I'm assuming your prospective tenant is on section 8 or a similar HUD program.
My understanding is section 8 agencies have very specific regs about which properties they are willing to certify to accept section 8.
If you want to find out more, you can look on the HUD website for the federal regulations or look on the website of the housing authority for more specific policies. Or you can try calling them and ask them to point you towards their written policy on this.
I would suspect that their denial was valid, but you should have the right to appeal the decision if you wish or if you find a policy was broken.
By the time you appeal, your tenant will probably have found other housing, though. You are probably better off just finding a new tenant.
___
I am not a lawyer, but I agree with the posters above. I don't think there are any discrimination or legal issues here - in what you have written so far.

