How to Comply with HUD’s Discriminatory Effects Standard

The federal Fair Housing Act (FHA) clearly bans intentional discrimination against applicants and others because of a protected characteristic such as race, color, religion, sex, national origin, familial status, or disability. Courts often refer to claims for intentional discrimination as “disparate treatment”—that is, intentionally denying housing or otherwise discriminating against applicants and residents because they—or someone associated with them—is a member of a protected class.

By contrast, there’s another type of claim that does not require proof of discriminatory intent. These claims, referred to as “disparate impact,” involve outwardly neutral policies that have an unfair discriminatory effect on members of protected groups. Generally, claims of disparate impact rely on statistical evidence to show that a particular practice has a significantly adverse or disproportionate effect on members of a protected class.

In February 2013, HUD issued a final rule to formalize the national standard for determining whether a housing practice violates the FHA based on disparate impact—that is, a practice that may have a discriminatory effect on a protected class, regardless of any intent to discriminate. The final rule doesn’t create new law, according to HUD, which has long interpreted the FHA to prohibit seemingly neutral housing practices with an unjustified discriminatory effect based on race, color, religion, sex, disability, familial status, or national origin.

There’s an ongoing debate about whether federal fair housing law, like its counterpart involving employment discrimination, outlaws practices that have a discriminatory effect on protected classes—even in the absence of discriminatory intent. In June 2013, the Supreme Court agreed to hear an appeal in a New Jersey case on whether the FHA covers disparate impact claims. However, the parties involved reached a settlement agreement, meaning that it’s no longer necessary for the court to hear the case. Therefore, owners must continue to rely on HUD’s final rule on disparate impact, “Implementation of the Fair Housing Act’s Discriminatory Effects Standard.”

We’ll highlight what you need to know about the new discriminatory effects regulations, and suggest four rules to follow to ensure compliance at your site.

What Do the Regulations Say?

The regulations accomplish two things:

1. Clarify that the FHA covers disparate impact claims. The final rules formalize HUD’s long-standing interpretation of the FHA to cover disparate impact claims—though it uses the term “discriminatory effect.” HUD emphasizes that it’s not a new rule, pointing to rulings by nearly all the federal appeals courts over the past four decades recognizing liability under the FHA for facially neutral practices that have a discriminatory effect.

The regulations state that liability may be established under the FHA based on a practice’s discriminatory effect, even if the practice wasn’t motivated by a discriminatory intent. Under the rule, 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.

Even if a practice has a discriminatory effect, it may still be lawful if supported by a “legally sufficient justification.” The regulations explain that a legally sufficient justification exists where the challenged practice:

• Is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant; and
• Those interests could not be served by another practice that has a less discriminatory effect.

2. Establish national standard for disparate impact cases. What’s new about the rules, according to HUD, is a national standard for determining whether a particular practice has an unjustified discriminatory effect, leading to liability under the FHA.

To assess liability under the FHA, the regulation adopts a three-part test similar to that used in assessing claims for employment discrimination and civil rights violations. The three-part test shifts the burden of proof back and forth between the parties, starting with the party that has raised the claim. At each stage, that party must present enough evidence to satisfy the requirement; if it does, then the case goes to the next step; otherwise, it’s the end of the case and the other party wins.

Here’s how it works in action when an individual or group accuses a site of adopting or enforcing a policy that has an unjustified discriminatory effect on a protected class:

• The party filing the complaint must present evidence that a particular practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. If the party doesn’t present such evidence, the case ends—and the site owner wins. If the party does present the evidence, then the case moves to the second step, where the burden of proof shifts to…
• The site owner to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If the site owner doesn’t prove this, then the case ends—and the other party wins. If it does prove this, then it’s on to the third step, where the burden of proof shifts to…
• The party filing the complaint to prove that the site owner’s substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect. If the party filing the complaint doesn’t prove this, then the case ends, and the site owner wins. If the party does prove this, it wins—and it’s up to the court (or jury) to decide whether the party filing the complaint is entitled to damages or other forms of relief, such as a court order prohibiting the site from enforcing the discriminatory policy.

