The lending industry would face “disparate-impact” liability for Fair Housing Act violations under a rule recently proposed by HUD. For example, a lender might face suit for a facially-neutral policy that allegedly had a different effect on borrowers from different racial groups. HUD’s rule would also make a defendant meet a high bar–proving that its challenged policy “has a necessary and manifest relationship to one or more of [its] legitimate, nondiscriminatory interests.” 76 Fed. Reg. 70,921, 70,924 (Nov. 16, 2011) (emphasis added).
If finalized, HUD’s proposed disparate-impact approach may lead to efforts by businesses to bring their end-results in line with demographics. Such efforts may lead to the use of quotas and thus, ultimately, to disparate treatment, the very situation that the Fair Housing Act is intended to eliminate. The pressure on the lending industry is only heightened by recent federal legislation imposing stringent underwriting requirements in making certain types of loans. These requirements may, in and of themselves, have a disproportionate impact on minority groups.
Yet, there are reasons to believe that HUD’s interpretation of the Fair Housing Act is wrong. First, the disparate-impact approach is not consistent with the plain language of the Fair Housing Act. Second, even if it were, HUD’s proposed burden and standard of proof are not consistent with several Supreme Court decisions. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S ----, 131 S. Ct. 2541 (2011); Meyer v. Holley, 537 U.S. 280 (2003); Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989). Third, HUD’s rulemaking arguably does not comply with federal administrative procedure law, including the requirement of explaining a significant policy change. Before issuing its proposed rule, HUD had never before articulated, through the formal notice-and-comment rulemaking process, that the Fair Housing Act supported a disparate-impact theory.
The Supreme Court was set to address this very issue in a case called Magner v. Gallagher, No. 10-1032 (U.S.). Just before argument, the appeal was withdrawn by the defendant, removing a judicial obstacle to HUD’s proposed rule. This does not mean, however, that the rule will be finalized as written. In January 2012, HUD received dozens of comments from interested parties voicing their concerns over the proposed rule. Whether any of these comments will lead HUD to revise the proposed rule remains to be seen, but even if HUD does not revise the rule, it may be subject to legal challenge on the bases discussed above.
Paul F. Hancock, Melanie H. Brody, and Roger L. Smerage with K&L Gates LLP also contributed to this blog
