InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Special Alert: Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
This morning, the Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). Twice before, the Court granted certiorari on this issue, but in both cases the parties reached a settlement prior to oral arguments.
As described further below, in their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions within the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether they should defer to HUD’s disparate impact rule.
“Disparate treatment” discrimination under the FHA is defined as intentional discrimination in the provision of housing on the basis of a protected class, such as race, religion, or national origin. However, to assert a “disparate impact” claim, a plaintiff need not show any intent to discriminate by the defendant in order to establish a prima facie case. Although eleven federal courts of appeals have recognized disparate impact discrimination, all of these decisions were issued prior to the Supreme Court’s holding in Smith v. City of Jackson. In Smith, the Court held that language addressing “adverse effects” in the Age Discrimination in Employment Act (ADEA) provided textual support for disparate impact claims under the ADEA, as it does under Title VII. One of the issues addressed in Inclusive Communities is whether the FHA contains “effects-based” language permitting disparate impact claims.
Counsel for Texas argued that the Court’s holding in Smith required the Court to hold here that disparate impact claims were barred by the statutory text of the FHA, because the FHA lacks the “effects” language present in the ADEA and Title VII. Justices Scalia, Breyer, Sotomayor, and Kagan, however, focused on the language of Section 804 of the FHA which provides that it is unlawful to “otherwise make unavailable or deny a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” These Justices asked whether the phrase “otherwise make unavailable” is the equivalent of the “adversely affect” language in other civil rights statutes. Counsel for Texas responded that “making unavailable” is an active verb, and therefore requires an affirmative action intended to make a dwelling unavailable. In response, Justice Scalia asked whether “adversely affects” similarly required action on the part of a defendant.
The Justices also focused on Congress’s 1988 amendments to the FHA, which created three exceptions from liability under the FHA for (i) appraisers under Section 805(c), (ii) decisions based upon an individual’s prior conviction for manufacturing or distributing illegal drugs under Section 807(b)(4), or (iii) the application of local, state, or federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling under Section 807(b)(1). Justice Scalia stated that the Court is required to read the statute as a whole, including these exceptions. Justice Scalia noted that “what hangs me up” is how these exceptions can be reconciled with the statutory text if the FHA does not permit disparate impact claims. Counsel for Texas responded that these exceptions also apply to disparate treatment claims, and do not suggest specific Congressional acknowledgement that the FHA permits disparate impact claims.
Next, the Justices asked counsel for Respondent Inclusive Communities whether the FHA’s “because of” language required intent to discriminate. Justices Kagan and Breyer specifically noted that the Court had recognized disparate impact claims under other civil rights statutes containing similar “because of” language. Counsel agreed and argued that there was no basis for treating the FHA’s “because of” language differently.
Justice Alito asked counsel for Respondents whether the 1988 amendments make disparate impact claims cognizable under the FHA if the original act did not. Justice Alito asked whether the 1988 amendments expanded the act. Counsel responded that the amendments did not expand the FHA—rather, that disparate impact was permitted in the original act.
Next, the Solicitor General directed the Court to HUD’s recent disparate impact rule and urged the Court to give deference to HUD’s interpretation under Chevron and noted that HUD issued its rule within days of the Court’s grant of certiorari in Magner v. Gallagher, a prior case raising the same issue. Justice Alito asked whether the Court should be “troubled” by the use of Chevron to “manipulate” the Court’s decisions. The Solicitor General responded that HUD had taken the position that the FHA permits disparate impact claims since 1992.
The Solicitor General further noted that defendants in disparate impact cases have protections under the burden-shifting framework, because claimants must point to a “specific practice” that gives rise to the alleged disparity to establish a prima facie case. Justice Breyer responded by asking whether it is necessary to eliminate disparate impact altogether given the protections provided by the burden-shifting framework.
NOTE: Quotations in this client alert are based on the notes of those who attended oral arguments, and not from any official transcript.
Supreme Court Holds That Notice of Rescission Is Sufficient For Borrowers to Exercise TILA's Extended Right to Rescind
As previously reported in our January 15 Special Alert, the Supreme Court held in Jesinoski v. Countrywide Home Loans, Inc. that a borrower seeking to rescind a loan pursuant to the Truth In Lending Act’s (“TILA’s”) extended right of rescission need only submit notice to the creditor within three years to comply with the three-year limitation on the rescission right. TILA gives certain borrowers a right to rescind their mortgage loans. Although that right typically lasts only for three days from the time the loan is made, 15 U.S.C. § 1635(a), it can extend to three years if the creditor fails to make certain disclosures required by TILA, 15 U.S.C. § 1635(f). Petitioners in the case had mailed a notice of rescission to Respondents exactly three years after the loan was made and Respondents responded shortly thereafter by denying that Petitioners’ had a right to rescind. A year after submitting their notice of rescission—four years after the loan was made—Petitioners filed a lawsuit seeking a declaration of rescission and damages. In his opinion for the unanimous Court, Justice Scalia stated that the statutory language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.” BuckleySandler submitted an amicus curiae brief in the case on behalf of industry groups, arguing that notice alone is insufficient to effectuate rescission under Section 1635(f).
