Third financial reform report questions rule’s effect on insurance industry
On October 26, 2017, the Department of the Treasury released its third of four reports that call for sweeping financial reform. The reports come at the direction of President Donald Trump, who signed an executive order in February directing Treasury Secretary Steven Mnuchin to examine the nation’s financial laws.
The first Treasury report was released in June and dealt with banks and credit unions. The second report, released earlier this month, focused on capital markets.
The third report, released Thursday evening October 27, 2017, focuses on asset management and insurance, and while most of the report deals with issues outside of housing, there is one piece that touches on an item of note for the housing industry – disparate impact.
In the Obama administration, the Department of Housing and Urban Development began using disparate impact theory as a way to enforce the Fair Housing Act.
A 2015 ruling by the Supreme Court established that the Fair Housing Act allows lawsuits based on disparate impact, meaning a law or practice has a discriminatory effect even if it wasn’t based on a discriminatory purpose.
In layman’s terms, that means that a mortgage lender’s practices can be viewed as discriminatory in the eyes of the law (specifically the Fair Housing Act) even if the lender didn’t purposefully discriminate.
Disparate impact and its effect have come under fire from the housing industry, and even from HUD Secretary Ben Carson.
In a well-publicized op-ed published in The Washington Times in 2015, Carson said that the Supreme Court ruling on disparate impact and the Obama administration’s Affirmatively Furthering Fair Housing rule are “government-engineered attempts to legislate racial equality create consequences that often make matters worse.”
Now, with Carson as the leader of HUD, Trump’s Treasury Department is calling for HUD to “reconsider” its use of the disparate impact rule.
The section of the report in question focuses on HUD’s potential application of the disparate impact rule to the insurance industry, specifically homeowners’ insurance.
“In 2011, HUD proposed a rule that would also impose a duty to avoid practices that are neutral by legal and regulatory definitions but with discriminatory effects (i.e., disparate impact),” the Treasury report states.
“This, among other things, would require entities covered by the rule to assess whether adverse fair housing consequences result from any business practice, even if such practices have no explicit discriminatory features. HUD has expressed its intention to apply the disparate impact rule to the insurance industry,” the report states.
Part of the issue is the McCarran–Ferguson Act of 1945, which stipulates that state laws governing the business of insurance are “not invalidated, impaired, or superseded by any federal law unless the federal law specifically relates to the business of insurance.”
And in the view of the Treasury, HUD’s use of disparate impact in the insurance industry could violate the McCarran-Ferguson Act.
“If this application leads to collection and evaluation of data on protected classes under insurance policies, this could be challenging as state insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk, and such data collection is expressly prohibited by insurance laws of at least one state,” the report states.
“To the extent that otherwise nondiscriminatory underwriting practices result in disparate outcomes, the rule could also impose unnecessary burdens on insurers and force them to alter practices in a manner that may not be actuarially sound,” the report continues.
To that end, the Treasury report recommends that HUD “reconsider” its plans to use disparate impact in the insurance industry.
“Treasury recommends that HUD reconsider its use of the disparate impact rule. In particular, HUD should consider whether the disparate impact rule, as applied, is consistent with McCarran-Ferguson and existing state law,” the report states. “HUD should also reconsider whether such a rule would have a disruptive effect on the availability of homeowners insurance and whether the rule is reconcilable with actuarially sound principles.”