[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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
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    \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