results in lower-
risk individuals subsidizing higher risks, eliminating incentives for
insureds to mitigate risk, forcing low-risk consumers out of the market
\174\ and diminishing insurers' ability to broadly spread risk.
---------------------------------------------------------------------------

\174\ Some commenters quoted the Seventh Circuit in NAACP in
support of their statement that considering protected traits would
lead to adverse consequences: ``putting young and old, or city and
country, into the same pool would lead to adverse selection: people
knowing that the risks they face are less than the average of the
pool would drop out.
---------------------------------------------------------------------------

HUD Response: HUD disagrees with the commenters' views on the final
rule's impact on the fundamental nature of insurance and that such
negative consequences will come to pass. Each example is premised upon
the faulty assumption that the rule prohibits risk-based practices or
would require insurers to use protected traits. As explained in further
detail above, it does not. The rule merely provides a framework for
determining if a particular policy or practice causes an unlawful
discriminatory effect. Furthermore, as noted above, insurers have been
subject to discriminatory effects liability since well before the 2013
Rule and have been subject to the 2013 Rule for ten years, yet to HUD's
knowledge the commenters' fears have not come to pass.\175\ Certainly,
no commenter has provided any evidence that such fears have
materialized.
---------------------------------------------------------------------------

\175\ Inclusive Cmtys. Project, Inc., 576 U.S. at 546 (the Court
noted that the existence of disparate impact claims ``for the last
several decades `has not given rise to . . . dire consequences.'
''). To HUD's knowledge, insurers continue to use risk-based
pricing. Commenters provided no evidence that over the past ten
years this rule has resulted in an increased risk of insurer
solvency, that it has caused any insurers to go out of business,
that it has caused rates to increase, or that it has caused insurers
to withdraw from insuring certain types of properties.
---------------------------------------------------------------------------

Whether Inclusive Communities Supports an Insurance Exemption

Issue: Commenters cited Inclusive Communities in support of their
request for an exemption for risk-based insurance practices. Commenters
stated that applying the rule to insurance would run afoul of the
limitations on disparate impact liability articulated in Inclusive
Communities, and affect their ability to accurately price for risk,
making risk assessment more expensive, penalizing consumers, and
adversely impacting the insurance market. Some commenters, citing
Inclusive Communities' discussion of ``legitimate business practices,''
asserted that risk-based insurance practices are examples of legitimate
business practices and merit an exemption. Commenters stated that
restricting insurers' use of objective risk-based factors would run
afoul of Inclusive Communities because it would undermine the Act's
purpose and the free-market system by making insurers fearful of
liability, restrict innovation, and hold insurers liable for
disparities they did not create, irreparably distorting the market.
Other commenters opposed an exemption for insurers, with a
commenter specifically noting that Inclusive Communities did not
discuss exemptions from liability. One commenter noted in Nat'l Fair
Hou. All. v. Travelers Indemnity Co., the court rejected defendants'
argument that Inclusive Communities introduced new standards such that
insurers could not be held liable, stating that the refusal to provide
insurance to Section 8 voucher holders remained the ``type of clear,
non-speculative, connection . . . that Inclusive Communities requires
to make out a prima facie claim of disparate impact.'' \176\
---------------------------------------------------------------------------

\176\ Nat'l Fair Hous. All. v. Travelers Indemnity Co., 261 F.
Supp. 3d at 30 (D.D.C. 2017).
---------------------------------------------------------------------------

HUD Response: HUD finds no support in Inclusive Communities for
exempting the insurance industry from discriminatory effects liability.
As discussed above, Inclusive Communities did not introduce any new
limitations to discriminatory effects law, did not address the
application of the 2013 Rule or disparate impact principles to risk-
based homeowners insurance practices, and did not discuss or suggest
exemptions to liability for insurers or anyone else. Inclusive
Communities discusses ``business necessity,'' \177\ and ``legitimate
needs'' \178\ in the context of the Title VII disparate impact
framework, which, like this rule, provides that a practice that is
deemed a ``business necessity'' may still violate the statute if the
plaintiff proves there is a less discriminatory alternative.\179\
Rather than support an exemption for risk-based insurance practices,
this language supports the framework of this final rule. The Court in
Inclusive Communities also stated that governmental entities ``must not
be prevented from achieving legitimate objectives.'' \180\ This
requirement is consistent with the final rule which, at the second step
allows the defendant to show that a challenged practice serves a
substantial, legitimate, non-discriminatory interest, so as to defeat a
disparate impact claim unless the plaintiff can prove there is a less
discriminatory alternative that serves that substantial, legitimate,
nondiscriminatory interest.
---------------------------------------------------------------------------

\177\ Inclusive Cmtys. Project Inc., 576 U.S. at 541.
\178\ Id.. at 533.
\179\ For instance, the court stated explained, describing the
rule for Title VII that ``[b]efore rejecting a business
justification--or a governmental entity's analogous public
interest--a court must determine that a plaintiff has shown that
there is ``an available alternative . . . practice that has less
disparate impact and serves the [entity's] legitimate needs.''
Inclusive Cmtys. Project, Inc., 576 U.S. at 533.
\180\ Inclusive Cmtys. Project, inc., 576 U.S. at 544.
---------------------------------------------------------------------------

Issue: Commenters stated that because the facts in Inclusive
Communities involve decisions on the location of housing, which are
distinguishable from the facts and decisions in insurance cases, the
principles of Inclusive Communities are inapplicable to the insurance
industry. This distinction, they said, supports an exemption for
insurance.
HUD Response: HUD agrees that Inclusive Communities had different
facts than a case involving insurance. That does not mean that
Inclusive Communities supports an exemption or safe harbor for
insurance. Inclusive Communities did not limit the use of
discriminatory effects claims to any particular industry \181\ and
provides no support for exempting insurance practices. The Court's
holding that discriminatory effects claims are cognizable under the Act
applies to all such claims under the Act, and does not exclude
practices particular to any industry, including insurance. HUD notes
that the potential application of disparate-impact analysis to the
insurance industry long predated Inclusive Communities, which generally
reaffirmed disparate-impact doctrine.
---------------------------------------------------------------------------

\181\ The Court stated ``the issue here is whether, under a
proper interpretation of the FHA, housing decisions with a disparate
impact are prohibited,'' and did not limit the holding to certain
fact patterns. Inclusive Cmtys. Project, Inc., 576 U.S. at 530.
---------------------------------------------------------------------------

Whether Other Supreme Court Precedent Supports an Exemption

Issue: Commenters stated that Wards Cove and Watson require an
exemption for insurance because they set a higher burden of proof for
plaintiffs than the proposed rule does.
HUD Response: HUD disagrees with the commenters. Neither Wards Cove
nor Watson provide a basis for an exemption for insurance practices.
Both cases, which involve Title VII claims, were decided prior to the
Supreme Court's controlling precedent in Inclusive Communities, with
which the final rule is consistent. And as explained more fully below,
neither case necessitates a revision to plaintiff's burden of proof in
Fair Housing Act cases. Simply stated, they provide no basis to exempt
insurance practices.

[[Page 19471]]

Whether Claims Against Insurers Will Fail as a Matter of Law

Issue: Commenters stated that insurance practices should be exempt
because challenges to risk-based pricing and underwriting will fail as
a matter of law under Inclusive Communities and Graoch. They stated
that insurance claims will fail as a matter of law because Inclusive
Communities mandates the removal only of ``artificial, arbitrary, or
unnecessary barriers'' and risk-based pricing does not create such
barriers and because plaintiffs would be unable to identify less-
discriminatory practices that will allow the insurer to pursue their
valid interest. According to the commenters, this is because it is
grounded in mathematics, is objective and fair, and advances
substantial, legitimate, nondiscriminatory interests. Other commenters
stated that making sure that insurance rates accurately reflect the
risk of future loss is a valid interest and that Inclusive Communities
requires that businesses have ``leeway to state and explain the valid
interest served by their policies.'' In addition, commenters said that
the Graoch court held that categorical bars are justified when
plaintiffs have no chance of success, a holding that commenters argued
the proposed rule ignores.
Commenters further stated that all insurance claims will fail as a
matter of law because there can never be a robust causal link between
legitimate risk factors and any disparate impact. According to them,
risk-based factors do not consider protected characteristics, and they
are mandated or approved by state law, limiting insurer discretion.
These commenters stated that any disparate impact caused by
socioeconomic factors is beyond the control of insurers. Moreover, they
stated that because state laws limit insurer discretion, these laws
make it impossible to ascribe any discriminatory effects in
underwriting and pricing to an insurer's own choices.
A commenter suggested that if HUD does not exempt or provide a
defense for insurers, HUD should state in the final rule that disparate
impact claims against risk-based pricing and underwriting practices
cannot succeed. Commenters also asked HUD to commit not to bring
disparate-impact challenges to risk-based insurance practices.
HUD Response: HUD disagrees with the commenters who claimed that
lawsuits against insurers based on a discriminatory effects theory will
necessarily fail as a matter of law and that therefore insurers are
entitled to an exemption.\182\ As discussed in detail above, courts
have found that insurers are subject to discriminatory effects
liability under the Act. HUD also declines to commit not to bring
discriminatory effects challenges against insurers or to specify that
any claims based on insurance practices will necessarily fail. As
discussed at length, insurance practices may be subject to disparate
impact liability and insurers may be proper defendants in lawsuits
alleging disparate impact under the Act. Indeed, the Act requires HUD
to file charges of discrimination if reasonable cause exists to believe
discrimination occurred.\183\
---------------------------------------------------------------------------

\182\ See Dehoyos, 345 F.3d at 293; see also; Nat'l Fair Hous.
All. v. Prudential Ins. Co. of Am, 208 F. Supp. 2d 46,48 (D.D.C.
2002); Nat'l Fair Hous. All. v. Travelers Indem. Co., 261 F. Supp.
3d 20, 22 (D.D.C. 2017).
\183\ 42 U.S.C. 3610(g)(2)(A) (``If the Secretary determines
that reasonable cause exists to believe that a discriminatory
housing practice has occurred or is about to occur, the Secretary
shall . . . immediately issue a charge on behalf of the aggrieved
person'').
---------------------------------------------------------------------------

Graoch provides no basis for such an exemption. First, the Graoch
court stated that ``we cannot create categorical exemptions from [the
Act] without a statutory basis'' and ``[n]othing in the text of the
[Act] instructs us to create practice-specific exceptions. Absent such
instruction, we lack the authority to evaluate the pros and cons of
allowing disparate-impact claims challenging a particular housing
practice and to prohibit claims that we believe to be unwise as a
matter of social policy.'' \184\ While the Graoch court said that
``categorical bars are justified when . . . plaintiffs have no chance
of success,'' \185\ it did not find such a situation and in fact noted
the possibility of success on a claim against a landlord seeking to
withdraw from a Section 8 program. It made no finding that challenges
against insurance practices--which were not the subject of the
lawsuit--were impossible under the Act.\186\ To the extent that Graoch
is relevant, it establishes a high bar--the literal impossibility of
making out a particular type of claim--that would have to be
established before a categorical bar would be appropriate. And in HUD's
belief, it is, in fact, possible for a claim against an insurer to
succeed, as demonstrated by several court opinions, so the standard set
out by Graoch is not met.\187\
---------------------------------------------------------------------------

\184\ Graoch, 508 F.3d at 375.
\185\ Id. at 376.
\186\ The Graoch court did not identify homeowners insurance as
an example of where application of the disparate impact rule is
never appropriate. The court in dicta incorrectly read NAACP v. Am.
Family Mut. Ins. Co. to hold ``that insurers never can face
disparate-impact liability for `charging higher rates or declining
to write insurance for people who live in particular areas.' ''
Graoch, 508 F.3d at 375. HUD believes that the Graoch court read
NAACP incorrectly. NAACP overturned a dismissal of a claim under the
Act, holding that it ``is reversed to the extent it holds that the
Fair Housing Act is inapplicable to property and casualty insurance
written or withheld in connection with the purchase of real
estate.'' NAACP, 978 F.2d at 302. The plaintiff in that case made
claims of disparate treatment and disparate impact. Id. at 290. In
discussing the two, the NAACP court stated that it must presume that
plaintiffs can prevail under a disparate treatment theory because
the Supreme Court had not yet decided whether disparate impact is a
viable legal theory under Title VIII and because of the nature of
insurance. Id. The court ultimately narrowed the holding to state
``[a]ll we decide is whether the complaint states claims on which
the plaintiffs may prevail if they establish that the insurer has
drawn lines according to race rather than actuarial calculations.''
Id. at 291. Further, NAACP was about redlining in insurance and does
not describe any/all practices of the insurance industry. Id. at
290. So, even if Graoch's reading were correct, the holding, and
Graoch's description of the holding is limited to one practice used
by insurers.
\187\ HUD is unaware of any trial on the merits of a
discriminatory effects claim against an insurer, but notes that many
have survived a motion to dismiss and subsequently settled. See
Dehoyos, 345 F.3d at 293 (affirming a district court's denial of a
motion to dismiss allegations that a credit scoring system had an
unjustified discriminatory effect because it resulted in higher
rates for non-white customers); Nat'l Fair Hous. All. v. Travelers
Indem. Co., 261 F. Supp. 3d 20, 22 (D.D.C. 2017) (denying a motion
to dismiss allegations that defendant's policy of declining to
insure properties where landlords accept Section 8 vouchers has an
unjustified discriminatory effect); Viens, 113 F. Supp. 3d at 558
(denying motion to dismiss allegations that defendant insurer's
insurance underwriting criteria that charge higher premiums or deny
coverage to landlords who rent apartments to tenants receiving
Section 8 housing assistance has an unjustified discriminatory
effect); Nat'l Fair Hous. All. v. Prudential Ins. Co. of Am, 208 F.
Supp. 2d 46, 48-50, (D.D.C. 2002) (denying a motion to dismiss
allegations that certain of defendant's minimum underwriting
requirements for certain types of coverages, such as a ``replacement
cost'' policy had an unjustified discriminatory effect).
---------------------------------------------------------------------------

Some comments are premised on the faulty assumption that Inclusive
Communities introduced different standards for discriminatory effects
claims. As explained above, Inclusive Communities described and
endorsed the same disparate impact framework that this rule sets out.
In that case, the Supreme Court explained, that policies and practices
that are artificial, arbitrary, and unnecessary are invalid under the
Act when the longstanding disparate impact elements as set forth in
this rule are satisfied. However, the Court did not require plaintiffs
to show that a policy or practice is artificial, arbitrary, and
unnecessary in addition to proving an unjustified discriminatory
effect. Rather, the Court, in quoting ``artificial, arbitrary, and
unnecessary'' from the decades-old case Griggs, was describing the
types of policies that will fail under the rule's traditional shifting

[[Page 19472]]

burden framework, which is consistent with this final rule. In other
words, if a practice with a discriminatory effect is not necessary to
achieve a substantial and legitimate interest, or when an alternative,
less discriminatory practice exists, the challenged practice is invalid
under the Act because it is artificial, arbitrary, or unnecessary.
Insurance practices, like other practices related to housing, may
sometimes create artificial, arbitrary, and unnecessary barriers.
Further, as part of the disparate impact framework set forth in this
rule, insurers, like all defendants, are provided the opportunity to
show a valid interest supporting any practice challenged under the Act.
Therefore, a specific exemption for insurers is unwarranted.
HUD finds that claims against insurers will not fail categorically
as a matter of law. HUD believes, contrary to commenters' assertions,
it is possible for plaintiffs to establish a causal connection between
an insurance practice and a discriminatory effect. HUD also believes
that it is possible for plaintiffs to prove a less discriminatory
alternative. HUD notes that the fact that risk-based pricing does not
facially consider protected characteristics provides no support for the
contention that plaintiffs cannot--or should be precluded from the
opportunity to--prove that a particular policy that defendants claim is
risk-based causes an unjustified discriminatory effect. A violation of
the Act based on a discriminatory effects claim requires proof of an
unjustified discriminatory effect because of a trait protected by the
Act, not proof of intentional discrimination. The fact that state laws
mandate that rates be actuarially sound, or risk-based, does not
necessarily negate causation because insurers may not in fact be using
risk factors that are actuarially sound or the least discriminatory set
of risk factors that would achieve that end. Specifically, an
actuarially sound practice may nonetheless cause an unjustified
discriminatory effect if a less discriminatory alternative is available
that also is actuarially sound and otherwise complies with state law.
As other examples, commenters referenced ratemaking, price
optimization, and credit scoring as examples of largely actuarially
based practices that can incorporate elements of non-actuarially based
subjective judgment or discretion, and thus cause an unjustified
discriminatory effect. HUD finds this comment persuasive. HUD
acknowledges that there may be scenarios where plaintiffs will be
unable to show causation or demonstrate the existence of a less
discriminatory alternative, but it is incorrect to say that all claims
will fail as a matter of law. Thus, HUD declines to grant a categorical
exemption on this basis.

State Regulation

Issue: Commenters stated that insurance practices should be
exempted from discriminatory effects liability, with some advocating
for retention of the 2020 Rule, because, according to the commenters,
states are better at regulating insurance and should be the primary or
sole regulators, and federal regulation creates a patchwork of rules,
leading to higher costs. Commenters stated that the state regulatory
system is comprehensive; protects consumers; effectively and
efficiently regulates the insurance industry; ensures that premiums are
actuarially justified and not excessive, inadequate, or unfairly
discriminatory; and has increased affordability and availability over
the past 150 years. Commenters stated that one of the primary aims of
state regulation is to protect insurer solvency by ensuring that
insurance providers charge premiums that adequately cover current and
future claims and provide adequate surplus for capitalization, asset
and reinsurance purchases and liquidity. Commenters also stated that
state regulations already preclude the type of discrimination they
believe the rule addresses, though others noted that unfair
discrimination under insurance laws is not the same as discrimination
under the Act. Commenters said that state regulators understand the
unique conditions in their state affecting market and consumer needs;
are structured so as to promote consistency and sufficiently flexible
to promote innovation; and have always set the right regulations for
local conditions. Commenters said that interfering with a system that
works well will have negative effects, undermining state insurance
regulations and consumer protection laws and upending the commonsense
structure of state regulation. Commenters stated that federal
regulation would subvert the role of state regulators and undermine the
accuracy of risk-based pricing, leading to premium increases.
Commenters, citing to Cole v. State Farm Insurance Co. (Alaska
2006) and Cain v. Fortis Insurance Co. (S.D. 2005), stated that courts
have recognized that state laws ensure that the insurance market
functions fairly.\188\ A commenter stated that every state has
effective civil and criminal insurance anti-discrimination laws,
regulations, and enforcement divisions.
---------------------------------------------------------------------------

\188\ Cole v. State Farm Ins. Co., 128 P.3d 171 (Alaska 2006);
Cain v. Fortis Ins. Co., 694 NW 2d 709 (S.D. 2005).
---------------------------------------------------------------------------

Other commenters, however, warned that a broad exemption for the
homeowners insurance industry could go beyond underwriting practices to
exclude unregulated practices like marketing, claims processing, and
claims payment from disparate impact liability.
HUD Response: HUD disagrees with commenters who say that this final
rule will upend the state regulatory system or create insurer
insolvency. The rule recodifies the rule that has been in effect since
2013--and that itself codified jurisprudence which has included
application to insurers for decades--during which time no such upending
has occurred. The rule makes no change to the status quo, and so there
is no basis for claims that it will upend anything. As discussed above,
the rule does not prohibit risk-based pricing or modify the ability of
states to regulate insurers as they have done for decades. And Congress
has delegated authority to HUD to regulate under the Act.\189\
---------------------------------------------------------------------------

\189\ 42 U.S.C. 3614a.
---------------------------------------------------------------------------

State regulators may effectively and efficiently ensure that
premiums are actuarially justified and not excessive, inadequate, or
unfairly discriminatory as defined by state insurance codes.\190\
However, as commenters arguing for the exemption themselves recognize,
``unfairly discriminatory'' as defined by insurance codes, is related
to treating similar risks differently, which is wholly distinct from
housing practices that are unlawful because they discriminate because
of the protected characteristics under the Act. State insurance codes
generally require only that policies and practices are aimed at a
legitimate objective without regard to whether that objective
discriminates because of a protected characteristic or whether a less
discriminatory

[[Page 19473]]

alternative exists to achieve that objective. As an example, many state
statutes mandating reasonable rates that are not excessive, inadequate,
or unfairly discriminatory, permit insurers, via the very same section
of the insurance code, to rely on discretionary ``judgment factors'' in
ratemaking.\191\ These judgment factors, although permissible under the
insurance code, may result in unlawful discrimination under the Act.
Moreover, it is the responsibility of HUD--not of state regulators--to
promulgate regulations related to compliance with the Act.\192\
---------------------------------------------------------------------------

\190\ Commenters overstate Cole and Cain as ``recogiz[ing] that
state laws ensure that the insurance market functions fairly.'' In
Cole, while recognizing that Alaska's state insurance laws prohibit
certain discrimination, the court engaged in a further analysis of
Alaska's human rights law, implicitly recognizing that the state
insurance law may leave gaps to be filled by other anti-
discrimination laws. Cole, 128 P.3d at 175-78. The case said nothing
about how the state insurance code ensured that the insurance market
functioned fairy. Cain also says nothing about how state insurance
regulation ensures market functions fairly. Cain, 694 NW 2d at 714
(rejecting the policy holder's argument that she was discriminated
against under South Dakota's unfair trade practices act by the
health insurance company when it denied her coverage for gastric
bypass surgery, analyzing whether she was discriminated against
using Black's Law Dictionary's definition of discrimination).
\191\ See e.g., Ga. Code Ann. 33-9-4; Mont. Code Ann. 33-16-201;
see also NAIC White Paper, supra note 161 at 1 ] 5 (``Making
adjustments to actuarially indicated rates is not a new concept; it
has often been described as `judgment.' '').
\192\ 42 U.S.C. 3614a.
---------------------------------------------------------------------------

McCarran-Ferguson Act

Issue: Commenters stated that HUD should exempt all insurance
practices, or at least risk-based pricing and underwriting, because
imposing the rule on insurers would violate the McCarran-Ferguson Act.
Commenters stated that the McCarran-Ferguson Act established the states
as the primary regulator of insurance and that state insurance laws
preempt federal laws, such as the Act, when (1) the federal law does
not expressly relate to the business of insurance; (2) the state law is
enacted for the purpose of regulating insurance; and (3) the
application of federal law might ``invalidate, impair, or supersede''
state laws regulating insurance. Commenters stated that the Act is not
expressly related to the business of insurance and therefore its
application to insurers would be inconsistent with the McCarran-
Ferguson Act.
Commenters, citing Humana Inc. v. Forsyth \193\ stated that the
rule contravenes the McCarran-Ferguson Act because it could invalidate
or conflict with risk-based insurance pricing or underwriting policies
that are permitted or required under state law. Commenters stated that
state insurance laws permit or require risk-based pricing and
underwriting, so any claim under the Act will always be preempted.
Commenters said insurers would be caught between conflicting state and
federal law and forced to either comply with state approved rates based
on objective risk factors permitted or required by state law or comply
with the Act by considering protected traits. Commenters stated that
under state laws, insurers make underwriting decisions based on
actuarial risk factors, and that risk-based differences in charges
could affect demographic groups differently. Commenters also stated
that the majority of states require insurers to set rates based on
neutral actuarial factors, requiring insurers to take risk into account
to remain solvent. Commenters said that permitting the showing of a
less discriminatory alternative at step three of the burden shifting
framework requires insurers to adopt alternate risk-based practices
that are less effective and will result in less accurate pricing, in
violation of state law. Commenters stated that the rule violates
McCarran-Ferguson because a federal court may be called upon to enjoin
the insurer's state-approved risk-based practice in favor of an
alternative that may not be equally effective at predicting loss.
Commenters stated that this violates state laws prohibiting inadequate
rates and unfair discrimination between individuals with comparable
risk profiles and would force insurers to use factors that are
prohibited in the underwriting process.
---------------------------------------------------------------------------

\193\ Humana Inc. v. Forsyth, 525 U.S. 299 (1999).
---------------------------------------------------------------------------

Commenters, citing Humana, stated that federal law must not be read
to authorize regulations that, if applied, would ``frustrate any
declared state policy or interfere with a State's administrative
regime'' concerning insurance.\194\ Commenters further stated that the
rule impermissibly interferes with the state regulatory system for
various reasons. The proposed rule, they stated, would interfere with a
state's administrative regime by substituting the judgment of a federal
court for state regulators. They also cited Saunders II,\195\ in
support of the assertion that it is improper to empower federal courts
to reject rates that were reviewed and approved by state regulators
under state law. Commenters stated that even if a federal court does
not reject the rate, allowing such a claim to proceed in federal court
would render insufficient the assurance of lawfulness that the state
approval provides. Commenters noted that the Saunders II court stated
that ``HUD has never applied a disparate-impact analysis to insurers''
and expressed doubt that it could.\196\ Commenters also cited Ojo v.
Farmers Insurance Company,\197\ which found that the McCarran-Ferguson
Act barred a disparate impact claim against Farmers because it would
frustrate Texas's regulatory policy, which does not prohibit an insurer
from using race neutral factors in credit scoring to price insurance,
even if it creates a disparate impact. A commenter pointed to Dehoyos
v. Allstate Corp,\198\ which stated that ``a disparate impact claim
goes to the heart of the risk adjustment that underlies the insurance
business'' to show that the proposed rule would interfere with a
state's administrative regime.\199\ Commenters stated that because
unfair discrimination as defined by state insurance laws is different
than discrimination prohibited by the Act, the rule disrupts states'
regulatory regimes.
---------------------------------------------------------------------------

\194\ Id. at 310.
\195\ Saunders v. Farmers Ins. Exch. (Saunders II), 537 F.3d 961
(8th Cir. 2008).
\196\ Id.
\197\ Ojo v. Farmers Grp., Inc., 356 SW.3d 421 (Tex. 2011).
\198\ Dehoyos v. Allstate Corp., 345 F.3d 290 (5th Cir. 2003)
\199\ The commenter also said that the opinion is likely to be
adopted by other courts.
---------------------------------------------------------------------------

