II. This Proposed Rule

§ 100.500 Discriminatory Effect Prohibited

Section 100.500 continues to provide that liability under the Fair Housing Act may be established based on a specific practice's discriminatory effect on members of a protected class, even if the specific practice was not motivated by a discriminatory intent. HUD seeks to amend this regulation to provide additional guidance in light of Inclusive Communities; this proposed revision represents HUD's interpretation of disparate impact law under the Fair Housing Act. Paragraph (a) would be slightly amended to reflect the removal of a definition for discriminatory effect and the changes to the burden-shifting framework. The previous definition simply reiterated the elements of a disparate impact claim, which HUD believes is now adequately defined in more detail in the later sections, thus, making the definition unnecessary. New paragraphs (b) through (d) would provide a new burden-shifting framework and new paragraph (e) would address the application of the section to the business of insurance.

[Here is HUD's proposed rule:

§ 100.500 Discriminatory effect prohibited.

(a) General. Liability may be established under the Fair Housing Act based on a specific policy's or practice's discriminatory effect on members of a protected class under the Fair Housing Act even if the specific policy or practice was not motivated by a discriminatory intent.

(b) Prima facie burden. To allege a prima facie case based on an allegation that a specific, identifiable policy or practice has a discriminatory effect, a plaintiff or the charging party (collectively, “plaintiff”) must state facts plausibly alleging each of the following elements:

(1) That the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law;

(2) That there is a robust causal link between the challenged policy or practice and a disparate impact on members of a protected class that shows the specific practice is the direct cause of the discriminatory effect;

(3) That the alleged disparity caused by the policy or practice has an adverse effect on members of a protected class;

(4) That the alleged disparity caused by the policy or practice is significant; and

(5) That there is a direct link between the disparate impact and the complaining party's alleged injury.

(c) Failure to allege a prima facie case. A defendant, or responding party, may establish that a plaintiff's allegations do not support a prima facie case of discriminatory effect under paragraph (b) of this section, if:

(1) The defendant shows that its discretion is materially limited by a third party such as through:

(i) A Federal, state, or local law; or

(ii) A binding or controlling court, arbitral, regulatory, administrative order, or administrative requirement;

(2) Where a plaintiff alleges that the cause of a discriminatory effect is a model used by the defendant, such as a risk assessment algorithm, and the defendant:

(i) Provides the material factors that make up the inputs used in the challenged model and shows that these factors do not rely in any material part on factors that are substitutes or close proxies for protected classes under the Fair Housing Act and that the model is predictive of credit risk or other similar valid objective;

(ii) Shows that the challenged model is produced, maintained, or distributed by a recognized third party that determines industry standards, the inputs and methods within the model are not determined by the defendant, and the defendant is using the model as intended by the third party; or

(iii) Shows that the model has been subjected to critical review and has been validated by an objective and unbiased neutral third party that has analyzed the challenged model and found that the model was empirically derived and is a demonstrably and statistically sound algorithm that accurately predicts risk or other valid objectives, and that none of the factors used in the algorithm rely in any material part on factors that are substitutes or close proxies for protected classes under the Fair Housing Act; or

(3) The defendant demonstrates that the plaintiff has failed to allege sufficient facts under paragraph (b) of this section.

(d) Burdens of proof for discriminatory effect. If a case is not resolved at the pleading stage, the burden of proof to establish that a specific, identifiable policy or practice has a discriminatory effect, are as follows:

(1) Plaintiff's burden.

(i) A plaintiff must prove by the preponderance of the evidence, through evidence that is not remote or speculative, each of the elements in paragraphs (b)(2) through (5) of this section; and

(ii) If the defendant rebuts a plaintiff's assertion that the policy or practice is arbitrary, artificial, and unnecessary under paragraph (b)(1) of this section by producing evidence showing that the challenged policy or practice advances a valid interest (or interests), the plaintiff must prove by the preponderance of the evidence that a less discriminatory policy or practice exists that would serve the defendant's identified interest in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.

(2) Defendant's burden. The defendant may, as a complete defense:

(i) Prove any element identified under paragraph (c)(1) or (2) of this section;

(ii) Demonstrate that the plaintiff has not proven by the preponderance of the evidence an element identified under paragraph (d)(1)(i) of this section; or

(iii) Demonstrate that the alternative policy or practice identified by the plaintiff under paragraph (d)(1)(ii) of this section would not serve the valid interest identified by the defendant in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.

(e) Business of insurance laws. Nothing in this section is intended to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.]

New Burden-Shifting Framework

The proposed new burden-shifting framework provides, in paragraph (b), that a plaintiff's allegations that a specific, identifiable, policy or practice has a discriminatory effect must plead facts supporting five elements. HUD notes that since Inclusive Communities many parties have failed to identify a “specific, identifiable practice.” [FN36] 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.[FN37] In unusual cases, a plaintiff may still be able to succeed at identifying a one-time decision, if the plaintiff can establish that the one-time decision is in fact a policy or practice.[FN38]

