TARGET MARKETING OF SUBPRIME LOANS

Transcription

JOURNAL OF LAW AND POLICY
VOLUME XVIII
2009
No. 1
CONTENTS
Symposium
USING GOVERNMENT POLICY TO CREATE MIDDLE CLASS
GREEN CONSTRUCTION CAREERS
Benjamin S. Beach, J.D. ................................................................................... 1
RETHINKING THE HOMEOWNERSHIP SOCIETY: RENTAL
STABILITY ALTERNATIVE
Arlo Chase, J.D.............................................................................................. 61
TARGET MARKETING OF SUBPRIME LOANS: RACIALIZED
CONSUMER FRAUD & REVERSE REDLINING
Linda E. Fisher, J.D. .................................................................................... 121
COMMUNITY BENEFITS AGREEMENTS AND COMPREHENSIVE
PLANNING: BALANCING COMMUNITY EMPOWERMENT AND THE
POLICE POWER
Patricia E. Salkin, J.D. and Amy Lavine, J.D. ............................................... 157
THE FAILURE OF FANNIE MAE AND FREDDIE MAC AND THE
FUTURE OF GOVERNMENT SUPPORT FOR THE HOUSING
FINANCE SYSTEM
Thomas H. Stanton, J.D................................................................................ 217
ELIMINATING RACIAL DISCRIMINATION IN THE SUBPRIME
MORTGAGE MARKET: PROPOSALS FOR FAIR LENDING REFORM
Winnie F. Taylor, J.D. .................................................................................. 263
Article
FELLOW-FEELING AND GENDER IN THE LAW OF
PERSONAL INJURY
Anita Bernstein, J.D. .................................................................................... 295
Notes and Comments
MIRANDA’S APPLICATION TO THE EXPANDING TERRY STOP
Daniel C. Isaacs........................................................................................... 383
HOW STREAMING AUDIO AND VIDEO CHANGE THE PLAYING
FIELD FOR COPYRIGHT CLAIMS
Melissa L. Morris......................................................................................... 419
LOCKING DOWN OUR BORDERS: HOW ANTI-IMMIGRATION
SENTIMENT LED TO UNCONSTITUTIONAL LEGISLATION AND
THE EROSION OF FUNDAMENTAL PRINCIPLES OF AMERICAN
GOVERNMENT
Jamie Nielsen............................................................................................... 459
ONE STEP FORWARD, TWO STEPS BACK: HOW MANDATING THE
HUMAN PAPILLOMAVIRUS VACCINE WILL INCREASE THE USE
OF VACCINE EXEMPTIONS AND NEGATIVELY IMPACT OUR
NATION’S HEALTH
Katharine Southard ...................................................................................... 503
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USING GOVERNMENT POLICY TO
CREATE MIDDLE CLASS GREEN
CONSTRUCTION CAREERS
Benjamin S. Beach*
INTRODUCTION
In the last several years, investment has flowed at significant
scale into what has come to be called the “green economy.”1 In
particular, the development sector, which encompasses
construction and rehabilitation of commercial, residential and
other facilities and infrastructure, has embraced “green” in its
materials, processes and products.2 At the same time, federal,
* Staff Attorney, Community Benefits Law Center. The author would
like to thank Scott Cummings, Evan Denerstein, Joanna Lee, Julian Gross
and Adrian Martinez for comments on drafts and helpful conversations.
1
Joel Makower et al., The State of Green Business 2009, GREENER
WORLD MEDIA, Feb. 2009, at 28. Venture capital investment in green
technologies soared to a record $7.6 billion, double the previous year,
according to Greentech Media.
Defining the “green economy” is beyond the scope of this article,
which focuses specifically on green building and construction. A number of
interesting, accessible articles have addressed the question of what constitutes
a “green job,” including: Bryan Walsh, What Is a Green Collar Job,
Exactly?, TIME, May 26, 2008, available at http://www.time.com/time/
health/article/0,8599,1809506,00.html, and Raquel Pinderhughes, Green
Collar Jobs, CITY OF BERKELEY, OFF. OF ENERGY & SUSTAINABLE DEV.
(2007), available at http://www.michigan.gov/documents/nwlb/Green_Collar
_Jos_236013_7.pdf.
2
Makower, supra note 1, at 22. The number of Energy Star-certified
buildings has increased from 90 buildings certified in 1999 to more than
3,200 in 2008. In 2009 alone, that number grew 230 percent, more than
doubling from the 1,400 buildings that certified in 2007. For the last several
years, the growth in certified projects in LEED for New Construction, LEED
1
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state and local governments have entered the green development
sector as funders, developers and regulators.3 Indeed, in 2009,
billions of dollars flowed from public coffers to fund “green”
development projects.4 This sudden and massive influx of funds
should prompt stakeholders at every level to consider what
policies will govern the expenditure of such funds, and what
goals will be served by such policies.
Supporters have rightly justified government facilitation of
green development on environmental grounds.5 But increasingly,
in advancing arguments for this government activity,
proponents, including the Obama administration, have focused
on that most meaningful of economic benefits: jobs.6
Community-based and labor organizations around the country
for Existing Buildings, and LEED for Commercial Interiors, has enjoyed an
annual growth rate of anywhere from 10 to 90 percent.
3
According to the U.S. Green Building Council’s website, “various
LEED initiatives including legislation, executive orders, resolutions,
ordinances, policies, and initiatives are found in 43 states, including 190
localities (126 cities, 36 counties, and 28 towns), 36 state governments
(including the Commonwealth of Puerto Rico), 12 federal agencies or
departments, 16 public school jurisdictions, and 39 institutions of higher
education across the United States.” U.S. GREEN BUILDING COUNCIL:
GOVERNMENT RESOURCES (2009), http://www.usgbc.org/DisplayPage.aspx?
CMSPageID=1779 [hereinafter USGBC Website].
4
U.S. Green Building Council, Select Highlights of Provisions Relevant
to Green Building in the American Recovery and Reinvestment Act of 2009,
https://www.usgbc.org/ShowFile.aspx?DocumentID=5458. According to the
U.S. Green Building Council’s website, the federal government has 2,831
projects pursuing LEED certification, state governments have 1,890 projects
pursuing LEED certification and local governments have 2889 projects
pursuing LEED certification. USGBA Website, supra note 3.
5
U.S Envtl. Protection Agency, Why Build Green, http://www.epa.gov/
greenbuilding/pubs/whybuild.htm (last visited Dec. 1, 2009).
6
Joseph R. Biden, Green Jobs Are a Way to Aid the Middle Class,
PHILADELPHIA ENQUIRER, Feb. 27, 2009; Reuters, More Green Building and
Energy Efficiency Could Save U.S. Economy $1.2 Trillion, REUTERS, July 30,
2009, available at http://www.reuters.com/article/pressRelease/idUS242898
+30-Jul-2009+BW20090730 (stating that a targeted investment in green
building of $50 billion a year for a 10-year period could create as many as
900,000 jobs).
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USING GOVERNMENT POLICY
3
have for some time observed a significant gap between the jobrelated promises that attend government-facilitated development
and the reality of low-road construction work with negligible
opportunities for low-income communities and communities of
color.7 In addition, environmental justice groups have long
exposed the fact that these same communities tend to experience
most severely the very environmental harms that green
development aims to address.8
A number of these organizations have come together to
successfully advocate for local, state and federal policy that
addresses these concerns and treats a career in green
construction as a pathway out of poverty.9 Much of this work
builds off a “Construction Careers” model pioneered in Los
Angeles and Oakland10 that advances the values of job quality
7
See, e.g., Kate Davis et al., Subsidizing the Low Road: Economic
Development in Baltimore, GOOD JOBS FIRST (2002), available at
http://www.goodjobsfirst.org/pdf/balt.pdf; Greg LeRoy et al., Economic
Development in Minnesota: High Subsidies, Low Wages, Absent Standards,
GOOD JOBS FIRST (1999), available at http://www.goodjobsfirst.org/pdf
/mngjf.pdf; Los Angeles Alliance for a New Economy, Who Benefits from
Redevelopment in Los Angeles?, http://74.10.59.52/laane/docs/research/Who
Benefits_es.pdf.
8
Nancy D. Perkins, Livability, Regional Equity and Capability: Closing
In on Sustainable Land Use, 37 U. BALT. L. REV 157, 157 (2008) (“Deeper
reforms are now being encouraged, due in part to the persistence of
environmental justice advocates, whose calls for fairness in the distribution of
environmental burdens and benefits have begun to infiltrate land use decisionmaking.”).
9
Michael Burnham, Jobs at Issue as Labor-Enviro Coalitions Stump for
Climate Bill, N.Y. TIMES, Apr. 16, 2009, available at http://www.nytimes.
com/gwire/2009/04/16/16greenwire-jobs-at-issue-as-laborenviro-coalitionsstump-10548.html; Leo Gerard & Michael Peck, Op-Ed., Green Jobs, Good
Jobs: Business, Labor and Government are Working Together to Revitalize
Pennsylvania, PITTSBURGH POST-GAZETTE, Mar. 25, 2009, available at
http://www.post-gazette.com/pg/09084/957972-109.stm;
LA
Passes
Ordinance for Green Building Retrofits, SUSTAINABLEBUSINESS.COM, Apr.
14, 2009, available at http://www.sustainablebusiness.com/index.cfm/go/
news.display/id/17995.
10
See infra Section III; see also Ronald D. White, Program Would Help
At-Risk L.A. Residents Get Construction Jobs, L.A. TIMES, Sept. 1, 2008, at
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and equitable access in the construction sector, and which itself
is an example of the growing movement of localized advances in
organizing successful campaigns for policy change led by
community-labor coalitions11 As described below, this model has
shown favorable results for facilitating the movement of
individuals from low-income communities into sustained careers
in the construction sector.
The objective of this article is to point the way toward policy
that meaningfully and lawfully addresses the important concerns
with green development and results in middle class careers in
green construction for all segments of a community. Part I
examines the green development sector’s salient features, with
particular focus on jobs, workforce development and
environmental justice. Part II describes and analyzes the
government’s role in that sector and its responsiveness to the
issues explored in Part I. Part III proposes a model “Green
Construction Careers” policy based on examples brought about
by the advocacy of coalitions containing community, labor and
environmental organizations. This model centers on a career
pipeline that starts with community-based outreach and intake,
includes high-quality training and concludes with entry into a
construction trades union. Part IV examines some of the
numerous and significant legal considerations that arise in
connection with the adoption and/or application of such policy.
In particular, measures relating to labor standards,
apprenticeship and targeted hiring each give rise to a
constellation of issues under the Federal Constitution and
Federal statutes. However, with appropriate findings and careful
drafting, policymakers may readily avoid legal obstacles to
C1,
available
at
http://articles.latimes.com/2008/sep/01/business/fiapprentice1.
11
See Scott Cummings & Steven A. Boutcher, Mobilizing Government
Law for Low-Wage Workers, U. CHI. LEGAL F. (Forthcoming); Peter Dreier,
Good Jobs, Healthy Cities, AMERICAN PROSPECT, Sept. 21, 2009, available
at
http://www.prospect.org/cs/articles?article=good_jobs_healthy_city;
Benjamin I. Sachs, Labor Law Renewal, 1 HARV. L. & POL. REV. 375
(2007); Richard Schragger, Mobile Capital, Local Economic Regulation and
the Democratic City, 123 HARV. L. REV. at 29–39 (F 2009).
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meaningful, effective policy.
I. THE GREEN DEVELOPMENT SECTOR
For purposes of this article, “green development” means
construction, rehabilitation or retrofitting of commercial,
residential and other facilities and infrastructure for the purposes
of improving the environmental impact thereof. This definition
is thus focused particularly on green building, which the U.S.
Environmental Protection Agency (EPA) has defined as “the
practice of creating structures and using processes that are
environmentally responsible and resource-efficient throughout a
building’s life-cycle from siting to design, construction,
12
operation, maintenance, renovation and deconstruction.”