Special Alert: Supreme Court Holds That Notice of Rescission is Sufficient For Borrowers to Exercise TILA's Extended Right to Rescind
The Supreme Court on January 13, 2015 held in Jesinoski v. Countrywide Home Loans, Inc. that a borrower seeking to rescind a loan pursuant to the Truth In Lending Act’s (“TILA’s”) extended right of rescission need only submit notice to the creditor within three years to comply with the three-year limitation on the rescission right. TILA gives certain borrowers a right to rescind their mortgage loans. Although that right typically lasts only for three days from the time the loan is made, 15 U.S.C. § 1635(a), it can extend to three years if the creditor fails to make certain disclosures required by TILA, 15 U.S.C. § 1635(f). Petitioners in the case had mailed a notice of rescission to Respondents exactly three years after the loan was made and Respondents responded shortly thereafter by denying that Petitioners’ had a right to rescind. A year after submitting their notice of rescission—four years after the loan was made—Petitioners filed a lawsuit seeking a declaration of rescission and damages.
The Court’s opinion resolved a circuit split over whether borrowers exercising their right to rescind certain loans pursuant to Section 1635(f) must file a lawsuit to rescind their loans within the three-year period set forth in that section or can satisfy the timing requirements by merely submitting notice of rescission to the creditor. In his opinion for the unanimous Court, Justice Scalia stated that the statutory language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.” The Court rejected Respondents’ argument that a court must be involved in a rescission under Section 1635(f).
As a result of the Court’s decision, we now expect that a creditor receiving a post three-day notice of rescission from a borrower would immediately file a lawsuit against the borrower to address the validity of the purported rescission in order to avoid ongoing ambiguity regarding the status of the loan, and, if the rescission were validly noticed, to condition the rescission on the return of the loan principal.
BuckleySandler submitted an amicus curiae brief in the case on behalf of industry groups, arguing that notice alone is insufficient to effectuate rescission under Section 1635(f).
Justice Scalia Places Renewed Focus on Lenity in Hybrid Civil-Criminal Statutes
On November 10, 2014, the Supreme Court denied Douglas Whitman’s petition for a writ of certiorari in Whitman v. United States, No. 14-29; Justice Antonin Scalia, joined by Justice Clarence Thomas, issued a brief statement specifically highlighting their view of the role that the doctrine of lenity should play in the interpretation of criminal statutes. Whitman asked the high court to review his 2012 conviction for securities fraud and conspiracy under the Securities Exchange Act of 1934. The Second Circuit appeared to defer to the SEC’s interpretation of ambiguous language in the Act—according to Justice Scalia, such an approach would disregard the “many cases . . . holding that, if a law has both criminal and civil applications, the rule of lenity governs its interpretation in both settings.” Justice Scalia further noted that it was the exclusive province of the legislature to create criminal laws, and to defer to the SEC’s interpretation of a criminal statute would “upend ordinary principles of interpretation.” Justice Scalia’s approach may indicate potential adjustments in the ongoing effort to strike the right balance between the due process rights of targets of enforcement actions to know what the law prohibits, and deference to enforcement agencies to interpret federal statutes flexibly. BuckleySandler discussed the tension between lenity and Chevron deference earlier this year in a January 16 article, Lenity, Chevron Deference, and Consumer Protection Laws.
Jesinoski Case Raises TILA Questions
On November 4, the Supreme Court heard oral arguments in Jesinoski v. Countrywide Home Loans, Inc., No. 13-648, to resolve a circuit split on whether under TILA a borrower who has provided notice of rescission within three years must also file a lawsuit within that three-year period, or whether such a borrower may file a lawsuit even after the three-year period lapses. In the court below, the Eighth Circuit Court of Appeals agreed with the creditor that a borrower must file suit within three years to rescind a loan under TILA. As noted in BuckleySandler attorneys’ November 4 article, Justices’ Questioning In Jesinoski May Be Cause For Concern, during oral arguments the Justices closely questioned counsel on the statutory text. While lawyers for the borrowers and the Department of Justice met with little opposition from the bench, the Justices struggled with the argument advanced by counsel for the creditor. Ultimately, as discussed in BuckleySandler’s article, “Questions from both conservative and liberal judges suggest that both camps may be more receptive to the textual reading advanced by the Jesinoskis.” BuckleySandler attorneys also filed an amici curiae brief on behalf of industry groups in this case.
CFPB, State AGs Weigh In On TILA Rescission
This week, the CFPB and 25 states filed amicus briefs in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, a case pending before the U.S. Supreme Court that may resolve a circuit split over whether a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, or if written notice within the three-year rescission period is sufficient to preserve a borrower’s right of rescission. In short, the CFPB argues, as it has in the past, that no TILA provision requires a borrower to bring suit in order to exercise the TILA-granted right to rescind, and that TILA’s history and purpose confirm that a borrower who sends a notice of rescission in the three-year period has exercised the right of rescission. The state AGs similarly argue that TILA’s plain meaning allows borrowers to preserve their rescission right with written notice. In so arguing, the government briefs aim to support the borrower-petitioner seeking to reverse the Eighth Circuit’s holding to the contrary. The majority of the circuit courts that have addressed the issue, including the Eight Circuit, all have held that a borrower must file suit within the three-year rescission period.
