Compliance Blog

The Fair Housing Act prohibits practices that lead to discriminatory effects, or disparate impacts, not just practices that include overt or intentional discrimination. However, it is not always clear when a practice or policy may lead to a disparate impact in violation of the Fair Housing Act. This is why the Department of Housing and Urban Development (HUD) is issuing a final rule to clarify these standards and align its regulation to Supreme Court rulings. In 2019, HUD issued a proposed rule to amend its interpretation of the disparate impact standard to better reflect the Supreme Court's 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. For a comprehensive discussion on the Fair Housing Act’s disparate impact standard and the litigation that led to these changes, see this NAFCU Compliance Monitor article.

In short, a disparate impact lawsuit consists of three main steps:

Step 1. A member sues a credit union and alleges a violation under the Act on the basis of disparate impact, claiming that a credit union policy or practice led to a discriminatory effect against a protected group;

Step 2. The credit union attempts to prove the policy or practice furthers a legitimate, nondiscriminatory business purpose;

Step 3. The member attempts to prove there are less discriminatory practices that could have furthered the same business purpose.

If at the end of these three steps a member can prove their case, a credit union may be held liable for violating the FHA. HUD, as the primary enforcer of the FHA, has the responsibility of writing regulations that explain these steps.

Step one of the process summarized above consists of the member’s “pleading”, or the initial complaint explaining why the member believes the credit union has a policy or practice that leads to a disparate impact. Under the 2019 proposed rule and now the final rule, the step one requirements for a member’s pleading include providing evidence of the following:

• The challenged policy or practice is arbitrary, artificial and unnecessary;
• There is a robust causal link between the challenged policy and a disparate impact;
• The policy or practice has an adverse effect on members of a class based on a prohibited basis of race, color, religion, sex, familial status, disability or national origin;
• The disparity caused by the policy or practice is significant; and
• The plaintiff's alleged injury is directly caused by the policy or practice.

If a member can meet the standards for bringing a lawsuit against a credit union, the case would move to step two and the credit union would have the burden of proving the policy or practice is in furtherance of a legitimate nondiscriminatory goal.

In addition to clarifying the standard for bringing a lawsuit, the final rule covers defenses available to a credit union facing a disparate impact complaint, and it articulates what defenses are available depending on the stage of litigation.

In the final rule in the discussion of defenses, HUD clarifies that a credit union might make the argument that the member bringing the disparate impact lawsuit has not sufficiently argued or offered any evidence of the above five factors that are required in the pleading. If a credit union successfully makes this argument, the case would not move forward.

Another defense that may be available to a credit union is the opportunity to show that a predictive model or risk assessment that appears to have a disparate impact is valid or accurate. This type of defense may be used if factors that are adequately accounted for within the model or risk assessment, members of a protected class are disproportionately associated with a particular outcome.

The 2019 proposed rule introduced defenses that would have been used to rebut an argument that the cause of a discriminatory effect was an algorithmic model used by a credit union. In explaining why the final rule does not provide details about the use of algorithmic models or artificial intelligence HUD stated, “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 final rule can be found here and it is effective 30 days from its date of publication in the Federal Register.