Expanding on this definition, the EPA explains that “green
buildings are designed to reduce the overall impact of the built
environment on human health and the natural environment” by:
(a) efficiently using energy, water, and other resources; (b)
protecting occupant health and improving employee productivity;
and (c) reducing waste, pollution and environmental
degradation.13
While there is vigorous debate about whether certain kinds
of projects should be called “green” due to their net
environmental impact, there is little doubt as to the overall
environmental value of green development. In the U.S.,
commercial and residential building operations account for about
40 percent of the primary energy consumption, 20 to 25 percent
of the landfill waste and 5 to 12 percent of the water
14
consumption. A number of credible studies demonstrate that
green buildings substantially reduce energy use, carbon
12
U.S. Envtl. Protection Agency, Basic Information, Definition of Green
Building, http://www.epa.gov/greenbuilding/pubs/about.htm#1 (last visited
Dec. 1, 2009).
13
Id.
14
SECRETARIAT OF THE COMMISSION FOR ENVTL. COOPERATION, GREEN
BUILDINGS IN NORTH AMERICA: OPPORTUNITIES AND CHALLENGES 4 (2008),
available at http://www.cec.org/files/PDF//GB_Report_EN.pdf.
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emissions and water use, and generate significant waste cost
savings. 15 In addition, green buildings have been found to
contribute to the health and productivity of their occupants.16
Investments in the green development sector also appear to
offer notable returns in the area of job creation. One recent
study concluded that green-building retrofits would generate 7
direct jobs and 4.9 indirect jobs for every $1 million in
expenditure, vastly outpacing the job-creating capacity of
comparable investment in oil and gas.17 Another study modeled a
hypothetical scenario in which green building measures were
undertaken in an amount sufficient to reduce energy
15
See, e.g., CATHY TURNER ET AL., NEW BUILDINGS INSTITUTE,
ENERGY PERFORMANCE OF LEED FOR NEW CONSTRUCTION BUILDINGS 5
(2008), available at http://newbuildings.org/sites/default/files/Energy_
Performance_of_LEED-NC_Buildings-Final_3-4-08b.pdf (stating that LEEDNC Certified buildings deliver energy savings of between 25 to 30 percent of
the national average); ROB WATSON, GREENER WORLD MEDIA, GREEN
BUILDING IMPACT REPORT 10–12 (2008) (finding that LEED Certified green
buildings have already produced energy savings equivalent to burning 1.3
million tons of coal for electricity, saved 9.5 billion gallons of water, and
reduced CO2 emissions by 7 million tons); GREG KATZ, SUSTAINABLE
BUILDING TASK FORCE, THE COSTS AND FINANCIAL BENEFITS OF GREEN
BUILDINGS: A REPORT TO CALIFORNIA’S SUSTAINABLE BUILDING TASK FORCE
19, 40, 52 (2003) (finding that green buildings generate 30% energy savings
on landscaping and 50–75% waste diversion).
16
See William J. Fisk, Health And Productivity Gains from Better Indoor
Environments and Their Relationship with Building Energy Efficiency, 25
ANN. REV. ENERGY ENVTL. 537 (2000); Judith Heerwagen, Green Buildings,
Organizational Success, and Occupant Productivity, 28 BLDG. RES. & INFO.
353–367 (2000).
17
ROBERT POLLIN ET AL., POLITICAL ECON. RESEARCH INST. & CTR.
FOR AM. PROGRESS, THE ECONOMIC BENEFITS OF INVESTING IN CLEAN
ENERGY 28 (2009); see also SARAH WHITE & JASON WALSH, CTR. ON
WISCONSIN STRATEGY, GREENER PATHWAYS: JOBS AND WORKFORCE
DEVELOPMENT IN THE GREEN ECONOMY 15 (2008) (“Most credible estimates
calculate eight to eleven direct jobs per $1 million invested. A 2004 Apollo
Alliance paper counted roughly 10 jobs per $1 million invested in highperformance buildings; a forthcoming study by COWS and the University of
Florida’s Powell Center for Construction and Environment projects 10 on-site
jobs per $1 million invested in a typical owner-occupied residential efficiency
retrofit in Wisconsin.”).
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7
consumption levels of American residential and commercial
buildings by 35% over 30 years and concluded that the scenario
would require nearly 81,000 green jobs, approximately 36,000
in the residential sector and 45,000 in the commercial sector.18
However, from the standpoint of job quality and equitable
access, there appears to be little that distinguishes “green”
construction from conventional construction.19 This fact gives
rise to a fundamental challenge for policymakers seeking to
create good jobs for all segments of a community through green
development for several reasons.
First, the conventional construction sector is very much
divided between low road non-union and high road union
employers. Data on construction wages indicates a significant
wage gap between union and non-union construction workers.20
An Economic Policy Institute analysis of nonunion laborers,
carpenters, painters, roofers and other non-licensed trades found
that half of the 3.5 million workers in this category earned less
than $12.50 an hour and one third earned less than the federal
poverty wage for a family of four.21 This is the same group of
workers most likely to undertake the energy-efficiency retrofits
and/or weatherization projects that, as described below, have
received tremendous attention from government entities looking
to participate in the green economy.22
18
GLOBAL INSIGHT, U.S. METRO ECONOMIES: CURRENT AND POTENTIAL
JOBS IN THE U.S. GREEN ECONOMY 15 (2008) (report prepared for the United
States Conference of Mayors and the Mayors Climate Protection Center).
19
Id. (“Many of the workers required to complete the renovation work
and installations of efficiency upgrades fall under the classifications of the
traditional construction trades that comprise this category. Ultimately,
increasing demand for green building work can be expected to generate new
employment opportunities for electricians, HVAC technicians, carpenters,
plumbers, roofers, laborers, and insulation workers, among others.”); White
& Walsh, supra note 17, at 16 (“Jobs in energy efficiency retrofitting look a
lot like traditional construction jobs.”).
20
PHILIP MATTERA ET AL., HIGH ROAD OR LOW ROAD: JOB QUALITY IN
THE NEW GREEN ECONOMY 5 (Good Jobs First 2009).
21
Id. at 21.
22
Id. at 25 (“In order to meet the President’s stimulus objectives, the
residential energy efficiency sector must find ways to train thousands of
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Second, the construction sector is plagued by longestablished underrepresentation of certain demographic groups.23
In particular, African-Americans residing in major metropolitan
areas with high concentrations of African-Americans have
substantially lower levels of participation in the construction
workforce than they have in the general workforce,24 and women
make up less than 3% of the construction workforce25.
Third, there is a significant need to invest in training a new
generation of construction workers. In a recent energy utility
sector survey, nearly half of respondents said that more than 20
percent of their work force—mostly skilled tradespeople—would
retire within the next five to seven years.26 Providing this
training seems plausible: many jobs in the industry require a
significant amount of postsecondary education, but not a fouryear degree.27 Yet, the construction training available outside of
union apprenticeship programs may often be ill-suited to the
task.28
Finally, the complex labyrinth of legal and contractual
requirements, customs, practices, entities, politics and
interpersonal relationships that characterize the high road
workers and raise standards in what is currently a low-wage industry.”).
23
See Jason Parkin, Constructing Meaningful Access to Work: Lessons
from the Port of Oakland Project Labor Agreement, 35 COLUM. HUMAN
RIGHTS L. REV. 375, 377–383 (discussing history of exclusion of minorities
and women from construction sector).
24
TODD SWANSTROM, PUBLIC POLICY RESEARCH CENTER, UNIV. OF
MO., ST. LOUIS, THE ROAD TO GOOD JOBS: PATTERNS OF EMPLOYMENT IN
THE CONSTRUCTION INDUSTRY 5 (2008).
25
BUREAU OF LABOR STATISTICS, EMPLOYED PERSONS BY DETAILED
OCCUPATION AND SEX, 2008 ANNUAL AVERAGES, available at
www.bls.gov/cps/wlf-table11-2009.pdf (indicating that the percentage of
women in “Construction and Extraction” occupations is 2.5%).
26
Id. (citing AMERICAN PUBLIC POWER ASSOCIATION, WORKFORCE
PLANNING FOR PUBLIC POWER UTILITIES: ENSURING RESOURCES TO MEET
PROJECTED NEEDS (2005)).
27
White & Walsh, supra note 17, at 4.
28
See BUSINESS ROUNDTABLE, TRAINING PROBLEMS IN OPEN SHOP
CONSTRUCTION: A CONSTRUCTION INDUSTRY COST EFFECTIVENESS PROJECT
REPORT 4 (1990).
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unionized construction trades can stymie even the most wellintentioned of policies. A new worker must first decide which
trade to enter and then obtain admission to the appropriate union
apprenticeship29 program.30 Admissions standards and practices
(including the frequency of openings) vary across programs, as
do the durations of the apprenticeships.31 The actual hiring of an
apprentice can be a function of contractor preferences, union
hiring hall practices, referral rules, union bylaws, collective
bargaining agreements32 and state or federal apprenticeship
standards33, among other things.
Notably, one tool that has gained use in the construction
sector to create uniform standards across a project, and which is
discussed below, is the project labor agreement or PLA. This is
a comprehensive agreement ensuring labor peace for a
29
An apprentice is a worker new to the construction trades and
participating in an “on the job” training program unique to a particular trade
or craft. Building and Construction Trades unions operate apprenticeship
programs in many jurisdictions, sometimes in conjunction with employers
through Joint Apprenticeship Training Councils.
30
Kathleen Mulligan-Hansel, Making Development Work for Local
Residents, PARTNERSHIP FOR WORKING FAMILIES, July 2008, at 50.
31
Id.
32
A “collective bargaining agreement” is a contract between an
employer and a union representing employees, regarding conditions of
employment for a particular bargaining unit; covers wages, hours, benefits,
and many other terms and conditions of employment, such as protection from
termination of employment without just cause. Collective bargaining
agreements usually also establish grievance resolution procedures.
33
Under the Fitzgerald Act-National Apprenticeship Act (29 U.S.C.
§ 50), the Labor Standards for the Registration of Apprenticeship Programs
(29 C.F.R. § 29), and the Equal Employment Opportunity in Apprenticeship
regulations (29 C.F.R. § 30), the U.S. Department of Labor’s Office of
Apprenticeship establishes basic standards for all apprenticeship programs,
including provisions regarding recruitment, selection, and training of
apprentices. These laws and regulations establish criteria for registering
apprenticeship programs with the federal government in order to “safeguard
the welfare of apprentices.” (29 U.S.C. § 50). They also determine how
State Apprenticeship Councils (SACs) can be created. SACs must be
approved by the federal government and meet certain minimum federal
standards. (29 CFR § 29.1).
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construction project by establishing ahead of time key terms of
hiring procedures and working conditions, generally with
reference to terms of local collective bargaining agreements in
various trades. Neither contractors nor workers need be
unionized in order to work on PLA projects. Public and private
entities overseeing large construction projects often require
PLAs to be in place in order to avoid costly delays due to labor
unrest, to facilitate high-road employment practices, and
sometimes to facilitate targeted hiring programs. Critically,
where properly drafted, a PLA’s uniform rules for hiring—
including targeted hiring—can cut across and supersede the
complex labyrinth of rules referred to above that may otherwise
govern a project.
In addition to the jobs-related challenge, policymakers must
also confront an environmental justice34 issue. From the
standpoint of environmental justice, it is, ironically, difficult to
distinguish green development as currently practiced in the U.S.
from conventional development. One community development
corporation, or “CDC,” that develops in low-income
communities in New York found that available green building
subsidy programs “do not include preference, set aside, or other
accommodations based on the affordability of the housing to
low-income purchasers or tenants or its not-for-profit
community-based auspices.”35 Further, the CDC found the
particular green building certification process, required by
funders, “costly and time consuming, especially for a not-forprofit affordable housing developer operating on a shoestring
36
budget.” At the same time, prevailing “green building”
standards are silent as to the siting of green facilities in low34
The term “environmental justice” as used in this article includes the
concept that healthy or green buildings should be sited in low-income
communities and communities of color, which is a direct corollary of the
more traditional meaning of the term associated with concept of the
preventing the siting of environmentally harmful uses in such communities.
35
Carmen Huertas-Noble, Jessica Rose & Brian Glick, The Greening of
Community Economic Development: Dispatches from New York City, 31 W.
NEW ENG. L. REV. 645, 662 (2009).
