HUD finalizes contentious revamp of fair lending rule with one tweak

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The Department of Housing and Urban Development has finalized a controversial interpretation of the Fair Housing Act's disparate impact standard — with one twist.

"With the exception of the defense for algorithms, the rule is broadly the same as what HUD proposed last year," said Jeffrey Naimon, a partner at law firm Buckley LLP, who represents financial services companies and has defended them against several types of claims, including fair lending allegations.

The original proposal allowed a defendant to rebut a plaintiff's case by citing the use of an algorithm that was "nondiscriminatory."

Because HUD received several comments citing a concern about algorithms, which some fear could make lending discrimination worse instead of better, it removed the specific reference to them as a way to rebut claims.

"HUD expects that there will be further development in the law in the emerging technology area of algorithms, artificial intelligence, machine learning and similar concepts. Thus, it is premature at this time to more directly address algorithms," the department said in its final rule.

However, the rule also noted that "a defendant may show that predictive analysis accurately assessed risk" to support a rebuttal of claims, and called this "an alternative for the algorithm defenses."

Some consumer and civil rights advocacy groups acknowledged that the softening of the language around algorithms was welcome, but they are still concerned about remaining language around the use of predictive analysis because it leaves the door open for the use of algorithms in the defense of fair housing and lending claims.

"I think the ways algorithms are referred to in the final rule is still pretty concerning," said Linda Jun, senior policy council at the Americans for Financial Reform Education Fund. "I think a few things are slightly improved, but taken as a whole this rule is extremely dangerous. It really guts the ability to challenge hidden discrimination at a time when COVID is already having a disparate impact on communities of color."

However, HUD said the revision could encourage more lending by bringing previous standards more in line with a Supreme Court ruling on the issue and decreasing fears about broad legal liabilities that increase risk-management costs.

"HUD is bringing the 2013 Obama-Biden disparate impact rule into alignment with the 2015 Supreme court ruling," the department said in the statement. "This action brings legal clarity for banks and underwriters, and that clarity will stimulate mortgage credit and affordable housing for low-income and minority populations."

The 2015 Supreme Court decision affirmed plaintiffs' ability to allege discrimination without showing intent, but suggested HUD could restrict how those allegations are applied, with the new final rule adding more hurdles that plaintiffs must surmount to establish claims.

There's been a split between larger and small lenders regarding HUD's amended interpretation of disparate impact, with bigger players, such as the Mortgage Bankers Association and Rock Holdings' Quicken Loans, suggesting the amendment be put on hold in light of the current national focus on racial equity issues.

"MBA appreciates Secretary [Ben] Carson's and HUD's commitment to better aligning its disparate impact rule with Supreme Court decisions that have occurred since the 2013 rule was published," Justin Wiseman, the MBA's managing regulatory counsel, said in an email. "Fair lending enforcement, however, is just one piece of the larger puzzle associated with remedying the unacceptable minority homeownership gap. MBA looks forward to continuing to work with HUD and other policymakers and stakeholders on additional efforts to ensure equal access to affordable homeownership for all Americans."

Smaller lenders, however, maintain that related regulation has been overly burdensome.

Companies may invest in analyses of their businesses aimed at detecting and avoiding any sign of patterns that may suggest a disparate impact in order to manage compliance risks related to fair lending, and the associated costs can be easier for a smaller company to absorb than a larger one.

Democratic nominee Joe Biden would likely reverse the Trump administration's change to fair lending if elected.

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Law and regulation HUD Originations Artificial intelligence Digital mortgages Racial Bias Digital Mortgage 2020
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