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Special Alert: SCOTUS Grants Cert. Petition Regarding Use of Disparate Impact Analysis Under the FHA
This morning, the U.S. Supreme Court granted certiorari in Township of Mount Holly, New Jersey, et al. v. Mt. Holly Gardens Citizens in Action, Inc., et al. (No. 11-1507). The case has been watched closely by financial institutions because it raised questions about the viability of disparate impact claims under the Fair Housing Act ("FHA"). Disparate impact theory allows government and private plaintiffs to establish "discrimination" based solely on the results of a neutral policy, without having to show any intent to discriminate - or even in the absence of an intent to discriminate.
The Court has agreed to address one of two disparate impact questions presented in a petition from the Township of Mount Holly, New Jersey (and other appellants) - specifically the threshold question of whether disparate impact claims are cognizable under the FHA. Though not a lending case, the case could offer the Supreme Court its first opportunity to rule on the issue of whether the FHA permits plaintiffs to bring claims under a disparate impact theory. Last year, the parties in another fair housing case brought before the Court, Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010), withdrew the case before the Court had an opportunity to decide the issue.
To date, eleven federal courts of appeals have upheld the cognizability of disparate impact claims under the FHA (Title VIII of the Civil Rights Act of 1968). They have done so based on their analysis of the Supreme Court's then-current Title VII jurisprudence regarding employment discrimination - which the appellate courts interpreted as permitting disparate impact claims - and a conclusion that disparate impact claims are consistent with the purposes of the FHA. In the seminal employment disparate impact case Griggs v. Duke Power, 401 U.S. 424 (1971), the Court held that a power company's neutral requirement that all employees have a high school education regardless of whether it was necessary for their job was discriminatory under Title VII because it had a disparate effect on African-Americans. However, the Court subsequently has issued a series of opinions, culminating in Smith v. City of Jackson, 544 U.S. 228 (2005), that call into question the prior appellate court holdings regarding the FHA into question. In City of Jackson, the Court held that employment-related disparate impact claims are grounded in Title VII's specific statutory text, not merely in the broader purpose of the legislation. Since City of Jackson, the courts of appeals have offered almost no guidance as to whether the FHA's statutory text permits disparate impact claims.
Earlier this year, the Department of Housing and Urban Development issued a rule on the use of disparate impact under the FHA that codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Citing that rule, among other things, the government urged the Court not to grant cert. and instead allow courts to implement the HUD rule.
While the Court now may have the opportunity to resolve the basic question of whether disparate impact claims are cognizable under the FHA, it could bypass certain, more nuanced issues relating to how such claims should be analyzed and the means by which statistical evidence should be evaluated in context of that analysis. These issues were raised in a multi-part second question on which cert. was not granted. Additionally, the question before the Court is whether disparate impact claims are cognizable under Section 804 of the FHA. Depending on the Court's analysis, the question of whether Section 805 of the FHA - the section specifically applicable to mortgage financing - permits disparate impact claims may remain an open issue.
The parties in the Mt. Holly case have been involved in well-publicized settlement meetings, which will continue this week. For this reason, the prospect exists that this matter may also be resolved prior to the Court having a chance to determine the question it has certified for review.
If the parties do not resolve the matter, the Court likely will hear the case in the fall and will issue a ruling in the spring of 2014.
FFIEC Creates Cyber Security Working Group
On June 6, the Federal Financial Institutions Examination Council (FFIEC) announced the formation of a working group to further promote coordination across the federal and state banking regulatory agencies on critical infrastructure and cybersecurity issues.
Obama Administration Targets Iranian Currency
On June 3, the Obama Administration announced a new Executive Order authorizing sanctions that directly target trade in Iran’s currency, the rial. The order authorizes the Treasury Secretary to take action against foreign financial institutions that knowingly conduct or facilitate significant transactions for the purchase or sale of the rial, or that maintain significant accounts outside of Iran denominated in the rial. Specifically, the Treasury Secretary can (i) prohibit opening, and prohibit or impose strict conditions on maintaining, in the United States, a correspondent account or a payable-through account by such foreign financial institution; or (ii) block all property and interests in property that are in the United States, that come within the United States, or that are or come within the possession or control of any United States person (including any foreign branch) of such foreign financial institution, and provide that such property and interests in property may not be transferred, paid, exported, withdrawn, or otherwise dealt in. The order also (i) subjects to new sanctions persons and financial institutions that knowingly engage in transactions for the supply of significant goods or services used in connection with the automotive sector of Iran, and (ii) expands sanctions against those who materially assist, sponsor, or provide financial, material, or technological support to persons designated by Treasury as the “Government of Iran.”
