The Fair Housing Act and disparate impact in homeowners insurance.

• Author: Kaersvang, Dana L.

TABLE OF CONTENTS INTRODUCTION I. APPLICATION OF THE FHA TO INSURANCE A. Statutory Interpretation B. Legislative History and Purpose of the FHA C. Deference to HUD' s Interpretation D. Impact of the McCarran-Ferguson Act on the Interpretation of the FHA II. APPLICATION OF THE FHA DISPARATE IMPACT STANDARD TO INSURANCE A. Disparate Impact under the FHA B. Application of the FHA Disparate Impact Standard to Insurance C. Burden of Proof in the Disparate Impact Test for Insurance under the FHA III. APPLICATION OF THE DISPARATE IMPACT TEST TO SPECIFIC INSURANCE POLICIES A. Elements of a Prima Facie Case of Disparate Impact B. The Business Necessity Defense CONCLUSION INTRODUCTION

President Bush has made homeownership a central element of his housing policy. (1) Through the American Dream Down Payment Act, (2) the Homeowner's Tax Credit, and the Zero Downpayment Mortgage Initiative, President Bush is attempting to make homeownership easier both by reducing the down payment required and by increasing financing options for the purchase of a home. (3) More Americans owned homes in 2004 than ever before. (4) This increase in homeownership has allowed more families to enjoy the "security, dignity, and independence that comes with owning their piece of the American dream." (5)

Homeownership is particularly important because of the numerous benefits it provides. It is one of the few vehicles through which low-income and minority families can accumulate capital. (6) For this reason, it can provide a multigenerational path out of poverty. (7) Not only do homeowners accumulate wealth that can be passed on to the next generation, homeownership increases psychological and physical well-being, self-esteem, and social capital. (8) Children of homeowners are not only more likely to own homes themselves, but are also more likely to graduate from high school and college, are less likely to become pregnant while teenagers, are more likely to have greater future earnings, and are more likely to be involved in civic affairs. (9)

Through much of this nation's history, however, blacks have been subject to a host of discriminatory practices in the housing market. Realtors refused to show blacks homes in white neighborhoods. Lenders refused mortgages on the basis of race or the racial composition of neighborhoods. When blacks did succeed in buying homes, their investments often depreciated because realtors used blockbusting to increase housing prices temporarily in neighborhoods transitioning from white to black. (10)

In response to such discriminatory practices, Congress enacted the Fair Housing Act, Title VIII of the Civil Rights Act of 1968 (FHA). (11) Congress recognized that widespread racial discrimination in the housing market was preventing integration and interfering with minority access to jobs and quality education." (12) Spurred by the race riots in the late 1960s, Congress looked to the FHA to ease the tension resulting from racial isolation. (13) Through the FHA, Congress hoped "to eliminate the discriminatory business practices which might prevent a person economically able to do so from purchasing a house regardless of his race." (14)

Despite the many successes of the FHA, homeownership rates among blacks continue to lag behind those of whites; non-Hispanic whites are half again as likely as blacks to own their homes. (15) The unavailability of homeowners insurance in black neighborhoods contributes to the gap in homeownership rates. (16) Lenders refuse to write mortgages on uninsured property for fear of risking a destruction of their collateral simultaneous with a reduction of the borrower's resources and capacity for repayment. Insurers have been reluctant to write policies in blackneighborhoods." (17) When insurance is available, blacks pay more per dollar of insurance than do whites, even when controlling for income. (18) The available data indicate that these premiums exceed those necessary to cover higher losses in black neighborhoods. (19)

Insurers use a wide range of practices which contribute to the pricing differential in insurance for whites and blacks. For example, insurance companies typically establish a maximum age for houses beyond which policies become more expensive or entirely unavailable. (20) Since a disproportionate number of blacks live in older homes, (21) this results in making insurance unavailable or more expensive for this population.

