Disparate-Effect Discrimination in Housing Finance

U.S. law bars discrimination based on protected classes – i.e., race, color, religion, sex, disability, familial status, or national origin – in the sale, rental, financing or other activities related to housing. In this final rule, HUD expands and ratifies the use of “disparate effect” or impact as a criterion by which fair-lending violations may be found, with disparate-impact judgments resulting when, as detailed in this rule, a lender or other party’s policies have the effect of differentiating against persons in a protected class even though there is no intent to do so. Because economic risk factors are sometimes correlated with protected basis – e.g., credit scores statistically coincide with race – lenders have argued that disparate impact is the necessary outcome of broader social factors for which they cannot be held responsible. However, as HUD reiterates in this final rule, it is possible that disparate impact may mask discrimination and, thus, parties found to have policies with disparate impact that cannot be substantiated on grounds of business necessity are subject to significant legal and reputational risk.

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