NMHC Notebook: The Accidental Discriminator

Under HUD’s disparate impact rule, common industry practices are coming under scrutiny, leaving some apartment providers vulnerable.

2010 NMHC PORTRAITSForty-five years have passed since President Lyndon B. Johnson signed the watershed Fair Housing Act into law, putting a symbolic end to systematic and intentional housing discrimination. While overt, intentional acts of discrimination can be more easily identified and remedied pursuant to the Fair Housing Act, thousands of housing discrimination cases are filed each year in the country, indicating the ongoing need for fair housing laws.

However, earlier this year, the U.S. Department of Housing and Urban Development (HUD) issued a final rule that has left many housing stakeholders wondering how far the government’s definition of housing discrimination will stretch and whether the industry could soon be facing an impending surge in complaint and enforcement activity. The rule formally implemented a so-called “disparate impact” standard of liability, which applies to a business practice or policy that is neutral on its face but nevertheless demonstrates a statistically discriminatory effect on persons protected by the Fair Housing Act, even if there is no evidence of an actual intent to discriminate.  The Fair Housing Act does not specifically address effects-based discrimination, but courts and agencies have inferred such liability in employment, housing and related contexts for years.
While HUD maintains that the rule essentially just formalizes its long-standing position on disparate impact, many legal, housing and finance experts see the new rule as a noteworthy expansion of the law with potentially significant repercussions for apartment owners and managers. And even if it only formalizes existing rules, it sets a clear road map for bringing disparate impact actions going forward. At issue is that apartment firms may institute a seemingly neutral business policy—occupancy limitations, resident screening requirements and Section 8 voucher policies, for example—that unintentionally but adversely affects members of a protected class, rendering them liable for discrimination claims despite no intention of singling out a particular group for adverse treatment.

Theory into practice

In practical terms, a number of often-endorsed business practices are coming under scrutiny for potential disparate impact liability, particularly as some state and local governments move to establish their own fair housing laws and expand protections within their jurisdictions to include marital status, sexual orientation, source of income or political affiliation, to name a few.

Criminal background checks are a good example. Apartment owners and managers often screen resident applicants for criminal history, citing the legal duty to provide quiet enjoyment and a secure environment for their tenants. This is in line with the criminal background checks that the government requires owners of HUD-insured and assisted housing to ensure residents have no recent history of violent crimes or drug dealing. Some states and localities, however, have adopted laws that formally limit the ability of owners to impose such screening policies. Even where there is no formal law on the subject, however, some advocates have used disparate impact theory to attack criminal screening, asserting that broad-brush, no-record policies have a harsher impact on some protected classes than others and, therefore, have a discriminatory impact.

Income-related policies also could become a lightning rod issue under disparate impact. Presently, a person’s purely economic status­—for example, receipt of alimony, public assistance, or Section 8 vouchers—is not itself a protected class under the federal Fair Housing Act. Nevertheless, some states and localities have made “source of income” a protected class under their fair housing laws. And as with criminal screening rules, some advocates are starting to leverage disparate impact theory to extend fair housing protections to economic status, arguing that certain business practices, such as minimum income requirements and rent-ratio policies, violate the federal Fair Housing Act, because they disproportionately affect minorities that are protected classes under that law. Here again, disparate impact is being used to attack widely adopted rules and practices, not because they expressly violate the Fair Housing Act, but because of their potential disparate impact on a protected class.

Along those same lines, credit requirements and qualifications are potentially problematic, not just for apartment firms but also housing lenders and insurers. Stricter, post-recession financial requirements and underwriting practices could disadvantage certain groups, leading to greater disparate impact liability risk.
That said, some housing and legal experts contend that this disparate impact rule could also work in housing providers’ favor, helping providers’ overcome particularly stringent local zoning laws and ordinances that have historically been unfriendly to new apartment development.

The debate continues

The heart of HUD’s new rule, which recognizes that the courts have used various standards to prove disparate impact liability in the past, formalizes a national, uniform three-step, burden-shifting test for determining violations. In the first step, a person alleging injury must show that the challenged practice has a disparate impact on a class of persons protected under the Fair Housing Act. If so, the burden switches to the apartment firm, requiring it to prove that (1) the policy in question has substantial, legitimate and nondiscriminatory interests supporting it and (2) no less discriminatory alternative exists. If the apartment firm meets that burden, the burden shifts back to the complainant to show that there is in fact a less discriminatory alternative.

Adding to the discomfort around these potential liability issues is that HUD rejected so-called “safe harbors,” which, by assuring no liability if certain minimal standards are met, typically give companies some flexibility in establishing and documenting efforts to meet compliance standards. HUD cites the decisions of 11 federal courts of appeals and various agency guidance, policy statements and case law to bolster
its position.

While the courts have applied disparate impact in housing cases for many years, it remains no less controversial. In fact, the U.S. Supreme Court has been critical of fault without intent rulings in discrimination cases. In June 2013, the Supreme Court announced that it will review the appellate court’s decision in Mount Holly v. Mount Holly Gardens Citizens in Action Inc., a case that involves the redevelopment of a blighted New Jersey neighborhood occupied mostly by low- and moderate-income minority households. A decision on the case could determine once and for all whether disparate impact claims are allowed under the Fair Housing Act.

But for now, housing providers have to be keenly aware of the multitude of contexts in which disparate claims could arise and cast a critical eye on company policies that, although considered standard business practices, may create liability if they have a disparate impact on protected classes.

Jeanne McGlynn Delgado is vice president, business operations and risk management policy, at the National Multi Housing Council in Washington, D.C.