Biden Administration Continues Fair Lending Efforts as HUD Announces Proposal to Restore the Discriminatory Effects RuleOne of the Biden administration’s first actions was a January 25, 2021, executive order on Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies, whereby the White House committed to revitalizing enforcement of fair lending laws to address the “ongoing legacies of residential segregation and discrimination [that] remain ever-present in our society.” Among other broad statements regarding the nation’s history of discrimination in the housing area, the executive order clearly said that the government “must recognize and acknowledge its role in systematically declining to invest in communities of color and preventing residents of those communities from accessing the same services and resources as their white counterparts,” and policy decisions are to blame for the fact that “racial inequality still permeates land-use patterns in most U.S. cities and virtually all aspects of housing markets.” The administration’s memorandum critically stated, “[t]his is not only a mandate to refrain from discrimination but a mandate to take actions that undo historic patterns of segregation and other types of discrimination and that afford access to long-denied opportunities.”

The acting director of the CFPB then advised his staff and the public that the bureau’s twin priorities are protecting consumers facing financial hardship due to COVID-19 and racial equity. The bureau’s webpage on racial and economic equity further outlines its commitment to these goals and its May 5, 2021, Report on the Characteristics of Mortgage Borrowers During the COVID-19 Pandemic further linked together the housing challenges of COVID-19 and racial equity issues.

Continuing the administration’s focus on racial equity and fair lending, the U.S. Department of Housing and Urban Development (HUD) issued a press release late last week announcing that it has published a Notice of Proposed Rulemaking (NPRM) titled “Restoring HUD’s Discriminatory Effects Standard.” The proposed rule will reenact HUD’s 2013 “Implementation of the Fair Housing Act’s (“FHA”) Discriminatory Effects Standard” rule, which established a three-part burden-shifting test to determine whether a housing practice that results in discrimination violates the FHA.

Under the new rule, “[l]iability may be established under the [FHA] on a practice’s discriminatory effect… even if the practice was not motivated by discriminatory intent.” If a plaintiff can establish discriminatory effect, the burden shifts to the defendant to establish that the practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests. At that point, the burden shifts back to the plaintiff to establish that the interest supporting the challenged practice could be served by another practice with a less discriminatory effect.

According to HUD Secretary Marcia L. Fudge, the department “is working to lift barriers to housing and promote diverse, inclusive communities across the country. Today’s publication of the proposed discriminatory effects rule is the latest step HUD is taking to fulfill its duty to ensure more fair and equitable housing.”

Inclusive Communities and HUD’s 2020 Rulemaking

This latest NPRM stems from the 2015 United States Supreme Court decision in Texas Department of Housing and Community Affairs v. Inclusive Communities, and subsequent rulemaking by the Trump-era HUD attempting to bring agency rules in line with the 2015 decision. Specifically, in Inclusive Communities, the Court held that although the FHA prohibited disparate impact discrimination, such discrimination cannot be proved solely by evidence of a statistical disparity. Rather, the Court enacted a “robust causality” rule that requires a plaintiff to show that a policy or practice actually caused the disparity.

As we discussed in this space last year, HUD issued an NPRM purporting to realign its disparate impact regulation to better match the Supreme Court’s holding in Inclusive Communities. HUD’s 2020 rule created a new burden-shifting framework for disparate impact claims in which the plaintiff must, as a threshold matter, sufficiently plead facts to support that a specific, identifiable policy or practice has a discriminatory effect, and that the challenged policy or practice was “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.”

In addition, under the 2020 rule, the plaintiff must plead that the challenged policy or practice has a disproportionately adverse effect on members of a protected class, that the specific policy or practice is the direct cause of the discriminatory effect, that the alleged disparity caused by the policy or practice is significant, and that there is a direct relationship between the injury asserted and the injurious conduct alleged. Only then, once the plaintiff has met those threshold requirements, does the defendant have to rebut the allegation with evidence that the policy advances a valid interest. In addition, the rule contains a number of additional defenses that a defendant may use during and after the pleading stage.

HUD’s 2020 Rule Is Enjoined

Although HUD enacted the 2020 disparate impact rule, it was immediately enjoined by the United States District Court for the District of Massachusetts. In Massachusetts Fair Housing Center, et al. v. HUD, the plaintiffs contended that HUD’s 2020 rule violated the Administrative Procedures Act, in part, because HUD’s justification of the rule was arbitrary and capricious. HUD, in response, argued on a motion for preliminary injunction that the rule was not arbitrary and capricious because it was designed to bring HUD’s practice in-line with the Supreme Court’s holding in Inclusive Communities. Ultimately, the district court agreed with the plaintiffs and granted the preliminary injunction, holding that “the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity.” Because the injunction has yet to be lifted, the 2020 disparate impact rule has never been enforced.

Biden Administration Works to Roll Back HUD’s 2020 Disparate Impact Rule

In response to the January 26, 2021, executive order cited above, HUD submitted draft rules to the Office of Management and Budget (OMB) that proposed to roll back HUD’s 2020 disparate impact rule. At the time, the draft rules were unavailable to the public.

As we predicted in this space, the new rule will fully rescind the 2020 disparate impact rule. In particular, the Biden-led HUD believes that “the 2013 rule” that was rescinded by the Trump-era 2020 rule “is more consistent with decades of caselaw and better effectuates the Act’s broad remedial purpose of eradicating unnecessary discriminatory practices from the housing market.” Stakeholders have until August 24, 2021, to submit a formal comment.

HUD’s restoration of its Discriminatory Effects Standard is clearly in furtherance of Biden’s mandate that his administration present policy that not only avoids discrimination but also “take[s] actions that undo historic patterns of segregation and other types of discrimination.” We will continue to monitor the new administration’s focus on housing equity, fair lending, and fair servicing.