The Department of Housing and Urban Development (HUD) recently issued a new rule to formalize a national standard for determining whether a housing practice violates the Fair Housing Act (FHA) as the result of a discriminatory effect, which will likely have a wide impact on banks, lenders and others operating in the housing market. The so-called Discriminatory Effects Rule, which goes into effect on March 18, 2013, establishes a three-part burden-shifting test to demonstrate liability for discriminatory effects under the FHA. Defendants will now be required to demonstrate that any practice with a discriminatory effect is "necessary" to achieve a "substantial, legitimate nondiscriminatory interest" and that there are no "less discriminatory" alternatives. The new rule applies to a broad range of banking and lending practices in the housing market, including the approval and denial of loan applications and the servicing of loans generally. The broad reach and more demanding standards imposed by the new rule will likely encourage additional lawsuits, including class actions, against lenders, developers and others operating in the housing market, and defending against such lawsuits will likely be more costly and time-consuming.
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