On June 20, the U.S. Department of Housing and Urban Development (“HUD”) published an advance notice of proposed rulemaking (“ANPR”) that seeks public comment on whether and how to amend its 2013 rule under the Fair Housing Act (“FHA”). The ANPR follows HUD’s May 10 announcement of its intention to formally seek public comment on the rule in light of the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., in which the Court recognized disparate impact as a cognizable theory under the FHA, but imposed meaningful limitations on the application of the theory.

The ANPR, together with the statement of Bureau of Consumer Financial Protection Acting Director Mick Mulvaney this spring that the Bureau would be “reexamining the requirements of ECOA” in light of “a recent Supreme Court decision” (i.e., Inclusive Communities), signals that the Trump administration is likely seeking to retreat from the Obama administration’s enthusiastic use of disparate impact liability in lending discrimination cases.

The Disparate Impact Rule and Inclusive Communities

HUD finalized its disparate impact rule in February 2013. The rule codified HUD’s Obama-era view that disparate impact is cognizable under the FHA. In contrast to disparate treatment claims, in which a plaintiff must establish a discriminatory motive, a disparate impact claim challenges practices that have a disproportionately adverse effect on a protected class that is not justified by a legitimate business rationale. The rule states that a practice has a “discriminatory effect” where “it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.” HUD explained that it had “consistently concluded” that facially neutral policies that resulted in a discriminatory effect on the basis of a protected characteristic violated the FHA, and that the rule merely “formalize[d] its longstanding view.” The rule also formalized a three-part burden-shifting test for determining whether a practice had an unjustified discriminatory effect.

At the time HUD issued the rule, the nonprofit Inclusive Communities Project, Inc. was embroiled in a lawsuit against the Texas Department of Housing and Community Affairs, in which it brought a disparate impact claim under the FHA. After HUD issued the disparate impact rule, the Texas Department filed a petition for a writ of certiorari to the Supreme Court on whether the FHA recognized disparate impact claims. In its 2015 decision, the Supreme Court held that disparate impact claims are cognizable under the FHA, but the Court articulated a rigorous standard for a successful claim. The Court did not explicitly address the merits of HUD’s rule, nor did the rule form the basis of its holding. 

HUD’s disparate impact rule has been controversial since its inception, particularly with the insurance industry. In fact, the ANPR comes in the midst of ongoing litigation with a homeowners insurance trade association regarding the disparate impact rule. The litigation was originally filed in June 2013, then remanded to the D.C. District Court following the Inclusive Communities decision. The insurance association argues that HUD violated the Administrative Procedures Act in interpreting the FHA to provide for disparate impact claims against insurance underwriting and pricing practices in a manner inconsistent with Inclusive Communities.


HUD states in the ANPR that it is reviewing the disparate impact rule to determine whether changes are warranted in light of Inclusive Communities. The ANPR additionally notes that this review stems from: (1) responses it received to its May 2017 request for public comment on ineffective regulations and (2) an October 2017 Treasury Department report that recommended that HUD “reconsider its use of the disparate impact rule,” particularly in the insurance industry context.

The ANPR seeks public input (due by August 20, 2018) on whether changes are warranted to the rule, and if so, how to revise the rule’s disparate impact standard, burden-shifting approach, relevant definitions, and causation standard. Specifically, HUD posed the following questions (although it noted that this list is not exhaustive):

  1. Does the disparate impact rule’s burden of proof standard for each of the three steps of its burden-shifting framework clearly assign burdens of production and burdens of persuasion, and are such burdens appropriately assigned?
  2. Are the second and third steps of the rule’s burden-shifting framework sufficient to ensure that only challenged practices that are artificial, arbitrary, and unnecessary barriers result in disparate impact liability?
  3. Does the rule’s definition of ‘‘discriminatory effect’’ in conjunction with its burden of proof for stating a prima facie case strike the proper balance in encouraging legal action for legitimate disparate impact cases while avoiding unmeritorious claims?
  4. Should the rule be amended to clarify the causality standard for stating a prima facie case under Inclusive Communities and other Supreme Court rulings?
  5. Should the rule provide defenses or safe harbors to claims of disparate impact liability (such as, for example, when another federal statute substantially limits a defendant’s discretion or another federal statute requires adherence to state statutes)?
  6. Are there revisions to the rule that could add to the clarity, reduce uncertainty, decrease regulatory burden, or otherwise assist the regulated entities and other members of the public in determining what is lawful?

The burden-shifting framework appears to be top-of-mind for HUD — in particular whether it aligns with the Court’s approach. Question Two refers to identifying “artificial, arbitrary, and unnecessary barriers,” a phrase currently absent from the direct impact rule but which the Court cites to describe the types of policies that may be deemed to result in disparate impact. While the final rulemaking result is impossible to predict, closer alignment between HUD’s rule and Inclusive Communities may mean a heavier burden for proving disparate impact claims.