Commenters also cited to Mutual of Omaha,\200\ stating that the
proposed rule contravenes the McCarran-Ferguson Act because it allows
courts--rather than states--to determine if rates are actuarially
sound. Commenters stated that in Mutual of Omaha, the Seventh Circuit
held that the McCarran-Ferguson Act preempted application of the
Americans with Disabilities Act because it would require insurers to
litigate whether the challenged insurance practices were actuarially
sound, thus stepping on the toes of state regulators. Specifically,
commenters stated that steps two and three of the burden shifting
framework would force federal courts to second guess the actuarial
soundness of state-regulated insurance. Commenters stated that under
Mutual of Omaha, a case-by-case approach to whether McCarran-Ferguson
preempts the Act's application is inappropriate because of the
uniformity in state laws permitting or requiring the use of risk
factors and because second guessing state regulators itself is
improper, regardless of outcome.
---------------------------------------------------------------------------

\200\ Doe v. Mut. of Omaha, 179 F.3d 557 (7th Cir. 1999).
---------------------------------------------------------------------------

Commenters stated that state anti-discrimination laws are
irrelevant to whether the McCarran-Ferguson Act preempts a case under
the Act, because McCarran-Ferguson asks only whether the application of
federal law would invalidate, impair, or supersede state laws enacted
for the purpose of regulating the business of insurance, and state
antidiscrimination laws are not enacted for such purpose. Commenters
said that even if a state's fair-housing law were identical to the Act
and would permit a disparate-impact challenge to risk-based practices
in state court, any federal litigation under the rule would still
require federal courts to second-guess the actuarial soundness of
insurance practices regulated by state law---

[[Page 19474]]

contrary to the express holding of Mutual of Omaha.
Other commenters stated that the proposed rule does not undermine
the state regulation of insurance and thus presents no conflict with
McCarran-Ferguson. They stated that state authority to regulate
insurance does not, on its own, create a conflict with federal law;
rather this is a fact-specific determination that depends on the
relevant state law, the conflict claimed and other case-specific
variables. Commenters stated that many states have regulations that
complement disparate-impact liability under the Act and, even if they
do not, that does not necessarily mean there is a conflict with state
law. Commenters cited Dehoyos, Humana, and Wai \201\ to show that the
need for a fact-specific inquiry depends on the relevant state law, the
conflict claimed, and other case-specific variables. Commenters stated
that the District of Columbia, California, and North Carolina, for
example, expressly provide by statute for disparate impact claims.
Commenters said that given the variation in state insurance laws, an
exemption for insurers is inappropriate, and a case-by-case evaluation
is the better approach.
---------------------------------------------------------------------------

\201\ See, e.g., Dehoyos, 345 F.3d at 297-300 (rejecting
McCarran-Ferguson reverse-preemption after appellant failed to
indicate any state laws or declared regulatory policies which would
conflict with federal civil rights statutes); see also Humana Inc.,
525 U.S. at 308 (1999) (``We reject any suggestion that Congress
intended to cede the field of insurance regulation to the States,
saving only instances in which Congress expressly orders
otherwise.''); Wai v. Allstate Ins. Co., 75 F. Supp. 2d 1, 5 (D.D.C.
1999) (rejecting defendant's argument for McCarran-Ferguson reverse-
preemption after noting that Maryland law did not grant the state's
insurance commissioner exclusive jurisdiction over discrimination
claims).
---------------------------------------------------------------------------

HUD Response: HUD believes that the McCarran-Ferguson Act neither
creates nor justifies a wholesale exemption for insurers from liability
for policies and practices that have an unjustified discriminatory
effect. Some discriminatory effects claims against insurers will be
preempted under McCarran-Ferguson but others will not, depending on a
host of case-specific variables, so wholesale exemptions would be
overbroad. 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.'' \202\ As interpreted by the Supreme Court in Humana,
McCarran-Ferguson applies to preempt federal law only when a particular
application of that law directly conflicts with a specific state
insurance regulation, frustrates a declared state policy, or interferes
with a State's administrative regime.\203\ That is, McCarran-Ferguson
preemption is assessed on an application-by-application basis and does
not operate at the wholesale level commenters sought here. Accordingly,
the mere fact that a state has the authority to regulate insurance or
has adopted ratemaking regulations does not on its own create the kind
of conflict, frustration of purpose, or interference that triggers
preemption under McCarran-Ferguson.\204\ Rather, the inquiry required
by Humana depends on the relevant state law and other case-specific
variables.\205\
---------------------------------------------------------------------------

\202\ 15 U.S.C. 1012(b).
\203\ Humana, 525 U.S. at 310 (``When federal law does not
directly conflict with state regulation, and when application of the
federal law would not frustrate any declared state policy or
interfere with a State's administrative regime, the McCarran-
Ferguson Act does not preclude its application.'').
\204\ Dehoyos v. Allstate Corp, 345 F.3d 290 (5th Cir. 2003)
(disparate impact under the Act); Nationwide Mut. Ins. Co. v.
Cisneros, 52 F.3d 1351 (6th Cir. 1995) (disparate treatment under
the Act); Moore v. Liberty Nat'l Life Ins. Co., 267 F.3d 1209 (11th
Cir. 2001) (disparate treatment in life insurance).
\205\ See PCIAA, 66 F. Supp. 3d at 1038 (``McCarran-Ferguson
challenges to housing discrimination claims [depend on] the
particular, allegedly discriminatory practices at issue and the
particular insurance regulations and administrative regime of the
state in which those practices occurred.'').
---------------------------------------------------------------------------

For example, in Dehoyos v. Allstate, the Fifth Circuit rejected a
McCarran-Ferguson defense to a disparate impact claim where the insurer
did not identify a specific state law that was impaired.\206\ The Fifth
Circuit reasoned that the Seventh Circuit's holding in Doe v. Mutual of
Omaha that McCarran-Ferguson barred a particular claim of
discrimination under the Americans with Disabilities Act did not
foreclose all discriminatory effects claims against insurers.\207\
Instead, the Fifth Circuit distinguished Doe, by explaining that ``[i]n
Doe, there was an actual state insurance law which purportedly
conflicted with the application of the ADA to the particular insurance
question at issue.'' \208\ Thus, where no state law is impaired,
McCarran-Ferguson will not require preemption of a discriminatory
effects claim against an insurer.
---------------------------------------------------------------------------

\206\ Dehoyos, 345 F.3d at 293, 299.
\207\ Id. at 298 n.6.
\208\ Id. Although in HUD's view the Fifth Circuit persuasively
distinguished the Seventh Circuit's holding in Mutual of Omaha, the
case-by-case approach appropriately accommodates any variations
among the circuits that may exist, now or in the future, as to how
McCarran-Ferguson should be applied. This includes the Second
Circuit's skepticism over whether McCarran-Ferguson applies at all
to ``subsequently enacted civil rights legislation.'' Viens,113 F.
Supp. 3d at 572 (quoting Spirt v. Teachers Ins. & Annuity Ass'n, 691
F.2d 1054, 1065 (2d Cir. 1982)).
---------------------------------------------------------------------------

HUD finds that whether in fact a particular policy or practice
would create a conflict so as to preempt the Act is highly fact
specific and depends on the particular state law and fair housing
allegations in question. Accordingly, HUD has determined that a case-
by-case approach is necessary and justified. McCarran-Ferguson, by its
nature, requires such case-by-case analyses and contains no requirement
that HUD provide categorical exemptions. McCarran-Ferguson requires a
fact-intensive inquiry that will vary state by state and by claim. Even
those cases in which an impermissible impairment under McCarran-
Ferguson was found support the case-by-case approach herein adopted by
HUD rather than the wholesale exemption sought by some commenters. For
example, in Saunders v. Farmers Insurance Exchange, prior to ruling
that McCarran-Ferguson barred a discriminatory effects claim under the
Act,\209\ the Eighth Circuit remanded the case for further inquiry into
the facts and Missouri law.\210\
---------------------------------------------------------------------------

\209\ Saunders v. Farmers Ins. Exch. (Saunders II), 537 F.3d
961, 963 (8th Cir. 2008).
\210\ Saunders v. Farmers Ins. Exch. (Saunders I), 440 F.3d 940
(8th Cir. 2006). These variables included whether Missouri insurance
law provided a private right of action to challenge the conduct at
issue, and whether determinations by the state insurance agency were
subject to judicial review. The court explained that ``the mere fact
of overlapping complementary remedies under federal and state law
does not constitute impairment for McCarran-Ferguson purposes.'' Id.
at 945-46
---------------------------------------------------------------------------

Precedent also demonstrates that, in some instances, state law may
not preempt discriminatory effects claims against insurers even when an
insurer points to a specific state law and alleges that it is impaired.
Although the commenters provided examples of cases in which state laws
were found to preempt particular discriminatory effects claims, other
cases provide examples of state laws that were not. For instance, in
Lumpkin v. Farmers Group (Lumpkin II), the court rejected a McCarran-
Ferguson defense to a disparate impact challenge to credit scoring in
insurance pricing, holding that disparate impact liability in that
context did not impair the state's law mandating that ``insurance rates
cannot be `unfairly discriminatory.' '' \211\ In so ruling, the court
held it erroneous to read a state law prohibiting ``unfairly
discriminatory'' rates ``too broadly'' and rejected the insurer's
argument that such state laws require that practices with an
unjustified discriminatory effect

[[Page 19475]]

must be permitted ``as long as the rates are actuarially sound.'' \212\
The court then cited other provisions of the state's insurance code
specifically dealing with credit scoring, concluding that they too were
not impaired.\213\
---------------------------------------------------------------------------

\211\ Lumpkin v. Farmers Grp. (Lumpkin II), No. 05-2868 Ma/V,
2007 U.S. Dist. LEXIS 98949, at *19-21 (W.D. Tenn. July 6, 2007).
\212\ Id.
\213\ Id.
---------------------------------------------------------------------------

The many ways in which one state's insurance laws can differ from
another's, as well as the ways in which a single state's insurance laws
can change over time, mean that even an exemption for specific
insurance practices would be overbroad and quickly outdated. For
example, variations in state insurance laws have resulted in
discriminatory effects challenges to similar insurance practices
surviving a McCarran-Ferguson defense in some states but not in
others.\214\ Precedent also demonstrates that the insurance laws of
each state can change over time in significant ways,\215\ and state
insurance regulators respond to new practices as they become common and
their effects become clear.\216\ Given the variation in state insurance
laws across more than 50 jurisdictions and over time, HUD declines to
fashion a one-size-fits-all exemption that would be overbroad, quickly
outdated, and inevitably insulate insurers engaged in otherwise
unlawful discriminatory practices from liability under the Act that
would not be precluded by McCarran-Ferguson.
---------------------------------------------------------------------------

\214\ For example, in cases challenging the discriminatory
effect of insurers' reliance on credit scores, the McCarran-Ferguson
defense has failed in some states but succeeded in others. Compare
Dehoyos, 345 F.3d 290 (McCarran-Ferguson defense fails) and Lumpkin
II, 2007 U.S. Dist. LEXIS 98949 (same) with Saunders II, 537 F.3d
961 (McCarran-Ferguson defense succeeds) and McKenzie v. S. Farm
Bureau Cas. Ins. Co., No. 3:06CV013-B-A, 2007 U.S. Dist. LEXIS 49133
at *11 (N.D. Miss. July 5, 2007) (same); see also PCIAA, 66 F. Supp.
3d at 1039 (``Variations among state regulatory regimes . . .
provide an additional variable that may complicate any hypothetical
McCarran-Ferguson analysis.'').
\215\ Compare Ojo v. Farmers Grp., Inc., 356 SW.3d 421, 430
(Tex. 2011) (recognizing a McCarran-Ferguson defense to a credit
scoring disparate impact claim based on the state legislature
``expressly authoriz[ing] the use of credit scoring in setting
insurance rates in 2003'') with Dehoyos, 345 F.3d 290 (rejecting a
McCarran-Ferguson defense to the same type of claim based on Texas
law in effect before 2003).
\216\ See, e.g., NAIC White Paper, supra note 161 ]] 39-42
(discussing the responses of state regulators to the rising increase
in use of price optimization practices by insurance providers).
---------------------------------------------------------------------------

A one-size-fits-all exemption is also inappropriate because
insurance practices are not governed solely by ``hermetically sealed''
state insurance codes,\217\ but are also governed by a range of other
state laws, including state fair housing laws. Many state fair housing
laws track the Act's applicability to insurance and provision of
effects liability, indicating that those states do not consider
disparate impact liability to conflict with the nature of insurance.
Categorical exemptions or safe harbors of the types requested by some
commenters would deprive all states of this federal support in
addressing discriminatory insurance practices--even those states that
welcome or depend on such support.\218\ This outcome would be at odds
with the purpose of McCarran-Ferguson to support the autonomy and
sovereignty of each individual state in the field of insurance.\219\
Connecticut's Discriminatory Housing Practices Act, for example,
``provides similar (albeit broader) protection against housing
discrimination as the [Act], which is [a] strong indication that
application of the federal antidiscrimination law will not impair
Connecticut's regulation of the insurance industry, but rather is
complementary with Connecticut's overall regulatory scheme.'' \220\
Similarly, a state court found that ``the disparate-impact approach
does not conflict with Ohio Insurance law'' and thus allowed a
disparate impact claim against an insurer to proceed under the state's
fair housing law.\221\ In another case where the court rejected a
McCarran-Ferguson defense to a discriminatory effects claim against an
insurer, the court explained that it was ``not persuaded that
California law would allow [the challenged] practice'' and therefore ''
the [] Act complements California law in this regard.'' \222\
Furthermore, the allocation of authority to enforce a state's
protections against discrimination in insurance can impact whether
McCarran-Ferguson is a viable defense to a discriminatory effects claim
in a given state.\223\ The case-by-case approach thus affirms state
autonomy and furthers the Act's broad remedial goals by ensuring that
HUD is not hindered in fulfilling its statutory charge to support and
encourage state efforts to protect fair housing rights.\224\
---------------------------------------------------------------------------

\217\ Humana, 525 U.S. at 312.
\218\ A commenter stated that this argument for failing to grant
an exemption was arbitrary and capricious because the McCarran
Ferguson Act is not intended to promote ``federal support'' for
state enforcement of anti-discrimination laws and because state
anti-discrimination laws are irrelevant to the McCarran-Ferguson
analysis which only asks whether the application of federal law
would invalidate, impair, or supersede state laws enacted for the
uprose of regulating business insurance. HUD disagrees. First, state
anti-discrimination laws are relevant to McCarran-Ferguson because
they help inform whether there is a conflict with state law. See
Viens, 113 F. Supp. 3d at 573 n.20 (the Connecticut Fair Housing Act
``provides similar (albeit broader) protection against housing
discrimination as the FHA, which is strong indication that
application of the federal antidiscrimination law will not impair
Connecticut's regulation of the insurance industry, but rather is
complementary''). Second, the commenter misconstrues HUD's point.
HUD is not saying that the McCarran-Ferguson Act is intended to
promote federal support for state enforcement. HUD is explaining
that state laws inform whether there is a conflict between state and
federal law and that where the state laws are interpreted
consistently with the federal law, this regulation is helpful to
states enforcing their own state anti-discrimination laws.
\219\ See 15 U.S.C. 1011 (explaining the purpose of McCarran-
Ferguson as ``the continued regulation . . . by the several States
of the business of insurance is in the public interest'').
\220\ Viens, 113 F. Supp. 3d at 573 (finding that McCarran-
Ferguson does not bar an FHA disparate impact claim against an
insurer).
\221\ Toledo Fair Hous. Ctr. v. Nationwide Mut. Ins. Co, 94 Ohio
Misc. 2d 151, 157 (Ohio Cnty. Ct. 1997).
\222\ Jones v. Travelers Cas. Ins. Co. of Am., Tr. of
Proceedings Before the Honorable Lucy H. Koh U.S. District Judge,
No. C-13-02390 LHK (N.D. Cal. May 7, 2015), ECF No. 269-1.
\223\ Toledo, 94 Ohio Misc. 2d at 157 (recognizing
discriminatory effects liability in homeowners insurance under state
law in part because the Superintendent of Insurance lacks ``primary
jurisdiction'' over such claims).
\224\ See, e.g., 42 U.S.C. 3610(f); 24 CFR pt. 115 (HUD's Fair
Housing Assistance Program); 42 U.S.C. 3608(d) (obligation to
affirmatively further fair housing).
---------------------------------------------------------------------------

Furthermore, HUD finds that comments claiming there is necessarily
always a conflict with state laws in violation of the McCarran-Ferguson
Act rest on the false presumption that this final rule prohibits the
use of risk-based pricing or would require insurers to consider
protected traits of individual insureds in making decisions. As
described in greater detail above, it does not. HUD also disagrees with
commenters who stated that even if a state fair housing law prohibits
practices having an unjustified discriminatory effect, the rule
contravenes McCarran-Ferguson. As courts have found, and HUD agrees, in
such circumstances there would be no conflict between the federal and
state law at issue.\225\ Step three of the burden-shifting framework,
allowing plaintiffs to prove a less discriminatory alternative, also
does not necessarily interfere with the state regulation of insurance.
All the rule requires is that if an insurer's practices have a
discriminatory effect and ``an adjustment . . . can still be made that
will allow both [parties'] interests to be

[[Page 19476]]

satisfied,'' the insurer must make that change.\226\ It does not
require insurers to violate state laws.
---------------------------------------------------------------------------

\225\ Viens, 113 F. Supp. 3d at 573 n.20 (the Connecticut Fair
Housing Act ``provides similar (albeit broader) protection against
housing discrimination as the FHA, which is strong indication that
application of the federal antidiscrimination law will not impair
Connecticut's regulation of the insurance industry, but rather is
complementary''); see also NAACP, 978 F.2d 287, 295 (7th Cir. 1992)
(``Having stood on the text to show that the McCarran-Ferguson Act
governs the construction of the Fair Housing Act, American Family
needs to show that the Fair Housing Act conflicts with state law.
Duplication is not conflict.'').
\226\ Avenue 6E Invs., 818 F.3d at 513.
---------------------------------------------------------------------------

HUD disagrees with Mutual of Omaha to the extent it implied that
any claim requiring a court to assess the actuarial soundness of a
policy and/or whether a policy or practice is consistent with state law
necessarily interferes with a state administrative regime. HUD notes
that in promulgating a rule of nationwide effect it is not bound to
follow the decision of a single appellate court, but may reasonably
conclude that the Act allows for a different result.\227\ HUD believes
courts should continue to decide through a case-by-case assessment
whether requiring a court to assess actuarial soundness or consistency
with state law necessarily interferes with an administrative regime, as
this is an underdeveloped area of the law and case law could evolve
differently in the circuits.
---------------------------------------------------------------------------

\227\ Nat'l Cable & Telecomm.s Assn. v. Brand X internet
Services, 545 U.S. 967, 982, 983-84 (2005) (``A court's prior
judicial construction of a statute trumps an agency construction
otherwise entitled to Chevron deference only if the prior court
decision holds that its construction follows from the unambiguous
terms of the statute and thus leaves no room for agency discretion.
. ..'' ``the agency may, consistent with the court's holding, choose
a different construction, since the agency remains the authoritative
interpreter (within the limits of reason) of such statutes. In all
other respects, the court's prior ruling remains binding law (for
example, as to agency interpretations to which Chevron is
inapplicable). The precedent has not been ``reversed'' by the
agency, any more than a federal court's interpretation of a State's
law can be said to have been ``reversed'' by a state court that
adopts a conflicting (yet authoritative) interpretation of state
law.'').
---------------------------------------------------------------------------

In any event, disparate impact claims challenging insurance
practices do not necessarily require courts to ascertain whether a
practice complies with state law or is actuarially sound. Therefore,
not all claims even implicate the reasoning of Mutual of Omaha.\228\ As
the Court in PCI explained, ``[w]hile some states require insurers to
use risk-based pricing, other states merely permit risk-based
pricing.'' \229\ Accordingly, Mutual of Omaha does not necessarily
preclude claims that challenge practices that rest on subjective
business judgments, rather than actuarially sound principles or state
law requirements because in adjudicating such claims, the court would
not necessarily need to ascertain whether the insurer's practices are
actuarially sound and/or consistent with state law. For example, a
plaintiff may not dispute that an insurer's practice complies with
state law, but rather may show that there are alternative practices
that also comply with state law that do not cause a discriminatory
effect. Such a claim would not require the court to evaluate whether
the challenged practice complies with state law or is actuarially sound
and thus would not run afoul of Mutual of Omaha. The analysis of the
challenged practice instead focuses on whether or not it produces a
discriminatory effect and, if the insurer states a legitimate interest
justifying the practice, the plaintiff may show that there is a less
discriminatory alternative that would serve defendant's substantial,
legitimate, nondiscriminatory interest. While another risk-based
practice could be a possible alternative at step three, it is not
necessarily the only alternative. And, even if the alternative is a
risk-based practice, a court may not need to assess the actuarial
soundness of the alternative practice. For example, the evidence might
show that an insurer opted for one of two risk-based practices which
were both equally actuarially sound and compliant with state law, even
though one produced a greater discriminatory effect. In such a case,
the actuarial soundness of the alternative risk-based practice and its
compliance with state law would already have been determined by the
insurer itself. The court's analysis, therefore, would be limited to
assessing the efficacy of the alternative risk-based practice in
serving the insurer's business interests--the type of ``unremarkable
task'' regularly undertaken by courts.\230\ As the court in PCI stated,
Mutual of Omaha called into question the viability of some disparate
impact claims. HUD agrees, but notes that while Mutual of Omaha may
prevent some claims from going forward due to the McCarran Ferguson Act
in Seventh Circuit district courts, it does not necessarily preclude
all claims. The Act's purpose is broad and inclusive, and because
Mutual of Omaha would not prevent all claims against insurers from
proceeding even in its own circuit, HUD believes it is important not to
foreclose meritorious claims by creating a wholesale exemption; indeed,
doing so would run counter to the Act's purposes. HUD believes that
case-by-case adjudication is appropriate to balance the purpose of the
Act and to account for any differences that emerge in the circuits.
---------------------------------------------------------------------------

\228\ Mut. of Omaha, 179 F.3d 557, 564 (7th Cir. 1999)
(``requiring a federal court to decide whether an insurance policy
is consistent with state law--obviously would interfere with the
administration of the state law. The states are not indifferent to
who enforces their laws.'')
\229\ PCIAA, 66 F. Supp. 3d at 1039-41.
\230\ Dehoyos, 345 F.3d at 297 n.5 (rejecting similar argument
because a court does not become a ``super actuary'' every time it
``engag[es] in the unremarkable task of determining whether specific
conduct falls within the ambit of federal civil rights law'').
---------------------------------------------------------------------------

Finally, HUD disagrees that the rule will lead to a deluge of
lawsuits. The industry has been subject to the 2013 Rule for ten years
and a HUD regulation on insurance for well over 30 years \231\ and
commenters have provided no evidence of an uptick in lawsuits. And as
explained above, the insurance industry was subject to disparate impact
liability long before the 2013 Rule, with many courts using a framework
similar to the rule. Therefore, because the statute itself is the
source of liability and the rule merely provides a framework for
assessing the evidence, the rule cannot be the cause of any increase in
lawsuits going forward.
---------------------------------------------------------------------------

\231\ 24 CFR 100.70(D)(4).
---------------------------------------------------------------------------

Issue: Commenters stated that applying the rule to insurance is
contrary to Congressional intent because of the McCarran-Ferguson Act.
A commenter noted that the McCarran-Ferguson Act specifically exempts
the Sherman, Clayton, and Federal Trade Commission Acts but not the
Fair Housing Act, so under the statutory canon of construction
expressio unius est exclusio alterius,\232\ Congressional intent was to
exclude only the specified statutes from pre-emption. Therefore,
commenters stated, an exemption for the insurance industry from the
rule is justified.
---------------------------------------------------------------------------

\232\ ``Expressio unius est exclusion alterius'' means the
expression of one thing is the exclusion of the other. Jennings v.
Rodriguez, 138 S. Ct. 830, 844 (2018).
---------------------------------------------------------------------------

HUD Response: HUD disagrees. Even assuming that at least some Fair
Housing Act claims are pre-empted by McCarran-Ferguson, that does not
mean that all disparate impact claims under the Act are categorically
preempted. The fact that a statute is not specifically exempted from
application of the McCarran-Ferguson Act simply means that the
McCarran-Ferguson analysis may be applied on a case-by-case basis to
claims brought under that non-exempt statute; it does not mean that
McCarran-Ferguson categorically bars all such claims. The Supreme Court
explained this in Humana, when it held that the McCarran Ferguson Act
did not create a field exemption and that claims under Racketeer
Influenced Corrupt Organizations Act (``RICO''),\233\ which like the
Act is not explicitly listed as exempt from preemption, were not barred
by McCarran-Ferguson.\234\ Thus,

[[Page 19477]]

HUD has determined that the arguments put forth by commenters regarding
congressional intent and expressio unius est exclusio alterius to
justify an exemption from discriminatory effects liability are
unpersuasive.\235\
---------------------------------------------------------------------------

\233\ 18 U.S.C. 1961 et seq.
\234\ Humana Inc., 525 U.S. at 309-310 (``[w]e reject any
suggestion that Congress intended to cede the field of insurance
regulation to the States, saving only instances in which Congress
expressly orders otherwise.'' Ultimately, the court held that
``[w]hen federal law does not directly conflict with state
regulation, and when application of the federal law would not
frustrate any declared state policy or interfere with a State's
administrative regime, the McCarran-Ferguson Act does not preclude
its application.'').
\235\ Although in HUD's view the Fifth Circuit persuasively
distinguished the Seventh Circuit's holding in Mutual of Omaha, the
case-by-case approach appropriately accommodates any variations
among the circuits that may exist, now or in the future, as to how
McCarran-Ferguson should be applied. Dehoyos, 345 F.3d at 298 n.6.
This includes the Second Circuit's skepticism over whether McCarran-
Ferguson applies at all to ``subsequently enacted civil rights
legislation.'' Viens, 113 F. Supp. 3d at 572 (quoting Spirt v.
Teachers Ins. & Annuity Ass'n, 691 F.2d 1054, 1065 (2d Cir. 1982)).
---------------------------------------------------------------------------