NIST Prepares Analysis of Comments Submitted Regarding Cybersecurity Framework
On May 16, the National Institute of Standards and Technology (NIST) released an initial analysis of the hundreds of comments it received in response to its request for information to begin developing the "Cybersecurity Framework" required by President Obama's executive order. The analysis sifts from the comments characteristics and considerations the Framework must encompass and practices identified as having wide utility and adoption, and identifies initial gaps in the responses that must be addressed in order to meet the goals of the executive order. The paper also includes a series of questions that will serve as the basis for additional discussion and study at an upcoming workshop to be hosted at Carnegie Mellon University in Pittsburgh, Pennsylvania on May 29-31, 2013.
State Department Finalizes Burma Investment Reporting Requirements
On May 23, the State Department announced that the Office of Management and Budget approved the final Burma Responsible Investment Reporting Requirements. Effective immediately, pursuant to General License No. 17, all U.S. persons with aggregate investment in Burma over $500,000 are subject to the reporting requirements, which generally cover a range of policies and procedures with respect to investments in Burma, including human rights, labor rights, land rights, community consultations and stakeholder engagement, environmental stewardship, anti-corruption, arrangements with security service providers, risk and impact assessment and mitigation, payments to the government, any investments with the Myanmar Oil and Gas Enterprise (MOGE), and contact with the military or non-state armed groups. The State Department will use the information collected to conduct to encourage U.S. businesses to develop robust policies and procedures to address a range of impacts resulting from their investments and operations in Burma.
FTC Approves Order Settling Data Breach Charges
On May 3, the FTC approved a final order settling charges against a California-based cord blood bank firm alleged to have violated the FTC Act by failing to use reasonable and appropriate procedures for handling customers’ personal information, despite its privacy policy claims to the contrary. Further, the FTC alleged that the firm created unnecessary risks to personal information by transporting portable data storage devices containing personal information in a manner that made the information vulnerable to theft, and failed to prevent, detect and investigate unauthorized access to computer networks. According to the FTC, these practices resulted in a data breach in which certain portable devices were stolen from an employee’s personal vehicle and the personal information of nearly 300,000 customers was compromised. The settlement requires the company to establish a comprehensive information security program and submit to security audits by independent auditors every other year for 20 years, and prohibits the company from misrepresenting the privacy and security of information collected from consumers.
FTC Sharpens Focus on Data Brokers
On May 7, the FTC released letters it sent to 10 data brokers warning that certain of the brokers’ practices could violate FCRA privacy protections. The announcement states that data broker companies that collect, distribute or sell information about consumers’ creditworthiness, eligibility for insurance, or suitability for employment are subject to FCRA, and as such, have an obligation to reasonably verify the identities of their customers and make sure that customers have a legitimate purpose for receiving consumer information. The letters were issued pursuant to an FTC “test-shopping” operation as part of an international privacy practice transparency sweep conducted by the Global Privacy Enforcement Network. The operation and subsequent warnings letters are the latest move by the FTC to address data broker compliance with FCRA. Last year, the FTC ordered certain data brokers to produce information about their collection and use of consumer data and announced at least one settlement with a data broker regarding FCRA compliance. However, the letters do not constitute an official notice that the companies are subject to FCRA or act as formal complaints, but rather “remind” the companies to review their practices to determine whether they are consumer reporting agencies subject to FCRA.
Special Alert: CFPB Issues Final Civil Penalty Fund Rule with Request for Comment
On April 26, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a final rule, effective immediately, that sets forth procedures for the administration of the Consumer Financial Civil Penalty Fund (Civil Penalty Fund or Fund). Under Dodd-Frank, all civil penalties obtained by the CFPB are deposited into the Civil Penalty Fund, which may be used to compensate victims and, to the extent any funds remain, to fund consumer education and financial literacy programs. The final rule identifies categories of victims who may receive payments from the Civil Penalty Fund and articulates the Bureau’s interpretation of the types of payments that may be appropriate for these victims. It also establishes procedures for allocating funds for such payments to victims and for consumer education and financial literacy programs. The CFPB simultaneously issued a proposed rule, seeking comment on possible revisions to the final rule. The CFPB is accepting comments on the proposed rule through July 8, 2013.