36
Id. at 663.
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income communities or communities with concentrations of
negative environmental impacts.37 This combination of obstacles
to green development and a lack of proactive policy to
encourage such development in disadvantaged communities
makes it less likely that green buildings will arise where they are
most needed.
Thus, as government enters the green development sector,
policymakers must either confront or ignore the significant jobs
and environmental justice issues discussed above. As the next
section explains, they have not yet done so on a scale
commensurate with the new investment in green development,
and are therefore missing a major opportunity to obtain better
social and economic outcomes.
II. THE GOVERNMENT ROLE IN GREEN DEVELOPMENT
The last several years have witnessed an explosion of
government efforts to encourage and participate in green
development, and a relative decline in private sector
investment.38 Every level of American government has either
adopted green building standards or allocated funds to support
green development, or both. This vast expansion of the
37
Nancy J. King et. al., Creating Incentives For Sustainable Buildings:
A Comparative Law Approach Featuring the United States and the European
Union, 23 VA. ENVTL. L.J. 397, 404–405 (2005) (citing Jude L. Fernando et
al., Rethinking Sustainable Development: Toward Just Sustainability in Urban
Communities, Building Equity Rights with Sustainable Solutions, 590 ANNALS
AM. ACAD. POL. & SOC. SCI. 35, 36 (2003)) (contrasting “green building”
with “sustainable construction” and noting “many definitions of sustainable
construction incorporate progressive social concepts, such as environmental
justice, not directly addressed by green building standards. To include
environmental justice in sustainable construction is to more fully recognize
the
social responsibility component of sustainable development. For
example, a broad view of sustainable construction would consider the impact
of building construction on the equitable distribution of environmental
resources, along with other issues of social responsibility”).
38
See Nathaniel Gronewold, Clean Tech Frets as Power of Government’s
Purse Grows, GREENWIRE, June 25, 2009, http://www.eenews.net/public/
Greenwire/2009/06/25/11.
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government role in green development, of course, heralds a
significant opportunity to shape the emerging sector through
government policy. Indeed, there is some indication already of
the efficacy of such policy: at least one study has found
significant correlations between the presence of a municipal
green building policy and the number of green buildings per
capita.39
A. Green Building Standards
Government entities at every level have promoted green
development through the adoption of green building standards.
Forty-three states have adopted energy-efficiency codes for
residential buildings and forty-one have adopted such codes for
commercial buildings.40 At the same time, many building codes
have been supplemented by green-building rating systems. Two
rating systems have dominated the market: the Leadership in
Energy and Environmental Design (“LEED”) (from the U.S.
41
Green Building Council (“USGBC”)) and Green Globe. The
USBGC indicates that various LEED initiatives including
legislation, executive orders, resolutions, ordinances, policies,
and initiatives are found in 43 states, including 190 localities, 36
state governments, 12 federal agencies or departments, 16 public
school jurisdictions, and 39 institutions of higher education.42
39
Julie Cidell, The Role of Public Policy in Private Sector Decisions to
Build Green, INDUSTRY STUDIES ASSOC., May 28, 2009, available at
http://www.industrystudies.pitt.edu/chicago09/docs/Cidell%202.3.pdf.
40
David E. Adelman & Kirsten H. Engel, Reorienting State Climate
Change Policies to Induce Technological Change, 50 ARIZ. L. REV. 835, 872
(2008).
41
Id. at 873 (“The LEED standards are based on building performance
in the following categories: site selection; water efficiency; energy and
atmosphere; materials and resources; indoor environmental quality and
innovation; and design quality. LEED has been particularly criticized for its
vulnerability to manipulation given the broad range of features that count
towards obtaining green certification and thus the ease with which a building
with mediocre green credentials in its major features might nevertheless
obtain a LEED certification.”).
42
USGBC Website, supra note 3.
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Unfortunately, the LEED standards are silent with respect to
job quality and labor practices.43 As noted, green buildings have
been shown to improve the productivity and health of occupying
workers.44 Further, LEED standards for Existing Buildings do
award points toward certification for the purchase of
environmentally sound cleaning products,45 which may create
fewer health risks for custodial workers. Yet, nothing on the
face of the LEED standards prevents a building from receiving
LEED certification, despite its having been constructed by
workers receiving low wages, no benefits and poor training.
Further, nothing in the LEED standards compels the hiring of
local residents for construction jobs, despite the rather obvious
potential environmental benefit of reduced emissions associated
with worker commutes. In fairness, the LEED standards may
well not have been designed to address these issues, which may
not fall squarely within the expertise of the U.S.G.B.C.
B. Funding
Recently, the Federal government has dramatically expanded
funding for green construction. According to the Apollo
Alliance,46 the American Reinvestment and Recovery Act
(“ARRA”), which became law in February 2009, contained
approximately $110 billion in funding for the green sector,
including $34 billion to improve energy efficiency, $17.7 billion
to modernize and expand the transit systems, $7.9 billion to
scale up renewable energy development, $10.9 billion to
modernize and expand the electric grid, and $29.14 billion on
43
See Mattera, supra note 20, at 21.
See generally Fisk, supra note 16.
45
U.S. Green Building Council, LEED for Existing Buildings:
Operations and Maintenance Rating System, Sept. 2008, at 77.
46
The Apollo Alliance describes itself as “a coalition of labor, business,
environmental, and community leaders working to catalyze a clean energy
revolution that will put millions of Americans to work in a new generation of
high-quality, green-collar jobs.” See Apollo Alliance, About, www.apollo
alliance.org/about (last visited Oct. 12, 2009).
44
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14
roads and bridges.47 Funds allocated for energy efficiency can
reasonably be expected to flow directly into green construction,
as more than $20 billion is directed to the construction or
rehabilitation of federally-owned or funded buildings.48 In
addition, energy efficiency retrofits of residential buildings
received a massive boost in the ARRA, which allocated $5
billion to the Department of Energy’s Weatherization Assistance
Program (“WAP”).49 The WAP’s purpose is “to increase the
energy efficiency of dwellings owned or occupied by lowincome persons, reduce their total residential expenditures, and
improve their health and safety.”50
Fortunately, the Federal government has also seen fit to
address the issues of job quality and equitable access in
connection with these new outlays for green construction. In
April 2009, the Office of Management and Budget issued a
memorandum to federal departments and agencies setting forth
“government-wide guidance for carrying out programs and
47
Elena Foshay & Keith Schneider, Congress Approves Clean Energy
Provisions of Stimulus; Consistent With Apollo Economic Recovery Act, Feb.
13, 2009, http://apolloalliance.org/rebuild-america/energy-efficiency-rebuildamerica/data-points-energy-efficiency/clean-energy-provisions-of-stimulus-areconsistent-with-apollo-economic-recovery-act/.
48
Id. ($4.5 billion for renovations and repairs to federal buildings
including focused on increasing energy efficiency, $4 billion to HUD for
public housing building repair and modernization, including critical safety
repairs and energy efficiency upgrades, $2.25 billion for a new program to
upgrade HUD sponsored low-income housing to increase energy efficiency,
including new insulation, windows, and furnaces, $2.25 billion to the HOME
Program to help local communities build and rehabilitate low-income housing
using green technologies, $4.23 billion for energy efficiency improvements to
Department of Defense and Veterans Administration facilities, $1.45 billion
for military hospital construction and energy efficiency improvements, $3.2
billion increase on limitation on Qualified Energy Conservation Bonds
(QECBs), which eligibility for QECBs to include green community programs
that use loans or repayment mechanisms to support such programs, and $510
million for energy-efficient retrofits for Native American housing).
49
See U.S. DEP’T OF ENERGY, FUNDING OPPORTUNITY ANNOUNCEMENT
FOR WEATHERIZATION FORMULA GRANTS 5 (2009).
50
Id.
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15
activities” enacted in ARRA.51 The memorandum, among other
things, encouraged agencies to: support entities with “sound
track records” of compliance with wage and hour, occupational
safety and health, and collective bargaining laws and that “are
creating good jobs”; support projects that “seek to ensure that
the people who live in the local community get the job
opportunities that accompany the investment”; and support
projects “that make effective use of community-based
organizations in connecting disadvantaged people with economic
opportunities.”52
States and localities have also entered the green development
sector as funders. Numerous state and local laws provide
financial incentives for businesses to adopt green construction or
renovation practices.53 States have also established subsidy
programs to reduce the cost of residential solar panel
installation.54 Local governments have established programs to
reduce permit fees or grant property tax exemptions to owners
that build LEED-certified green buildings.55 Apart from the
examples described below, however, it appears that few states or
localities have attached jobs-related standards to these programs.
III. THE GREEN CONSTRUCTION CAREERS MODEL
The Green Construction Careers Model proposed in this
51
Memorandum from Peter R. Orzag, Dir. Office of Mgmt. and Budget,
Updated Implementing Guidance for the American Recovery and
Reinvestment Act of 2009, (Apr. 3, 2009) available at http://www.white
house.gov/omb/assets/memoranda_fy2009/m09-15.pdf.
52
Id. at 5–6.
53
King et al., supra note 37, at 418; New Energy for States, Feb. 2006,
APOLLO ALLIANCE 15 (describing tax credit programs in New York,
Maryland and Oregon for energy efficient buildings).
54
See, e.g., James Hohmann, Subsidies Help Residents Go Solar,
WASH. POST, Aug. 14, 2009, at 10; Marc Lifsher, California Solar-Power
Subsidy Program Approaches Its Limit, L.A. TIMES, July 6, 2009, at B1.
55
Adelman & Engel, supra note 40, at 873–874; Tanya Batallas, N.J.
Small Businesses Losing Out as State Supports Larger Solar Ventures, NEW
JERSEY STAR-LEDGER, Aug. 27, 2009.
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16
article offers an important tool for advancing the values of job
quality, equitable access and environmental justice in the green
development sector. It aims to have substantial numbers of
formerly disadvantaged workers solidly advancing in sustained
high-road careers in green construction. It operates by ensuring
high-quality training and employment for these workers, cutting
through legal and bureaucratic obstacles, and bringing
sometimes divided constituencies together in collaborative
working relationships.
The model derives much of its content from the Construction
Careers model pioneered in Los Angeles and Oakland by
community and labor organizations, construction employers and
local officials.56 This model couples specific measures that
facilitate the hiring of targeted workers with the use of project
labor agreements that ensure job quality and labor peace.
There are several examples of the Construction Careers
model now at work. The Los Angeles Unified School District
(“LAUSD”) established a targeted hiring program for its $19
billion school site modernization and construction program via a
Project Stabilization Agreement, which established a goal that
50% of the construction workforce consist of workers residing
within the district.57A 2008 study by the University of California
at Los Angeles determined that LAUSD’s program resulted in
targeted workers comprising 41% of apprentices, 39% of
journey-level workers,58 and 23% of foremen on LAUSD
56
Cummings & Boutcher, supra note 11, at 22. For more information on
the Construction Careers model, see generally Kathleen Mulligan-Hansel,
Making Development Work for Local Residents, PARTERNSHIP FOR WORKING
FAMILIES (2008).
57
LOS ANGELES UNIFIED SCH. DIST. PROJECT STABILIZATION
AGREEMENT—NEW CONSTRUCTION AND MAJOR REHABILITATION FUNDED BY
PROPOSITION BB AND/OR MEASURE K §3.5 (May 12, 2003), available at
http://www.laschools.org/contractor/fca/fs-fca/download/psa/documents/
Project_Stabilization_Agreement.pdf.
58
A journey-level worker is an individual who has completed an
apprenticeship in the construction trades and is therefore eligible for certain
wages, benefits and seniority on construction jobs.
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17
projects.59The Los Angeles Department of Public Works has
negotiated a number of Project Labor Agreements for major
projects that include a goal that 30-40% of the construction
workforce consists of targeted workers.60 As of June 2009,
targeted workers made up between 19 and 35% of the respective
workforces on these projects.61
The Port of Oakland, California established a targeted hiring
program for its $1.2 billion modernization via a Project Labor
Agreement that set a goal that 50% of work hours be performed
by residents of a designated local impact area.62 The PLA also
set a goal that 20% of all construction work be performed by
apprentice-level workers, all of whom should reside in the local
59
Memorandum from Veronica Soto, Dir. Of Contractor Relations &
Small Bus., to Ramon Cortines, Superintendent of the Los Angeles Unified
Sch. Dist. Facilities (Jan. 28, 2009), available at http://www.laschoolboard.
org/files/14.%20We%20Build%20Annual%20Report.pdf.