The first proposed element would require a plaintiff to plead that the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective. Inclusive Communities requires plaintiffs to allege facts at the pleading stage supporting a prima facie claim of disparate impact and requires courts to analyze these claims “with care” to ensure that “the specter of disparate-impact litigation” does not prevent parties “from achieving legitimate objectives.” [FN39] In accordance with this standard, this proposed rule would require plaintiffs to allege facts plausibly showing that the challenged practice is arbitrary, artificial, and unnecessary. This requirement is supported by Ellis v. City of Minneapolis, which dismissed the plaintiffs' disparate impact claim against the city's housing code for failure to plead facts showing how the housing code was arbitrary, artificial, and unnecessary.[FN40] In Ellis, the challenged housing code was, on its face, intended to require sanitary housing, and the plaintiffs made no attempt to explain how the housing code was arbitrary, artificial, and unnecessary to advance this goal.[FN41] HUD recognizes that plaintiffs will not always know what legitimate objective the defendant will assert in response to the plaintiff's claim or how the policy advances that interest, and, in such cases, will not be able to plead specific facts showing why the policy or practice is arbitrary, artificial, and unnecessary. In such cases, a pleading plausibly alleging that a policy or practice advances no obvious legitimate objective would be sufficient to meet this pleading requirement. However, in cases where a policy or practice has a facially legitimate objective, the plaintiff must allege facts at the pleading stage sufficient to support a plausible allegation that the policy is arbitrary, artificial, and unnecessary.[FN42]

If a plaintiff adequately alleges facts to support the assertion that the practice or policy is arbitrary, artificial, and unnecessary, only then does the defendant have the burden to identify a valid interest or interests that the challenged policy or practice serves, which may then be rebutted by the plaintiff, as described below.[FN43]

The second proposed element would require a plaintiff to allege a robust causal link between the challenged policy or practice and a disparate impact on members of a protected class. Claims relying on statistical disparities must articulate how the statistical analysis used supports a claim of disparate impact by providing an appropriate comparison that shows that the policy is the actual cause of the disparity.[FN44]

The third proposed element would require a plaintiff to allege that the challenged policy or practice has an adverse effect on members of a protected class. This element would require a plaintiff to explain how the policy or practice identified has a harmful impact on members of a particular “race, color, religion, sex, familial status, or national origin.” [FN45] Consistent with Inclusive Communities, it would be insufficient to allege only that the plaintiff is a member of a protected class and would be adversely affected or that members of a protected class are impacted as are all individuals. This element would require the plaintiff to show that the policy or practice has the “effect of discriminating against a protected class” as a group.[FN46]

The fourth proposed element would require a plaintiff to allege that the disparity caused by the policy or practice is significant. Where a disparity exists but is not material, a plaintiff will not have stated a plausible disparate impact claim. If a defendant were subject to liability for policies that have a negligible disparity, the defendant could be forced to “resort to the use of racial quotas” [FN47] to ensure that no subset of its data appears to present a disparate impact. Inclusive Communities specifically noted that courts must “examine with care whether a plaintiff has made out a prima facie showing of disparate impact, and prompt resolution is important . . .” to avoid injecting “racial considerations into every housing decision.” [FN48] Therefore, a plaintiff would be required to show that the statistical disparity identified is material and caused by the challenged policy or practice, rather than attributable to chance.

The fifth proposed element would require a plaintiff to allege that the complaining party's alleged injury is directly caused by the challenge policy or practice. This element seeks to codify the proximate cause requirement under the Fair Housing Act that there be “some direct relation between the injury asserted and the injurious conduct alleged.” [FN49]

If a party brings a claim under paragraph (b), HUD proposes that the defending party may rebut a claim at the pleading stage by asserting that a plaintiff has not alleged facts to support their prima facie claim as explained in paragraph (c).[FN50] Paragraph (c) also provides defendants with three methods through which to establish that plaintiffs have not alleged a disparate impact claim. HUD proposes to provide that the defendants may raise any of these defenses in paragraph (c) through a variety of procedural motions. For example, in a rule 12(b)(6) motion to dismiss, the defendant can make an argument under the paragraph (c) defense that the facts alleged in the complaint fail to allege sufficient facts to support a claim under paragraph (b). Another example is a rule 56 motion for summary judgment where the defendant could assert facts outside of the complaint to substantiate a defense under paragraph (c). For instance, on a rule 56 motion for summary judgment, the defendant may succeed where the defendant “shows that there is no genuine dispute as to any material fact and . . . is entitled to judgment as a matter of law.”

Paragraph (c)(1) provides that the defendant may show its discretion is materially limited by a third party—such as through a Federal law or a State or local law—or a binding or controlling court, arbitral, regulatory, administrative order, or administrative requirement. In cases where a State actor or municipality is the defendant, a State or local law, respectively, may not be considered materially limiting for purposes of this defense.[FN51] This defense would allow a defendant to show that the complaining party has not shown a robust causality as required in Inclusive Communities and codified in paragraph (b)(2), by failing to show that the defendant's policy is the actual cause of the alleged disparate impact.[FN52] This defense partially overlaps with proposed paragraph (e) of this section, which clarifies that nothing in § 100.500 is intended to conflict with State insurance law. This defense applies to any Federal, State, or local law that limits the defendant's discretion. As discussed further in the Business of Insurance section below, § 100.500(e) applies only to State insurance law.

Paragraph (c)(2) provides that, where a plaintiff identifies an offending policy or practice that relies on an algorithmic model, a defending party may defeat the claim by: (i) Identifying the inputs used in the model and showing that these inputs are not substitutes for a protected characteristic and that the model is predictive of risk or other valid objective; (ii) showing that a recognized third party, not the defendant, is responsible for creating or maintaining the model; or (iii) showing that a neutral third party has analyzed the model in question and determined it was empirically derived, its inputs are not substitutes for a protected characteristic, the model is predictive of risk or other valid objective, and is a demonstrably and statistically sound algorithm.

