Earlier this month, the Bureau of Consumer Financial Protection and the Department of Justice brought an $80 million discriminatory lending action against Ally Financial. Ally, a major recipient of TARP bailout money, allegedly charged different rates based on the race or national origin of borrowers. The loans at issue do not include information about the race or national origin of the borrowers, but "the CFPB and the DOJ assigned race and national origin probabilities to the applicants" based on a geography-based and name-based methodology. In other words, the government's discriminatory lending action is rooted in its assumptions about whether or not borrowers were minorities. Illegal discrimination in lending is just as unacceptable as it is in other contexts, but punishing lenders based on government guesses about whether discrimination occurred is not the solution.
December 2013 Archives
Judge Jed Rakoff uses a piece in the New York Review of Books to consider why government officials, who have talked a lot about fraud being at the root of the financial crisis, have not prosecuted the individuals that allegedly perpetrated the fraud. In doing so, he raises some bigger concerns about how government bureaucracies make decisions about whom to pursue and how.
Earlier this week, the Bureau of Consumer Financial Protection filed its first lawsuit against an online lender. The alleged offense was making loans in violation of state usury and licensing laws. The Bureau alleges that, because the loans were illegal under state law, making them and collecting them violated the federal prohibition against unfair, deceptive, and abusive acts and practices. Some state attorneys general have filed their own suits on the same facts. This move by the Bureau raises a number of questions. Should the Bureau target high-cost consumer financial products even if the costs are disclosed? The loans in question come with very high interest rates, but the Bureau's complaint reproduces a table from the offending lender's website that clearly sets out how high those rates are, how many payments will have to be made, and what the amount of each payment will be. Is it the role of the new federal consumer finance regulator to enforce state laws designed to prevent consumers from taking out certain types of loans? States presumably adopted those laws with the view that the prohibitions were of sufficient importance for the states to dedicate the necessary resources to enforce them. But should a federal agency's resources be spent on enforcing consumer lending limits the merits of which it has not considered? Even well-intentioned caps constrain credit availability to consumers, which may lead to more serious financial consequences to the consumers than paying high interest rates would have. Before championing these laws, the Bureau ought to undertake the necessary analysis to determine whether they hurt or harm consumers.
Post written by Mark Behrens, partner at Shook, Hardy & Bacon L.L.P. and co-chair of SHB's Public Policy Group
The New York Court of Appeals, the state's highest court, today rejected an equitable medical monitoring claim brought by longtime heavy smokers who have not been diagnosed with a smoking-related disease. The court said that medical monitoring is only available after a physical injury has been proven. The court explained that the "requirement that a plaintiff sustain physical harm before being able to recover in tort is a fundamental principle of our state's tort system" and that this physical injury requirement is important because "it defines the class of persons who actually possess a cause of action, provides a basis for the fact-finder to determine whether a litigant actually possesses a claim, and protects court dockets from being clogged with frivolous and unfounded claims."
The court also stated it "undoubtedly has the authority to recognize a new tort cause of action, but this authority must be exercised responsibly...." Echoing arguments previously articulated by SHB - and citing a Missouri Law Review article by Victor Schwartz and Leah Lorber - the court summarized some of the policy problems that could occur from creating a new, full-blown tort cause of action. For instance, the court acknowledged that countless plaintiffs could come forward to recover monitoring costs, "effectively flooding the courts while concomitantly depleting the tortfeasor's resources for those who have actually sustained damage." "Moreover," the court added, "it is speculative at best, whether asymptomatic plaintiffs will ever contract a disease; allowing them to recover medical monitoring costs without first establishing physical injury would lead to the inequitable diversion of money away from those who have actually sustained an injury as a result of the exposure." The court also noted that, from a practical standpoint, "it cannot be overlooked that there is no framework concerning how such a medical monitoring program would be implemented and administered." Again citing the article by Victor & Leah, the court concluded, "The Legislation is plainly in the better position to study the impact and consequences of creating such a cause of action, including the costs of implementation and the burden on the courts in adjudicating such claims."
The long-in-the-making Volcker Rule was finalized this week. Under the rule, banks and affiliated entities, will not be permitted to engage in proprietary trading and their relationships with hedge funds and private equity funds will be limited. The rule--a five-agency, nearly thousand-page effort--is a reflection of the difficulty of distinguishing prohibited from permissible activity. Volcker compliance programs will be large and complex, and frequent unintentional missteps across Volcker's hazy lines are likely. Consequently, the rule promises to be a plentiful supplier of cases for regulators and a great source of enforcement risk to the companies subject to it.
In a victory for corporate defendants that often face baseless suits intended to extort a quick settlement, a judge this week imposed sanctions on so-called "porn troll" Prenda.
Prenda had filed multiple suits against Comcast, AT&T and other internet service providers, claiming copyright infringement arising from the downloading of copywritten pornographic materials. The defendants claimed that the claims were baseless and that Prenda had brought the claims in hopes of extorting a quick settlement from corporations looking to avoid an association with pornography.
U.S. District Judge Patrick Murphy did not mince words:
"These men have shown a relentless willingness to lie to the court on paper and in person, despite being on notice that they were facing sanctions in this court, being sanctioned by other courts and being referred to state and federal bars, the United States Attorney in at least two districts, one state attorney general and the Internal Revenue Service."
Judge Murphy ordered Prenda to pay more than $260,000 in attorneys' fees and litigation costs to the defendants. Earlier this year a federal judge in California also ordered Prenda to pay defendants' attorneys' fees based on similar reasoning.
Because of the high cost of defending litigation, plaintiffs willing to aggressively plead cases can often extort settlements from defendants who are willing to settle at a price they think will be less than their cost of litigation. I covered this phenomenon and described the high economic costs resulting from the practice in my 2005 book, Out of Balance.
The Commodity Futures Trading Commission was sued again today. The complaint alleges that the CFTC undertook a major rulemaking effort without complying with the procedural requirements in the Commodity Exchange Act and the Administrative Procedure Act. It is a long overdue reminder to the CFTC of its obligation to make rules in accordance with the law.
Dodd-Frank gave the CFTC the huge swaps market to oversee, and the agency has spent the past three years putting in place a complex set of rules to govern it. Introducing transparency to a formerly dark market has been the rallying cry of this effort. One of the persistent questions asked about the new regulatory framework as it was developing was how it would apply outside the U.S. The swaps market is highly international, so these questions were not mere academic musings. The CFTC avoided the question at first, but eventually issued a guidance document that looks a lot like a binding rule. Through its web of definitions and directives, it draws into the CFTC's new regulatory framework many non-U.S. participants who are also regulated at home.
The complaint alleges that the CFTC failed to fulfill its cost-benefit mandate under the Commodity Exchange Act. The complaint further alleges that the CFTC violated the Administrative Procedure Act by failing to give people sufficient opportunity to weigh in on the CFTC's cross-border approach, ignoring the comments on extraterritorial application, and arbitrarily expanding Dodd-Frank's reach.
The CFTC repeatedly has employed illegitimate methods of imposing binding requirements in recent years. The guidance document is one of the most egregious examples of this pattern. It is time for the CFTC to make its case in court for why it has relied so heavily on nontransparent rulemaking methods to bring transparency to the swaps market.
Mark A. Behrens and Virginia Knapp Dorell of the international law firm Shook, Hardy & Bacon, L.L.P., in an article originally published on Corporate LiveWire, outline proposed amendments to the Federal Rules of Civil Procedure released by the Advisory Committee on Civil Rules. These suggested fixes are aimed at curbing litigation costs, especially those related to discovery.