60
CITY OF LOS ANGELES DEP’T OF PUBLIC WORKS, BUREAU OF
ENGINEERING, PROJECT LABOR AGREEMENT FOR FIRE STATION NO. 64—
SOUTH LOS ANGELES § 7.6, available at http://bca.lacity.org/site/pdf/hiring/
Fire%20Station%2064%20PLA.pdf; CITY OF LOS ANGELES DEP’T OF PUBLIC
WORKS, BUREAU OF ENGINEERING, PROJECT LABOR AGREEMENT FOR
AVENUE 45 & ARROYO DR. RELIEF SEWER § 7.6, available at http://bca.
lacity.org/site/pdf/hiring/Avenue%2045%20pla.pdf; CITY OF LOS ANGELES
DEP’T OF PUBLIC WORKS, BUREAU OF ENGINEERING PROJECT LABOR
AGREEMENT FOR POLICE ADMINISTRATION BUILDING § 7.6, available at
http://bca.lacity.org/site/pdf/hiring/PAB%20Signed%20PLA.pdf.
61
LOS ANGELES DEP’T OF PUBLIC WORKS, OFFICE OF CONTRACT
COMPLIANCE, BUREAU OF CONTRACT ADMIN., FIRE STATION #64: SUMMARY
OF LOCAL HIRING @ 99% COMPLETION, available at http://bca.lacity.org/
site/pdf/hiring/PLA%20Fire%20Station%2064.pdf; LOS ANGELES DEP’T OF
PUBLIC WORKS, OFFICE OF CONTRACT COMPLIANCE, BUREAU OF CONTRACT
ADMIN., AVENUE 45 & ARROYO DR. RELIEF SEWER: SUMMARY OF LOCAL
HIRING AT @ 53% COMPLETION, available at http://bca.lacity.org/site/pdf/
hiring/PLA%20Avenue%2045.pdf; LOS ANGELES DEP’T OF PUBLIC WORKS,
OFFICE
OF
CONTRACT
COMPLIANCE,
BUREAU
OF
CONTRACT
ADMINISTRATION, POLICE ADMINISTRATION BUILDING, SUMMARY OF LOCAL
HIRING AT @ 99% COMPLETION, available at http://bca.lacity.org/site/pdf/
hiring/PLA%20PHQ.pdf.
62
PORT OF OAKLAND MARITIME & AVIATION PROJECT LABOR
AGREEMENT, Art. V, § 6, available at http://www.communitybenefits.org/
downloads/Project%20Labor%20Agreement.pdf.
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18
impact area.63 Between 2001 and 2007, the program resulted in
31% of targeted worker hours having been performed by these
targeted workers.64
The Community Redevelopment Agency of the City of Los
Angeles has also adopted a Construction Careers and Project
Stabilization policy for construction projects that it undertakes
and subsidizes.65 This policy requires that developers or prime
contractors on major projects undertaken or subsidized by the
agency reserve 30% of construction work hours for local
residents, 10% of construction work hours for local, low-income
or otherwise disadvantaged residents, and 50% of apprentice
work hours for local residents.66 The policy further requires
contractors and subcontractors to become signatory to a master
Project Labor Agreement negotiated between the construction
trades unions and the agency that contains a set of targeted
67
hiring measures. The policy also calls on developers and prime
contractors to submit a targeted hiring schedule that establishes
the approximate hiring timetable of construction workers by
trade in order to satisfy the policy’s targeted hiring
requirements.68
It is worth noting that the Construction Careers model was
designed principally for large, government-subsidized projects.
The model may well have to be adjusted to better fit smaller
projects and smaller employers. In addition, the model emerged
from settings featuring strong community-labor partnerships and
high-quality training resources. The model may take longer to
implement in a less politically or programmatically supportive
environment. Indeed, there may be settings for which the model
is not appropriate.
63
Id., Art. XIII, § 2.
Mulligan-Hansel, supra note 56, at 54.
65
See White & Walsh, supra note 17.
66
CMTY. REDEVELOPMENT AGENCY OF THE CITY OF LOS ANGELES,
CAL., RESOLUTION ADOPTING A POLICY REGARDING CONSTRUCTION
CAREERS AND PROJECT STABILIZATION § III(I) [hereinafter CONSTRUCTION
CAREERS POLICY].
67
Id. at § IV.
68
Id. at § V(2).
64
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19
A. Tenets
The Green Construction Careers model, which expands on
the model above by incorporating principles associated with
environmental justice, follows four basic and interrelated tenets:
(1) meaningful green development in low-income communities;
(2) high quality jobs; (3) opportunity for low-income
communities and communities of color to obtain sustained
employment in the construction sector; and (4) high-quality job
training. The essence of the model is to address each of these
tenets, but a range of factors, including legal considerations,
should contribute to the specific policy measures adopted in any
particular jurisdiction. Accordingly, the discussion below sets
forth a number of policy approaches available to advance each
of the tenets.
1. Meaningful Green Development in
Low-Income Communities
One core function of the Green Construction Careers model
is to make “green” development relevant and effective in lowincome communities. This starts with steering investment in
green development to these communities. Fortunately,
government policy has begun to lead the way with its own
capital, thereby, one hopes, incentivizing the movement of
private capital in this direction.69 This approach is reflected in
the rapidly expanding low-income weatherization programs,
which target low-income homes and neighborhoods for
government-funded residential retrofits that enhance energy
efficiency.70 Focusing investment in these areas helps directly
address the health impacts of all types of pollution, which are
71
more concentrated in low-income communities. Further, it may
69
See U.S. Green Building Council, supra note 4.
See Foshay & Schneider, supra note 47.
71
See, e.g., Sam Magavern, Affordable Housing and the Environment, In
Buffalo, New York, (Legal Studies Research Paper No. 2008-07 July 9, 2007
at 21), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
70
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result in higher marginal energy-efficiency gains because older
buildings, which tend to be the least efficient, are also more
heavily concentrated in these communities.72
In order to maximize the impact of green development
policy, the model also focuses investment within low-income
communities on buildings that receive high levels of use by
community members. These buildings, whether major centers of
employment, recreation, or other public use, offer higher returns
on environmental investment. For example, fixing a “sick”
building can result in major improvements in the productivity
and overall health of occupants.73 And, logically, a building that
generates high levels of energy usage should be among the first
to be made more energy-efficient.
Finally, “greening the ghetto”74 isn’t just about making
buildings more environmentally sound, especially under existing
USGBC standards. The Green Construction Careers model calls
for green building standards that substantially improve the
environmental impact of buildings and that generate significant
amounts of high-quality work in green construction, operations
1091549 (“Buffalo’s housing and environmental problems are not evenly
distributed: they fall most heavily on people with low incomes and especially
people of color. For example, the four zip codes with the highest rates of
lead poisoning are on the predominantly African-American east side of the
City of Buffalo, with incidence rates between three and five times higher than
Erie County’s average.”); Douglas Houston et al., Structural Disparities of
Urban Traffic in Southern California: Implications for Vehicle-Related Air
Pollution Exposure in Minority and High-Poverty Neighborhoods, 26 J. URB.
AFF. 565, 568 (2004) (“Minority and low-income areas in the Los Angeles
region have borne a disproportionate level of stationary sources of air
pollution including hazardous waste storage and disposal facilities (TSDFs)
and Toxic Release Inventory (TRI) facilities.”).
72
Houston, supra note 71, at 578–80 (describing disproportionate
concentration of older buildings in poor and minority communities).
73
Fisk, supra note 16, at 552–53.
74
Elizabeth Kolbert, Greening the Ghetto, NEW YORKER, Jan. 12, 2009,
available at http://www.newyorker.com/reporting/2009/01/12/090112fa_fact_
kolbert (“The group’s goal is to broaden the appeal of the environmental
movement and, at the same time, bring jobs to poor neighborhoods. Jones
often says that he is trying to “green the ghetto.”).
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21
and maintenance. For example, while locating a building near
major public transit lines is important, it does not have as much
value within the Green Construction Careers framework as it
does within the LEED standards, which do not place a priority
on the type or number of jobs created by green projects.75 In
contrast, installation of photovoltaic solar panels, where
appropriate, because of its substantial impact on pollution and
efficiency76 and its skilled work intensity, has high value in the
model.
2. High Quality Jobs
The model promotes high quality jobs in the construction
sector for the benefit of workers, communities and investors
alike. Of course, high quality jobs start with decent wages and
benefits. In setting policy for the construction sector,
government entities may rely on federal or state prevailing wage
laws to help set a baseline. These laws establish wage standards
based on the hourly wage, usual benefits and overtime paid in
the largest city in each county to the majority of workers,
laborers, and mechanics, and many units of government are
already well equipped to enforce them.77
Community
Workforce
Agreements—project
labor
agreements containing provisions to ensure meaningful hiring of
targeted workers—among unions and employers involved in
green construction projects are also important to success. Under
the Green Construction Careers model, the entity with overall
responsibility for the project requires that all contractors and
75
MATTERA ET AL., supra note 20, at 21.
See generally Soteris A. Kalogirou, Environmental Benefits of
Domestic Solar Energy Systems, 45 ENERGY CONVERSION & MGMT. 3075
(2004).
77
Prevailing wages are set by the federal and state governments for each
trade and occupation. The Davis-Bacon act requires the payment of prevailing
wages on federally funded or assisted projects. 40 U.S.C.A. § 3142. Some
states have similar statutes. See, e.g., CAL. LAB. CODE § 1770 et seq., 820
ILL. COMP. STAT. ANN. 130/0.01 et seq., N.Y. LABOR § 220, TEX. GOV’T
CODE ANN. §§ 2258.021–.023.
76
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22
subcontractors, before bidding on construction work on the
project, become signatory to a Community Workforce
Agreement that contains all of the equitable access measures
described below. Such agreements establish uniform rules for
hiring across entire projects and help to ensure labor peace. In
the absence of such agreements, pre-existing hiring
arrangements may—and often do—conflict with targeted hiring
policies, creating obstacles to implementation. Moreover,
successful targeted hiring initiatives such as the Port of Oakland,
the Los Angeles Unified School District and the City of Los
Angeles Construction Careers Policy have all relied on these
kinds of agreements.78 In most cases, these agreements provide
that union hiring halls serve as the primary source of all craft
labor on a project,79 thereby providing an important assurance to
unions that their membership will obtain work on the project.
This assurance is vital to the basic political bargain at the heart
of the model,80 and allows unions to open their ranks to new
members.
“Responsible contractor” measures offer a final, but equally
important, means of ensuring job quality. These measures ensure
that construction contractors with significant or repeated
violations of workplace, tax and other laws are not utilized on
construction projects on which the measures apply. The National
Employment Law Project (NELP) has recently published a
useful guide for policymakers seeking to adopt such measures.81
Based on a review of responsible contractor programs across the
country, NELP recommends: (a) making responsibility review
the first step in the bidder evaluation process, where
78
See supra notes 57, 66.
Id.
80
See Mulligan-Hansel, supra note 56, at 20 (“Getting more low income
workers and workers of color into union apprenticeship required increasing
union contractors’ access to work”); Parkin, supra note 23, at 395 (“[T]he
unions’ interest in opening up construction work to local residents served as a
springboard for collaboration with a community that was skeptical as to
whether unions with an exclusionary history should be trusted.”).
81
Paul K. Sonn & Tsedeye Gebreselassie, The Road to Responsible
Contracting, NATI’L EMPLOYMENT LAW PROJECT, June 2009.
