Reinstatement of HUD's Discriminatory Effects Standard

Federal RegisterMar 31, 2023

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 100

[Docket No. FR-6251-F-02]

RIN 2529-AB02

Reinstatement of HUD's Discriminatory Effects Standard

AGENCY:

Office of the Assistant Secretary for Fair Housing and Equal Opportunity, U.S. Department of Housing and Urban Development (HUD).

ACTION:

Final rule.

SUMMARY:

The Fair Housing Act prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities. This prohibition extends to practices with an unjustified discriminatory effect, regardless of whether there was an intent to discriminate. In 2013, HUD published a rule which formalized a burden-shifting test for determining whether a given practice has an unjustified discriminatory effect. In 2020, HUD published a rule that would have altered the standards set forth in the 2013 rule. However, a preliminary injunction prevented the 2020 rule from ever going into effect. On June 25, 2021, HUD published a proposed rule to recodify the 2013 rule. After considering public comments, HUD in this final rule reinstates and maintains the 2013 rule and rescinds the 2020 rule.

DATES:

Effective:

May 1, 2023.

FOR FURTHER INFORMATION CONTACT:

Jeanine Worden, Associate General Counsel for Fair Housing, Office of General Counsel, U.S. Department of Housing and Urban Development, 451 7th Street SW, Washington, DC 20410-0500, or telephone number 202-402-3330 (this is not a toll-free number). HUD welcomes and is prepared to receive calls from individuals who are deaf or hard of hearing, as well as individuals with speech or communication disabilities. To learn more about how to make an accessible telephone call, please visit:

https://www.fcc.gov/consumers/guides/telecommunications-relay-service-trs.

SUPPLEMENTARY INFORMATION:

I. Background

The Fair Housing Act and Its Goals

Title VIII of the Civil Rights Act of 1968, as amended (“Fair Housing Act” or “Act”), prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities because of race, color, religion, sex (including sexual orientation and gender identity), disability, familial status, or national origin.

Through the Act, Congress expressed its intent to eradicate discrimination and proclaimed that “[i]t is the policy of the United States to provide, within constitutional limitations, for fair housing throughout the United States.”

The Act's protections are meant to be “broad and inclusive.”

Congress passed the Act in the wake of the assassination of Dr. Martin Luther King, Jr., recognizing that “residential segregation and unequal housing and economic conditions in the inner cities” were “significant, underlying causes of the social unrest”

and that both open and covert race discrimination were preventing integrated communities.

As the Supreme Court reiterated more recently, the Act's expansive purpose is to “eradicate discriminatory practices within a sector of the Nation's economy” and to combat and prevent segregation and discrimination in housing.

Congress considered the realization of this policy “to be of the highest priority.”

42 U.S.C. 3601-3619, 3631. This preamble uses the term “disability” to refer to what the Act and its implementing regulations term a “handicap.”

See, e.g., Hunt

Aimco Props., L.P.,

814 F.3d 1213, n.1 (11th Cir. 2016) (noting the term disability is generally preferred over handicap).

42 U.S.C. 3601.

Trafficante

Metro. Life Ins. Co.,

409 U.S. 205, 209 (1972).

Tex. Dep't of Hous. & Cmty. Affairs

Inclusive Cmtys. Project, Inc.,

576 U.S. 519, 529 (2015) (citing Report of the National Advisory Commission on Civil Disorders 91 (1968) (Kerner Commission Report).

Id.

at 529 (citing Kerner Commission Report).

Id.

at 539.

Trafficante,

409 U.S. at 211 (1972).

The Act gives HUD the authority and responsibility for administering and enforcing the Act, including the authority to conduct formal adjudications of complaints and to promulgate rules to interpret and carry out the Act.

Through that authority, HUD promulgates this rule.

See

42 U.S.C. 3608(a), 3612, 3614a. The Supreme Court has recognized HUD's rulemaking authority in the specific context of this rule.

See Inclusive Cmtys. Project,

576 U.S. at 527-28, 542;

See also

2011 Notice of Proposed Rulemaking, 76 FR 70922 (Nov. 16, 2011) (“In keeping with the `broad remedial intent' of Congress in passing the Fair Housing Act, and consequently the Act's entitlement to a `generous construction' HUD . . . has repeatedly determined that the Fair Housing Act is directed to the consequences of housing practices, not simply their purpose.”) (citing

Havens Realty Corp

Coleman,

455 U.S. 363, 380 (1982);

City of Edmonds

Oxford House, Inc.,

514 U.S. 725, 731-732 (1995) (internal citations removed)).

78 FR 11460, 11461 (citing 126 Cong. Rec. 31,166-31,167 (1980) (statement of Sen. Mathias reading into the record letter of HUD Secretary)).

78 FR 11460, 11461-62.

Among other things, the 2013 Rule codified a three-part burden-shifting framework consistent with frameworks on which HUD and courts had long relied: (1) The plaintiff or charging party is first required to prove as part of the prima facie showing that a challenged practice caused or predictably will cause a discriminatory effect; (2) if the plaintiff or charging party makes this prima facie showing, the defendant or respondent must then prove that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant or respondent; and (3) if the defendant or respondent meets its burden at step two, the plaintiff or charging party may still prevail by proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

78 FR 11460, 11482;

see, e.g., Inclusive Cmtys. Project, Inc.,

576 U.S. at 527 (overviewing the 2013 Rule's burden shifting framework).

The 2015 Inclusive Communities Supreme Court Decision

In 2015, the Supreme Court confirmed that the Act provides for discriminatory effects liability in

Texas Department of Housing and Community Affairs

Inclusive Communities Project, Inc.

The State of Texas presented two questions to the Court (1) Whether disparate-impact claims are cognizable under the Act, and (2) if they are, what standards and burdens of proof should apply,

but the Court declined to consider the second question.

On the first question, the Court found that disparate-impact claims are cognizable, concluding that Congress's use of the phrase “otherwise make unavailable” in Section 804(a) of the Act and the term “discriminate” in Section 805(a) are each parallel to language that the Court had previously held to provide for discriminatory effects liability under other civil rights statutes.

Inclusive Cmtys. Project, Inc.

576 U.S. at 519, 519, 532-35.

See

Petition for a Writ of Certiorari, in

Tex. Dep't of Hous. & Cmty. Affairs et al.,

Inclusive Cmtys. Project, Inc.,

573 U.S. 991, 2014 U.S. S. Ct. Briefs LEXIS 1848, at *9;

See Questions Presented in, https://www.supremecourt.gov/qp/13-01371qp.pdf.

Inclusive Cmtys. Project, Inc.,

573 U.S. 991 (2014), 2014 U.S. LEXIS 4912 at *1 (“Petition for writ of certiorari to the United States Court of Appeals for the Fifth Circuit granted limited to Question 1 presented by the petition.”);

See also Questions Presented in, Inclusive Cmtys Project, Inc.,

573 U.S. 991.

Inclusive Cmtys. Project, Inc.,

576 U.S. at 534 (citing

Griggs

Duke Power Co.,

401 U.S. 424 (1971);

Bd. of Educ.

Harris,

444 U.S. 130 (1979);

Smith

City of Jackson,

544 U.S. 228, 233 (2005).

In reaching this holding, the Court explained that from its first decision to recognize disparate impact liability, in

Griggs

Duke Power Co.,

it “put important limits” on the scope of liability.

For example, with respect to employment discrimination claims under Title VII of the Civil Rights Act of 1964,

Griggs

explained that an employer can justify a practice that has a disparate impact with a “business necessity” defense, such that Title VII “does not prohibit hiring criteria with a `manifest relationship' to job performance.”

Similarly, after holding that the Act provided for disparate impact liability, the

Inclusive Communities

Court noted that, under the Act, “disparate-impact liability has always been properly limited in key respects . . .' ”

Quoting

Griggs,

the Court explained that it has always been true that disparate impact liability under the Act “mandates the `removal of artificial, arbitrary, and unnecessary barriers,' not the displacement of valid governmental policies.”

Inclusive Cmtys. Project, Inc.,

576 U.S. at 531.

Id.

(quoting

Griggs,

401 U.S. at 431-32).

Id.

at 540.

Id.

(quoting

Griggs,

401 U.S. at 431).

The Court then sketched out some of these long-standing limitations on the scope of disparate-impact liability, including: (1) The requirement that “housing authorities and private developers [have] leeway to state and explain the valid interest served by their policies . . . analogous to the business necessity standard under Title VII;” and (2) the requirement that a “claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant's policy or policies causing that disparity.”

Id.

at 541, 542.

HUD's 2016 Notice: Application of the Fair Housing Act's Discriminatory Effects Standard to Insurance

In 2016, HUD published a document (“2016 Notice”) supplementing its response to certain comments concerning homeowners' insurance received during rulemaking for the 2013 Rule in accordance with the district court's decision in

Property Casualty Insurers Association of America (PCIAA)

Donovan.

In that Notice, HUD stated, among other things, that “[a]fter careful reconsideration of the insurance industry comments in accordance with the court's decision . . . HUD has determined that categorical exemptions or safe harbors for insurance practices are unworkable and inconsistent with the broad fair

housing objectives and obligations embodied in the Act” and that “commenters' concerns regarding application of the discriminatory effects standard to insurance practices can and should be addressed on a case-by-case basis.”

81 FR 69012-13.

Id.

HUD's 2020 Disparate Impact Rule

On June 20, 2018, HUD published an Advance Notice of Proposed Rulemaking (“ANPRM”), inviting public comment on “what changes, if any” to the 2013 Rule were necessary as a result of

Inclusive Communities.

HUD then published a Notice of Proposed Rulemaking on August 19, 2019 (“2019 Proposed Rule”) proposing to change the 2013 Rule.

83 FR 28560.

84 FR 42854.

In response to the 2019 Proposed Rule, HUD received approximately 45,000 comments, most of which opposed the proposed changes and many of which raised significant legal and policy concerns with the 2019 Proposed Rule. Commenters objected that the proposed changes did not align with case law, created problematic defenses and made discriminatory effects claims effectively impossible to plead and prove in many instances, thus contravening the core holding of

Inclusive Communities.

On September 24, 2020, HUD published a final rule titled “HUD's implementation of the Fair Housing Act's Disparate Impact Standard” (“2020 Rule”), which, among other things removed the definition of discriminatory effect, added demanding pleading elements that made it far more difficult to initiate a case, altered the burden-shifting framework, created new defenses, and limited available remedies in disparate impact claims.

See, e.g.,

85 FR 60317, 60319 (overview of some of the comments making these points).

85 FR 60288.

Massachusetts Fair Housing Ctr. v. HUD Order Staying Implementation of the 2020 Rule

Following publication of the 2020 Rule, HUD was sued in three separate federal courts—:

Massachusetts Fair Housing Ctr., et al.

HUD,

No. 3:20-cv-11765 (D. Mass.);

Nat'l Fair Hous. All., et al.

HUD,

No. 3:20-cv-07388 (N.D. Cal.);

Open Cmtys., et al.

HUD,

No. 3:20-cv-01587 (D. Conn.). The plaintiffs in each case contended that the 2020 Rule was invalid because it was inconsistent with the Act and its promulgation violated the Administrative Procedure Act (“APA”). Prior to the effective date of the 2020 Rule, the U.S. District Court for the District of Massachusetts in

Massachusetts Fair Housing Ctr.

HUD

issued a preliminary injunction staying the implementation and postponing the effective date of the 2020 Rule.

Because of this preliminary injunction, the 2020 Rule never took effect, and the 2013 Rule remained in effect.

Mass. Fair Hous. Ctr.