HUD received comments expressing concern that complicated, yet increasingly commonly used, algorithmic models to assess factors such as risk or creditworthiness, should be provided a safe harbor. While disparate impact provides an important tool to root out factors that 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. Therefore, HUD proposes these defenses to provide parties with three methods of defending their models where they can show their models achieve “legitimate objectives[.]” [FN53] They are intended to ensure that disparate impact liability is “limited so employers and other regulated entities are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” [FN54] This section is not intended to provide a special exemption for parties who use algorithmic models, but merely to recognize that additional guidance is necessary in response to the complexity of disparate impact cases challenging these models. HUD proposes that a successful defense under this section would demonstrate the lack of a robust causal link between the defendant's use of the model and the alleged disparate impact, as described below.

The first defense allows a defendant to provide analysis showing that the model is not the actual cause of the disparate impact alleged by the plaintiff. It allows the defendant to break down the model piece-by-piece and demonstrate how each factor considered could not be the cause of the disparate impact and to show how each factor advances a valid objective. This defense simply lays out the steps that a defendant would take in defending its actions. A defendant will succeed under this defense where the plaintiff is unable to then show that the defendant's analysis is somehow flawed, such as by showing that a factor used in the model is correlated with a protected class despite the defendant's assertion.

The second defense provides that a defendant can show that use of the model is standard in the industry, it is being used for the intended purpose of the third party, and that the model is the responsibility of a third party. It is similar to the defense that the defendant's actions are materially limited by law, as discussed above, in that it recognizes that there are situations in which standard practice is so clearly established that the proper party responsible for the challenged conduct is not the defendant, but the party who establishes the industry standard. In these situations, the defendant may not have access to the reasons these factors are used or may not even have access to the factors themselves, and, therefore, may not be able to defend the model itself, even where a perfectly rational reason exists for its use. Further, if the plaintiff prevails, the plaintiff would only remove the model from use by one party, whereas suing the party that is actually responsible for the creation and design of the model would remove the disparate impact from the industry as a whole. A plaintiff may rebut this allegation by showing that the plaintiff is not challenging the standard model alone, but the defendant's unique use or misuse of the model, as the cause of the disparate impact.

The third defense is similar to the first and provides defendants with another method of showing that the model is not the actual cause of the disparate impact. This defense allows defendants to prove through the use of a qualified expert that the model is not the cause of a disparate impact. A plaintiff may rebut this defense by showing that the third party is not neutral, that the analysis is incomplete, or that there is some other reason why the third party's analysis is insufficient evidence that the defendant's use of the model is justified.

Given the complicated nature of this issue, HUD is specifically soliciting comments on the nature, propriety, and use of algorithmic models as related to the defenses in (c)(2).

Paragraph (c)(3) provides that a defendant may make any additional claims that the plaintiff has failed to allege sufficient facts to support a prima facie case under paragraph (b).

If a party alleges facts sufficient to show a prima facie case under paragraph (b), a case proceeds beyond the pleading stage. Under paragraph (d)(1), HUD's proposed rule provides that the plaintiff has the burden of proving by a preponderance of the evidence each of the elements of the prima facie case, established not by statistical imbalances or disparities alone, but through evidence that is not remote or speculative. A plaintiff may now have access to discovery to establish facts supporting each allegation, including the allegation that the identified policy or practice is “arbitrary, artificial, and unnecessary.” In addition, a defendant may show that the policy or procedure advances a valid interest. The plaintiff must counter this by proving by a preponderance of the evidence that a less discriminatory policy or practice would serve the interest in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant, consistent with existing disparate impact case law.[FN55]

Under paragraph (d)(2), the proposed rule provides that the defendant may rebut a plaintiff's case by proving any element identified under paragraph (c)(1) or (2). The defendant may also rebut a plaintiff's case by demonstrating that the plaintiff has not met the burden of proof laid out in paragraph (d)(1), either by failing to prove the elements of a prima facie case or by failing to identify an alternative practice that advances the valid interest identified by the defendant without creating materially greater costs or other material burdens for the defendant, and, therefore, has not in fact “made out a prima facie case of disparate impact.” [FN56] HUD is also particularly seeking input on whether it would be consistent with Inclusive Communities to provide a defense for housing authorities who can show that the policy being challenged is a reasonable approach and in the housing authority's sound discretion.

HUD specifically seeks comments on the terms used in this section of the rule and whether HUD should define those terms. Examples of terms that HUD would consider providing definitions to are “robust causal link,” “evidence that is not remote or speculative,” “algorithmic model,” and “material part.”

Footnotes

[FN36] See, e.g., Frederick v. Wells Fargo Home Mortg., 649 F. App'x 29, 30 (2d Cir. 2016) (Plaintiff challenging lender's denial of a mortgage application failed to identify the specific policy or practice that caused the disparate impact).

[FN37] See, e.g., Barrow v. Barrow, Civil Action No. 16-11493-FDS, 2017 U.S. Dist. LEXIS 103495, at *8 (D. Mass. July 5, 2017) (citing Inclusive Communities, 135 S. Ct. at 2523) (“[A] plaintiff challenging the decision of a private developer to construct a new building in one location rather than another will not easily be able to show this is a policy causing a disparate impact because such a one-time decision may not be a policy at all.”).

[FN38] See 135 S. Ct. at 2523-24 (“For instance, a plaintiff challenging the decision of a private developer to construct a new building in one location rather than another will not easily be able to show this is a policy causing a disparate impact because such a one-time decision may not be a policy at all. It may also be difficult to establish causation because of the multiple factors that go into investment decisions about where to construct or renovate housing units.”).

[FN39] 135 S. Ct. at 2523-24.

[FN40] See Ellis v. City of Minneapolis, 860 F.3d 1106, 1112-14 (8th Cir. 2017) (citing Inclusive Communities, 135 S. Ct. at 2524).

[FN41] Id.

