On October 26, the U.S. Treasury Department published a report outlining a number of recommendations for ways to manage systemic risk primarily within the asset management and insurance industry. A section of the report, however, also discusses HUD’s potential application of the disparate impact rule to the insurance industry—specifically related to homeowner’s insurance. The report, “A Financial System That Creates Economic Opportunities—Asset Management and Insurance,” is the third in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772 (EO), which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert on the EO here and InfoBytes coverage on the first two reports here.)
HUD is authorized to adjudicate housing discrimination claims and issue rules relating to the Fair Housing Act. According to the report, Treasury recommends that HUD reconsider the use of the disparate impact theory to the insurance industry. The report notes a number of problems and challenges that would arise from applying disparate impact to the insurance industry. In particular, the report identifies potential challenges because (i) “state insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk” and at least one state expressly prohibits the collection of this data; (ii) the rule could impose unnecessary burdens on insurers and lead to actions that are not actuarially sound in an effort to avoid underwriting practices that may result in disparate outcomes; and (iii) it may be inconsistent with the McCarran-Ferguson Act and other existing state laws.
The report also recommends, among other things, that Congress clarify the “business of insurance” exception that generally excludes these services from the CFPB’s jurisdiction. The report recommends clarification to this exception to eliminate uncertainty about the CFPB’s jurisdiction and the potential overlap between the Bureau and state insurance regulators. A fact sheet accompanying the report further highlights Treasury’s recommendations to evaluate systemic risk, streamline regulations, rationalize international engagement, and promote economic growth.