Need to Know!

HUD Discriminatory Effects Standard & Tenant Screening

July 2, 2014 9:19 pm

The Department of Housing and Urban Development (HUD) is charged with enforcement of Title VIII of the Civil Rights Act of 1968,
as amended by the Fair Housing Act (Act) – which prohibits discrimination based on race, color, religion, sex, disability, familial status or national origin.  HUD has long held that the Act prohibits practices that have an unjustified discriminatory effect (commonly referred to as a disparate impact) on protected individuals, whether or not there is an intent to discriminate. 

According to HUD, the eleven federal courts of appeal that have ruled on this issue ruled that “…liability under the Act may be established through proof of discriminatory effects.

In its final rule, published in February, 2013, HUD formulated a three-part burden shifting test to determine whether a facially neutral business practice results in an unjustified discriminatory effect and represents a violation of Title VIII.  The stated goal is to provide a level of clarity and consistency for all parties to the housing transactions. 

HUD’s Three-part Burden Shifting Test

  1. The… “plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in a discriminatory effect (or disparate impact) on the basis of a protected characteristic.”  If successful;
  2. “…the burden of proof <then> shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests” – that the practice rises to the level of a “business necessity”.  Note that the rule clarifies that a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. If the respondent (landlord in this case) is successful;
  3. The burden shifts back to the plaintiff to prove that those same (substantial, legitimate and nondiscriminatory) interests can be satisfied by a less discriminatory practice.

Unfortunately, HUD failed to offer guidance as to what constitutes a legitimate business interest and what practices it deems necessary to achieve those interests – noting instead that it must be determined on a case-by-case basis.  In other words, there exists no safe-harbor.

So we as landlords are left to our own devices to determine:

  1. What constitutes substantial, legitimate, non-discriminatory business interests. Few would argue, I suppose, with maximizing financial performance, minimizing the risk to persons & property and staying out of court;
  2. What specific practices are necessary in furtherance of these interests; and
  3. What evidence supports the connection.

Criminal Records and the Discriminatory Effects Standard

The discriminatory effects standard – or the disparate impact legal theory – are most often discussed in connection with use of criminal records for employment screening purposes.  That said, there is a considerable legal precedent supporting its application in a tenant screening environment.  HUD’s final rule leaves no doubt.

It is well established that use of criminal records has a disparate impact on certain protected groups – based on race and national origin.  So if a claim is brought by a protected individual, the burden will almost certainly fall on the landlord to prove business necessity.  The question becomes, what evidence can we site to support the business necessity argument.

A good place to start is to ask ourselves what specific offenses are pertinent to our business interest – what behaviors represent a threat to persons or property or might impact the quiet enjoyment of the property by other residents – offering rates of recidivism as evidence of the validity of those concerns.  The second step is to apply a time limit of some kind – recognizing that rates of recidivism decline over time.

The bottom line is this.  Blanket policies that deny tenancy for any and all criminal convictions – regardless of when they occur – are unlikely to survive the three part burden shifting test.  Similarly, denying tenancy based on records of arrest alone will come up short.  It is well established that certain groups are more often arrested (and not convicted) than others.  Finally, denying tenancy based on convictions regardless of when they occurred is high risk behavior – since rates of recidivism drop significantly as years pass beyond the date of final disposition.

Credit and the Discriminatory Effects Standard

The risk of a disparate impact claim based on use of credit for tenant screening purposes is less since few would argue the business necessity of assessing the ability and likelihood that an applicant will pay their rent on time.  Further, relatively few landlords deny for credit alone – except perhaps if there is an open bankruptcy or rental collections.  It is more common to treat derogatory credit with an increased deposit.

Denying tenancy based on a credit score alone might increase the risk of a claim – since the best known models are not designed to assess rental risk.  Certainly there are those (applicants) with low scores who have consistently fulfilled the terms of their rental
agreement. 

The concern here is that:

  1. A plaintiff (who is protected) meets their burden – establishes that use of credit results in a disparate impact on their protected group;
  2. The landlord meets their burden – establishes that the practice meets the business necessity test; and then
  3. The plaintiff then argues that a less discriminatory practice exists to accomplish the same thing – rental references

What to Do?

The bottom line is that HUD offers little guidance as to what constitutes business necessity and what practices satisfy the three step burden shifting test.  It is up to us, then, to strike a balance between carefully underwriting prospective residents and
mitigating the risk of a Title VIII claim.  Do so by carefully crafting your rental criteria – consider incorporating:

  1. A list of specific criminal offenses that, given rates of recidivism represent a risk to persons or property, as well as a liability exposure.
  2. A time limit for consideration of criminal offenses – based on the date of final disposition (release from prison or parole).  Apply a 7 year rule – a limit imposed on consumer reporting agencies by a number of states.  The risk that someone will reoffend after seven years (from the date of final disposition) tends to be quite low.
  3. Avoid use of credit scores alone.  Conduct rental references as part of your screening process – which when combined with an income verification – is quite possibly the best predictor an applicant will fulfill the terms of the rental agreement.

There is no question that things are more complicated than before.  It is imperative, then, to stay abreast of the evolving legal and regulatory environment.  By taking a few simple steps – such as those outlined above – it remains possible to adequately vet prospective residents AND mitigate the risk of a discriminatory effects (Title VIII) claim.  For more information about this and related topics, visit Moco Incorporated or MyScreeningReport.com

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