[FN42] See id. at 1114 (“a plaintiff must, at the very least, point to an ‘artificial, arbitrary, and unnecessary” policy causing the problematic disparity.).

[FN43] See Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989) (holding that the defendant has the burden of producing evidence of the justification for the alleged policy or practice but making clear that the burden of persuasion to prove their case ultimately remains with the plaintiff).

[FN44] See id. (holding that a disparate impact claim is not adequately pled where the alleged disparity is the result of factors outside the defendant's control and does not support the assertion that the defendant's policy itself is the cause of the disparity).

[FN45] 42 U.S.C. 3604(a).

[FN46] Anderson v. City of Blue Ash, 798 F.3d 338, 364 (6th Cir. 2015).

[FN47] 135 S. Ct. at 2512.

[FN48] Id.

[FN49] Bank of Am. Corp. v. City of Miami, 137 S. Ct. 1296, 1306 (2017).

[FN50] For example, the Supreme Court in Wards Cove Packing Co. dismissed a disparate impact claim against a firm that denied job applicants from a protected class at a higher rate than non-protected class members. Despite the statistical disparity, the plaintiffs had not identified an injury because a disproportionate number of qualified minorities were not denied employment. 490 U.S. at 650, 653.

[FN51] See Mount Holly, 658 F.3d 375 (3d Cir. 2011).

[FN52] 135 S. Ct. at 2524 (“[I]f [the plaintiff] cannot show a causal connection between the Department's policy and a disparate impact—for instance, because Federal law substantially limits the Department's discretion—that should result in dismissal of this case.”).

[FN53] Id. at 2524.

[FN54] Id. at 2518.

[FN55] Wards Cove, 490 U.S. at 661.

MASSACHUSETTS FAIR HOUSING CENTER, and Housing Works, Inc., Plaintiffs,
v.
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, and Ben Carson, Department of Housing and Urban Development, Defendants.

Civil Action No. 20-11765-MGM

Filed 10/25/2020

Attorneys and Law Firms
Annie Lee, Mina S. Makarious, Scott P. Lewis, Anderson & Kreiger LLP, Lauren A. Sampson, Oren M. Sellstrom, Lawyers' Committee for Civil Rights and Economic Justic, Boston, MA, for Plaintiffs.

James D. Todd, Jr., Vinita B. Andrapalliyal, United States Department of Justice, Washington, DC, for Defendants.

MEMORANDUM AND ORDER REGARDING PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION UNDER 5 U.S.C. § 705 TO POSTPONE THE EFFECTIVE DATE OF HUD'S UNLAWFUL NEW RULE

MASTROIANNI, U.S.D.J.

I. Introduction

Presently before the court is a motion, filed by Plaintiffs Massachusetts Fair Housing Center (“MFHC”) and Housing Works, Inc., seeking a preliminary injunction and stay of the effective date of a new Department of Housing and Urban Development (“HUD”) rule, HUD's Implementation of the Fair Housing Act's Disparate Treatment Standard, 85 Fed. Reg. 60288 (Sept. 24, 2020) (“2020 Rule”), under the Administrative Procedure Act (“APA”), 5 U.S.C. § 705. For the following reasons, the court will grant Plaintiffs’ motion.

II. Background

HUD has long recognized so-called “disparate impact” liability under the Fair Housing Act. Unlike disparate treatment liability, which requires discriminatory intent, disparate impact liability is based on the discriminatory impact of a policy or practice and the absence of an adequate justification. See Texas Dep't of Hous. & Cmty. Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519, 524, 135 S.Ct. 2507, 192 L.Ed.2d 514 (2015) (recognizing disparate impact liability under the Fair Housing Act). In 2013, HUD issued a rule setting forth its interpretation of the standards for such disparate impact claims under the Fair Housing Act: Implementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed. Reg. 11560 (Feb. 15, 2013) (“2013 Rule”). The 2013 Rule, codified at 24 C.F.R. § 100.500, provides a relatively straight-forward burden-shifting framework. Specifically, it states:

Liability may be established under the Fair Housing Act based on a practice's discriminatory effect, as defined in paragraph (a) of this section, even if the practice was not motivated by a discriminatory intent. The practice may still be lawful if supported by a legally sufficient justification, as defined in paragraph (b) of this section. The burdens of proof for establishing a violation under this subpart are set forth in paragraph (c) of this section.

(a) Discriminatory effect. 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.

(b) Legally sufficient justification.

(1) A legally sufficient justification exists where the challenged practice:

(i) Is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent, with respect to claims brought under 42 U.S.C. 3612, or defendant, with respect to claims brought under 42 U.S.C. 3613 or 3614; and

(ii) Those interests could not be served by another practice that has a less discriminatory effect.

(2) A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. The burdens of proof for establishing each of the two elements of a legally sufficient justification are set forth in paragraphs (c)(2) and (c)(3) of this section.

(c) Burdens of proof in discriminatory effects cases.

(1) The charging party, with respect to a claim brought under 42 U.S.C. 3612, or the plaintiff, with respect to a claim brought under 42 U.S.C. 3613 or 3614, has the burden of proving that a challenged practice caused or predictably will cause a discriminatory effect.

(2) Once the charging party or plaintiff satisfies the burden of proof set forth in paragraph (c)(1) of this section, the respondent or defendant has the burden of proving that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent or defendant.

(3) If the respondent or defendant satisfies the burden of proof set forth in paragraph (c)(2) of this section, the charging party or plaintiff may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

(d) Relationship to discriminatory intent. A demonstration that a practice is supported by a legally sufficient justification, as defined in paragraph (b) of this section, may not be used as a defense against a claim of intentional discrimination.

