HUD’s New Fair Housing Rule Could Face Supreme Court Scrutiny

By Margaret Dreschel, J.D. Candidate 2015 | Posted on

The Housing and Urban Development Agency (HUD) recently issued a new “disparate impact” rule – essentially codifying the main method used to prove housing and lending discrimination for the past several decades – but the timing of this move may say more than the rule itself.  The new rule has come into effect while the Supreme Court is deciding whether or not to hear a critical housing discrimination case, Mount Holly v. Mt. Holly Gardens Citizens in Action.   If the Court grants cert, it has the potential to overturn the very substance of HUD’s new rule and, more importantly, the “disparate impact” method of fighting housing and lending discrimination in general.  Among the many stakeholders, this has considerable impact on the banking and insurance industries, which have faced an increase in lending and rate-setting discrimination lawsuits based on “disparate impact” claims.  You can read the HUD rule here, and you can read the Mount Holly petition for a writ of certiorari here.

In the case, the Mount Holly Township in New Jersey determined that a residential area known as “the Gardens” was blighted, and it moved forward with redevelopment plans for the area.  Although the Township acquired and demolished most of the houses in the area over several years, it failed to build new housing.  Residents of “the Gardens” eventually sued and won on the claim that the Township’s actions have had a disparate impact on African Americans.  On appeal before the Supreme Court, the Township now raises the question whether “disparate impact” is a cognizable claim for proving discrimination under the Fair Housing Act.

As the agency responsible for enforcing the Fair Housing Act, HUD works to sniff out illegally discriminatory housing practices based on protected characteristics (e.g., race, ethnicity, disability, etc.).  It has long interpreted the Act so that even where discriminatory motivation is missing or hard to prove, HUD can still prosecute lenders or landlords, for example, if their practices cause protected persons to suffer unjustified and disproportionate harm.  This is known as the “disparate impact” principle that is now codified into the rule.  Based on a three-part burden-shifting test, the rule often makes it easier for plaintiffs to establish a practice as discriminatory since they do not have to prove the more subjective motivation behind that practice.

HUD’s reason for promulgating the rule is simple enough on its face: the agency wants to ensure a formalized, consistent application of the “disparate impact” principle nationwide.  At the same time, HUD and the Obama administration are also likely taking proactive measures in light of Mount Holly, given that the principle may have a better chance of surviving the Court’s review if backed by a codified federal regulation.

More broadly, this decision could have significant implications for home insurers and banking institutions like Wells Fargo and Bank of America, which have been the latest targets of discriminatory lending lawsuits.  The Obama administration has relied heavily on the “disparate impact” principle to go after discriminatory mortgage lending practices, pointing to data showing higher interest rates and less favorable loan conditions provided to minority persons.  In the process, the administration has won some of the largest settlements in history worth hundreds of millions of dollars for minority communities across the country.  Banks maintain that these settlements are the undue cost of avoiding litigation rather than any real finding of discrimination, and that the inevitable result is a transferred cost to the consumer.  The American Banking Association, in particular, has expressed concern that HUD’s rule creates “unnecessary compliance risk,” which then limits credit availability and drives up the cost of borrowing in a recovering economy.

Therefore, civil rights advocates and the American Bankers Association (ABA) are well aware of the high stakes if HUD’s rule is upheld or overturned.  If the Supreme Court takes the case, the waiting period begins; otherwise, HUD and civil rights advocates may have a greater sense of closure for the present.

For further reference, please see this Wall Street Journal article and this ProPublica article.

BCLBE Russian Market Conference: Cross-Border Investment

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

Earlier this month, the Berkeley Center for Law, Business and the Economy hosted its latest conference on the “Russian Market: Legal and Business Perspectives.”  The Network extensively covered the series of speakers and panel talks, with special attention to its IP and innovation topics.  This post considers international investment in the Russian market.