United States HUD,

496 F. Supp. 3d 600, 611 (D. Mass. Oct. 25, 2020).

In its order, the district court preliminarily found that many significant changes made by the 2020 Rule were likely not supported by

Inclusive Communities

or other case law. Similarly, the court concluded that the 2020 Rule did not appear to bring the clarity to the discriminatory effects framework that it was intended to foster, but rather introduced new concepts that had never been part of disparate impact case law without fully explaining their meaning. In support of its conclusions, the court identified numerous provisions in the 2020 Rule as problematic, including § 100.500(b) (“requiring at `the pleadings stage,' among other things, that plaintiffs `sufficiently plead facts to support' . . . `[t]hat the challenged policy or practice 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' ”); § 100.500(c)(2) (permitting defendants to “ `rebut a plaintiff's allegation under (b)(1) . . . that the challenged policy or practice is arbitrary, artificial, and unnecessary by producing evidence showing that the challenged policy or practice' merely `

advances a valid interest

' ”) (emphasis in original); § 100.500(c)(3) (requiring “at the third step of the burden-shifting framework that the plaintiff prove `a less discriminatory policy or practice exists that would serve the defendant's identified interest (or interests) in an

equally effective manner without imposing materially greater costs

on, or creating

other material burdens

for, the defendant' ” (emphasis in original)); § 100.500(d)(1) and (d)(2)(iii) (“conflating of a plaintiff's prima facie burden and pleading burden”); and § 100.500(d)(2)(i) (the outcome prediction defense).

Id.

at 605-07, n.2, 610-11.

The district court found that the “practical business, profit, policy consideration” language, the “outcome prediction” defense, changes to the third element of the burden-shifting framework, and the conflating of a plaintiff's prima facie burden and pleading burden, ran the risk of “effectively neutering” discriminatory effects liability under the Act, and were all likely unsupported by

Inclusive Communities

or other judicial decisions.

The district court also stated that the 2020 Rule's use of “new and undefined terminology altered the burden-shifting framework, and perplexing defenses” accomplished “the opposite of clarity” and were likely “arbitrary and capricious.”

The court stated that “[t]here can be no doubt that the 2020 Rule weakens, for housing discrimination victims and fair housing organizations, disparate impact liability under the Fair Housing Act. . . . In addition, the 2020 Rule arms defendants with broad new defenses which appear to make it easier for offending defendants to dodge liability and more difficult for plaintiffs to succeed. In short, these changes constitute a massive overhaul of HUD's disparate impact standards, to the benefit of putative defendants and to the detriment of putative plaintiffs.”

Id.

at 611.

Id.

at 607.

HUD's Reconsideration of the 2020 Rule and the 2021 Notice of Proposed Rulemaking

On January 26, 2021, President Biden issued a Memorandum ordering the Department to “take all steps necessary to examine the effects of the [2020 Rule], including the effect that amending the [2013 Rule] has had on HUD's statutory duty to ensure compliance with the Fair Housing Act” and “take any necessary steps . . . to implement the Fair Housing Act's requirements that HUD administer its programs in a manner that . . . furthers . . . HUD's overall duty to administer the Act [ ] including by preventing practices with an unjustified discriminatory effect.”

See

86 FR 7487, 7488.

Consistent with the President's Memorandum, HUD began a process to reconsider the 2020 Rule. On June 25, 2021, after reviewing prior public comments on the previous rulemakings described above, HUD's responses to those comments, HUD's 2016 supplemental explanation regarding the 2013 Rule's applicability to the insurance industry, legal precedent including

Inclusive Communities,

the

Massachusetts Fair Housing Center

court's order, and HUD's own experience with discriminatory effects cases over 40 years, HUD promulgated a proposed rule titled “Reinstatement of HUD's Discriminatory Effects Standard” (“proposed rule”) that proposed to recodify the 2013 Rule.

The proposed

rule advocated returning to the 2013 Rule because HUD believed that the 2013 Rule established a workable framework that was more consistent with existing case law and the purpose of the Act than the 2020 Rule.

86 FR 33590.

As HUD described in the proposed rule, in HUD's experience, the 2013 Rule set a more appropriately balanced standard for pleading, proving, and defending a fair housing case alleging that a policy or practice has a discriminatory effect. HUD believed that the 2013 Rule provided greater clarity about what each party must show by relying on concepts that have a long history in judicial and agency precedent and that it appropriately balanced the need to ensure that frivolous claims do not go forward with a realistic understanding of the practical challenges to litigating these claims. With regard to the 2020 Rule, HUD's experience investigating and prosecuting discriminatory effects cases informed its views that many of the points made by commenters and the District Court in

Massachusetts Fair Housing Center

were, in HUD's opinion, correct. In particular, the changes the 2020 Rule made, such as amending pleading standards, changing the burden shifting framework, and adding defenses, all operated to tip the scales in favor of respondents, introduced unnecessary confusion, may have precluded otherwise valid claims, and, at worst would have made discriminatory effects liability a practical nullity.

HUD further stated its belief that the 2013 Rule was more consistent with the Act's purpose; prior case law under the Act, including

Inclusive Communities;

other civil rights authorities, including the Equal Credit Opportunity Act and Title VII; and HUD's prior interpretations of the Act. In its 2020 Rule, HUD noted that the rule was intended to better reflect

Inclusive Communities,

but HUD now believes that the 2020 Rule was itself inconsistent with the holding of

Inclusive Communities,

which maintained the fundamentals of long-established disparate-impact precedent rather than changing them. Moreover, based on HUD's experience investigating and litigating discriminatory effects cases, HUD believed that the practical effect of the 2020 Rule's amendments was to severely limit HUD's and plaintiffs' use of the discriminatory effects framework in ways that would substantially diminish that frameworks' effectiveness in accomplishing the purposes that

Inclusive Communities

articulated.

By comparison, in HUD's experience, the 2013 Rule provided a workable and balanced framework for investigating and litigating discriminatory effects claims that is consistent with the Act, HUD's own guidance,

Inclusive Communities,

and other jurisprudence.

HUD noted that

Inclusive Communities

heavily relied on

Griggs,

which is the foundation of Title VII disparate impact jurisprudence, to illustrate the well-settled principles of disparate impact under the Act, and HUD believed

Inclusive Communities

to be fully supportive of the 2013 Rule.

Inclusive Communities

explained that in

Griggs,

“[w]hat is required by Congress [in Title VII cases] is the removal of artificial, arbitrary, and unnecessary barriers to employment when the barriers operate invidiously to discriminate on the basis of racial or other impermissible classification.”

Quoting from its foundational decision in

Griggs,

the Supreme Court in

Inclusive Communities

observed that “[d]isparate impact liability mandates the `removal of artificial, arbitrary, and unnecessary barriers,' not the displacement of valid governmental policies.”

HUD proposed that this quotation from a seminal decision of longstanding disparate impact doctrine is properly read as maintaining existing law, not changing it. HUD highlighted that

Inclusive Communities

explicitly stated, “disparate-impact liability

has always been

properly limited in key respects” (emphasis added), making clear that the Court was not adding additional pleading or proof requirements or calling for a significant departure from pre-existing precedent under the Act and Title VII.

Furthermore, HUD stated that reading

Inclusive Communities

to support a heightened pleading standard is contradicted by the fact that the “heartland” cases cited by the Court would not have survived a motion to dismiss under that standard because plaintiffs in those cases did not have specific facts to plausibly allege that a policy or practice was arbitrary, artificial, or unnecessary until after discovery.

Finally, HUD explained that because

Inclusive Communities

considered a judgment reached after discovery and bench trial, the Court had no occasion or opportunity to consider the proper pleading standards for cases brought under the Act. The parties did not brief or argue such questions to the Court, making it particularly unlikely that the Court intended to reach them.

Inclusive Cmtys. Project, Inc.

, 576 U.S. at 578.

Id.

at 540.

Id.

See, e.g., Town of Huntington, NY

Huntington Branch,

NAACP, 488 U.S. 15 (1988);

United States

City of Black Jack,

508 F.2d 1179, 1184, 1187-88 (8th Cir. 1974) (specific facts produced during the case supported the court's determination that the policy was one of those “artificial, arbitrary, and unnecessary” practices that is properly invalidated under disparate impact doctrine);

Greater New Orleans Fair Hous. Action Ctr.

St. Bernard Parish,

641 F. Supp. 2d 563, 567-568 (E.D. La. 2009) (relying on information gathered after the pleadings to find disparate impact).

For these reasons and others, HUD proposed that

Inclusive Communities'

quotation of

Griggs'

decades-old “artificial, arbitrary, and unnecessary” formulation would be best construed as maintaining continuity with longstanding disparate-impact jurisprudence, as reflected in the 2013 Rule.

HUD stated in the proposed rule its belief that other changes the 2020 Rule made would create problems that could be cured by a return to the 2013 Rule. For example, the 2020 Rule eliminated the 2013 Rule's definition of “discriminatory effect,” stating that the definition was unnecessary because it “simply reiterated the elements of a disparate impact claim.”

In eliminating this definition, the 2020 Rule erased “perpetuation of segregation” as a recognized type of discriminatory effect distinct from disparate impact, which was contrary to well established precedent. HUD proposed to reaffirm that perpetuation of segregation remains, as it always had been, a basis for contending that a policy has an unlawful discriminatory effect.

86 FR 33594-5.

84 FR 42858.

HUD described how the 2020 Rule also eliminated from the Act's prohibitions policies or practices that could “predictably result[] in a disparate impact on a group of persons,”

i.e.,

those for which the disparate impact has not yet manifested but will predictably do so. HUD noted, as it stated in 2013, that the Act prohibits discrimination that is predictable because it defines an “aggrieved person” as any person who “believes that such person will be injured by a discriminatory housing practice that is about to occur.”

HUD noted that courts have found that predictable discriminatory effects may violate the Act: “[t]o establish a prima facie case of racial discrimination, the plaintiff need prove no more than that the conduct of the defendant actually or predictably results in racial discrimination; in other words, that it has a discriminatory

effect.”

HUD stated in the proposed rule that the 2020 Rule did not adequately explain how the Act and case law construing it can be read to require waiting until harm is inflicted before an action with predictable discriminatory effects can be challenged, nor did HUD perceive that any such explanation would be availing, given the plain language of the Act and the case law interpreting it.

42 U.S.C. 3602(i)(2).

See Inclusive Cmtys. Project, Inc.,

576 U.S. at 539-40 (describing

City of Black Jack,

508 F.2d at 1184 as “at the heartland of disparate-impact liability”).

In addition, in the 2021 proposed rule, HUD recognized and agreed with concerns that the 2020 Rule created new and confusing defenses at both the pleading and post-pleading stage, including the new defense allowing a defendant to show that the challenged policy or practice is “reasonably necessary to comply with a third-party requirement.”

The 2020 Rule's preamble stated that this defense would not require a showing that the challenged policy is the only way to comply with such a requirement, only that the policy serves that purpose. In the 2021 proposed rule, HUD stated that this new defense was inconsistent with the Act, which specifies that state and local laws requiring or permitting discriminatory housing practices are invalid. HUD expressed its concern that the defense would preclude many otherwise proper discriminatory effects claims, because, for example, a plaintiff may not have any practical means of knowing whether some other party's policies also contributed to the defendant's practice. HUD reasoned that nothing in

Inclusive Communities

suggests this defense is required, let alone reasonable, for the agency to create.

24 CFR 100.500(d)(1); 85 FR 60333.

HUD noted further in the proposed rule that the 2020 Rule also created a new “outcome prediction” defense which HUD believed would in practice exempt most insurance industry practices (and many other housing-related practices that rely on outcome predictions, such as lending practices) from liability under a disparate impact standard.

In the proposed rule, HUD stated that it considered this defense to be inconsistent with HUD's repeated finding, including in the 2020 Rule, that “a general waiver of disparate impact law for the insurance industry would be inappropriate.” HUD reconsidered the defense and explained in the proposed rule that it believed the defense was unclear and would suggest that comparators be used, which were, in HUD's experience, inappropriate. HUD stated that at the very least, the defense would introduce unnecessary confusion into the doctrine.