Supreme Court Holds President May Make Recess Appointments During Intra-Session Recesses Of Sufficient Length
On June 26, the Supreme Court rejected the federal government’s challenge to a January 2013 decision by the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281, 2014 WL 2882090 (U.S. Jun. 26, 2014). A five-member majority of the Court held that Presidents are permitted to exercise authority under the Recess Appointments Clause to fill a vacancy during both intra-session and inter-session recesses of sufficient length, and that such appointments may fill vacancies that arose prior to or during the recess.
The Court determined that the phrase “recess of the Senate” is ambiguous, and that based on the functional definition derived from the historical practice of past presidents and the Senate, it is meant to cover both types of recesses. Further, the court held that although the Clause does not indicate how long a recess must be before a president may act, historical practice suggests that a recess less than 10 days is presumptively too short. The Court did not foreclose the possibility, however, that appointments during recesses of less than 10 days may be permissible in unusual circumstances. The Court also validated the Senate’s practice of using pro forma sessions to avoid recess appointments, holding the Senate is in session when it says it is, provided it retains capacity to conduct business. Because the Senate was in session during its periodic pro forma sessions, and because the recess appointments at issue were made during a three-day recess between such sessions, the appointments were invalid.
A minority of the Court concurred in the judgment, but endorsed a narrower reading of the President’s authority to make recess appointments and the Senate’s ability to avoid triggering the President’s recess-appointment power. Writing for that minority, Justice Scalia explained that the plain constitutional text limits the President’s recess appointment power to filling vacancies that first arise during the recess. The minority reading of the Clause also limits the President’s recess appointment power to recesses between legislative sessions, and not intra-session ones. CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members whose appointments were at issue in this case, but was subsequently re-nominated and confirmed for the position. He later ratified CFPB actions taken during the period he served as a recess appointee.
Supreme Court Upholds Securities Class Action "Fraud On The Market" Theory
On June 23, the U.S. Supreme Court rejected a challenge to the long-standing “fraud-on-the-market” theory, on which securities class actions often are based. Halliburton v. Erica P. John Fund Inc., No. 13-317, 2014 WL 2807181 (Jun. 23, 2014). Halliburton petitioned the Court after an appeals court relied on the theory to affirm class certification in a securities suit against the company, even after the appeals court acknowledged that no company misrepresentation affected its stock price. The theory at issue derives from the Court’s holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) that a putative class of investors should not be required to prove that each individual actually relied in common on a misrepresentation in order to obtain class certification and prevail on the merits. The petitioner argued that empirical evidence no longer supports the economic theory underlying the Court’s holding in Basic allowing putative class members to invoke a classwide presumption of reliance based on the concept that all investors relied on the misrepresentations when they purchased stock at a price distorted by those misrepresentations. The Court declined to upset the precedent set in Basic, holding that the petitioner failed to show a “special justification” for overruling presumption of reliance because petitioner had failed to establish a fundamental shift in economic theory and that Basic’s presumption is not inconsistent with more recent rulings from the Court. The Court also declined to require plaintiffs to prove price impact directly at the class certification stage, but agreed with the petitioner that a defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
Supreme Court Agrees To Hear Trade Group Challenge To Mortgage Loan Officer Compensation Guidance
On June 16, the U.S. Supreme Court consolidated and agreed to hear two related cases regarding the Department of Labor’s (DOL) 2010 interpretation of its regulations under the Fair Labor Standards Act that mortgage loan officers are not exempt from minimum wage and overtime pay requirements. Perez v. Mortgage Bankers Assoc., No. 13-1041. In July 2013, the D.C. Circuit instructed the district court to vacate the DOL’s 2010 guidance, holding that the guidance significantly revised an earlier contrary agency interpretation of DOL regulations and, as such, required notice and comment rulemaking. The Supreme Court will address the question of “[w]hether a federal agency must engage in notice-and-comment rulemaking before it can significantly alter an interpretive rule that articulates an interpretation of an agency regulation.” The case will be argued and decided during the Court’s next term, which begins in October 2014 and ends June 2015.
Supreme Court Directs Tenth Circuit To Reconsider RMBS Ruling
On June 16, the U.S. Supreme Court vacated a Tenth Circuit holding that RMBS claims filed by the NCUA were timely and instructed the circuit court to reconsider that holding in light of the Supreme Court’s recent decision in an environmental case. National Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., No. 13-576, 2014 WL 2675836 (U.S. Jun. 16, 2014). On June 9, the Court delivered its opinion in CTS Corp. v. Waldburger, an environmental case that addressed the difference between statutes of limitations and statutes of repose, which are both used to limit the temporal extent or duration of tort liability. In Waldburger, the Supreme Court held that under the environmental statute at issue, Congress intended to preempt state statutes of limitations but not statutes of repose. In light of that decision, the Court asked the Tenth Circuit to reconsider its holding that the federal extender statute supplants all other limitations frameworks, including both the one-year statute of limitations and the three-year statute of repose, included in the limitations provision of the Securities Act of 1933 and the similar state laws at issue in the case.