Panelists Michael Sanders and Ramsey Hanna discussed the Russian investment climate and the challenges of completing cross-border transactions.  Specifically, Sanders and Ramsey analyzed the joint venture between RUSANO and Domain Associates to highlight the business culture challenges of completing cross-border investment transactions with Russian firms.  In March 2012, RUSANO, a Russian open joint stock company, and Domain Associates (“Domain”), a U.S. venture capital firm, entered into an investment agreement.  Pursuant to the agreement, the parties agreed to jointly invest in emerging life sciences technology companies, foster transfer of technology into Russia, and establish pharmaceutical manufacturing facilities in the country.  Sanders and Ramsey noted the importance of building trust and confidence between RUSANO and Domain.  That is, successfully negotiating the joint venture’s terms required developing good working relationships between the parties’ legal teams and those individuals charged with structuring their partnership.

Conducting business with firms from different markets is not without its challenges.  Russian firms employ different negotiation tactics and the negotiation process can be lengthy and detailed.  As the director of a US pharmaceutical firm wrote, “Russia is a great place to operate – you can really build a strong, profitable business here – but there are no shortcuts.”  In negotiating the RUSANO-Domain joint venture, the parties dealt with the counter-effects of corruption.  To be sure, there is tendency among Russian firms to focus on procedure and formalities.  In the face of corruption and bribery, honest Russian firms strive for transparency and can be “methodical to a fault.”  The “rigid business culture” in Russia can be contrasted with the more “nimble start-up culture” present among Silicon Valley firms.

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CFPB Announces “Ability to Repay” Rule for Mortgage Lenders

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages.  The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act.  The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.

The Ability-to-Repay rule is aimed at protecting American consumers.  According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”

Under the new rule:

  • 1. Lenders are required to obtain and verify financial information from potential borrowers,
  • 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
  • 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.

In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors:  1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.

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BCLBE Russian Market Conference: The Innovation Aspect

By Natalia Katunkina, J.D. Candidate 2014 | Posted on

In a follow up to a previous post, an interesting aspect of the “Russian Market: Legal and Business Perspectives” symposium was the panelists’ discussion of Russia’s treatment of domestic and foreign businesses—and argument that it is a large stop sign for many investors.  Consequently, the oil-focused government has for years ignored one of its chief assets—the country’s young science and technology innovators.  Educated in traditionally math-heavy state schools and inspired by the successes of Sergey Brin and Arkady Volozh, they too are ready to innovate.  This undervalued science and technology talent has attracted many Indian and Chinese investors to explore Russia, and these investments have proven to be lucrative.

The panelists agreed that Russian entrepreneurs tend to generate highly original proposals.  “Russians don’t usually pitch yet another social network idea,” observed Stephanie Marrus, Director of the Entrepreneurship Center at UCSF.  Building on her comment, Axel Tillman, CEO of RVC-USA, shared an example of how a small team of Russian engineers, within days, developed a commercially-viable way of avoiding a costly energy distribution inefficiency in the elevator industry, which many others thought permanent and inevitable.

The panelists also discussed how Russian entrepreneurs tend to have a can-do attitude and a strong confidence in their own ability to overcome obstacles to innovation.  While valuable in many respects, these tendencies, if unchecked, can result in delays and frustrations even for entrepreneurs themselves, as they attempt to accomplish unfamiliar business tasks on their own, often without consulting an expert even when one is available.  The resulting delays can be highly damaging for the outlook of a business, both in the short- and long-term future.

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Professor Gadinis Comments on the Recent DOJ Suit Against S&P

By Luke Burton, J.D. Candidate 2015 | Posted on

The Department of Justice recently brought charges of mail fraud, wire fraud, and financial institution fraud against Standard and Poor’s Rating Service, owned by parent company McGraw-Hill. It was filed in federal court in Los Angeles. (Read full complaint here).

The DOJ’s civil action against S&P calls for at least $1 billion in civil penalties, and the complaint alleges the rating agency defrauded investors out of as much as $5 billion. The fraud is claimed to have occurred as S&P purposely misled investors in an effort to increase the use and revenue of its ratings service. S&P’s press release denied any allegations that the company behaved in any manner other than “good-faith” when grading RMBSs and CDOs, and further questioned the legal merit of DOJ’s case.