Similarly, insurance companies consider the market value of a home in deciding whether to underwrite it and in deciding what type of policy to provide at what rate. (22) For example, insurers often establish a minimum-value threshold below which insurance is unavailable. (23) Because low-income minorities need to buy inexpensive homes, and since insurance is necessary to secure a loan, minimum-value requirements operate to prevent poor people from buying homes. Insurers who do offer to cover inexpensive homes usually charge higher rates and refuse to write insurance for the entire replacement cost of the home. (24)

Insurance companies also adjust premiums by neighborhood in a way that increases prices in low-income, minority areas. Although insurance companies no longer draw red lines around minority neighborhoods to mark off areas where they will not underwrite policies, (25) they accomplish similar results by cleaving territory based in part on crime rates, the percentage of owner-occupied homes in the neighborhood, the number of vacant buildings in the neighborhood, and the response time of the fire and police departments. (26) Insurance companies fail to market insurance in low-income, minority areas (27) and charge higher rates per dollar of insurance. (28) As a result, insurance companies typically have lower loss-to-premium ratios in minority neighborhoods than in others. (29)

Finally, insurance companies use subjective criteria, such as requiring that the insured " 'be a person of integrity and financial stability who takes pride in his property.'" (30) This language has been likened to "code words" used to exclude black customers in the era of overt redlining. (31) Subjective criteria provide a vehicle for insurance agents to exercise their own biases.

This Note argues that because homeowners insurance is central to homeownership, the FHA applies to insurance underwriting policies, such as those mentioned above, that have a disparate impact on minority potential homeowners. Part I considers whether the FHA applies to homeowners insurance and concludes that homeowners insurance is covered by the Act. Part II goes on to argue that the FHA applies to homeowners insurance even where the discrimination results from disparate impact, rather than from disparate treatment. Finally, Part III analyzes the above-mentioned policies of the insurance industry under the FHA disparate impact standard.

1. APPLICATION OF THE FHA TO INSURANCE

   Although courts have disagreed about whether the FHA applies to homeowners insurance, the great weight of authority supports its application. (32) Section I.A analyzes the language of the FHA and concludes that it applies to insurance. Section I.B examines the legislative history and determines that applying the Act to insurance comports with congressional intent. Section I.C presents the alternative argument that, even if the FHA does not expressly apply to insurance, courts should give deference to the Department of Housing and Urban Development (HUD) regulation forbidding discrimination in insurance under the FHA. Finally, Section I.D determines that application of the FHA to insurance is consistent with state control of the insurance industry.

   1. Statutory Interpretation

      The language of the FHA should be interpreted to include homeowners insurance. Although insurance is not explicitly mentioned in the Act, the broad language of both [section] 3604 and [section] 3605 logically covers insurance.

      Under [section] 3604(a), it is unlawful to do anything that makes a dwelling "unavailable." (33) Because insurance is required in order to qualify for a mortgage, and since most people need a mortgage in order to buy a home, discrimination in underwriting decisions or in insurance pricing can make a dwelling unavailable, in contravention of [section] 3604. (34)

      Although it could be argued that "otherwise make unavailable or deny" (35) should only apply to activities similar to the refusal to sell or rent a home, not to all activities that make housing unavailable, this reading is inconsistent with other [section] 3604 jurisprudence. The Supreme Court has found that the FHA should be read broadly. (36) Courts have readily applied [section] 3604 to a number of activities beyond the actual sale or rental transaction, such as zoning, (37) the construction of low-income housing, (38) and the provision of Section 8 housing vouchers. (39)

      Most courts have agreed that insurance, like zoning, is covered by [section] 3604. The Sixth Circuit explicitly rejected the argument that, under the canon of ejusdem generis, the FHA must be interpreted to exclude insurance. (40) That court found a "direct connection of availability of property insurance and ability to purchase a house," which makes insurance discrimination the kind of discrimination banned by the FHA. (41) The Seventh Circuit agreed that banning insurance discrimination forwards the FHA's goal of "removing obstacles to minorities' ownership of housing." (42) Only the Fourth Circuit has disputed that this language applies to homeowners insurance. (43) Various district courts have also held that this language applies to insurance, both in the context of race-based insurance redlining (44) and in the context of underwriting hazard and liability insurance for mental health group homes. (45)

      Although most courts have analyzed insurance under [section] 3604, insurance also falls within the language of [section] 3605. Section 3605 makes it unlawful to discriminate in lending or in...