Issue: Commenters made various comments concerning the impact of
Inclusive Communities on the McCarran Ferguson Act, including that
Inclusive Communities did not invalidate McCarran-Ferguson or expand
disparate impact liability to insurance; that applying the rule to
insurance would bring about an undesirable ``specter'' of litigation in
conflict with Inclusive Communities; and that the rule would increase
the likelihood of a conflict between the Act and state laws regulating
insurance because the rule does not conform to Inclusive Communities.
HUD Response: As discussed above, HUD believes that Inclusive
Communities had no impact on the application of this final rule to
insurance practices. Inclusive Communities also had no impact related
to the application of the McCarran-Ferguson Act. HUD agrees that
Inclusive Communities did not invalidate the McCarran-Ferguson Act, as
the Court did not address insurance or McCarran-Ferguson. Nor did
Inclusive Communities expand liability for unjustified discriminatory
effects to insurers, who were subject to such liability long before the
decision.\236\ Moreover, since there is no conflict between this rule
and Inclusive Communities, as discussed above, there is no likelihood
of the rule leading to litigation in conflict with that precedent or
with state laws.
---------------------------------------------------------------------------

\236\ See, supra Comments Concerning Inclusive Communities.
---------------------------------------------------------------------------

Issue: Commenters requested that HUD retain the provision in the
2020 Rule that recognized the McCarran-Ferguson Act. Another commenter
disagreed, stating that the 2020 Rule attempted to undermine the
nuanced position HUD took in 2016, when it stated that there is a
circuit split as to whether McCarran-Ferguson applies at all to
``subsequently enacted civil rights legislation'' \237\ This commenter
also stated that HUD had no authority to interpret McCarran-Ferguson in
the 2020 Rule.
---------------------------------------------------------------------------

\237\ 81 FR 69012, 69016 n.50 (Oct. 5, 2016).
---------------------------------------------------------------------------

HUD Response: HUD declines to retain the portion of the 2020 Rule
that references the McCarran-Ferguson Act because it was confusing.
While the 2020 Rule did not mention the McCarran-Ferguson Act in its
regulatory text, it borrowed from some of the statute's language,
stating that ``[n]othing in this section is intended to invalidate,
impair, or supersede any law enacted by any state for the purpose of
regulating the business of insurance.'' \238\ HUD expressed in its 2019
Proposed Rule that this language was meant to ``codify the general
applicability of the `reverse preemption' provisions of the McCarran-
Ferguson Act as it applies to the Fair Housing Act'' and ``clarify that
the Fair Housing Act does not `specifically relate to the business of
insurance.'' \239\ In comments to that proposed rule, commenters stated
that this language would create an exemption for insurance practices or
preempt all such possible claims. HUD responded in the 2020 Rule that
it was ``neutral'' as to McCarran-Ferguson's application in specific
cases and pointed to cases in which the Act had been not preempted and
cases in which it had been preempted.\240\ HUD repeated that it was not
exempting the insurance industry and was ``only clarifying that its
disparate impact rule is not specifically related to the business of
insurance.'' \241\
---------------------------------------------------------------------------

\238\ 85 FR 60288, 60333.
\239\ 84 FR 42854, 42860.
\240\ 85 FR 60288, 60323
\241\ Id.
---------------------------------------------------------------------------

HUD believes that some commenters appear to have misread the 2020
Rule to provide a complete exemption from disparate impact liability
for insurers. It is plain from reading the 2020 Rule that it neither
provided an exemption nor specified that McCarran-Ferguson reverse
preemption always applies to insurance practices. It simply stated that
the Fair Housing Act was not intended to ``invalidate, impair, or
supersede any law enacted by any state for the purpose of regulating
the business of insurance.'' HUD has reconsidered the 2020 Rule and
concludes that this provision does not clarify how the Act and the
McCarran-Ferguson Act interact. Nothing in the McCarran-Ferguson Act
requires HUD to make this statement and it is not HUD's responsibility
to interpret the McCarran-Ferguson Act. HUD has decided this statement
is unnecessary and confusing, as evidenced by commenters' misreading of
the provision, and declines to retain it.
As HUD stated in 2016, the agency has adopted a case-by-case
approach on McCarran-Ferguson reverse preemption, as that law requires.
This approach is appropriate given the variations in jurisprudence
across circuits that currently exist and may continue to evolve over
time.\242\ HUD continues to believe that a case-by-case approach is
appropriate. It therefore declines to incorporate the 2020 Rule's
language into this final rule. HUD leaves it to the courts to decide,
as they encounter individual cases, whether the McCarran-Ferguson Act
preempts application of the Act in each case.
---------------------------------------------------------------------------

\242\ Dehoyos, 345 F.3d at 298 (finding McCarran-Ferguson does
not preclude plaintiff's claims); Mut. of Omaha, 179 F.3d at 564
(finding McCarran Ferguson precludes plaintiff's claim); Viens, 113
F. Supp. 3d at 572 (expressing skepticism over whether McCarran-
Ferguson applies to all ``subsequently enacted civil rights
legislation.'') (quoting Spirt v. Teachers Ins. & Annuity Ass'n, 691
F.2d 1054, 1065 (2d Cir. 1982)).
---------------------------------------------------------------------------

Filed-Rate Doctrine

Issue: Commenters stated that insurance practices merit an
exemption because the proposed rule would violate the filed-rate
doctrine, which prohibits federal courts from reexamining rates filed
by a regulated entity and subject to the review and approval of a
regulatory agency, as these rates are ``presumed reasonable and
unassailable in judicial proceedings brought by ratepayers.'' \243\
Commenters stated that the Eighth Circuit decision in Saunders v.
Farmers Ins. Exch., on which HUD relied in the 2016 Supplement, is
inconsistent with the weight of case law holding that the filed-rate
doctrine bars challenges under federal laws to rates filed with state
agencies.\244\ Commenters stated that the proposed rule would upend the
protections afforded the filed-rate doctrine, threatening the health,
solvency, and competitiveness of the insurance market.
---------------------------------------------------------------------------

\243\ Commenters cited Wegoland Ltd. v. NYNEX Copr., 27 F.3d 17,
18 (2d. Cir. 1994) and Goldwasser v. Ameritech Corp., 222 F.3 390,
402 (7th Cir. 2000) in support of their assertion.
\244\ Commenters relied on Taffet 967 F.2d 1483, 1494 (11th Cir.
1992)), Square D, 476 U.S. 409,417 (1986), Wegoland Ltd. v. NYNEX
Copr., 27 F.3d 17, 18 (2d. Cir. 1994); Goldwasser, and Saunders II,
537 F. 3d 961, 968 (8th Cir. 2008).
---------------------------------------------------------------------------

HUD Response: HUD disagrees that this final rule conflicts with the
filed-rate doctrine. The doctrine primarily serves two purposes:
preventing litigants from securing more favorable rates than their non-
litigant competitors,

[[Page 19478]]

and preserving for agencies rather than courts the role of
ratemaking.\245\ HUD is not aware of any case, and no commenter cited
one, in which a court has applied the filed-rate doctrine to defeat a
claim under the Act, although several courts have rejected such
attempts, including for discriminatory effects claims.\246\ For
example, Wegoland Ltd. held that ``[t]he [filed-rate] doctrine bars
suits against regulated utilities grounded on the allegation that the
rates charged by the utility are unreasonable.'' \247\ (emphasis
added). Whether a rate causes an unjustified discriminatory effect is a
different issue than whether it is reasonable; discriminatory effects
claims do not challenge the reasonableness of insurance rates but
rather their discriminatory effects.\248\
---------------------------------------------------------------------------

\245\ Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 18-19 (2d Cir.
1994).
\246\ See Saunders I, 440 F.3d at 946 (``The district court
erred in invoking the judicially created [filed-rate] doctrine to
restrict Congress's broad grant of standing to seek judicial redress
for race discrimination.''); Dehoyos, 345 F.3d at 297 n.5 (finding
``unpersuasive'' the argument that the [filed-rate] doctrine barred
a Fair Housing Act disparate impact claim); Lumpkin v. Farmers Grp.,
Inc. (Lumpkin I), No. 05-2868 Ma/V, 2007 U.S. Dist. LEXIS 98994, at
*20-22 (W.D. Tenn. Apr. 26, 2007) (ruling that ``the [filed-rate]
doctrine does not apply'' to a Fair Housing Act disparate impact
claim).
\247\ Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 18 (2d Cir.
1994).
\248\ Lumpkin I, 2007 U.S. Dist. LEXIS 98994, at *21; Dehoyos,
345 F.3d at 297 n.5 (``[T]he application of anti-discrimination laws
cannot be reasonably construed to supplant the specific insurance
rate controls of [states].''); c.f. Taffet 967 F.2d at 1490-1495
(stating that the claim should be precluded because it would focus
on the reasonableness of the rate and stating ``[a]ccordingly, a
court reviewing the reasonableness of a utility rate `shall not
substitute its judgment for that of the [rate-approving entity] if
there is any evidence to support its findings.' '').
---------------------------------------------------------------------------

Multiple courts examining the filed-rate doctrine in the context of
Fair Housing Act claims have found the doctrine inapplicable, noting
that the Supremacy Clause, rather than the filed-rate doctrine,
applies.\249\ Unlike filed-rate doctrine cases involving a conflict
between federal ratemaking and a federal statute, applying the filed-
rate doctrine to prioritize state ratemaking over a federal statute
``would seem to stand the Supremacy Clause on its head.'' \250\
Moreover, the filed-rate doctrine ``does not preclude injunctive relief
or prohibit the Government from seeking civil or criminal redress,''
\251\ which are types of relief often obtained for violations of the
Act.\252\ A filed-rate doctrine defense requires an examination of the
facts in context of the laws and ratemaking structure at issue.\253\
The case-by-case approach best accommodates these variations.\254\
---------------------------------------------------------------------------

\249\ See, e.g., Saunders I, 440 F.3d at 944; Perryman v. Litton
Loan Servicing, LP, No. 14-cv-02261-JST, 2014 U.S. Dist. LEXIS
140479, at *20-22 (N.D. Cal. Oct. 1, 2014). As one court has stated,
the filed-rate doctrine is a ``weak and forcefully criticized
doctrine.'' Cost Mgmt. Servs. v. Wash. Natural Gas Co., 99 F.3d 937,
946 (9th Cir. 1996).
\250\ Perryman v. Litton Loan Servicing, LP, No. 14-cv-02261-
JST, 2014 U.S. Dist. LEXIS 140479, at *20-22 (N.D. Cal. Oct. 1,
2014).
\251\ In re Title Ins. Antitrust Cases, 702 F. Supp. 2d 840, 849
(N.D. Ohio 2010); see also Marcus v. AT&T Corp., 138 F.3d 46, 62 (2d
Cir. 1998).
\252\ See 42 U.S.C. 3612(g)(3), 3613(c), 3614(d).
\253\ Munoz v. PHH Corp., 659 F. Supp. 2d 1094, 1099 (E.D. Cal.
2009).
\254\ Saunders I, 440 F.3d at 945.
---------------------------------------------------------------------------

As discussed above, HUD disagrees that the rule would threaten the
health, solvency, and competitiveness of the market because no conflict
exists with the filed-rate doctrine. Furthermore, insurers have been
subject to the 2013 Rule for ten years, and disparate impact liability
generally even longer, and the market effects alleged by commenters
have not come to pass.

Case-by-Case Adjudication Cost for Insurers

Issue: Commenters opposed the rule's application to the insurance
industry because case-by-case litigation in federal court is costly
and, they contended, these costs outweigh the benefits. A commenter
stated that even if a case is resolved in favor of the insurer, another
suit with slightly altered facts may quickly follow. Commenters
asserted that insurers would have to defend various risk factors on a
regional basis, with courts possibly reaching inconsistent judgments.
Commenters stated case-by-base adjudication would be a waste of
judicial resources. Commenters also stated that requiring insurers to
defend risk-based practices in court will make insurance less
affordable. According to commenters, the costs are unjustified because
rates are risk-based as required by state insurance law and have been
approved by state regulators, and plaintiffs may bring claims that are
hypothetical and speculative. Commenters stated that the vagueness and
uncertainty of the rule threatens insurer insolvency.
Other commenters stated that the 2013 Rule, 2016 Supplement, and
proposed rule appropriately state that a case-by-case analysis is the
correct approach for assessing whether discriminatory effects are
unjustified for all industries, including insurers. Commenters
explained that to create an exemption, HUD would need to outline highly
specific standardized rules, which would not be possible as actuarial
practices are constantly changing and evolving.
HUD Response: As demonstrated by the relatively few cases filed
against insurance companies in the decades-long history of disparate
impact liability and in the ten years since the 2013 Rule was
promulgated, there is no reason to believe that a continued case-by-
case approach will lead to increased litigation, increased expenses in
defending against claims of unjustified discriminatory effects, insurer
insolvency, or increased premiums for customers. Nor did commenters
provide support for these assertions.
HUD also disagrees with comments predicting that the proposed rule
would create increased compliance costs. As discussed above, insurers
have been subject to discriminatory effects liability since well before
the 2013 Rule and have been subject to the 2013 Rule for ten years, yet
commenters have not demonstrated that the 2013 Rule has led to
significantly higher compliance costs.\255\ Prior to the 2013 Rule, in
adjudications, HUD always used a three-step burden-shifting
approach,\256\ as did many federal courts of appeals,\257\ but one
federal court of appeals applied a multi-factor balancing test,\258\
other courts of appeals applied a hybrid between the two,\259\ and one
court of appeals applied a different test for public and private
defendants.\260\ By formalizing the three-part burden-shifting test for
proving such liability under the Act, the 2013 Rule provided for
consistent and predictable

[[Page 19479]]

application of the test on a national basis. Reduced compliance costs
would be expected to result because housing providers could look to a
uniform standard at HUD and in the various courts across the country.
It also offered clarity to persons seeking housing and persons engaged
in housing transactions as to how to assess potential claims involving
discriminatory effects. HUD now recodifies the burden shifting
framework of the 2013 Rule, continuing the clarity, consistency, and
predictability that accompanied that rule.
---------------------------------------------------------------------------

\255\ Inclusive Cmtys.Project, Inc., 576 U.S. at 546 (the Court
noted that the existence of disparate impact claims ``for the last
several decades `has not given rise to . . . dire consequences.'
'').
\256\ See, e.g., HUD v. Twinbrook Vill. Apts., HUDALJ Nos. 02-
00-0256-8, 02-00-0257-8, 02-00-0258-8, 2001 HUD ALJ LEXIS 82, at *46
(HUD ALJ Nov. 9, 2001); HUD v. Pfaff, 1994 HUD ALJ LEXIS 69, at *19
(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 HUD ALJ
LEXIS 94, at *37 (HUD ALJ Mar. 22, 1993); HUD v. Carter, 1992 HUD
ALJ LEXIS 72, at *15 (HUD ALJ May 1, 1992); see also 1994 Joint
Policy Statement on Discrimination in Lending, 59 FR 18269.
\257\ See, e.g., Charleston Hous. Auth. V. U.S.D.A., 419 F.3d
729,740-42 (8th Cir. 2005); Langlois v. Abington Hous. Auth., 207
F.3d 43, 49-50 (1st Cir. 2000); Huntington Branch v. NAACP of
Huntington, 844 F.2d 926, 939 (2d. Cir. 1988).
\258\ See, e.g., Metro. Hous. Dev. Corp. v. Vill. of Arlington
Heights, 558 F.2d 1283,1290 (7th Cir. 1977) (applying a four-factor
balancing test).
\259\ 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).
\260\ 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).
---------------------------------------------------------------------------

Issue: Commenters stated that HUD has provided no basis for the
statement that it would cost as much for an insurer to demonstrate
eligibility for an exemption for risk-based practices as it would to
litigate the actuarial soundness of a challenged practice on a case-by-
case basis in multiple jurisdictions at different points in time.
HUD Response: It appears that commenters may be referencing HUD's
discussion from its 2016 Supplement of granting safe harbors for
specific risk-based factors. In 2016, HUD did not discuss the cost to
insurers of demonstrating eligibility for a general exemption for
``risk-based practices.'' Rather, HUD discussed how the arguments and
evidence that insurers would need to demonstrate to show they qualified
for an exemption would be the same as the arguments and evidence that
they would need to meet their burden at step two.\261\ As HUD
explained, if HUD were to provide a safe harbor for the use of any
factor that an insurer could prove is purely risk-based, entitlement to
the safe harbor would inevitably necessitate the insurer to establish
it qualifies for the defense, i.e., that the use of the factor is, in
fact, risk-based.\262\ If an insurance practice is provably risk-based,
and a plaintiff cannot establish that a less discriminatory alternative
exists, the insurer will have a legally sufficient justification under
this final rule. The arguments and evidence that would be necessary to
establish whether a practice qualifies for the requested exemption
would effectively be the same as the arguments and evidence necessary
for establishing a legally sufficient justification. Consequently, on
the one hand an exemption for all provably risk-based factors would
offer little added value for insurers, in terms of avoiding litigation
costs. On the other hand, an exemption would foreclose potentially
meritorious claims in contravention of the Act's broad remedial goals
and HUD's obligation to affirmatively further fair housing.
---------------------------------------------------------------------------

\261\ See 81 FR 69012, 69017.
\262\ HUD went on to further explain that ``selecting a few
factors for exemption . . . based on bare assertions about their
actuarial relevance, without data and without a full survey of all
factors utilized by the homeowners insurance industry, would . . .
be arbitrary. Even if such data were available and a full survey
performed, safe harbors for specific factors would still be
overbroad because the actuarial relevance of a given factor can vary
by context. Also, while use of a particular risk factor may be
generally correlated with probability of loss, the ways in which an
insurer uses that factor may not be. Furthermore, the actuarial
relevance of any given factor may change over time as societal
behaviors evolve, new technologies develop, and analytical
capabilities improve.'' 81 FR 69017.
---------------------------------------------------------------------------

Other Comments Related to Insurance

Issue: Commenters urged HUD to retain the 2020 Rule for numerous
reasons. Commenters said that different forms of this rule have been
enacted and retracted over the past few years, leading to confusion and
that reinstating the 2013 Rule would be a step backwards. A commenter
stated that in 2013, HUD expanded the scope of the Act to cover the
insurance industry. Commenters stated that the 2020 Rule did not apply
to insurance, so this rule should not create liability for homeowners
insurers. Commenters noted that retracting the 2020 Rule so soon after
it was promulgated was problematic for policy holders and the insurance
industry, as risk-based pricing should not be subject to fleeting
changes in policy.
Other commenters stated that it makes practical sense for insurers
to be covered by the proposed rule given a long and well documented
history of discrimination in the insurance industry. Commenters noted
that the insurance industry has been subject to discriminatory effects
liability for several decades. A commenter noted that in the more than
twenty years since the Act was amended, courts that have considered the
issue have consistently held that the Act prohibits acts of
discrimination by homeowners insurers.
HUD Response: HUD declines to retain the 2020 Rule and notes that
the 2020 Rule also did not exempt insurers. Commenters appear to
misunderstand HUD's prior rules. Insurance practices have long been
subject to liability under a disparate impact theory; that liability
did not begin with the 2013 Rule and did not end with 2020 Rule, which
contained no exception for such practices. Indeed, since 1989, HUD's
fair housing regulations have explicitly prohibited ``[r]efusing to
provide . . . property or hazard insurance for dwellings or providing
such . . . insurance differently'' because of a protected
characteristic.\263\ And the 2020 Rule explicitly stated that it ``does
not establish an insurance industry exemption.'' \264\ Moreover, since
the 2020 Rule never went into effect, there have been no changes in
policy. In promulgating this final rule, HUD is recodifying a standard
that has been in effect for ten years, has proven workable, and is
supported by decades of caselaw both before and following its
enactment.
---------------------------------------------------------------------------

\263\ 24 CFR 100.70(d)(4); 54 FR 3232, 3285 (Jan. 23, 1989).
\264\ 85 FR 60288, 60324 (Oct. 6, 2020) (``This rulemaking does
not establish an insurance industry exemption.'')
---------------------------------------------------------------------------

Issue: A commenter requested that the rule include a specific
defense for risk-based ratemaking, as provided in the 2020 Rule. Other
commenters stated that HUD should add a substantive defense for risk-
based practices whereby if a defendant can show it relied on risk-based
practices at step two of the burden-shifting framework, the plaintiff
should not have the opportunity to rebut the defense at step three.
HUD Response: HUD notes that the 2020 Rule did not in fact provide
defenses specific to risk-based ratemaking and it declines to add such
a defense now. Step two of the burden-shifting framework already
provides a defense for substantial, legitimate nondiscriminatory
interests, which will allow a defendant to prevail absent the
plaintiff's ability to show a less discriminatory alternative.
Eliminating the third step would remove the requirement for insurers to
adopt the least discriminatory alternative that serves their
substantial, legitimate, nondiscriminatory interest, undermining the
purpose of the Act. In sum, by suggesting that the third step be
eliminated, the commenter is asking for an exemption from liability for
policies and practices having a discriminatory effect, which may have a
legally sufficient justification, but for which a less discriminatory
alternative may exist, which as explained above, HUD declines to do.
Issue: Commenters noted that in 2017, the U.S. Department of
Treasury recommended that HUD reconsider whether its 2013 Rule is
consistent with the McCarran-Ferguson Act, whether the disparate impact
rule would have a disruptive effect on the availability of insurance,
and whether the rule is reconcilable with actuarially sound
principles.\265\
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\265\ U.S. Dept. of Treasury, A Financial System that Creates
Economic Opportunities: Asset Management and Insurance (2017)
(formerly available at https://home.treasury.gov/news/featured-stories/a-financial-system-that-creates-economic-opportunities-asset-management-and).

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[[Page 19480]]

HUD Response: As discussed above in greater detail, HUD has
considered these issues and finds that the 2013 Rule and its framework,
as adopted in this rule, is consistent with the McCarran Ferguson Act,
is reconcilable with actuarially sound principles, and would not have a
disruptive effect on the availability of insurance. Treasury believes
that HUD, in its reconsideration of the 2013 Rule, has addressed the
concerns Treasury noted in the 2017 report regarding the Rule's
application to the insurance industry. Treasury no longer has the
concerns expressed in that report.
Issue: Commenters stated that the 2013 Rule and 2016 supplement
adequately considered the issue of application to insurance and
adequately addressed the industry's concerns. Other commenters stated
that the 2016 Supplemental Explanation failed to adequately explain why
the filed-rate doctrine would not bar challenges to insurance rates
under the Act.
HUD Response: While these comments are outside the scope of this
final rule, since HUD is now re-finalizing the 2013 Rule and responding
to the current comments received in response to its 2021 Notice of
Proposed Rulemaking, HUD agrees with the commenters who stated that the
2013 Rule and 2016 Supplement adequately considered the 2013 Rule's
application to insurance and adequately addressed the industry's
concerns. And this final rule thoroughly responds to comments from the
insurance industry, including those concerning the filed-rate doctrine.
Section 100.5(d): Data Collection
Issue: Commenters disagreed about whether to include the 2020
Rule's language that nothing in HUD's fair housing regulations requires
or encourages the collection of data relevant to characteristics
protected by the Act. Some commenters opposed including such a
provision, stating that: its inclusion was unnecessary and unwise; data
collection can be used to identify policies and practices that may have
a discriminatory effect; and discouraging data collection would have a
grave effect on discriminatory effects litigation.
Other commenters asked HUD to include such a provision, stating
that otherwise, the rule's burden shifting framework necessitates data
collection, which will create unnecessary costs and be especially
burdensome and expensive for insurers because they do not already
collect this data. Commenters stated that without the provision, the
rule would expose businesses to liability risks by requiring them to
obtain and store personal and potentially sensitive information about
an individual's protected characteristics. Another commenter stated
that requiring the collection of data would inappropriately shift the
burden of proof from a plaintiff to a defendant.
Commenters also expressed concern that the only way for insurers to
collect data regarding protected characteristics would be through self-
reporting, which may result in incomplete or erroneous data, making
compliance with the rule difficult. A commenter stated that disparate-
impact challenges to risk-based practices in insurance would improperly
inject race into the business of insurance by incentivizing or
compelling insurers to collect and analyze data on protected
characteristics to be able to mount a defense in the event of a
disparate impact challenge. Commenters stated that insurers may be
prohibited under state law from collecting protected trait data.
Commenters added that: insurance company employees will be
uncomfortable asking current or potential policy holders for
information about their membership in a protected class; collecting
demographic data regarding protected traits would invade customer's
privacy; and asking about protected class characteristics could
discourage applicants for insurance from seeking quotes.
HUD Response: HUD believes that this final rule need not include
data collection language. HUD agrees that data collection can play an
important role in assessing whether a policy or practice may have an
unjustified discriminatory effect. HUD also agrees with the Court in
Inclusive Communities, when it acknowledged that ``awareness of race''
can help industries ``[that] choose to foster diversity and combat
racial isolation with race-neutral tools.'' \266\ This supports the
idea that this Rule should not discourage the collection of this
information. But HUD is also not requiring data collection. The purpose
of this final rule is to recodify a long-recognized legal framework,
not to describe how data and statistics may be collected, obtained, or
used in the application of the framework.
---------------------------------------------------------------------------

\266\ Inclusive Cmtys. Project, Inc., 576 U.S. at 519, 542.
---------------------------------------------------------------------------

HUD notes further that while data collection can be a means to
identify practices that have or predictably will have a discriminatory
effect, there are other ways of identifying such practices that do not
require examining a business' own client pool. For example, businesses
can look to publicly available datasets or studies related to their
practices to see if their practices cause or predictably will cause a
discriminatory effect. As HUD explained regarding the use of criminal
records, ``[a]cross the United States, African Americans and Hispanics
are arrested, convicted and incarcerated at rates disproportionate to
their share of the general population. Consequently, criminal records-
based barriers to housing are likely to have a disproportionate impact
on minority home seekers.'' \267\ A business need not collect data from
its own clients to ascertain that relying on criminal records in its
policies or practices likely has a discriminatory effect on certain
populations. In addition, independent data gathering is not necessary
to defend a lawsuit alleging discriminatory effects. Plaintiffs must
meet their initial burden at step one to show a disparate impact.
Defendants need not present their own statistics in response to this
step one evidence, but may defend in numerous other ways, including by
showing that the data put forward by plaintiff is incorrect or wrongly
analyzed, or by showing at step two that the challenged practice is
necessary to achieve a substantial, legitimate, nondiscriminatory
interest. This is true for all defending parties, including insurers,
who bear no increased burden.
---------------------------------------------------------------------------

\267\ ``Office of General Counsel Guidance on Application of
Fair Housing Act Standards to the Use of Criminal Records by
Providers of Housing and Real Estate-Related Transactions'' at 2
(April 4, 2016) (internal citations omitted).
---------------------------------------------------------------------------

Moreover, concerns about how the rule would change industry
practices--in particular what commenters say is the insurance industry
practice of not collecting demographic data--do not square with the
fact that current industry practice is based on a rule that has been in
place, uninterrupted, since 2013, and based on the underlying law that
has been in place for decades prior. Businesses that have not collected
data over the past several decades will not be facing any change in the
laws regulating their practices with HUD's recodification of the 2013
Rule.
Issue: Commenters requested that HUD clarify expectations and
provide protections for lenders that collect demographic data for use
in fair lending self-testing.
HUD Response: As discussed above, HUD believes that demographic
data can be helpful in assessing whether a policy has an unjustified
discriminatory effect. HUD notes further that lenders

[[Page 19481]]

routinely collect data on protected characteristics as part of their
Home Mortgage Disclosure Act reporting obligations. However, HUD is not
requiring either collection of demographic data or self-testing. It is
unclear what ``protections'' commenters meant for HUD to provide to
lenders who collect demographic data and use that data to engage in
self-testing. HUD notes that the self-testing privilege as described in
42 U.S.C. 3614-1 already applies to lenders. This self-testing
privilege will not provide a lender (or any other entity) with an
exemption from liability under the Act, but if a complaint is made to
HUD against a lender alleging practices that have an unjustified
discriminatory effect, HUD is prohibited from obtaining self-testing
results covered by this self-testing privilege to investigate a
lender's compliance with the Act. Of note, HUD will not absolve a
lender of potential liability merely because the lender collects
demographic data and does self-testing. Doing so would abdicate HUD's
basic obligation to enforce the Act by ceding substantive compliance
authority from HUD to private lenders.