Pursuant to the final rule, victims are eligible for compensation from the Fund if a final order in a Bureau enforcement action imposed a civil penalty for the particular violation that harmed the victim. A final order is defined as a consent order or settlement issued by a court or by the Bureau, or an appealable order issued by a court or by the Bureau as to which the time for filing an appeal has expired and no appeals are pending. The Bureau’s proposed rule, however, states that it is considering whether it should revise the final rule to allow payments to victims of any “type” of activity for which civil penalties have been imposed, even if no enforcement action has imposed penalties for the “particular” activity that harmed the victims.
Under the final rule, victims will be compensated from the Fund to the extent of their uncompensated harm. Uncompensated harm is defined as the victim’s compensable harm minus any compensation for that harm that the victim has received or is reasonably expected to receive. The final rule describes three categories of compensation that a victim has received or may be reasonably expected to receive: (i) a previous allocation from the Civil Penalty Fund to the victim’s class; (ii) any redress that a final order in a Bureau enforcement action orders paid to the victim that has not been suspended, waived, or determined by the Chief Financial Officer to be uncollectible; and (iii) other redress that the Bureau knows has been paid to the victim. In determining whether a victim’s harm is compensable, the final rules states that the CFPB will look to the objective terms of the order imposing the civil penalty, or if the order does not set forth such objective terms, the victim’s out-of-pocket loss that resulted from the violation. The Bureau’s proposed rule, however, seeks comment on (i) what should qualify as compensable harm. (ii) whether, when the amount of harm cannot be determined based on the terms of a final order, the Fund Administrator should determine what amount of harm is “practicable,” as opposed to using the victim’s out-of-pocket loss, and (iii) whether, instead of paying victims for their uncompensated harm, the Bureau instead should pay victims a share of the civil penalties collected for the particular violations that harmed them.
The CFPB has stated that it will only make payments to victims to the extent practicable. In the final rule’s interpretative commentary, the CFPB explained that it believes that for payments to be “practicable,” it must be feasible to carry out all of the steps involved in making the payments, and to do so efficiently and without excessive administrative cost. The final rule identifies scenarios where distribution may be impracticable, including when the amount of the payment is so small the victim is unlikely to redeem it, the cost of distribution is not justified, the victim cannot be located with reasonable effort, the victim does not timely submit information required by the distribution plan, or the victim does not redeem the payment within a reasonable time.
With respect to fund allocation procedures, the final rule establishes a Civil Penalty Fund Administrator who will manage the Fund and report to the CFPB’s Chief Financial Officer. The Fund Administrator also must follow written direction provided by the Civil Penalty Fund Governance Board, which will be established by the Director of the CFPB. The Administrator will designate a payment administrator—who may be a CFPB employee or a contractor—who will propose a plan for distributing the allocated funds to individual victims. The plan must be approved by the Administrator.
Under the final rule, funds will be allocated based on six-month periods, which will be published on the CFPB’s website by July 8, 2013. The start date for the first period has been established as July 21, 2011. The first two periods, however, need not be exactly six months in order to allow the Bureau to establish a schedule that will be administratively efficient. When there are sufficient funds available to fully compensate all the victims in the six-month period class, the Fund Administrator will allocate to each victim the amount necessary to fully compensate those victims for their uncompensated harm. If there are insufficient funds to fully compensate victims in any six-month period, victims from the most recently concluded six-month period will receive an equal percentage of their uncompensated harm. In the event of a surplusage within a given six-month period, the Fund Administrator next will allocate any remaining funds to classes of victims from preceding six-month periods until no funds remain or the victims are fully compensated. The proposed rule seeks comments regarding (i) how funds should be allocated to classes of victims, particularly when there are insufficient funds in a particular period to fully compensate all victims and (ii) whether funds should be allocated more or less frequently, or whether a different method of timing allocations should be used.
Under the final rule, any funds that remain after distribution can be allocated to consumer education or financial literacy programs, based on criteria separately adopted by the CFPB. The Fund Administrator, however, does not have the authority to select or allocate funds to particular programs. The proposed rule also seeks comment regarding whether there should be a limit to the amount of funds that may be allocated to such programs.
The CFPB will issue annual reports that describe how the funds will be allocated, the basis for those allocations, and how the funds have been distributed. The reports will be available on the CFPB’s web site.
Spotlight on the False Claims Act: Wartime Suspension of Limitations Act Suspends Statute of Limitations in False Claims Act Cases
The False Claims Act (FCA), which allows both the government and whistleblowers to seek treble damages for claims of civil fraud on the United States, is a powerful tool. In the past two years, the government has aggressively used the FCA to target financial institutions for claims of reckless lending and improper servicing. (e.g. FCA, FHA Lending, and US v. Deutsche Bank). As events leading to the financial crisis have approached - and in some cases exceeded - the FCA’s statute of limitations, financial institutions have increasingly responded to such claims by arguing that the government did not assert them in a timely manner.