24 CFR 100.500(d)(2)(i), 85 FR 60319, 60333.

In the proposed rule, HUD explained that the 2020 Rule inappropriately limited remedies in discriminatory effects cases in three respects. It specified that “remedies should be concentrated on eliminating or reforming the discriminatory practice so as to eliminate disparities between persons in a particular protected class and other persons.” It prohibited HUD in administrative proceedings from pursuing anything but “equitable remedies” except that “where pecuniary damage is proved, HUD will seek compensatory damages or restitution.” And it restricted HUD from seeking civil penalties in discriminatory effects cases unless the respondent had been adjudged within the last 5 years to have committed intentional unlawful housing discrimination under the Act. In the proposed rule, HUD proposed that these limitations have no basis in law and run contrary to public interest and the purpose of the Act. While the 2020 Rule cited

Inclusive Communities

as supporting these limitations, HUD noted that no part of

Inclusive Communities

suggested such limitations. Moreover, HUD viewed these limitations as in conflict with the plain language of the Act, which provides in all cases for a wide variety of remedies, including injunctive relief, actual damages, punitive damages, and civil penalties. HUD clarified that whereas Congress explicitly has limited the remedies available in disparate impact cases under Title VII, it has chosen not to do so in cases brought under the Act.

In sum, HUD stated in the proposed rule that it believed that the 2013 Rule would be preferable to the 2020 Rule. It believed the 2013 Rule would be more consistent with judicial precedent construing the Fair Housing Act, including

Inclusive Communities,

as well as the Act's broad remedial purpose. Based on its experience interpreting and enforcing the Act, HUD also believed the 2020 Rule, if put into effect, threatened to limit the effectiveness of the Act's discriminatory effects doctrine in ways that are inconsistent with the doctrine continuing to play its critical role in “moving the Nation toward a more integrated society.”

Furthermore, HUD stated that it believed that the 2013 Rule provided clarity, consistency, and a workable, balanced framework, recognized by the Supreme Court, under which to analyze discriminatory effects claims, and under which HUD could better ensure it has the tools to further its “duty to administer the Act [ ] including by preventing practices with an unjustified discriminatory effect.”

Inclusive Cmtys. Project, Inc.,

576 U.S. at 547.

86 FR 33594.

II. This Final Rule

HUD received 10,113 comments in response to the proposed rule. HUD reviewed and carefully considered these comments and, as explained in the responses to the comments below, HUD has decided to recodify the 2013 Rule. HUD has confirmed that the concerns it expressed in the proposed rule are consistent with the public comments received in response to the proposed rule, HUD's previous rulemakings and notices, and relevant discriminatory effects case law under the Act, including cases using the 2013 Rule and the 2020 Rule.

HUD continues to believe that, as compared to the 2020 Rule, the 2013 Rule more accurately describes discriminatory effects law in a manner that is consistent with both the Act and the Supreme Court's ruling in

Inclusive Communities.

As in the 2013 Rule, this final rule does not impose any new liability, but merely provides a consistent, nationwide framework for determining whether a given practice has an unjustified discriminatory effect, leading to liability under the Act. HUD believes the 2013 Rule best aligns with Fair Housing Act jurisprudence and is most consistent with the Act's remedial purposes. As described in greater detail below, HUD believes that the 2013 standard is consistent with and was implicitly endorsed by

Inclusive Communities.

Moreover, even if the 2020 Rule were a permissible approach to discriminatory effects law and HUD had no doubts about the legality or appropriateness of the 2020 Rule under the Act, HUD would recodify the 2013 Rule as an exercise of the discretion Congress gave HUD to make rules under the Act.

The 2013 Rule's framework is practical and, in contrast to the novel and complicated 2020 Rule, has worked well in discriminatory effects cases. The 2013 Rule's framework adequately balances the interests of plaintiffs

and defendants and encourages the latter to seek a less discriminatory alternative

when a policy or practice causes a discriminatory effect, without imposing an excessive burden on their substantial, legitimate, non-discriminatory interests. As described in greater detail below, HUD declines to create any exemptions or safe harbors in this rule or to proscribe specific conduct that per se has an unjustified discriminatory effect. As

Inclusive Communities

recognized in affirming that discriminatory effects claims are cognizable under the Act, “the [Fair Housing Act] must play an important part in avoiding the Kerner Commission's grim prophecy that `[o]ur Nation is moving toward two societies, one black, one white—separate and unequal.' ”

For the reasons discussed in HUD's 2013 Rule, in the proposed rule, and below in response to the public comments, HUD rescinds the 2020 Rule and recodifies the 2013 Rule.

See generally

42 U.S.C. 3614a.

In the HUD administrative hearing process, HUD is referred to as the charging party and the housing providers who are alleged to have violated the Act are referred to as respondents.

See

24 CFR 100.500. Rather than repeat those terms throughout this preamble, HUD uses the terms plaintiff and defendant to include the charging party and respondent.

Inclusive Cmtys. Project, Inc.,

576 U.S. at 519, 546 (quoting Report of the National Advisory Commission on Civil Disorders 91 (1968) (Kerner Commission Report at 1).

HUD adopts one amendment made by the 2020 Rule to HUD's general fair housing regulations at § 100.70(d)(5). This amendment provides additional illustrations of prohibited activities under the Fair Housing Act generally, though it is not specific to discriminatory effects cases. HUD proposed keeping these additional examples in the proposed rule and received no public comments specifically opposing these additions. In this final rule's amendatory instructions, HUD includes instructions to “republish” § 100.70(d)(5) without change from the 2020 Rule to clearly show that HUD is adopting this language in this final rule.

III. Public Comments

General Comments in Support

Commenters generally supported the proposed rule, which would reinstate the 2013 Rule. Commenters stated that the proposed rule is consistent with President Biden's memorandum directing agencies to redress America's history of housing discrimination and the 1994 interagency fair lending guidance under the Act and the Equal Credit Opportunity Act. Commenters also stated that the proposed rule is an important and appropriate exercise of HUD's rulemaking authority.

Among the supportive comments were those stating that the proposed rule: is appropriately broad, inclusive, and will be instrumental in ensuring optimal compliance with the Act and in challenging covert or latent discrimination that can be intentionally or unintentionally embedded in facially neutral policies and practices; is critical for ensuring equal opportunity under the Act; would help secure equal opportunity in a wide variety of housing areas, including in land use and zoning, affordable and public housing, environmental permitting, air quality, and utility burdens; would be effective in protecting against housing discrimination based on all of the Act's protected characteristics, as well as related groups such as persons without English language proficiency or who are survivors of domestic violence or sexual assault; would advance sustainable homeownership and affordable housing programs; would benefit both real estate professionals and consumers; may prevent segregated housing patterns that might otherwise result from covert and illicit stereotyping; is essential to challenging blanket refusals to accept Housing Choice Vouchers, which are disproportionately used by people of color, households with children, and persons with disabilities; and would address de facto and de jure discrimination in housing policies, construction, and tenancy.

Commenters noted that the proposed rule's burden-shifting framework is consistent with long-standing case law, including

Inclusive Communities,

and well-established agency practice. Commenters explained that the proposed rule contains the traditional burden shifting framework for disparate impact claims, which was endorsed by the Supreme Court in

Inclusive Communities

and is consistent with the framework for disparate impact claims under Title VII and the Equal Credit Opportunity Act.

Commenters stated that out of more than 40 federal appellate and district court decisions in disparate-impact fair housing cases following

Inclusive Communities,

very few, other than

Inclusive Communities Project

Lincoln Prop. Co.,

found any inconsistency between the 2013 Rule and the Supreme Court's

Inclusive Communities

decision. Commenters pointed to

Avenue 6E Investments, LLC

City of Yuma

which cited the 2013 Rule as authority for the proper burden-shifting framework without noting any inconsistencies between that rule and

Inclusive Communities,

and

Mhany Mgmt., Inc.

Cnty. of Nassau

which found that the Supreme Court implicitly endorsed the 2013 Rule's framework in

Inclusive Communities.

Commenters also noted that the court in

Mhany Mgmt., Inc.

Cnty. of Nassau,

as well as numerous other cases successfully utilized the 2013 Rule's burden shifting framework to reach decisions.

Inclusive Communities Project

Lincoln Prop. Co,

920 F.3d 890 (5th Cir. 2019).

Avenue 6E Investments, LLC

City of Yuma,

818 F.3d 493, 510 (9th Cir. 2016).

Mhany Mgmt., Inc.

Cnty. of Nassau.

819 F.3d 581, 618-20 (2d Cir. 2016).

Avenue 6E Investments, LLC

City of Yuma,

818 F.3d 493, 510 (9th Cir. 2016);

Mhany Mgmt., Inc.

Cnty. of Nassau,

819 F.3d 581, 618-20 (2d Cir. 2016).

Commenters supporting the proposed rule stated that it provides a clear, simple, and effective standard that would promote consistency between judicial and administrative venues and throughout the housing industry. Commenters explained that this standard would maintain continuity for regulated entities and enable them to better comply with the Act, since this regulatory framework has been in place since 2013. Commenters described the framework as pragmatic, fostering fair and sound business practices and finding the appropriate balance between fair housing concerns and business necessities.

Commenters expressed support for the burden-shifting framework, describing it as clear, easy to follow, practical, and striking the appropriate balance between competing interests. Commenters stated that the 2013 Rule settled the law on several important issues, including whether the burden-shifting framework is appropriate and which party bears the burden of demonstrating the business necessity for a particular policy and the existence of a less discriminatory alternative. A commenter noted that the 2013 Rule is a fair and accurate codification of longstanding jurisprudence of discriminatory effects liability under the Act and posed no significant departure from previous HUD interpretation or the weight of judicial authority. Commenters noted that plaintiff's burden under the proposed rule is not easy to meet, which eliminates the danger of an onslaught of groundless litigation. A commenter described the proposed rule as balancing the need to prevent frivolous claims from moving forward with a process that allows potentially meritorious claims to be substantiated or disproved. A commenter compared the proposed rule's three-tiered framework to the 2020 Rule's five-tiered test, noting that the former provides a clear way to challenge policies that may unnecessarily restrict housing, while the latter is vague and allows discrimination to continue unchallenged. Comments also stated that the 2020 Rule conflicted with decades of legal precedent, including

the Supreme Court's decision in

Inclusive Communities

and that discriminatory effects claims that sought to challenge neutral policies that actually caused discrimination would not survive under the test contained in the 2020 Rule.

General Comments in Opposition

Other commenters generally opposed the proposed rule, suggesting that HUD withdraw it and retain the 2020 Rule. A commenter stated that the 2020 Rule thoroughly explained its reasoning and was consistent with

Inclusive Communities.

Another commenter described the proposed rule as unclear and overly burdensome. Commenters also suggested that the proposed rule lacks limitations on how and where it applies, thus adding a new layer of complexity and uncertainty to discriminatory effects law. A commenter stated that the proposed rule would harm the people it purports to benefit by applying a complex, court-created legal framework to a public policy issue and requiring all issues to be resolved in expensive litigation in federal court. Another commenter stated that the proposed rule will not create a uniform mechanism to resolve discriminatory effects disputes but will instead encourage courts to develop alternative approaches to handling such cases. A commenter stated that HUD and others have used the 2013 Rule to bully housing providers into expanding access to housing even if landlords cite legitimate business reasons for restricting housing based on certain admission or occupancy policies.

HUD Response:

HUD disagrees with the commenters who opposed the proposed rule. As discussed in the preamble to the proposed rule and elsewhere in this preamble, HUD believes that this final rule establishes the appropriate, balanced framework for assessing claims of discriminatory effects and is entirely consistent with

Inclusive Communities

and long-standing judicial precedent. In contrast, HUD finds that the 2020 rule, if retained, would limit liability in a manner inconsistent with the Act's purpose and judicial precedent. HUD further believes that some of the standards announced in the 2020 rule might lead some courts to develop alternative approaches to assessing discriminatory effects claims that are inconsistent with the text and broad remedial purposes of the Act. HUD believes that the framework in the proposed rule sets out a consistent nationwide approach to evaluating discriminatory effects claims and adopts the majority view of judicial opinions interpreting the Act. As a result, this final rule affords housing providers the opportunity to maintain policies and practices so long as they do not have an unjustified discriminatory effect because of a protected characteristic. And it does not require allegations of discriminatory effects to be resolved in federal court. Rather, housing providers may avoid potential litigation and liability by reviewing their policies and practices to ensure that they do not have an unjustified discriminatory effect. The discriminatory effects framework is not intended to force housing providers to take any particular course of action but rather to ensure that an important goal of the Act—to safeguard fair housing throughout the country—is accomplished.

