The D.C. district court recently granted two industry trade associations whose members sell homeowners insurance 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 (HUD). In their amended complaint, the trade associations allege that the Rule is inconsistent with the U.S. Supreme Court decision last June in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. Should the district court reach the merits of the trade associations’ claims, its decision could provide helpful precedent for creditors in challenges to the CFPB’s or DOJ’s use of a disparate impact theory of liability under the Equal Credit Opportunity Act (ECOA).
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 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 the request of HUD, agreed to hold the case in abeyance pending the Supreme Court 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. Notwithstanding HUD’s opposition, the district court granted the trade associations’ motion to amend.
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 the underwriting and ratemaking decisions of insurers. As described in more detail in our legal alert, these grounds include the Supreme Court’s admonition that, without adequate causality safeguards at the prima facie stage, disparate impact liability “might cause race to be used and considered in a pervasive way;” the Court’s emphatic statement that the “robust causality requirement” is necessary to ensure that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create;” and the Court’s statements that disparate impact liability does not mandate the displacement of valid governmental or private policies, only the removal of “artificial, arbitrary, and unnecessary barriers.”
Given that non-mortgage creditors, like insurers, do not collect data on an applicant’s race, a district court ruling that addresses when disparate impact liability would be deemed to inject race pervasively into otherwise “race blind” underwriting and pricing practices could have positive implications for non-mortgage creditors facing ECOA disparate impact claims. A district court ruling elaborating upon the robust causality requirement also could assist creditors in defending against ECOA claims.
Additionally, a finding by the district court that the Rule’s burden shifting framework impermissibly allows plaintiffs to second guess which of two reasonable approaches a defendant should follow could similarly be helpful precedent in ECOA cases. Such a finding would also serve as a rebuttal to comments about Inclusive Communities made last October by Patrice Ficklin, Director of the CFPB Office of Fair Lending, at the American Bar Association’s Consumer Financial Services Institute. In response to a question from my colleague Mark Furletti, Ms. Ficklin stated that, while some had interpreted language in Inclusive Communities to be helpful to defendants with respect to the burden shifting that takes place under a disparate impact analysis, any such language was mere “dicta” and the decision did not lighten or change a defendant’s burden.
We will continue to follow the case, with the next significant development likely to be HUD’s decision whether to answer or move to dismiss the amended complaint.