PCIA v HUD

Issue: Whether the 2023 Disparate-Impact Rule from the U.S. Department of Housing and Urban Development (HUD), which recodifies its 2013 rule, conflicts with the Fair Housing Act (FHA) and the Supreme Court’s decision in Texas Department of Housing & Community Affairs v. Inclusive Communities Project Inc.

Case Summary:  ABA filed a coalition amicus brief urging the Seventh Circuit to vacate HUD’s 2023 Disparate-Impact Rule.

In 2013, HUD published a disparate-impact rule formalizing a burden-shifting test for determining whether a given practice has an unjustified discriminatory effect (2013 rule). Under the 2013 rule, a policy which had a discriminatory effect on a protected class was unlawful if it was not necessary to achieve a substantial, legitimate, nondiscriminatory interest or if a less discriminatory alternative could also serve that interest.

After HUD published the 2013 rule, the Property Casualty Insurers Association of America (PCIA) sued HUD in the Northern District Court of Illinois challenging the 2013 rule. PCIA argued: HUD’s decision to apply disparate-impact liability to homeowners’ insurance was contrary to law and exceeded the agency’s jurisdiction; HUD acted arbitrarily and capriciously in failing to consider issues on the McCarran-Ferguson Act, such as the filed-rate doctrine and the nature of insurance; and HUD’s burden-shifting framework was both arbitrary and capricious and contrary to law. In 2014, the district court dismissed PCIA’s lawsuit and granted summary judgment in HUD’s favor on PCIA’s challenges to the burden-shifting framework. The court reasoned the agency’s adoption of the framework was adequately reasoned and entitled to deference.

In 2015, the U.S. Supreme Court ruled that parties may bring disparate-impact claims under the FHA in Texas Department of Housing & Community Affairs v. Inclusive Communities Project Inc. The Court concluded claims based on statistical disparity fail without a showing of causation. In response to Inclusive Communities, PCIA moved to amend its complaint, but the district court denied its motion. In 2023, HUD (under the Biden administration) published its 2023 rule, which recodified the 2013 rule. Months later, PCIA filed a Second Amended Complaint challenging the 2023 Rule. However, Judge Rebecca Pallmeyer of the Northern District of Illinois denied PCIA’s motion for summary judgment. The court held HUD did not act arbitrarily or capriciously in promulgating its 2023 Rule.

On appeal, ABA filed a coalition amicus brief supporting PCIA, arguing HUD exceeded its authority and acted contrary to law when it rejected the Supreme Court’s disparate-impact standard in Inclusive Communities that applied Wards Cove. In Wards Cove, the Supreme Court clarified the statistical analysis needed to prove discrimination. First, a plaintiff must show a disparity occurred by making a proper statistical comparison. After proving a disparity existed, a plaintiff must show “causation” by identifying the specific practices at issue and proving the identified practice caused the disparity.

ABA emphasized HUD is bound by Supreme Court precedent defining the standard for disparate-impact claims under the FHA. In promulgating its 2023 rule, HUD adopted an incorrect and improper standard for disparate-impact liability under the FHA, ignoring the parameters set by Inclusive Communities and Wards Cove.  ABA argued the 2023 rule, which adopted the standard of the Civil Rights Act of 1991, is a substantial departure from Inclusive Communities in at least three significant ways:

• Inclusive Communities requires a plaintiff to identify the specific policy of the defendant and adequately plead the policy is the cause of the disparity, but HUD permits a plaintiff to challenge a decision-making process as a whole.
• Inclusive Communities cautioned “policies are not contrary to the disparate-impact requirement unless they are artificial, arbitrary and unnecessary barriers,” and defendants must be given “leeway to state and explain the valid interest served by their policies.” But HUD requires the defendant to prove the challenged practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests.
• Inclusive Communities concluded when a defendant offers a legitimate business justification, a plaintiff cannot sustain a disparate-impact claim if it cannot prove an available alternative practice exists that has less disparate impact and serves the entity’s legitimate needs. HUD refused to adopt this standard.

ABA claimed HUD’s decision to announce the Civil Rights Act of 1991 as the standard for disparate impact under the FHA is an unauthorized and unlawful agency action. HUD cannot emulate Congress and overrule Supreme Court statutory interpretation with which it may disagree. Agencies can seek relief from Congress if they believe new statutory standards should govern their enforcement of statutes, but they cannot achieve their objective simply through administrative rulemaking. This action required an act of Congress to achieve in the context of Title VIII.

In addition, ABA claimed HUD lacks authority to cherry-pick portions of the disparate-impact standard Congress enacted for Title VII claims. Under the 1991 Title VII standard, employment-discrimination plaintiffs must establish intent -not merely discriminatory effect – to state a claim for money damages. But in its 2023 rule, HUD rejected the provisions of Title VII precluding disparate-impact plaintiffs from obtaining money damages under the more lenient standard enacted by the 1991 Act. HUD also set no limits on the use of disparate impact to obtain money damages under the Fair Housing Act. The 2023 rule provides no sound rationale for adopting certain Title VII provisions while rejecting others.