Amidst all the recent noteworthy rulemakings, the Department of Housing and Urban Development released a final rule last week that conclusively subjects lenders to liability for discrimination without a finding that the lender actually intended to discriminate. Specifically, lenders may now be found liable for discrimination under the Fair Housing Act based on the discriminatory effect of a neutral practice. A practice is considered discriminatory under the Act if 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.” Notwithstanding the foregoing, a defendant can avoid liability by proving the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent, and could not be served by another practice that has a less discriminatory effect.
The greatest risk of this standard is its ambiguous nature. HUD specifically declined to provide any sense of meaningful examples, or specific boundaries as to what amounts to a disparate impact. Rather, HUD relied upon the case law applicable to employment claims to interpret and apply this new lender liability. The problem with HUD’s reliance on employment case law is that contextually employment decisions are typically individualized and not based upon generic standards. Lending based decisions, on the other hand, are by necessity based on generalities and in fact are often decided mechanically based upon an applicant’s conformity with preexisting specific goals. The reliance on broad based generalities for lending decisions is misplaced in that it relies upon decisions made in an inapplicable context to interpret and apply a highly ambiguous rule.
At bottom, what this all means is that lenders must be more vigilant than ever in ensuring that their lending statistics do not show statistically significant disproportionality. There are no substitutes or short-cuts. Ongoing statistical monitoring is now an essential part of a lender’s operations.