Tort Reform or Gross Injustice? HUD’s proposed changes to Disparate Impact Discrimination Cases

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So this week I was going to have a nice little 10 list for you guys about the reasons why renters file complaints against their neighbors in apartment buildings. But that’s going to have to wait a couple of weeks because the US Department of Housing and Urban Development has decided to propose some changes the way they handle disparate impact cases. I really can’t post a 10 list when this sort of thing is going on or the Twitterverse will eat me for lunch.

Longtime readers will know that I try to take a neutral stance on most hot-button issues in a sort of infuriating way. This time is no different. Most of the articles I’ve seen are decrying the changes as hostile to minorities, and yes, that is definitely a problem. But I have been calling for tort reform in the area of landlord-tenant litigation for 13 years now, and have done so no less than five times so far in this blog alone. Having gotten my wish, even if it’s in a really icky area, I would be remiss to immediately take a stance either way without fully investigating the changes.

Now I know this may disappoint some of you, especially given the length of what I’m about to put out there, but I can’t give you my full take on the changes today. It’s too early in the process and there’s some missing pieces of data that I need before I feel comfortable making a judgment call. So I’ll have to follow this up with that information next week if I can find it. But I can give you some initial first impressions and an overview of the changes as I understand them.

The proposed changes to the rule are currently open for public comment until October 18, 2019. If this article or the changes themselves inspire you to contribute a public comment, you may do so at the Regulations.gov node for the proposal using the “Comment Now” button in the top right corner of that page.

What is Disparate Impact?

We all know what discrimination is. It’s when someone in a position of power uses arbitrary and unrelated aspects of a person’s biology, history or character to deny them access to something. It happens in every walk of life from hiring to housing to that time my grandfather got drunk and cut me out of his will for being biracial.

You can have active or actual discrimination. That’s when someone says outright that “you can’t have this wedding cake because you’re marrying someone of the same gender” or “you can’t have this house because you are a Muslim and I am a Christian.” But this is 2019. Most people (except for the extremist wackjobs that you see in shock articles) don’t say things like that. Discrimination still happens. It’s more subtle now, but it happens.

Disparate impact is a form of this subtle and often accidental discrimination done at an institutional level. Instead of someone saying “you can’t have this apartment because you are black” they will say “you can’t have this apartment because you have a criminal record.” This seems to remove the issue of a protected class from the decision but ignores the statistical evidence that there’s a lot more RAP sheets for black folks than there are for white folks.

Disparate impact discrimination doesn’t only happen between civilians, such as landlords and tenants. It can also be the result of government actions. Suppose a city decides to fund the construction of housing for single mothers in an area that’s much further from public transit than the majority of other residential zones in the area. That could be construed as a city creating a situation that has a sex-based disparate impact.

The Current Way

The current way of combating disparate impact discrimination in housing stems from a 2015 SCOTUS case called “Texas Dept of Housing and Community Affairs vs. Inclusive Communities Project, Inc.” which established that disparate impact did in fact fall within the realm of things covered by the US Federal Fair Housing Act. It empowered HUD to get involved and bring federal resources to bear to ensure that these situations were stopped and the perps were punished.

So as of August 2019, if you find yourself in a disparate impact situation you have the option of either filing a civil suit at any level of the court system that’s equipped to handle it, or you can get HUD involved. They’ll send out inspectors and if they find that the landlord or city department is in fact accidentally discriminating they will back your case through the US Department of Justice in an Administrative Law Court. They’ll cover your fees and everything.

The burden of proving disparate impact in court is currently distributed between the plaintiff (that’s you) and the defendant (the landlord or other offender). It’s a three step process.

  1. The plaintiff pleads shows that a practice is likely to affect one or more protected classes more severely to the end of perpetuating housing segregation.
  2. The defendant can then plead that there is no other viable practice available to achieve the same goals and that the practice is necessary to continue their business interests.
  3. The plaintiff may then provide examples of other conventionally acceptable substitute practices that can, in fact, achieve the same goals while not enforcing segregated housing.

