Last month, the Department of Housing and Urban Development (“HUD”) issued a formal rule relating to housing discrimination that went into effect Monday, March 18, 2013. The Fair Housing Act, as codified in 42 USC 45, “prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin.” For decades, HUD has interpreted this language to prohibit not just overtly discriminatory practices, but also those “with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate.” The eleven circuits that have addressed the issue have all concurred, but, over the years, have developed slightly different “methodolog[ies] of proving a claim of discriminatory effects liability.” In order to establish uniformity in interpretation and application of discriminatory effects liability, HUD issued the new rule entitled “Implementation of the Fair Housing Act’s Discrimination Effects Standard” (the “Rule”).
The Rule sets forth a “three-party burden-shifting test for determining when a practice with a discriminatory effect violates the Fair Housing Act” (the “Test”):
- Plaintiff must establish a prima facie case “that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic.”
- If the Plaintiff establishes a prima facie case, the burden then shifts to the Defendant “to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests.”
- If the Defendant satisfies that burden, then the burden shifts back to the Plaintiff to prove “that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.”
The Rule does not explain what constitutes a “prima facie case,” but the Sixth Circuit Court of Appeals has consistently held that “a prima face case is established when: (1) the plaintiff identifies a specific … practice to be challenged; and (2) through relevant statistical analysis proves that the challenged practice has an adverse impact on a protected group.” In all other ways, the Test mirrors the Sixth Circuit approach to discriminatory effects liability, but it will be a change for residents of some Circuits. Interestingly, in regards to the third prong of the Test, HUD specifically rejected a proposal that would require a practice with a “less discriminatory effect” to be “equally effective” or “at least as effective as the challenged practice.” However, HUD did state that the alterative must “serve the … defendant’s substantial, legitimate nondiscriminatory interest, must be supported by evidence, and may not be hypothetical or speculative.”
While HUD officials emphasize that the Rule is merely a codification of previous policy and therefore does not create an additional burden on lending institutions or other parties to whom it is applicable, critics of the Rule have expressed concern that it could lead to an increased risk of liability to financial institutions. Contributing to this concern is the impact the Rule could have on future Supreme Court deliberations. At this point, the Supreme Court has yet to weigh in on the HUD’s interpretation of the FHA extending liability to practices with discriminatory effects. A case addressing the issue was scheduled to be heard last year, but was resolved by settlement instead. Currently, the Court is considering granting certiorari on a New Jersey case that directly addresses whether the FHA extends liability to practices that result in discriminatory effects. Some commentators believe that, by issuing the Rule, HUD hopes to strengthen its position at the Supreme Court level because of the strong deference courts give to an agency’s interpretation of its enabling legislation.
HUD is not the only governmental agency pursuing discriminatory effect (also referred to as disparate impact) claims against financial institutions. In April of 2012, the Consumer Financial Protection Bureau (“CFPB”) issued a bulletin stating its intent to apply a disparate impact analysis under the Equal Credit Opportunity Act (“ECOA”). The ECOA prohibits discrimination by a creditor “in any credit transaction against any applicant because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program; or the exercise in good faith of a right under the Consumer Credit Protection Act.” The CFPB expressed its agreement with the Policy Statement on Discrimination in Lending issued by the Interagency Task Force on Fair Lending in 1994, which held that “lending discrimination under the ECOA” could be proven by “overt evidence of discrimination; evidence of disparate treatment; and evidence of disparate impact.” The CFPB explains its approach to the disparate impact doctrine by quoting the commentary to Regulation B, the regulation implementing the ECOA:
The act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot be reasonably be achieved as well by means that are less disparate in their impact.The CFPB has already applied its disparate impact policy, most recently issuing a bulletin regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” The bulletin addresses discriminatory effects liability that can arise for financial institutions that act as “indirect auto lenders” by providing third party financing to automobile purchases from a dealer, “permit dealers to increase consumer interest rates,” and “compensate dealers with a share of the increased interest revenues.” In the bulletin, the CFPB restates the features for a “strong fair lending compliance program” that it originally recommended in the CFPB’s “Supervisory Highlights: Fall 2012”:
- an up-to-date fair lending policy statement;
- regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and Board members;
- ongoing monitoring for compliance with fair lending policies and procedures;
- ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on dealer discretion);
- review of lending policies for potential fair lending violations, including potential disparate impact;
- depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction;
- regular assessment of the marketing of loan products; and
- meaningful oversight of fair lending compliance by management and, where appropriate, the financial institution’s board of directors.
Agencies are not the only governmental entities showing increased interest in pursuing discriminatory effects. On February 19, 2013, Texas Champion Bank (the “Bank”) entered into a Consent Order in response to the civil action filed by the United States Department of Justice against the Bank accusing the Bank of engaging “in a pattern or practice of lending discrimination on the basis of national origin in the pricing of unsecured consumer loans in violation of the” ECOA. As part of the Consent Order, the Bank must “establish uniform pricing policies, conduct employee training and pay $700,000.” The Texas Champion Bank case should eliminate any expectation that small banks will be exempt from discriminatory effects liability or overlooked by the federal government. Texas Champion Bank has assets of only $345.5 million.
With both HUD and CFPB interpreting their respective enabling acts to impose liability on creditors for practices that have discriminatory effects, regardless of intent, and the U.S. Department of Justice pursuing claims of discriminatory effects in court, a financial institution needs to be especially careful that its practices can meet the HUD and CFPB discriminatory effects standards.