HUD Will Once Again Subject Homeowners Insurers To Discriminatory Effects Scrutiny

Our Client Alert of January 28 predicted this development, and insurers which utilize credit scoring and other race-neutral underwriting and rating practices, which arguably affect Blacks, Latinos, and other minorities adversely, should be prepared to defend the validity of those practices in administrative proceedings before HUD and in any ensuing litigation.

The 2013 Obama Administration regulation, “Implementation of the Fair Housing Act’s Discriminatory Effects Standard”, codified at 24 CFR Part 100, created a burden-shifting procedure for evaluating disparate impact complaints. After the charging party has met its burden to show that a practice resulted in disparate impact on persons protected under the Fair Housing Act, the burden shifts to the respondent to show that the practice has a “legally sufficient justification”, i.e. that the challenged practice serves substantial, legitimate and nondiscriminatory interests and that those interests could not be served by a practice having a less discriminatory effect. The 2013 regulation did not categorically exempt insurer underwriting and rating practices allowed by state insurance departments from the regulation, and the Property Casualty Insurance Association of America won a court order in 2014 from an Illinois federal court directing HUD to explain why insurer practices should be adjudicated on a case-by-case basis, instead of applying a categorical exemption under the McCarran-Ferguson Act.

The Obama Administration HUD responded in 2016 (81 F.R. 69012) with a notice justifying its case-by-case approach and stating that it considered a categorical exemption for insurer practices to be unworkable and inconsistent with the purposes of the Fair Housing Act, but that insurers were free under the regulation to argue that state insurance regulators had specifically permitted the challenged practice as part of their defense in showing that the challenged practice enjoyed a legally sufficient justification.

The Trump Administration tried to amend the 2013 regulation in September of 2020 generally, not solely in respect of insurance, but as part of its amendment the Trump Administration HUD specifically stated that the McCarran-Ferguson Act would apply to any challenged insurer practices, thereby essentially exempting insurance companies from the regulation if their underwriting and rating practices were permitted under state insurance laws.

However, the Trump Administration amendments were stayed by a federal court injunction in October, 2020 which held that the amendments lacked statutory authority but did not address the insurance issues specifically. The amendments and the federal court injunction can be read here. 

Once the Biden Administration HUD formally re-codifies the 2013 regulation later this year, homeowners insurance companies should brace for heightened HUD scrutiny of credit scoring and other traditional underwriting and rating tools, such as tiered, geographically-based rates,  which have long enjoyed acceptance from state insurance regulators. The insurance trade associations can be expected to again challenge the validity of the HUD regulation as applied to insurers in federal court, but the outcome of any such litigation is uncertain. We strongly recommend to clients in this space that they begin now to prepare their defense of their race-neutral underwriting and rating tools against the possibility of HUD administrative proceedings and plaintiffs’ civil suits under the Fair Housing Act.