General Comments Concerning Clarity

Issue:

Commenters disagreed about the clarity that would result from setting aside the 2020 Rule. A commenter stated that the 2020 Rule should be retracted because it created a legal landscape in which HUD, other federal regulators, and courts would have different standards for analyzing discriminatory effects claims, and because it created confusion that would disadvantage housing discrimination victims. However, other commenters asked HUD to retain the 2020 Rule so as to avoid confusion and uncertainty because different forms of the rule have been promulgated and retracted over the last several years. A commenter stated that HUD should recognize the practical implications of repeatedly and drastically changing policies and justification for those policies and requested that HUD solidify clear and consistent long-term standards in order to minimize confusion and uncertainty for federal funding recipients. The commenter said it makes little sense to change procedures with each new administration and that reinstating the 2013 Rule will provoke litigation and disputes between courts rather than provide clarity. Another commenter noted a particular concern about confusion for businesses and damage to their ability to know and comply with the law since litigation concerning the 2020 Rule is pending.

HUD Response:

HUD agrees with the commenters who stated that the 2020 Rule introduced a new standard that is incompatible with the standards used by courts and other federal regulators, creating confusion and uncertainty. In contrast, this final rule will provide clarity consistent with well-established judicial and agency interpretations of the Act by eliminating the novel and undefined standards introduced by the 2020 Rule. HUD also notes that the 2020 Rule never went into effect and has never been enforced by HUD. HUD has considered potential reliance interests and believes that no significant reliance was created by the 2020 rule, because unlike a regulation that even briefly governed conduct or supplied benefits, the 2020 Rule never did so. While HUD proposed revising the rule in 2019 and subsequently issued a final rule in 2020, the 2013 Rule, which is recodified in this final rule, is and has been the only promulgated rule governing the standard for discriminatory effects liability that has ever taken effect since the Act became law in 1968. HUD agrees that the 2020 Rule introduced a new standard that is incompatible with the Act and with the standards used by courts and other federal regulators. Had HUD used the 2020 Rule, while other federal agencies and courts used rules analogous to the 2013 Rule or created their own rules in response to

Inclusive Communities,

there would be substantial confusion in discriminatory effects jurisprudence. HUD believes that it is important that those affected by or accused of discrimination know what standard governs their housing related activities and that that standard does not unnecessarily vary depending on the forum in which a case is decided. Having differing standards would increase litigation costs for the parties and likely result in the dismissal of claims in some forums that are upheld in others. Restoring the 2013 Rule will help ensure the consistency of federal discriminatory effects law and will avoid the confusion caused by the 2020 Rule.

This final rule sets out a usable and uniform framework that is fully consistent with the requirements established by courts, as well as the text and purpose of the Act.

Comments Concerning Harmony Between Other State and Federal Civil Rights Statutes

Issue:

A commenter noted that the Rule will bring HUD's regulations back into conformity with state civil rights laws.

HUD Response:

HUD acknowledges that many state courts and agencies that interpret and enforce civil rights laws utilize a burden-shifting framework that is similar to this final rule and that HUD's 2020 Rule created confusion and conflicting standards.

HUD believes that it is important for plaintiffs to have

access to consistent relief in state and federal jurisdictions.

See e.g., Tetro

Elliott Popham Pontiac, Oldsmobile, Buick, & GMC Trucks, Inc.,

173 F.3d 988, 993 (6th Cir. 1999) (explaining that state civil rights statute is interpreted consistently with analysis used for federal civil rights statute).

Issue:

Commenters applauded the rule for being consistent with other civil rights laws and their discriminatory effects liability frameworks, including Title VII and ECOA. A commenter also noted that courts, including the Supreme Court in

Inclusive Communities,

have often drawn on Title VII's jurisprudence when interpreting the Act and vice versa because of the similarities between the statutes' texts, structures, purposes, and dates of enactment. The commenter expressed support for the rule because it aligns with judicial precedent that interprets the Act and Title VII similarly. The commenter also stated that the proposed rule furthers the principle that language that is similar across statutes should be given similar meaning.

HUD Response:

HUD agrees that the rule is consistent with other civil rights laws and their discriminatory effects liability frameworks, including Title VII of the Civil Rights Act of 1964, as amended (Title VII),

and the Equal Credit Opportunity Act (ECOA).

HUD acknowledges that courts have generally interpreted these statutes consistently and agrees that HUD should do the same to promote consistency and clarity, particularly for entities whose actions must be compliant with both ECOA and the Act.

78 FR 11468-11471.

Id.

HUD notes that the preamble to the 2013 Rule explained in great detail how its framework operates harmoniously with other civil rights laws, including Title VII and ECOA, and best effectuated the important goals of the Fair Housing Act.

As HUD noted in the 2013 Rule, the discriminatory effects framework borrowed from Title VII and

Griggs

is the fairest and most reasonable approach for resolving disparate impact claims, in part because it does not require either party to prove a negative, and it provides the parties the opportunity to obtain adequate information in discovery to meet their burdens.

Id.

78 FR 11474.

Comments Concerning Massachusetts Fair Housing Center

Issue:

Commenters stated that although the district court in

Massachusetts Fair Housing Center

stayed implementation of the 2020 Rule, it did not require HUD to totally abandon the 2020 Rule. The commenters stated that the decision primarily addressed three elements of the 2020 Rule—the outcome prediction defense, the requirement that plaintiffs present an equally effective alternative, and the conflation of the plaintiff's prima facie burden and their pleading burden. The commenters also stated that the court acknowledged the requirement that a plaintiff must plead that a challenged policy is “arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective,” may have some grounding in case law. The commenters also stated that the court did not address the 2020 Rule's recognition that the Act does not and cannot supplant state laws concerning insurance, or its codification of

Inclusive Communities'

guidance on remedies.

Mass. Fair Hous. Ctr.

United States HUD,

496 F. Supp. 3d 600, 603 (D. Mass. Oct. 25, 2020).

Other commenters stated that

Massachusetts Fair Housing Center

criticized the 2020 Rule for introducing onerous pleading standards, defenses that lacked precedent in case law, for conflicting with the remedial purpose of the Act, and for likely being arbitrary and capricious.

HUD Response:

While the

Massachusetts Fair Housing Center

court enjoined HUD from implementing or enforcing the 2020 Rule in any manner and ordered HUD to “preserve the status quo pursuant to the regulations in effect as of the date of this Order,”

HUD is not basing its decision to abandon the 2020 Rule and recodify the 2013 Rule on the

Massachusetts Fair Housing Center

order. Rather, HUD declines to retain any part of the 2020 Rule's substantive disparate impact language based on its own interpretation of and decades of experience in implementing the Act. HUD also finds other aspects of the 2020 Rule that the court left unaddressed or uncriticized to be equally troublesome.

Id.

at 612.

Comments Concerning Inclusive Communities

Issue:

Commenters supported reinstatement of the 2013 Rule because it is consistent with

Inclusive Communities.

Commenters stated that the Court cited the 2013 Rule with approval, noting each step in the 2013 Rule's burden-shifting framework without critique. Commenters also noted that multiple courts since

Inclusive Communities,

including courts of appeals, have read

Inclusive Communities

as affirming or implicitly adopting the 2013 Rule's burden-shifting test

and

have applied the 2013 Rule's framework.

A commenter pointed out that the district court in

Inclusive Communities

stated on remand that, “[a]s a result of the Fifth Circuit's decision adopting the HUD regulations, and the Supreme Court's affirmance (without altering the burden-shifting approach), the following proof regimen now applies to

ICP's

disparate impact claim under the [Act].”

A commenter also cited multiple district court decisions that have incorporated the language of

Inclusive Communities

when applying the 2013 Rule's framework.

Another commenter noted that

Inclusive Communities

endorsed “heartland” cases,

all of which used burden shifting frameworks consistent with the proposed rule. Commenters also stated that the 2020 Rule did not meaningfully address

MHANY Management, Inc., de Reyes

Waples Mobile Home Park Limited Partnership,

Avenue 6E Investments, LLC

City of Yuma,

which found that the 2013 Rule remained valid after

Inclusive Communities.

A commenter added that in

Property Casualty Insurance Association of America

Carson,

a lawsuit directly challenging the validity of the 2013 Rule, the district court held that

Inclusive Communities

affirmed HUD's burden-shifting approach and did not identify any aspect of the approach that required correction.

See. e.g., Mhany Mgmt., Inc.

Cnty. of Nassau at 618-20; Oviedo Town Ctr. II, L.L.L.P. v. City of Oviedo,

759 F. App'x 828, 834-35 (11th Cir. 2018)

; de Reyes

Waples Mobile Home Park L.P.,

903 F.3d 415, 426 n.6, 428 (4th Cir. 2018);

see also Nat'l Fair Hous. All.

Travelers Indem. Co.,

261 F. Supp. 3d 20, 29-30 (D.D.C. 2017

); Nat'l Fair Hous. All.

Bank of Am., N.A.,

401 F. Supp. 3d 619, 631-632 (D. Md. 2019);

See, e.g., River Cross Land Co., LLC

Seminole Cty.,

2021 WL 2291344, at *66-69, 72-73, 75-76 (M.D. Fla. June 4, 2021);

Jones

City of Faribault,

No. 18-1643 (JRT/HB), 2021 U.S. Dist. LEXIS 36531, at *48-49 (D. Minn. Feb. 18, 2021

); Conn. Fair Hous. Ctr.

CoreLogic Rental Prop. Sols., LLC,

478 F. Supp. 3d 259, 296 (Aug. 7, 2020) (and related decisions,

see CoreLogic,

No. 3:17-cv-705 (VLB), 2020 WL 401776 (D. Conn. Jan. 24, 2020));

Borum

Brentwood Vill., LLC,

2020 U.S. Dist. LEXIS 54840, at *13 (D.D.C. Mar. 30, 2020);

NFHA

Deutsche Bank Nat'l Trust,

2019 WL 5963633 (N.D. Ill. Nov. 13, 2019);

Yellowstone Women's First Step House Inc.

City of Costa Mesa,

2019 U.S. Dist. LEXIS 221209, at *4 (C.D. Cal. Nov. 4, 2019

); Mass. Fair Hous. Ctr.,

496 F. Supp. 3d at 611.

Inclusive Cmtys. Project, Inc.

Tex. Dep't of Hous. & Cmty. Affairs,

2015 WL 5916220 at *3 (N.D. Tex. 2015).

Prince George's Cty.

Wells Fargo & Co.,

397 F. Supp. 3d 752, 766 (D. Md. 2019);

Fortune Soc'y

Sandcastle Hous. Dev. Fund Corp.,

388 F. Supp. 3d 145, 172-173 (E.D.N.Y. 2019);

Conn. Fair Hous. Ctr.

Corelogic Rental Prop. Sols., LLC,

369 F. Supp. 3d 362, 377-78 (D. Conn. 2019

); Nat'l Fair Hous. All.

Fannie Mae (“Fannie Mae”),

294 F. Supp. 3d 940, 947 (N.D. Cal. 2018);

Paige

N.Y.C. Hous. Auth.,

2018 U.S. Dist. LEXIS 137238, at *9 (S.D.N.Y. Aug. 14, 2018);

R.I. Comm'n for Hum. Rights

Graul,

120 F. Supp. 3d 110, 123-24 (D.R.I. 2015);

Price

Country Brook Homeowners Ass'n,

2021 U.S. Dist. LEXIS 228914, at *5-6 (S.D. Ohio Nov. 30, 2021

); Pickett

City of Cleveland,

No. 1:19 CV 2911, 2020 U.S. Dist. LEXIS 259242, at *9 (N.D. Ohio Sep. 29, 2020);

Winfield

City of N.Y.,

No. 15CV5236-LTS-DCF, 2016 U.S. Dist. LEXIS 146919, at *18-19 (S.D.N.Y. Oct. 24, 2016

); Alexander

Edgewood Mgmt. Corp.,

Civil Action No. 15-01140 (RCL), 2016 U.S. Dist. LEXIS 145787, at *6-7 (D.D.C. July 22, 2016).

