Last week, we reported that a lawsuit was filed on June 26 in federal district court in Washington, D.C. challenging HUD’s final rule formalizing its use of disparate impact liability under the Fair Housing Act (FHA). The rule, adopted in February 2013, provides that if a practice has a “discriminatory effect” on a protected class under the FHA, HUD or a private plaintiff can establish liability under the FHA even if there is no discriminatory intent. The CFPB, consistent with the bulletin it issued in April 2012, has been using a disparate impact test in fair lending examinations and investigations under the FHA and the Equal Credit Opportunity Act (ECOA) and Regulation B. Since the FHA’s relevant language is very similar to the ECOA’s relevant language, the outcome of this lawsuit could impact the CFPB’s authority to continue to use a disparate impact theory.
The plaintiffs in the new lawsuit are two insurance industry trade groups, the American Insurance Association and the National Association of Mutual Insurance Companies, whose members sell homeowners insurance. The complaint alleges that the HUD rule is contrary to law for two reasons. First, the complaint alleges that, based on the FHA’s plain language, the FHA only prohibits intentional discrimination. Whether disparate impact claims are available under the FHA is the same issue that the U.S. Supreme Court agreed to hear when it granted certiorari in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. on June 17.
Second, the complaint alleges that the HUD rule is invalid as applied to homeowners insurance companies because it conflicts with the federal McCarran-Ferguson Act. That law generally reserves to the states the regulation of the insurance business and provides that federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law specifically relates to insurance.
The plaintiffs claim that the HUD rule would impair state laws that prohibit discrimination between risks of the same class or essentially the same hazard in violation of sound actuarial practice. They also claim that it would impair state laws that prohibit consideration of race in the underwriting or rating process because, to avoid potential disparate impact liability, insurers would need to collect and consider data about characteristics such as race and national origin. Accordingly, plaintiffs allege the HUD rule violates McCarran-Ferguson because the FHA does not specifically indicate that Congress intended to override state insurance regulation.
The complaint asks the court to declare that, because HUD exceeded its authority to make rules that “carry out” the FHA, it violated the Administrative Procedures Act. It also asks the court to declare that the HUD rule does not accord with the FHA, grant an order and judgment vacating the HUD rule, and enjoin HUD from enforcing the rule.
It is possible that HUD may ask the district court to stay any further proceedings in the case pending a decision by the Supreme Court in Mt. Holly. However, as we reported, counsel for the Township of Mount Holly has sent a letter to the Supreme Court asking for an extension in the merits briefing schedule because of ongoing settlement discussions. Should Mt. Holly settle, the D.C. case could prove to be the next vehicle for testing the validity of disparate impact liability under the FHA.
However, it is possible that the district court might invalidate the HUD rule as applied to the plaintiffs because of McCarran-Ferguson without ever reaching the broader issue of whether the rule is contrary to the FHA’s language. Such a ruling would be of no consequence to lenders since it would not result in a judicial determination of whether a disparate impact theory applies under the FHA. One possible solution would be for another trade association whose members include mortgage lenders affected by the HUD rule to intervene in the pending lawsuit. That would increase the likelihood of the district court reaching the broader issue.