79
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23
appropriate, through a “prequalification” system; (b) using a
standardized responsibility questionnaire and quantified point
system for contractors; and (c) publishing the names of firms
seeking to bid or prequalify, in order to allow the public to
report relevant information.82
3. Equitable Access to Construction
Employment Opportunities
The goal of careers in green construction for low-income
individuals lies at the heart of the Green Construction Careers
model. When designed and implemented properly, targeted
hiring measures are an effective means of achieving this goal
through policy.83 Federal, State and local policy have utilized
different measures of this type.84 However, the successful
policies, some of which are discussed above, have all set strict,
high standards for construction work hours performed by
targeted workers.85 Accordingly, the Green Construction Careers
model reserves a specific percentage of construction work hours
for low-income residents that reside in the same labor market as
the project in question. There are myriad formulations of this
standard, but the core components are: (a) a clear definition of
the targeted beneficiary group based on income, barriers to
employment and/or geography; (b) a percentage of construction
work hours on the project reserved for workers from this group
at the apprentice level, journey level or both; and (c) where a
residency-based approach is adopted by state or local
government, some means of accommodating the Privileges and
82
Id. at 10.
Mulligan-Hansel, supra note 56, at 4.
84
See Parkin, supra note 23, at 383–384 (“Hiring preferences for local
residents have become popular at all levels of government, with almost half
the states and a number of local governments enacting some sort of local-hire
legislation.”).
85
See supra notes 58–61, 63, 67 and accompanying text; MulliganHansel, supra note 56, at 51 (describing “clear requirements for local hiring”
as among core components of local hire policies).
83
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24
Immunities Clause issues discussed below.86
Another kind of policy measure aimed at facilitating the
entry of disadvantaged individuals into the green construction
involves targeted hiring from specially certified training
programs. For example, a jurisdiction’s policy may set aside
construction work hours for graduates of weatherization training
programs certified by the jurisdiction based on standards for
quality and enrollment of targeted individuals. This approach has
emerged in the newly expanded residential weatherization sector,
for which conventional apprenticeship training formats have not
fully developed. In addition to New Jersey and Delaware, which
are discussed below, the City of Portland recently adopted this
approach for its Clean Energy Works home retrofit program.87
Because the local, low-income individuals targeted by the
model are likely to be new to the construction trades, it is
important to ensure that contractors on the subject project
employ substantial numbers of apprentice-level workers. On
projects in which contractors are utilizing state or federallyregistered apprenticeship programs, the standards governing
those programs must contain ratios for the number of journey86
See, e.g., CONSTRUCTION CAREERS POLICY, supra note 66 (requiring
that developers or prime contractors on major projects undertaken or
subsidized by the agency reserve 30% of construction work hours for local
residents, 10% of construction work hours for local, low-income or otherwise
disadvantaged residents, and 50% of apprentice work hours for local
residents). Id. § III(1). The policy also addresses the Privileges and
Immunities Clause issue by excluding out-of-state workers from the targeted
hiring calculation. Id. § III(3).
87
City of Portland, Bureau of Planning and Sustainability, Portland City
Council Approves Community Workforce Agreement To Support Equity And
Workforce Goals For Clean Energy Works Portland, Sept. 30, 2009, http://
www.portlandonline.com/bps/index.cfm?c=44851&a=265154; COMMUNITY
WORKFORCE AGREEMENT ON STANDARDS AND COMMUNITY BENEFITS IN THE
CLEAN ENERGY WORKS PORTLAND PILOT PROJECT, http://www.portland
online.com/bps/index.cfm?c=50152&a=265161 § II(c) (“[C]ontractors and
sub contractors will hire 100% of new worker/installer weatherization
employees from a designated training program, as described in section IV,
until 50% of contractor’s total non supervisory worker/installer
weatherization employee monthly work hours on covered projects are
performed by graduates of a designated training program.”).
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25
level workers to the number of apprentice-level workers in each
craft.88 The Green Construction Careers model relies on a
standard under which contractors must employ apprentice-level
workers on the project in question to the maximum extent
allowed by the applicable apprenticeship standards.
Used in connection with Community Workforce Agreements,
craft request forms offer an additional helpful tool in facilitating
the referral of targeted workers between unions and contractors.
These forms provide a standardized method for contractors to
request that qualified targeted workers be admitted to the
appropriate union and referred by that union for work on the
project in question.89 Under the model, contractors are required
to use, and unions are required to accept, such forms where they
are properly completed and refer to a qualified targeted worker.
Finally, the model relies upon a central coordinator to
facilitate the interactions among the various parties and ensure
that targeted workers progress smoothly through the system.
Government entities may perform this function themselves,
contract this function out, or require the entity with overall
responsibility for the project to contract with a pre-qualified
entity to perform this function. At a minimum, this central
coordinator should: (a) establish a single point of contact for
employers, unions, training providers, community organizations
and targeted workers; (b) maintain an up-to-date list of qualified
targeted workers; (c) facilitate outreach to targeted workers by
qualified pre-apprenticeship training programs; (d) facilitate
relationships among qualified apprenticeship and other training
programs and employers to enable prompt referrals of targeted
workers; and (e) where necessary, refer targeted workers to
employers, qualified apprenticeship and other training programs
and hiring halls.
88
29 C.F.R. § 29.5(b)(7).
See, e.g., CONSTRUCTION CAREERS POLICY, supra note 66, at
§ IV(4)(d) (including among the terms for inclusion in a PLA, a requirement
that Developer, Contractors, and Unions use and accept a standardized Craft
Request Form and the procedures written therein to request any and all
workers from Unions, including workers qualified as general dispatch and
targeted workers).
89
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26
Policymakers should also be aware that the mechanics of
targeted hiring measures require close attention. Effective
measures hold the key actors, such as developers and
contractors, accountable to meaningful standards while affording
flexibility to accommodate variations in performance across a
project. For example, policymakers may wish to hold a
developer or prime contractor ultimately responsible for numeric
targets, including through monetary penalties, while holding
individual contractors to more specific, straightforward “best
efforts” requirements.
4. High Quality Training
Construction work—done well—is physically and mentally
demanding, and requires substantial knowledge and skill. In
low-income communities, high quality training is a fundamental
necessity. Successful Green Construction Careers programs must
offer specialized training and preparation to ensure equitable
access.90
This starts with high quality pre-apprenticeship programs.
Such programs are characterized by (a) well-established
partnerships with high-quality apprenticeship programs that
ensure the pre-apprenticeship program will properly prepare
targeted workers for apprenticeships and (b) strong track records
of placing targeted workers into sustained careers in the
construction trades.91 One example may be found in Newark,
New Jersey, where the City, the Laborers’ International Union
of North America and Garden State Alliance for a New
90
Kate Rubin & Doug Slater, Winning Construction Jobs for Local
Residents, BRENNAN CENTER FOR JUSTICE AT NYU SCHOOL OF LAW, July
2005, at 31, available at http://www.brennancenter.org/content/resource/win
ning_construction_jobs_for_local_residents_a_users_guide_for_community_o/
(“Experience with innovative workforce development programs around the
country has shown that a comprehensive pre-apprenticeship program—one
that includes recruitment, pre-apprenticeship training, case management,
support services, job placement, and mentoring—is key for helping workers
from diverse backgrounds succeed as construction trades apprentices.”).
91
Id. at 34.
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Economy, a community organization, sponsor a six-week preapprenticeship training program focused on improving
environmental quality and reducing waste and leading to entry
into the Laborers’ union.92 Note that this is the kind of training
program that can provide a foundation for the alternative
targeted hiring model discussed above in Sec. III(a)(iii).
Of course, low-income individuals cannot be expected to
drop everything and enroll in a pre-apprenticeship program that
prevents them from holding down a regular job. Here, the
model promotes the use of employment positions that
compliment pre-apprenticeship training. For example, local
governments may create or utilize existing pre-craft-helper or
entry-level operations and maintenance positions for targeted
workers. Ideally, employment in such positions will expose
targeted workers to green construction and operations and
maintenance practices followed by environmentally-sound
government entities.
Effective training programs will also accommodate
participants’ particular needs, which may include childcare and
other supportive services as well as record expungement.
Because of the pivotal role of apprenticeship programs in the
model, it is important that each construction contractor or
subcontractor participate in an apprenticeship or other training
program that meets fundamental standards for quality. For
starters, apprenticeship programs that meet certain standards
may register with the state or federal government.93 However,
some registered programs—particularly those administered
unilaterally by employers—have shown relatively poor results,
94
including for integration of minorities and women. Thus,
92
Ralph Ortega, Newark Dons a ‘Green Collar’ with Construction
Training Program, NEW JERSEY STAR-LEDGER, Jan. 13, 2009, available at
http://www.nj.com/news/ledger/jersey/index.ssf?/base/news-12/12318249661
24410.xml&coll=1.
93
Robert W. Glover & Cihan Bilginsoy, Registered Apprenticeship
Training in the U.S. Construction Industry, 47 EDUC. & TRAINING 337, 339
(2005).
94
Id. at 342 (showing that jointly administered union apprenticeship
programs have higher graduation and lower cancellation rates than non-union
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policymakers should supplement this baseline. For example,
policy can focus on the length of time over which a program has
successfully operated and the number of individuals that a
program has placed into sustained employment in the
construction trades.
Under the model, apprenticeship programs must also take
steps to ensure that targeted workers progress through the
system. These steps can include agreeing to admit particular
numbers of targeted workers based on the needs of the project in
question and/or to establish formalized relationships with preapprenticeship programs training targeted workers. Policymakers
can ease the burden on apprenticeships participating in the Green
Construction Careers program by either contributing to the cost
of training targeted workers or requiring contractors to do so.
B. Examples
In the last year, coalitions of community, labor and
environmental organizations have succeeded in advancing the
Green Construction Careers model as a part of local, state and
federal policy. The following examples, which cover a range of
types of green development, each incorporate core components
of the model. None have been in existence long enough to
evaluate for effectiveness. Note that in some cases, the kind of
development projects covered, including small scale residential
weatherization, differ in important ways from the typically
large-scale, multi-trade construction projects covered by the
Construction Careers policies discussed above.
1. Los Angeles Green Retrofit
and Workforce Ordinance
On April 15, 2009, the City of Los Angeles enacted an
ordinance establishing a “Green Retrofit and Workforce
95
Program.” Building on the City’s existing Construction Careers
programs, including for women and minorities.)
95
CITY OF LOS ANGELES, CAL., ORDINANCE NO. 180633 (2009).
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policies96 and green building standards for large projects,97 the
ordinance was the first in the nation to combine both green
building and jobs standards. The ordinance was an important
victory for the Los Angeles Apollo Alliance, which had
campaigned for more than two years for its adoption.98
The ordinance requires the City to develop a comprehensive
plan to retrofit all City-owned buildings over 7,500 square feet
or constructed prior to 1978 with a goal of attaining at least a
LEED-EB Silver rating99 and incorporating thirteen specific
elements that ensure substantial environmental and health
improvements as well as significant job creation.100 The
ordinance prioritizes buildings located in low-income areas,
buildings that pose health and safety risks, and buildings that
provide direct services to residents.101
Under the guidance of a new Director in the Mayor’s office,
an interagency taskforce and an advisory council of outside
experts, including representatives of community, labor and
environmental groups, the City will develop an innovative
workforce system for the program.102 The system includes
agreements with building trades unions to ensure job quality and
labor peace on all retrofit work, targeted hiring measures
96
See supra note 19.
CITY OF LOS ANGELES, CAL., ORDINANCE NO. 179820 (2008)
(prohibiting issuance of building permit for projects at or above 50,000 gross
square feet of floor area unless “[t]he project applicant . . . demonstrates that
the Project meets the intent [emphasis added] of the criteria for certification
at the LEED certified level”).
98
Strategic Concepts in Organizing and Policy Education, Green Jobs:
The Los Angeles Apollo Alliance, http://www.scopela.org/article.php?list=
type&type=35.
99
The LEED rating system offers different levels of certification,
including “certified,” “silver,” “gold” and “platinum” based on the number
of points earned in the LEED scoring system. See How to Achieve
Certification, USGBC, available at http://www.usgbc.org/DisplayPage.aspx?
CMSPageID=1991.
100
CITY OF LOS ANGELES, CAL., ORDINANCE NO. 180633, § 7.302(B)
(2009).
101
Id. § 7.302(C).
102
Id. §§ 7.303, 7.304.
