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The Empire Strikes Back: HUD's Fair Lending Standards
November 16, 2011



On November 16, 2011, the Department of Housing and Urban Development (HUD) issued a proposal, entitled Implementation of the Fair Housing Act's Discriminatory Effects Standard. Comments from the public are due by January 17, 2012.

This announcement is much more involved than it seems, for HUD, to which Congress gave the authority and responsibility for administering the Fair Housing Act and the power to make rules implementing the Act. In HUD's proposal, a demonstration that a housing practice is supported by a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.

The question of "disparate impact" (euphemistically linked to the "effects test") has deep roots in previous and on-going litigation, rising now to judicial review before the United States Supreme Court.

So, what's at stake? Let's take a closer look.  


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Jonathan Foxx
President and
Managing Director



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HUD's Pre-Emptive AttackPreemptive
It is rare, indeed, when a federal agency, such as HUD, seems to be issuing its position on a matter that is currently before the U. S. Supreme Court. But that is what appears to be happening. The case is Gallagher v. Magner, and on November 7, 2011, the Supremes granted a petition to review the Eighth Circuit's decision reversing summary judgment in the defendants' favor. Yet HUD is not filing an amicus curiae, the normative response expected by a federal agency, it is actually publishing its standards now - after the Supreme Court has decided to review the case.

To say HUD's tactic is unusual, is a considerable understatement!

Purpose of HUD's ProposalProposal
So what is the basis of HUD's "pre-emptive strike," if I might be at liberty to use that term?

Here is HUD's stated purpose for its issuance:

"Although there has been some variation in the application of the discriminatory effects standard, neither HUD nor any Federal court has ever determined that liability under the Act requires a finding of discriminatory intent. The purpose of this proposed rule, therefore, is to establish uniform standards for determining when a housing practice with a discriminatory effect violates the Fair Housing Act."

Now to make sense of that statement of purpose, we'll need to give some consideration to Gallagher v. Magner.

Gallagher v. MagnerGallagher
Gallagher v. Magner (hereinafter Gallagher), is a claim by owners of rental properties against the City of St. Paul's alleged "practice" of "aggressively enforcing" its Housing Code.

The case arose when a group of landlords claimed that officials in the City of St. Paul, Minnesota, targeted rental properties for housing code violations, with a disparate impact on African-American tenants. Despite the lack of evidence showing intent, the Eighth Circuit Court of Appeals upheld a finding of Fair Housing Act violations.

The Route to the Supreme CourtRoute
Here is a brief outline of Gallagher v. Magner's route to the Supreme Court:

Phase 1:

The district court granted the defendants' motion for summary judgment.

Phase 2:

The Eighth Circuit reversed with respect to the plaintiffs' "disparate impact" claim under the Fair Housing Act (FHA), 42 U.S.C. � 3604(a)-(b). In so holding, the Eighth Circuit applied a three prong "burden-shifting" approach requiring: (a) a prima facie case of disparate impact on protected classes; (b) a showing by the defendant that the challenged policy or practice has a "manifest relationship" to a legitimate, non-discriminatory policy objective; and (c) a showing by the plaintiffs that there exists "a viable alternative means" to meet the legitimate objective without discriminatory effects. [619 F.3d at 833-34]

The Eighth Circuit described the "policy or practice" at issue as "the City's aggressive Housing Code Enforcement practices," including allegations that "the City issued false Housing Code violations and punished property owners without prior notification," invitations to "cooperate" with the enforcement authority, or adequate time to remedy Housing Code violations." [Idemat 834]

The court held that the plaintiffs presented a prima facie case of disparate impact by presenting evidence that (1) the city had a shortage of affordable housing; (2) racial minorities were disproportionately represented in the pool of those requiring affordable housing; (3) the city's "aggressive enforcement" of its code made ownership of rental properties more expensive; and (4) these increased costs to owners resulted in less affordable housing in the city. [Idem 834-35]

The City of St. Paul's position, when seeking certiorari from the Supreme Court, stated that increased costs relating to enforcement of a housing code would always have a prima facie disparate impact in cities where there is insufficiently low income housing and, of course, minorities are disproportionately in need of such housing.

So, the court found that there was a prima facie case of disparate impact, and the City of St. Paul had demonstrated that the challenged "aggressive enforcement" of its Housing Code promoted legitimate objectives; however, the court also held that the plaintiffs had produced evidence of a viable alternative without discriminatory effect.

That alternative was an enforcement program previously used by the city, called "Problem Properties 2000." [Idem 837]

Unfortunately, the "Problem Properties 2000" program was not described in sufficient detail in the case, and, in any event, the defendants argued that use of this enforcement program, itself being a prior enforcement program, would not reduce the alleged impact on protected class tenants. Of course, the defendants took this position because there might be increased costs to the owners, and, as I've stated above, increased costs would be construed concomitantly alongside of enforcement.