FOLLOW FOUR RULES FOR COMPLIANCE

Rule #1: Review Site’s Occupancy Standards

Owners of HUD-subsidized sites must develop written occupancy standards that specify the unit size and number of bedrooms appropriate for different family sizes. Occupancy standards ensure that applicants and tenants are treated fairly and consistently, and receive adequate housing space.

Owners have discretion in developing occupancy policies that meet needs of a specific site. HUD does not prescribe specific policies owners must implement but provides guidelines owners must follow when developing written occupancy standards [HUD Handbook 4350.3, par. 3-23(E)(1)]. One example of an occupancy standard is a limit of two persons per bedroom. But an owner may establish a different standard for assigning unit size based on specific characteristics of the property [HUD Handbook 4350.3, par. 3-23(E)(2)]. For example, some bedrooms on the site may be too small for two people.

Some sites have faced liability for housing discrimination based on familial status because of the disparate impact that these seemingly neutral policies may have on families with children. Although owners may set occupancy standards, sometimes those standards may be so restrictive that they exclude families who, based on a home’s overall size and configuration, should be able to live there.

So take a close look at your occupancy standards to ensure that they satisfy fair housing guidelines as well as state and local requirements. Remember, “two people per bedroom” is only a general rule of thumb, which is subject to exceptions based on other factors—such as the size of the bedroom, the size and configuration of the unit, the age of the children, other physical limitations of the housing, any state or local restrictions, and other relevant factors—which could make it reasonable to allow more people to live in a particular unit.

Rule #2: Comply with VAWA 2013 Requirements

In a 2011 memo, HUD recognized that facially neutral housing policies addressing domestic violence can have a disparate impact on women in violation of federal fair housing law. The memo explained that domestic violence survivors may pursue a federal fair housing claim based on sex if they face housing discrimination because of their history or the acts of their abusers. Since statistics show that women are overwhelmingly the victims of domestic violence, HUD reasoned that discrimination against domestic violence survivors is almost always discrimination against women.

In 2013, to address this discrimination, HUD issued a notice to provide an overview of the applicability of the Violence Against Women Reauthorization Act of 2013 (VAWA 2013). VAWA 2013 was designed to protect both child and adult victims of domestic violence, dating violence, sexual assault, and stalking. VAWA established that domestic violence-, stalking-, or sexual assault-related incidents or threats cannot be interpreted as serious or repeated lease violations.

The law extended coverage to more federal housing programs, extended protections to sexual assault survivors, provided survivors with emergency transfers, allowed survivors to remain in a unit when a lease is bifurcated, and mandated certain notices of VAWA housing rights to applicants and tenants.

Lease bifurcation. VAWA 2013 mandates that if a lease is bifurcated and the removed tenant or occupant was the sole person eligible to receive assistance in the covered HUD program, the owner or manager must provide remaining tenants with the opportunity to establish eligibility under the HUD program providing assistance. 

If the tenant is unable to establish eligibility, the owner or manager must give the tenant a reasonable amount of time to find new housing or establish eligibility under a different housing program. 

Notices. VAWA 2013 requires owners to notify applicants and tenants of their VAWA-related housing rights at three specific times—when application for residency is denied, when a resident is newly admitted, and with any notification of eviction or termination of assistance.

Transfer plan. VAWA 2013 requires HUD to adopt a model emergency transfer plan. The plan must allow tenants who are victims of domestic violence, dating violence, sexual assault, or stalking, to transfer to another available and safe dwelling under a covered housing program and must incorporate reasonable confidentiality measures. The tenant can be granted a transfer only if she requests one and either reasonably believes she is threatened with imminent harm from further violence if she remains in the unit or, if the tenant is a victim of assault, the assault occurred on the premises during the 90-day period before the transfer request. Transfers are subject to the availability of other assisted housing and to all other HUD requirements being met.

