BROADCAST EMAIL – Regulatory Update

1)  Counsel’s Corner Special – Final Rule or Final Word? HUD Finalizes New Disparate Impact Regulation

On September 24, HUD published a Final Rule entitled, “HUD’s Implementation of the Fair Housing Act’s Disparate Impact Standard” in the Federal Register. Below, Harry J. Kelly, Esq., Partner at Nixon Peabody, LLP (CARH’s General Counsel), provides CARH members with an in-depth look on this final rule and its impact on our industry.

Disparate impact – the theory that a person may be held liable in discrimination cases for adopting a policy or practice that unintentionally has a disproportionately harsh impact on members of a protected class – has been a contentious topic in the context of the Fair Housing Act (FHAct) for almost a decade. In 2013, anticipating review of the issue by the U.S. Supreme Court, HUD adopted a final rule that codified how disparate impact liability applied in FHAct cases, including a “burden-shifting” approach widely adopted by courts with some variations in prior cases. Under that approach, the plaintiff in a disparate impact case had the initial burden to make a “prima facie” showing that a challenged practice had a disparate impact on a protected class. If so, the burden swung to the defendant to show that there was an important and nondiscriminatory reason to adopt the challenged practice. If the defendant met that burden, the burden swung back to the plaintiff to show that the defendant’s goal could be served by another policy that had a less discriminatory effect.

In 2015, the U.S. Supreme Court finally addressed disparate impact under the FHAct. In the Inclusive Communities case, then-Justice Anthony Kennedy confirmed that in fact the FHAct did recognize disparate impact claims – there had been some dispute as to whether it only addressed intentional forms of discrimination – and essentially endorsed the burden-shifting approach but added a number of “safeguards” that he claimed were necessary to prevent abusive outcomes. Among other things, he said disparate impact should be limited to challenging practices that were “arbitrary, artificial and unnecessary” and that at an early phase, plaintiffs should show that there was a “robust” causal connection between the challenged practice and the alleged discriminatory effect. Overall, Kennedy’s approach seemed to endorse the use of disparate impact to attack practices that artificially reduced housing opportunities for minorities – such as exclusionary zoning – but to make it harder to use disparate impact to “second-guess” otherwise legitimate decisions of government agencies and private firms.

Initially, HUD took the position that there was no daylight between its disparate impact regulation and the Inclusive Communities decision. During the Trump administration, however, that view changed and in August 2019, HUD announced a proposed overhaul of its disparate impact rule, to align it more closely with the Supreme Court’s decision. While retaining the burden-shifting framework, the new rule formally required the plaintiff, as part of its prima facie case, to demonstrate it met several of the “safeguards” announced in Justice Kennedy’s decision, and stated multiple defenses that a party could assert in response. In addition, HUD proposed rules for the use of various algorithms to calculate risk decisions – some of which may result in more onerous terms for minority applicants – after receiving complaints from many insurance companies and lenders that the 2013 rule made routine risk analysis potentially discriminatory.

CARH submitted comments to the proposed rule, applauding its effort to incorporate elements of the Inclusive Communities decision but cautioning against changes that might complicate efforts by developers and other persons to challenge arbitrary zoning practices that could make it more difficult to build affordable housing.

Last week, HUD announced its final disparate impact rule and published it last week. 85 Fed. Reg. 60288 (Sept. 24, 2020). The final rule retains most of the concepts of the 2019 proposed rule, with some tweaks and clarifications. For example, it still requires the plaintiff to show that the challenged policy is “arbitrary, artificial and unnecessary,” and to demonstrate a “robust causal link” between the challenged policy and the alleged effect on the members of a protected classes. The final rule also lists specific defenses that a defendant may assert , including showing that the challenged policy was “reasonably necessary” to comply with a “third-party requirement,” such as federal or state law, a court order, or a binding regulatory requirement.  The final rule backed away from expressly approving risk decision algorithms but did adopt a rule broadly authorizing policies or practices “intended to predict an occurrence of an outcome,” where “the prediction represents a valid interest,” and the “outcome predicted by the policy or practice does not…have a disparate impact on protected classes” compared to persons not in the protected classes. The final rule also backs away from limiting the ability of HUD administrative law judges to impose pecuniary damages and – perhaps anticipating litigation in the future – adopts a severability provision that permits part of the disparate impact rule to survive if other portions are deemed invalid.

It remains to be seen whether the 2020 final rule is, in fact, HUD’s final statement on disparate impact. Depending on the outcome of this year’s election, further changes to the new rule may be anticipated. And even if the rule itself is not changed, some of the same debates over the meaning of the Inclusive Communities decision would reasonably be applied to the new HUD rule. For example, the phrase “arbitrary, artificial and unnecessary” is still subject to judicial construction, as is what constitutes a “robust causal link.” Perhaps more important, because the new disparate impact rule is so closely aligned with the Inclusive Communities decision, courts may not give HUD’s interpretation as much deference as they did to the original 2013 rule, on the grounds that judges are just as adept at reading the Supreme Court’s decisions as HUD is.

 

2)  Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2021

Also on September 24, HUD published a Notice in the Federal Register entitled, “Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2021” for purposes of the low-income housing tax credit (LIHTC). LIHTC developments in DDAs or QCTs are eligible for as much as 30 percent more LIHTC subsidy.

The designations of DDAs in this notice are based on modified Fiscal Year (FY) 2020 Small Area Fair Market Rents (SAFMRs), FY 2020 nonmetropolitan county FMRs, FY 2020 income limits, and 2010 Census population counts. In addition, HUD has implemented a minimum population requirement for metropolitan Small Difficult Development Areas in order to avoid designating areas unsuitable for residential development, such as airports. This notice also designates QCTs based on new income and poverty data released in the American Community Survey (ACS). HUD relies on the most recent three sets of ACS estimates to ensure that anomalous estimates, due to sampling, do not affect the QCT status of tracts.

The effective date of the new QCTs and DDAs is January 1, 2021.

Please contact the CARH national office at carh@carh.org or 703-837-9001 should you have questions or concerns.