The Proposed Changes

The proposed version changes all 3 steps.

Firstly it clarifies the process a plaintiff (again, that’s you, the tenant) must follow to prove that a practice is having a disparate impact on a protected class. If the changes are approved, going forward you would have to prove five things about the practice:

  1. The practice must be arbitrary, artificial and unnecessary to the defendant’s bottom line.
  2. There must be a “robust causal link” between the practice and discrimination. That means it has to be extremely obvious that point A leads directly to point B.
  3. The practice must have a negative impact on members of a protected class. Remember that the federal government only has seven protected classes: race, color, national origin, religion, sex, familial status and disability. Age is not protected. Source of income is not protected. Sexual preference is not protected. Military status is not protected.
  4. The negative impact must be significant.
  5. The plaintiff must themselves be directly affected by the negative impact of the practice.

Secondly it removes a lot of the proof that the landlord currently has to provide and it gives them a scapegoat.

  1. The defendant no longer has to prove that there are no other viable practices out there that don’t also cause an equal level of segregation.
  2. If the defendant’s discriminatory act was based on analytics provided by a third party such as a credit screening service, they can pass the blame off to that third party, essentially blaming the computer.
  3. The defendant can say they must follow this specific practice in order to remain within the bounds of existing laws or court orders.

Finally, if the case moves past the pleading stage to a trial, the plaintiff must prove both that the discrimination has occurred and there is another less discriminatory method that would cost the defendant the same or less to execute.

The defendant can take any one of three options to rebut the claims. They can either claim that to change methods would be breaking the law, or that the plaintiff hasn’t clearly satisfied all five points, or that the alternative proposed method would not be an economically sound choice.

The Effect on Tenants

HUD makes their goals here quite clear in a few sentences I will quote for you below.

“HUD notes that since Inclusive Communities many parties have failed to identify a “specific, identifiable practice.” It is insufficient to identify a program as a whole without explaining how the program itself causes the disparate impact as opposed to a particular element of the program. Plaintiffs must identify the particular policy or practice that causes the disparate impact. Plaintiffs will likely not meet the standard, and HUD will not bring a disparate impact claim, alleging that a single event—such as a local government’s zoning decision or a developer’s decision to construct a new building in one location instead of another—is the cause of a disparate impact, unless the plaintiff can show that the single decision is the equivalent of a policy or practice.”

Plaintiffs will likely not meet the standard.

Thank you for revealing your motives, HUD.

Basically they think there’s been too many frivolous disparate impact cases brought before the Department of Justice and they want to stop them outright. They are making the restrictions so difficult that the majority of these cases will fail to meet the criteria with the sole exception of true and legitimate large-scale disparate impact scenarios.

This does not prevent tenants from suing on the grounds of actual or perceived discrimination. Tenants can still file civil suits. They always have been able to file civil suits if they have the funds to pay for it out of pocket. Most of them can’t, and certainly not without the support of interested outside agencies who are now barred from being co-plaintiffs.

But HUD would no longer get involved with all their lawyers, guns and money unless the case is enormous. The changes would close off one avenue out of two available for legal recourse and in the process remove what has most likely become a huge drain on federal resources.

The Effect on Landlords

Here at RentConfident we operate on the premise that most landlords are good at what they do and operate with the best intentions of providing good housing. There’s a few bad apples though, as there are in any industry. We also understand that there are many different kinds of landlord business models, from the small owner-occupants in the two-flats to the trailer park managers to the large scale property management REIT owned empires. In order to truly assess the impact of these changes we have to consider the effect at all levels of the industry.

The effect on the big guys is the most obvious. They will have a huge burden lifted off of them. They’re already using screening services and can simply say “hey, don’t blame me, blame the computer” if they get into trouble.

But we have to consider the effect on the little guys. I can tell you flat out that most solid computer systems out there are scaled for use by landlords with over 1000 units in their portfolios, ideally consolidated into high rises or large scale complexes. If you’re operating at a lower level than that it is very, very difficult to find a good, cost-effective digital systems for assisting you with things like prices, screening and risk assessment.