Section 100.500: The Discriminatory Effects Rule

Section 100.500(a): Removing ``Predictably'' From the Definition of
Discriminatory Effect
Issue: Commenters asked HUD to remove the word ``predictably'' from
the proposed rule's definition of discriminatory effects in Sec.
100.500(a), asserting that it violates the Act. A commenter stated that
the plain language of section 804(b) does not include practices that
might result in a discriminatory effect. Other commenters asserted that
the ``predictably results'' language violates Inclusive Communities'
``robust causality'' requirement. According to one commenter, this
``new'' robust causality standard requires a plaintiff to prove that a
practice already caused the discriminatory effect, not just that a
practice will predictably do so. Commenters similarly suggested that
Inclusive Communities' bar on claims that are based solely on
statistical evidence rules out claims based on predictable or
hypothetical impacts.
Other commenters wrote in favor of retaining the ``predictably''
language in the rule. Commenters pointed out that courts, including
Inclusive Communities, have interpreted the ``predictably'' language in
the proposed rule to contain a ``robust causality'' requirement,
including a bar on claims that are based solely on statistical evidence
of discriminatory effects. One commenter noted that the robust
causality requirement that Inclusive Communities discusses is simply
the 30-year-old requirement that a plaintiff, to prevail in a disparate
impact challenge, must show that the disparate impact is causally
related to, not merely correlated with, the identified practices of the
defendant. Another commenter noted that in the very first case in which
an appeals court recognized discriminatory effects liability, the 8th
Circuit required the plaintiff to bear the burden of showing that
defendants' conduct actually or predictably resulted in a
discriminatory effect. One commenter noted that HUD in 2013 explained
how the ``predictably'' language was supported by the plain language of
the Act and case law, and HUD ignored this justification when it
attempted to remove the language in the 2020 Rule.
One commenter acknowledged that ``predictability'' is a necessary
element to assess the disparate impact of a policy and an issue that
Inclusive Communities did not address. Other commenters noted multiple
cases in which courts have utilized the proposed rule's predictably
standard in practical, effective ways, such as in Georgia Conference of
the NAACP v. City of LaGrange, and Fortune Society v. Sandcastle.\268\
---------------------------------------------------------------------------

\268\ Ga. State Conf. of the NAACP v. LaGrange, 940 F.3d 627
(11th Cir. 2019); Fortune Soc'y v. Sandcastle Hous. Dev. Fund Corp.,
388 F. Supp. 3d 145 (E.D.N.Y. 2019).
---------------------------------------------------------------------------

A commenter noted that caselaw and practical common-sense support
that one need not wait until actual harm is inflicted before an action
can be challenged. Another commenter noted that removing the
predictably standard would unnecessarily increase the risk of harm to
communities by taking away the ability to make claims for reasonable,
foreseeable harm.
HUD Response: HUD declines to remove ``predictably'' from this
final rule's definition of discriminatory effects. As explained in the
2013 Rule, the plain language of the Act supports the inclusion of this
language. The Act defines an ``aggrieved person'' as anyone who, among
other things, ``believes that such person will be injured by a
discriminatory housing practice that is about to occur.'' \269\
Furthermore, the Act explicitly authorizes HUD to take enforcement
action and Administrative Law Judges (ALJs) and courts to order relief
with respect to discrimination that ``is about to occur.'' \270\ In
addition, courts interpreting the Act have agreed that predictable
discriminatory effects may violate the Act.\271\ HUD further believes
it would be contrary to HUD's duty to affirmatively further fair
housing if it could not take action to prevent the harm of a
predictable discriminatory effect and instead had to first allow
individuals to be subjected to discrimination before any enforcement
action could be taken. As explained above, the Court in Inclusive
Communities did not announce a new ``robust causality'' requirement.
Nor did it indicate any intention to exclude from liability cases that
allege predictable discriminatory effects. Rather, the Court simply
described the longstanding requirement that a plaintiff must establish
a causal connection between the policy or practice and the
discriminatory effect. Inclusive Communities explained that a plaintiff
raising a ``disparate-impact claim relying on a statistical disparity''
must ``point to a defendant's policy or policies causing that
disparity.'' \272\ Consistent with Inclusive Communities, this final
rule requires--whether for a disparity that has already occurred or one
that will occur--that the plaintiff point to a defendant's policy or
policies that cause the disparity, and not rely on a statistical
disparity alone.\273\
---------------------------------------------------------------------------

\269\ 42 U.S.C. 3602(i)(2) (emphasis added).
\270\ 42 U.S.C. 3610(g)(2)(A), 3613(c)(1), 3614(d)(1)(A)
(emphasis added).
\271\ See, e.g., United States v. City of Black Jack, Mo., 508
F.2d 1179, 1184 (8th Cir. 1974) (``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 is has a discriminatory
effect.'') (emphasis added); Fortune Soc'y v. Sandcastle Towers
Hous. Dev. Fund Corp., 388 F. Supp. 3d 145 (E.D.N.Y. 2019).
\272\ Inclusive Cmtys. Project, Inc,576 U.S. at 542.
\273\ See 24 CFR100.500(c)(1) (The . . . plaintiff . . . has the
burden of proving that a challenged practice caused or predictably
will cause a discriminatory effect)(emphasis added); 100.500(c)(a)(A
practice has a discriminatory effect where it actually or
predictably results in a disparate impact on a group of persons . .
. because of race, color, religion, sex, handicap, familial status,
or national origin).
---------------------------------------------------------------------------

Issue: Commenters also objected to the ``predictably results''
language in proposed Sec. 100.500(a) (and the ``predictably will
cause'' language at Sec. 100.500(c)(1)) saying that it is inconsistent
with case law under Title VII and the Age Discrimination in Employment
Act (ADEA). They stated that the Title VII cases Wards Cove Packing Co.
v. Atonio \274\ and Watson v. Fort Worth Bank & Trust \275\ preclude

[[Page 19482]]

discriminatory effects claims based on policies which predictably,
rather than actually, cause a discriminatory effect. Commenters stated
that in Wards Cove, the Supreme Court stated that ``[a] plaintiff must
demonstrate that it is the application of a specific or particular . .
. practice that has created the disparate impact under attack. Such a
showing is an integral part of the plaintiff's prima facie case.''
\276\ Commenters quoted Watson, which said that ``the plaintiff must
offer statistical evidence of a kind and degree sufficient to show that
the practice in question has caused the exclusion of applicants for
jobs or promotions because of their membership in a protected group.''
Similarly, a commenter cited Meacham v. Knolls Atomic Power Lab'y \277\
for the proposition that plaintiffs in cases brought under the ADEA
must prove an existing disparate impact--not a future one.
---------------------------------------------------------------------------

\274\ Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989).
\275\ Watson v. Fort Worth Bank & Trust, 487 U.S. 977 (1988).
\276\ Wards Cove Packing Co., 490 U.S. at 657.
\277\ Meacham v. Knolls Atomic Power Lab'y 554 U.S. 84 (2008).
---------------------------------------------------------------------------

HUD Response: HUD believes that the commenters' reliance on these
Title VII and ADEA cases is misplaced because these cases only
considered the question of whether certain policies already had had a
disparate impact, not whether they would ``predictably'' have one in
the future.\278\ Furthermore, the Act explicitly defines an aggrieved
person as including ``any person who believes that such person will be
injured by a discriminatory housing practice that is about to occur''
\279\ Finally, courts interpreting the Act have agreed that predictable
discriminatory effects may violate the Act.\280\
---------------------------------------------------------------------------

\278\ See Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989)
(examining whether the employer's policy or practice caused
documented racial disparities at different positions at a cannery,
not whether the employer's policy or practice would predictably
cause disparities at different positions at the cannery); Watson v.
Fort Worth Bank & Trust, 487 U.S. 977 (1988) (examining whether a
bank's subjective promotion practices had a disparate impact on
black employees, not whether the bank's practice would predictably
have a disparate impact on black employees); Meacham v. Knolls
Atomic Power Lab'y, 554 U.S. 84 (2008) (examining a case where the
employer was alleged to have utilized a policy that a caused a
disparate impact on ADEA protected employees, not where the employer
was alleged to have utilized a policy that predictably would cause a
disparate impact on ADEA protected employees).
\279\ See 42 U.S.C. 3602(i)(2); compare 42 U.S.C. 2000e; 29
U.S.C. 630.
\280\ See, e.g., Pfaff v. HUD, 88 F.3d at 745, 745 (9th Cir.
1996) (``'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.''); Fortune Soc'y, 388 F. Supp. 3d 145; Conn. Fair Hous. Ctr
v. CoreLogic Rental Prop. Sols., LLC, No. 18-cv-705, 2021 U.S. Dist.
LEXIS 60197, at *51 (D. Conn. Mar. 30, 2021); Jones v. City of
Faribault, No. 18-1643 (JRT/HB), 2021 U.S. Dist. LEXIS 36531, at *55
(D. Minn. Feb. 18, 2021).
---------------------------------------------------------------------------

Section 100.500(a): Perpetuation of Segregation in the Definition of
Discriminatory Effect
Issue: Commenters disagreed about the proposed rule's inclusion of
perpetuation of segregation as a type of unlawful discriminatory
effect. Some commenters stated that including liability for practices
that perpetuate segregation is too broad and may have a chilling effect
on the development of affordable housing. One commenter said that
prohibiting practices that perpetuate, create, increase, or reinforce
segregated housing patterns based on protected classes was a more
stringent standard than Inclusive Communities announced. Another
commenter stated that this language would expand liability to cover any
action or any absence of action that reinforces or perpetuates
segregated housing patterns, which is inconsistent with Inclusive
Communities' requirement that plaintiffs demonstrate that the
challenged practice is a direct cause of the disparate impact.
In contrast, other commenters stated that including the
perpetuation of segregation provision is crucial to combatting
segregation (including segregation based on disability and race), which
is still a major problem today and can have devastating impacts on
communities. Commenters said if HUD did not include this language, it
would mean that HUD had adopted the view that perpetuation of
segregation was not a central or relevant concern of disparate impact,
that perpetuation of segregation was no longer a basis for liability
under the Act, and/or that perpetuation of segregation liability would
be collapsed into disparate impact liability, and only be evidence of a
disparate impact claim, rather than an independent means of
establishing a violation in and of itself. Commenters noted that
reinstating the perpetuation of segregation language was important to
eliminate the confusion that the 2020 Rule had caused through its
removal, and to clarify that perpetuation of segregation is a distinct
type of discriminatory effect under the Act. Commenters gave examples
of activities which may unlawfully perpetuate segregation, including
facially neutral zoning decisions whose real but disguised purpose is
to exclude people of color, and the demolition or displacement of
affordable housing leading to severely limited opportunities for people
of color. Commenters said that removing the perpetuation of segregation
provision would conflict with Inclusive Communities. One commenter
stated that federal appellate courts have long recognized perpetuation
of segregation as a distinct basis for discriminatory effects
liability.\281\ Commenters stated that the 2020 Rule, which eliminated
perpetuation of segregation, conflicted with HUD's duty to
affirmatively further fair housing, which is a central goal of the Act.
---------------------------------------------------------------------------

\281\ See Mhany Mgmt., Inc. v. Cnty. Of Nassau, 819 F.3d 618 (2d
Cir. 2016) (finding that a discriminatory effect violating the Act
could be shown by a disparate impact on a minority group or a
segregative effect); see also Avenue 6E Investments, LLC, 818 F.3d
493 (9th Cir. 2016) (explaining that the City's action to prevent
the project in question from being built had the effect of
perpetuating segregation).
---------------------------------------------------------------------------

HUD Response: HUD agrees with the latter commenters that
perpetuation of segregation is prohibited by the Act and, as such,
should be included in the definition of discriminatory effects in this
rule. The elimination of segregation is a central goal of the Act, one
that was highlighted by Inclusive Communities and has long been
recognized by other courts.\282\ Inclusive Communities also recognized
that practices that perpetuate segregation independently violate the
Act.\283\ HUD also notes that every

[[Page 19483]]

federal court of appeals to have addressed the issue has agreed with
HUD's interpretation in the 2013 Rule.\284\ HUD finds that the rule is
consistent with Inclusive Communities' causation requirement because it
plainly requires that a practice ``causes or will cause'' a
discriminatory effect. While Inclusive Communities did not directly
address a claim brought under a ``perpetuation of segregation'' theory,
it \285\ discusses disparate impact's long-standing limits, including
its causation requirement, as in harmony with its aim to prohibit
``perpetuating segregation.'' HUD believes that eliminating the
perpetuation of segregation language will cause inconsistency between
HUD's rule and judicial precedent and create the mistaken impression
that HUD believes that practices that perpetuate segregation are not
practices which create discriminatory effects.
---------------------------------------------------------------------------

\282\ Inclusive Cmtys. Project, Inc., 576 U.S. at 528-531. See,
e.g., Avenue 6E Invs. v. City of Yuma, 818 F.3d 493, 503 (9th Cir.
2016) (``[A]s the Supreme Court recently reaffirmed [in ICP], the
FHA also encompasses a second distinct claim of discrimination,
disparate impact, that forbids actions by private or governmental
bodies that create a discriminatory effect upon a protected class or
perpetuate housing segregation without any concomitant legitimate
reason.'') (emphasis added); Graoch Assocs. # 33, L.P. v.
Louisville/Jefferson County Metro Hum. Rels. Comm'n, 508 F.3d 366,
378 (6th Cir. 2007) (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.''); see also
Huntington Branch, NAACP v. Huntington, 844 F.2d 926, 937 (2nd Cir.
1988); Metro. Housing Dev. Corp. v. Vill. of Arlington Heights, 558
F.2d 1283, 1290 (7th Cir. 1977); Nat'l Fair Hous. All. v. Bank of
Am., 401 F. Supp. 3d 619, 641 (D. Md. 2019) (``Perpetuation of
segregation is, in effect, an alternate avenue of pleading disparate
impact under the FHA.'') (citing Graoch, 508 F.3d at 378); Hallmark
Developers, Inc. v. Fulton Cnty., 386 F. Supp. 2d 1369, 1383 (N.D.
Ga. 2005); Dews v. Town of Sunnyvale, 109 F. Supp. 2d 526, 569 (N.D.
Tex. 2000) (ruling that the defendant-town's zoning restrictions
were racially motivated in violation of various civil rights laws
and also had both a disparate impact and segregative effect that
violated the Act).
\283\ Inclusive Cmtys. Project, Inc. 576 U.S. at 540 (``[T]he
FHA aims to ensure that those priorities can be achieved without
arbitrarily creating discriminatory effects or perpetuating
segregation''). See also id. at 539-540 (citing United States v.
City of Black Jack, 508 F.2d 1179 (8th Cir. 1974) and Huntington
Branch, N.A.A.C.P. v. Town of Huntington, 844 F.2d 926, 934 (2d
Cir.), aff'd in part, 109 S. Ct. 276 (1988), which were
``perpetuation of segregation'' cases and described as ``heartland''
disparate-impact liability cases).
\284\ See, e.g., Graoch Assocs. #33, L.P. v. Louisville/
Jefferson Cnty. Met. Hum.n Rels. Comm'n, 508 F.3d 366, 374-78 (6th
Cir. 2007); Reinhart v. Lincoln Cnty., 482 F.3d 1225, 1229-1232
(10th Cir. 2007); Hallmark Devs. s, Inc. v. Fulton Cnty., 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); 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).
\285\ Inclusive Cmtys. Project, Inc., 576 U.S. at 540-41.
(``[D]isparate-impact liability has always been properly limited in
key respects . . . for instance, if such liability were imposed
based solely on a showing of a statistical disparity. Disparate
impact liability mandates the `removal of artificial, arbitrary, and
unnecessary barriers,' not the displacement of valid governmental
policies. The FHA is not an instrument to force housing authorities
to reorder their priorities. Rather, the FHA aims to ensure that
those priorities can be achieved without arbitrarily creating
discriminatory effects or perpetuating segregation.'') (internal
citations omitted).
---------------------------------------------------------------------------

HUD also disagrees that the final rule would chill the development
of affordable and fair housing, including in predominantly minority
neighborhoods. Commenters did not provide, and HUD is not aware of, any
support for the proposition that this rule would have such an effect.
Instead, this rule provides a framework for plaintiffs to challenge
discriminatory housing decisions. And Inclusive Communities
specifically noted that HUD's discriminatory effects rule recognized
that disparate impact liability does not mandate that affordable
housing be located in neighborhoods with any particular
characteristic.\286\ Eliminating the provision on perpetuation of
segregation would also be inconsistent with HUD's duty to affirmatively
further fair housing, which applies, inter alia, to HUD's program of
administering, implementing, and enforcing the Fair Housing Act.\287\
---------------------------------------------------------------------------

\286\ Id. at 542 (quoting 78 FR 11476).
\287\ See, e.g., 42 U.S.C. 3608(e)(5) (The Secretary of Housing
and Urban Development shall--administer the programs and activities
relating to housing and urban development in a manner affirmatively
to further the policies of this subchapter); Thompson v. United
States HUD, 348 F. Supp. 2d 398, 417 (D. Md. 2005) (finding that
HUD's duty to affirmatively further fair housing under Sec. 808(e)
holds HUD's actions to a ``high standard'' which includes ``to have
a commitment to desegregation'').
---------------------------------------------------------------------------

In sum, HUD declines to eliminate the provision on perpetuation of
segregation because doing so would lead to uncertainty over the state
of the law, the provision is consistent with Inclusive Communities and
well established caselaw, and doing so would undermine one of the core
goals of the Act, i.e., ending the perpetuation of segregation.\288\
---------------------------------------------------------------------------

\288\ Inclusive Cmtys. Project, Inc.. at 540 (``[t]he FHA aims
to ensure that those [legitimate] priorities can be achieved without
arbitrarily creating discriminatory effects or perpetuating
segregation.'').
---------------------------------------------------------------------------

Section 100.500: Racial Quotas or Unfair Advantages to Plaintiffs
Issue: Commenters expressed concern that the proposed rule's
framework would cause them to adopt quotas to avoid unlawful
disparities. One commenter stated that this is because the rule does
not require any causal connection between the policy and any disparity
and would therefore pose the risk that financial services and
businesses would adopt a quota-based approach to avoid disparities.
Another commenter similarly suggested that the proposed rule does not
contain a robust causality requirement, stating that Inclusive
Communities emphasized a robust causality requirement to prevent
housing providers and businesses from resorting to racial quotas.
Another commenter asserted that to align the rule with Inclusive
Communities' robust causality requirement and therefore reduce the
incentive for housing providers to use racial quotas, while still
maintaining the essence of the 2013 Rule, HUD should modify the final
rule to say that ``discrimination on a group of persons is predictable
through a robust causal link by the challenged policy or practice.''
In contrast, a commenter stated that the proposed rule would not
require businesses to consider race or quotas. Other commenters stated
that by requiring that a plaintiff prove that the challenged practice
caused or predictably will cause a disparate impact rather than
imposing liability based on statistical disparities alone or general
societal discrimination, this rule addresses any concerns that
disparate impact liability would cause defendants to resort to quotas.
HUD Response: HUD disagrees that this final rule will incentivize
quotas. While the Court expressed concern in Inclusive Communities that
``without adequate safeguards at the prima facie stage,'' disparate-
impact liability might lead to the use of ``numerical'' or ``racial
quotas,\289\ this rule already contains these ``adequate safeguards.''
In particular, the rule requires plaintiffs to demonstrate that ``a
challenged practice caused or predictably will cause'' (emphasis added)
a discriminatory effect. Furthermore, it defines ``a practice that has
a discriminatory effect'' as one where the practice ``actually or
predictably results in a disparate impact'' (emphasis added) or in
segregation cases, where the practice ``creates, increases, reinforces
or perpetuates segregated housing patterns.'' As explained previously
in this preamble, this connection between the challenged practice and
the discriminatory effect is the causality that Inclusive Communities
spoke of when discussing how safeguards would prevent the use of racial
quotas.\290\ And it was in the context of the Inclusive Communities
district court's failure to require this connection (by finding the
defendant liable based solely on discrepancies in outcomes, without
requiring the plaintiff to show that a particular practice caused those
outcomes) that the Fifth Circuit remanded the matter with instructions
to follow the 2013 Rule,\291\ a judgment

[[Page 19484]]

the Supreme Court ultimately affirmed. Crucially, therefore, far from
invalidating the 2013 Rule for failing to require this connection, the
Fifth Circuit and Supreme Court decisions both support HUD's position
that that applying the 2013 Rule's framework is the correct method of
ensuring that disparate impact liability does not improperly require
the use of racial quotas.
---------------------------------------------------------------------------

\289\ Id. at 542-43.
\290\ See id. at 540-43 (explaining that a robust causality
requirement means that a plaintiff must ``point to a defendant's
policy causing [a] disparity'' and ``allege facts at the pleading
stage or produce statistical evidence demonstrating a causal
connection'' between the policy and the disparity/imbalance, as
opposed to simply relying on a statistical disparity or racial
imbalance alone, and noting that this requirement safeguards against
defendants being held liable for disparities they did not create,
which might encourage the use of racial quotas).
\291\ See Inclusive Cmtys. Project, Inc. v. Tex. Dep't of Hous.
and Cmty. Affairs, 747 F.3d 275 (5th Cir 2014) (remanding the matter
for application of HUD's 2013 Rule); id at 283-84 (concurring)
(highlighting specifically the problem of the lower courts analysis
as accepting plaintiffs relying on statistical evidence of disparity
alone without a connection to an offending policy).
---------------------------------------------------------------------------

Further, HUD's discussion above regarding the insurance
underwriting processes explains the difference between being aware of
protected traits to avoid discrimination (consistent with this final
rule, Inclusive Communities, and the Act) and violating the Act by
making decisions based upon a protected trait.\292\
---------------------------------------------------------------------------

\292\ See supra at Discriminatory Effects as Applied to
Insurance.
---------------------------------------------------------------------------

In addition, it is unclear how the commenter's proposed alternative
language, that ``discrimination on a group of persons is predictable
through a robust causal link by the challenged policy or practice''
would improve the rule or disincentivize quotas. On the contrary, HUD
believes modifying the rule to incorporate this language would create
confusion about the causal link between the policy and the effect
discussed by Inclusive Communities. For example, it is unclear what
``by'' means in the proposed sentence, and the sentence does not make
clear that the practice must cause (predictably or actually) the
discriminatory effect. HUD further believes incorporating the ``robust
causal link'' language is unnecessary and could confuse people about a
heightened standard that Inclusive Communities did not create, as
detailed elsewhere in this preamble.
Issue: Commenters stated that the proposed rule would create an
uneven playing field in favor of plaintiffs through the requirements
and burdens placed on defendants, as compared to plaintiffs. Some
commenters stated that the proposed rule requires defendants to show
that their policy will not cause a disparate impact on a protected
group. Other commenters said the proposed rule allows plaintiffs to use
hypothetical or speculative evidence, or no evidence at all, to show
that a practice causes a discriminatory effect, while at the same time
requiring defendants to meet their burden at step two with evidence
that is not hypothetical or speculative, thus placing the entire burden
of proof on defendants. A commenter said the rule allows plaintiffs to
raise hypothetical or speculative impacts at step one (because of the
``predictably results'' language), while barring defendants from
raising hypothetical or speculative defenses at step two.
On the other hand, commenters supported HUD's continuation of the
2013 Rule's framework, stating that the 2020 Rule unjustifiably favors
defendants because plaintiffs must meet a preponderance of the evidence
standard to prove discrimination, but defendants are only required to
show that a policy advances a legitimate interest. The commenters
stated that this conflicts with well-established case law placing the
burden on the defendant to prove that the challenged practice is
necessary to achieve one or more substantial, legitimate,
nondiscriminatory interests.
HUD Response: HUD believes that the burdens and requirements in the
rule are appropriately balanced, and that the concerns that the rule is
tipped in favor of plaintiffs are based on misunderstandings of the
rule.
First, the rule does not require a defendant to show that its
policy or practice does not cause a disparate impact. In fact, this
rule does not require any party to prove a negative. While a defendant
may choose to present evidence that the defendant's policy does not
cause a discriminatory effect to rebut the plaintiff's evidence that it
does, the plaintiff has the ultimate burden of proving that a
defendant's policy caused (or predictably will cause) a discriminatory
effect.
Nor does this rule place a greater evidentiary burden on defendants
than on plaintiffs or otherwise shift the burden of proof entirely onto
defendants. Under the rule, the plaintiff must prove through evidence
(not speculation) that a challenged practice caused or predictably will
cause a discriminatory effect (step one). Assuming the plaintiff meets
this burden, the defendant must prove through evidence (not
speculation) that a challenged practice is necessary to achieve one or
more of its substantial, legitimate, nondiscriminatory interests (step
two). If the plaintiff fails to meet its step one burden, defendant
prevails, and if the defendant fails to meet its step two burden, the
plaintiff prevails. It is the plaintiff--not the defendant--who carries
the burden at two of the three steps in the burden shifting framework,
including the final one. As HUD said in the 2013 Rule: ``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 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.''
Although commenters specifically called out evidence that could
support a complaint concerning a ``predictable'' disparate impact as
``hypothetical'' or ``speculative'' under the rule, this is incorrect.
In the final rule's framework, neither the plaintiffs nor defendant may
rely on hypothetical or speculative evidence. All parties must rely on
evidence that is sufficiently rigorous and not speculative, and there
is no requirement that either side rely solely on evidence of the
already existing effects of defendants' adopted policy. For example,
lenders routinely assess proposed policy changes using current data to
determine whether, if adopted, the policy would have a disparate impact
in the future. Data analysis like this--of the effects that a policy
will have, rather than the effects a policy already has had--is neither
``hypothetical'' nor ``speculative'' and could be used by either a
plaintiff or a defendant to support or rebut a predictable effects
claim at step one. And just as a plaintiff can rely on evidence that
the defendant's policy will predictably have certain effects, a
defendant can rely on evidence that a proffered less discriminatory
alternative to its policy will not work.
Moreover, characterizing the impact of a ``predictable effects''
showing at step one as ``hypothetical or speculative'' is incorrect.
Even if the impact has not yet occurred, this final rule still requires
that plaintiffs prove that it predictably will occur. If plaintiffs
show only that the discriminatory impact is ``hypothetical,'' or
``speculative,'' they will not prevail. Defendants may prove that a
policy or practice with a discriminatory effect was necessary to meet a
substantial, legitimate, interest. Hypothetical or speculative defenses
articulated in support of a policy or practice will not be sufficient,
because defendants know the actual reason for the policy or practice at
issue. Allowing defendants to present different reasons than their
actual reasons for implementing policies with

