Because of their potential impact on the CFPB’s conclusion that the ECOA and Regulation B encompass disparate impact claims, we have been following two insurance industry lawsuits involving a challenge to HUD’s Federal Housing Act (FHA) disparate impact rule, with one lawsuit filed in federal district court in D.C. and the other filed in an Illinois federal district court.

Last week, the Illinois federal court ruled on the summary judgment motion filed by the plaintiff Property Casualty Insurers Association of America, whose members sell homeowners insurance, and defendant HUD’s motion to dismiss or for summary judgment.  The plaintiff had alleged that the HUD rule violates McCarran-Ferguson as applied to the provision and pricing of homeowners insurance.  McCarran-Ferguson generally reserves the regulation of the insurance business to the states and provides that a federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law involved “specifically relates to the business of insurance.”  Under McCarran-Ferguson, a federal law is essentially “reverse-preempted” if it “directly  conflict[s] with state regulation” of the business of insurance or when “application of the federal law would frustrate any declared state policy or interfere with a State’s administrative regime.”  Humana Inc. v. Forsyth, 525 U.S. 299 (1999).  The plaintiff also claimed that (1) the disparate impact rule was promulgated in violation of the Administrative Procedure Act (APA) in that HUD failed to give adequate consideration to the  insurance industry’s comments that application of the rule would violate McCarran-Ferguson, and (2) the rule’s burden-shifting framework is contrary to law.  

With regard to the plaintiff’s McCarran-Ferguson preemption claim, the district court dismissed the claim for lack of subject matter jurisdiction because it found that the claim was not ripe.  According to the court, the claim was “best left for a concrete dispute challenging a particular insurance practice.”  With regard to the plaintiff’s APA claim, the court held that HUD acted arbitrarily and capriciously in failing to (a) provide a “reasoned explanation” for preferring a case-by-case approach to determining McCarran-Ferguson issues, (b) give adequate consideration to industry comments regarding the effect of the filed-rate doctrine, which precludes courts from changing rates filed with regulatory agencies, and (c) address industry’s concerns about the inappropriateness of applying disparate impact liability to insurers based on the fundamental nature of insurance.  In referring to the fundamental nature of insurance, the court observed that, “HUD made no effort to evaluate the substance of the insurance industry’s concerns, disregarding them merely because insurers would have an opportunity to raise their arguments as part of the burden-shifting framework.”  Accordingly, the court remanded the case to HUD “for further explanation.” 

Despite the case’s McCarran-Ferguson focus, the court’s ruling on the plaintiff’s challenge to the rule’s burden-shifting framework could have implications that extend beyond the insurance industry.  The plaintiff had argued that HUD’s more challenger-friendly framework was contrary to  the burden-shifting framework for disparate impact claims articulated by the U.S. Supreme Court in Wards Cove Packaging Co. v. Antonio, 490 U.S. 642 (1989).  In particular, the plaintiff noted that under Wards Cove, a challenger would have to attack a specific practice, rather than the decision making process as a whole.  A challenger would also have to show that the challenged practice resulted in a significant disparate impact, rather than just some disparate impact.  A challenger would have to carry the burden of proof at all times, rather than having the burden of proof shift on whether there is are legitimate business reasons for the practice.  A party whose practice was being challenged would not have to show that its legitimate business interest was “essential” or “indispensible” but must prove its business interest was “necessary” under HUD’s framework.  And a challenger would have to show that any alternative was as “equally effective” as the challenged practice, rather than merely just articulating an alternative practice.  Nonetheless, according to the court, HUD’s framework was entitled to Chevron deference and reflected “HUD’s reasonable accommodation of the competing interests at stake.” 

The court noted that among the recent decisions that have applied the same approach adopted by HUD is the Fifth Circuit’s decision in Inclusive Communities Project v. Texas Dep’t of Housing and Community Affairs.  The petition for certiorari filed in that case in May 2014 by the Texas Department of Housing and Community Affairs is slated for consideration by the Supreme Court at its September 29 conference.  The case presents the Supreme Court with its third opportunity since 2012 to decide whether disparate impact claims are available under the FHA and (by analogy) the ECOA. 

The D.C. case challenging HUD’s disparate impact rule was filed in June 2013 by two insurance industry trade associations.  The complaint alleged that the text of the FHA does not proscribe facially-neutral practices that have discriminatory effects.  It also alleged that HUD rule is invalid as applied to insurance companies that issue homeowners insurance because it conflicts with McCarran-Ferguson.  On July 22, 2014, the district court heard oral argument on the plaintiffs’ summary judgment motion and HUD’s motion to dismiss or for summary judgment. 

As we have previously observed, if the district court in the D.C. action were to grant summary judgment to the plaintiffs solely on the basis that the HUD disparate impact rule is invalid under McCarran-Ferguson as applied to members of the plaintiff trade associations, its ruling would be inconsequential to lenders since it would not address whether disparate impact claims are cognizable under the FHA.  We had expressed concern that a decision by the Illinois district court invalidating the HUD rule on McCarran-Ferguson grounds might have prompted the district court in D.C. to base its ruling on McCarran-Ferguson grounds as well rather than address the broader issue of whether disparate impact claims are cognizable under the FHA.  The Illinois district court’s decision that McCarran-Fergusson issues are not ripe may now prompt the D.C. district court to reach that broader issue.