Administration to Issue Guidance Regarding HUD’s Interpretation of Disparate Impact in Fair Housing

On Monday, August 19, 2019, the Trump administration will introduce a new rule that may change the way the federal government enforces fair housing law, making it harder for people to file fair housing discrimination complaints.

The proposed regulation from the Department of Housing and Urban Development (HUD) would replace the current rule on disparate impact, a legal theory that has guided fair housing law for more than 50-years. Disparate impact refers to practices or policies than have an adverse impact on certain protected groups (e.g., race or national origin) without discriminating against them in explicit ways. In 2015, the Supreme Court recognized this form of discrimination as being prohibited under the Fair Housing Act. The proposed rule from HUD will substantially raise the burden of proof for parties claiming discrimination, making it easier for property owners to implement policies that have a discriminatory effect.

In addition to weakening the disparate impact protections, the proposed rule will carve out guidance for the automated decision-making systems used by lenders and landlords that deliver judgments on credit risk, home insurance, mortgage interest rates, and decisions based on criminal records. Under the new regulation, lenders and landlords would not be responsible for the effects of an algorithm provided by a third party – a standard that will almost certainly build a backdoor to bias.

The proposed regulation is not a surprise. Last June, HUD Secretary Ben Carson made it clear that HUD was looking at revising the disparate impact procedures to favor lenders and landlords. Once the rule is published on August 19, there will be a 60-day public comment period before it can be implemented.

The Current Rule

Presently, disparate impact cases proceed by meeting a three-part “burden-shifting” test. A plaintiff makes an allegation and must show that a practice or policy has a disparate impact based on a protected characteristic. If this is shown, the defendant offers a rebuttal, showing that there is a legitimate business reason behind the policy. If that is shown, the plaintiff has an opportunity to show that there is a less discriminatory way to accomplish the same business goal.

The Proposed Change

The new rule will set a five-point prima facie evidentiary test on the plaintiff side alone. This means that a party seeking to bring a discrimination case under the FHA would need to establish some level of evidence in the pleading stage. To bring forward an accusation of implicit discrimination, plaintiffs would have to demonstrate – before any discovery process – that the policy itself is flawed, and not just that the policy has a discriminatory effect.

Under the five-point burden test, plaintiffs would need to 1) prove that a policy is “arbitrary, artificial, and unnecessary” to achieve a valid interest; (2) demonstrate a “robust causal link” between the practice and the disparate impact; (3) show that the policy negatively affects “members of a protected class” based on race, color, religion, sex, familial status, national origin, or disability; (4) indicate that the impact is “significant;” and (5) prove that the “complaining party’s alleged injury” is directly caused by the practice in question.

The major weakness with this new procedure is that without going through a discovery process, it is nearly impossible to establish the tight causal link between the policy and the impact.

In addition, the new HUD rule would establish three new defenses for landlords, lenders, and others accused of discrimination based on models and algorithms. The first defense would enable defendants to indicate that a model is not the cause of the harm. The second would allow the defendant to show that a model or algorithm is being used as intended and is the responsibility of a third party. Finally, the new rule would allow the defendant to call on a qualified expert to show that the alleged harm is not a model’s fault.

This new rule will give lenders and landlords a huge loophole. Many, if not most, lenders and landlords are not capable of developing their own in-house credit-risk algorithms; instead, they rely on third party vendors. By placing the burden of fairness on the vendors, HUD is establishing an incentive for users and vendors alike to decline to study the outcomes of automated decision-making systems. In other words, as long as the vendor claims to have tested for algorithmic fairness, the lender or landlord is shielded from liability. Since there are no established standards, and HUD does not propose any, to test for disparate impact, the vendors can set their own requirements for testing.

If a lender or landlord is not liable for discrimination resulting from an algorithm that it uses, there is no incentive to look for a company that guarantees non-discriminatory algorithms. As for the vendors, there is no incentive to test for disparate impact since if they don’t know the type of disparate impact that may result from their algorithm, it will be almost impossible to make them responsible for any discrimination.

At the same time, a plaintiff will have no way of knowing what data a vendor uses to reach a leasing or mortgage decision. The vendors will be able to shield their practices behind trade secrets in the way that the algorithms are established.

This is the first federal regulation to directly address algorithms and disparate impact. Based on early information on the proposed regulation, it appears that vendors will not be held liable unless their model is blatantly discriminatory. Under this proposal, it will fall on plaintiffs to determine, case by case, how an algorithm affects them by suing the company or companies responsible for making the algorithm – without any standard for what algorithmic fairness means.

Civil rights organizations are going to aggressively fight this proposed regulation, while real estate and lender lobbyists will strongly support it.

In truth, even if the rule becomes final, no one can be quite sure what impact it will have on fair housing claims or enforcement. As with all regulations of this type, it is likely to be fraught with unintended consequences. But, one thing is certain – if the rule becomes final, tenants and potential purchasers of housing will have a reduced chance of prevailing is disparate impact claims.

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