NAA, Housing Provider Coalition Joint Letter on Reinstatement of HUD’s Discriminatory Effects Standards

NAA and a coalition of housing providers file comments with the U.S. Department of Housing and Urban Development (HUD) voicing concerns over the agency’s proposal to reinstate HUD’s 2013 Rule on Disparate Impact under the Fair Housing Act (FHA).

 

August 24, 2021

Via E-Mail (www.regulations.gov)

Regulations Division
Office of General Counsel
U.S. Department of Housing and Urban Development
451 Seventh Street, S.W., Room 10276
Washington, DC 20410

RE: Reinstatement of HUD’s Discriminatory Effects Standard
[Docket No. FR-6251-P-01] RIN 2529-AB02

Dear Sir or Madam:

On behalf of our clients, the National Leased Housing Association (“NLHA”), the Council for Affordable and Rural Housing (“CARH”), the National Apartment Association (“NAA”), National Affordable Housing Management Association (“NAHMA”), and the National Multifamily Housing Council (“NMHC”) (jointly, the “Housing Associations”), and their tens of thousands of members – owners, managers, developers, and investors in the nation’s multifamily housing industry – we provide these comments to the Proposed Rule in “Reinstatement of HUD’s Discriminatory Effects Standard,” [Docket No. FR-6251-P-01], RIN 2529-AB02, published at 86 Fed. Reg. 33590 (June 25, 2021) (the “2021 Proposal”).

The nation’s housing providers represented here support the goals of the Fair Housing Act (“FHAct”) and are fully committed to creating communities that provide equal housing opportunity for all. However, continued uncertainty and confusion related to disparate effects, or disparate impact, liability under the FHAct has resulted in operational, legal and broad business challenges for the housing industry. Unfortunately, the Proposal will do little to address the needs of housing providers and America’s renters or improve the predictability and results of fair housing efforts. Most importantly, the 2021 Proposal fails to seize the opportunity to clarify lingering questions about how guidance from the Supreme Court’s landmark decision in Texas Dept. of Hous. & Comm. Affairs v. The Inclusive Communities Project, Inc. (“Inclusive Communities”), 576 U.S. 519 (2015) should be incorporated into the rule. Because it fails to address these important legal developments since the issuance of its original disparate impact rule in 2013, the 2021 Proposal renders the U.S. Department of Housing and Urban Development’s (“HUD”) disparate impact policies largely irrelevant and will lead courts and litigants to develop a separate body of case law that follows the requirements of the Inclusive Communities decision. Instead of simply reinstating the 2013 rule, the Housing Associations therefore urge HUD to resolve this tension by revising and reissuing a rule and supporting guidance that helps housing providers execute necessary and ordinary business practices without running afoul of fair housing requirements.

Background

As noted above, the theory of disparate impact liability under the FHAct has been in flux for the last ten years. After proposing to adopt disparate impact rules in 2011, HUD issued its final disparate impact rules in 2013. 24 CFR §100.500 (the “2013 Rule”), published at 78 Fed. Reg. 11460. Thereafter, some courts began to adopt those regulations as governing their adjudication of disparate impact cases under the FHAct. See The Inclusive Communities Project, Inc. v. Texas Dept. of Hous. & Comm. Affairs, 747 F.3d. 275, 276-77(2014).

Shortly after HUD published its final disparate impact rule, the U.S. Supreme Court accepted a certiorari petition in the Inclusive Communities case, where the plaintiff contended that application of facially neutral principles for allocating low income housing tax credits in Texas nevertheless had a disparate impact on housing opportunities for minorities and persons in other protected classes. In the court’s 2015 decision, authored by Justice Kennedy, the Court affirmed that disparate impact liability did in fact exist under the FHAct. However, Justice Kennedy focused much of his decision on what he referred to as “safeguards” that were needed to prevent “abusive” disparate impact cases. 576 U.S. at 544. He pointed to constitutional objections that might arise if disparate impact relied solely on showing statistical imbalances. Id. at 540. He also warned against practical consequences, such as placing government and private interests in a “double-bind” (id. at 542), where any decision they make could be attacked as discriminatory, or where other “valid interests” might be frustrated, if appropriate safeguards were not put in place. Id. at 541. These safeguards include, among other things, a “robust causality requirement,” demonstrating that the “defendant’s policy or policies caus[ed] that disparity.” Id. at 542. He also insisted that, to avoid “displac[ing] valid governmental and private priorities,” disparate impact cases should focus “solely [on] ‘removing . . . artificial, arbitrary, and unnecessary barriers.” Id. at 544, quoting Griggs v. Duke Power Co., 401 U.S. 424, 431 (1971).