A recent Fourth Circuit decision interpreting the Wartime Suspension of Limitations Act (WSLA), an obscure act first enacted during World War II, however, threatens to make it significantly more difficult for financial institutions to assert a statute of limitations defense to FCA claims. The case, United States ex rel. Carter v. Halliburton, came before the Fourth Circuit after a lower court dismissed an FCA lawsuit brought against Halliburton and related entities (collectively “KBR”) as barred by the FCA’s six-year statute of limitations. In a critical decision, the Fourth Circuit reversed the dismissal on the grounds that the FCA’s statute of limitations was tolled by the WSLA.
The holding is significant as the Fourth Circuit held that the WSLA applies regardless of whether the government or a private plaintiff prosecutes the case or the case involves the defense industry. The case, therefore, has the potential to reach any FCA defendant in any civil case — from financial institutions to healthcare providers.
The WSLA, enacted in 1942, extended the time to bring charges related to “indictable” fraud against the U.S. when “at war.” An amendment in 1944 deleted the term “indictable.” In 2008, the Wartime Enforcement of Fraud Act further amended the WSLA to allow it to apply whenever “Congress has enacted specific authorization for the use of the Armed Forces,” and extend the tolling period until “five years after the termination of hostilities.”
In a novel interpretation, the Fourth Circuit held that the WSLA applies to both civil and criminal fraud claims against the U.S., regardless of whether the U.S. has intervened, and even without a formal declaration of war. The Fourth Circuit first held that a formal declaration of war is not required under the WSLA, and that the U.S. was “at war” in Iraq from the date that Congress authorized the use of military force in 2002.
The court also held that the U.S. was still “at war” for the purposes of the WSLA when the alleged fraud occurred because neither Congress nor the President had met the formal requirements of the act for ending the tolling period. The Fourth Circuit then held that the WSLA applies to both criminal and civil cases because the 1944 amendments removed the word “indictable.”
Finally, the Fourth Circuit held that whether the U.S. – or a plaintiff – brings an FCA claim under the qui tam provisions is “irrelevant” because the WSLA’s tolling provision hinges not on who brings the claim, but when the claim is brought. Accordingly, the Fourth Circuit held that the relator’s FCA claims against KBR were not time-barred.
As Dietrich Knauth, a reporter with Law 360, recently noted, “The Fourth Circuit's decision in Carter v. Halliburton caused consternation among many FCA defense attorneys, who said that the decision effectively eviscerates the FCA's time limits.” Indeed, while the Fourth Circuit’s decision is remarkable, the theory advanced by the relator is gaining traction, including in cases outside of the defense industry. In mid-2012, the Department of Justice successfully made the same arguments in United States v. BNP Paribas SA, when it brought civil claims against under the FCA, alleging that the defendants had defrauded the U.S. in connection with commodity payment guarantees provided by the Department of Agriculture.
Collectively – and with broad interpretation - the Halliburton and BNP Paribas decisions could be invoked to suspend the limitations period for a wide-range of FCA claims and are certain to spur increased litigation as the government, relators and defendants alike join the fast-growing debate about the WSLA’s proper application.
For more information, see:
- Little Known Statute May Breathe New Life Into Stale False Claims Act Cases Against Financial Institutions (April 18, 2013; Thomson Reuters Accelus/Compliance)
- FCA Allows Treble Damages - 'But Treble What?' (March 26, 2013; Law360)
- False Claims Act & FIRREA (BuckleySandler Practice Overview)
CFPB Report Urges Adoption of Standards for Marketing Financial Adviser Services to Seniors
On April 18, the CFPB issued a report that reviews the marketing of investment adviser services to older Americans. The CFPB found that financial advisers use more than 50 different designations to market expertise in financial issues affecting seniors, which the CFPB claims creates confusion in the marketplace. The report includes detailed recommendations for the SEC and Congress related to (i) consumer education and disclosures, (ii) standards for the acquisition of senior designations, (iii) standards for senior designee conduct, and (iv) enforcement related to the misuse of senior designations. Among the recommendations, the CFPB suggests that policymakers consider requiring adviser education and standardized testing prior to obtaining a senior designation. The CFPB also suggests that the SEC and state policymakers consider increasing enforcement of misleading or other improper conduct by a holder of a senior designation and that state policymakers consider providing consumers with a private right of action to seek relief for the improper use of senior designations.