The Eighth Circuit found that the alternative enforcement program "would significantly reduce the impact on protected class members." [Idem 838]

Phase 3: The City of St. Paul petitioned for rehearing en banc. That petition was denied (five judges dissented).

Phase 4: The City of St. Paul then filed a petition for certiorari in the Supreme Court on the basis of two positions requiring judicial review: (a) whether disparate impact claims are cognizable under the FHA and, if so, (b) whether the proper mode of analysis is the "shifting the burden" approach (Seventh and Tenth Circuits, so held); variations were applied by the First and Second Circuits; or perhaps some other standard.

Phase 5: Certiorari - U. S. Supreme Court. Petition granted on November 7, 2011.

Specifically, the questions to be adjudicated by the Supreme Court are:

1. Are disparate impact claims cognizable under the Fair Housing Act?
2. If such claims are cognizable, should they be analyzed under the burden shifting approach used by three circuits, under the balancing test used by four circuits, under a hybrid approach used by two circuits, or by some other test?

The primary question is this: is there availability under the FHA of "disparate impact" claims - given the City of St. Paul's petition for certiorari, and considering the dissent from the petition for rehearing en banc - when the Supreme Court has never addressed the propriety of "disparate impact" claims under the FHA?

And this is in addition to the fact that lower courts have recognized such claims actually began before the Supreme Court had decided on another case, Smith v. City of Jackson, Mississippi. [544 U.S. 228 (2005)]

In Smith, the Supreme Court held that disparate impact claims are cognizable under Section 4(a)(2) of the Age Discrimination in Employment Act because the language in the aforementioned, cited section is "identical" to that of Title VII - and that language is absent from the FHA.

I should mention, as well, that the same language is also absent from the Equal Credit Opportunity Act (ECOA). However, even after the ruling on Smith, courts have allowed disparate impact claims to proceed under the ECOA, and most of those claims followed in the wake of the availability of the expanded Home Mortgage Disclosure Act data in recent years.

HUD - The Empire Strikes BackHUD
The Supreme Court has ruled that a plaintiff seeking to use disparate impact bears the burden of proof at all stages of the proceedings. That is, it places the burden of proving a "necessary and manifest relationship" to a legitimate, nondiscriminatory interest on the defendant or respondent and the burden of proving a less discriminatory alternative on the plaintiff or complainant.

In the proposed rule, the following process applies:

1) Complainant or plaintiff first "bears the burden of proving its prima facie case," that is, that a housing practice caused, causes, or will cause a discriminatory effect on a group of persons or a community on the basis of race, color, religion, sex, disability, familial status, or national origin.

2) Once the complainant or plaintiff has made its prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice has a necessary and manifest relationship to one or more of the housing provider's legitimate, nondiscriminatory interests.

3) If the respondent or defendant satisfies its burden, the complainant or plaintiff may still establish liability by demonstrating what the legitimate, nondiscriminatory interests could be that produce a less discriminatory effect.

In HUD's proposal, a demonstration that a housing practice is supported by a legally sufficient justification may not be used as a defense against a claim of intentional discrimination.

HUD's new standards for shifting the burden conflicts with the Supreme Court's own precedent that a plaintiff who seeks to use disparate impact must bear the burden of proof at all stages of the proceedings.

What's at Stake?Stakes
The Supreme Court's decision - which is expected in the spring of 2012 - will have implications for fair lending litigation and the enforcement affecting all types of consumer financial products.

Depending on the ruling, there may be far-reaching consequences, such as effectively determining the availability of disparate impact claims under the ECOA as well as under the FHA. It is also possible that, given the Eighth Circuit's ruling, a narrow decision may be the outcome, such as vacating the Eighth Circuit's opinion, but leaving intact the possibility of the FHA disparate impact claims in some circumstances.

Under the current disparate impact theory of discrimination, a plaintiff can establish "discrimination" based solely on the results of a neutral policy, without having to show any actual intent to discriminate. The Supreme Court has never decided whether the FHA permits plaintiffs to bring claims under a disparate impact theory.

So, the Supreme Courts decision entails whether the FHA permits disparate impact claims.

Will a decision lead to a view that the the Fair Housing Act permits claims of discrimination if there was no intent to discriminate?

In its proposed disparate impact standards, is HUD now asserting an authority it has not been granted by Congress, in effect legislating a new rule without support from actual, existing legislation?

Further ReadingsReadings
Implementation of the Fair Housing Act's Discriminatory Effects Standard
Department of Housing and Urban Development
Proposed rule
Federal Register - 76/221
November 16, 2011

Gallagher v. Magner
Docketed: February 16, 2011
Decision Date: September 1, 2010
United States Court of Appeals for the Eighth Circuit

Magner v. Gallagher
United States Supreme Court
Questions Presented
November 7, 2011


What do you think?

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