Two insurance industry trade groups, the American Insurance Association and the National Association of Mutual Insurance Companies, recently filed suit against the U.S. Department of Housing and Urban Development (HUD) challenging HUD’s new rule which codifies disparate impact liability (i.e., no-fault discrimination) under the Fair Housing Act (FHA).1
The plaintiffs allege that liability for discrimination in providing homeowner’s insurance under the FHA should be limited to intentional discrimination. They argue that HUD’s rule would require insurers to provide and price insurance in a manner that is inconsistent with actuarial practice and applicable state insurance law. They also allege HUD’s disparate impact rule is inconsistent with the McCarran-Ferguson Act.
As discussed in our previous OnPoint,2 HUD’s rule makes facially neutral lending policies susceptible to discrimination liability claims under the FHA even when there is no evidence of discriminatory intent in the application of such policies.
Disparate Impact, an Ongoing Issue
Liability for disparate impact claims under the FHA is an issue that has been in the spotlight recently, but has yet to be resolved by the U.S. Supreme Court (Supreme Court). The Administration seems intent on avoiding Supreme Court review of the policies that its various agencies have espoused in this area and have asserted claims under.3 That is consistent with the way that standards have been created in this area in the past – by using the settlement process and avoiding judicial determinations.
In that regard, the city of Saint Paul, Minnesota, challenged the use of disparate impact liability used by a group of landlords who were contesting the city’s housing code enforcement policies. The City’s certiorari petition was granted by the Supreme Court, but Saint Paul later withdrew its appeal in February of 2012, due to a settlement engineered by the Department of Justice.
In June 2013, the Supreme Court agreed to hear another case challenging the use of disparate impact as a basis of liability brought by the town of Mount Holly, New Jersey. A news report indicates that the parties in that case have been engaged in settlement talks.
Issues for Lenders
There are significant disparate impact issues also being presented by lenders’ application of the Consumer Financial Protection Bureau’s (CFPB’s) ability-to-repay (ATR) and qualified mortgage (QM) rules that become effective January 10, 2014.4 Disparate impact issues may be raised by, among other things, a decision by a lender to limit residential mortgage lending to loans that meet the requirements to be treated as qualified mortgages.5
Lenders will want to consider potential disparate impact issues and potential mitigating actions as they evaluate how to structure their mortgage operations under the ATR Rule. These issues are addressed in A Strategic Guide to the ATR/QM Rules (PDF) that Dechert published together with the American Bankers Association and Dechert’s ATR/QM Legal Stress Test (PDF).