WASHINGTON — The Department of Housing and Urban Development is planning to amend its "disparate impact" standard to raise the legal bar for plaintiffs alleging discrimination under the Fair Housing Act.
Under a proposal that circulated Wednesday but has not officially been unveiled, a consumer would have to follow a more rigorous five-step framework to demonstrate that discrimination occurred. The "disparate impact" doctrine can be used to punish lenders for discriminatory effects even if none were intended.
“Plaintiffs must identify the particular policy or practice which causes the disparate impact,” said HUD in its notice of proposed rulemaking.
The proposal, which has not yet been published but was submitted for congressional review Monday, was first reported by Bloomberg Law.
The "disparate impact" standard, as a basis for alleging fair-lending violations, has long been unpopular with lending institutions. In 2015, the U.S. Supreme Court decided that such a standard does apply under the Fair Housing Act, but left it to HUD to determine if changes to its disparate impact rule were necessary.
The proposal essentially says disparate impact claims can be invalidated if the plaintiff does not point to a single decision made by the company that led to a discriminatory outcome.
“Plaintiffs will likely not meet the standard, and HUD will not bring a disparate impact claim, alleging that a single event … is the cause of a disparate impact, unless the plaintiff can show that the single decision is the equivalent of a policy or practice,” the proposal says.
The first step would require a plaintiff to argue that a policy or practice is “arbitrary, artificial and unnecessary,” while the second step would require establishing a “robust causal link” between the practice and the discriminatory effect.
In the third step, a person alleging discrimination would have to prove that a policy had an adverse effect on members of a protected class — and not just the individual filing the complaint.
The fourth step requires plaintiffs to argue that the discrimination stemming from a policy or practice is significant. The fifth step requires filers to argue that “proximate cause” of injury exists, or show that the policy and the discrimination are linked.
HUD’s current disparate impact rule is independent from the Fair Housing Act, and has a three-step framework.
The proposal redefining the disparate impact standard
“While disparate impact provides an important tool to root out factors which may cause these models to produce discriminatory outputs, these models can also be an invaluable tool in extending access to credit and other services to otherwise underserved communities,” HUD said in its NPR.
HUD proposed several different defenses that creators of algorithms can use to prove that their tools did not have an unintentional, discriminatory effect. They include demonstrating that an algorithmic model is an industry standard as well as proving that the technology is not the direct cause of disparate impact.
