BuckleySandler LLP:HUD Issues Proposed Disparate Impact Rule

Excerpted from Infobytes, a weekly electronic newsletter on developments in financial services law from BuckleySandler LLP. For the full issue of Infobytes, click here:http://www.buckleysandler.com/infobyte-detail/infobytes-november-11-2011

On November 15, the U.S. Depart hment of Housing and Urban Development ("HUD") issued a proposed rule interpreting the Fair Housing Act (the "FHA") as authorizing so-called "disparate impact" or "effects test" claims. If adopted, it will provide support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a "disparate impact" on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent.

The proposed rule adopts a three-step burden-shifting approach to determine liability under a disparate impact claim. Under the proposed rule, once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the defendant would have the "burden of proving that the challenged practice has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests" (emphasis added). Many would consider this elucidation to set a higher standard than the usual "business justification" that defendants typically are expected to meet. Even if the defendant meets this test, the plaintiff could still prevail "by demonstrating that these legitimate nondiscriminatory interests could be served by a policy or decision that produces a less discriminatory effect."

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