So the smaller guys are either going to have to shell out for systems intended for much larger businesses or risk going into litigation without the comfortable seat belt of blaming the computer that HUD has provided. While the available tech out there is starting to send out feelers towards the smaller landlords, there’s really not enough of it out there yet for me to feel comfortable with making reliance on third-party AI screening a mandatory thing.

The Effect on Emerging Technology

There’s a glaring absence in these changes. Yes, landlords can claim that the computer is at fault but there’s no restrictions included on what makes for a legally admissible computer program. But with such a high profile conservative-driven issue coming up against software developers (who tend to be a pretty liberal bunch), you’d best believe that there will be some regulations put into place rather quickly.

Something strange happens in the tech world when their products become subject to government scrutiny. On the one hand you get situations like Big Pharma and GMO Food against the FDA. Products that would normally be nicely affordable get bogged down in government review and the prices skyrocket for the few products that manage to make it through the system. Innovation is stifled.

On the other hand you can wind up with the situation we see with copyright infringement and DMCA takedowns. The waters wherein content creators swim have become very muddy indeed, while the middleman content providers are trapped in a sort of limbo at the mercy of changing laws and public opinions.

I find myself looking at the changes from the rather unique perspective of someone who’s written a third party screening algorithm for the housing industry, but instead of targeting tenants it targets landlords. In my prior job I also made one for screening tenants. I can tell you that this technology is still in its infancy. If HUD proceeds down this route what we will see is a handful of established conventional market leaders emerge and the rest of the innovators out there working to refine the technology become too terrified to continue. The amount of seed funding you’ll need to get a new algorithm out on the market is going to become really, really high. The few companies that are working with smaller landlords like Cozy wouldn’t stand a chance if they started under the new laws.

It is only through market competition and repeated iterations of software refinement that the best AIs come into being. Modern software design practice is to release at beta stage when there are still bugs in the system and then refine based on market input. It is still way too early for HUD to start clamping down on this technology now. We need another 10 years or so.

Preponderance of Evidence

In the court system it’s always the plaintiff who bears the burden of proving injury. However, there are different levels of proof. There’s the “proof beyond a reasonable doubt” that you hear about all the time in TV crime dramas. That’s the top level of proof. It’s what you need to provide in court if you want to send someone to prison for murder. There’s also “clear and convincing evidence” which is in the middle. Then at the bottom grade of proof is “preponderance of evidence.” It’s a pretty lightweight proof. It’s mostly used in civil cases.

The proposed changes specify that plaintiffs must provide a preponderance of evidence. So HUD is clarifying exactly what must be proven in order for a judge to say that disparate impact discrimination has actually occurred, they have not set the bar for the quality of the proof so high that you have to convince every juror that your case is air tight.

Now part of me wants to argue here that by setting the bar at the level of civil cases, HUD is saying that discrimination is not a crime. The logical part of me agrees with this conjecture. It isn’t a crime of intent. At worst it’s a thought crime, which isn’t subject to modern law. Disparate impact discrimination is largely accidental. Prosecuting people for the end result of organic expressions of deep-rooted cultural values, be those values right or wrong, is a rather pear-shaped process when you think about it.

Wolves in Sheep’s Clothing?

Most of the folks who have been making a big fuss over these proposed changes have been lawyers. Now, Hanlon’s Razor tells me to never assume malice when stupidity is the more likely cause. It’s entirely possible that lawyers are the most likely to be paying attention to changes like these and therefore the most likely to parrot them out in their blogs. But there’s also part of me that wants to follow the money.

In an industry like law that’s been widely decried as over-filled with incoming new talent with insufficient work to keep them all paid, of course there’s going to be some self-preservation involved. HUD-backed fair housing cases are important from a social standpoint but they also mean a big paycheck and lots of media coverage. Fair housing lawsuits are a dog whistle for the left these days. They’re important certainly, but they also sell a lot of newspapers.

