It is looking like our prediction that Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. would settle before the U.S. Supreme Court heard oral argument was accurate. Late yesterday, the Wall Street Journal reported that the parties have reached a tentative settlement.
A settlement would mean that the Supreme Court has lost its second opportunity to decide whether plaintiffs suing under the Fair Housing Act can bring disparate impact claims. The justices were poised to decide the same question last year in Magner v. Gallagher, but the case disappeared from the Court’s docket just a few weeks before its scheduled oral argument in February 2012, when the City of Saint Paul agreed to the dismissal of its appeal.
A Supreme Court ruling that disparate impact claims are not available under the FHA because of a lack of textual support would have carried serious implications for disparate impact claims under the Equal Credit Opportunity Act (ECOA). Like the Fair Housing Act, the ECOA does not explicitly permit disparate impact claims, but there is a long-standing administrative interpretation in Regulation B (which implements the ECOA) that asserts that disparate impact claims can be brought under the ECOA. 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 ECOA.
A settlement in Mount Holly increases the potential significance of the lawsuit filed this past June in federal district court in Washington, D.C. challenging HUD’s final rule adopted in February 2013 that formalized HUD’s use of disparate impact liability under the FHA. The plaintiffs in that 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.
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. The plaintiffs allege the HUD rule violates McCarran-Ferguson because the FHA does not specifically indicate that Congress intended to override state insurance regulation.
Upon HUD’s motion which was not opposed by the trade groups, the D.C. lawsuit was stayed pending a Supreme Court decision in Mount Holly. Assuming a settlement is approved in Mount Holly, we expect the trade groups to ask the court to lift the stay and allow their lawsuit to proceed.
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 disparate impact claims are permissible 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.