HUD hasn’t developed this model transfer plan yet. Until HUD does so, you may continue to implement the transfer plan described in your occupancy plan.

Rule #3: Review Site’s Policies on Criminal Background Screening

It’s too soon to tell, but the new disparate impact rule may sharpen the focus on the potentially discriminatory effect of criminal background screenings on members of racial and ethnic groups. Advocacy groups have long argued that relying on criminal background checks to exclude individuals from employment or housing has a disparate impact on African Americans and Hispanics.

HUD has encouraged owners to make tenant-selection policies more flexible for residents and applicants with prior criminal convictions. In separate letters to public housing authorities and the owners of HUD-assisted housing, Secretary Donovan noted the scope of the problem: In the United States each year, more than a half-million people are released from prison, and an additional 7 million are released from jails. Studies show that most intend to return to their families, yet they often face significant barriers in obtaining housing. And, he noted, ex-offenders who don’t find stable housing in the community are more likely to return to criminal activity.

Donovan noted that the law and HUD regulations generally require that resident selection plans include screening criteria for drug-related or criminal activity. The rules impose permanent bans that exclude: (1) sex offenders subject to a lifetime registration requirement under state sex offender registration programs; and (2) individuals convicted of manufacturing methamphetamine on federally assisted housing property.

Owners must also establish standards that bar admission if any household member is currently engaged in the illegal use of drugs or has reasonable cause to believe that a household member’s illegal use of drugs or alcohol may threaten the health, safety, or right to peaceful enjoyment of the premises by other residents. In addition, owners must also prohibit the admission of an applicant for three years from the date of eviction if a household member has been evicted from federally assisted housing for drug-related criminal activity, although the housing provider has discretion to admit households under certain circumstances.

Beyond those restrictions, Donovan pointed out that site owners have broad discretion to set admissions policies. Owners may adopt reasonable criminal background policies that are related to their substantial, legitimate, nondiscriminatory interests in protecting residents’ safety and preventing criminal activity on their property. When screening family behavior and suitability for tenancy, he urged consideration of all relevant information, including factors that indicate a reasonable probability of favorable future conduct, such as evidence of rehabilitation and the family’s participation in counseling or other social services.

Overly broad policies that exclude anyone with a criminal record—without considering whether it’s an arrest or conviction, the severity of the offense, or how long ago it occurred—may fall under the scope of disparate impact regulations. Be careful in using arrest, as opposed to conviction, records—and set reasonable limits about the age and type of criminal activity that would disqualify an applicant from living there. The more severe and recent the crime, the more likely it will be a bar to living at the site.

Rule #4: Abide by AFHMP and Practice Inclusive Marketing

You could be accused of selective marketing practices if you’re marketing only to certain Zip codes and geographic areas, particularly if the areas have a population mainly consisting of a particular racial, ethnic, or religious background. It is not illegal to target market to certain groups as long as it’s part of a broad, inclusive marketing campaign and you have a valid, nondiscriminatory reason for doing so. If, for example, you find that members of a particular ethnic group have settled into your community and the surrounding area—and you did nothing to create or encourage the situation—an inclusive campaign could include outlets that cater to that group because it’s already represented.

To demonstrate that your marketing campaign is broad and inclusive, you should include details in your Affirmative Fair Housing Marketing Plan (AFHMP). The AFHMP is a marketing strategy designed to attract applicants of all majority and minority groups, regardless of sex, handicap, familial status, and other protected characteristic, to assisted sites. The AFHMP describes initial advertising, outreach, and other marketing activities that inform potential tenants of the existence of the units. No applications for applicable HUD-assisted programs may be funded without an approved AFHMP. HUD requires that your AFHMP be updated at least every five years, although reviewing the form annually and updating it as needed is a good business practice.

You should also keep a written record of your marketing campaign. This will demonstrate your efforts to run an inclusive marketing campaign without discrimination. And if the racial or ethnic makeup of your current residents is not diverse, your records will document your efforts to reach a wide, diverse range of applicants and show that you did nothing to create or encourage the situation.