D.D.C. Upholds HUD’s Disparate Impact Rule Following Ten Years of Challenges

Last month, a federal judge for the U.S. District Court for the District of Columbia upheld HUD’s Disparate-Impact Rule (Rule) after ten years of challenges by insurance trade associations, which alleged that the Rule was impermissible under the FHA.

The Rule, promulgated in 2013, states that a “policy is unlawful if it has a ‘discriminatory effect’ on a protected class and was not necessary to achieve a ‘substantial, legitimate, nondiscriminatory’ interest or if there is a less discriminatory alternative.”  Shortly after it was promulgated, plaintiff insurance associations challenged the Rule, asserting that HUD exceeded its statutory authority by expanding the scope of the FHA to recognize disparate-impact claims; not just disparate-treatment claims.

Although the Court in 2014 found that HUD had exceeded its authority by adopting the Rule, the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., held that that disparate impact claims may be brought under the FHA.  Despite this holding, plaintiffs amended their complaint to allege that although disparate impact claims could be brought under the FHA, the Rule as promulgated was still inconsistent with the FHA. 

Following HUD issuing a final revised Rule in September 2020, this ruling was stayed by a Massachusetts federal district court until the current administration urged HUD to reinstate the Rule in 2021, before HUD ultimately reinstated the final Rule earlier this year, permitting the remaining plaintiff insurance association to renew its challenge to the Rule.

Plaintiff filed a motion for summary judgment, arguing that the reinstated Rule conflicts with the FHA by imposing a disparate impact requirement on insurers’ underwriting and rating practices.  Plaintiff also argued insurers were heavily regulated by state laws limiting discretion in underwriting and rate making decisions and how insurers may make risk assessments, and therefore the Rule conflicts with these existing state regulations.  Further, plaintiff alleged the Rule conflicted with the FHA as it permitted a claim to be established based on statistical disparities.  Lastly, plaintiff argued the Rule conflicts with the Supreme Court’s holding in Inclusive Communities that the FHA should not be used to “second-guess which of two reasonable approaches” an entity should follow, that the FHA is not “an instrument to force . . . [defendants] to reorder their priorities,” and that disparate impact liability is properly used only to “remov[e] artificial, arbitrary, and unnecessary barriers.”

The Court was unpersuaded by each of these arguments.  It denied plaintiff’s motion for summary judgment and granted HUD’s cross-motion for summary judgment. 

The case is National Association of Mutula Insurance Companies v. United States Department of Housing and Urban Development, et al., 1:13-cv-00966-RJL (D.D.C. 2023).