97
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30
focused on low-income neighborhoods, and specialized green
construction training programs.103
While the Los Angeles ordinance represents an important
and path-breaking policy development, it certainly leaves room
for policymakers to improve on the original. First and foremost,
the ordinance neither requires the City to retrofit any building
nor provides funding for the performance of retrofits. Further,
the ordinance defers a number of important policy and program
details for future discussion, including what targeted hiring
measures, if any, will apply and what programs will be eligible
to provide training. Standards for the retrofits are to be set forth
in a “Plan,”104 which, as of this writing, has not yet been issued.
2. New Jersey State Weatherization
Assistance Program Plan
As noted, the American Recovery and Reinvestment Act
(ARRA) recently passed by Congress and signed by President
Barack Obama included a $5 billion dollar investment in the
Weatherization Assistance Program (WAP), administered by the
Department of Energy (DOE).105 The Weatherization Assistance
Program is the largest residential energy conservation program
in the nation and its funds are used to improve the energy
efficiency of low-income dwellings. In New Jersey, nearly 4000
106
multi-family units will be weatherized under the program.
In order to receive WAP funds, states are required to submit
to the DOE a State “WAP Plan” setting forth in detail the
107
weatherization program and how it will be implemented. New
103
Id.
Id. § 7.302(B).
105
AMERCIAN RECOVERY AND REINVESTMENT ACT OF 2009, at 24.
106
See OFFICE OF LOW-INCOME ENERGY CONSERVATION, N.J. DEP’T OF
CMTY. AFFAIRS, 2009–2012 N.J. STATE PLAN AND GRANT APPLICATION FOR
U.S. DEPARTMENT OF ENERGY’S AMERICAN RECOVERY AND REINVESTMENT
ACT WEATHERIZATION ASSISTANCE PROGRAM GRANT, at 23, available at
http://www.nj.gov/dca/divisions/dhcr/offices/docs/wapdraftarraplan.pdf.
107
10. C.F.R. § 440.14.
(c) After the hearing, the State must prepare a final State plan that
104
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31
Jersey’s WAP Plan for 2009-2012 incorporates a number of
Green Construction Careers principles.108 First, the program is
focused on low-income communities.109 To be eligible, a multiunit building must contain at least 66% low-income
households.110
Second, the Plan integrates targeted hiring and high-quality
training.111 Contractors must utilize a workforce that consists of
at least 50% individuals that have graduated from certified
weatherization training programs.112 Such programs are those
that offer unrestricted enrollment and in which at least 50% of
participants meet all of the following criteria:
(1) Is a low-income individual;
(2) Resides in a zip code containing at least one census
tract with a rate of unemployment exceeding 150% of the
unemployment rate for the state in which it is located;
and
(3) In the year prior to commencing work on the project
in question, has not registered as an apprentice in a
certified apprenticeship program or performed craft labor
identifies and describes:
(1) The production schedule for the State indicating projected
expenditures and the number of dwelling units, including
previously weatherized units which are expected to be
weatherized annually during the program year;
(2) The climatic conditions within the State;
(3) The type of weatherization work to be done;
(4) An estimate of the amount of energy to be conserved;
(5) Each area to be served by a weatherization project within the
State . . .
(6) How the State plan is to be implemented.
Id. § 440.14(c).
108
See OFFICE OF LOW-INCOME ENERGY CONSERVATION, N.J. DEP’T
CMTY. AFFAIRS, supra note 106, at 38–39.
109
See id. at 23–24.
110
See id. at 24.
111
See id. at 39.
112
Id.
OF
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32
as a licensed journeyman.113
Finally, the Plan contains several strong measures to ensure
job quality. All contractors performing weatherization work
must pay employees the higher of (a) a state living wage
estimated at $17.40 per hour or (b) the federal prevailing
wage.114 Contractors must also provide “quality, affordable
employer sponsored health insurance”115 and must attest that they
meet an extensive and detailed set of responsible contractor
requirements.116 All employees must complete at least 10 hours
of OSHA safety training.117 Finally, all contractors are required
to sign a labor peace agreement.118
The New Jersey plan incorporates most of the components of
the Green Construction Careers Model. In addition to obtaining
jobs for targeted workers, it also focuses on entry into
specialized training programs, on which employers must in turn
rely for workers. This approach seems appropriate where the
primary objective is to move entry-level workers into entry-level
construction positions. However, this approach also relies
entirely on training programs that can effectively accomplish the
plan’s goals, which may or may not exist in the jurisdiction in
question.
3. Delaware State Weatherization
Assistance Program Plan
Delaware has also built the core principles of the Green
Construction Careers model into its WAP Plan for years 2009 to
2012, which will govern $13,733,668 in federal funds and
weatherization of a minimum of 1,526 homes.119 First, the
113
Id.
Id. at 38.
115
Id.
116
Id. at 39.
117
Id.
118
Id.
119
DEL. HEALTH AND SOCIAL SERV., AMERICAN RECOVERY AND
REINVESTMENT ACT WEATHERIZATION PROGRAM STATE PLAN PROGRAM
114
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program targets investment to low-income residences.120
Buildings qualifying for weatherization assistance are dwelling
units occupied by a family whose income is at or below 200
percent of poverty as determined in accordance with criteria
established by the Director of the U.S. Office of Management
and Budget and adopted by the State of Delaware.121
Second, the Plan also integrates targeted hiring measures.122
Under the Plan, all employers receiving Recovery Act funds to
provide residential energy efficiency services are required to
utilize currently enrolled trainees or graduates of programs that
serve low-income communities to perform at least 33% of work
hours.123 Third, the Plan helps ensure job quality by requiring
that employer-paid family health coverage is provided “to all
energy auditors, supervisors and installers whose wages are paid
in whole or in part with Recovery Act funds.”124 The plan also
requires employees supervising or performing energy audit or
installation work to complete a state-recognized training
program.125
Finally, high quality training is also a key piece of the plan.
The Delaware Weatherization Assistance Program (WAP) has
formed a partnership with the Laborers International Union of
North America Local 55 to provide specialized workforce
training.126 This training, in the form of 5-week intensive
training modules, will be performed at a new training facility
purchased by the union for this purpose.127 In addition, the WAP
is participating in a statewide consortium that includes
educational institutions, contractors, labor unions, the state’s
YEAR 2009–2012, at 4, available at http://recovery.delaware.gov/documents/
grant-applications/Weatherization-Assistance-Program.pdf
[hereinafter
DELAWARE WEATHERIZATION PROGRAM].
120
Id. at 15.
121
Id.
122
Id. at 22.
123
Id.
124
Id. at 58
125
Id.
126
Id. at 20.
127
Id.
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34
utility industry, and state and local government to “build a
‘career ladder’ for the weatherization sector.”128 The consortium
is chaired by a senior official of Delaware Technical and
Community College and is preparing a coordinated program of
certificate training, associate and 4-year degree opportunities.129
This program, while similar to New Jersey’s, also strays a
bit further from the model in terms of its approach to targeted
hiring. As noted, the targeted hiring requirement relates to
enrolled trainees or graduates of programs that merely serve
low-income communities.130 Any number of training programs
might reasonably meet that criteria. Fortunately, it appears that
the specialized LIUNA training program will play a prominent
role in Delaware’s Plan implementation, ideally crowding out
any low-road training operators.131
4. The American Clean Energy and
Security Act of 2009 (H.R. 2454)
In June 2009, the U.S. House of Representatives passed
H.R. 2454, the American Clean Energy and Security Act, which
included a Green Construction Careers Demonstration Project
(“GCCDP”). The purpose of the GCCDP is to “promote middle
class careers and quality employment practices in the green
construction sector among targeted workers.”132 The Act
establishes programs and legal standards relating to a vast
universe of green construction projects, including, to name just a
few: construction of facilities related to carbon capture and
133
sequestration; construction of facilities that manufacture plugin vehicles or their batteries;134 manufacturing of energy efficient
128
Id. at 7.
Id.
130
See Cummings & Boutcher, supra note 11 and accompanying text.
131
See DELAWARE WEATHERIZATION PROGRAM, supra note 119, at 1.
132
American Clean Energy and Security Act, H.R. 2454, 111th Cong.
§ 424A(a) (2009).
133
See id. at §§ 114, 115.
134
Id. § 116.
129
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35
homes;135 and energy efficiency building retrofits.136 Any project,
“including residential retrofitting projects, funded directly by or
assisted in whole or in part by or through the Federal
Government pursuant to [the] Act or by any other entity
established in accordance with [the] Act” is eligible for inclusion
in the GCCDP.137
The Act, while incorporating core components of the Green
Construction Careers model, gives substantial discretion to the
Secretary of Labor to structure and administer the GCCDP. For
starters, the Secretary, in consultation with the Secretaries of
Energy, must establish which projects will be a part of the
GCCDP.138 There is no limitation on the number, size or cost of
projects that may be covered, and the Secretaries may expand
the project in the future.139 The Secretaries are specifically
empowered to set a percentage of targeted workers to be hired
on covered projects.140
The Act devotes several provisions to ensuring both job
quality and high quality training. The Secretaries are explicitly
permitted to require Project Labor Agreements on GCCDP
projects.141 On covered projects, contractors and subcontractors
must have a written agreement with quality apprenticeship or
training programs, which are those defined in § 3(1) of the
Employee Retirement Income Security Act of 1974.142 The
135
See id. § 203.
See id. § 202.
137
Id. § 424A(a).
138
Id. § 424A(a).
139
See id. § 424A(c).
140
See id. § 424A(b). The Act defines targeted workers to include groups
targeted under the Work Opportunity Tax Credit (including youth, veterans
and public benefits recipients), those in low-income families and households,
and displaced homemakers. Id. § 424A(e).
141
Id. § 424A(h).
142
Id. § 424A(g). The statute for the Act, 29 U.S.C. 1002(1), defines an
“employee benefit welfare plan” as “any plan, fund, or program which was
heretofore or is hereafter established or maintained by an employer or by an
employee organization, or by both, to the extent that such plan, fund, or
program was established or is maintained for the purpose of providing for its
participants or their beneficiaries, through the purchase of insurance or
136
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apprenticeship and training programs must, in turn, have written
agreements with pre-apprenticeship programs that have a
demonstrated ability to recruit and prepare targeted workers for
apprenticeship program admission.143
As with the Los Angeles ordinance, the GCCDP reflects the
core principles of the Green Construction Careers model, but
leaves many vital matters to the discretion of the implementing
agency. For example, the Department could elect not to include
any construction projects in the GCCDP, or to not require
meaningful targeted hiring measures or community workforce
agreements. In addition, the Department may encounter a
political and/or bureaucratic thicket in trying to implement the
program, which focuses on projects funded by other agencies
through a variety of administrative channels.
IV. LEGAL CONSIDERATIONS FOR STATE AND LOCAL
GOVERNMENTS ADOPTING GREEN CONSTRUCTION CAREERS
POLICIES
The core provisions of the Green Construction Careers
model, if adopted as state or local regulation, give rise to a
number of noteworthy legal considerations. Counsel for
policymakers wishing to adopt some version of the model should
be well apprised of these issues, while appreciating that none
have yet created an obstacle to adoption or implementation in
the cases discussed above. The legal issues implicated by the
model and discussed in this section include: pre-emption of
labor-related standards by the National Labor Relations Act; and
otherwise . . . apprenticeship or other training programs . . . .” 29 U.S.C.
§ 1002(1). This standard allows both union and non-union programs to
participate. The California Supreme Court has held that an apprenticeship
program created by a nonunion group of contractors (including a trust
established to receive and manage employer contributions to fund program,
and written standards under which program operates) was an “employee
welfare benefit plan” under ERISA. S. Cal. Chapter of Associated Builders
v. Calif. Apprenticeship Council, 841 P.2d 1011, 1019–20 (1992).
143
American Clean Energy and Security Act, H.R. 2454, 111th Cong.
§ 424A(g)(1).
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conflict of residency-based targeted hiring measures with the
Privileges and Immunities Clause of Article VI of the U.S.
Constitution, the Commerce Clause of Article I of the U.S.
