Fair Housing Act Challenges to the Use of Consumer Credit Information in Homeowners Insurance Underwriting: Is the McCarran-Ferguson Act a Bar?

Article excerpt

Despite the promise of the Fair Housing Act, structural inequality in the housing market persists. One of the most notable manifestations of this inequality is the racial and ethnic divide in patterns of homeowner ship. Although many factors contribute to this disparity, civil rights and consumer-protection groups have highlighted insurers' practice of using consumer credit information to price homeowners insurance policies and to decide who qualifies for coverage. These groups argue that this practice can limit certain minority groups' access to insurance coverage. However, plaintiffs that have sought to challenge this practice under the Fair Housing Act (FHA) have met an unexpected foe: the McCarran-Ferguson Act (MFA), a federal statute that mandates state preemption of federal law if that federal law impairs, invalidates, or supersedes state insurance law ("reverse preemption"). Where a state law regulates the use of credit information in insurance decision-making, the MFA has been invoked to bar recovery for insurance discrimination under the FHA. This Note examines courts' conflicting interpretations of the MFA in "insurance scoring" cases and argues that future courts should adopt a narrow approach to MFA reverse preemption, which would allow claims under the FHA to proceed.

I. Introduction

The Valuator should investigate areas surrounding the location to determine whether or not incompatible racial and social groups are present, to the end that an intelligent prediction may be made regarding the possibility or probability of the location being invaded by such groups. If a neighborhood is to retain stability it is necessary that properties shall continue to be occupied by the same social and racial classes. 1

Gone are the days when explicit racial considerations were built into official government housing policy.2 Gone, too, is the era of official tolerance and even encouragement of discrimination in private housing sales and underwriting decisions.3 In the three-quarters of a century since the Federal Housing Administration promulgated the overtly race-conscious underwriting guidelines quoted above, the fair housing movement has won critical victories at all levels of government and has enshrined the right to obtain shelter free from discrimination as a key civil right.4

And yet, equal access to housing and unconstrained housing choice remain important, and unfulfilled, public policy objectives.5 Though minorities are no longer prevented from living in certain neighborhoods as a matter of official policy, what one observer has termed "maturing disparities" still endure, arising from "conduct that is accepted industry practice, but when examined critically, shows exclusionary patterns."6 One area that has received scrutiny in recent years is structural inequality in insurance and credit markets, and its effects on free and full housing choice.7 For example, minority borrowers take out high-interest-rate (i.e. subprime) mortgages at much higher rates than non-minorities,8 and minorities are far more likely to live in older and less valuable homes, which insurers often categorically refuse to insure.9 Curbing minorities' access to insurance markets and steering them towards home mortgage loans with more onerous terms has helped to perpetuate the racial wealth gap10 and harden patterns of residential segregation.11 The recent home foreclosure crisis has only exacerbated these patterns, as it has had a disproportionate impact on minorities.12

The persistence of this racial divide in wealth and homeownership patterns calls out for diagnosis and reform. One of the most contentious factors in recent years has been the use of consumer credit information, such as credit scores13 in homeowners insurance underwriting and ratemaking decisions.14 Since 2000, thirty-eight states have passed statutes and administrative rules regulating the use of credit information in insurance decisionmaking.15 These laws permit insurers, within certain parameters, to include consumers' "insurance scores" in their pricing and underwriting models. …