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HUD's Disparate Impact Rule Praised by Fair Housing Advocates: Misunderstood by Critics

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On Feb. 8, 2013, the US Department of Housing and Urban Development issued a rule clarifying the circumstances under which certain housing practices may violate the Fair Housing Act (FHA) as a result of a discriminatory effect. Referred to as the disparate impact rule, this directive explains the longstanding prohibition under the FHA of practices that have a discriminatory effect even where there may not be evidence of discriminatory intent.

Barbara R. Arnwine, President and Executive Director of the Lawyers Committee for Civil Rights Under Law, praised HUD's announcement, offering that "This regulation will foster the goals of the Fair Housing Act and benefit the clients and constituents of our organization. It provides a national standard for courts, housing providers, municipalities and the financial and insurance industries." Shanna Smith, CEO of the National Fair Housing Alliance, added, "We applaud this Administration for taking this step to strengthen our economy by promoting open, efficient markets free from discrimination."

Under the law, as clarified by the new rule, when a practice results in the denial of a service (e.g., refusing to rent an apartment or approve a mortgage loan) or unfavorable terms and conditions under which that service is available to members of protected classes, it would violate the Act if it did not serve a substantial, legitimate, and nondiscriminatory interest. (Protected classes under the FHA are race, color, religion, sex, handicap, familial status, or national origin.) If the practice did serve such a purpose, but the complainant can show a less discriminatory alternative is available that would equally serve that purpose, the practice in question would also violate the law. However, the rule also makes clear that those practices having a negative impact on racial minorities and other protected classes are fully in compliance if they serve a significant business objective and no less discriminatory alternative is available to serve that interest.

There have long been misunderstandings of the disparate impact. The new rule should resolve these misunderstandings and provide greater consistency, clarity, and effectiveness in fair housing enforcement efforts.

While the rule is new, the disparate impact standard is not. This rule does not change the substance of the law in any way. It simply clarifies a longstanding policy in fair housing enforcement. For more than 40 years HUD, the Department of Justice, and other enforcement agencies, under Democratic and Republican Administrations, have enforced the disparate impact standard. All 11 circuit courts that have considered the issue of whether or not Congress intended for the law to prohibit such practices that had a discriminatory effect have ruled that this in fact was the intent.

There have been some minor variations among the courts in the ways the disparate impact standard has been carried out. For example, in some circuits it is the defendant who has had to prove there was no lesser discriminatory alternative that would serve the business purpose of a challenged practice that had a discriminatory effect in order for the practice to be in compliance. But in most circuits it was the complainant who had to show there was such an alternative in order for the practice to be struck down as a violation of law. Under this rule, it is now clear that it is the complainant who must make the case. Despite the few variations that have existed across the circuits, all have confirmed that there is a disparate impact standard under the FHA. This rule eliminates those inconsistencies.

Consequently, HUD and other fair housing enforcement agencies will be able to more effectively realize the objectives of the FHA. The FHA has a dual mandate: eliminating housing discrimination and creating truly balanced and integrated living patterns. Enforcement of the disparate impact standard has been, and will continue to be, critical to progress on both objectives. But in order to more fully realize the objectives of the law, it appears certain key misunderstandings must be clarified, particularly on the part of some housing providers.

One concern that has, mistakenly, been attributed to the FHA and related fair housing rules is that they virtually require housing providers, particularly mortgage lenders, to implement racial quota systems. In its editorial titled "The Loan Quota Rule," (Jan. 27, 2012) the Wall Street Journal argued that HUD "is pushing through a rule to support racial loan quotas... forcing banks to lend to minorities."

But this rule will not require a quota or any other specific remedy. It does require housing providers to offer evidence that a practice having a discriminatory effect serves an important business objective. So the rule increases, rather than reduces, the likelihood that mortgage lending, and the provision of other housing related services, will be based on objective evidence rather than subjective judgment, reducing the incentive to introduce anything like a quota system. The fact that evidence of intent to discriminate is not a requirement to establish that a given practice violates the FHA does not translate into a requirement to meet any particular numerical target. A question arises as to why any housing provider, would want to continue a practice that did have a discriminatory effect but served no business objective.

