We have been following the lawsuit in federal district court in D.C. in which two insurance industry trade associations have challenged the HUD disparate impact rule. The complaint in the D.C. action, which was commenced in June 2013, alleges that the text of the FHA does not proscribe facially-neutral practices that have discriminatory effects. It also alleges that the HUD disparate impact rule is invalid as applied to insurance companies that issue homeowners insurance because it conflicts with the federal McCarran-Ferguson Act.
McCarran-Ferguson generally reserves the regulation of the insurance business to the states and provides that a federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law involved “specifically relates to the business of insurance.” Under McCarran-Ferguson, a federal law is essentially “reverse-preempted” if it “directly conflict[s] with state regulation” of the business of insurance or when “application of the federal law would frustrate any declared state policy or interfere with a State’s administrative regime.” Humana Inc. v. Forsyth, 525 U.S. 299 (1999). As we have observed previously, if the district court in the D.C. action were to grant summary judgment to the plaintiff solely on the basis that the HUD disparate impact rule is invalid under McCarran-Ferguson as applied to members of the plaintiff trade associations, its ruling would be inconsequential to lenders since it would not address whether disparate impact claims are cognizable under the FHA.
We recently learned about a second insurance industry challenge to the HUD disparate impact rule, which is pending in federal district court in Illinois. This challenge has been brought by the Property Casualty Insurers Association of America, whose members sell homeowners insurance. However, unlike the case pending in D.C., the complaint in the Illinois lawsuit is confined principally to McCarran-Ferguson and Administrative Procedure Act (APA) implications of HUD’s inclusion of homeowners insurance in its disparate impact rule. Among other things, the Illinois lawsuit alleges that the HUD disparate impact rule violates McCarran-Ferguson as applied to the provision and pricing of homeowners insurance. It also asserts that the disparate impact rule was promulgated in violation of the APA in that HUD failed to address whether its rule would invalidate, impair, or supersede state laws regulating the business of insurance.
HUD has filed a motion to dismiss and/or for summary judgment. In its motion, HUD asserts that the plaintiff trade association lacks standing to bring the lawsuit. HUD further argues that its disparate impact rule does not contravene McCarran-Ferguson and was promulgated in accordance with the APA. The plaintiff has opposed HUD’s dispositive motion and filed its own motion for summary judgment. HUD, which has until June 20, 2014 to file a reply brief, recently objected to the filing of a proposed amicus brief by various financial services trade associations in support of the plaintiff’s summary judgment motion on the ground that the issue of whether disparate impact liability is contrary to the plain language of the FHA is not before the court.
Assuming the district court in Illinois does not dismiss the case for lack of standing, the manner in which the plaintiff has framed its complaint means that the Illinois case is likely to yield a decision with respect to the McCarran-Ferguson-based claims. Depending upon its timing, a decision by the district court in Illinois invalidating the HUD disparate impact rule on McCarran-Ferguson grounds could prompt the district court in D.C. to base its ruling on McCarran-Ferguson rather than addressing the broader issue of whether disparate impact claims are cognizable under the FHA.
Finally, although the Illinois case is focused almost exclusively on McCarran-Ferguson considerations, the claims alleged in Counts VI and VII of the complaint could have broader implications if the court addresses them. This is because those claims allege that, in the absence of a statutory direction to the contrary, the applicable disparate impact standards and burden-shifting framework are those articulated by the U.S. Supreme Court in Wards Cove Packaging Co. v. Antonio, 490 U.S. 642 (1989), rather than the more challenger-friendly standards and burden-shifting framework reflected in the HUD disparate impact rule.