See e.g. United States

City of Black Jack, Mo.,

508 F.2d 1179, 1184 (8th Cir. 1974

); Huntington Branch, NAACP

Huntington,

844 F.2d 926, 937 (2nd Cir. 1988);

Greater New Orleans Fair Housing Action Center

St. Bernard Parish,

641 F. Supp. 2d 563, 567-568 (E.D. La. 2009).

Prop. Cas. Insurers Ass'n of Am.

Carson,

2017 WL 2653069, at *8-9 (N.D. Ill. June 20, 2017) (finding that HUD's 2013 adoption of the 3-step burden-shifting framework was a reasonable interpretation of the Act and that “in short, the Supreme Court in

Inclusive Communities

. . . did not identify any aspect of HUD's burden-shifting approach that required correction.”)

Other commenters opposed the proposed rule, stating that it is inconsistent with

Inclusive Communities.

In support of this, commenters noted that the 2013 Rule preceded

Inclusive Communities

and stated that the 2013 Rule does not adequately incorporate the holdings of that case. Commenters requested that HUD retain the 2020 Rule or incorporate additional language from the

Inclusive Communities

decision into this final rule. Commenters stated that although

Inclusive Communities

mentioned the 2013 Rule, it did not endorse the rule. Others stated that the 2013 Rule does not align with the Supreme Court's caution against injecting racial considerations into every housing decision and perpetuating race-based considerations rather than moving beyond them. A commenter said that compliance with the rule, as opposed to

Inclusive Communities,

will lead to costly litigation. Commenters noted that the Supreme Court specifically limited the scope of

Inclusive Communities

to the first question presented (whether disparate impact claims were cognizable under the Act) so references to the 2013 Rule cannot be viewed as approving the 2013 framework. Commenters further stated that the Court in

Inclusive Communities

did not state that the 2013 Rule incorporates the appropriate limits of disparate impact liability.

Another commenter stated that courts, such as the court in

Woda Cooper Dev., Inc.

City of Warner Robins,

Civ. No. 5:20-CV-159 (MTT), 2021 WL 1093630, *1, at *7 (M.D. Ga. Mar. 22, 2021), have struggled to apply the 2013 Rule's framework in the wake of

Inclusive Communities,

with some choosing to ignore the rule entirely. The commenter stated that

Inclusive Communities

identified a number of safeguards to prevent abusive disparate impact cases but did not provide detailed explanations of those safeguards or guidance on how courts should apply those safeguards. The commenter urged HUD to elaborate on those safeguards in the final rule.

HUD Response:

HUD agrees with the commenters who stated that the 2013 Rule is consistent with the

Inclusive Communities

holding. The Court in

Inclusive Communities

did not call into question the 2013 Rule's framework for analyzing discriminatory effects claims, nor did it suggest that HUD should make any modifications to that framework. To the contrary, the Court cited HUD's 2013 Rule several times with approval.

For instance, the Court noted that the burden-shifting framework of

Griggs

and its progeny, adopted by HUD in the 2013 Rule and retained in this final rule, adequately balanced the interests of plaintiffs and defendants by giving housing providers the ability “to state and explain the valid interest served by their policies.”

The Court also discussed the history of HUD's promulgation of the 2013 Rule, noted that lower courts had relied on it, and repeatedly cited its three-part burden shifting test.

Notably, other courts have recognized these findings and relied on the 2013 Rule's burden shifting framework without difficulty since

Inclusive Communities

was decided.

Moreover, HUD agrees that

Inclusive Communities'

discussion approving the holdings of the “heartland cases” supports reinstating the 2013 Rule.

HUD also agrees that the 2020 Rule did not adequately address the well-considered and thorough reasoning of

MHANY Mgmt., de Reyes,

and

Avenue 6E Investments, LLC,

each of which found that the 2013 Rule remained valid after

Inclusive Communities.

Inclusive Cmtys. Project,

576 U.S. at 527, 535-536, 541.

Id.

at 541.

Id.

at 527-28.

Supra

at n.69.

See also

Defendants' Opposition to Plaintiff's Motion for Leave to Amend Complaint,

Prop. Cas. Ins. Assoc. of Am.

Carson and the U.S. Dep't of Hous. and Urb. Dev.,

No. 1:13-cv-08564 (2017); Defendants' Memorandum in Support of Their Motion for Summary Judgment and in Opposition to Plaintiffs' Motion for Summary Judgment,

Am. Ins. Assoc.

U.S. Dep't of Hous. and Urb. Dev. et al.,

No. 1:13-cv-00966 (RJL) (D.D.C. 2016).

See, e.g., de Reyes

Waples Mobile Home Park Ltd. P'ship,

903 F.3d 415, 424, 432 n.10 (4th Cir. 2018) (noting that “[i]n

Inclusive Communities,

Inclusive Communities

and cannot be relied upon, and thus “afford[ing] the HUD regulation and guidance the deference it deserves”) (citations omitted);

MHANY Mgmt. Inc.

Cnty. of Nassau,

819 F.3d 581, 618-619 (2d Cir. 2016) (deferring to HUD's [2013] regulation, noting that “the Supreme Court implicitly adopted HUD's [burden shifting] approach [in 24 CFR 100.500(c)]”);

Avenue 6E Invs., LLC

City of Yuma,

818 F.3d 493, 512-513 (9th Cir. 2016) (citing

Inclusive Communities

and the 2013 Rule at 100.500(c) for the same proposition);

Nat'l Fair Hous. Alliance

Travelers Indem. Co.,

261 F. Supp. 3d 20, 29 (D.D.C. 2017) (citing

Inclusive Communities

and HUD's 2013 Rule at 100.500(c) as standing for the same proposition);

Prop. Cas. Insurers Ass'n of Am.

Carson,

Inclusive Communities

. . . did not identify any aspect of HUD's burden-shifting approach that required correction.”);

Burbank Apartments Tenant Ass'n

Kargman,

474 Mass. 107, 126-27 (Mass. 2016) (explaining that it was following the “burden-shifting framework laid out by HUD and adopted by the Supreme Court in [

Inclusive Communities

].”).

See, e.g., MHANY Mgmt. Inc.

Cnty. of Nassau,

819 F.3d 581, 618 (2d Cir 2016) (“the Supreme Court implicitly adopted HUD's approach”);

6E Invs., LLC

City of Yuma,

818 F.3d 493, 512-513 (9th Cir. 2016) (citing the 2013 Rule in describing the three-prong analytical structure set forth in

Inclusive Communities

);

Nat'l Fair Hous. Alliance

Travelers Indem. Co.,

261 F. Supp. 3d 20, 20 (D.D.C. 2017) (stating that the Supreme Court “carefully explained that disparate-impact liability has always been properly limited” and that “disparate-impact liability under the FHA can be proven under a burden-shifting framework analogous to that used in employment discrimination cases.”) (internal citations and quotations omitted);

Prop. Cas. Insurers Ass'n of Am.

Carson,

2017 WL 2653069, at *8-9 (N.D. Ill. June 20, 2017) (finding that HUD's 2013 adoption of the 3-step burden-shifting framework a reasonable interpretation of the Act, finding that “in short, the Supreme Court in

Inclusive Communities

. . . did not identify any aspect of HUD's burden-shifting approach that required correction.”);

Burbank Apartments Tenant Ass'n

Kargman,

474 Mass. 107, 126-27 (Mass. 2016) (explaining that it was following the “burden-shifting framework laid out by HUD and adopted by the Supreme Court in [

Inclusive Communities

].”);

Jackson

Tryon Park Apartments, Inc.,

No. 6:18-CV-06238 EAW, 2019 U.S. Dist. LEXIS 12473, at *11 (W.D.N.Y. Jan. 25, 2019) (noting that “the Supreme Court's 2015

Inclusive Communities Project

ruling uph[eld] [HUD's 2013] regulation”).

River Cross Land Co., LLC

Seminole Cty.,

2021 WL 2291344, at *66-69, 72-73, 75-76 (M.D. Fla. June 4, 2021).

In light of the views of a majority of courts and HUD's experience applying the Act, HUD finds that the Fifth Circuit's conclusions in

Lincoln Property

do not require it to change course.

In that case, the majority of a divided panel acknowledged that

Inclusive Communities

reviewed and affirmed the Fifth Circuit's earlier judgment in that case, remanding to the trial court to apply the 2013 Rule's burden-shifting framework, and that the Court did not explicitly call into question the 2013 Rule's requirements. Nonetheless, the

Lincoln Property

court found that because the Supreme Court in

Inclusive Communities

had not explicitly stated that it was adopting the 2013 Rule's framework, whether the Court accepted the framework or modified it remained unresolved.

The court construed language from

Inclusive Communities

as calling for courts to make it more difficult to plead a discriminatory effects claim in some fashion, but acknowledged that

Inclusive Communities

provided no clear direction as to how it was thus changing the law. While acknowledging that other appellate courts had interpreted

Inclusive Communities

to have “implicitly adopted the 2013 framework,” the panel's review of certain passages from

Inclusive Communities

and of subsequent decisions from the Fourth, Eighth, and Eleventh Circuits

led the panel to conclude simply that

Inclusive Communities

“announce[d] a more demanding test than that set forth in the HUD regulation” but “did not clearly delineate its meaning or requirements.”

Finding no consensus even among those who believed

Inclusive Communities

made some change, it concluded that the claim at issue in that case was not properly pleaded under any of several possible standards it could apply, making it unnecessary to state with more specificity how, in its view,

Inclusive Communities

had changed the law.

Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d 890 (5th Cir. 2019).

Id.

at 902.

Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d 890, 902-05 (5th Cir. 2019) (citing

de Reyes

Waples Mobile Home Park Ltd. P'ship,

903 F.3d 415 (4th Cir. 2018);

Ellis

City of Minneapolis,

860 F.3d 1106, 1114 (8th Cir. 2017);

Oviedo Town Ctr. II, L.L.P.

City of Oviedo,

759 Fed. App'x 828 (11th Cir. 2018)) (pinpoint citations omitted).

See Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d 890, 902 (5th Cir. 2019).

HUD believes

Lincoln Property's

language concerning a more demanding standard is not a reason to change the standard it promulgated in 2013. As stated earlier, HUD disagrees that anything in

Inclusive Communities

is inconsistent with the 2013 Rule's requirements for discriminatory effects claims. Rather, HUD agrees with the Fourth Circuit that the 2013 Rule “is similar to the framework the Supreme Court ultimately adopted in

Inclusive Communities,”

and with its observation that “some courts believe the Supreme Court implicitly adopted the HUD framework altogether.”

But even if the Fifth Circuit were correct in identifying inconsistencies between the 2013 Rule and

Inclusive Communities, Lincoln Property

does not provide persuasive reasoning for HUD to modify the 2013 Rule, because the court only found ambiguity in the law after

Inclusive Communities

rather than specifying the way in which HUD needed to change course. Additionally, the other circuit courts that have analyzed the robust causation discussion in

Inclusive Communities

have either defined it in a way that is consistent with this final rule or were similarly non-specific in explaining robust causality's meaning.

Reyes,

903 F.3d at 424 n.4 (collecting cases).

See de Reyes

Waples Mobile Home Park Ltd. P'ship,

903 F.3d 415, 424-27 (4th Cir. 2018) (explaining that identifying policy that causes disparity establishes robust causation);

Ellis

City of Minneapolis,

860 F.3d 1106, 1111 (8th Cir. 2017) (quoting

Inclusive Cmtys.,

but not defining robust causation beyond identifying the connection between a challenged policy and a disparate impact);

Oviedo Town Ctr. II, L.L.L.P.

City of Oviedo,

759 F. App'x 828, 834-36 (11th Cir. 2018) (plaintiff must make statistical showing sufficient to connect challenged policy and disparate impact)

HUD notes that, while acknowledging that other appellate courts had interpreted

Inclusive Communities

to have “implicitly adopted the 2013 framework,” the Fifth Circuit panel's review of certain passages from

Inclusive Communities

as well as subsequent decisions from the Fourth, Eighth, and Eleventh Circuits,

led the panel to conclude that

Inclusive Communities

“undoubtedly announce[d] a more demanding test than that set forth in the HUD regulation.”

