HUD Clarifies ‘Discriminatory Effects’ for Rental Housing

The agency reinstated a 2013 rule on determining when a provider has been biased against a resident, notes Burr & Forman's Russell Rutherford.

Russell Rutherford

Under the Fair Housing Act, it is unlawful for a seller, lessor, or financier of housing to discriminate on the basis of race, color, religion, sex (including sexual orientation and gender identity), disability, familial status, or national origin. A new HUD rule clarifies exactly how this prohibition will be applied in instances where a housing provider’s facially neutral practices are challenged on the basis of “disparate impact” or “discriminatory effects.”

Obviously, the FHA prohibits housing providers from engaging in practices that are facially discriminatory—meaning any practice that overtly treats people less favorably because of their status as a member of one of these protected classes. Beyond that, it can also be illegal to engage in practices that are facially neutral if they have discriminatory effects. A claim challenging this type of practice is called a “disparate impact” or “discriminatory effects” challenge. For example, if a multifamily property institutes a local preference, meaning it gives leasing priority to applicants who live or work in the area, this is a facially neutral policy that could potentially be challenged under the FHA, where the claimant asserts the policy has a disproportionately adverse effect on members of a protected class.  The success of such a challenge will depend on the facts and how the preference is implemented.

In March 2023, HUD published a new rule that clarifies the standard applicable to “discriminatory effects” claims. The 2023 rule provides for the application of a burden-shifting analysis in “discriminatory effects” actions.

  • First, the burden is on the plaintiff to make a prima facie showing, using statistical evidence, that a specific neutral policy or practice has had a greater impact on members of a protected class than on others. It must be shown that any statistical disparities were actually caused by the challenged policy.
  • If the plaintiff is able to carry its burden, the burden shifts to the defendant to prove that the challenged policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory purpose.
  • If the defendant satisfies that burden, the burden shifts back to the plaintiff to show that the defendant could achieve the purpose supporting the challenged policy using another practice or policy that has a lesser discriminatory impact. The plaintiff will prevail if able to satisfy that burden.

Prior to March 2023, there was a great deal of uncertainty surrounding this burden-shifting framework. In 2013, HUD adopted a rule formally codifying longstanding case law providing for the application of the same burden-shifting analysis set forth above. Several federal agencies, including HUD, had long relied on the aforementioned case law and the 2013 rule was intended merely to clarify and formalize this standard.

However, the waters were muddied in 2015, when the Supreme Court issued its opinion in Tex. Dept. of Hous. & Cmty. Affairs v. The Inclusive Communities Project, Inc., 573 U.S. 576 (2015). In ICP, the Court held that disparate impact claims are cognizable under the Fair Housing Act, but imposed burdensome requirements in order for a claimant to establish a prima facie case. The Court held that a claimant may not establish a prima facie showing of disparate impact unless they identify a specific policy causing a disparity affecting a protected class. In other words, it is not enough to allege the existence of a racial imbalance (or other protected class).

In 2020, HUD took this a step further by adopting a new rule replacing the three-prong test set out in the 2013 rule with a five-prong analysis, requiring a plaintiff to plead all five of the following elements:

  • The challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.
  • The challenged policy or practice has a disproportionately adverse effect on members of a protected class.
  • There is a direct causal link between the challenged policy and the adverse effect on members of a protected class.
  • The alleged disparity caused by the policy or practice is significant; and
  • There is a direct relationship between the plaintiff’s injury and the defendant’s alleged conduct.

The 2020 rule was adopted, but it never went into effect—it was challenged in court and enjoined.  Therefore, the 2013 rule never stopped being the law. Now, the 2023 rule abrogates the 2020 rule and formally reinstates the 2013 rule.

In light of HUD’s 2023 clarification of this burden-shifting framework, housing providers need to consider whether any of their policies or practices could have discriminatory effects. Best practices dictate that providers (and their legal counsel) should carefully plan to avoid instituting any policies unless they are narrowly tailored to achieve a legitimate business purpose. Providers should be especially careful with any policy or procedure that allows for discretion (for instance, where a leasing employee is permitted to exercise discretion when selecting qualified residents), and they should consider performing periodic internal audits to identify areas susceptible to challenge.

Russell Rutherford is a partner at Burr & Forman’s Birmingham, Alabama office, where he serves as outside general counsel for several unique clients with a broad spectrum of issues, including litigation/dispute resolution, corporate, compliance, government contracting, government relations and issues specific to charitable, mission-driven businesses. 

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