24 C.F.R. § 100.500.

In contrast, the 2020 Rule, set to go into effect on October 26, 2020, significantly alters the 2013 Rule's standards. It provides:

(a) General. Liability may be established under the Fair Housing Act based on a specific policy's or practice's discriminatory effect on members of a protected class under the Fair Housing Act even if the specific practice was not motivated by a discriminatory intent.

(b) Pleading stage. At the pleading stage, to state a discriminatory effects claim based on an allegation that a specific, identifiable policy or practice has a discriminatory effect, a plaintiff or charging party (hereinafter, “plaintiff”) must sufficiently plead facts to support each of the following elements:

(1) That the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law;

(2) That the challenged policy or practice has a disproportionately adverse effect on members of a protected class;

(3) That there is a robust causal link between the challenged policy or practice and the adverse effect on members of a protected class, meaning that the specific policy or practice is the direct cause of the discriminatory effect;

(4) That the alleged disparity caused by the policy or practice is significant; and

(5) That there is a direct relation between the injury asserted and the injurious conduct alleged.

(c) Burdens of proof in discriminatory effect cases. The burdens of proof to establish that a policy or practice has a discriminatory effect, are as follows:

(1) A plaintiff must prove by the preponderance of the evidence each of the elements in paragraphs (b)(2) through (5) of this section.

(2) A defendant or responding party (hereinafter, “defendant”) may rebut a plaintiff's allegation under (b)(1) of this section that the challenged policy or practice is arbitrary, artificial, and unnecessary by producing evidence showing that the challenged policy or practice advances a valid interest (or interests) and is therefore not arbitrary, artificial, and unnecessary.

(3) If a defendant rebuts a plaintiff's assertion under paragraph (c)(1) of this section, the plaintiff must prove by the preponderance of the evidence either that the interest (or interests) advanced by the defendant are not valid or that a less discriminatory policy or practice exists that would serve the defendant's identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.

(d) Defenses. The following defenses are available to a defendant in a discriminatory effect case.

(1) Pleading stage. The defendant may establish that a plaintiff has failed to sufficiently plead facts to support an element of a prima facie case under paragraph (b) of this section, including by showing that the defendant's policy or practice was reasonably necessary to comply with a third-party requirement, such as a:

(i) Federal, state, or local law;

(ii) Binding or controlling court, arbitral, administrative order or opinion; or

(iii) Binding or controlling regulatory, administrative or government guidance or requirement.

(2) After the pleading stage. The defendant may establish that the plaintiff has failed to meet the burden of proof to establish a discriminatory effects claim under paragraph (c) of this section, by demonstrating any of the following:

(i) The policy or practice is intended to predict an occurrence of an outcome, the prediction represents a valid interest, and the outcome predicted by the policy or practice does not or would not have a disparate impact on protected classes compared to similarly situated individuals not part of the protected class, with respect to the allegations under paragraph (b). This is not an adequate defense, however, if the plaintiff demonstrates that an alternative, less discriminatory policy or practice would result in the same outcome of the policy or practice, without imposing materially greater costs on, or creating other material burdens for the defendant.

(ii) The plaintiff has failed to establish that a policy or practice has a discriminatory effect under paragraph (c) of this section.

(iii) The defendant's policy or practice is reasonably necessary to comply with a third party requirement, such as a:

(A) Federal, state, or local law;

(B) Binding or controlling court, arbitral, administrative order or opinion; or

(C) Binding or controlling regulatory, administrative, or government guidance or requirement.

(e) Business of insurance laws. Nothing in this section is intended to invalidate, impair, or supersede any law enacted by any state for the purpose of regulating the business of insurance.

(f) Remedies in discriminatory effect cases. In cases where liability is based solely on a discriminatory effect theory, remedies should be concentrated on eliminating or reforming the discriminatory practice so as to eliminate disparities between persons in a particular protected class and other persons. In administrative proceedings under 42 U.S.C. 3612(g) based solely on discriminatory effect theory, HUD will seek only equitable remedies, provided that where pecuniary damage is proved, HUD will seek compensatory damages or restitution; and provided further that HUD may pursue civil money penalties in discriminatory effect cases only where the defendant has previously been adjudged, within the last five years, to have committed unlawful housing discrimination under the Fair Housing Act, other than under this section.

(g) Severability. The framework of the burdens and defenses provisions are considered to be severable. If any provision is stayed or determined to be invalid or their applicability to any person or circumstances invalid, the remaining provisions shall be construed as to be given the maximum effect permitted by law.

24 C.F.R. § 100.500 (effective October 26, 2020).

There can be no doubt that the 2020 Rule weakens, for housing discrimination victims and fair housing organizations, disparate impact liability under the Fair Housing Act. It does so by introducing new, onerous pleading requirements on plaintiffs,[FN1] and significantly altering the burden-shifting framework by easing the burden on defendants of justifying a policy with discriminatory effect while at the same time rendering it more difficult for plaintiffs to rebut that justification.[FN2] In addition, the 2020 Rule arms defendants with broad new defenses which appear to make it easier for offending defendants to dodge liability and more difficult for plaintiffs to succeed. In short, these changes constitute a massive overhaul of HUD's disparate impact standards, to the benefit of putative defendants and to the detriment of putative plaintiffs (and, by extension, fair housing organizations, such as MFHC).