HUD believes that in two of these decisions, the courts gave more deference to the 2013 Rule than the commenters recognized.

Additionally, in the district court decisions cited by the commenters, and in

Lincoln Property'

s progeny, HUD believes that the courts misread

Inclusive Communities

as creating heightened pleading standards.

Even

Lincoln Property

only requires a plaintiff to

plausibly

demonstrate a robust causal connection between a discriminatory practice and an alleged disparate impact.

100

HUD adopts the view of courts that found

Inclusive Communities

endorsed the 2013 Rule's framework.

Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d 890, 902-05 (5th Cir. 2019) (citing

de Reyes

Waples Mobile Home Park Ltd. P'ship,

903 F.3d 415 (4th Cir. 2018);

Ellis

City of Minneapolis,

860 F.3d 1106, 1114 (8th Cir. 2017);

Oviedo Town Ctr. II, L.L.P.

City of Oviedo,

759 Fed. App'x 828 (11th Cir. 2018)) (pinpoint citations omitted).

See Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d 890, 902 (5th Cir. 2019).

River Cross Land Co., LLC

Seminole Cty.,

2021 WL 2291344, at *66-69, 72-73, 75-76 (M.D. Fla. June 4, 2021);

Oviedo Town Ctr. II, L.L.L.P.

City of Oviedo,

No. 6:16-cv-1005, 2017 WL 3621940, at *4 (M.D. Fla. Aug. 23, 2017) (utilizing 2013 Rule to analyze disparate impact claim)

For example, the pleading standards used in

Oviedo Town Ctr, II, L.L.P.

City of Oviedo, Florida,

759 Fed. App'x at 833-35, and

River Cross Land Co., LLC

Seminole Cty.,

2021 WL 2291344, at *22-24, are not inconsistent with the 2013 Rule. In addition, both

Cnty. of Cook, Ill.

Wells Fargo & Co.,

314 F. Supp. 3d 975, 990 (N.D. Ill. 2018) and

Nat'l Fair Hous. All.

Travelers Indem. Co.,

261 F. Supp. 3d at 22, incorrectly relied on dicta when they stated that

Inclusive Communities

created higher pleading standards in disparate impact cases.

100

Inclusive Cmtys. Project, Inc.

Lincoln Prop. Co.,

920 F.3d at 899 (5th Cir. 2019).

HUD also notes that

Lincoln Property

—a suit between private parties—was decided without the benefit of input from HUD on what effect, if any,

Inclusive Communities

had on Fair Housing Act disparate impact claims. As the agency to which Congress has delegated the responsibility to interpret and enforce the Fair Housing Act, HUD believes that its reasonable reading of any ambiguities in the meaning of the Act following

Inclusive Communities

is entitled to deference.

101

Thus, to the extent

Lincoln Property

identified such an ambiguity and came to conclusions that conflict with those HUD has reached, HUD declines to adopt the court's conclusions. Any risk that litigants in the Fifth Circuit would be subject to a different standard than litigants elsewhere is created by the

Lincoln Property

decision, not by HUD's promulgation of this rule.

101

National Cable & Telecommunications Assn.

Brand X internet Services,

545 U.S. 967, 980 (2005) (holding that agency interpretation of statute can override prior judicial interpretation when the statute is ambiguous and agency interpretation is reasonable).

In short, HUD does not believe that the cases cited by the commenters support revisions to the rule.

Issue:

Commenters stated that the proposed rule conflicts with what they characterized as

Inclusive Communities'

holding that a “robust causality requirement . . . protects defendants from being held liable for racial disparities they did not create.” Some commenters asked HUD to expressly add a robust causality requirement to the final rule, while others asked HUD to retain the 2020 Rule, stating that it appropriately reflected

Inclusive Communities'

robust causality requirement.

Some commenters urged HUD to adopt the view that, in stating that disparate impact claims may not be established simply by demonstrating a “statistical disparity” in outcomes,

Inclusive Communities

held that such claims must meet a higher causation standard than in the proposed rule. Other commenters stated that the proposed rule does not require proximate cause or a direct link between the policy and the discriminatory effect, which, they said,

Inclusive Communities

requires. Commenters said that if plaintiffs are not required to establish “robust causality” or “direct proximate cause,” defendants would be liable in cases where discrimination does not actually exist. Commenters also stated that without an explicit robust causality requirement, race will be used in a pervasive way, leading to the use of numerical quotas and raising constitutional questions. Commenters stated that the requirement is necessary so that regulated entities can make practical business choices and profit-related decisions. A commenter suggested revising the proposed rule to provide that to establish robust causality, the plaintiffs have the burden of proving that a challenged practice is the sole and proximate cause, or reasonably predicted cause, of a discriminatory effect.

Commenters who supported the proposed rule said that it incorporates

Inclusive Communities'

protections for defendants who may fear liability for disparities their policies did not create. Commenters noted that the proposed rule does not permit liability based on statistical disparities alone.

HUD Response:

The 2013 Rule and this final rule contain a robust causality requirement by requiring the plaintiff to prove at the first step of the framework that a challenged practice caused or predictably will cause a discriminatory effect. As discussed above, in HUD's view, the framework in this final rule, which includes the requirement that the challenged practice causes a discriminatory effect, is consistent with

Inclusive Communities.

The

Inclusive Communities

Court did not announce a heightened causality requirement for disparate impact liability, a requirement which would find no support in the statutory text or case law. Rather, in considering a district court opinion where the trial court had found a violation of the Act without ever requiring the plaintiff to identify a causal link between a specific policy and the challenged disparate impact, the Court merely reiterated that plaintiffs must identify a causal link between the challenged practice and the alleged disparate impact that is sufficiently robust to permit that connection to be scrutinized at each stage of the case. The 2013 Rule, and this final rule require exactly that. The 2013 Rule and this final rule do not use the precise words “robust causality” and (as explained elsewhere in this preamble) nothing in

Inclusive Communities

requires these words. What

Inclusive Communities

requires is that a court's examination of causality be robust. Both the 2013 Rule and this final rule implicitly incorporate this requirement by requiring a plaintiff to link a specific practice to a current or predictable disparity. Ultimately, the error identified both by the Fifth Circuit and then by the Supreme Court in

Inclusive Communities

came from the district court's failure to fully apply the 2013 Rule's framework, not the 2013 Rule's framework itself. Through its framework this rule ensures that, as required by

Inclusive Communities,

defendants are not held liable for racial disparities they did not create.

102

The rule thus already requires a showing of causation, not just correlation, between the policy or practice and the disparate impact, and so is fully consistent with

Inclusive Communities.

102

See Inclusive Cmtys. Project, Inc.,

576 U.S. at 519, 542 (describing robust causality as requiring that a plaintiff draw a connection between the defendant's challenged policy causing the alleged disparity, noting that this ensures that racial imbalance does not, without more, establish a prima facie case of disparate impact and thus protects defendants from being held liable for racial disparities they did not create.)

HUD also believes that the rule's burden-shifting framework does not preclude businesses from making business and profit-motivated choices, even if they cause a discriminatory effect, so long as they do not create an

unjustified

discriminatory effect. Once a plaintiff meets its burden of proving that a policy causes a disparate impact because of a protected characteristic, the burden then shifts to the defendant to prove that the policy is necessary to serve the defendant's substantial, legitimate, nondiscriminatory interest. This safeguard allows housing providers and others to make practical business choices and profit-related decisions. The third step of the framework then shifts the burden back to the plaintiff to prove that an alternative policy would have a less discriminatory effect than the challenged policy. This rule balances the interests of the parties by allowing defendants to implement policies that meet their needs, as long as there is no unjustified discriminatory effect, while providing plaintiffs the opportunity to identify policies that serve those needs with less discriminatory effects based on protected characteristics.

HUD notes further that although the 2013 Rule has been in effect for ten years—with similar judicial precedent effective even longer, it is unaware of any case applying the 2013 Rule in a manner that would impose quotas.

Issue:

Commenters requested that HUD include in the final rule a requirement that plaintiffs plead that the challenged policy is “artificial, arbitrary, and unnecessary” in addition to the traditional elements of a disparate impact claim, as the 2020 Rule did. Commenters stated that

Inclusive Communities

required this additional element when the Court stated that “[d]isparate-impact liability mandates the `removal of artificial, arbitrary, and unnecessary barriers' ” to “avoid the serious constitutional questions that might arise under the Act, for instance, if such liability were imposed based solely on a showing of a statistical disparity.”

103

Another commenter explained that the district court in

Massachusetts Fair Housing Center

did not invalidate the “arbitrary, artificial, and unnecessary” language in the 2020 Rule, but rather noted that it came from

Inclusive Communities

and other case law, like

Ellis

City of Minneapolis,

860 F.3d 1106, 1112 (8th Cir. 2017).

103

Id.

at 540.

Other commenters disagreed, stating that if such a requirement were added to the rule, it would be impossible to challenge discriminatory policies absent facts showing discriminatory intent, thus negating

Inclusive Communities'

holding that violations of the Act may be established through proof of disparate impact. The commenters explained that pleading that a policy is “artificial” is essentially pleading that a policy is pretextual—a showing required in cases alleging intentional discrimination, not discriminatory effects. Commenters also noted that the phrase “artificial, arbitrary, and

unnecessary” originated in

Griggs

and pointed out that in applying this phrase in Fair Housing Act cases, courts have applied it consistent with the 2013 Rule's burden shifting framework, essentially using it as short-hand for the three-step framework, not as a separate, independent element. As examples, these commenters cited

City of Black Jack,

104

which

Inclusive Communities

describes as a heartland case, as well as

Graoch Assocs. #33, L.P.

Louisville/Jefferson Cty. Metro Human Relations Comm'n.

105

A commenter stated that the three-step burden-shifting framework, and especially the defense at the second step—that the policy was necessary to achieve a legitimate interest—already ensures that as the

Inclusive Communities

Court described, “disparate-impact liability mandates the `removal of artificial, arbitrary, and unnecessary barriers,' not the displacement of valid governmental policies.”

104

City of Black Jack,

508 F.2d at 1184-1185.

105

Graoch Assocs. #33, L.P.,

508 F.3d 366, 374-75 (6th Cir. 2007) (“We use the burden-shifting framework described above—and especially the final inquiry considering the strength of the plaintiff's statistical evidence and the strength of the defendant's business reason—to distinguish the artificial, arbitrary, and unnecessary barriers proscribed by the FHA from valid policies and practices crafted to advance legitimate interests.”).

HUD Response:

HUD declines to add an “artificial, arbitrary, and unnecessary” pleading standard or substantive element to this final rule. As previously explained, HUD does not construe

Inclusive Communities

to require the agency to add specific elements or pleading standards for disparate impact cases that go beyond what “has always” been required.

106

Rather, when the

Inclusive Communities

Court quoted

Griggs'

decades-old formulation that disparate impact claims require the removal of artificial, arbitrary, and unnecessary barriers, it did so as part of restating the safeguards and requirements that it found (and HUD agrees) have always been a part of disparate impact jurisprudence. In this context, the Court quoted

Griggs'

short-hand formulation for the type of policy that traditionally has been held to create an unjustified discriminatory effect at the end of the burden shifting analysis. HUD believes that

Inclusive Communities,

following

Griggs

as well as earlier Fair Housing Act cases, went on to describe policies invalidated by longstanding precedent as either “arbitrary” or “artificial” as a shorthand for those found to violate the Fair Housing Act under traditional jurisprudence.

107

HUD does not believe this language, when read in context, is best read to require the agency to impose a requirement for plaintiffs and the charging party to plead and prove, in addition to the traditional elements, that policies are artificial

and

arbitrary

and

unnecessary. HUD notes, moreover, that the source of this language is

Griggs,

a decades-old case at the bedrock of disparate impact jurisprudence, and notes that

Griggs

did not require plaintiffs to establish that the practice at issue met each of these three descriptors, let alone that such evidence be pleaded in a complaint. In addition, HUD believes that reading

Inclusive Communities

or other cases to support a heightened pleading standard for plaintiffs, such as in the 2020 Rule, is contradicted by the fact that the “heartland” cases cited favorably by the Court would not have survived a motion to dismiss under that standard because plaintiffs in those cases did not allege facts that would plausibly support a claim that a policy or practice was arbitrary, artificial, and unnecessary to the extent those terms are construed as requiring more than satisfaction of the traditional elements. Simply put, in HUD's experience implementing the Fair Housing Act, plaintiffs likely would not have had access to such facts until after discovery.