Now don’t get me wrong here. I wholeheartedly support the efforts of groups such as the Lawyers’ Committee for Better Housing and the Chicago Lawyers’ Commission for Civil Rights Under the Law. They do excellent work keeping housing affordable and accessible. But they are lawyers. Sometimes what seems to be pro bono is also pro ego. No attorney in their right mind is going to argue for tort reform because they like being able to afford groceries.

Now there are other public policy groups who have come out as strongly against the changes, chief among them being the National Low Income Housing Coalition. Making it harder to punish the worst offenders in housing discrimination is certainly a misguided idea. But one must admit that there’s probably been a lot of resources wasted on frivolous disparate impact cases over the past 4 years. The litigious environment surrounding the multifamily housing market is severe enough that it’s brought and end to the security deposit in Chicago and bankrupted several large scale landlords. We need tort reform. Possibly not this particular form of it, but certainly some form.

Standardized Testing

By allowing landlords to pass the blame for disparate impact discrimination to third party analytics services they are basically applying a form of standardized testing to housing situations. Standardized aptitude tests as they’re used for hiring, school assessments and college admissions have provided a hotbed of discussion in the sphere of civil rights for decades now. It is argued that some cultures do not test as well as others. It is also argued that employers who have sought to comply with equal opportunity employment legislation have sacrificed jobs for skilled workers in order to comply with the law, hiring workers who scored lower or outright failed standard tests.

One might be inspired to make the same argument for this housing discrimination debacle. There are no math questions here. There is no long form essay question. But there is heavy reliance on credit reports, while the use of credit is viewed very differently from protected class to protected class. There is heavy reliance on criminal background checks although those have also been proven to deliver different statistical curves depending on variables like race, gender and income.

There’s also the issue that the exchanges between a landlord and a tenant remain for most of the country very personal interactions. There are still many tenants who know their landlord, the landlord’s family, and send birthday presents back and forth. There are still boarding houses and accidental landlords who can’t sell their homes in a slow market. There are college kids subleasing for the summer while the real tenants are back at home on vacation.

Until the recent resurgence in locally grown food and farmer’s markets, rental housing was for decades the only remaining basic utility that was provided largely by a private market of small independent vendors. The consolidation of property management into huge national firms has only really happened since the creation of REITs in the 1960s, and slowly at that. No matter how big the landlords want to get, the tenants want the market to keep that personal aspect. Forcing the insertion of third party analytics into the whole thing dehumanizes the exchange.

The Missing Data

At this point I’m inclined to say that introducing the idea of tort reform is a good and needed thing. However, I think that the choice of fair housing as the venue for the discussion was ill-advised, and that’s assuming more good faith of Ben Carson’s HUD than it possibly deserves. We are after all heading into an election year. But before I can really come down on one side or the other I need a few rather substantial pieces of data.

What I need is a list of every disparate impact related case that’s gone through the Department of Justice since the verdict of the Texas DOH vs. Inclusive Communities case came down in 2015. Ideally I’d also like an estimate of what those cases cost HUD. Finally, I’d need a comparable data for a different group of court cases, such as disparate impact employment discrimination cases that passed through the DoJ within a similar timeframe. Because while there are a lot of valid discrimination suits that go through the court system, I can tell you from personal experience that there’s also a lot of discrimination claims that have no basis in reality.

I’m going to try and track down that data over the coming week. If you get a follow up to this article next week I’ve succeeded. If you get a 10 list about unhappy neighbors, I’ve failed but am probably still trying to find what I need.

Of course I would love to hear your thoughts on the matter, especially if they’re more substantial than “Discrimination bad, HUD bad.” But something tells me I’m going to spend the next week elbow-deep in legal research so if you need me, please shout.

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Kay Cleaves

Founder and owner of RentConfident. She's the primary developer of the website and research engine code. She's spent over 10 years working in the Chicago rental industry and has assisted with over 1200 leases.