[[Page 19485]]

discriminatory effects would allow pretextual reasons to justify
discriminatory policies, thus defeating the important role of
discriminatory effects liability in uncovering discriminatory
intent,\293\ and would permit, rather than remove, arbitrary and
artificial barriers to housing.
---------------------------------------------------------------------------

\293\ See Inclusive Cmtys. Project, Inc., 576 U.S. at 540
(describing discriminatory effects liability as playing a role in
uncovering discriminatory intent).
---------------------------------------------------------------------------

Finally, HUD agrees with commenters who noted that the burden
shifting framework in this rule strikes the appropriate balance between
the interests of plaintiffs and defendants, and that the 2020 Rule
upset this balance. For example, it required defendants to identify
only a legitimate interest rather than an interest that is also
substantial and nondiscriminatory. It removed the requirement that the
defendant's challenged practice be necessary to achieving that
legitimate interest. Additionally, the defendants' burden was reduced
from one of proof to one of production. HUD notes that these changes
were neither consistent with nor justified by the text of the Act or
case law interpreting it.\294\ And to the extent the Act and case law
provide discretion, HUD exercises its policy judgment to maintain the
2013 Rule's burden shifting framework for the reasons stated above.
---------------------------------------------------------------------------

\294\ See, e.g., MHANY Mgmt. Inc. v. Cnty. of Nassau, 819 F.3d
581, 618-619 (2d Cir 2016) (deferring to HUD's [2013] regulation,
noting that ``the Supreme Court implicitly adopted HUD's [burden
shifting] approach [in 24 CFR 100.500(c)]''); Prop. Cas. Insurers
Ass'n of Am. v. Carson, 2017 WL 2653069, at *8-9 (N.D. Ill. June 20,
2017) (finding that HUD's 2013 adoption of the 3-step burden-
shifting framework was a reasonable interpretation of the Act and
that ``in short, the Supreme Court in Inclusive Communities . . .
did not identify any aspect of HUD's burden-shifting approach that
required correction.''); Burbank Apartments Tenant Ass'n v. Kargman,
474 Mass. 107, 126-27 (Mass. 2016) (explaining that it was following
the ``burden-shifting framework laid out by HUD and adopted by the
Supreme Court in [Inclusive Communities].'').
---------------------------------------------------------------------------

Section 100.500(a) and (c)(1): Clarifying Causation
Issue: Commenters suggested HUD provide guidance to help clarify
causation in the final rule or modify the causation standard in the
rule to make it more detailed or specific. Some commenters asked HUD to
clarify that a challenged practice may be too remote from the alleged
discriminatory effect to give rise to liability. Other commenters
criticized the proposed rule for not making clear that a plaintiff must
identify a specific policy or practice that caused the alleged
disparate impact (as opposed to challenging a more general array of
practices), with some saying that Wards Cove requires this. Other
commenters suggested that the rule specify that the discriminatory
impact be ``significant'' because Wards Cove and Inclusive Communities
require it. According to the commenters, the latter's warning that race
should not be used in a pervasive way or injected into every housing
decision necessitates a ``significant'' discriminatory impact. Others
suggested the rule needs to be clearer on what evidence is required to
show causation and should establish statistical standards, with one
commenter stating that the rule should require some threshold of
showing credible, localized, statistical proof that a challenged
practice has a discriminatory effect. A commenter said clarification is
needed because HUD's 2016 Guidance on criminal records, by pointing to
historic nationwide incarceration rates, shows that HUD has interpreted
the proposed rule to allow the plaintiff to meet the initial burden
using sweeping generalizations about statistics and impact with little
or no showing of statistically valid discriminatory impact. The
commenter further stated that courts have interpreted the initial
burden under Title VII, including in Wards Cove, as much higher than
the burden articulated in the rule, including requiring that the
practice has an adverse impact on a specific protected class that is
qualitatively different from other classes and that can be demonstrated
to have a materially different impact based on statistics for the
relevant geographic area.
In contrast, other commenters stated that the proposed rule already
contains a sufficiently clear causation requirement. A commenter wrote
that the 2013 Rule and federal jurisprudence have appropriately
rejected any potential single test to define ``discriminatory effect''
through evaluating statistical evidence of causation, citing Mt. Holly
Gardens Citizens in Action, Inc. v. Twp. of Mount Holly, Bonasera v.
City of Norcross, and Langlois v. Abington Hous. Auth.\295\ and noted
that further defining ``discriminatory effect'' (including that a
disparate impact is ``significant'') is inappropriate because of the
wide variety of policies and practices challenged.
---------------------------------------------------------------------------

\295\ Mt. Holly Gardens Citizens in Action, Inc. v. Twp. of
Mount Holly, 658 F.3d 375, 382 (3d Cir. 2011); Bonasera v. City of
Norcross, 342 F. App'x. 581, 585 (11th Cir. 2009); Langlois v.
Abington Hous. Auth., 207 F.3d 43, 50 (1st Cir. 2000).
---------------------------------------------------------------------------

HUD Response: HUD believes that revising the causation requirement
in this final rule is inappropriate. The final rule already requires
plaintiffs to show a causal link between the challenged practice and
the alleged discriminatory result. That requirement, in turn,
necessitates consideration of whether a challenged practice is too
remote from the alleged discriminatory effect for liability to arise
under the Act.
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. As has been recognized in the employment context under Title VII
after Wards Cove, the elements of a decision-making process may not be
capable of separation for analysis,\296\ 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 that together result in a discriminatory effect.\297\ Finally,
in some instances, the absence of a policy may amount to a
practice.\298\ And while Wards Cove limited plaintiffs' ability in an
employment matter to aggregate multiple practices in showing that a
practice or practices cause a disparate impact until Congress amended
Title VII, Inclusive Communities did not endorse a wholesale
application of Wards Cove to disparate impact cases under the Act.
Indeed, the Court only cited Wards Cove for an uncontroversial and
undisturbed portion of its holding, i.e., that simply pointing to
racial imbalances within a company is insufficient to show that a
policy caused a disparate impact. And Inclusive Communities explicitly
noted when it cited Wards Cove that the ``robust causality''
requirement it attributed to Wards Cove did not incorporate any part

[[Page 19486]]

of the opinion that was superseded by Title VII's statutory amendments:
---------------------------------------------------------------------------

\296\ 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'').
\297\ See, e.g., Hargraves v. Capital City Mortg. Corp, 140 F.
Supp. 2d 7, 18-22 (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).
\298\ See, e.g., Miller v. Countrywide Bank, N.A., 571 F. Supp.
2d 251, 258 (D. Mass. 2008) (``Where the allocation of subjective
decisionmaking authority is at issue, the `practice' amounts to the
absence of a policy, that allows racial bias to seep into the
process. Allowing this `practice' to escape scrutiny would enable
companies responsible for complying with anti-discrimination laws to
`insulate' themselves by `refrain[ing] from making standardized
criteria absolutely determinative.''') (citing Watson, 487 U.S. at
990).
---------------------------------------------------------------------------

A robust causality requirement ensures that `[r]acial imbalance . .
. does not, without more, establish a prima facie case of disparate
impact'' and thus protects defendants from being held liable for racial
disparities they did not create.' Wards Cove Packing Co. v. Atonio, 490
U.S. 642, 653 (1989), superseded by statute on other grounds, 42 U.S.C.
2000e-2(k) (emphasis added).\299\
---------------------------------------------------------------------------

\299\ Inclusive Cmtys. Project, Inc., 576 U.S. at 542.
---------------------------------------------------------------------------

HUD further declines to set statistical standards, including
statistical thresholds, to require localized statistics, or note a
``significance'' requirement. HUD continues to believe, as it did in
2013, consistent with courts, that analyzing causation in these matters
on a case-by-case basis is the best approach, especially given the wide
variety of policies, practices, and discriminatory effects at issue in
these types of cases.\300\ Courts have recognized a variety of
circumstances--both under the Act and Title VII--in which using
national statistics, rather than local statistics, is appropriate.\301\
HUD's 2016 Guidance recognizes this, while also noting that ``state or
local statistics should be presented where available and appropriate
based on a housing provider's market area or other facts particular to
a given case.'' \302\ The Supreme Court has recognized that a case-by-
case approach is appropriate in the Title VII context when it comes to
statistical thresholds and requirements and levels of
significance.\303\ And, as HUD noted in 2013, the decision not to
codify a significance requirement is consistent with the 1994 Joint
Policy Statement on Discrimination in Lending, the statutory
codification of the disparate impact standard under Title VII, and the
Consumer Financial Protection Bureau's interpretation of the disparate
impact standard under ECOA.\304\
---------------------------------------------------------------------------

\300\ See, e.g., Conn. Fair Hous. Ctr. v. CoreLogic Rental Prop.
Sols., LLC, 478 F. Supp. 3d 259, 296 (D. Conn. 2020) (noting the
appropriateness of a case-by-case approach which considers not only
statistics but all the surrounding facts and circumstances in
judging the significance or substantiality of disparities in a Fair
Housing Act disparate impact case) (citing Chin v. Port Auth. of New
York & New Jersey, 685 F.3d 135, 153 (2d. Cir. 2012)); Langlois v.
Abington Hous. Auth., 207 F.3d 43, 50 (1st Cir. 2000) (describing
the issue of impact as ``fact-bound'' and applying Supreme Court's
Watson holding that ``no single test controls in measuring disparate
impact'' to the Title VIII case before it). Courts have held the
same in the Title VII context.
\301\ See, e.g., Conn. Fair Hous. Ctr. v. CoreLogic Rental Prop.
Sols., 478 F. Supp. 3d 259, 292 (D. Conn. 2020) (``National or state
general population statistics may be used as the appropriate
comparison groups in at least three situations: First, national or
state statistics are appropriate where there is no reason to suppose
that the local characteristics would differ from the national
statistics . . . . Second, studies based on general population data
and potential applicant pool data'' may be the ``initial basis of a
disparate impact claim, especially in cases [where] the actual
applicant pool might not reflect the potential applicant pool, due
to a self-recognized inability on the part of potential applicants
to meet the very standards challenged as discriminatory . . . .
Third, national or state general statistics are appropriate where
actual applicant data is not available'') (internal citations
omitted); Dothard v. Rawlinson, 433 U.S. 321, 330 (1977)
(``[R]eliance on general population demographic data was not
misplaced where there was no reason to suppose that physical height
and weight characteristics of Alabama men and women differ markedly
from those of the national population.''); Griggs, 401 U.S. at 430
(relying on general population data in finding disparate impact of
diploma requirement on Black applicants); EEOC v. Joint
Apprenticeship Comm. of the Joint Indus. Bd. of the Elec. Indus.,
186 F.3d 110, 119-120 (2d Cir. 1999) (finding that actual applicant
pool data was based upon too small a sample size and use of general
population and potential applicant data was thus appropriate); El v.
SEPTA, 418 F. Supp. 2d 659, 668-69 (E.D. Pa. 2005) (finding that
plaintiff proved prima facie case of disparate impact under Title
VII based on national data from the U.S. Bureau of Justice
Statistics and the Statistical Abstract of the U.S., which showed
that People of Color were substantially more likely than whites to
have a conviction), aff'd on other grounds, 479 F.2d 232 (3d Cir.
2007).
\302\ ``Office of General Counsel Guidance on Application of
Fair Housing Act Standards to the Use of Criminal Records by
Providers of Housing and Real Estate-Related Transactions'' at 3
(April 4, 2016).
\303\ See, e.g., Watson v. Fort Worth Bank & Trust, 487 U.S.
977, 995-96 n.3 (1988) (``We have emphasized the useful role that
statistical methods can have in Title VII cases, but we have not
suggested that any particular number of ``standard deviations'' can
determine whether a plaintiff has made out a prima facie case in the
complex area of employment discrimination. Nor has a consensus
developed around any alternative mathematical standard. Instead,
courts appear generally to have judged the ``significance'' or
``substantiality'' of numerical disparities on a case-by-case basis
. . . [W]e believe that such a case-by-case approach properly
reflects our recognition that statistics `come in infinite variety
and . . . their usefulness depends on all of the surrounding facts
and circumstances.''') (internal citations omitted); See also Jones
v. City of Bos., 752 F.3d 38, 52-53 (1st Cir. 2014) (outlining the
difficulty in applying a rule to assess ``practical significance''
when analyzing causation in disparate impact cases, including
outlining criticisms of EEOC's four-fifths rule to show ``practical
significance'').
\304\ 78 FR 11460, 11468-9.
---------------------------------------------------------------------------

Section 100.500(c)(1): When Multiple Factors Produce Discriminatory
Effects
Issue: Commenters stated that the ``actually or predictably
results'' language in step one ignores situations in which multiple
factors may produce discriminatory effects.
HUD Response: This rule requires plaintiffs to prove that the
challenged policy caused or predictably will cause the alleged
discriminatory effect. Therefore, plaintiffs are required to show that
the policy they challenge is a cause of a discriminatory effect. The
rule does not require the challenged policy to be the sole factor that
causes or predictably will cause the discriminatory effect. Such an
approach is consistent with HUD's position that in disparate treatment
cases, the Fair Housing Act is violated even if discriminatory animus
was only one of the factors motivating the defendant's actions.\305\
---------------------------------------------------------------------------

\305\ See, e.g., HUD v. Cox et. al, HUDALJ 09-89-1641-1, 1991
HUD ALJ LEXIS 106, at *21 (HUD ALJ 1991) (``The Secretary need not
prove that race was the sole factor motivating Respondents. He need
only demonstrate by a preponderance of the evidence that race was
one of the factors that motivated Respondents; that is, that race
did in fact play a part in their decisional process.''); HUD v.
Robert and Mary Jane Denton, HUDALJ 05-90-0406-1, 1992 HUD ALJ LEXIS
60, at * 18-26 (HUD ALJ 1992) (finding that the mixed motive
analysis from Title VII applies to the Act); Community Services,
Inc. v. Wind Gap Mun. Auth., 421 F.3d 179, 177 (3rd Cir. 2005) (to
prevail in a disparate treatment claim under the Fair Housing Act,
``a plaintiff must demonstrate that some discriminatory purpose was
a `motivating factor' behind the challenged action''); Hamm v.
Gahnna, Ohio, 109 Fed. Appx. 744, 747 (6th Cir. 2004) (to establish
intentional discrimination under the Fair Housing Act, ``a plaintiff
must present evidence showing that an impermissible `discriminatory
purpose was a motivating factor in the defendant's decision'')
(internal quotations and citations omitted); Hadeed v. Abraham, 103
Fed. Appx. 706, 707 (4th Cir. 2004) (reviewing Fair Housing Act
claim based on the ``a motiving factor'' standard); Moore v.
Townsend, 525 F.2d 482, 485 (7th Cir. 1975) (race is an
``impermissible consideration'' and it need only be established that
race ``played some part in the refusal to deal''); Hanson v.
Veterans Admin., 800 F.2d 1381, 1386 (5th Cir. 1986) (Fair Housing
Act is violated if race ``was a consideration and played some role
in a real estate transaction''); Green v. Century 21, 740 F.2d 460,
464 (6th Cir. 1984) (Fair Housing Act is violated if race was ``an
effective reason'' for defendant's refusal to sell); Jordan v.
Dellway Villa of Tenn., Ltd., 661 F.2d 588, 594 (6th Cir. 1981)
(plaintiff is to recover if race ``played a part'' in his
rejection); Marable v. H. Walker & Assoc., 644 F.2d 390, 395 (5th
Cir. 1981) (race may not be ``one significant factor considered by
the defendant in dealing with the plaintiff''); Robinson v. 12 Lofts
Realty, Inc., 610 F.2d 1032, 1042-43 (2nd Cir. 1979) (Fair Housing
Act is violated if race ``is even one of the motivating factors,''
and racial motivation must not ``play any role in the decision to
deny [plaintiff's] application''); Payne v. Bracher, 582 F.2d 17, 18
(5th Cir. 1978) (race is not to be considered ``in any way''); U.S.
v. Mitchell, 580 F.2d 789, 791 (5th Cir. 1978) (Fair Housing Act is
violated if race ``was a consideration and played some role in the
real estate transaction''); Smith v. Anchor Bldg. Corp. 536 F.2d
231, 233 (8th Cir. 1976) (race is an ``impermissible factor'');
Williams v. Matthews Co., 499 F.2d 819, 826 (8th Cir. 1974) (same);
U.S. v. Pelzer Realty Co., Inc., 484 F.2d 438, 443 (5th Cir. 1973)
(race need only be ``one significant factor'' that the defendant
considered); Stevens v. Dobs, Inc. 483 F.2d 82, 84 (4th Cir. 1973)
(liability is established if race was ``an important element'' in
the defendant's decision.).

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

[[Page 19487]]

Section 100.500(c)(2): Proving That the Challenged Practice Is
Necessary To Achieve One or More Substantial, Legitimate, Non-
Discriminatory Interests
Issue: A commenter characterized the proposed rule as requiring
defendants to show ``hefty'' evidence at step two that the policy or
practice is necessary to achieve a substantial, legitimate,
nondiscriminatory interest, placing an almost insurmountable burden on
defendants.
HUD Response: HUD disagrees that the rule places an insurmountable
or unreasonable burden on defendants. Whether a defendant's own policy
or practice is necessary to achieve one or more substantial,
legitimate, nondiscriminatory interests of the defendant is well within
the knowledge of that defendant, who is uniquely able to meet this
burden. Furthermore, the rule does not specify what evidence is
necessary to meet this burden; it merely states that a legally
sufficient justification must be supported ``by evidence.'' \306\
---------------------------------------------------------------------------

\306\ Some commenters mischaracterized the rule as prohibiting
hypothetical or speculative evidence. What the rule prohibits is a
hypothetical or speculative justification for the challenged
practice. See 100.500(b)(2) (``A legally sufficient justification
must be supported by evidence and may not be hypothetical or
speculative.'').
---------------------------------------------------------------------------

As HUD explained in 2013, the requirement that a defendant prove
with evidence the substantial, legitimate, nondiscriminatory interest
supporting the challenged practice and the necessity of the challenged
practice to achieve that interest is consistent with HUD's longstanding
application of an effects framework under the Act, and is similar to
the approach taken by other federal regulatory and enforcement agencies
under ECOA \307\ and Title VII.\308\ This requirement is furthermore
consistent with most federal courts' interpretations of the Act after
Inclusive Communities.\309\ Nowhere has HUD seen this approach present
an insurmountable burden on defendants, except where appropriate: when
defendants do not have a legally sufficient justification.
---------------------------------------------------------------------------

\307\ See 1994 Joint Policy Statement on Discrimination in
Lending, 59 FR at 18269 (``The justification must be manifest and
may not be hypothetical or speculative.'').
\308\ 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'').
\309\ See, e.g., Alexander v. Edgewood Mgmt. Corp., Civil Case
No. 15-1140, 2019 U.S. Dist. LEXIS 111068 (D.D.C. June 25, 2019)
(``If the plaintiff's prima facie burden is met, the burden shifts
to the defendant to prov[e] that the challenged practice is
necessary to achieve one or more substantial, legitimate,
nondiscriminatory interests.'') (citing Inclusive Cmtys. Project,
Inc., 135 S. Ct. at 2514-15); Borum v. Brentwood Vill. LLC, Civil
Action No.: 16-1723 (RC), 2020 U.S. Dist. LEXIS 54840 at *13-14
(D.D.C. March 30, 2020) (deferring to HUD's 2013 Rule, including at
24 CFR 100.500(c)(2)); Oviedo Town Ctr. II, L.L.L.P. v. City of
Oviedo, 2017 U.S. Dist. LEXIS 134930 (M.D. Fla. Aug. 23, 2017)
(citing HUD's regulation and sating ``[t]he burden then shifts to
the defendant to prove that the challenged practice is necessary to
achieve one or more [of its] substantial, legitimate,
nondiscriminatory interests.'' Such interests must be supported by
evidence and may not be hypothetical or speculative.'') (internal
citations omitted) (affirmed by Oviedo Town Ctr, II, L.L.P. v. City
of Oviedo, Florida, 759 Fed. App'x 828 (11th Cir. 2018)); NFHA v.
Deutsche Bank Nat'l Trust, No. 18 CV 839, 2019 WL 5963633 (N.D. Ill.
Nov. 13, 2019) (``After a plaintiff establishes a prima facie
showing of disparate impact, the burden shifts to the defendant to
prove that the challenged practice is necessary to achieve . . . [a]
legitimate, nondiscriminatory interest[.]'') (citing Inclusive Cmtys
Project, Inc.., 135 S. Ct. at 2514-15); Fair Hous. Ctr. of Wash. v.
Breier-Scheetz Props., LLC, 743 F. App'x 116, 118 (9th Cir. 2018)
(upholding summary judgment for plaintiff because defendant never
justified its challenged policy as ``necessary to achieve one or
more substantial, legitimate, nondiscriminatory interests'') (citing
HUD's rule and Inclusive Cmtys Project, Inc.., 135 S. Ct. at 2522);
Mhany Mgmt. v. Cty. of Nassau, 819 F.3d 581 (2d. Cir. 2016)
(announcing HUD's burden shifting framework as the proper framework
for evaluating disparate impact claims, noting that the second step
was already in line with the circuit's prior case law); Treece v.
Perrier Condo. Owners Ass'n, 519 F. Supp. 3d 342, 353-54 (E.D. La.
2021) (explaining that ``after ICP'', once a plaintiff makes a prima
facie case, including robust causation, the[] burden shift[s] to the
defendant to show the challenged practice is necessary to achieve
one or more of the defendant's substantial, legitimate,
nondiscriminatory interests'') (citing Inclusive Cmtys. Project v.
Lincoln Prop. Co., 920 F.3d 890, 901-02) (5th Cir. 2019); Fair Hous.
Rights Ctr. v. Morgan Props. Mgmt. Co., LLC, Civil Action No. 16-
4677, 2018 U.S. Dist. LEXIS 108905, at *31 (E.D. Pa. June 29, 2018)
(``If a disproportionate burden is established, the burden shifts to
the defendant to establish whether it has a legitimate, non-
discriminatory reason for its actions.. If the defendant can
establish that reason, it must then also establish that no
alternative course of action could be adopted that would enable that
interest to be served with less discriminatory impact.'') (internal
citations omitted); de Reyes v. Waples Mobile Home Park L.P., 903
F.3d 415, 426 n.6, 428 (4th Cir. 2018) (``In Inclusive Communities,
the Supreme Court explained that an FHA disparate-impact claim
should be analyzed under a three-step, burden-shifting framework . .
. Under the second step, the defendant has the burden of persuasion
to `state and explain the valid interest served by their policies.'
[Inclusive Cmtys. Project, Inc.135 S. Ct.] at 2522 (stating that
this step is analogous to Title VII's business necessity
standard.''); Price v. Country Brook Homeowners Ass'n,, Civil Action
No. 1:21-cv-113, 2021 U.S. Dist. LEXIS 228914, at *6 (S.D. Ohio Nov.
30, 2021) (``Further, the Supreme Court recognized the U.S.
Department of Housing and Urban Development's (``HUD'') burden-
shifting framework that is used to analyze disparate impact claims .
. . [where at the second step,] the defendant to prove that the
challenged practice is necessary to achieve a substantial,
legitimate, nondiscriminatory interest.'') (citing Inclusive Cmtys.
Project, Inc., 135 S. Ct. at 2514-15).
---------------------------------------------------------------------------

Issue: Commenters disagreed about whether the defendant's burden at
step two in Sec. 100.500(c)(2) should be a burden of proof or
production based on Inclusive Communities and Wards Cove. Some
commenters stated that the proposed rule places a more onerous burden
on defendants than what Inclusive Communities requires and that
defendants should have only a burden of production at step two.
Commenters said that although in Inclusive Communities, the Court did
not address defendants' burden, it analogized it to the business
necessity defense of Title VII under Wards Cove, which is one of
production. They stated that the Court also made clear in Wards Cove
that the defendant's obligation was only a burden of production and
that this ``conforms to the usual method for allocating persuasion and
production burdens.'' They said that the Inclusive Communities Court
instructed that disparate impact claims must be limited to give
insurers latitude to consider market factors. Another commenter focused
on the Inclusive Communities statement that ``housing authorities and
private developers [are provided] leeway to state and explain the valid
interest served by their policies'' and concluded that a defendant need
only explain how its policy interests are reasonably served by the
particular practice, rather than prove it.
Other commenters supported the proposed burden of proof on
defendants. These commenters noted that Wards Cove is no longer good
law because the Civil Rights Act of 1991 specifically placed the step
two burden of proof on defendants under Title VII. Commenters stated
that the proposed rule contains the necessary protections for
defendants, allowing them ``leeway to state and explain the valid
interest served,'' consistent with Inclusive Communities. Commenters
pointed out that Inclusive Communities specifically described
defendants' burden as a burden of proof rather than production, and as
``important and appropriate.''
HUD Response: As HUD noted in 2016, in over 25 years of case law
since Wards Cove, no circuit court of appeals had ever applied the
Wards Cove burden-shifting framework to the Act.\310\ Since then, only
one circuit court of appeals has applied Wards Cove's holding that step
two requires a defendant to produce, rather than prove, its interest.
HUD believes that the court's explanation in that case of why it
applied Wards Cove to the Fair Housing Act case before it is

