Federal Judge Strikes Down HUD’s Disparate Impact Rule

Facts: Two nonprofit insurance trade associations filed a lawsuit against HUD, challenging its final rule providing for liability based on disparate impact under the Fair Housing Act (FHA). HUD had recently finalized regulations that were intended to codify how a disparate impact claim is established, including the respective burdens that the plaintiffs and defendants must carry. Under “disparate impact,” a person may be held liable for discriminatory conduct under the FHA without any showing of actual intent to discriminate. To make out a basic case, all that’s necessary is statistical evidence that a policy or practice had a harsher effect–a “disparate impact”–on a class protected by the FHA.

The associations claim that HUD violated the Administrative Procedure Act by exceeding its statutory authority when it expanded the scope of the FHA to recognize not only disparate-treatment claims but also disparate-impact claims. They also claimed that the disparate impact regulation would dramatically impair their ability to assess premiums based on risk, and that it was preempted by the McCarran-Ferguson Act, which reserves most regulation of insurance companies to the states, rather than the federal government.

Ruling: The District Court for the District of Columbia ruled for the trade associations.

Reasoning: The court agreed that the FHA prohibits disparate treatment only, and that the defendant, therefore, exceeded its authority under the FHA. And thus the court vacated the disparate impact rule.

• American Insurance Association v. HUD, November 2014

Editor’s Note: Although this ruling was a win for the American Insurance Association and other business groups that oppose disparate impact claims, which allow for a broad range of business decisions related to housing to be subject to civil rights litigation, the immediate impact of this decision is limited. That’s because the U.S. Supreme Court in October said it would take up a related case and is likely to decide by the end of June once and for all whether the Fair Housing Act allows for disparate impact lawsuits. In his opinion, the federal judge of this case wrote, “the Supreme Court is now perfectly positioned . . . to finally address this issue in the not-to-distant future.”

The case is Texas Dept. of Housing and Community Affairs v. the Inclusive Communities, which held that policies used to allocate low-income housing tax credits in that state had a disparate impact on housing opportunities for some minorities and therefore violated the FHA.

The Fair Housing Act, passed in 1968, doesn’t specifically allow disparate impact claims, but courts have permitted lawsuits making such allegations for decades. The Supreme Court has never ruled on the issue. In recent years, the high court has twice agreed to hear a disparate impact case, but both times the dispute was settled before the justices could rule.