Federal District Court Stays Effective Date and Enjoins Enforcement of HUD’s Final Rule on the Fair Housing Act’s Disparate Impact StandardOn October 24, 2020, the U.S. Department of Housing and Urban Development’s (HUD) final rule on the implementation of the Fair Housing Act’s disparate impact standard was scheduled to become effective. That effective date was short lived: on October 25, 2020, the U.S. District Court for the District of Massachusetts entered a preliminary injunction staying HUD’s final rule on the disparate impact standard (the “2020 Final Rule”) and enjoining the rule’s enforcement. The court’s order stays and postpones the 2020 Final Rule’s effective date pending entry of final judgment on an Administrative Procedure Act (APA) violation claim brought by the plaintiffs in the case, the Massachusetts Fair Housing Center and Housing Works, Inc.

The Fair Housing Act (FHA) prohibits discrimination in many housing-related activities on the basis of race, color, religion, sex, disability, familial status, and national origin. For at least the past four decades, HUD and federal courts have read the FHA to prohibit “disparate impact” discrimination, which is conduct that, while not motivated by discriminatory intent, has a discriminatory effect. In 2013, HUD codified its long held view that the FHA bans disparate impact discrimination by issuing a rule entitled Implementation of the Fair Housing Act’s Discriminatory Effects Standard. That rule established a three-part, burden-shifting test to determine whether a housing practice that results in discrimination violates the FHA.

However, in 2015, the U.S. Supreme Court decided Texas Department of Housing and Community Affairs v. Inclusive Communities, in which a non-profit organization claimed that policies of the Texas Department of Housing and Community Affairs regarding the distribution of low-income housing development tax credits resulted in discrimination against African Americans in violation of both 42 U.S.C. § 1983 and the FHA. In Inclusive Communities, the Supreme Court did not rely upon HUD’s 2013 disparate impact burden-shifting test. Rather, the Supreme Court undertook its own analysis, resulting in standards that differed from HUD’s 2013 rule. Several years after Inclusive Communities, in September 2020, HUD issued the 2020 Final Rule. Through the 2020 Final Rule, HUD aimed to adopt the disparate impact analysis applied in Inclusive Communities. The 2020 Final Rule created a new burden-shifting framework for disparate impact claims, which is a framework that generally reduces the burden on parties defending against disparate impact claims.

The plaintiffs in the case before the Massachusetts federal district court argue that the 2020 Final Rule is contrary to law for multiple reasons. Specifically, plaintiffs argue that (1) the rule undermines one of the FHA’s core purposes of eradicating discriminatory housing practices; (2) HUD’s justification for the 2020 Final Rule is arbitrary and capricious under the APA; and (3) HUD violated notice and comment rulemaking requirements by replacing the “algorithmic model” defense used with the 2013 disparate impact rule with a new “outcome prediction” defense without giving the public notice of, or any opportunity to comment on, the new outcome prediction defense.

For purposes of the motion for preliminary injunction, the federal court only considered the plaintiffs’ argument that HUD’s justification for the 2020 Final Rule is arbitrary and capricious under the APA. In response, HUD argued that the 2020 Final Rule isn’t arbitrary and capricious because the rule merely brings HUD’s disparate impact regulations in alignment with the Supreme Court’s holding in Inclusive Communities. HUD also argued that the 2020 Final Rule was needed to bring greater clarity regarding the disparate impact standard.

The district court disagreed with both of HUD’s arguments. The court, citing language within the 2020 Final Rule regarding new pleading requirements, stated that the 2020 Final Rule requires that plaintiffs sufficiently plead facts to support “that the challenged policy is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.” The court disagreed that the 2020 Final Rule brought HUD’s disparate impact regulations in line with Inclusive Communities by noting that the language “such as a practical business, profit, policy consideration” is not in any judicial decision. The court also disagreed that the 2020 Final Rule provided clarity to the public regarding the disparate impact standard – stating that HUD’s explanation for greater clarity “appear[ed] arbitrary and capricious” and agreed with the plaintiffs that “the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity.”

In the end, the court granted the motion, finding that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that the 2020 Final Rule is arbitrary and capricious and therefore violates the APA. Additionally, the court found that plaintiffs proved that there is a significant risk of irreparable harm if the injunction was not entered and that the balance of harms and public interest supported entering the preliminary injunction rather than allowing the rule to go into effect. Unless lifted by the court earlier, HUD will remain enjoined from enacting and enforcing the 2020 Final Rule until after the court has entered a final judgement on the plaintiffs’ claims.

In addition to the case brought in the U.S. District Court of Massachusetts, there have been at least two other similar challenges brought in recent weeks. On October 22, 2020, housing advocacy organizations brought cases in federal district courts in both Connecticut and California. As of the drafting of this article, preliminary injunctions have not been issued in either case. For a more thorough analysis of the 2020 Final Rule, see Bradley’s earlier coverage of the details of the rule. As with any major rule promulgated by a federal agency, legal challenges are usually inevitable. For the 2020 Final Rule, the likelihood of its ultimate fate is not only tied to the decisions of federal courts, but – perhaps more importantly – to the final outcome of the 2020 presidential election. We will continue to monitor the space for any updates on this litigation or HUD’s final rule.