[[Page 19488]]

unpersuasive \311\ and notes that it conflicts with the other
circuits.\312\ Moreover, as explained above, Inclusive Communities'
sole reference to Wards Cove was limited to a discussion that was not
overruled by statute, and had nothing to do with the burden under step
two; it instead related to the causation analysis required as part of a
plaintiff's prima facie case under Sec. 100.500(c)(1).\313\ Far from
endorsing a burden limited to production, Inclusive Communities
explicitly noted and approved of the requirement that defendants
``prove'' the necessity of their policies.\314\ And contrary to what
some commenters wrote, Inclusive Communities did not, analogize the
business necessity defense to Wards Cove's Title VII standard (which is
a burden of production); instead, Inclusive Communities analogized the
business necessity defense to Title VII's modern standard (which is a
burden of proof).\315\ Further, Inclusive Communities specifically and
favorably cited HUD's 2013 Rule as ``properly limit[ing] disparate
impact liability . . . to give housing authorities and private
developers leeway to state and explain the valid interest served by
their policies.'' \316\
---------------------------------------------------------------------------

\310\ ``Defendants' Memorandum in Support of Their Motion for
Summary Judgment and in Opposition to Plaintiffs' Motion for Summary
Judgment'' at 42 n.32, American Insurance Association. v. Carson and
the U.S. Dep't of Hous. and Urb. Dev., No. 1:13-cv-00966-RJL (D.D.C.
August 30, 2016).
\311\ Sw. Fair Hous. Council, Inc. v. Maricopa Domestic Water
Improvement Dist., 17 F.4th 950, 960 (9th Cir. Nov. 12, 2021). The
Maricopa case justified its application of the Wards Cove burden
shifting framework to the Fair Housing Act by stating, first, that
``[i]n Wards Cove Packing Co. v. Atonio the Supreme Court developed
a three-step burden-shifting framework to address [disparate impact]
claims.'' Id. HUD notes, however, this statement is incorrect, and
that the burden shifting framework for Title VII cases was developed
in 1975, in Albemarle Paper Co. v. Moody, 422 U.S. 405, 425 (1975).
Additionally, HUD notes that the Wards Cove framework was abrogated
by the Civil Rights Act of 1991, which restored the Albemarle
standard. Public Law 102-166, 105, 105 Stat. 1071, 1074 (1991),
amending 42 U.S.C. 2000e-2. Also, the opinion states that ``the
Supreme Court has applied the [Ward's Cove] framework across federal
antidiscrimination statutes,'' 17 F.4th at 960, but cites only a
single instance in which the Supreme Court applied the Wards Cove
framework to another federal antidiscrimination statute: Smith v.
City of Jackson, 544 U.S. 228, 240 (2005) (applying Wards Cove to
the ADEA). As HUD discusses earlier, the Supreme Court has
acknowledged that the ADEA has a narrower scope than Title VII, and
no other court has applied this standard, so HUD declines to adopt
this reading of the Fair Housing Act's protections.
\312\ Mhany Mgmt. v. Cty. of Nassau, 819 F.3d 581 (2d Cir.
2016); Inclusive Cmtys. Project, Inc. v. Heartland Cmty. Ass'n, 824
F. App'x 210 (5th Cir. 2020); de Reyes v. Waples Mobile Home Park
Ltd. P'ship, 903 F.3d 415 (4th Cir. 2018).
\313\ See Inclusive Cmty's Project Inc., 576 U.S. at 542
(``[r]acial imbalance . . . does not, without more, establish a
prima facie case of disparate impact'').
\314\ Id. at 541. (describing the second step of HUD's burden
shifting analysis as ``important'' and ``appropriate'' and as
requiring that defendants ``prove'' their policies are necessary to
achieve a valid interest).
\315\ Id. (This step of the analysis is analogous to the
business necessity standard under Title VII and provides a defense
against disparate-impact liability'') (citing HUD's 2013 Rule at 78
FR 11470).
\316\ Id. (``[a]n important and appropriate means of ensuring
that disparate-impact liability is properly limited is to give
housing authorities and private developers leeway to state and
explain the valid interest served by their policies. This step of
the analysis is analogous to the business necessity standard under
Title VII and provides a defense against disparate-impact
liability'') (citing HUD's 2013 Rule at 78 FR 11470).
---------------------------------------------------------------------------

Issue: Commenters suggested revising the requirement that
defendants show a policy is ``necessary'' in step two to something less
burdensome. One commenter suggested HUD should require a defendant to
show only that the challenged policy is rationally-related to a
legitimate, nondiscriminatory interest of the defendant. Another urged
HUD to require that a defendant show its practice simply serves a valid
interest of the defendant. Other commenters stated that in Wards Cove,
the Supreme Court expressly rejected a ``necessity'' requirement,
concluding that such a requirement would impose a degree of scrutiny
impossible to meet.
Other commenters disagreed, stating that the proposed rule is
consistent with Inclusive Communities, which requires defendants to
prove that the challenged practice is necessary to achieve a valid
interest. They cited the Court's statement that a housing provider
should be allowed to maintain a policy if it is ``necessary to achieve
a valid interest'' and noted a lower standard would conflict with well-
established disparate impact jurisprudence, including under Title VII.
A commenter also noted that in 2013 HUD specifically rejected a
suggestion to remove ``necessary'' from the rule, because ``necessary''
is clear, uniform, in compliance with the 1994 interagency guidance,
and effectuated the Act's broad remedial goal.
HUD Response: HUD declines to change the defendant's burden in step
two because doing so would be inconsistent with longstanding judicial
and agency interpretations and because HUD believes that the
defendant's burden in step two best effectuates the broad, remedial
goals of the Act.\317\ Moreover, the Court in Ward's Cove never
expressly rejected a ``necessity'' requirement, but rather rejected a
standard which required a showing that the challenged practice be
essential or indispensable to the employer's business.\318\ The
proposed rule does not require a defendant to show that a challenged
practice is essential or indispensable, but only that it is necessary
to achieve a substantial, legitimate, nondiscriminatory interest of
that business.
---------------------------------------------------------------------------

\317\ See supra n. 17, n. 126.
\318\ Wards Cove Packing Co., 490 U.S. at 659.
---------------------------------------------------------------------------

Furthermore, the Court in Inclusive Communities specifically cited
to the 2013 Rule's explanation of step two of the burden shifting
approach as being analogous to the business necessity standard of Title
VII when explaining that ``this step of the analysis'' of disparate
impact liability is ``an important and appropriate means of ensuring
that disparate impact liability is properly limited.'' The opinion
continued that housing authorities must prove their policies are
``necessary'' to achieve a valid interest, which mirrors the necessity
requirement of this final rule.\319\
---------------------------------------------------------------------------

\319\ Inclusive Cmtys. Project, Inc. 576 U.S. at 541.
---------------------------------------------------------------------------

Issue: Commenters requested that HUD provide additional guidance in
the final rule concerning what may constitute substantial, legitimate,
nondiscriminatory interests. A commenter cited the 1994 Interagency
Policy Statement on Discrimination in Lending, which describes factors
that may be relevant to the legally sufficient justification, including
cost and profitability. The commenter stated that the Policy Statement
contains helpful guidance for lenders and urged HUD to reference the
Policy Statement in this final rule.
Others stated that the proposed rule's failure to recognize
practical business considerations, including profit making, as valid
interests conflicts with Inclusive Communities, which stated that
disparate impact liability must be limited to ensure that ``regulated
entities are able to make the practical business choices and profit-
related decisions that sustain a vibrant and dynamic free-enterprise
system'' and warned against ``second-guessing'' between ``two
reasonable approaches.'' They said that defendants must be given
latitude to consider market factors.
In contrast, other commenters claimed that it is best to maintain a
case-by-case approach so that no justification is automatically deemed
a substantial, legitimate, non-discriminatory interest despite its
disparate impact on a protected class.
Commenters expressed that profit should not be a legally sufficient
justification and that the proposed rule makes clear that there are no
automatically valid objectives, such as maximizing profit. Commenters
stated that allowing defendants to justify discriminatory policies
under the guise of profit would render the discriminatory effects
framework completely toothless, because it would

[[Page 19489]]

make for-profit businesses virtually immune from challenges to their
policies or practices that cause a discriminatory effect. A commenter
stated that almost all discriminatory policies can be justified by
profit. Commenters also stated that a profit defense would be
inconsistent with disparate impact jurisprudence; run counter to HUD's
mission; and encourage the continuation of profitable, but
discriminatory policies. A commenter explained that courts have
appropriately rejected profit and market factors as substantial,
legitimate, nondiscriminatory interests in the lending arena, limiting
the legitimate business justification defense to a lender's use of
objective variables and practices to ascertain creditworthiness. A
commenter gave as examples cases in which lenders had engaged in
practices not related to creditworthiness, like subjective markup
pricing, that caused disparate impacts, to show profit should not be
considered a legally sufficient justification.\320\
---------------------------------------------------------------------------

\320\ See Miller v. Countrywide Bank NA, 571 F. Supp. 2d 251 (D.
Mass. 2008); see also Ramirez v. GreenPoint Mortg. Funding, Inc.,
268 FRD. 627 (N.D. Cal. 2010); Guerra v. GMAC, L.L.C., 2009 WL
449153 (E.D. Pa. Feb. 20, 2009); Taylor v. Accredited Home Lenders,
Inc., 580 F. Supp. 2d 1062 (S.D. Cal. 2008); Ware v. Indymac Bank,
534 F. Supp. 2d 835 (N.D. Ill. 2008); Garcia v. Countrywide Fin.
Corp., No. 07-1161 (C.D. Cal. Jan. 15, 2008), available at
www.nclc.org/unreported; Newman v. Apex Fin. Grp., 2008 WL 130924
(N.D. Ill. Jan. 11, 2008); Martinez v. Freedom Mortg. Team, 527 F.
Supp. 2d 827 (N.D. Ill. 2007); Jackson v. Novastar Mortg., Inc.,
2007 WL 4568976 (W.D. Tenn. Dec. 20, 2007). Cf. Tribett v. BNC
Mortg., 2008 WL 162755 (N.D. Ill. Jan. 17, 2008) (consumer can
refile complaint with more specificity); Complaint, United States v.
Countrywide Fin. Corp., Countrywide Home Loans, Inc. & Countrywide
Bank, No. CV-11-10540 (C.D. Cal. Dec. 21, 2011) (charging over
200,000 Hispanic and African American borrowers higher interest
rates, fees, and costs for mortgage loans than non-Hispanic white
borrowers and steering them into subprime loans), available at
www.justice.gov; Stipulated Final Judgment & Order, Fed. Trade
Comm'n v. Golden Empire Mortg., Inc., No. CV09-03227 (C.D. Cal.
Sept. 24, 2010) (charging Hispanic consumers higher prices for
mortgages than similarly situated non-white consumers), available at
www.ftc.gov; Order to Cease & Desist, Order for Restitution, and
Order to Pay, In re First Mariner Bank Balt., Md., No. FDIC-07-285b
& FDIC-08-358k (Fed. Deposit Ins. Corp. Mar. 22, 2009), available at
www.fdic.gov; Complaint, United States v. AIG Fed. Sav. Bank, No.
1:99-mc-09999 (D. Del. Mar. 4, 2010) (wholesale mortgage brokers
charged higher fees to African American borrowers), available at
www.justice.gov.
---------------------------------------------------------------------------

HUD Response: HUD does not believe listing specific valid interests
is necessary or appropriate and declines to alter the text of this
rule. In promulgating the 2013 Rule, HUD did not state that profit or
other business considerations could never be substantial, legitimate,
nondiscriminatory interests; rather, HUD declined to explicitly name
increasing profits, minimizing costs, and increasing market shares as
per se substantial, legitimate, nondiscriminatory interests. HUD
explained that the 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.\321\ HUD
agrees that factors that may be relevant to a defendant's step two
burden could include cost and profitability, as HUD and other agencies
stated in the 1994 Interagency Policy Statement on Discrimination in
Lending. However, recognizing interests as per se legitimate would
undermine the effectiveness of disparate impact liability as a tool for
rooting out policies that appear to be neutral but have been adopted
for discriminatory reasons. HUD notes that Inclusive Communities
highlighted disparate impact's important role in uncovering such
disguised animus that escapes easy classification as disparate
treatment.\322\ Accordingly, this rule, like the 2013 Rule, does not
list interests that would always qualify as substantial, legitimate,
nondiscriminatory interests for every defendant in any context. But the
rule still allows regulated entities to make the practical business
choices and profit-related decisions that sustain a vibrant and dynamic
free-enterprise system and does not require second guessing between two
reasonable approaches. HUD thus concludes that creating per se defenses
would erroneously weaken the rule and result in the dismissal of cases
where the practices are not actually necessary to achieve a valid
interest and, more concerning, where the seemingly valid interests put
forward by defendants are acting to disguise a defendant's underlying
actions that are motivated by discriminatory intent.
---------------------------------------------------------------------------

\321\ 78 FR 11471.
\322\ Inclusive Cmtys. Project, Inc. 576 U.S. at 540.
---------------------------------------------------------------------------

Issue: Commenters stated that under Inclusive Communities,
defendants are only required to show that the challenged practice is
related to a valid interest, not that the practice is necessary or
related to a substantial interest. Other commenters disagreed and
stated that replacing the ``substantial legitimate non-discriminatory
interest'' standard with a much lower and overly broad ``valid
interest'' standard would make it too easy for defendants to rebut
allegations of discrimination, allowing insubstantial business, profit,
or policy considerations to defeat meritorious disparate impact claims,
and would make it virtually impossible for plaintiffs to make a step
three showing.
HUD Response: Nothing in Inclusive Communities suggests that the
Court endorsed lowering the burden for defendants in step two of the
discriminatory effects framework. When Inclusive Communities discussed
the ability of defendants to state a ``valid interest'', it referred
specifically to HUD's 2013 Rule and the second step of the burden
shifting analysis \323\ which requires that defendant show that its
policy is necessary to achieve a substantial, legitimate, and
nondiscriminatory interest.\324\ HUD believes the Court in Inclusive
Communities, like other courts and HUD itself, used ``valid'' as
shorthand for the same concept that the 2013 Rule describes as
``substantial, legitimate, and non-discriminatory.'' \325\
---------------------------------------------------------------------------

\323\ See Inclusive Cmtys. Project, Inc., 576 U.S. at 541
(explicitly citing 78 FR 11470 (where HUD states that `the
``substantial, legitimate, nondiscriminatory interest'' standard
found in Sec. 100.500(b)(1) is equivalent to the ``business
necessity'' standard' and that `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') when explaining this ``[t]his step
of the analysis'' which gives defendants leeway to state and explain
``the valid interest'' served by their policies).
\324\ Id. at 527 (describing that the second step of the burden
shifting framework requires a defendant to ``prov[e] that the
challenged practice is necessary to achieve one or more substantial,
legitimate, nondiscriminatory interests'' and is ``analogous to the
Title VII requirement that an employer's interest in an employment
practice with a disparate impact be job related'') (quoting 24 CFR
100.500(c)(2) and 78 FR 11470).
\325\ See, e.g., Inclusive Cmtys. Project, Inc., 576 U.S. at 541
(describing that defendants having leeway to state a ``valid
interest'' as part the second step of the burden shifting framework,
citing HUD's explanation of the 2nd step of the framework in the
2013 Rule, which describes the interest as substantial, legitimate,
and nondiscriminatory at 78 FR 11470); Treece v. Perrier Condo.
Owners Ass'n, 519 F. Supp. 3d 342, 353-54 (E.D. La. 2021) (referring
to the defendant's ``substantial, legitimate, nondiscriminatory
interests'' and ``valid interest[s]'' interchangeably); supra at
Whether Claims Against Insurers Will Fail as a Matter of Law
(``Further, as part of the disparate impact framework set forth in
this rule, insurers, like all defendants, are provided the
opportunity to show a valid interest supporting any practice
challenged under the Act'').
---------------------------------------------------------------------------

To the extent that commenters nonetheless ask HUD to substitute a
``valid interest'' standard out of a belief that the Court intended a
lower standard rather than one synonymous with the existing step two
standard, HUD believes that it would be inappropriate to do so. HUD
notes that such a standard would not accord with the majority of
judicial opinions concerning the Act, and so it would introduce
unnecessary confusion.\326\ Furthermore,

[[Page 19490]]

as HUD stated in its 2013 Rule, ``in order to effectuate the Act's
broad, remedial goal, practices with discriminatory effects cannot be
justified based on interests of an insubstantial nature.'' \327\
---------------------------------------------------------------------------

\326\ See supra n. 309, 312, 314, 316.
\327\ 78 FR 11470.
---------------------------------------------------------------------------

Section 100.500(c)(3): Proving an Alternative Practice That Could Serve
the Interest With a Less Discriminatory Effect
Issue: Commenters asked HUD to place the evidentiary burden at step
three on defendants, rather than plaintiffs. They cited to studies
showing the difficulty plaintiffs have had succeeding with
discriminatory effects claims over time, as well as Second Circuit
precedent and the State of California's fair housing statute, which
place the burden on defendants.\328\ Commenters stated that this
revision is necessary because issues of segregation and discrimination
in housing and lending have not abated since the 2013 Rule and, in
fact, housing is more unaffordable, many cities have seen increasing
displacement of communities of color, and borrowers of color are
substantially more likely than white borrowers to be denied
conventional loans. These commenters also cited to the growing role of
data analytics and online platforms in the housing sale and rental
market, increasing risks that segments of society will be steered away
from or denied housing in a way that is immune to examination of
intent, and resulting in even more segregated housing patterns. These
commenters cited a 2021 Harvard study finding that the gap between
whites and African Americans in homeownership rate stands at 28.1
percentage points, with the gap between whites and Hispanics at 23.8
percentage points.\329\
---------------------------------------------------------------------------

\328\ MHANY Mgmt., 819 F.3d at 617-19 (holding the 2013 Rule
abrogated Second Circuit precedent placing the burden at the final
stage on the defendant); Cal. Code Regs. tit. 2, Sec. 12062 (Lexis
Advance through Register 2022, No. 34, August 26, 2022).
\329\ See, e.g., Joint Ctr. for Housing Studies of Harvard
Univ., The State of the Nation's Housing: 2021, at 3 available at
http://www.jchs.harvard.edu/sites/default/files/Harvard_JCHS_State_Nations_Housing_2021.pdf.
---------------------------------------------------------------------------

HUD Response: HUD declines to place the step three burden on
defendants. As explained in 2013, this rule's burden-shifting scheme is
consistent with the majority view of courts interpreting the Act as
well as the Title VII discriminatory effects standard codified by
Congress in 1991, and the discriminatory effects standard under ECOA,
which borrows from Title VII's burden-shifting framework. As HUD has
explained, all but one of the federal appeals courts to address the
issue have \330\ placed the burden at the third step on the plaintiff.
HUD additionally notes the significant overlap in coverage between
ECOA, which prohibits discrimination in any aspect of a credit
transaction, and the Fair Housing Act, which prohibits discrimination
in housing and residential real estate-related transactions. 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
claims based on the same underlying facts. Having the same allocation
of burdens under the Fair Housing Act and ECOA will provide for less
confusion and more consistent decision making by courts. Moreover, HUD
continues to believe that this framework makes the most sense because
it does not require either party to prove a negative.
---------------------------------------------------------------------------

\330\ 78 FR 11462.
---------------------------------------------------------------------------

Issue: Commenters criticized step three of the proposed rule,
stating that it enables plaintiffs to prevail even if the less
discriminatory alternative practice they present is unreasonable, less
practical, less productive or less effective. Commenters asked HUD to
revise step three to permit plaintiffs to prevail only if there is an
alternative that is equally effective, is no more costly, or can be
implemented at a reasonable cost, and does not impose an undue burden
on a defendant or otherwise adversely affect the defendant's non-
discriminatory policies and valid interests. Otherwise, commenters
said, there would be no limit on what constitutes a reasonable
alternative practice allowing plaintiffs to second-guess which of two
reasonable approaches should be adopted.
Commenters stated that their proposed revisions to heighten a
plaintiff's burden in step three are required by or consistent with
Inclusive Communities, which held that the Act is not a tool for
plaintiffs to force defendants to reorder their priorities or to
displace valid governmental and private priorities, and that disparate
impact liability must be limited so that employers and other regulated
entities are able to make practical business choices and profit-related
decisions. A commenter said that step three of the proposed rule is
moot in light of Inclusive Communities' recognition that re-writing
governmental policies exceeds the courts' remedial powers.
Commenters further stated that an equally effective standard for
prevailing at step three of the analysis is required by Wards Cove.
According to the commenters, Wards Cove explicitly requires that a
plaintiff demonstrate an alternative policy is an ``equally effective''
alternative and warns that courts should proceed with care before
mandating alternative practices.\331\ Commenters said that Wards Cove
further noted that cost is relevant in determining whether an
alternative is equally effective.
---------------------------------------------------------------------------

\331\ Wards Cove, 490 U.S. at 661 (quoting Furnco Construction
Corp. v. Waters, 438 U.S. 567, 578 (1978)).
---------------------------------------------------------------------------

Other commenters supported retaining step three of the proposed
rule, stating that the ``less discriminatory alternative'' requirement
is consistent with judicial precedent and Congressional intent. They
stated that an ``equally effective alternative'' requirement is not
appropriate in the housing context where the practices covered by the
Act are ``not readily quantifiable.''
Commenters stated that the step three burden articulated by the
2020 Rule should not be retained for various reasons. Commenters said
that the 2020 Rule's requirement that plaintiffs identify an equally
effective alternative created too high a burden on plaintiffs; put
defendant's financial gain above ensuring access to fair housing;
departed from established precedent and the core purpose of the Act
without justification; lowered the burden for defendants, such that
clearly meritorious claims would be dismissed and the effectiveness of
disparate impact liability as an incentive to identify less
discriminatory alternative practices would be severely weakened; and
improperly required plaintiffs to prove that any alternative is equally
effective and does not impose materially greater costs. A commenter
explained that if the 2020 Rule were retained, with its increased
burdens on plaintiffs at step three and reduced burdens on defendants
at step two, meritorious claims would be dismissed because it would
shift much of the defendant's burden of proof at step two to the
plaintiff to disprove at step three, insulating from scrutiny many
policies that have an unjustified discriminatory effect. A commenter
noted that the 2020 Rule's language was neither consistent with nor
required by Inclusive Communities. One commenter explained that under
the 2020 Rule's reformulation of step three, even a policy with the
most flagrantly discriminatory effects would pass legal muster so long
as a less discriminatory alternative is even slightly more costly or
burdensome, and even if the

[[Page 19491]]

alternative was still significantly profitable. A commenter pointed out
that the term ``other material burdens'' in the 2020 Rule is undefined,
broad and subjective, and forces plaintiffs to obtain information that
is squarely in the purview of the defendant.
HUD Response: HUD declines to modify step three of the proposed
framework or adopt the 2020 standard. As HUD explained in the 2013
Rule, the framework in this rule does not allow plaintiffs to impose
untenable policies upon defendants because it still requires the less
discriminatory alternative to ``serve the defendant's [substantial,
legitimate, nondiscriminatory stated] interests.'' \332\ This rule's
step three continues to be consistent with the 1994 Joint Policy
Statement on Discrimination in Lending,\333\ with the purpose of the
Act and its goal to ``eradicate discriminatory practices within a
sector of the Nation's economy,'' \334\ and with judicial
interpretations of the Act, including Inclusive Communities.\335\ HUD
also notes that a requirement that alternative policies be ``equally
effective'' did not appear in Inclusive Communities, despite citation
to the proposed source of the requirement, Wards Cove, and significant
discussion of the checks on liability that have always been part of
Fair Housing Act jurisprudence. HUD further notes that its position is
supported by the Massachusetts Fair Housing Center court, which
criticized the 2020 Rule's inclusion of this requirement as ``run[ning]
the risk of effectively neutering disparate impact liability'' and
described it as onerous and inadequately justified.\336\ HUD, based on
its own experience, agrees with the district court. Moreover, as
discussed elsewhere in this preamble, Wards Cove construed Title VII,
and the portions cited by commenters were barely tried, even in that
context, having been superseded by the Civil Rights Act of 1991. In
order to avoid unnecessary confusion and uncertainty, HUD declines to
abandon a well-established standard in favor of a virtually untested
one.
---------------------------------------------------------------------------