The complaint states that DOJ is going to use the Financial Institutions Reform, Recovery, and Enforcement Act to extract civil penalties from S&P for misrepresenting material facts to investors in an effort to increase profits and market share for its rating business. FIRREA was enacted in 1989 in response to the Savings and Loan Crisis. The statute was little used before it was resurrected by prosecutors who realized the statute might be of particular value for pursuing fraud that occurred during the sub-prime mortgage crisis.  FIRREA is a particularly strong tool for prosecutors because it imposes large civil penalties (up to $1 million per offense), has a long statute of limitations period (10 years), and allows prosecutors to have much greater investigative tools than they would normally enjoy in a civil case (e.g. prosecutors can take testimony from individuals).

Perhaps most importantly, FIRREA only requires that prosecutors prove their case by a preponderance of the evidence. The statute could essentially give DOJ many powerful evidentiary tools and punitive remedies, most commonly seen in criminal cases, but would not require them to demonstrate their case to the onerous reasonable doubt standard.

Because DOJ lawsuit against a ratings agency is uncharted legal waters, much remains to be seen about the merits of the case. Berkeley Law Professor Stavros Gadinis notes that courts have required a high evidentiary burden in the context of fraud litigation in order to curb frivolous or unmeritorious claims. “In Tellabs v. Makor, which concerned 10b-5 litigation, the Supreme Court held that, in order to establish scienter (broadly speaking, intent to defraud or knowledge), courts must look at the evidence as a whole, and not at just excerpts hand-picked by the plaintiffs.” Professor Gadinis explained, “In the S&P’s case, this could mean that, if one looks at email correspondence as a whole, their employees have expressed enough support for their ratings to disprove the claim that these ratings were clearly part of a scheme to defraud.” However, because FIRREA has been rarely been utilized, there is little case law to aid in forecasting how a court might rule. Gadinis emphasized that the reasoning in Tellabs pertained to 10b-5 litigation, thus the extension of the Court’s reasoning to FIRREA “remains an open question.”

 

Former Senior Executives Receive Lucrative Consulting Arrangements

By Bali Kumar, J.D. Candidate 2013 | Posted on

For some senior executives at major companies, retirement does not lead to the cessation of income.  Aside from pension and/or severance benefits, some retired executives are retained as consultants.  The Wall Street Journal illustrates the variety of purposes former executives can serve as consultants, including relationship management, closing deals, and facilitating new executive transitions.

For example, Phillip E. Powell of First Cash Financial Services, Inc. is former executive who received a lucrative consulting arrangement after retirement. According to First Cash Financial Services Inc.’s most recent proxy statement, Powell performs “such services as may be requested by the Board of Directors.”  This consulting arrangement began in 2005, and the term of this arrangement extends through the end of 2016.  For his services, Powell receives $700,000 per year for an unspecified number of hours of work.  If the company terminated his contract in 2011, he would have been paid out the remaining $3.5 million on his contract.

This is a highly rewarded consulting contract.  Based on 2011 salary alone, Powell earned one of the highest salaries of any First Cash Financial Services Inc. employee in that year.  In 2011, no employee other than the President and CEO earned a higher base salary than Powell.  In terms of 2011 total compensation, Powell would be within the top five most highly compensated employees, earning more than two Named Executive Officers: General Counsel Peter Watson and Vice President of Finance Jim Motley,.

The fact that Powell’s total package places him among the ranks of the most highly compensated employees of First Cash Financial Services Inc. is noteworthy, especially considering his salary is guaranteed—there is no performance-related element to his pay package.  This means that Powell is not held accountable for his performance in the same way that executive officers are.  This clearly demonstrates that the Board of Directors of First Cash Financial Services Inc. considers Powell’s consulting services to be extremely valuable.

