Two industry trade associations whose members sell homeowners insurance have been granted leave to file an amended complaint in their lawsuit challenging the Fair Housing Act (FHA) disparate impact rule (Rule) adopted by the U.S. Department of Housing and Urban Development. In their amended complaint, the trade associations claim that the Rule is inconsistent with the U.S. Supreme Court's decision last June in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc.

The trade associations originally filed their complaint in American Insurance Association and National Association of Mutual Insurance Companies v. U.S. Department of Housing and Urban Development in June 2013. The original complaint alleged that, in promulgating the Rule, HUD exceeded its authority under the Administrative Procedure Act (APA) because the FHA prohibited only disparate treatment. Agreeing with the trade associations, the District Court issued a decision in November 2014 vacating the Rule. HUD appealed the decision and the D.C. Circuit, at HUD's request, agreed to hold the case in abeyance pending the Supreme Court's decision in Inclusive Communities. The D.C. Circuit subsequently granted the trade associations' motion requesting that the District Court decision be vacated and the case be remanded for consideration in light of Inclusive Communities.

In Inclusive Communities, the Supreme Court held that disparate impact claims are cognizable under the FHA but discussed at length limitations on disparate impact liability that "are necessary to protect potential defendants against abusive disparate impact claims." In their amended complaint, the trade associations allege that these limitations provide four grounds for vacating the Rule as unlawful under Inclusive Communities to the extent it applies to ratemaking and underwriting decisions of insurers:

  • Citing the Supreme Court's admonition that, without adequate safeguards, disparate impact liability "might cause race to be used and considered in a pervasive way," the associations allege that the Rule's imposition of a disparate impact requirement on the ratemaking and underwriting practices of insurers is unlawful "because it necessarily injects race into ratemaking and underwriting decisions." In contrast, the associations assert that "[i]nsurers decide what to charge and who to insure based on statistics. The process is race-blind."

  • In Inclusive Communities, the Supreme Court used federal law that "substantially limits" a defendant's discretion as an example of a circumstance that would prevent a plaintiff from satisfying the "robust causality requirement" because those legal obligations break the causal chain between a policy and its effect. The associations allege that the Rule is unlawful as applied to insurers' rating and underwriting practices because state insurance regulatory laws "substantially limit" insurers' discretion. According to the associations, "[s]tate insurance codes substantially limit insurers' discretion to make underwriting and ratemaking decisions, dictating what criteria insurers may use to classify risk." They also assert that this argument is buttressed by the McCarran-Ferguson Act, which generally confines the regulation of the insurance business to the states.

  • The Supreme Court stated in Inclusive Communities that a "robust causality requirement" ensures that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact and thereby protects defendants "from being held liable for racial disparities they did not create." The associations argue that the Rule is unlawful because "it allows disparate-impact claims to proceed based on statistics alone" and does not "identify a specific practice causing the disparity."

  • In Inclusive Communities, the Supreme Court observed that unless the standards "for proceeding with disparate-impact suits [include] at least the safeguards" discussed by the Court, "then disparate-impact liability might displace valid governmental and private priorities" rather than only removing "artificial, arbitrary, and unnecessary barriers." It also observed that Inclusive Communities involved "a novel theory of liability that may, on remand, be seen simply as an attempt to second-guess which of two reasonable approaches a housing authority should follow in the sound exercise of its discretion in allocating tax credits for low-income housing." According to the associations, the Rule violates the FHA because "it allows plaintiffs to second-guess defendants' policies, even if those policies are not artificial, arbitrary, and unnecessary barriers." The associations note that HUD expressly rejected a requirement that a less discriminatory practice identified by the plaintiff be "equally effective" or "at least as effective" as the challenged practice in advancing the defendant's proffered interest.

HUD opposed the trade associations' motion for leave to amend their complaint in light of Inclusive Communities. In addition to arguing that the associations should be bound by their "strategic decision to pursue a single claim to judgment" (i.e., the theory that disparate impact claims are not cognizable under the FHA), HUD argued that the limitations on disparate impact liability discussed by the Supreme Court "have long been a part of the standard" and "nothing in the Supreme Court's opinion casts any doubt on" the Rule's validity. HUD also asserted that the Supreme Court's extensive discussion of safeguards against abusive disparate impact claims "was directed toward lower courts as they evaluate particular disparate impact claims pending before them" and therefore "could be relevant only in potential future cases involving specific applications of the FHA's prohibition on disparate impact discrimination and of the [Rule]." (emphasis included). For that reason, HUD argued that Inclusive Communities "does not provide a basis for a separate facial, pre-enforcement cause of action."

Notwithstanding these HUD arguments, the district court granted the associations' contested motion to amend. HUD must now decide whether to move to dismiss the amended complaint, or simply file an answer.

Ballard Spahr's Consumer Financial Services and Mortgage Banking Groups have created a Fair Lending Task Force that brings together regulatory attorneys who deal with fair lending law compliance (including preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims. The firm's Housing Group is nationally recognized for its leadership in the development and financing of housing, community development, energy, public/private partnerships, and transportation projects. Members of the Housing Group regularly advise clients on fair housing-related matters and defend them in fair housing investigations and lawsuits.


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