\332\ 78 FR 11473.
\333\ 59 FR 18269.
\334\ Inclusive Cmtys. Project, Inc., 576 U.S. at 539.
\335\ See, e.g., MHANY Mgmt. v. City of Nassau, No. 05-cv-2301
(ADS)(ARL), 2017 U.S. Dist. LEXIS 153214, at *25 (E.D.N.Y. Sep. 19,
2017) (``contrary to Garden City's assertions, courts have not
imposed a heightened standard on plaintiffs at the third step in
disparate impact cases under 24 CFR 100.500. Indeed, courts have
followed the plain language of the [regulation.]'') (citing
Inclusive Communities Project, 135 S. Ct. at 2518 (``[B]efore
rejecting a . . . public interest[,] a court must determine that a
plaintiff has shown that there is `an available alternative . . .
practice that has less disparate impact and serves the [entity's]
legitimate needs' ''); see also Keller v. City of Fremont, 719 F.3d
931, 949 (8th Cir. 2013) (``[W]hether plaintiffs can show that `a
viable alternative means was available to achieve the legitimate
policy objective without discriminatory effects.' '') (quoting
Gallagher v. Magner, 619 F.3d 823, 834 (8th Cir. 2010)); Theodora
Rescue Comm. v. Volunteers of Am. of Washington, No. C14-0981RSL,
2014 U.S. Dist. LEXIS 157279, at *11 (W.D. Wash. Nov. 6, 2014)
(``Even if the Court assumes that the Ninth Circuit will ultimately
allow plaintiffs to rebut a showing of business necessity simply by
identifying an alternative act or practice that would serve the
identified interests with less discriminatory impact, plaintiff has
not made that showing.'') (internal citations omitted); Oviedo Town
Ctr. II, L.L.L.P. v. City of Oviedo, Florida, Case No. 6:16-cv-1005-
Orl-37GJK, 2017 U.S. Dist. LEXIS 134930, at *11 (M.D. Fla. Aug. 23,
2017) (``If the defendant satisfies its burden, the plaintiff may
still prevail by proving that the defendant's interests could be
served by another practice that has a less discriminatory effect.'')
(citing 24 CFR 100.500(c)(3)); Inclusive Communities Project, Inc.
v. Lincoln Prop. Co., No. 3:17-CV-206-K, 2017 U.S. Dist. LEXIS
130818, at *20 (N.D. Tex. Aug. 16, 2017) (``If the defendant meets
its burden, the plaintiff must then show that the defendant's
interests could be served by another practice that has a less
discriminatory effect'' (citing 24 CFR 100.500(c)(3)). See also
Darst-Webbe Tenant Ass'n Bd. V. St. Louis Hous. Auth., 417 F.3d 898,
906 (8th Cir. 2005) (``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 149 (it must be analyzed whether an alternative ``could be
adopted that would enable [the defendant's] interest to be served
with less discriminatory impact.'').
\336\ Mass. Fair Hous. Ctr., 496 F. Supp. 3d at 611.
---------------------------------------------------------------------------

As to other concerns that commenters suggested required revisions
to step three, HUD notes that an unreasonable alternative practice that
creates an undue burden on defendant would not satisfy plaintiff's
three-step burden. Nor will a proposed less discriminatory alternative
fail simply because there will be some amount of increased cost
associated with the alternative policy. And nothing in the rule
suggests that reasonable, valid policies and priorities of defendants
will be second guessed or forced to be reordered. Step one of the
burden shifting framework ensures that the only policies which will be
examined further are ones that cause a disparate impact because of a
protected characteristic. Step three ensures that any alternative
policy proposed is less discriminatory and actually serves the interest
the defendant has already identified in step two. Moreover, HUD
disagrees that Inclusive Communities rendered step three moot by
stating that re-writing governmental policies exceeds the remedial
powers of courts. Inclusive Communities did not say this. Indeed, there
is no statement in Inclusive Communities indicating that courts lack
the authority to invalidate policies that cause unjustified
discriminatory effects.
In sum, HUD believes this provision and the structure of the burden
shifting framework provide sufficient protections for defendants'
business interests.
Issue: A commenter stated that step three of the proposed rule
conflicts with Inclusive Communities because defendants can still be
held liable despite establishing that their practices are substantial,
legitimate, and nondiscriminatory at step two. One commenter criticized
step three as unnecessary and inviting uncertainty and continued
litigation. The commenter wrote that if the challenged practice is not
artificial, arbitrary, and unnecessary, plaintiffs should not be
permitted to substitute their proposed practices or business judgment
for defendants' practices and judgment.
HUD Response: HUD disagrees. First, step two of the burden shifting
framework requires the defendant to establish that its practice is
necessary to achieve a substantial, legitimate, nondiscriminatory
interest of the defendant--not that the defendant establish that the
practice itself is substantial, legitimate and nondiscriminatory. By
step two of the analysis, the plaintiff has already established that
the practice itself causes or predictably will cause a discriminatory
effect. Assuming the defendant meets its step two burden, the plaintiff
then must establish that a less discriminatory alternative practice
exists that still serves defendant's cited interest. HUD finds nothing
in Inclusive Communities indicating that it is appropriate to cut off
the inquiry after the second step.
Without step three, defendants with practices that have a
discriminatory effect will have little incentive to examine their
policies to determine if there are less discriminatory options to
achieve their goals, thus allowing practices having unjustified
discriminatory effects to continue unchecked. The suggestion that there
should be no third step would eliminate a full assessment as to whether
the same interest could be served in a less discriminatory way. The
third step allows the plaintiff to offer an alternative policy that is
less discriminatory and that still accomplishes the legitimate interest
identified by the defendant. If the third step were eliminated,
``artificial, arbitrary, and unnecessary barriers'' would remain in
place despite the fact that they are unnecessary to achieve the
defendant's stated purpose.
Issue: A commenter said that the third step removes the Supreme
Court's

[[Page 19492]]

requirement that the plaintiff not resort to reverse discrimination.
HUD Response: The commenter did not explain what it meant by
reverse discrimination or how step three might cause a plaintiff to
resort to such discrimination. It is possible that the commenter meant
that the need to satisfy the third step causes the defendant to resort
to reverse discrimination. However, there is nothing in step three, or
any other part of the proposed rule that requires the plaintiff or
anyone else to resort to any type of discrimination. To the contrary,
step three encourages defendants to utilize practices that have the
least discriminatory effect because of any protected characteristic.
Section 100.500(f) (2020 Rule Only): Limiting Damages and Other
Penalties in Discriminatory Effects Cases
Issue: Commenters criticized the proposed rule for omitting
provisions in the 2020 Rule that limit HUD's authority to seek damages
and penalties in discriminatory effects cases. The commenters stated
that the 2020 Rule was consistent with Inclusive Communities' statement
that ``even when courts do find liability under a disparate-impact
theory, their remedial orders must be consistent with the
Constitution'' and that ``remedial orders should concentrate on the
elimination of the offending practice.'' One commenter suggested this
means that the rule must only allow remedial orders that completely
eliminate rather than only minimize the discriminatory effect.
Commenters stated further that punitive or exemplary damages should not
be allowed in discriminatory effects cases, noting that courts have
applied a rigorous standard in assessing whether an award of punitive
damages is proper. Commenters stated that because a discriminatory
effects claim does not require a showing of defendant's state of mind,
this type of claim cannot meet the standard for punitive damages.
HUD Response: HUD believes that limiting or suggesting favored
remedies in this rule would be contrary to the plain language of the
Act and its broad remedial purpose. The Act explicitly provides for
punitive and compensatory damages, civil penalties (in cases brought by
the Attorney General), and injunctive relief in federal court, and
actual damages, injunctive and equitable relief and civil penalties in
administrative hearings.\337\ HUD does not believe that Inclusive
Communities can be read to suggest that remedial orders should be the
sole or favored remedy in discriminatory effects cases or that civil
penalties are somehow inappropriate.\338\ Rather, the Court merely
addressed what courts must keep in mind when remedial orders are
issued. Nor does HUD believe Inclusive Communities can be read to limit
remedial orders to only those that completely eliminate discriminatory
effects. Moreover, well-established criteria in statute and in decades
of judicial precedent set forth when penalties and punitive damages may
be appropriate, thus preventing arbitrary awards. In any case, the
availability of various remedies does not mean that they will be sought
or granted in all cases; remedies are considered on a case-by-case
basis.
---------------------------------------------------------------------------

\337\ 42 U.S.C. 3612(g)(3), 3613(c), 3614(d).
\338\ Inclusive Cmtys. Project, Inc., 576 U.S. at 544-45
(identifying considerations for court when designing remedial
orders).
---------------------------------------------------------------------------

Comments Regarding Other Defenses and Safe Harbors

Issue: Commenters stated that HUD should add a defense similar to
the 2020 Rule's third-party defense allowing defendants to rebut
plaintiff's prima facie case by showing that their discretion was
materially limited by a third party. They said such a defense is
necessary to protect defendants from being held liable for
discriminatory conduct mandated by law. As an example, a commenter
asserted that independent mortgage banks must follow guidelines set by
federal agencies, including the government sponsored enterprises, the
Department of Veterans Affairs, the Federal Housing Administration, and
the Department of Agriculture, which may cause a disparate impact. The
commenter stated that these mortgage banks should be granted a safe
harbor in such situations. A commenter stated that Inclusive
Communities requires a third-party defense because it stated that
causation does not exist where the defendant's discretion is
substantially limited and cited to a concurring opinion in the
appellate court decision that included as an element of plaintiff's
prima facie case that the defendant's policy or practice is not a
result of a law that substantially limits defendant's discretion.
Commenters also stated that a third-party defense is necessary to
protect insurers that conform to state laws and regulations on
insurance in compliance with McCarran-Ferguson. They said that HUD
cannot now say that the third-party defense is inconsistent with the
Act when it said in the 2020 Rule that ``in the event that unlawful
discriminatory practices are mandated by statute or court order, the
most effective way to eliminate the discrimination is to remove or
modify the underlying statute or order that mandated the unlawful
discrimination.'' They also stated that HUD's proposal to remove the
2020 defense implies that HUD intends to improperly test the boundaries
of its ability to preempt state regulations.
Other commenters supported HUD's proposal not to retain the third-
party defense from the 2020 Rule, arguing that the defense would allow
defendants to evade liability for illegal acts by showing that they
complied with third party requirements that are themselves
discriminatory. Commenters stated that the defense would deny
plaintiffs the ability to address whether less discriminatory
alternatives exist to the defendant's chosen method of meeting the
third-party requirement. Commenters also stated that such a defense is
contrary to the Act's preemption clause because it would prioritize
compliance with local ordinances over federal civil rights obligations,
even where there may be less discriminatory ways to comply with the
third party's requirement, and even in exclusionary zoning cases. In
addition, a commenter stated that a third-party defense would impede
efforts to prevent algorithm-driven discrimination. Another commenter
characterized the 2020 Rule's third-party defense as unnecessarily
confusing and vague. A commenter stated that whether a party's
discretion is limited by a third party should be addressed at the
second step of the burden shifting framework, not at the pleading
stage.
HUD Response: HUD disagrees that a third-party defense should be
included in this rule. First, Inclusive Communities does not suggest
that such a defense is necessary or appropriate. Inclusive Communities
stated that if a plaintiff ``cannot show a causal connection . . .--for
instance, because federal law substantially limits the Department's
discretion--that should result in dismissal of this case.'' As this
passage suggests, if federal law requires defendants to act in a
certain manner, plaintiffs may not be able to show that defendants'
actions are the cause of a discriminatory effect. Such an argument
already is available to defendants under this rule in appropriate cases
and does not require revisions to this rule. And as noted in the 2013
Rule, the discriminatory effects standard already permits a defendant
to defend against a claim of discriminatory effects by establishing a
legally sufficient justification, as specified in Sec. 100.500.

[[Page 19493]]

Thus, independent mortgage banks, for example, who follow federal
guidelines, have multiple opportunities under the rule to defend their
practices: first, at the prima facie stage, if federal guidelines,
rather than the challenged practices are the cause of the
discriminatory effect, and also at the second step of the burden
shifting framework, by showing that the practice is truly necessary to
comply with the federal guidelines.
That does not mean that, as the 2020 Rule allowed, any time
defendants are subject to a third-party requirement, the plaintiff's
case will necessarily fail. As other commenters explained, there may be
multiple ways of complying with a third-party requirement, some of
which have an unjustified discriminatory effect and some of which do
not. In those cases, the defendant caused the effect by opting for one
way of complying with a third-party requirement over another that does
not cause such an effect. A third-party defense such as was included in
the 2020 Rule would allow defendants to avoid the requirement to
utilize a less discriminatory alternative to comply with a third party
requirement.\339\ Indeed, if the defense could be raised at the
pleading stage (as permitted by the 2020 Rule), disparate impact claims
could be dismissed based on mere assertions of third party
requirements, without plaintiffs having any opportunity to challenge
these assertions with the benefit of discovery. Without discovery, some
plaintiffs would have no means of ascertaining whether the third-party
obligation actually exists, and if so, whether it is the actual,
legitimate reason for defendant's policy or practice, whether that
obligation actually requires the defendant to implement the policy at
issue or if there is a less discriminatory way to do so. This would
essentially eliminate any meaningful inquiry into steps two and three
of the burden shifting framework whenever the defendant asserts that
its policy was required by a third party. Such a defense is
inappropriate because it presumes that discrimination may be permitted
without consideration of whether the third-party requirement is itself
discriminatory or whether there are non-discriminatory ways to comply
with that third-party requirement. Moreover, such a defense would be
inconsistent with the Act, which specifies that state and local laws
requiring or permitting discriminatory housing practices are
invalid.\340\
---------------------------------------------------------------------------

\339\ Inclusive Cmtys. Project, Inc., 576 at 533 (analogizing to
Title VII, the court said that ``before rejecting a business
justification--or, in the case of a governmental entity, an
analogous public interest--a court must determine that a plaintiff
has shown that there is ``an available alternative . . . practice
that has less disparate impact and serves the [entity's] legitimate
needs.'')) (internal citations omitted).
\340\ 42 U.S.C. 3615.
---------------------------------------------------------------------------

Issue: Commenters supported HUD's proposed removal of the ``outcome
prediction'' defense that was inserted into the 2020 Rule, which was
designed to shield certain policies based on algorithms from disparate
impact liability with a ``results-based approach.'' Commenters stated
that the final rule's framework was the appropriate method of analyzing
discriminatory effects claims involving algorithmic and machine
learning technologies. A commenter noted that disparate impact
litigation is a key mechanism for redressing discrimination in light of
the increase of algorithms, which bring risks for perpetuating or
amplifying patterns of discrimination through biased development,
biased inputs, or bias arising from automatic adaptations from
artificial intelligence. Another commenter stated that the potential
for disparate impact liability protects borrowers and encourages
lenders using these technologies to innovate in ways that expand access
to credit. A commenter stated that the rule should clarify in the
preamble that the Act applies to entities that rely on algorithms.
Commenters expressed numerous concerns about the defense.
Commenters stated that this defense would have the practical effect of
foreclosing many disparate impact claims based on algorithms and models
and would shield such defendants from liability. Commenters stated that
in creating this defense, the 2020 Rule impermissibly created
exemptions for predictive models in the lending and insurance industry
that have no basis in the Act or any other source of authority, because
the Act does not grant HUD authority to create safe harbors or
exceptions from discriminatory effects liability, and no court has ever
held that entire categories of policies or practices that might
otherwise be subject to challenge are exempt from such liability.
Commenters also noted that HUD had previously explained why categorical
exemptions from disparate impact liability are undesirable.
A commenter noted that the defense would shield a wide range of
discriminatory policies and practices, because many discriminatory
models would qualify for an exemption because of the 2020 Rule's novel
``similarly situated individuals'' analysis, for which there is no
basis as a matter of law or as a matter of fact. As one commenter
explained, it would be easy for defendants to show that a challenged
policy or practice is intended to predict an outcome because that is
what any predictive model claims to do, and it would be easy to show
that the prediction represents a valid interest. Another commenter
stated that the defense is based on an outdated academic theory of
discrimination that relies on statistical disparities to absolve
defendants of liability, without acknowledging the possibility that the
defendant's policies contributed to the disparities.
Commenters noted that the defense would make it very difficult for
plaintiffs to demonstrate that an alternative, less discriminatory
policy would result in the same outcome, without imposing materially
greater costs or other material burdens because there is no standard or
agreed upon definition of algorithmic predictive performance or
accuracy. Commenters also stated that the defense would make it
difficult for plaintiffs to prevail because of the proprietary nature
of algorithms; without knowing what the algorithm is and how it works,
it is nearly impossible to demonstrate what the 2020 Rule requires:
that the practice has a disproportionately adverse effect on members of
the protected class, that there is a robust causal link between the
algorithm and this adverse effect, and that this effect is significant.
Commenters also described the defense as ambiguous and difficult
for parties and courts to apply. Another commenter described this and
other defenses as confusing and harmful, noting that the defense would
obfuscate discrimination in lender models and algorithmic systems.
Moreover, commenters noted that the defense was promulgated without
public notice and comment and was not a ``logical outgrowth'' of the
2019 Proposed Rule, thereby violating the APA.
HUD Response: HUD agrees with the commenters that the defense is
not appropriate to include in this rule. Upon HUD's consideration of
these comments and in light of HUD's experience interpreting and
handling cases under the Act, HUD has determined that the outcome
prediction defense is unclear and not found in any case law.\341\ The
rule properly describes

[[Page 19494]]

the framework to be used in cases involving algorithms and machine
learning in housing and housing-related transactions. The defense, if
retained, could in practice improperly exempt many housing-related
practices that are increasingly reliant upon algorithms and automated
processes that rely on outcome predictions, such as lending practices,
from liability under a disparate impact standard. The defense would be
inconsistent with HUD's repeated finding, including in the 2020 Rule,
that ``a general waiver of disparate impact law for the insurance
industry would be inappropriate.'' \342\ And although unclear, with its
novel ``compared to similarly situated individuals not part of the
protected class'' language, it appears that this defense would suggest
using comparators that are, in HUD's experience, inappropriate, and
would fail to consider the reasons why disparities are observed. At the
very least, the defense introduces unnecessary confusion into disparate
effects doctrine.
---------------------------------------------------------------------------

\341\ Massachusetts Fair Hous. Ctr. v. HUD, 2020 U.S. Dist.
LEXIS 205633 (D. Mass. Oct. 25, 2020) (case no 20-11765-MGM)
(calling the added defenses from the 2020 Rule ``perplexing'' and
``accomplish[ing] the opposite of clarity'' and noting that the
outcome prediction defense was ``not, as far as the court is aware,
found in any judicial decision'').
\342\ 85 FR 60321 (citing ``Application of the Fair Housing
Act's Discriminatory Effects Standard to Insurance'' 81 FR 69012));
see also 78 FR 11460, 11475.
---------------------------------------------------------------------------

Issue: In addition to insurers, various other commenters requested
safe harbors or exemptions. Commenters stated HUD should develop safe
harbors for those who ``followed rules set out by HUD in developing
their operating policies.'' Another commenter seemed to similarly
request specific protections for public housing agencies (PHAs) that
have policies that are consistent with HUD rules for operation for
federally assisted housing, are in compliance with otherwise legitimate
laws, are approved for use in federally insured housing, or are for the
purpose of eligibility criteria for enhancing housing opportunities for
protected classes or other under-housed persons.
Commenters suggested that HUD should have, as a safe harbor, a
process where HUD provides concrete guidance to housing providers so
that the housing providers do not have to wait until litigation to
discover that their policy may violate the Act. Another commenter
requested a safe harbor for entities that implement written policies
that identify non-discriminatory goals, explain how the policy is
reasonably calculated to achieve that goal, and conclude that the
policy does not impose a greater burden on members of protected classes
than it does on the wider population. Some commenters requested a safe
harbor for credit unions that limit membership based on statutory
requirements, explaining that while a disparate impact claim already
would fail under the proposed rule because credit unions are legally
unable to lend outside their membership, litigating these cases, even
by just filing a motion to dismiss, is costly, particularly for small
credit unions. They stated further that Inclusive Communities stated
that where a causal connection between a policy and a disparate impact
cannot be shown because federal law substantially limits discretion of
the defendant, dismissal is appropriate.
Other commenters said no safe harbors should be provided for
policies and practices that have discriminatory effects by limiting
housing opportunities for protected groups. Commenters stated that the
2013 Rule, 2016 Supplement, and this rule appropriately apply a case-
by-case disparate impact analysis to all housing related industries and
agreed that this approach is consistent with the Act.
HUD Response: HUD agrees with commenters that advocate for a case-
by-case approach rather than safe harbors. As explained above, HUD
believes that it does not have the authority to create exemptions that
do not appear in the statute. Moreover, even if a court were to find
that HUD had such authority, HUD believes that a case-by-case approach
appropriately implements HUD's obligations to enforce the Act to
redress discrimination that exists in an entire sector of the economy
and to affirmatively further fair housing. Moreover, safe harbors are
unnecessary as regulated entities can defend themselves utilizing the
second step of the burden shifting framework. Regulated entities may
also use the burden shifting framework to assess their own existing
policies and practices as well as new policies and practices that are
under consideration in order to ascertain whether they may cause an
unjustified discriminatory effect. HUD also emphasizes that entities'
purported compliance with program specific rules does not guarantee
compliance with the Fair Housing Act, and that the Fair Housing Act's
mandate is to refrain from discrimination--including refraining from
using policies or practices with unjustified discriminatory effects.
The rule provides clarity as to how HUD and a court would analyze such
a claim, allowing regulated entities to better comply with their
obligations under the Act and prevent unjustified discriminatory
effects in the first place. HUD notes further that Inclusive
Communities provides no support for any exemptions; the passage cited
by commenters merely explains that courts dismiss lawsuits pursuant to
the pleading standards in the Federal Rules of Civil Procedure.

Comments Regarding Additional Explanations, Examples and Guidance

Issue: Commenters suggested that HUD should provide additional
examples of practices that can have unjustified discriminatory effects
in the rule, its Preamble, or in future guidance. They suggested that
HUD: note in the rule that policies or practices that result in the
benign neglect of people with disabilities can have discriminatory
effects; provide examples of specific zoning ordinances or other
policies that restrict manufactured housing and may have a
discriminatory effect; and discuss criminal records screening practices
as examples of policies that may have an unjustified discriminatory
effect on protected classes. One commenter suggested that HUD should
outline less discriminatory alternatives to eviction in cases where a
housing provider has a policy of evicting the household for certain
types of lease violations.
HUD Response: HUD declines to insert examples of practices that may
specifically have unlawful discriminatory effects into this rule. This
rule is designed to provide a framework to help entities and courts
assess whether a policy or practice may have an unjustified
discriminatory effect, not to establish a list of practices that may be
unlawful under a discriminatory effects theory. HUD has already issued
Guidance on some topics, including certain criminal records screening
practices \343\ and certain zoning practices \344\--that may have
unjustified discriminatory effects on protected classes.
---------------------------------------------------------------------------

\343\ See ``Office of General Counsel Guidance on Application of
Fair Housing Act Standards to the Use of Criminal Records by
Providers of Housing and Real Estate-Related Transactions'' (April
4, 2016).
\344\ See ``Joint Statement of the Department of Housing and
Urban Development and the Department of Justice[:] State and Local
Land Use Laws and Practices and the Application of the Fair Housing
Act'' at 5 (November 10, 2016).
---------------------------------------------------------------------------

While HUD believes the rule provides a sufficiently clear framework
under which specific practices can be evaluated, HUD will consider
issuing more guidance as it deems appropriate.
Issue: A commenter urged HUD to consider providing separate
guidance related to the use of algorithms, artificial intelligence, and
machine learning.
HUD Response: HUD appreciates this request and believes that the
rule provides the appropriate framework for

[[Page 19495]]

evaluating discriminatory effects liability for all claims under the
Act, including as applied to algorithms, artificial intelligence, and
machine learning. However, given the rapid evolution in this field, HUD
will consider in the future whether to adopt more detailed guidance
expanding on those particular types of claims.
Issue: A commenter asked HUD to specify that a one-off action, like
the decision of a private developer to construct a new building in one
location rather than another, is insufficient to establish disparate
impact liability. Other commenters opposed this change, noting that a
single zoning decision or single application of a zoning standard often
results in or is, in fact, a community's policy or practice and can
have wide discriminatory impacts. They noted that a ``single event''
limitation would essentially sanction many discriminatory zoning
actions, even where Inclusive Communities specifically called suits
targeting ``zoning laws and other housing restrictions . . . that
function to unfairly exclude minorities from certain neighborhoods
without any sufficient justification . . . [as] resid[ing] at the
heartland of disparate impact liability.''
HUD Response: HUD believes that a so-called ``one-off'' action may,
in certain cases, be sufficient to establish a practice that has an
unjustified discriminatory effect. As noted throughout this preamble,
HUD continues to find that discriminatory effects claims should be
assessed on a case-by-case basis. A ``one-off'' exception would tend to
protect siting decisions that may have been influenced by a community's
desire to keep out people of a certain race, or against people with
disabilities. And HUD agrees with commenters that this limitation may
pose obstacles to meritorious zoning cases. HUD notes that an
individual siting decision by a private housing developer, or a single
zoning decision by a locality, will not result in an unjustified
discriminatory effect liability so long as the developer or locality
has a legally sufficient justification for that decision. HUD believes
this fully protects localities and the individual siting decisions of
private housing developers. Furthermore, while the Court in Inclusive
Communities noted in dicta that it would be difficult to prove that a
developer's one-time decision to build in one location rather than
another was a policy that caused a disparate impact, it did not go so
far to say that such a scenario could never succeed under a disparate
impact theory.
Issue: A commenter suggested that in the preamble to the final
discriminatory effects rule and in separate guidance, HUD should
outline potentially less discriminatory alternatives to eviction in
cases where a housing provider has a policy of evicting the household
for certain types of lease violations.
HUD Response: As discussed above, HUD believes that each
discriminatory effects claim should be assessed on a case-by-case
basis, including what less discriminatory alternatives might exist. HUD
declines to provide additional guidance in this regulation but will
consider in the future whether such guidance may be appropriate.
Issue: Commenters asked HUD to make revisions to various guidance
documents including the 2016 Office of General Counsel Guidance
entitled ``Application of Fair Housing Act Standards to the Use of
Criminal Records by Providers of Housing and Real Estate-Related
Transactions'' (2016 Guidance) and a 2011 internal HUD memorandum for
HUD's Fair Housing and Equal Opportunity headquarters and field staff
entitled ``Assessing Claims of Housing Discrimination against Victims
of Domestic Violence under the Fair Housing Act (FHAct) and the
Violence Against Women Act (VAWA)''. Other commenters stated that the
2016 Guidance provided clarity.
HUD Response: While guidance is beyond the scope of this
rulemaking, HUD will consider at a later date whether any revisions to
guidance documents may be necessary or helpful.

