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HUD Sued over Disparate Impact; Could Affect CFPB Authority

by devteam July 3rd, 2013 | Share

Two insurance industry trade groups,rnthe American Insurance Association and the National Associationrnof Mutual Insurance Companies, whose members sell homeownersrninsurance, have filed suit against the Department of Housing andrnUrban Development (HUD) challenging HUD’s final rule formalizing itsrnuse of disparate impact liability under the Fair Housing Act (FHA). </p

Therndoctrine of disparate impact</iis commonly used in labor law. It holds that employment practicesrnmay be considered discriminatory and thus illegal if they have arndisproportionate "adverse impact" on members of a minority group.rn The practice, by definition is one that does not appear to berndiscriminatory on its face, but rather is discriminatory in itsrnapplication of effect. The employer has only the so-called “businessrnnecessity” defense – that the practice or policy in question hasrna demonstrable relationship to the requirements of the job inrnquestion.</p

HUD’s rule, adopted in February 2013,rnprovides that if a practice has a discriminatory effect HUD or arnprivate plaintiff can establish liability under FHA even if there isrnno discriminatory intent. The Consumer Financial Protection Bureaurn(CFPB) has also been using disparate impact tests in fair lendingrnexaminations and investigations and the suit could impact itsrnauthority as well.</p

The Consumer Financial Services Grouprnof the Ballard Spahr law firm has published an analysis of the newrnlaw suit on its blog. Alan S. Kaplinsky, a partner in the firm, saidrnthat the lawsuit, filed on June 26 in federal court, alleges that thernHUD rule is contrary to law for two reasons. First, based on thernFHA’s plain language, it only prohibits intentional discrimination.rnThis is the same issue raised in Township of Mount Holly v. Mt.rnHolly Gardens Citizens in Action, Inc, for which the U.S.rnSupreme Court granted certiorari (agreedrnto hear) on June 17. </i</p

Second,rnthe plaintiffs allege that the HUD rule cannot apply to insurancerncompanies because it is contrary to the federal McCarran-Ferguson Actrnwhich forbids federal laws which invalidate, impair, or supersedernstate insurance laws unless the federal law specifically relates torninsurance. The HUD rule, plaintiffs say, would violate state lawsrnthat prohibit discrimination between risks of the samernclass or essentially the same hazard in violation of sound actuarialrnpractice as well as laws that prohibit consideration of race in thernunderwriting or rating process. The later is an issue because, tornavoid potential disparate impact liability, insurers would need torncollect and consider data about characteristics such as race andrnnational origin.  The plaintiffs further state that thesernactions are a violation of McCarran-Ferguson because Congress did notrnstate its intention to supersede state law by passing FHA.</p

Whilernthe current suit involves the insurance industry, it has implicationsrnfor the mortgage industry as well. In another blog entry regardingrnthe Mt. Holly Gardens</isuit, the law firm says, "The viability of disparate impact claimsrnunder the Fair Housing Act is an issue that could have both directrnand indirect effects on consumer finance litigation. It is notrnuncommon for fair lending litigation brought against mortgage lenders</bto involve claims under the Fair Housing Act. If the Supreme Courtrnholds that disparate impact claims cannot be pursued, that legalrnavenue will no longer be available to private and governmentalrnlitigants." </p

Kaplinsky said it is possible that HUD may ask the district courtrnto stay any proceedings until the Supreme Court rules in Mt. Holly</ibut there is also a possibility that case might be settled whichrnwould make this new case the next logical vehicle for testing thernvalidity of disparate impact liability under the FHA. It is alsornpossible that the district court might rule against HUD on thernMcCarran-Ferguson issue without ever reaching the disparate impactrntheory.   One possible solution, Kaplinsky said, “would be forrnanother trade association whose members include mortgage lendersrnaffected by the HUD rule to intervene in the pending lawsuit. rnThat would increase the likelihood of the district court reaching thernbroader issue.”

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.

About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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