Plaintiffs are fair housing organizations that provide an array of services to victims of housing and lending discrimination, including legal representation, education, and advocacy. (See Dkt. No. 12-1; Dkt. No. 12-2.) They filed this action on September 28, 2020, seeking to vacate the 2020 Rule under the APA. (Dkt. No. 1.) On October 6, 2020, Plaintiffs filed their motion for preliminary injunction and stay under 5 U.S.C. § 705. (Dkt. No. 11.) Defendants opposed Plaintiffs’ motion on October 14, 2020, arguing a lack of standing and ripeness as well as failure to satisfy the requirements for obtaining a preliminary injunction. Plaintiffs thereafter filed a reply brief, and the court held a hearing on October 16, 2020. (Dkt. Nos. 25, 27, 28.)

III. Subject Matter Jurisdiction

“Article III of the Constitution confines the judicial power of federal courts to deciding actual ‘Cases’ or ‘Controversies.’ ” Hollingsworth v. Perry, 570 U.S. 693, 704, 133 S.Ct. 2652, 186 L.Ed.2d 768 (2013). “Two of the ... manifestations [of this limitation] are the justiciability doctrines of standing and ripeness, which are interrelated; each is rooted in Article III.” Reddy v. Foster, 845 F.3d 493, 499 (1st Cir. 2017).

A. Standing

“[T]he standing inquiry [is] focused on whether the party invoking jurisdiction had the requisite stake in the outcome when the suit was filed.” Davis v. Fed. Election Comm'n, 554 U.S. 724, 734, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008). To show standing, “[a] plaintiff must demonstrate (1) an injury in fact which is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical,’ (2) that the injury is ‘fairly traceable to the challenged action,’ and (3) that it is ‘likely ... that the injury will be redressed by a favorable decision.’ ” Massachusetts v. United States Dep't of Health & Human Servs., 923 F.3d 209, 221–22 (1st Cir. 2019) (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)). Moreover, “[i]t is well-established that an organization can sue to obtain compensation for injuries it sustains,” so long as these same requirements are met. Sexual Minorities Uganda v. Lively, 960 F. Supp. 2d 304, 324 (D. Mass. 2013); see Havens Realty Corp. v. Coleman, 455 U.S. 363, 379-80, 102 S.Ct. 1114, 71 L.Ed.2d 214 (1982). Accordingly, organizational standing exists when the organization suffers (or likely will suffer) “an injury to its organizational activities.” Equal Means Equal v. Ferriero, ––– F.Supp.3d ––––, ––––, 2020 WL 4548248, at (D. Mass. Aug. 6, 2020).

The court concludes, at this preliminary stage of the litigation, that Plaintiff MFHC has demonstrated standing. See Massachusetts v. E.P.A., 549 U.S. 497, 518, 127 S.Ct. 1438, 167 L.Ed.2d 248 (2007) (only one plaintiff need establish standing). Contrary to the government's significantly overstated argument, MFHC has shown more than “a mere interest in a problem.” Sierra Club v. Morton, 405 U.S. 727, 739, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972). Rather, MFHC “has set forth predictions of injury, supported by evidence” which “would be caused by the federal regulations and would be redressable by an injunction.” Massachusetts, 923 F.3d. at 227; see also E. Bay Sanctuary Covenant v. Barr, 964 F.3d 832, 843–44 (9th Cir. 2020). Specifically, MFHC attests that if the 2020 Rule goes into effect, it will be forced to expend additional resources in preparing to bring disparate impact claims due to the heightened pleading and proof requirements, abandon potential disparate impact claims which are otherwise viable under the 2013 Rule, and modify its education and training programs. (See Dkt. No. 12-1 ¶¶ 24-28, 44-49.) As the First Circuit has explained, plaintiffs “need not wait for an actual injury to occur before filing suit” nor “demonstrate that it is literally certain that the harms they identify will come about.” Massachusetts, 923 F.3d. at 222, 224; see also Adams v. Watson, 10 F.3d 915, 921 (1st Cir. 1993) (“[I]t could hardly be thought that administrative action likely to cause harm cannot be challenged until it is too late.” (internal quotation marks omitted)). By demonstrating a “substantial probability” that concrete and particularized harm will occur to MFHC's core mission of combatting housing discrimination, MFHC has satisfied the standing requirement. Maine People's All. And Nat. Res. Def. Council v. Mallinckrodt, Inc., 471 F.3d 277, 284 (1st Cir. 2006).

B. Ripeness

The court also concludes that this APA challenge is ripe. The “ripeness doctrine seeks to prevent the adjudication of claims relating to ‘contingent future events that may not occur as anticipated, or indeed may not occur at all.’ ” Reddy, 845 F.3d at 500 (quoting Texas v. United States, 523 U.S. 296, 300, 118 S.Ct. 1257, 140 L.Ed.2d 406 (1998)); see also Roman Catholic Bishop of Springfield v. City of Springfield, 724 F.3d 78, 89 (1st Cir. 2013) (“The basic rationale of the ripeness inquiry is to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements.” (internal quotation marks omitted)). Moreover, as to APA challenges, “[w]here, as here, a petition involves purely legal claims in the context of a facial challenge to a final rule, a petition is ‘presumptively reviewable,’ ” i.e., ripe. Owner-Operator Indep. Drivers Ass'n, Inc. v. Fed. Motor Carrier Safety Admin., 656 F.3d 580, 586 (7th Cir. 2011) (quoting Sabre, Inc. v. Dep't of Transp., 429 F.3d 1113, 1119 (D.C. Cir. 2005)). Plaintiffs have brought such a facial challenge to a final rule based on purely legal claims. See Bucklew v. Precythe, ––– U.S. ––––, 139 S. Ct. 1112, 1127, 203 L.Ed.2d 521 (2019) (“A facial challenge is really just a claim that the law or policy at issue is [unlawful] in all its applications.”); Nat'l Ass'n of Home Builders v. U.S. Army Corps of Engineers, 417 F.3d 1272, 1281–84 (D.C. Cir. 2005) (“[C]laims that an agency's action is arbitrary and capricious or contrary to law present purely legal issues.”) (internal quotation marks omitted) Although Plaintiffs’ challenge to the 2020 Rule is somewhat abstract, that is in the nature of disparate impact theory. The government has made well-reasoned points on this issue but, at this preliminary stage, the court finds Plaintiffs’ challenge is sufficiently “fit” for judicial resolution and they face immediate hardship if the court were to withhold review. See Roman Catholic Bishop of Springfield, 724 F.3d at 89-93.

