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By John Zasada, JD, CAMS – Shareholder, Financial Institutions Group

On March 17, 2023, the Department of Housing and Urban Development (HUD) issued a 184-page final rule reversing an early rule imposed in 2020, which limited the application of the effects test.

The effects test refers to the principle that discrimination under the Fair Housing Act (FHA) may be established through evidence of discriminatory effects (i.e., facially neutral practices with an unjustified discriminatory effect). Illegal discrimination can be shown if a neutral policy or practice either has a disparate impact on a protected group or creates, perpetuates or increases segregation, even if such a policy or practice was not adopted for a discriminatory purpose. The FHA prohibits not only overt discrimination, but also practices fair in form, but discriminatory in operation.

In 2013, the HUD issued a rule formalizing a burden-shifting three-part test for determining whether a given practice has an unjustified discriminatory effect:

  1. The plaintiff or charging party is first required to prove, as part of the prima facie, showing a challenged practice caused or predictably will cause a discriminatory effect.
  2. If the plaintiff or charging party makes this prima facie showing, the defendant or respondent must then prove the challenged practice is necessary to achieve one or more substantial, legitimate and nondiscriminatory interests of the defendant or respondent.
  3. If the defendant or respondent meets its burden at step two, the plaintiff or charging party may still prevail by proving the substantial, legitimate and nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

The 2013 rule was viewed by many, including consumer groups, as favoring those harmed by illegal discrimination. While the 2020 rule was viewed as tipping the scales in favor of defendants, as it “removed the definition of discriminatory effect, added demanding pleading elements that made it far more difficult to initiate a case, altered the burden-shifting framework, created new defenses, and limited available remedies in disparate impact claims.”

Moving forward, effects tests will be conducted in accordance to the 2013 rule. For more information, contact Doeren Mayhew’s regulatory compliance specialists today.