Monday, November 10, 2014

FYI: DC District Court Vacates HUD's "Disparate Impact" Rule

The U.S. District Court for the District of Columbia recently vacated HUD’s expansion of the Fair Housing Act, 42 U.S.C. § 3601, et seq. (“FHA”), to include disparate impact liability. 


Although the Court based its decision on several grounds, it determined that the language of the FHA was unambiguous and did not include “disparate impact” or “effects discrimination” liability.  The Court held that HUD had acted outside of its statutory authority in promulgating the so-called “Disparate-Impact Rule.”


A copy of the opinion is attached.


This action arises from a rule promulgated by the U.S. Department of Housing and Urban Development (“HUD”) in February, 2013, which provided for liability under the FHA based on a practice’s “discriminatory effects” even if not motivated by a “discriminatory intent.”  Despite multiple comments explaining the harmful effect of this “Disparate-Impact Rule,” HUD promulgated the rule without substantial change.


Notably, the rule itself defines a practice as having a “discriminatory effect” where “it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”  24 C.F.R. § 100.500(a).  Moreover, in the preamble to the Disparate-Impact Rule, HUD “expressly extended the availability of disparate-impact liability to the provision and pricing of homeowner’s insurance for the first time.”  Slip. Op. at 6 (emphasis in opinion). 


Plaintiffs – two non-profit trade associations whose members sell homeowner’s insurance within the United States (for convenience, the “Insurance Providers”) – filed the present action against HUD and the HUD Secretary challenging the Disparate-Impact Rule, and seeking to have it vacated. 


In their complaint, the Insurance Providers contended that the Disparate-Impact Rule violated the Administrative Procedure Act, 5 U.S.C. § 551, et seq. (“APA”).  Specifically, they argued that HUD exceeded its statutory authority by expanding the scope of the FHA to recognize not just “disparate-treatment” claims (claims for intentional discrimination) but also “disparate-impact” claims (claims for facially neutral practices that have discriminatory effects).


In light of a case pending before the United States Supreme Court that would resolve the same statutory question, the Court stayed this action.  After the Supreme Court dismissed the writ of certiorari due to settlement, the Insurance Providers filed a motion for summary judgment.  In response, HUD filed a motion to dismiss or, in the alternative, for summary judgment.  Following full briefing of the issues, and oral argument, the D.C. federal district court entered judgment in favor of the Insurance Providers, and vacated the Disparate-Impact Rule.


As you may recall, under the APA, courts must set aside any agency action that is in excess of that agency’s “statutory jurisdiction, authority, or limitations.”  5 U.S.C. § 706(2)(C).  Judicial review of an agency’s interpretation of a statute is subject to the two-step analysis laid out by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984).  For the first step of Chevron analysis, a court “must give effect to the unambiguously expressed intent of Congress.”  Chevron, 467 U.S. at 842-43.  For the second Chevron step, where the statute is “silent or ambiguous with respect to the specific issue,” the court must determine whether the agency’s interpretation is “based on a permissible construction of the statute.”  Id. at 843.


Considering the cross-motions before it, the U.S. District Court for the District of Columbia first rejected HUD’s argument that the Insurance Providers lacked standing to assert this action.  Noting that the Disparate-Impact Rule “clearly intended to apply” to the business engaged in by Insurance Providers, the Court determined that they were objects of HUD rulemaking, and that therefore, standing was “self-evident.”  See Slip. Op. at 12-14 (citing Sierra Club v. EPA, 292 F.3d 895, 899-900 (D.C. Cir. 2002).


Moving to HUD’s interpretation of the FHA, the Court determined that only disparate-treatment or intentional discrimination claims are unambiguously cognizable under the plain text of the FHA.  Although HUD argued that Congress’s intent to recognize disparate impact under the FHA is evidenced throughout the statute’s language, the Court disagreed.  Notably, the Court observed that “[w]hen Congress intends to expand liability to claims of discrimination based on disparate impact, it uses language focused on the result or effect of particular conduct, rather than the conduct itself.”  Slip. Op. at 19.  However, in the FHA, Congress did not include any “effects-based language.”  Id. at 20.  Rather, the statutory language of the FHA focuses on the motivation for the conduct itself.  See id.


Even if the statutory text were ambiguous, according to the Court, Congress’s intent to limit the FHA is still “readily discernable.”  Slip. Op. at 22.  Pointing to several statutes enacted contemporaneously with the FHA, the Court observed that “Congress knows how to craft statutory language providing for disparate-impact liability when it intends to do so.”  Id. at 23.  As to HUD’s arguments that certain provisions of the FHA presupposed the existence of disparate-impact liability, the Court deemed them to be “nothing more than wishful thinking on steroids!”  Slip. Op. at 26.


Additionally, the Court determined the “the expansion of the FHA to include disparate-impact liability against insurers would run afoul of previously enacted federal law.”  Slip. Op. at 25.  Specifically, the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq., provides that no federal law may supersede state law “regulating the business of insurance. . .  15 U.S.C. § 1012(b).  The Court noted that expanding the FHA to include disparate-impact liability would not only have a “wide-ranging disruptive effect on the pricing and provision of homeowner’s insurance,” but would also require insurers to collect and analyze certain types of race-based data, such collection being expressly prohibited in many states.  See Slip. Op. at 26-27.


Finally, the Court addressed HUD’s argument that previous holdings of other federal circuit courts precludes it from finding that the FHA unambiguously prohibits disparate-impact treatment.  The Court was quick to reject this argument, stating that a lack of judicial consensus does not render a statute ambiguous.  See Deal v. United States, 508 U.S. 129, 136 (1993) (“judges cannot cause a clear text to become ambiguous by ignoring it”).  Moreover, it noted that no federal circuit court has recognized disparate impact in the FHA subsequent to the Smith v. City of Jackson decision, “where the Supreme Court made it clear than inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language.”  Slip. Op. at 30; see also Smith v. City of Jackson, 544 U.S. 228, 235-36 (2004).


Accordingly, the D.C. federal district court granted the Insurance Providers’ motion for summary judgment, denied HUD’s motion, and vacated HUD’s Disparate-Impact Rule.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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          McGinnis Wutscher Beiramee LLP





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