Powell is one of many executives who benefit from consulting contracts after stepping down from their executive role.  According to Business Insider, “semi-retirement” can allow for either an effective transition from one executive to another or potentially be a new pool of funding for severance packages.  In either case, the pay packages are lucrative.

The Week in Review: FB, BNY Mellon, and Cybersecurity

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Facebook (FB) has cleared an important legal hurdle, as a S.D.N.Y. district court dismissed a lawsuit regarding its fumbled IPO last May.  The plaintiffs had argued that CEO Mark Zuckerberg and other directors should be liable for selectively disclosing negative measures of the company’s performance.  Judge Sweet disagreed.  Unsurprisingly, a Facebook representative said they were “pleased with the court’s ruling.”  For more, see CNBC.

The IRS won a major case in U.S. Tax Court earlier this week, and the ruling could cost the Bank of New York Mellon more than $800 million.  The dispute arose from Structured Trust Advantaged Repackaged Securities (STARS) – essentially manufactured tax shelters marketed by the bank.  In ruling against BNY Mellon, the Court held the STARS program was a “subterfuge for generating, monetizing and transferring the value of foreign tax credits.”  For more, see the Wall Street Journal.

In a follow-up to a previous Network post, President Obama has signed an executive order on cybersecurity.  However, the President’s order does not reach tough new regulations on private companies, falling short of last year’s proposed legislation, and does not allow for broad information sharing with government intelligence agencies as proposed by CISPA.  Congressional reaction to the executive order is yet to be determined—some commentators view the move as taking pressure off Congress to act on cybersecurity this term, but even President Obama, in his State of the Union address last night, addressed the need for a comprehensive law.  For more, see CNET and BBC.

More from the Russian Market Symposium: The IP Side of Business in Russia

By Mark Rutter, J.D. Candidate 2015 | Posted on

As part of the recent Berkeley Center for Law, Business and the Economy (BCLBE) symposium, “Russian Market: Legal and Business Perspectives,” which took place in San Francisco this past week (see full coverage here), a variety of panelists discussed topics ranging from Russia’s recent accession to the World Trade Organization (WTO) to intellectual property development and protection in Russia and the current opportunities for innovation by Russian entrepreneurs.

The intellectual property panel delivered a mixed message of hope amid cautionary warnings about the state of Russian intellectual property laws in Russia. Mark Chizhenok, a partner and IP practitioner at Moscow-based Ivanov, Makarov & Partners, warned that despite Russia’s ascension to the WTO—which supposedly opened the country more fully to foreign attorneys—the complexity of Russian IP law continues to necessitate competent local counsel assisting in all intellectual property transactions. (more…)

BCLBE Presents: “Who is Your Client: The Company or Its CEO?”

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

On Thursday, February 14, the Berkeley Center for Law, Business and the Economy is hosting “Who is Your Client: The Company or Its CEO?” The event will take place in Room 110 at Boalt Hall. Presenters include Kenton King, a partner at Skadden Arps, Scott Haber, a partner at Latham & Watkins, and Michael Ross, a former Latham & Watkins partner and General Counsel of Safeway, Inc.  The speakers will address the ethical and practical issues that arise when there are actual or potential conflicts of interest between the organization and its senior management. Lunch will be provided and CLE credit is available. Registration information is available here.

Lessons from the Symposium, “Russian Market: Legal and Business Perspectives”

By Nadezhda Nikonova, J.D. Candidate 2013 | Posted on

On February 5, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) and LegalConnect RU held the Russian Market: Legal and Business Perspectives symposium. Several of the panelists also presented at Berkeley Law the following day. The various panels discussed the benefits and obstacles of doing business in Russia, Russia’s accession into the WTO, Russia’s changing Intellectual Property regime, and innovation in Russia (private and government-backed). Common themes included the effects of corruption on Russian law and business, the need to partner with a Russian attorney for all cross-border transactions and litigation, and the differences between Russian-style and American-style law and business culture.

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