108

HUD further believes that adding such a standard would also conflict with the text and broad remedial purpose of the Act which provides “within constitutional limitations, for fair housing throughout the United States.”

109

HUD thus concludes that a heightened pleading and proof standard would frustrate the clearly expressed intent to use the maximum allowable power under the law to secure equal housing opportunity. Finally, HUD observes that

Inclusive Communities

did not specify how courts and agencies should apply a new pleading and proof standard, nor did it come close to clearly stating that it intended to create new elements. To the extent that leaves ambiguity in the law, as a matter of policy, HUD believes it is preferable to retain existing standards that have decades of case law and administrative actions specifying their content rather than impose ones that are undefined and untested.

106

Inclusive Cmtys,

576 U.S. at 540.

107

Inclusive Cmtys. Project,

576 U.S. at 539-541.

108

Supra

at n. 78.

109

42 U.S.C. 3601.

Comments on Bank of America

Issue:

Commenters stated that the proposed rule is inconsistent with

Bank of America Corp.

City of Miami,

110

a 2017 Supreme Court case which held that “proximate cause under the [Act] requires some direct relation between the injury asserted and the injurious conduct alleged.” A commenter suggested that HUD add the phrase “some direct relation” to the proposed rule's burden of proof standard. Another commenter suggested revising the proposed rule to provide that in order to establish a “robust causal link,” the plaintiffs have the burden of proving that a challenged practice is the sole and proximate cause, or reasonably predicted cause, of a discriminatory effect.” Another commenter suggested that HUD state that the causation analysis must consider whether a practice is too remote to give rise to liability.

110

137 S. Ct. 1296 (2017).

HUD Response:

HUD believes that it is not required to add language to this rule to ensure consistency with

Bank of America.

In that case, which involved a municipality suing a lender on the theory that predatory lending practices had caused foreclosures which in turn eventually led to damages to the municipality such as reduced tax revenues, the Supreme Court held that, because actions for damages under the Act are akin to tort actions, such suits are “subject to the common-law requirement that loss is attributable to the proximate cause, and not to any remote cause.”

111

The Court declined to further explain the proximate cause requirement as applied to Fair Housing Act claims and did not suggest that such a requirement would otherwise alter analyses under the Act. For example, HUD believes that

Bank of America

has no impact on the ability of organizational plaintiffs to prove standing by tracing their injuries to the challenged policy.

112

111

Id.

at 1305.

112

Havens Realty Corp.

Coleman,

455 U.S. 363 (1982).

HUD believes, although the

Bank of America

decision was in the context of a disparate impact claim, it is not inherently specific to and does not create an additional burden for disparate impact claims. To the contrary, HUD believes that the proximate cause requirement

Bank of America

described for standing applies to all Fair Housing Act cases, not just disparate-impact claims, and so HUD does not believe it is appropriate to add a proximate-cause requirement to the regulatory requirements that are specific to disparate-impact claims. More broadly, this rule does not purport to address the requirements for Fair Housing Act standing, and neither

Bank of America

nor any other case requires HUD to add such considerations to this rule. Accordingly, HUD believes that

adding the suggested language to this final rule, which purports only to set out the framework for analyzing the merits of disparate impact claims, is unnecessary. Nothing in this rule creates a conflict with

Bank of America

or bars a court from applying its requirements. This rule simply does not touch on that subject matter.

HUD additionally observes that, in its view,

Bank of America

applies to claims such as the one in that case that involve unusual claims in which the policy challenged has an unusually attenuated connection to the alleged harm to the plaintiff. HUD does not construe

Bank of America

as having a larger impact on longstanding principles of Fair Housing Act standing.

Discriminatory Effects as Applied to Insurance

113

Many of the issues raised by commenters regarding the application to insurance in response to the proposed rule were also raised in commenting on the 2013 rule. HUD's 2016 Supplemental Responses covers these issues in depth. “Application of the Fair Housing Act's Discriminatory Effects Standard to Insurance.” 81 FR 69012. In considering these comments, HUD has reviewed the 2016 Supplemental Responses and believes the responses made there continue to accurately reflect HUD's interpretation of discriminatory effects law.

Issue:

Commenters asked HUD to exempt homeowners insurance—in whole or in part, as well as risk-based pricing and underwriting in particular—from liability for any unjustified discriminatory effects, advancing a number of reasons. Among other things, commenters stated that the fundamental nature of insurance does not allow discriminatory effects liability; such claims cannot succeed as a matter of law; and the McCarran-Ferguson Act

114

bars claims. A commenter said that applying the rule to insurers is unnecessary because there have been no allegations or findings of unlawful discriminatory effects against an insurer prior to or since 2013. Other commenters disagreed, stating that HUD should not create exceptions for any industry, including insurance, because such categorical exemptions are unworkable and inconsistent with the Act's purpose, which is broad and inclusive. Commenters also stated that exemptions would allow some discriminatory practices to go uncorrected.

114

15 U.S.C. 1011

et.seq.

HUD Response:

HUD declines to provide an exemption for the insurance industry in whole or in part. HUD responds below to the specific reasons commenters advanced for exempting homeowners insurance. However, as a threshold matter, HUD lacks the authority to create exemptions that are not in the text of the Act. When Congress passed the Act in 1968 and amended it in 1988, it established exemptions for certain practices but not for insurance.

115

Furthermore, courts have routinely applied the Act to insurers and have found that discriminatory effects liability applies to insurers under the Act.

116

Moreover, nothing in this rule precludes insurers from raising a defense based on the McCarran-Ferguson Act

117

or from arguing that claims cannot succeed as a matter of law in particular cases. What HUD is declining to do, and what it believes it has no authority to do, is provide a single industry or a set of specific practices a blanket exemption from liability from all claims regardless of whether those claims otherwise would satisfy the rule's (and the Act's) requirements.

115

See Sierra Club

EPA,

719 F.2d 436, 453 (D.C. Cir. 1983) (“The agency relies on its general authority under section 301 of the Act to `prescribe such regulations as are necessary to carry out [its] functions under [the Act]' . . . . EPA's construction of the statute is condemned by the general rule that when a statute lists several specific exceptions to the general purpose, others should not be implied.”);

see, e.g., Colorado Pub. Int. Rsch. Grp., Inc.

Train,

507 F.2d 743, 747 (10th Cir. 1974) rev'd on other grounds, 426 U.S. 1 (1976) (“Another cardinal rule of statutory construction is that where the legislature has acted to except certain categories from the operation of a particular law, it is to be presumed that the legislature in its exceptions intended to go only as far as it did, and that additional exceptions are not warranted.”);

Nat. Res. Def. Council, Inc.

Costle,

568 F.2d 1369, 1377 (D.C. Cir. 1977) (courts cannot manufacture a “revisory power” granting agency authority to act “inconsistent with the clear intent of the relevant statute”);

Alabama Power Co.

Costle,

636 F.2d 323, 357 (D.C. Cir. 1979) (“[T]here exists no general administrative power to create exemptions to statutory requirements based upon the agency's perceptions of costs and benefits.”);

see also Nat'l Fair Hous. All.

Travelers Indem. Co.,

Viens,

113 F. Supp. 3d at 558 (denying motion to dismiss allegations that defendant insurer's insurance underwriting criteria that charge higher premiums or deny coverage to landlords who rent apartments to tenants receiving Section 8 housing assistance has an unjustified discriminatory effect);

Nat'l Fair Hous. All.

Prudential Ins. Co. of Am,

208 F. Supp. 2d 46, 50, 48-49, 60-61 (D.D.C. 2002) (denying a motion to dismiss allegations that certain of defendant's minimum underwriting requirements for certain types of coverages, such as a “replacement cost:” policy had an unjustified discriminatory effect).

HUD finds that the concerns raised by the insurance industry do not outweigh these fundamental considerations. This rule sets out a framework by which liability under the Act may be determined; liability arises only for those insurance practices that actually or predictably result in a discriminatory effect and lack a legally sufficient justification. The framework takes into account any defendant's legitimate interest in the challenged practice—including an insurance defendant. As discussed below, HUD finds that any conflict with a specific state insurance law can and should be addressed on a case-by-case basis in the context of that state law.

In sum, the case-by-case approach set out in this final rule appropriately weighs the relevant factors, which include HUD's obligation to enforce the Act, the diversity of potential discriminatory effects claims, the variety of insurer business practices, and the differing insurance laws of the states, as they currently exist or may exist in the future. Given these considerations, HUD believes that it would be impossible for the agency to define the scope of insurance practices covered by an exemption with enough precision to avoid case-by-case disputes over its application. Accordingly, HUD has determined that categorical exemptions or safe harbors for insurance practices are unworkable and inconsistent with HUD's statutory mandate.

Issue:

Commenters stated that if HUD does not provide an exemption for insurance practices, insurers would be forced to evaluate whether their practices lead to segregation and to learn what statistical disparities are permissible.

HUD Response:

HUD disagrees. Any obligation to evaluate practices comes from the language of the Act itself, not this final rule. As explained above, this final rule does not impose any new liability upon insurers, so it will not require insurers to start new reviews of their practices. Any such obligation to review their practices arose long before the 2013 Rule was promulgated and originates from the statutory language.

133

Judicial precedent applying disparate impact analysis to insurance companies long predates the 2013 Rule, let alone this rule.

134

Any costs entities may now choose to incur will not be due to any new requirement, and in any case will simply be the ordinary costs of complying with any preexisting statute, administrative practice, and case law governing nondiscrimination in housing and housing-related practices. In any event, evaluating and re-evaluating current practices are not unreasonably burdensome activities for a business or industry to undertake. As explained elsewhere, many other industries, such as lending, engage in risk-based practices and show that it is possible to consistently evaluate and re-evaluate their policies and practices to endeavor to avoid those that may cause unjustified discriminatory effects. Yet those industries have not suffered the dire consequences that the insurance industry claims it will suffer. HUD does not believe the insurance industry stands on different footing from other industries in that respect such as to warrant differential treatment.

133

42 U.S.C. 3601

et. seq.; see, e.g., Dehoyos

Allstate Corp.,

345 F.3d 290, 293 (5th Cir. 2003);

see also Nat'l Fair Hous. All.

Travelers Indem. Co.,

Viens,

Nat'l Fair Hous. All.

Prudential Ins. Co. of Am,

Issue:

Commenters, citing

NAACP

Am. Family Mut. Ins. Co.,

135

asked HUD to exempt all homeowners insurance practices from liability for unjustified discriminatory effects, stating that the Act covers only insurance practices that make housing unavailable, thus effectively precluding homeownership. Homeowners insurance practices, they stated, do not make housing unavailable. In addition, citing

Southend Neighborhood Improvement Assoc.

St. Clair,

136

commenters stated that section 804(b)'s prohibition against discrimination in the provision of services in connection with the sale or rental of a dwelling applies only to services generally provided by governmental units, such as police and fire protection or garbage collection, not insurance.

135

NAACP

American Family Mut. Ins. Co.,

978 F.2d 287, (7th Cir. 1992).

136

Southend Neighborhood Improvement Assoc.

St. Clair,

743 F.2d 1207 (7th Cir. 1984).

HUD Response:

HUD declines to exempt homeowners insurance from liability for the reasons stated previously and explained more fully below. Neither

NAACP

nor

Southend Neighborhood Improvement Ass'n

support such an exemption. The commenters are incorrect in stating that insurance practices cannot make housing unavailable or that the Act only covers insurance practices that make housing unavailable. A discriminatory practice that precludes a person from obtaining homeowners or renters insurance may indeed make housing unavailable to that person, as insurance is usually required as a condition for obtaining a mortgage or a lease. Moreover, while section 804(a) prohibits discrimination that “make[s] unavailable” a dwelling, other provisions in the Act may prohibit insurance practices, including pricing, regardless of whether they make housing unavailable.