The Supreme Court’s decision in Inclusive Communities fundamentally altered the analysis of disparate impact cases. As a result, it also rendered HUD’s 2013 Rule obsolete because the 2013 Rule did not address the safeguards identified by the Supreme Court. Indeed, while the Supreme Court cited to the 2013 Rule (id. at 527), it did not formally endorse it.

Although initially HUD took the position that its 2013 Rule was completely consistent with the Inclusive Communities decision, HUD eventually changed its position. In 2019, HUD proposed a new set of disparate impact regulations which attempted to update the 2013 Rule to reflect the changes introduced by the Inclusive Communities decision. 84 Fed. Reg. 42854 (the “2019 Proposal”). Among other things, the 2019 Proposal expressly identified the safeguards discussed in the Inclusive Communities decision, and revised the parties’ respective burdens of proof to correspond with that decision’s requirements. Parties participating in these comments also filed comments with respect to the 2019 Proposal. See Letter to Office of the General Counsel from Harry J. Kelly (“Comment Letter”) dated October 17, 2019 (Attachment A hereto). At that time, the Housing Associations acknowledged the need to address the inconsistencies between HUD’s rule and subsequent legal outcomes and were generally supportive of the 2019 Proposal. However, the Comment Letter identified additional elements that needed to be incorporated into the 2019 Proposal to more fully adhere to the Inclusive Communities guidance and improve compliance efforts.

In September 2020, HUD published a new final disparate impact rule (the “2020 Rule”) that went much further than the 2019 Proposal, imposing additional pleading obligations on plaintiffs. 85 Fed. Reg. 60288 (Sept. 24, 2020). The changes made by the 2020 Rule were sweeping in nature and addressed issues outside the scope of the Supreme Court’s guidance in Inclusive Communities. Before that rule took effect, however, a federal district court entered an injunction staying implementation and enforcement of the 2020 Rule. Mass. Fair Hous. Ctr. V. HUD, No. 20-11765-MGM, 2020 U.S. Dist. LEXIS 205633 (D. Mass. October 25, 2020). Among other things, the district court pointed out that the 2020 Rule incorporated a number of new terms and procedural requirements that were not found in the Inclusive Communities guidance and that would only make disparate impact analysis more difficult in the future. Id. at *9-19. It found that “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 10. As a result, the court entered its order enjoining implementation and enforcement of the 2020 Rule.

While questions remain about whether the 2019 Proposal and the 2020 Rule fairly addressed the concepts adopted in the Inclusive Communities decision, they rightly acknowledged that the 2013 Rule was no longer viable and needed to be updated to reflect the consequences of that decision. The 2021 Proposal, on the other hand, would essentially reinstate the 2013 Rule without any significant changes to reflect Inclusive Communities and decisions since that time. As explained in the following section of these comments, it is inadequate to reimpose the 2013 Rule without making necessary changes reflecting those changes wrought by Inclusive Communities. Courts, housing providers and the public need a national disparate impact regulation that provides uniformity and equal treatment of all persons involved in disparate impact proceedings. Without proper review and revision of HUD’s policy, courts and litigants will continue to develop disparate impact law outside of the HUD regulatory framework, creating challenges for timely and consistent fulfillment of fair housing requirements.

Discussion

1. The 2013 Rule is the wrong starting point for HUD’s efforts as it does not provide a framework to address the safeguards imposed by the Inclusive Communities decision.

As explained below, courts and litigants have struggled to implement the Inclusive Communities decision. To reduce this confusion, HUD must take the lead in making changes to the 2013 Rule that incorporate the safeguards announced there. This can be done through modest changes to the 2013 Rule that do not unfairly tip the scales towards either party. To be sure, Justice Kennedy vindicated the concept of disparate impact in FHAct cases and felt that it served an important role in permitting “plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.” 576 U.S. at 540. But he was also unmistakably concerned about “abusive” disparate impact cases that would frustrate the “valid interests” of public agencies and private entities. Necessarily, Inclusive Communities will limit the claims of some plaintiffs, but if HUD takes the lead in implementing the safeguards, only “abusive” claims will be restricted.

Unfortunately, Justice Kennedy’s opinion did not offer a framework that would allow courts and litigants to systematically address these issues. Our review of a number of cases suggests that in the absence of such a framework, courts and litigants have struggled to address the concepts Inclusive Communities requires. In the process, courts have increasingly turned away from HUD’s disparate impact regulations, apparently because it offers them no way to address the safeguards that Inclusive Communities now requires them to consider. The following discussion summarizes the results of our analysis:

a. Courts are struggling with applying the Inclusive Communities standards into the framework of HUD’s 2013 DI rules. The Inclusive Communities decision clearly identified a number of safeguards to prevent abusive disparate impact cases, but it did not provide detailed explanations of those safeguards or provide a framework for how those safeguards should be applied by the courts. Since the Inclusive Communities decision, courts have been trying to develop a method of applying the safeguards in a way that would allow appropriate cases to proceed while sifting out “abusive” cases. As a result, Inclusive Communities left it for the courts to flesh out and give meaning to the safeguards it adopted. The process has not been easy or simple.

