Two insurance industry trade groups, the American Insurance Association and the National Association of Mutual Insurance Companies, whose members sell homeowners insurance, have filed suit against the Department of Housing and Urban Development (HUD) challenging HUD's final rule formalizing its use of disparate impact liability under the Fair Housing Act (FHA).

The doctrine of disparate impact is commonly used in labor law. It holds that employment practices may be considered discriminatory and thus illegal if they have a disproportionate "adverse impact" on members of a minority group. The practice, by definition is one that does not appear to be discriminatory on its face, but rather is discriminatory in its application of effect. The employer has only the so-called "business necessity" defense - that the practice or policy in question has a demonstrable relationship to the requirements of the job in question.

HUD's rule, adopted in February 2013, provides that if a practice has a discriminatory effect HUD or a private plaintiff can establish liability under FHA even if there is no discriminatory intent. The Consumer Financial Protection Bureau (CFPB) has also been using disparate impact tests in fair lending examinations and investigations and the suit could impact its authority as well.

The Consumer Financial Services Group of the Ballard Spahr law firm has published an analysis of the new law suit on its blog. Alan S. Kaplinsky, a partner in the firm, said that the lawsuit, filed on June 26 in federal court, alleges that the HUD rule is contrary to law for two reasons. First, based on the FHA's plain language, it only prohibits intentional discrimination. This is the same issue raised in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc, for which the U.S. Supreme Court granted certiorari (agreed to hear) on June 17.

Second, the plaintiffs allege that the HUD rule cannot apply to insurance companies because it is contrary to the federal McCarran-Ferguson Act which forbids federal laws which invalidate, impair, or supersede state insurance laws unless the federal law specifically relates to insurance. The HUD rule, plaintiffs say, would violate state laws that prohibit discrimination between risks of the same class or essentially the same hazard in violation of sound actuarial practice as well as laws that prohibit consideration of race in the underwriting or rating process. The later is an issue because, to avoid potential disparate impact liability, insurers would need to collect and consider data about characteristics such as race and national origin.  The plaintiffs further state that these actions are a violation of McCarran-Ferguson because Congress did not state its intention to supersede state law by passing FHA.

While the current suit involves the insurance industry, it has implications for the mortgage industry as well. In another blog entry regarding the Mt. Holly Gardens suit, the law firm says, "The viability of disparate impact claims under the Fair Housing Act is an issue that could have both direct and indirect effects on consumer finance litigation. It is not uncommon for fair lending litigation brought against mortgage lenders to involve claims under the Fair Housing Act. If the Supreme Court holds that disparate impact claims cannot be pursued, that legal avenue will no longer be available to private and governmental litigants."

Kaplinsky said it is possible that HUD may ask the district court to stay any proceedings until the Supreme Court rules in Mt. Holly but there is also a possibility that case might be settled which would make this new case the next logical vehicle for testing the validity of disparate impact liability under the FHA. It is also possible that the district court might rule against HUD on the McCarran-Ferguson issue without ever reaching the disparate impact theory.   One possible solution, Kaplinsky said, "would be for another trade association whose members include mortgage lenders affected by the HUD rule to intervene in the pending lawsuit.  That would increase the likelihood of the district court reaching the broader issue."