A related concern is that the new rule will require lenders to make loans to unqualified borrowers, precisely the practice that (once again it is wrongly argued) led to the foreclosure crisis, undermining efforts to revitalize communities that have been adversely affected by previous, and possible future, crises.

The Fair Housing Act and other fair lending and fair housing rules require lenders and other housing providers to make loans and offer other services on the basis of objective, non-racial considerations. In the mortgage lending area, this has meant requiring lenders to use fair, transparent, and sound underwriting. The foreclosure crisis resulted from the many lenders who refused to do so. So-called "liar loans" where income was not verified (or worse, was fraudulently overstated) and other predatory practices resulted in many loans underperforming. That is what led to the housing bubble and foreclosure crises that followed. The settlement of recent lawsuits and administrative complaints against Bank of America, Wells Fargo, and other major financial service providers are illustrative. When Wells Fargo loan officers referred to predatory, high cost loans as "ghetto loans" for "mud people," this hardly reflected sound underwriting.

Fair, objective, and non-discriminatory policies and practices are essential for any city to pursue successful community revitalization initiatives. For example, following Hurricane Katrina, the Greater New Orleans Fair Housing Action Center filed a lawsuit, against HUD ironically, claiming that its Road Home program discriminated against African Americans because assistance was based on the lesser of the pre-storm value of the home or the cost of repairs. Because property values were lower in African American neighborhoods many residents in those communities received insufficient support to rebuild their homes. No evidence of intent was provided, but the discriminatory effect was clear. A settlement was reached that enabled far more families, particularly in African American communities, to begin rebuilding their homes and their lives.

Perhaps the most provocative interpretation of the new rule is, as Roger Clegg, president of the Center for Equal Opportunity, argued incorrectly in a letter to the editor of the Wall Street Journal (Feb. 2, 2012), "The disparate-impact approach... is flatly at odds with the color-blind ideals of the civil rights movement and the laws for which it fought." In fact, by clarifying the disparate impact standard, this rule will discourage race-based decisionmaking. By encouraging housing providers to justify, with objective evidence, their practices which have a discriminatory effect, the provision of those services will increasingly be based on fair and equitable criteria rather than subjective and potentially discriminatory criteria. This will benefit both consumers and providers of housing and housing related services.

For example, in the 1990s several major insurance companies were the targets of lawsuits and administrative complaints because they frequently refused to insure older and lesser valued homes. Such homes, of course, tend to be concentrated in African American and Latino neighborhoods. Yet those rules were not effective in predicting losses resulting in claims paid by those insurers. Elimination of those underwriting rules created opportunities for residents of previously underserved communities to obtain coverage and for insurers to find previously untapped yet profitable markets.

Finally, there is concern that the disparate impact rule will encourage expensive, unnecessary, and often frivolous lawsuits. Again, by clarifying the longstanding policy and removing the inconsistencies in the enforcement of the disparate impact standards, lawsuits should be minimized. Providers of housing and housing related services will be better informed about the requirements of the law thus enabling them to more effectively avoid legal action. Such enhanced voluntary compliance will result in the initiation of fewer lawsuits. In addition, courts have tools available to readily dismiss truly frivolous lawsuits.

By clarifying what the law requires, HUD's disparate impact rule will resolve many of the current misunderstandings of the FHA, resulting in far fewer legal actions. One consequence will be the targeting of scarce enforcement resources to those cases where there are more likely to be violations, thus enhancing the efficiency and effectiveness of fair housing law enforcement.

A portion of this essay was published under the title "Disparate Impact Rule Works, Critics Notwithstanding" by the American Banker, Feb. 14, 2013.

Gregory D. Squires is a professor of sociology and public policy and public administration at George Washington University.