137

For example, section 805(a)

138

prohibits discrimination in the “terms or conditions” of “residential real estate-related transactions,” and section 804(b)

139

prohibits discrimination in the “terms, conditions or privileges of sale or rental of a dwelling or in the provision of services . . . in connection therewith.” Indeed, since 1989, HUD's fair housing regulations have specifically prohibited “[r]efusing to provide . . . property or hazard insurance for dwellings or providing such . . . insurance differently” because of a protected characteristic.

140

Courts have applied the Act's provisions to various insurance practices, including insurance pricing,

141

marketing and claims processing, irrespective of whether the discriminatory conduct occurred when the unit became available or in conjunction with or subsequent to the acquisition of a dwelling.

142

137

Depending on the circumstances, discriminatory insurance practices can violate 42 U.S.C. 3604(a), (b), (c), (f)(1), (f)(2), 3605, and 3617.

See, e.g., Cisneros,

52 F.3d at 1360 (holding that HUD's interpretation that section 3604 of the Act prohibits discriminatory insurance underwriting is reasonable);

Nevels

W. World Ins. Co.,

359 F. Supp. 2d 1110, 1119-23 (W.D. Wash 2004) (recognizing that sections 3604(f)(1), 3604(f)(2), 3605 and 3617 of the Act cover insurance practices);

Nat'l Fair Hous. All.

Prudential Ins. Co. of Am.,

208 F. Supp. 2d at 55-58 (holding that sections 3604(a), 3604(b), and 3605 of the Act prohibit discriminatory insurance underwriting practices);

Owens

Nationwide Mut. Ins. Co.,

Civ. No. 3:03-CV-1184-H, 2005 U.S. Dist. LEXIS 15701, at *16-17 (N.D. Tex. Aug. 2, 2005) (holding that section 3604 of the Act prohibits discriminatory insurance practices);

Francia

Mount Vernon Fire Ins. Co.,

No. CV084032039S, 2012 Conn. Super. LEXIS 665, at *24-25 (Conn. Super. Ct. Mar. 6, 2012) (relying on section 3604(c) to interpret an analogous state law as prohibiting a discriminatory statement in an insurance quote).

138

42 U.S.C. 3605(a).

139

42 U.S.C. 3604(b).

140

24 CFR 100.70(d)(4) (emphasis added). As used in this regulation, the phrase “property or

hazard insurance for dwellings” includes insurance purchased by an owner, renter, or anyone else seeking to insure a dwelling. 42 U.S.C. 3602(b) (defining “dwelling” without reference to whether the residence is owner- or renter-occupied).

141

See, e.g., NAACP,

978 F.2d at 301 (“Section 3604 of the Fair Housing Act applies to discriminatory denials of insurance, and discriminatory pricing, that effectively preclude ownership of housing because of the race of the applicant.”);

Dehoyos,

345 F.3d at 293 (holding that a claim alleging discriminatory insurance pricing was not barred by McCarran-Ferguson).

142

See, e.g., Franklin

Allstate Corp.,

No. C-06-1909 MMC, 2007 U.S. Dist. LEXIS 51333, at *17-19 (N.D. Cal. July 3, 2007) (applying the Act to claims processing);

Burrell

State Farm & Cas. Co.,

226 F. Supp. 2d 427 (S.D.N.Y. 2002) (same);

see also Nat'l Fair Hous. All.

Travelers Indem. Co.,

Viens,

Nat'l Fair Hous. Alliance

Prudential Ins. Co. of Am,

150

42 U.S.C. 3614a.

Fundamental Nature of Insurance

Issue:

Commenters requested an exemption for insurance practices because of the fundamental nature of the industry, alleging that the proposed rule would fundamentally and problematically alter insurance practices. Commenters said that the foundation of the business of insurance is the ability to classify insurance policyholders by risk and that insurers make decisions based on actuarial and business principles that group policyholders for the purpose of treating those with similar risk profiles similarly. Commenters stated that the industry is predicated on setting rates and making underwriting decisions based on relevant, mathematical, and objective risk factors that accurately predict loss. Commenters said that risk-based pricing has been a bedrock principle of state insurance regulation for more than 150 years, acting as a primary tool for ensuring rates are adequate, not excessive, not unfairly discriminatory, accurately predictive of risk, and protective of the solvency of insurers. Commenters stated that the insurance market functions best when each insured pays a rate that accurately reflects the cost of providing insurance to similarly-situated policy holders. Commenters stated that although professional underwriters routinely avoid or exclude risks for which they lack expertise, underwriting judgment, or actuarial data, they still are required to consider similar factors bearing on risk of loss and do not consider protected traits.

Commenters noted that risk-based pricing is the primary tool to ensure that rates are not unfairly discriminatory, as defined by state insurance codes. Commenters stated that in the context of insurance, unfair discrimination means treating similar risks in a dissimilar manner, which is different from discrimination under the Act. They stated that a rate is unfairly discriminatory if the premium differences do not correspond to expected losses and average expenses.

Commenters stated that the proposed rule would force insurers to eliminate

actuarially sound risk-based practices, which is central to the effective determination of insurance premiums, in favor of substitutes that are less effective at furthering an insurer's legitimate, nondiscriminatory interests. A commenter stated that the proposed rule would penalize insurers for relying on sound risk factors that disproportionately affect a protected class, because they would be held liable for disparities they did not create. A commenter stated that the rule will require uniform rates, regardless of risk. Commenters disagreed with the proposed framework's case-by-case analysis. For example, commenters stated that insurers implement polices accounting for risk factors through actuarially sound methodologies, and that it would be impossible for a plaintiff to identify a less discriminatory alternative because any alternative would necessarily correspond to a different risk than the factor at issue, identified through actuarially sound methodology. As a result, if the plaintiff's alternative was adopted, the risk challenged in the lawsuit would no longer be reflected in the price of insurance, resulting in overcharging low-risk customers and likely driving them from the markets.

Other commenters disagreed, stating that the proposed rule appropriately applies to insurance. A commenter stated that application of the 2013 Rule and 2016 Supplement

151

to insurance is consistent with sound actuarial practices because it accommodates underwriting decisions that satisfy the shifting burden framework. Commenters explained that ratemaking, though largely actuarially based, can incorporate elements of non-actuarially based subjective judgments. Commenters cited ratemaking, price optimization, and credit scoring as examples of insurance practices that are not entirely risk-based. Commenters further noted that consideration of these non-purely risk-based factors had not led to the demise of the industry. A commenter indicated that over the past few decades, the insurance industry has removed barriers that restrict homeowners insurers from writing policies in communities of color and, in response to disparate-impact challenges, some insurers have refined underwriting and pricing systems to eliminate arbitrary barriers to the availability of adequate homeowners coverage, resulting in business growth. Commenters concluded that subjecting insurers to disparate impact liability does not “threaten the fundamental nature of the insurance industry.” Commenters noted that other risk-based industries, such as mortgage lending, are subject to liability for unjustified discriminatory effects under the Act and have not had to forego risk-based analysis to avoid liability under the Act.

151

On October 5, 2016, HUD issued supplemental responses to insurance industry comments in accordance with the court's decision in

Property Casualty Insurers Association of America (PCIAA)

Donovan,

which upheld the rule's burden-shifting framework for analyzing discriminatory effects claims as a reasonable interpretation of the Fair Housing Act, but that HUD had not adequately explained why case-by-case adjudication was preferable to using its rulemaking authority to provide exemptions or safe harbors related to homeowners insurance. 81 FR 69012;

Prop. Cas. Insurers Ass'n of Am.

Donovan (PCIAA),

66 F. Supp. 3d 1018, 1049-54 (N.D. Ill. 2014).

HUD Response:

HUD disagrees that the fundamental nature of insurance warrants the exemptions requested by some commenters, whose comments were premised upon the faulty assumption that the proposed rule generally prohibits risk-based practices. It does not. This final rule does not declare any activity per se unlawful. It merely provides a framework for determining if a particular policy or practice causes an unjustified and unlawful discriminatory effect. HUD recognizes that risk-based decision making is an important aspect of sound insurance practices, and nothing in this final rule prohibits insurers from making decisions that are in fact risk-based. Under the framework established by this rule, practices that actually are risk-based, and for which no less discriminatory alternative exists, will not give rise to discriminatory effects liability. The rule simply requires that if an insurer's practices are having a discriminatory effect and “an adjustment . . . can still be made that will allow both [parties'] interests to be satisfied,” the insurer must make that change.

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Avenue 6E Invs., LLC,

818 F.3d at 513.

Risk-based decision making is not unique to insurance, and discriminatory effects liability has proven workable in other contexts involving complex risk-based decisions, such as mortgage lending, without the need for exemptions or safe harbors. Indeed, all businesses covered by the Act make risk-based decisions. For example, landlords assess risk when they select tenants, set rental rates, and decide whether to require deposits. The Act requires that such risk-based determinations not be based on protected characteristics, in whole or in part. Moreover, some states specifically provide for discriminatory effects liability against insurers under state laws, further undermining the claim that providing for such liability as a matter of federal law threatens the fundamental nature of the industry.

153

Viens,

113 F. Supp. 3d at 573 n.20 (stating that Connecticut “provides a similar (albeit broader) protection against housing discrimination as the [Act]” and finding that McCarran-Ferguson does not bar an FHA disparate impact claim against an insurer related to a property located in Connecticut).;

Jones

Travelers Cas. Ins. Co. of Am.,

Tr. of Proceedings Before the Honorable Lucy H. Koh U.S. District Judge, No.5:13-cv-02390 LHK (N.D. Cal. May 7, 2015), ECF No. 236 (holding that California law complements the Act and denying an insurer's motion to for summary judgement);

Toledo Fair Hous. Ctr.

Nationwide Mut. Ins. Co,

94 Ohio Misc. 2d at 157-159 (recognizing discriminatory effects liability in homeowners insurance under state law in part because the Superintendent of Insurance lacks “primary jurisdiction” over such claims).

Unfortunately, the history of discrimination in the homeowners insurance industry is long and well documented,

154

beginning with insurers overtly relying on race to deny insurance to persons of color and evolving into more covert forms of discrimination.

155

For example,

minorities were denied access to insurance through property-location and property-age restrictions, even when data demonstrated that such restrictions were not justified by risk of loss.

156

This history of discrimination led to persons of color being unjustifiably denied insurance policies or paying higher premiums.

157

As described more fully in other responses, HUD believes that discriminatory effects liability continues to play an important role in preventing unjustifiable discrimination, including in the insurance industry.

154

Although the discussion that follows focuses on race and national origin discrimination because of their historic prevalence, examples of discrimination in insurance against other protected classes exist as well.

See e.g., Nevels

W. World Ins. Co.,

359 F. Supp. 2d 1110 (W.D. Wash. 2004) (disability).

155

See generally, Homeowners' Insurance Discrimination: Hearings Before the S. Comm. on Banking, Housing and Urban Affairs, 103d Cong. (1994) [hereinafter 1994 Hearings]; Insurance Redlining Practices: Hearings before the Subcom. on Commerce, Consumer Protection & Competitiveness of the H. Comm. on Energy and Commerce, 103d Cong. (1993) [hereinafter Mar. 1993 Hearings]; Insurance Redlining: Fact or Fiction: Hearing before the Subcom. On Consumer Credit and Insurance of the H. Comm. on Banking, Finance & Urban Affairs, 103d Cong. (1993) [hereinafter Feb. 1993 Hearing]; Insurance Redlining: Fact Not Fiction (Feb. 1979) [hereinafter Comm'n on Civil Rights] (report of the Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin Advisory Committees to the U.S. Commission on Civil Rights); President's National Advisory Panel on Insurance in Riot-Affected Areas, Meeting the Insurance Crisis of Our Cities (1968) [hereinafter Nat'l Advisory Panel].

Further, as the 2016 Supplement stated at times, agents were given plainly discriminatory instructions, such as “'get away from blacks' and sell to `good, solid premium-paying white people,'” or they simply were told, “We don't write Blacks or Hispanics.”

See

139 Cong. Rec. 22,459 (1993) (statement of Rep. Joseph P. Kennedy, II);