Comments Regarding Effects of the Proposed Rule

Issue: Commenters stated that regulated entities will face
increased litigation risks under the proposed rule. They said that the
``specter of disparate-impact litigation'' could discourage businesses
from undertaking the activities that ensure a well-functioning housing
market, undermining the Act's purpose and the free-market system. A
commenter stated that the 2013 Rule created an uncertain legal
environment where any adverse impact that a practice may have on a
protected group invited the threat of a lawsuit over its discriminatory
effect. As an example, this commenter stated that people of color are
more likely to be tenants than homeowners, so the proposed rule invites
tenant advocates to assert that any rule or policy that is adverse to
actual or prospective renters may have a discriminatory effect while
citing little or no statistical or evidentiary basis. Commenters stated
that reinstating the 2013 Rule will increase litigation costs, with one
commenter saying that this is due to unclear, overly burdensome, and
duplicative standards, saying that HUD itself recognized this in the
2019 Proposed Rule. A commenter also noted that the proposed rule would
impose additional burdens on entities administering Community
Development Block Grant disaster relief funding.
HUD Response: HUD disagrees that this rule will increase litigation
risks in a manner that interferes with the free-market system and
undermines the purpose of Act. This rule does not restrict valid free-
market activity, but rather only regulates policies that have
unjustified discriminatory effects and encourages businesses to develop
and implement policies that achieve their substantial legitimate
purposes in the least discriminatory manner. HUD believes the rule will
further the goal of a vibrant, integrated, and open housing market.
Furthermore, the rule does not create any new liability or burdens for
businesses or declare any activity per se unlawful. It merely
prescribes a method for evaluating liability under the Act. HUD
believes that litigation and burdens concerning the Act is more
properly attributable to the Act, rather than the rule. HUD notes that
commenters' concerns are undermined by the fact that the rule has been
in place since 2013 and in HUD's experience, no such increased
litigation has occurred.
Issue: A commenter critiqued the rule for increasing the threat of
challenges to certain types of landlord practices that the commenter
characterized as justified by practical business decision making. For
instance, the commenter stated, the rule allows landlords to be sued
for occupancy restrictions that are stricter than state or local codes
even though these restrictions advance housing providers' legitimate
interests in limiting wear and tear, minimizing operational costs, and
addressing issues with safety, overcrowding, and noise in multifamily
properties. According to the commenter, advocates have increasingly
used the rule to challenge occupancy restrictions with HUD and state
agencies. The commenter also said that the rule allows lawsuits against
landlords who purchase buildings that are largely populated by persons
with certain protected characteristics and institute new rules that are
facially neutral but have a disparate impact on protected classes, such
as requiring existing tenants to provide valid government issued
identification or requiring tenants to pay rent through direct deposit
from a bank account. The commenter also mentioned the 2016 Guidance on
criminal records, alleging that it has invited costly challenges to

[[Page 19496]]

all criminal records screening, and requires property owners to set up
a ``mini parole board'' to review applicants with criminal records,
even if there are legitimate reasons not to rent to persons with
certain types of criminal records, including lesser offenses like
disorderly conduct, illegal drug use, and nuisance conduct. Finally,
the commenter stated that advocates are using the 2013 Rule against
landlords who choose not to participate in the Section 8 program. The
commenter described one class action case in which it represented the
new owner of a building who decided to not accept Section 8 vouchers
and wanted to raise rents to pay for costly improvements to the
building, which allegedly had a discriminatory effect on residents with
disabilities, African Americans and Hispanics who used Section 8
vouchers or could not afford higher rent. The commenter said that the
claim survived a summary judgment motion because of the possibility
that the plaintiffs might be able to show a less discriminatory
alternative, such as raising rents less, doing less to improve the
property, or looking for some public funding or subsidies to allow the
owners to get a return on investment without discontinuing
participation in Section 8 and raising rents.
HUD Response: HUD disagrees that the commenter's concerns merit
revising the rule. The examples provided by the commenter are well
within the types of cases that may or may not state a valid claim under
the Act and may be decided through the rule's framework. While the
practices cited by the commenter that have a discriminatory effect on
protected classes may advance legitimate interests, these practices are
still illegal if, for example, they are not necessary to achieve
substantial, legitimate, nondiscriminatory interests of the defendant
or there is a different practice that advances that same interest but
has a less discriminatory effect. This is the essential framework of
discriminatory effects liability that has developed in case law,
whether the rule exists or not. For example, as noted in the 2013 Rule,
even decades prior to the rule, unreasonable restrictions on occupancy
that impose a discriminatory effect on families with children will
result in liability.\345\ Furthermore, the 2016 Guidance on criminal
records sets out this well-established discriminatory effects
framework. It does not require a ``mini parole board'' but rather
posits that an individualized review of a person with a criminal record
is likely to have a less discriminatory effect than a policy that
imposes an automatic categorical ban. To the extent the commenter
disagrees with that assessment, its quarrel is with the Guidance's
particularized application of this rule and not with the more general
principles this rule sets out.
---------------------------------------------------------------------------

\345\ 78 FR 11461-11462.
---------------------------------------------------------------------------

In sum, HUD believes that this rule strikes a reasonable balance,
in accordance with the Act and with caselaw, between allowing policies
that permit landlords to advance their interests, even if those
policies disproportionately adversely impact protected classes, while
requiring landlords to demonstrate that their policies are necessary to
advance those interests.
Issue: A commenter stated that the proposed rule violates the
constitutional principle of separation of powers because Sec.
100.500(c) is an attempt by HUD to dictate rules of judicial procedure
and evidence to the judicial branch. The commenter said the rule would
unnecessarily produce complication throughout the federal courts
because they have no obligation to use a standard dictated by the
executive branch, and different courts will decide to follow the rule
(or not) in different ways. The commenter requested that HUD rescind
all provisions that address judicial standards of review, rules of
procedure, and evidence. The commenter continued that HUD's reliance on
Congress's delegation of certain authority under section 3608(a) is
improper because that statutory provision does not mention the
judiciary, standards of review, rules of procedure or evidence, or any
directives for HUD to assume a role that is clearly the province of the
judiciary.
HUD Response: The final rule sets out a framework for analyzing and
proving cases under a theory of discriminatory effects and does not
amend or establish rules of judicial or civil procedure or evidence. It
remedies concerns expressed by many commenters that the 2020 Rule
infringed upon the judicial branch by, for example, setting pleading
standards, establishing a confusing burden that appeared to contradict
the Federal Rules of Civil Procedure, and defining ``plausibility'' in
such a way as to preclude substantively meritorious claims. HUD agrees
that it does not have the authority to amend pleading standards, to
modify the defenses under Federal Rule of Civil Procedure 12, or the
rules of evidence. It does, however, have authority to ``make rules . .
. to carry out'' the Act, including the prohibition of discrimination
in housing.\346\ That is precisely what HUD is doing here.
---------------------------------------------------------------------------

\346\ 42 U.S.C. 3614a.
---------------------------------------------------------------------------

Comments Regarding the Administrative Procedure Act

Issue: Commenters disagreed about whether the proposed rule
violates the Administrative Procedure Act (APA). A commenter stated
that HUD's reasoning for the proposed rule, that ``the practical effect
of the 2020 Rule's amendments is to severely limit HUD's and
plaintiffs' use of the discriminatory effects framework in ways that
substantially diminish that frameworks' effectiveness,'' does not
satisfy APA requirements because HUD neither provided the essential
facts on which its conclusion was based nor explained how those facts
justified that conclusion, instead making a conclusory statement.
Another commenter stated that reverting to the 2013 Rule, which was
promulgated before Inclusive Communities, without adequately explaining
the reversal would violate the APA.
Other commenters stated that the 2020 Rule violated the APA and
that the proposed rule would rightfully reinstate the standard set
forth in the 2013 Rule. Commenters stated that changes made by the 2020
Rule were arbitrary and capricious and contrary to law. Commenters also
stated that the 2020 Rule failed to explain why it was deviating from
legal standards and failed to address that courts have easily applied
existing disparate impact case law and Inclusive Communities.
Commenters also stated that the 2020 Rule violated the APA by failing
to address numerous comments about the negative effects the rule would
have, namely on plaintiffs' ability to successfully challenge housing
discrimination in accordance with the Act.
HUD Response: HUD believes that the proposed rule and this final
rule fully comply with the requirements of the APA. HUD disagrees with
the assertion that HUD did not explain its proposed rule in light of
Inclusive Communities. The proposed rule directly and thoroughly
explained HUD's reason for believing that the 2013 Rule was consistent
with and in fact supported by Inclusive Communities. The proposed rule
also explained why HUD believed that the 2020 Rule was deficient.
There, HUD provided a number of different reasons why it was proposing
to change course from the position it had taken in 2020 and was
proposing recodification of the 2013 Rule, not just that ``the
practical effect of the 2020 Rule's

[[Page 19497]]

amendments was to severely . . . diminish the [discriminatory effects]
framework's effectiveness.'' \347\ While the commenter characterized
this statement as conclusory, HUD explained that this belief was
``based on HUD's experience investigating and litigating discriminatory
effects cases.'' \348\ HUD further explained that its experience
informed ``it that many of the points made by commenters opposing the
2020 Rule and the Massachusetts District Court are correct, including
that the changes the 2020 Rule makes, such as amending pleading
standards, changing the burden shifting framework, and adding defenses,
all favoring respondents, will at the very least introduce unnecessary
confusion and will at worst make discriminatory effects liability a
practical nullity.'' \349\ Further, the APA requires in relevant part
that a proposed rule make reference to the legal authority under which
the rule is proposed and include either the terms or substance of the
proposed rule or a description of the issues involved, all of which HUD
did in the proposed rule.\350\ Now, in this final rule, HUD has again
explained that the Act vests HUD with the requisite authority, and has
further explained why, having reconsidered the 2020 Rule, HUD is
finalizing its proposal to recodify the 2013 Rule.\351\
---------------------------------------------------------------------------

\347\ 86 FR 33593, 33594.
\348\ Id.
\349\ Id.
\350\ See 5 U.S.C. 553(b)(1)-(3).
\351\ Supra at n. 8.
---------------------------------------------------------------------------

Furthermore, this final rule explains HUD's position after
consideration of the comments HUD received on the proposed rule. As
explained in the proposed rule, the facts that spurred HUD's decision
to recodify the 2013 Rule include the consistent concerns expressed
through thousands of public comments regarding the effect of the 2020
Rule's changes on disparate impact jurisprudence and protected classes,
the concerns raised by the court in Massachusetts Fair Housing Center,
HUD's own experience in interpreting and applying the Act, which
indicated that these criticisms are correct, and HUD's determination
after examining case law that several provisions of the 2020 Rule were
inconsistent with the purpose of the Act and judicial and agency
precedent.\352\ HUD expounds upon its reasoning in this final rule in
responding to specific comments.
---------------------------------------------------------------------------

\352\ 86 FR 33593-33595.
---------------------------------------------------------------------------

HUD is not ignoring facts or circumstances that underlay HUD's 2020
Rule; rather, HUD is acknowledging its change in position, drawing on
its experience in different ways than it did in the 2020 Rule, drawing
on case law that did not exist when the 2020 Rule was promulgated,
relying on other case law that the 2020 Rule downplayed and/or ignored,
and drawing on new public comments about the final version of the 2020
Rule that did not exist when HUD decided to issue the 2020 Rule.

Comments Regarding HUD's Findings and Certifications

Issue: Commenters stated that HUD inappropriately and incorrectly
assumed that reinstating the 2013 Rule ``would not have federalism
implications,'' and asserted that HUD should have consulted with state
regulators as required by Executive Order 13132 and acknowledged that
the rule would interfere with state law in violation of McCarran-
Ferguson in all or nearly all cases.
HUD Response: HUD stands by its certification that this rule--like
the 2013 Rule it recodifies and the 2020 Rule it rescinds--does not
have federalism implications. These commenters' assertion that this
rule is inconsistent with Executive Order 13132 is based solely on the
assertion that this rule would interfere with states' ability to
regulate insurance in violation of McCarran-Ferguson. As discussed
extensively above, HUD disagrees with this assertion and finds that
this rule does not interfere with state insurance laws and is
consistent with McCarran-Ferguson. Therefore, this rule has no
federalism implications. The existing relationship between the Act and
McCarran-Ferguson, and therefore the Act and state insurance law,
remains the same before and after this rule. Section 6 of Executive
Order 13132 only requires consultation with the states when there are
federalism implications, when a regulation has ``substantial direct
effect on the States''; therefore, HUD has no obligation to consult
with state regulators.
Issue: Commenters stated that the proposed rule would have an
impact on regulated entities and that the proposed rule does not pass a
basic cost benefit analysis. Another commenter stated that the proposed
rule would eliminate economic burdens that the 2020 Rule imposed by
removing ambiguity and uncertainty that would have led to expensive
litigation and dispute resolution and would have imposed these expenses
on plaintiffs, state governments, the public, and attorneys general.
HUD Response: HUD agrees that 2020 Rule would have been burdensome
if it had not been enjoined and that the proposed rule does not impose
a significant economic impact, as further explained in HUD's
certification. HUD stands by its certification that this rule will not
have a significant economic impact. 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, it
adds no additional costs to housing providers and others engaged in
housing transactions. Rather, HUD believes that 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.

Other Comments

Issue: A commenter stated that the proposed rule is unnecessary
because credit unions have already carefully structured their policies
to comply with the Act.
HUD Response: HUD appreciates the efforts of regulated entities to
comply with the Act and its implementing regulations. However, HUD
disagrees that any alleged current compliance provides a basis for
retracting the rule or providing exemptions, particularly where
policies may change in the future. HUD believes--and many commenters
have stated--that this rule is a necessary tool for ensuring both new
and continued compliance.
Issue: A commenter asserted that plaintiffs sometimes use the
disparate impact framework to bring costly and lengthy litigation which
is resolved without a court finding. A commenter suggested HUD include
an extensive examination of disparate impact cases relating to
residential lending activity from the standpoint of any actual
discriminatory findings and court judgments and provide an accounting
of cases brought in class action form, examining and reporting any
monetary awards actually being delivered to the purported class.
HUD Response: This comment is outside the scope of the proposed
rule because it is a criticism of plaintiffs who bring cases based on a
disparate impact theory of liability and/or the disparate impact theory
itself, rather than the final rule. HUD does not believe that
conducting such an examination or finding that most disparate impact
cases settle before a judicial determination, would inform any changes
HUD should or should not make to the proposed rule. For these reasons,
HUD declines to

[[Page 19498]]

conduct such an examination in this final rule.

IV. Severability

Consistent with the requirements of the Administrative Procedure
Act, HUD has carefully responded to all public comments received in
response to its notice of proposed rulemaking. HUD has determined that
the discriminatory effects standard and burden-shifting framework in
this rule appropriately implement, and are fully consistent with, the
Fair Housing Act and governing law, including Inclusive Communities.
Furthermore, HUD's decision to not create exemptions for any industry
covered by the Fair Housing Act is also fully consistent with the plain
language of the Act and governing law, including the McCarran-Ferguson
Act. As explained in 2013, 2016, and 2020, as well as in greater detail
above, HUD is declining to provide any exemptions, including for the
insurance industry, in whole or in part, including because HUD lacks
the authority to create such exemptions under the Act.\353\ Further,
declining to provide exemptions for certain industries furthers
congressional intent by effectuating the Act's broad remedial
purpose.\354\
---------------------------------------------------------------------------

\353\ See Sierra Club v. EPA, 719 F.2d 436, 453 (D.C. Cir. 1983)
(``The agency relies on its general authority under section 301 of
the Act to `prescribe such regulations as are necessary to carry out
[its] functions under [the Act]' . . . . EPA's construction of the
statute is condemned by the general rule that when a statute lists
several specific exceptions to the general purpose, others should
not be implied.''); Colorado Pub. Int. Rsch. Grp., Inc. v. Train,
507 F.2d 743, 747 (10th Cir. 1974), rev'd on other grounds, 426 U.S.
1 (1976) (``Another cardinal rule of statutory construction is that
where the legislature has acted to except certain categories from
the operation of a particular law, it is to be presumed that the
legislature in its exceptions intended to go only as far as it did,
and that additional exceptions are not warranted.''); Nat. Res. Def.
Council, Inc. v. Costle, 568 F.2d 1369, 1377 (D.C. Cir. 1977)
(courts cannot manufacture a ``revisory power'' granting agency
authority to act ``inconsistent with the clear intent of the
relevant statute''); Alabama Power Co. v. Costle, 636 F.2d 323, 357
(D.C. Cir. 1979) (``[T]here exists no general administrative power
to create exemptions to statutory requirements based upon the
agency's perceptions of costs and benefits.''); see also Graoch, 508
F.3d at 375 (``[n]othing in the text of the FHA instructs us to
create practice-specific exceptions.'').
\354\ Inclusive Cmtys. Project, Inc., 576 U.S. at 539 (stating
that the FHA ``was enacted to eradicate discriminatory practices
within a sector of our Nation's economy'' and noting that the
viability of disparate impact claims is ``consistent'' with the
Act's ``central purpose''); H.R. Res. 1095, 110th Cong., 154 Cong.
Rec. H2280-01 (April 15, 2008) (explaining that the goal of the Act
was to advance equal opportunity in housing and to ``achieve racial
integration for the benefit of all people in the United States.'').
---------------------------------------------------------------------------

Through this rule, HUD is taking two separate actions. First, HUD
rescinds the 2020 Rule, removing 24 CFR 100.500 and the second and
third sentences of 24 CFR 100.5(b), thus nullifying the 2020 Rule and
eliminating any and all legal effect that the 2020 Rule could have.
Second, HUD adds a new 24 CFR 100.500 and a new second sentence to 24
CFR 100.5(b). The new language in both sections is identical to the
language in those sections of the Code of Federal Regulations that took
effect on March 18, 2013, which HUD refers to throughout this preamble
as ``the 2013 Rule.'' HUD intends the language promulgated today to be
the only operative rule.
HUD intends these separate actions to be legally severable. In
particular, in the event that any portion of Sec. 100.500 or Sec.
100.5(b) of this final rule is held to be invalid or unenforceable, HUD
intends that the rescission of the 2020 Rule be unaffected. HUD
believes that it would be more consistent with the plain language and
legislative history of the Act for the Code of Federal Regulations to
contain no language regarding discriminatory effects liability and for
litigants to rely on existing jurisprudence than for any provision of
the 2020 Rule to remain in effect. HUD has made this determination for
all the reasons described elsewhere in this preamble, including that
the 2020 Rule is inconsistent with such jurisprudence. In addition to
rescinding the 2020 Rule for the reasons described more fully in this
preamble, HUD's rescission will serve to resolve three pending
lawsuits, all of which challenge the 2020 Rule as arbitrary and
capricious and inconsistent with Inclusive Communities and other case
law.\355\ Moreover, having no rule in place at all regarding
discriminatory effects would be workable, as precedent proves; for
decades prior to the 2013 Rule, there was no HUD rule on discriminatory
effects liability, and litigants relied on caselaw.
---------------------------------------------------------------------------

\355\ Massachusetts Fair Hous. Ctr., et al. v. HUD, 496 F. Supp.
3d 600 (D. Mass. 2020); Nat'l Fair Hous. All., et al. v. HUD, No.
3:20-cv-07388 (N.D. Cal.); Open Cmtys., et al. v. HUD, No. 3:20-cv-
01587 (D. Conn.).
---------------------------------------------------------------------------

HUD also intends that the rule be treated as severable in its
applications to certain industries. Litigation brought by the insurance
industry regarding the 2013 Rule is ongoing.\356\ One of those cases,
decided in the context of the 2013 Rule, has already upheld the rule's
burden-shifting framework for analyzing discriminatory effects claims
as a reasonable interpretation of the Act, but also held that HUD had
not adequately explained why case-by-case adjudication was preferable
to using its rulemaking authority to provide exemptions or safe harbors
related to homeowners insurance.\357\ To resolve that suit, HUD issued
the 2016 Supplemental Explanation.\358\ The plaintiff filed an amended
complaint and that litigation is pending. HUD believes, as described in
greater detail above, that discriminatory effects liability can be
properly applied to the insurance industry and that doing so is fully
consistent with the Act's plain language and broad remedial purpose.
However, should a court decide that the insurance (or any other)
industry or certain types of insurance (or other) claims should be
exempt from the Rule, HUD intends that this final rule remain in effect
and apply to all other actors and claims covered by the Act. Moreover,
in the event of such a court decision, this final rule would still
function sensibly with respect to others covered by the Act, as nothing
in this final rule's applicability to the insurance (or any other)
industry affects its applicability to others covered by the Act.
---------------------------------------------------------------------------

\356\ Nat'l Ass'n. of Mut. Ins. Cos. v. HUD, No. 1:13-cv-00966
(D.D.C); Prop. Cas. Ins.. Ass'n. of Am. v. Fudge, 1:13-cv-08564
(N.D. Ill.).
\357\ Prop. Cas. Ins. Ass'n of Am. v. Donovan, 66 F. Supp. 3d
1018, 1049-54 (N.D. Ill. 2014).
\358\ 81 FR 69012-13.
---------------------------------------------------------------------------

V. 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).
In its proposed rule, HUD invited comments on whether any further
analysis was needed to assess the impact of the rule, given the fact
that the rule would simply be retaining the status quo and would
therefore have no

[[Page 19499]]

new impact on regulated entities. Specifically, HUD explained:
``[b]ecause the 2020 Rule never took effect, and therefore did not
affect the obligations of any regulated entities, this proposed rule is
only recodifying the 2013 Rule and will have no impact on regulated
entities except to affirm that the 2013 Rule remains in effect.
Furthermore, the 2013 Rule itself had little direct effect on regulated
entities because it only ``formalize[d] the longstanding interpretation
of the Fair Housing Act to include discriminatory effects liability''
and ``[was] not a significant departure from HUD's interpretation to
date or that of the majority of federal courts.'' HUD stated further
that it did not believe that additional analysis was needed on this
point but invited comment.
Some commenters stated that the rule does not pass a cost benefit
analysis, but they did not explain why this was so. Nor did they
address HUD's explanation in the proposed rule as to why a deeper
assessment of the impact of the rule was unnecessary. HUD continues to
believe that this rule will provide significant benefits, while having
no new impact on regulated entities, for the reasons explained earlier
and summarized below.
As explained in 2013, 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. 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.'' \359\ And as HUD
explains both in this rule and the proposed rule, Inclusive Communities
did not disrupt this long-standing case law or the 2013 Rule; rather,
it affirmed it, citing to HUD's 2013 Rule multiple times with approval.
The Court articulated long-standing limitations on the scope of
disparate impact liability, which HUD had already accounted for in the
2013 Rule.
---------------------------------------------------------------------------

\359\ Id.
---------------------------------------------------------------------------

When deciding whether to enact this rule, HUD also considered
whether any part of the 2020 Rule should be retained, which is
evidenced by our discussion of various parts of the 2020 Rule
elsewhere. It decided that no substantive portion of the 2020 Rule
should be incorporated into this rule. Only three additional
illustrations of discriminatory practices under the Act at Sec.
100.70(d) are incorporated from the 2020 Rule, which were not
specifically objected to by commenters and present no substantive
change from the 2013 Rule. The 2020 Rule would impose significant costs
to the agency, the public, and regulated entities while affording
little, if any, benefit. As described in further detail elsewhere in
this preamble, the 2020 Rule introduced new and confusing standards,
including standards not found anywhere in case law, that were largely
untested. Accordingly, the 2020 Rule would require regulated entities
to spend more resources attempting to ascertain what the 2020 Rule
means and how to defend against any potential claims, as well as
increased spending that could last for years as courts try to interpret
what the 2020 Rule means. Relatedly, entities that are covered by the
Fair Housing Act have a serious reliance interest in the 2013 Rule,
which has been in place for ten years. Conversely, these entities
should have little to no reliance interest in the 2020 Rule, which
never went into effect.
Furthermore, HUD's experience investigating and litigating
discrimination cases under various regulatory frameworks informs that
the 2020 Rule would make it significantly more difficult, almost
impossible, to bring a discriminatory effects claim, and significantly
more difficult to provide sound guidance to housing providers
attempting to comply with the Act, at great cost to the agency in terms
of its mission and its resources. Extra staff time would need to be
spent to determine how to apply the 2020 rule to current cases being
investigated and new cases that will be filed, and to determine how to
address various guidance documents for the public and grantees which
have been issued based on the 2013 Rule. Additionally, allowing
unlawful discrimination to go unchecked and unremedied because of
burdensome and confusing pleading and proof standards would come at
great cost to the public who, as the Act mandates, are entitled to
equal access to housing throughout the country.

Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') (5 U.S.C. 601 et seq.)
generally requires 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.
This rule amends the Code of Federal Regulations to accurately reflect
HUD's discriminatory effects regulation as it currently exists. As a
result, all entities, big and small, have a responsibility to comply
with the law.
As discussed above, this Rule will continue to apply the 2013 Rule,
which has been in effect uninterrupted for ten years. HUD concludes, as
it did when it published the 2013 Rule, that the majority of entities,
large or small, currently comply and will remain in compliance with the
Fair Housing Act. All entities, large and small, have been subject to
the Fair Housing Act for over fifty years and subject to the 2013 Rule
for ten years. For the minority of entities that have 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 be the costs of compliance with a
preexisting statute and regulation. This rule does not change
substantive obligations; it merely recodifies the regulation that more
accurately reflects the law. Any burden on small entities is simply
incidental to the pre-existing requirements to comply with this body of
law. Furthermore, HUD anticipates that this rule will eliminate
confusion for all entities, including small Fair Housing Advocacy
organizations, by ensuring HUD's regulations accurately reflect current
standards. Accordingly, the undersigned certifies that this rule will
not have a significant economic impact on a substantial number of small
entities. HUD invited comment on this certification in the proposed
rule. HUD did not receive any comments providing analysis of the number
of small entities which commenters believe may be affected by this
regulation. Some commenters stated that application of discriminatory
effects law to the

[[Page 19500]]

business of insurance would harm small businesses. HUD has responded to
these comments in this rule.

Environmental Impact

This 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 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 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

Aged, Civil rights, Fair housing, Incorporation by reference,
Individuals with disabilities, Mortgages, and 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. Amend Sec. 100.5 by revising paragraph (b) and removing paragraph
(d) to read as follows:

Sec. 100.5 Scope.

* * * * *
(b) This part provides the Department's interpretation of the
coverage of the Fair Housing Act regarding discrimination related to
the sale or rental of dwellings, the provision of services in
connection therewith, and the availability of residential real estate-
related transactions. 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, paragraph (d)(5) is republished to read as follows:

Sec. 100.70 Other prohibited sale and rental conduct.

* * * * *
(d) * * *
(5) Enacting or implementing land-use rules, ordinances,
procedures, building codes, permitting rules, policies, or requirements
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 G--Discriminatory Effect

0
4. Revise Sec. 100.500 to read as follows:

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 (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.

Marcia L. Fudge,
Secretary.
[FR Doc. 2023-05836 Filed 3-27-23; 4:15 pm]
BILLING CODE 4210-67-P