IV. Analysis

Plaintiffs seek a preliminary injunction barring implementation of HUD's 2020 Disparate Impact Rule and a stay of the effective date of this rule under the Administrative Procedure Act (“APA”), 5 U.S.C. § 705.[FN3] The parties agree that the same standard governs both forms of relief.

“A preliminary injunction is an extraordinary remedy never awarded as of right.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008). “In each case, courts ‘must balance the competing claims of injury and must consider the effect on each party of the granting or withholding of the requested relief.’ ” Id. (quoting Amoco Production Co. v. Village of Gambell, Ak., 480 U.S. 531, 542, 107 S.Ct. 1396, 94 L.Ed.2d 542 (1987)). “The purpose of such interim equitable relief is not to conclusively determine the rights of the parties ... but to balance the equities as the litigation moves forward.” Trump v. Int'l Refugee Assistance Project, ––– U.S. ––––, 137 S. Ct. 2080, 2087, 198 L.Ed.2d 643 (2017) (internal citation omitted). In order to obtain such preliminary injunctive relief, a plaintiff must demonstrate “(1) a substantial likelihood of success on the merits, (2) a significant risk of irreparable harm if the injunction is withheld, (3) a favorable balance of hardships, and (4) a fit (or lack of friction) between the injunction and the public interest.” NuVasive, Inc. v. Day, 954 F.3d 439, 443 (1st Cir. 2020) (internal quotation marks omitted). The First Circuit has explained that likelihood of success on the merits is “the most important of the four preliminary injunction factors.” Doe v. Trustees of Bos. Coll., 942 F.3d 527, 533 (1st Cir. 2019).

A. Likelihood of Success on the Merits

In support of their preliminary injunction motion, Plaintiffs rely on three arguments: (1) the 2020 Rule is “contrary to law”; (2) the changes to the 2013 Rule are “arbitrary and capricious”; and (3) the 2020 Rule's inclusion of the “outcome prediction defense,” to be codified at 24 C.F.R. § 100.500(d)(2)(i), violates the APA's “notice and comment” requirements. The court only addresses Plaintiffs’ second argument, which it finds is likely meritorious.

“The APA ‘sets forth the procedures by which federal agencies are accountable to the public and their actions subject to review by the courts.’ ” Dep't of Homeland Sec. v. Regents of the Univ. of California, ––– U.S. ––––, 140 S. Ct. 1891, 1905, 207 L.Ed.2d 353 (2020) (quoting Franklin v. Massachusetts, 505 U.S. 788, 796, 112 S.Ct. 2767, 120 L.Ed.2d 636 (1992)). “It requires agencies to engage in ‘reasoned decisionmaking,’ ... and directs that agency actions be ‘set aside’ if they are ‘arbitrary’ or ‘capricious,’ 5 U.S.C. § 706(2)(A).” Id. (internal citation omitted). This standard of review is “narrow” and “a court is not to substitute its judgment for that of the agency.” Id. (internal quotation marks omitted); see also F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 513, 129 S.Ct. 1800, 173 L.Ed.2d 738 (2009) (“Under what we have called this ‘narrow’ standard of review, we insist that an agency ‘examine the relevant data and articulate a satisfactory explanation for its action.’ ” (quoting Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983))).

As explained above, the 2020 Rule constitutes a significant overhaul to HUD's interpretation of disparate impact standards. HUD's explanation for these changes generally boil down to two justifications: (1) they bring these standards into alignment with the Supreme Court's decision in Inclusive Communities, and (2) they provide greater clarity to the public. See generally 85 Fed Reg. 60288-01.

As to the first justification, the parties vigorously dispute whether the changes “merely incorporate” the standards set forth by the Supreme Court in Inclusive Communities and other precedent, as Defendants argue. (Dkt. No. 24 at 16; see also id. at 22-24.) The court believes both sides have exaggerated their respective arguments on this point. For example, Plaintiffs argue there is no judicial support for the 2020 Rule's requirement, to be codified in 24 C.F.R. § 100.500(b)(1), that a plaintiff must plead, at the outset, facts showing “[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.” But, as Defendants point out, the “arbitrary, artificial, and unnecessary” language comes directly from Inclusive Communities, 576 U.S. at 540, 543, 544, 135 S.Ct. 2507. Moreover, Plaintiffs completely ignore, in their briefing, the Eighth Circuit's decision in Ellis v. City of Minneapolis, 860 F.3d 1106, 1112 (8th Cir. 2017), which interpreted Inclusive Communities to require that plaintiffs allege in the complaint that the challenged policy is “arbitrary and unnecessary.”