Constitution, the Equal Protection Clause of the Fourteenth
Amendment to the U.S. Constitution, and the Federal Highway
Administration’s regulatory prohibition against local hiring
preferences. This section discusses each of these legal issues and
explores ways that policymakers seeking to adopt Green
Construction Careers measures in states and municipalities can
avert obstacles the issues may raise.
Note that a jurisdiction may follow the tenets of the
construction careers model using policy measures that do not
implicate the legal issues discussed below. For example, a
jurisdiction could address job quality using measures such as
living wage requirements or modest responsible contractor
standards that do not give rise to significant National Labor
Relations Act pre-emption concerns. Or a jurisdiction could have
a targeted hiring program without the geographically-based
residency requirements that implicate a number of legal issues.
But policymakers rightly want measures that implicate the legal
issues discussed below because of effectiveness of measures like
Community Workforce Agreements and political and policy
desirability of certain types of geography-based targeting.
Fortunately, in general, proper findings and careful drafting will
enable avoidance of the issues discussed below, especially where
the jurisdiction has adopted Green Construction Careers
measures in connection with its role as a market participant.
A. Pre-emption of Labor-Related Provisions by National
Labor Relations Act
144
which
The National Labor Relations Act (“NLRA”),
governs labor organizing and the relationship between unions
145
and employers, contains no express pre-emption provision.
144
145
(2008).
29 U.S.C. § 151–69.
Chamber of Commerce of the U.S. v. Brown, 128 S. Ct. 2408, 2412
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However, the U.S. Supreme Court has articulated two implied
pre-emption doctrines.146 The first, known as Garmon preemption,147 “is intended to preclude state interference with the
National Labor Relations Board’s interpretation and active
enforcement of the ‘integrated scheme of regulation’ established
by the NLRA.”148The Garmon pre-emption doctrine forbids state
regulation of activities that the NLRA (a) protects, (b) makes an
unfair labor practice, or (c) arguably protects or prohibits.149The
second, known as Machinists pre-emption, prohibits state
regulation of conduct that Congress intended be unregulated and
left to be controlled by the “free play of economic forces.”150The
Machinists doctrine focuses on state regulation of economic
weapons available to employers and workers.151 However, as
discussed below, two important exceptions limit the scope of the
Garmon and Machinists doctrines.
The NLRA will only pre-empt regulatory actions of states
and subdivisions thereof. The U.S. Supreme Court and several
circuit courts have recognized that a state or municipality acting
as a participant in the market that is the subject of the
government-adopted standard at issue will not be subject to
NLRA pre-emption.152 It is worth noting that the Green
146
147
Id.
See San Diego Bldg. Trades Council v. Garmon, 359 U.S. 236
(1959).
148
Golden State Transit Corp. v. City of Los Angeles, 475 U.S. 608
(1986).
149
Wis. Dep’t of Indus., Labor & Human Relations. v. Gould, Inc., 475
U.S. 282 (1986).
150
Machinists v. Wis. Employment Relations Comm’n, 427 U.S. 132
(1976) (quoting NLRB v. Nash-Finch Co., 404 U.S. 138 (1971)).
151
See Golden State Transit Corp. v. City of Los Angeles, 475 U.S. 608
(1986) (overturning a city’s decision not to renew company’s cab license
unless the company resolved a labor dispute with its employees); Machinists,
427 U.S. at 155 (invalidating state order enjoining union and its members
from continuing to refuse to work overtime); Chamber of Commerce of the
U.S. v. Bragdon, 64 F.3d 497, 504 (9th Cir. 1995) (invalidating a wage
increase regulation that applied to employees working on private projects
costing over $500,000).
152
Bldg. & Construction Trades Council v. Associated Builders &
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39
Construction Careers model seems most likely to be applied in
contexts in which the policymaking entity is acting as a market
participant. The Los Angeles Green Retrofit ordinance and the
New Jersey and Delaware weatherization program plans
discussed above each provide an example of standards governing
market participation. In Los Angeles, the ordinance establishes
rules related to the City’s own retrofitting ((i.e., retrofitting
undertaken by city employees or contractors) of City
buildings.153 The New Jersey and Delaware program plans
describe state rules governing the expenditure of state and
federal funds for weatherization.154 In each case, the government
entity is acting as a participant in the building retrofit market to
which its standards apply and should thus qualify as a market
participant for purposes of NLRA pre-emption analysis.
State and local governments seeking to adopt the Green
Construction Careers model in connection with the provision of
subsidies,155 or the leasing of land or space should take note of
varied case law on the question of whether these actions provide
a basis for qualifying as a market participant.156 Further, the
Contractors of the Metro. Dist., 507 U.S. 218, 227, 229 (1993) (“[NLRA]
pre-emption doctrines apply only to state regulation [and] a State may act
without offending the pre-emption principles of the NLRA when it acts as a
proprietor.”).
153
See supra Part III(b)(i).
154
See supra Part III(b)(ii) and (iii).
155
In Associated Builders & Contractors v. City of Providence, the court
examined a local regulation that required the execution of a PLA for private
projects in exchange for favorable tax treatment. 108 F. Supp. 2d 73 (D.R.I.
2000). The court reasoned that because favorable tax treatment did not
constitute direct market participation akin to purchasing/selling
goods/services, the local tax regulation was pre-empted by the NLRA. Id.
However, in Hotel Employees & Rest. Employees Union, Local 57 v. Sage
Hospitality Res., the court held that the City was not preempted from
requiring parties receiving tax increment financing to sign a labor neutrality
agreement. 390 F.3d 206, 207–208 (3rd Cir. 2004).
156
See, e.g., Four T’s, Inc. v. Little Rock Mun. Airport Comm’n, 108
F.3d 909 (8th Cir. 1997) (holding that airport participating in rental car
market by renting counter space and parking spaces to rental car companies);
Transport Limousine of Long Island, Inc. v. Port Auth. of N.Y. and N.J.,
571 F. Supp 576 (E.D.N.Y. 1983) (holding that Port Authority’s imposition
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U.S. Supreme Court has indicated that the mere granting of a
franchise is not adequate to qualify a government entity as a
participant in the market for which the franchise is granted.157
This issue is more apt to occur in the service contract context,
but could be important where, for example, a private party is
engaged in building operations and maintenance under a
franchise agreement.
At bottom, while this area of law is complex, and, on some
questions, unclear, the basic rule established in the Boston
Harbor case158—that government entities applying standards to
their sponsored projects may avoid NLRA pre-emption—should
give policymakers solid footing from which to shape green
development.
Policymakers should also be aware that the basis of the
policy in dispute is an important component of pre-emption
analysis.159 For example, in Associated Builders & Contractors,
of fees on limousine services in exchange for counter space qualified Port
Authority as participant in market for ground transportation services).
Compare J.L. Smith v. Dept. of Agric. of the State of Ga., 630 F.2d 1081,
1083 (5th Cir. 1981) (holding that market participant doctrine did not apply
to state regulation of space assignment at state-owned farmer’s market);
Aeroground v. City and County of San Francisco, 170 F. Supp. 2d. 950
(N.D. Cal. 2001) (holding that airport not acting as market participant in
promulgating rule requiring certain employers on the airport site to enter into
card check agreements with registered unions).
157
See Golden State, 475 U.S. at 615, 618 (the Court explicitly rejected
the argument that a state regulation was immune from Machinists pre-emption
because the regulation took the form of a traditional use of local authority to
grant a benefit, and pre-empted an exercise of a city’s decision to grant a taxi
franchise).
158
See Bldg. & Construction Trades Council v. Associated Builders &
Contractors of the Metro. Dist., 507 U.S. 218, 227, 229 (1993).
159
In Building & Construction Trades Council, the U.S. Supreme Court
examined a state bid specification for a state owned and managed project that
required contractors and subcontractors to agree to a Project Labor
Agreement (PLA) containing particular terms. 507 U.S. 218, 221–22 (1993).
The court found that the state was acting as a purchaser of services; that the
state was “attempting to ensure an efficient project that would be completed
as quickly and effectively as possible at the lowest cost;” that the bid
specification was specifically tailored to one particular job; and that project
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Inc. v. City of Seward, the Ninth Circuit determined that the
state acted as a market participant when it required the winning
bidder on a public works project to comply with a work
preservation clause contained in the City’s contract.160 The court
noted that the City “was not driven by regulatory concerns, but
by legitimate management concerns that may lead any employer,
public or private, to agree to a work preservation clause.”161
The Machinists and Garmon doctrines are also limited by the
principle that minimum standards that merely create a
background for collective bargaining are not pre-empted by the
NLRA. In Fort Halifax Packing Co. v. Coyne162 and
Metropolitan Life Insurance v. Massachusetts,163 the Supreme
Court held that laws setting minimum health benefits and
minimum severance payments were not pre-empted.164Many of
the core components of the Green Construction Careers model
may also be characterized as falling into this category of
regulation.
The following discusses more specifically the risk of NLRA
pre-emption associated with some of the core components of the
Green Construction Careers model.
labor agreements were specifically contemplated under the NLRA. Id. at 232.
The Court concluded that there was therefore “no basis on which to
distinguish the incentives at work here from those that operate elsewhere in
the construction industry” and held that the state acted as a market
participant, not as a regulator. Id.
160
966 F.2d 492, 496–98 (9th Cir. 1992).
161
Id. at 496 (emphasis added).
162
482 U.S. 1, 22 (1987) (holding that the NLRA did not pre-empt a
state law requiring minimum severance payments when a factory closes).
163
471 U.S. 724, 758 (1985) (holding NLRA did not pre-empt state law
that set minimum health care benefits).
164
Id.; see also Dillingham Constr. N.A. v. County of Sonoma, 190
F.3d 1034, 1038–39 (9th Cir. 1999) (holding NLRA did not pre-empt
California law that required public works employers to pay prevailing wages
to apprentices); Contract Servs. Network v. Aubry, 62 F.3d 294, 298–99
(9th Cir. 1995) (holding NLRA did not pre-empt California law that required
employers to contribute to unemployment and workers’ compensation funds).
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1. Targeted Hiring
In order to withstand a legal challenge under the NLRA preemption doctrines, it is important that the targeted hiring
measures not have a direct effect on the collective bargaining
process. In Hudson County Building and Construction Trades
Council, AFL-CIO v. City of Jersey City, the court reviewed a
motion for summary judgment by plaintiff Trades Council,
which had challenged a city targeted hiring ordinance. The
ordinance required subsidized developers to employ 51% Jersey
City residents (51% of whom had to be minority and 7% of
whom had to be women) and to require subcontractors to enter
local hiring agreements containing good faith obligations.165 The
ordinance further required unions with whom subcontractors had
referral agreements to submit signed statements that the unions
would act consistently with the good faith obligations.166 If an
employer could not meet its good faith obligations because of
the non-compliance of a union, the employer was required to
notify the City of its referral needs to meet the goal and consider
those referred by the City without regard to any agreement it
had with a union.167
The court considered plaintiff’s argument that the Garmon
doctrine applied because the ordinance required a unilateral
change in the hiring hall procedure designated in the collective
bargaining agreement, and that such a unilateral change was an
unfair labor practice prohibited by the NLRA.168 The court held
that there were issues of material fact that prevented it from
granting summary judgment, noting in particular that Garmon
pre-emption depends on the factual determination of whether and
how the city ordinance regulates the collective bargaining
process, rather than on the substantive terms of the bargain that
169
is struck.
165
166
167
168
169
960 F. Supp. 823, 826–27 (D.N.J. 1996).
Id. at 827.
Id.
Id. at 833.
Id. at 834.
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The court also considered the argument that the ordinance
was subject to Machinists pre-emption because hiring hall
provisions, a mandatory subject of negotiations, had been left to
the “free play of economic forces.”170 The court denied summary
judgment, noting that a factual question remained as to whether
the ordinance affected the conduct of unions and employers in
the collective bargaining process.171 Thus, even though the court
found that Congress left these types of provisions to the free
play of economic forces, the court would not automatically find
Machinist pre-emption in the absence of evidence of an actual
effect on collective bargaining.