For example, in Woda Cooper Dev., Inc. v. City of Warner Robins, the Middle District of Georgia summarized the struggle that courts have experienced in analyzing a plaintiff’s disparate impact claim under the FHAct. In response to the defendants’ questioning of the merits of plaintiff’s disparate impact claim, the court expressed, “To a point, that is understandable—since the Supreme Court's decision in [Inclusive Communities], courts have struggled to determine just what it takes to allege a disparate impact theory of liability.” Woda Cooper Dev., Inc. v. City of Warner Robins, Civil Action No. 5:20-CV-159 (MTT), 2021 WL 1093630, *1, at *7 (M.D. Ga. Mar. 22, 2021). But, while acknowledging that a robust causal connection is one of the safeguards identified in Inclusive Communities, the district court continued, “Just what ‘robust causality’ means is very much a work in progress.” Id. (citing Inclusive Communities Project, Inc. v. Lincoln Prop. Co., 920 F.3d 890, 903-09 (5th Cir. 2019) (reviewing the efforts to define “robust causality”); see also Inclusive Cmtys. Project, Inc., v. Tex. Dep’t of Hous. & Cmty. Affairs, Civil Action No. 3:08-CV-0546-D, 2016 U.S. Dist. LEXIS 114562, *1 (N.D. Tex. Aug. 26, 2016) (“other circuits ‘have applied multiple different legal standards to similar [disparate impact] claims under the FHA’"). Simply put, the safeguards identified by the Supreme Court are not self-executing and require further elaboration, both with respect to what they require and how they should by implemented as courts consider disparate impact claims. That means that HUD should use the current rulemaking process to not merely reinstate its 2013 Rule, but to provide guidance to courts, administrative law judges, housing providers and renters about how the Inclusive Communities safeguards apply to disparate impact cases.

b. Courts have alternated between following the HUD regulations and applying the ICP safeguards. In some cases, the courts struggled with a basic issue of whether to apply HUD’s disparate impact rule at all. Thus, the courts acknowledge the existence of the HUD regulations but in many cases, courts seem to treat the Inclusive Communities safeguards as an alternative standard for determining disparate impact liability. See, e.g., Reyes v. Waples Mobile Home Park Ltd. P’ship, 903 F.3d 415, 424 n.4 (4th Cir. 2018) (“the standard announced in [Inclusive Communities]… controls our inquiry”); City of Los Angeles v. Wells Fargo & Co., Case No. 2:13-cv-09007-ODW(RZx), 2015 U.S. Dist. LEXIS 93451, *1 (C.D. Cal. July 17, 2015) (basing its decision on how Inclusive Communities has instructed lower courts); Ellis v. City of Minneapolis, 860 F.3d 1106 (8th Cir. 2017) (exclusively applying the Inclusive Communities safeguards to determine whether the Plaintiffs pled a prima facie case of disparate impact under the FHAct). No doubt, the courts’ decision to ignore the 2013 Rule reflects the fact that since the 2013 Rule does not explicitly incorporate the Inclusive Communities safeguards, the 2013 Rule is largely irrelevant to determining how to decide a disparate impact case at this point. See. Lincoln Prop. Co., 920 F.3d at 902 (“Although it affirmed our decision, the Supreme Court never explicitly stated that it adopted the HUD regulation’s framework”). If a court has to choose between following HUD regulations or the Supreme Court, they will follow the Supreme Court. This suggests that if HUD wants its regulations to be something more than window-dressing, it needs to modify the regulations to affirmatively address the safeguards announced in the Inclusive Communities decision.

c. Courts need additional guidance about how and when to apply the Inclusive Communities safeguards. Federal procedural rules allow parties to file a motion to dismiss which challenges the sufficiency of a complaint by arguing that even if all the facts in the complaint are true, they fail to state a legal claim. In that situation, it seems at least some of the safeguards – most often, the “robust causation” requirement – may properly be the basis of a motion to dismiss at an early phase of the case. Indeed, in explaining that “[a] plaintiff who fails to allege facts at the pleading stage . . . demonstrating a causal connection cannot make out a prima facie case of disparate impact,” Justice Kennedy seemed to invite early scrutiny of plaintiff’s theory of causation, as some courts have acknowledged. Ellis, 860 F.3d at 1112 (adopting Justice Kennedy’s “causal connection” requirement); see also Winfield v. City of New York, 15CV5236-LTS-DCF, 2016 WL 6208564, *1, at *6 (S.D.N.Y. Oct. 24, 2016) (citing Justice Kennedy’s “causal connection” guidance). But even here, courts appear to be struggling with whether they are to subject disparate impact plaintiffs’ causation theories to early scrutiny or to treat those theories like any other portion of the plaintiffs’ burden of proof. See id. (noting that Inclusive Communities “did not alter the plausibility standard for pleading, which requires only the plaintiff plead allegations that plausibly give rise to an inference that the challenged policy causes a disparate impact”) (citing Vega v. Hempstead Union Free Sch. Dist., 801 F.3d 72, 87 (2d Cir. 2015)). Rather, they are asking whether the plaintiff’s pleadings – including its theory of causation – if taken as true, are sufficient to make out a prima facie case, as in any other motion to dismiss. This suggests that HUD’s basic burden-shifting framework – where the burden is initially on the plaintiff to make out a prima facie case – is still valid, but that courts need additional guidance about how to address the plaintiff’s burden at the motion to dismiss phase, especially with respect to the Inclusive Communities safeguards.