On the other hand, the additional language in 24 C.F.R. § 100.500(b)(1)—“such as a practical business, profit, policy consideration”—is not, as far as the court is aware, found in any judicial decision. The same is true as to other important provisions in the 2020 Rule, including the new “outcome prediction” defense; the requirement at the third step of the burden-shifting framework that the plaintiff prove “a less discriminatory policy or practice exists that would serve the defendant's identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant”; and the conflating of a plaintiff's prima facie burden and pleading burden. 2020 Rule, 24 C.F.R. § 100.500(c)(3) (emphasis added), (d)(1), and (d)(2)(iii). These significant alterations, which run the risk of effectively neutering disparate impact liability under the Fair Housing Act, appear inadequately justified.

Similarly, HUD's second explanation for the changes—to provide greater clarity—appear arbitrary and capricious. As Plaintiffs argue, the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity—“it raises far more questions than it answers.” (Dkt. No. 12 at 12.)

Accordingly, at this very preliminary stage, the court finds Plaintiffs have shown a substantial likelihood of success on the merits as to their claim that the 2020 Rule is arbitrary and capricious under the APA.

B. Irreparable Harm

As explained, the 2020 Rule's massive changes pose a real and substantial threat of imminent harm to MFHC's mission by raising the burdens, costs, and effectiveness of disparate impact liability. Moreover, because the APA does not provide for monetary damages, these harms are not recoverable if the 2020 Rule is allowed to go into effect but later vacated. See E. Bay Sanctuary Covenant, 964 F.3d at 854; D.C. v. U.S. Dep't of Agric., 444 F. Supp. 3d 1, 34–38 (D.D.C. 2020); City & Cty. of San Francisco v. U.S. Citizenship & Immigration Servs., 408 F. Supp. 3d 1057, 1121 (N.D. Cal. 2019); New Hampshire Hosp. Ass'n v. Burwell, 2016 WL 1048023, at *16–18 (D.N.H. Mar. 11, 2016). The court therefore finds Plaintiffs have demonstrated a significant risk of irreparable harm if the injunction is withheld.

C. Balance of Harms and Public Interest

The final two preliminary injunction factors “merge when the Government is the opposing party.” Nken v. Holder, 556 U.S. 418, 435, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009). Defendants have not identified any particularized risks of harm the government or the public would face should the injunction issue, especially given the existence of the 2013 Rule, which has been and can continue to be workable, for both sides, in the realm of disparate impact litigation. In addition, the court finds it is in the public interest to require agencies to adequately justify significant changes to its regulations, particularly changes that weaken anti-discrimination provisions. As the Supreme Court explained in Inclusive Communities, disparate impact liability “is consistent with the FHA's central purpose” of “eradicate[ing] discriminatory practices within a sector of our Nation's economy.” Inclusive Communities, 576 U.S. at 539, 135 S.Ct. 2507 (2015). Moreover, “disparate-impact liability under the FHA also plays a role in uncovering discriminatory intent: It permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.” Id. at 540, 135 S.Ct. 2507. The court finds the balance of harms and public interest supports a preliminary injunction pending a complete review of Plaintiffs’ APA challenge.

V. Conclusion

For these reasons, the court ALLOWS Plaintiffs’ Motion for a Preliminary Injunction Under 5 U.S.C. § 705 to Postpone the Effective Date of HUD's Unlawful New Rule (Dkt. No. 11).

(1)The court therefore, pursuant to 5 U.S.C. § 705, STAYS the implementation of HUD's Rule entitled HUD's Implementation of the Fair Housing Act's Disparate Treatment Standard, 85 Fed. Reg. 60288 (Sept. 24, 2020) (to be codified at 24 C.F.R. § 100.500), in its entirety, pending entry of a final judgment on Plaintiffs’ APA claims. The effective date of the Final Rule is hereby POSTPONED pending conclusion of these review proceedings.

(2) In addition, pursuant to Rule 65(a) of the Federal Rules of Civil Procedure, the court PRELIMINARILY ENJOINS Defendants and their officers, agents, servants, employees, and attorneys, and any person in active concert or participation with them, from implementing or enforcing the Rule entitled HUD's Implementation of the Fair Housing Act's Disparate Treatment Standard, 85 Fed. Reg. 60288 (Sept. 24, 2020), in any manner or in any respect, and shall preserve the status quo pursuant to the regulations in effect as of the date of this Order, until further order of the court.

(3) No bond shall be required pursuant to Federal Rule of Civil Procedure 65(c).

It is So Ordered.

Footnotes

[FN1] See 2020 Rule, 24 C.F.R. § 100.500(b) (requiring at “the pleadings stage,” among other things, that plaintiffs “sufficiently plead facts to support” ... “[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.”)

[FN2] For example, the 2013 Rule requires defendants, after plaintiffs meet their initial burden of showing that the practice “caused or predictably will cause a discriminatory effect,” to prove “that the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests,” before the burden shifts back to plaintiffs. 2013 Rule, 24 C.F.R. § 100.500(c)(2) (emphasis added). The 2020 Rule, however, permits defendants to “rebut a plaintiff's allegation under (b)(1) ... that the challenged policy or practice is arbitrary, artificial, and unnecessary by producing evidence showing that the challenged policy or practice” merely “advances a valid interest.” 2020 Rule, 24 C.F.R. § 100.500(c)(2) (emphasis added). In addition, the 2013 Rule, at the third step of the burden-shifting framework, permits a plaintiff to prevail by “proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect,” 2013 Rule, 24 C.F.R. § 100.500(c)(2), whereas the 2020 Rule requires the plaintiff to prove “that a less discriminatory policy or practice exists that would serve the defendant's identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant,” 2020 Rule 24 C.F.R. § 100.500(c)(2) (emphasis added).

[FN3] In relevant part, 5 U.S.C. § 705 provides: “On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on application for certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.” 5 U.S.C. § 705.