Federal District Court Defers To HUD On Disparate Impact Rule Burden-Shifting Framework

HUD FHA

On September 3, the U.S. District Court for the Northern District of Illinois declined to invalidate to the burden-shifting framework established by HUD in its 2013 disparate impact rule, but remanded to HUD for further consideration certain comments on the rule submitted by insurers. Property Casualty Insurers Assoc. of Am. V. Donovan, No. 13-8564, WL 4377570 (N.D. Ill. Sept. 3, 2014). An association of insurers challenged HUD’s rule, which authorized so-called “disparate impact” or “effects test” claims under the Fair Housing Act. The insurers filed suit to enjoin HUD from applying the rule to the homeowners’ insurance industry, arguing that HUD’s refusal to build safe harbors for homeowners’ insurance violates the McCarron-Ferguson Act and is arbitrary and capricious. The court agreed that HUD acted in an arbitrary and capricious manner because HUD did not give adequate consideration to comments from the insurance industry relating to the McCarran-Ferguson Act, the filed-rate doctrine, and the potential effect that the disparate impact rule could have on the nature of insurance. Therefore, the court remanded those issues back to HUD for further explanation. The court also addressed the burden-shifting approach established by HUD to determine liability under a disparate impact claim. Under the rule, once a practice has been shown by a plaintiff to have a disparate impact on a protected class, the defendant has the burden of showing that the challenged practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” The court held that the final burden-shifting framework “reflects HUD’s reasonable accommodation of the competing interests at stake—i.e., the public’s interest in eliminating discriminatory housing practices and defendants’ (including insurer-defendants’) interest in avoiding costly or frivolous litigation based on unintentional discriminatory effects of their facially neutral practices[,]” and deferred to HUD’s interpretation of the Fair Housing Act pursuant to Chevron v. U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).