In a move that could pose challenges for lenders that employ artificial intelligence and algorithms to evaluate borrowers, federal housing officials are moving to rescind policies put in place last year by the Trump administration to protect lenders and other businesses from claims of inadvertent discrimination.
Marcia Fudge
Housing and Urban Development Secretary Marcia Fudge announced Thursday that HUD wants to go back to rules put in place by the Obama administration in 2013 for addressing “disparate impact” — discriminatory practices that are unintentional, but nevertheless unjustified.
“We must acknowledge that discrimination in housing continues today and that individuals, including people of color and those with disabilities, continue to be denied equal access to rental housing and homeownership,” Fudge said in a statement.
HUD will accept comments through Aug. 24 on its proposal to rescind the Trump Administration’s 2020 disparate impact rule and restore the 2013 discriminatory effects rule. The 2013 rule made it easier for regulators, affordable housing groups, and private citizens to win discrimination claims under the Fair Housing Act.
In a June 25 Federal Register notice, HUD said the 2013 rule “broke no new ground, but instead largely codified longstanding judicial and agency consensus regarding discriminatory effects law.”
In previous rulings, HUD said, courts “had long found that discrimination under the [Fair Housing Act] may be established through evidence of discriminatory effects” — practices which are, on their face, neutral, but which have “an unjustified discriminatory effect.”
Lenders might have data on default rates at different high schools, for example, scholars at the University of California, Berkeley, noted in a 2019 academic paper exploring ways that the use of algorithms can lead to inadvertent discrimination. Basing a loan approval decision on where someone went to high school might amount to inadvertent discrimination, they said, if that methodology disproportionately affects minority applicants.
The Trump administration used a 2015 Supreme Court decision as justification to draft new rules limiting disparate impact claims. In Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc., the court outlined limitations on the scope of disparate-impact liability, noting that claims that rely on a statistical disparity must fail “if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.”
In 2018, under the leadership of Trump appointee Ben Carson, HUD published a notice that it was considering a new disparate impact rule to address issues raised by the Supreme Court’s 2015 ruling. The proposed rule introduced by HUD the following year drew 45,000 comments, most opposing the changes.
In testimony before a task force of the House Financial Services Committee, Brookings Institution scholar Makada Henry-Nickie said the proposed disparate impact rule “introduced five new criteria for establishing disparate impact burdens that, in principle, serve to provide a safe harbor to institutions using algorithms to exploit vulnerable consumers and exacerbate historical disparities.”
Industry groups including the Mortgage Bankers Association initially supported the proposed rule, saying liability for disparate impact should be limited to protect lenders from abusive claims. Mortgage lenders in particular need protection from disparate impact claims, the trade group said, because they are subject to policies “over which they have little control or discretion” that are imposed on them by government and quasi-governmental entities including Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).
But after the May, 2020 murder of George Floyd and other acts of violence against African Americans that sparked nationwide protests, the MBA asked HUD to delay publication of the final rule.
“Recent events have made clear that it is past time for our nation to address the persistence of systemic racism and the structural barriers to progress and equal opportunity for people of color,” MBA President Robert D. Broeksmit said in a July, 2020, letter to Carson. “We also must acknowledge the historical fact that past policies of both industry and government have contributed to the wide gaps in wealth and homeownership experienced by minority households. As we move forward, we must be thoughtful and intentional in our approach to remedy past inequities and injustices.”
Not all lenders supported the changes. The American Fintech Council, whose members include providers of personal loans and private student loans, opposed changes to the 2013 disparate impact rule. In its comments to HUD, AFC member LendingClub club said the 2013 rule allowed an “outcomes-based” approach that favored innovation.
“Rather than allowing only certain types of data, or certain modeling techniques, the existing framework permits innovative market participants to develop the most effective credit models, and then requires those models to be held accountable for unintended discrimination by measuring their outcomes, rather than their inputs,” Richard H. Neiman, LendingClub’s head of public policy, told HUD. “We see an outcomes-based approach as a pro-innovation approach to regulation, and we encourage regulatory agencies and lawmakers to explore adopting outcomes-based frameworks elsewhere when applicable.”
LendingClub did not respond to a request for comment about HUD’s move to return to the 2013 rule.
Although HUD went ahead and published the final rule last September, fair housing and civil rights groups sued to stop its implementation, winning a preliminary injunction.
The Trump administration’s disparate impact rule has never been implemented. In seeking to rescind it, HUD now says the final rule “removed the definition of discriminatory effect, added 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.”
The ability to file lawsuits under the Fair Housing Act is “a critically important mechanism for redress,” Virginia Foggo and John Villasenor of the Brookings Institution wrote in March.
“Algorithm-driven discrimination is a concern in many fields, and particularly so in housing—a domain with extensive historical and continuing patterns of discrimination,” Foggo and Villasenor wrote at the time. “With algorithms playing a growing role in home financing, leasing, marketing, sales, and zoning, there will be inevitable cases where the resulting decisions have a disparate impact on a protected group.”
In an email, Villasenor told Inman that in his reading of the Federal Register notice, it seems clear that HUD is ready to let the 2013 rule continue, and that no new rule is needed.
“That said, it’s reasonable to ask whether, in light of changes since 2013 in how algorithms are used in the industry, an updated framework is needed to address those changes,” Villasenor said. “I don’t yet have an answer to that question, though I do think it’s important to be open to considering it. I also think that it would be important for the advocates of any proposed new rule to identify ways in which they believe the 2013 rule is insufficient.”
On its website, the American Fintech Council calls for the Trump administration’s disparate impact rule to be “revoked and revised.” The group did not immediately respond to a request for comment.
The Center for Responsible Lending called the 2013 disparate impact standard a “crucial legal tool” for fighting housing discrimination.
“Since discrimination now rarely arrives with a bright neon sign, the disparate impact standard is an essential legal tool to root it out” CRL Senior Policy Counsel Melissa Stegman said in a statement. “We commend the Administration for moving to restore a strong disparate impact standard and for recognizing how integral this rule is to advancing civil rights.”
In a written statement provided to Inman, Pete Mills, the MBA’s senior vice president of residential policy and member engagement, said every American deserves the right to be treated fairly and equitably when securing safe and affordable housing.
“We look forward to reviewing the proposed rule and working with HUD to ensure a final rule that is consistent with case law, provides robust protections for borrowers and renters, and clarity for lenders,” Mills said.
