The U.S Department of Housing is already receiving criticism from lawmakers after rolling out a three-part test that will be used to determine whether a lender’s practices are discriminatory under the Fair Housing Act.

The decision is the direct result of an ongoing legal dispute about whether a discriminatory lending practice can be maintained in court by simply showing a lender’s act had a discriminatory effect on a borrower, or whether the plaintiff claiming discrimination has to show a financial firm actually ‘intended’ to discriminate against a party.

HUD released a final rule on the issue Friday, saying it has always maintained that an act with an "unjustified discriminatory effect" is the standard. But to further plant this interpretation, the agency developed a three-part legal test to help borrowers and lenders determine whether a particular lending practice is discriminatory.

"Under this test, the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic," HUD said.

If the plaintiff proves a case exists on the surface, the burden will then shift back to the defendant, or lender, to show that the practice is a necessary measure to "achieve one or more substantial, legitimate, nondiscriminatory interests."

Then, if the defendant satisfies this burden, the charging party can still try to "establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect," HUD wrote in its rule.

The goal of the rule is to establish a clear standard for housing discrimination claims.

"Through the issuance of this rule, HUD is reaffirming its commitment to enforcing the Fair Housing Act in a consistent and uniform manner," said HUD Secretary Shaun Donovan. "This will ensure the continued strength of one of the most important tools for exposing and ending housing discrimination."

But U.S. Rep. Scott Garrett, R-NJ, immediately criticized the HUD rule and test on Friday, suggesting it allows a case to exist on a disparate impact basis alone.

Garrett wrote, "If statistics indicate, for instance, that a disparity exists between the number of loans made in a specific area to a certain preferred minority class versus the number of preferred minorities that live in that area – a lender could be charged with discriminatory practices – even if there was no intent."

The congressman believes the three-part test in its current form could "weaken credit availability."

"The proposed HUD rule would create a presumption of discriminatory disparate impact that could undermine the basic purposes of risk-based pricing which ensures persons with different risk characteristics have to make payments commensurate to the risk they pose," he wrote.

Click here to read the full rule.

kpanchuk@housingwire.com