2. To avoid obsolescence and to promote the goals of uniformity in resolving disparate impact cases, HUD must update its 2013 Rule to reflect the Inclusive Communities holding.

The discussion of case law above indicates that HUD’s current disparate impact rule is legally obsolete and will become increasingly irrelevant unless HUD updates it to reflect the outcome of the Inclusive Communities decision. Because it fails to address the concerns raised in the Inclusive Communities decision, it does not provide a useful framework to resolve disparate impact cases. Reinstating an obsolete rule will do nothing to promote HUD’s goal of achieving a uniform mechanism to resolve disparate impact disputes. Rather, it will continue to encourage courts and litigants to develop alternative approaches to handling disparate impact cases outside the framework originally established by HUD.

In order to properly update its disparate impact rule, HUD should clarify what each party must show to meet its burden. Fortunately, much can be accomplished with minimal edits, but those edits are necessary to address the Supreme Court’s guidance, including the following changes:

a. HUD must revise the plaintiff/complainant’s burden of proof to expressly include satisfaction of the safeguards announced in Inclusive Communities. HUD must acknowledge that while Inclusive Communities confirmed that disparate impact liability exists under the FHAct, it also recognized that “abusive” disparate impact cases could frustrate legitimate goals of public and private decision makers. Unavoidably, these will add to the pleading burdens on plaintiffs, but that is exactly what the Supreme Court intended when it imposed additional requirements on plaintiffs to prevent those abusive lawsuits.

First, HUD’s disparate impact rules should expressly adopt the “robust causality requirement,” which requires a plaintiff to demonstrate that the disparate impact suffered was caused by the policy it challenges, as part of the plaintiff’s burden of proof. The current rule does mention causation in the most general way:

The charging party . . . or the plaintiff . . . has the burden of proving that a challenged practice caused or predictably will cause a discriminatory impact.

24 CFR §100.500(c)(1)(2019). Justice Kennedy made clear that to satisfy his “robust causality requirement,” something more than a vague causal relationship is needed. The current HUD standard would presumably be satisfied even if multiple policies or practices caused the alleged discriminatory impact, so long as the challenged policy or practice was one of those causes. That is not consistent with Justice Kennedy’s “robust causality requirement,” which is not met where multiple factors could have caused a particular harm and is inconsistent with his warning that defendants should not be “held liable for racial disparities they did not create.” 576 U.S. at 542. Justice Kennedy was imposing a “sole cause” standard which should be reflected in HUD’s regulations. See, e.g., 576 U.S. at 543 (warning that “[i]t may also be difficult to establish causation because of the multiple factors that go into investment decisions about where to construct or renovate housing units.”) The current rule does not reflect the “sole cause” nature of Justice Kennedy’s “robust causality” requirement and must be amended to do so.

Likewise, on multiple occasions, Justice Kennedy confirmed that to prevail, a disparate impact plaintiff must show that the challenged policy or practice constitutes “an artificial, arbitrary and unnecessary barrier[]” to housing opportunities for persons in a protected class. 576 U.S. at 540, 544. Clearly, this was not dicta – the “artificial, arbitrary and unnecessary” standard was a critical mechanism for sorting abusive disparate impact cases from legitimate ones. Indeed, he explained that “the [FHAct] aims to ensure that [the] priorities [of housing providers] can be achieved without arbitrarily creating discriminatory effects or perpetuating segregation.” Id. at 540 (emphasis added). And in his conclusion, he warned that without the safeguards he recommended, “disparate impact liability might displace valid governmental and private priorities, rather than solely “remov[ing] . . . artificial, arbitrary and unnecessary barriers.” Id. at 544 (emphasis added), quoting Griggs, 401 U.S. at 431. Clearly, Justice Kennedy felt that courts had to focus “solely” on attacking artificial, arbitrary and unnecessary barriers, to prevent intrusion into otherwise legitimate public and private decision-making.