5th Circuit Applies HUD Discriminatory Effects Rule to Fair Housing Act Case

By: Melanie Brody, Anjali Garg*

*Ms. Garg is a law clerk and is not admitted to practice law.

On March 24, 2014, the Fifth Circuit issued an opinion in Inclusive Communities Project, Inc. v. Texas Department of Housing and Community Affairs applying HUD’s discriminatory effects rule and burden-shifting analysis to a Fair Housing Act claim. This is the first circuit court to apply the rule since it took effect on March 18, 2013.

The HUD rule codifies liability in housing discrimination cases under the Fair Housing Act based on a disparate impact theory and outlines a three-part burden-of-proof test. HUD first proposed its discriminatory effects rule in 2011, just days after the Supreme Court granted certiorari in Magner v. Gallagher, a case that would have determined whether the Fair Housing Act prohibits practices that have a disparate impact or discriminatory effect on a prohibited basis. The petitioner in that case withdrew its appeal. In 2013, the Supreme Court also granted certiorari in Township of Mount Holly, N.J. v. Mt. Holly Gardens Citizens in Action, Inc., but that case was also resolved prior to a decision by the Supreme Court. (K&L Gates filed a brief as amicus curiae in that case.) As a result, the Supreme Court has never opined on whether the disparate impact theory of liability is cognizable under the Fair Housing Act. Nevertheless, HUD finalized its discriminatory effects rule on February 8, 2013, and the rule became effective on March 18, 2013.

The HUD rule codifies disparate impact liability under the Fair Housing Act despite legislative history that leaves open the question of whether the Act contemplates the disparate impact theory of liability. For example, in 1990, Congress amended Title VII of the Civil Rights Act of 1964 to explicitly include the burden-shifting test in disparate impact cases in the context of employment discrimination; the Fair Housing Act lacks such language. Indeed, Congress chose not to adopt the disparate impact theory in its 1988 amendments to the Fair Housing Act, and HUD consistently rejected codification of the theory in its regulations until 2011. For a more in-depth discussion on the history and substance of the HUD discriminatory effects rule and the legal arguments against the codification of the disparate impact theory of liability see here, here, and here.

Since the final rule was issued on February 8, 2013, seven federal court cases have made reference to the rule. The Fifth Circuit, however, is the first circuit to apply the HUD rule. In Inclusive Communities Project, the defendant, the Texas Department of Housing and Community Affairs, appealed the district court’s finding that the its administration of Low Income Housing Tax Credits in Dallas had a disparate impact on African American residents in violation of the Fair Housing Act. The plaintiffs argued that the Texas agency disproportionately approved tax credits in minority neighborhoods and disproportionately denied tax credits in predominately Caucasian neighborhoods. The Texas agency argued that there were no less discriminatory alternatives to the allocation of the tax credits.

The primary issue on appeal was the correct legal standard to apply in Fair Housing Act disparate impact claims. The Fifth Circuit noted that the Supreme Court recently dismissed two cases that would have determined whether disparate impact claims are cognizable under the Act. However, the Court deferred to Fifth Circuit precedent providing that disparate impact claims are cognizable under the Fair Housing Act due to the lack of any Supreme Court precedent to the contrary. The Fifth Circuit explained that HUD’s disparate impact rule took effect after the district court’s decision, and as such, adopted the burden-shifting approach found in the rule for claims of disparate impact under the Fair Housing Act. The case was remanded in order for the district court to apply the legal standard in HUD’s rule.

The Fifth Circuit decision is not surprising, based on precedent in that circuit. However, HUD’s rule is now being challenged in the district court for the District of Columbia where there is currently no binding circuit precedent. In American Insurance Association et al v. U.S. Department of Housing and Urban Development, two insurance trade groups have sued HUD and are mounting a facial challenge to the rule. The groups argue that HUD exceeded its statutory authority in codifying the discriminatory effects rule and that the Fair Housing Act only prohibits intentional discrimination, not unintentional disparate impact on a prohibited basis. The parties have filed cross-motions for summary judgment, which are pending. For now, HUD’s disparate impact rule remains in effect and lenders should consider the potential compliance challenges that may result.



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