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SEC Announces First-Ever Enforcement Action Against Credit Ratings Agency
On January 21, the SEC announced a settlement with a credit rating agency in connection with its rating of certain commercial mortgage-backed securities (CMBS). The ratings agency agreed to pay the SEC more than $58 million for allegedly (i) misrepresenting its conduit fusion CMBS ratings methodology; (ii) publishing a “false and misleading article purporting to show that its new credit enhancement levels could withstand Great Depression-era levels of economic stress;” and (iii) failing to maintain and enforce internal controls regarding changes to its surveillance criteria. In a separate administrative order, the SEC instituted a litigated administrative proceeding against the former head of the agency’s CMBS Group for “fraudulently misreprent[ing] the manner in which the [ratings agency] calculated a critical aspect of certain CMBS ratings in 2011.”
CFPB and Maryland AG Bring Enforcement Action For Alleged RESPA Violations
On January 22, the CFPB and Maryland Attorney General announced an enforcement action against two banks, as well as a former loan officer and his wife, for alleged violations of RESPA and state law. The complaint filed in the District of Maryland alleges that loan officers at the banks accepted leads and marketing assistance from a title company in exchange for the referral of settlement service business to the title company. The parties filed Stipulated Final Judgments and Orders, under which one bank will pay approximately $10.8 million to consumers and $24 million in penalties, and the other bank will pay $300,000 to consumers and $600,000 in penalties. The individual loan officer and his wife will pay a combined $30,000 penalty.
House Financial Services Committee Approves Agenda for 114th Congress
On January 21, the Committee on Financial Services, in a voice vote, agreed to a new oversight plan that identifies the areas that the Committee and its subcommittees plan to oversee during the 114th Congress. Notable sections of the oversight plan include: (i) examining the governance structure and funding mechanism of the CFPB; (ii) reviewing recent rulemakings by the CFPB and other agencies on a variety of mortgage-related issues; (iii) examining the effects of regulations promulgated by Dodd-Frank on community financial institutions; and (iv) examining proposals to modify the GSEs.
FHFA Director Set to Testify At First Committee Hearing
On January 27, FHFA Director Mel Watt is scheduled to testify before the House Committee on Financial Services. The hearing, scheduled to begin at 10am, will be the first for the Committee in the 114th Congress.
New General Counsel Takes Helm at FDIC
On January 15, the FDIC announced Charles Yi as the agency’s new general counsel. Previously, Yi served as staff director and chief counsel on the Senate Committee on Banking, Housing, and Urban Affairs, as Deputy Assistant Secretary for Banking and Finance at the Department of Treasury, and as Counsel for the Committee on Financial Services of the U.S. House of Representatives. Richard Osterman, who has served as acting General Counsel, will return to his previous position as Deputy General Counsel.
NY Attorney General Announces Agreement To End Bank's Alleged Mortgage Redlining
On January 19, the New York Attorney General (AG) announced an agreement with a New York-based community bank that the AG alleged had excluded predominantly minority neighborhoods from its mortgage lending business. As part of the agreement, the bank will (i) open two branches in neighborhoods with a minority population of at least 30 percent, with the first located within two miles of a majority-minority neighborhood and the second located within one mile of a majority-minority neighborhood; (ii) create a special financing program to provide $500,000 in discounts or subsidies on loans to residents of majority-minority neighborhoods; and (iii) create a marketing program directed at minority communities. Additionally, the bank agreed to submit to reporting and monitoring by the AG for a three-year period and pay $150,000 in costs to the State of New York.
Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
On January 21, the U.S. 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). 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 of the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether the Court should defer to HUD’s disparate impact rule. The Court is expected to issue its ruling by the end of June. For more information on the oral argument, please refer to our previously issued Special Alert.
Large National Bank Faces Class Action Suit Over Alleged SCRA Violations
On January 15, an Army Reserve sergeant filed a class action suit against a large national bank for allegedly violating the SCRA limitation on a lender's ability to foreclose on an active duty service member's property. According to the complaint, the bank violated the law by foreclosing on the plaintiff’s home and seizing personal property while the sergeant was on active duty. Wensel et al v. The Bank of New York, No 2:15-cv-00068, (W.D. Penn. Jan. 15, 2015)
Australian AML Regulator Fines Company For Failing to Register Affiliates
On January 21, the Australian Transaction Reports and Analysis Centre (AUSTRAC) announced a $122,400 penalty (Australian dollars) against a large financial services company for failing to register six affiliate businesses as remittance services providers. AUSTRAC serves as Australia’s regulator of anti-money laundering and counter-terrorism financing activities. AUSTRAC noted the company’s voluntary disclosure was taken into consideration when determining its enforcement approach.
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.