HUD proposal may make lending discrimination harder to prove

Dive Brief:

A proposal from the Department of Housing and Urban Development would make it tougher for plaintiffs to use "disparate impact" to bring discrimination claims against lenders under the Fair Housing Act. The disparate impact theory holds businesses and governments accountable for practices that have an unintentional, disproportionate, negative effect on minorities. The proposal, sent to Congress on Monday for a 15-day review period, would establish a five-step test for plaintiffs — the current test has three steps — while defendants would only have to prove their policies are not discriminatory.
HUD said the proposal brings the agency in line with a 2015 U.S. Supreme Court ruling that preserved disparate impact but left it to HUD to determine necessary changes to the rule. HUD is also seeking to more clearly define how disparate impact comes into play for digital lenders that use algorithms to determine loan eligibility.
Many insurers argue that state insurance laws should preempt the Fair Housing Act. HUD has resisted giving insurers a safe harbor, saying disparate impact claims must be evaluated on a case-by-case basis because of differences between state laws. This week’s proposal makes it easier for insurers to argue their practices are allowed under state law and ensures parties are never placed in a "double bind of liability" — sued under one law for actions required in good faith under another.

Dive Insight:

Under this week's proposal, obtained by Politico, plaintiffs must:

Argue that a policy is "arbitrary, artificial and unnecessary."
Establish a "robust, causal link" between the policy and the discriminatory effect.
Prove that a policy had an adverse effect on a protected group of people, not just the individual bringing the claim.
Argue that the discrimination is significant.
Show that the policy and discrimination are linked.

The key for plaintiffs is to point to a single decision made by the company that led to a discriminatory outcome. Without that, a claim can be invalidated.

"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.

Algorithm creators can prove their tools don't have an unintentional, discriminatory effect by demonstrating that an algorithmic model is an industry standard, HUD suggested, or by proving that the technology is not the direct cause of disparate impact.

"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 a notice of proposed rulemaking, according to American Banker.