Policymakers and their counsel should also consider the
perspective in addressing this issue that, following the holdings
in Metropolitan Life and Fort Halifax, modest targeted hiring
requirements like those at issue in Jersey City will almost never
directly impact the collective bargaining process in a way that
triggers NLRA pre-emption. As to Garmon pre-emption,
Metropolitan Life may be read to say that, while an issue may
be the subject of collective bargaining, where the NLRA is silent
as to that issue, as it is regarding hiring hall referral procedures,
the jurisdiction cannot be said to have sought to interfere with
the National Labor Relations Board’s interpretation and
enforcement of the NLRA.172 As to Machinists pre-emption,
Metropolitan Life and Fort Halifax also mean that the NLRA is
not concerned with regulations that, like targeted hiring
170
Id.
Id.
172
In Metropolitan Life, plaintiffs challenged a Massachusetts statute
requiring that certain health insurance policies purchased by employers
provide minimum mental health benefits. Because some of these plans were
purchased pursuant to collective bargaining agreements, the terms of the
plans were subject to collective bargaining, and plaintiffs argued that the
statute “mandate[d] the terms of collective-bargaining agreements.” 471 U.S.
724, 749 (1985). The Court rejected the Garmon argument, stating, “there is
no claim here that Massachusetts has sought to regulate or prohibit any
conduct subject to the regulatory jurisdiction of the NLRB, since the [NLRA]
is silent as to the substantive provisions of welfare-benefit plans.” Id. at 748–
49.
171
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44
measures, may affect the substantive terms of a collective
bargaining agreement, but do not affect the relative positions of
the parties to that agreement.173
2. Project Labor Agreements
Community
Workforce
Agreements—project
labor
agreements containing targeted hiring provisions—are central to
the Green Construction Careers model. However, requiring the
use of such agreements outside the market participant context
may create substantial risk of pre-emption by the NLRA. In
Associated Builders & Contractors v. Providence, the federal
district court applied the Machinists pre-emption doctrine to hold
that the NLRA pre-empted a local regulation requiring the
execution of a project labor agreement for private project
receiving favorable tax treatment from the City.174 The court
reasoned that by influencing the decisions of private employers
and employees as to whether or not, and with whom, to bargain,
the city clearly implicated conduct Congress meant to leave
unregulated.175
3. Apprenticeship Program Participation
Requiring contractors to participate in high-quality
apprenticeship programs is crucial to ensuring that targeted
workers obtain sustained careers in green construction. On its
face, a requirement that contractors obtain apprentices from, and
provide support to, apprenticeship programs meeting high
standards for quality would not appear to be pre-empted by the
NLRA. The Ninth Circuit has held that a state prevailing wage
173
In Metropolitan Life, the Court opined, “[t]he NLRA is concerned
primarily with establishing an equitable process for determining terms and
conditions of employment, and not with particular substantive terms of the
bargain that is struck when the parties are negotiating from relatively equal
positions.” Id. at 753; see also Fort Halifax Packing Co. v. Coyne, 482 U.S.
1, 20 (1987).
174
108 F. Supp. 2d 73, 84 (D.R.I. 2000).
175
Id. at 81.
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law for apprentices was not pre-empted under the Machinists
doctrine in part because “federal law contemplates and permits
regulation of apprenticeship standards.”176
4. Responsible Contractor
Many states and localities have used responsible contractor
requirements in connection with their procurement and other
market participation activities.177 However, policymakers
designing such requirements should be aware of Wisconsin Dept.
of Industry v. Gould Inc., in which the U.S. Supreme Court
held that the NLRA pre-empted a Wisconsin statute that forbade
state procurement agents from using state funds to purchase
products made or sold by NLRA violators.178 The court reasoned
that because the statute functioned as a supplemental sanction for
violations of the NLRA, it conflicted with the National Labor
Relations Board’s comprehensive regulation of industrial
relations in precisely the same way as would a prohibition
against private parties within the State doing business with
repeat labor law violators.179 Thus, policymakers should avoid
creating such supplemental sanctions for NLRA violations in
designing responsible contractor requirements.
5. Minimum Wage, Benefit
and Workplace Standards
As noted, the NRLA does not pre-empt generally applicable
minimum wage, benefit or other minimum labor standards that
affect union and non-union employees equally, and neither
encourage nor discourage the collective-bargaining processes
180
that are the subject of the NLRA. States and localities wishing
176
Dillingham Constr. N.A. v. County of Sonoma, 190 F.3d 1034, 1039
(9th Cir. 1999).
177
Sonn & Gebreselassie, supra note 81, at 8.
178
475 U.S. 282 (1986).
179
Id. at 286–87.
180
See Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 755
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to include such minimum standards in green construction careers
measures may look to Associated Builders & Contractors of
Southern California v. Nunn, in which the Ninth Circuit held
that California regulations establishing minimum wages and
benefits on public and private construction projects for stateregistered apprentices survived Machinists pre-emption because
the law only established minimum labor standards and because
federal law permits state regulation of apprenticeship
standards.181However, policymakers must also take note of
Chamber of Commerce of the United States v. Bragdon, in
which the Ninth Circuit determined that a Contra Costa county
ordinance requiring payment of prevailing wages on certain
types of private industrial construction projects costing over
$ 500,000 was pre-empted by the NLRA.182
B. Conflict of Targeted Hiring Measures with the Privileges
and Immunities Clause of Article IV of the U.S.
Constitution
The Privileges and Immunities Clause of Article IV of the
United States Constitution provides that “the Citizens of each
State shall be entitled to all Privileges and Immunities of
Citizens in the several States.”183 The targeted hiring measures
described in the Green Construction Careers model, to the extent
they result in a preference scheme adverse to out-of-state
workers, might be said to interfere with those workers’ ability to
pursue private employment, which the U.S. Supreme Court has
held is a fundamental right for purposes of the Privileges and
184
Immunities Clause. The Court has rejected the argument that
discrimination based on municipal—as opposed to state—
(1985).
181
356 F.3d 979, 990–91 (9th Cir. 2004).
64 F.3d 497 (9th Cir. 1995); see also 520 South Michigan Avenue
Associates, LTD. v. Congress Plaza Hotel & Convention Center, 549 F. 3d
1119 (2008).
183
U.S. CONST. art. IV, § 2, cl. 1.
184
See United Bldg. & Construction Trades Council of Camden v.
Mayor of Camden, 465 U.S. 208, 219 (1984).
182
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residency does not implicate the Clause.185
However, the Privileges and Immunities Clause only
precludes discrimination against non-residents when the
governmental action burdens one of the privileges and
immunities protected under the clause, and the government does
not have a “substantial reason” for the difference in treatment or
the discrimination practiced against the nonresidents does not
bear a “substantial relationship” to the government’s
objectives.186 In accordance with this deferential standard, local
governments have adopted targeted hiring measures based on an
explicitly stated desire to address poverty and unemployment.187
Wisely, these entities have made extensive findings about the
poverty and unemployment they hope to address and the way in
which targeted hiring measures accomplish that goal.188
185
Id. at 215–16.
Supreme Court of N.H. v. Piper, 470 U.S. 274, 284 (1985).
187
See, e.g., CONSTRUCTION CAREERS POLICY, supra note 66, at 1
(“[R]edevelopment objectives will be advanced by targeting construction
employment and training opportunities in ways calculated (i) to mitigate the
harms caused by geographically-concentrated poverty, (ii) to fight
unemployment and underemployment in vulnerable populations and
neighborhoods, including under-represented populations, populations with
employment barriers and youth, (iii) to advance the skills of the local labor
pool, including youth, to enable workers to earn wages that will assist them
in moving out of poverty, (iv) to provide links to career paths for vulnerable
populations and Local Residents . . . .”).
188
For example, in Jersey City, the City defended its ordinance by
pointing to poverty and unemployment rates there that were higher than those
of surrounding municipalities. Hudson County Bldg. & Constr. Trades
Council v. Jersey City, 960 F. Supp. 823, 830–31 (D.N.J. 1996). The court,
in declining summary judgment against the City, noted that the City still
needed to show that “out-of-state workers are a source of unemployment and
poverty within its borders.” Id. at 831. In W.C.M. Window Co. v. Bernardi,
the Seventh Circuit invalidated an Illinois statute that provided that the
contractor on “any public works project or improvement for the State of
Illinois or any political subdivision, municipal corporation or other
governmental unit thereof shall employ only Illinois laborers on such project
or improvement,” unless the contractor certifies, and the contracting officer
finds, that Illinois laborers either “are not available, or are incapable of
performing the particular type of work involved . . . .” 730 F.2d 486, 489
186
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4/10/2010 2:42 PM
In United Building & Construction Trades Council of
Camden County v. Mayor & City of Camden, the U.S. Supreme
Court examined a Privileges and Immunities challenge189 to an
ordinance of the City of Camden, New Jersey that required at
least 40% of the employees of contractors and subcontractors
working on city-funded construction projects to be Camden
residents.190 During the course of litigation, the ordinance was
amended to apply to any construction project “funded in whole
or in part with City funds or funds which the City expends or
administers in accordance with the terms of a grant.”191
Additionally, “the 40% resident-hiring requirement was changed
from a strict ‘quota’ to a ‘goal’ with which developers and
(7th Cir. 1984) (omission in original) (quoting the Illinois statute). The statute
defined “Illinois laborers” as a worker who had been a resident of Illinois for
at least a year. Id. at 494. The court found that the state had not put forth
any evidence regarding benefits of a residents-preference law in dealing with
a problem created by nonresidents. Id. at 497. In Util. Contrs. Ass’n of New
Eng. v. City of Worcester, the court invalidated an ordinance reserving 50%
of work hours on city public works projects for city residents, despite
evidence of high unemployment, because the city had not shown that the
unemployment was caused by out-of-state residents. 236 F. Supp. 2d 113,
115 (2002).
189
Initially, the appellant trade union raised Commerce Clause and Equal
Protection arguments as well. United Bldg. & Construction Trades Council of
Camden County, 465 U.S. at 212. Appellant abandoned its Commerce Clause
argument in light of the Supreme Court’s decision in White v. Mass. Council
of Constr. Employers, which held a mayor’s executive order immune from
scrutiny under a “market participation” exception to the Commerce Clause.
460 U.S. 204, 213 (1983) (relying upon the decision in 460 U.S. 204 (1983).
Appellants abandoned their Equal Protection argument when the ordinance
was amended to eliminate a one-year residency requirement. Id.
190
465 U.S. at 210. The ordinance specifically applied, “[w]herever the
City of Camden spends funds derived from any public source for construction
contracts or where the City of Camden confers a direct financial benefit upon
a party, but excluding the grant of a property tax abatement, the fair market
value of which exceeds $ 50,000.00, the provisions of this ordinance shall
apply . . . . The provisions of this ordinance shall also apply to the
development and construction of all residential housing of four (4) units or
less.” Id. at 211 n.3 (omission in original) (quoting the ordinance at issue).
191
Id. at 214 (quoting the appellees’ brief).
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contractors were to make ‘every good faith effort’” to comply.192
Having concluded that the ordinance burdened a fundamental
right, the Court analyzed the ordinance’s relationship to the
government’s objectives.193 The City argued that “the ordinance
[was] necessary to counteract grave economic and social ills
[such as] unemployment, a sharp decline in population, and a
reduction in the number of businesses located in the city, [each
of which resulted in] eroded property values and a
depleted . . . tax base.”194 The resident-hiring preference was
designed, the city contended, to increase the number of
employed persons living in Camden and to arrest the “middleclass flight” plaguing the city.195 The city also argued that all
non-Camden residents employed on city public works projects,
whether they reside in New Jersey or Pennsylvania, constitute a
“source of the evil at which the statute is aimed.”196 The Court
reversed the New Jersey Supreme Court’s decision to uphold the
ordinance on the ground that the record contained insufficient
facts to evaluate the City’s justification because there had never
197
been a trial or findings of fact. The case ultimately settled on
remand, without a determination of whether the ordinance would
have violated the Privileges and Immunities clause.
The U.S. Supreme Court does accord deference to states and
localities in analyzing “local evils” and prescribing “appropriate
cures.”198 In particular, the Court has given deference to state
and local governments that are “merely setting conditions on the
expenditure of funds” that they control.199 One district court has
followed that doctrine to hold that a city-contract term requiring
airport security contractors to hire Detroit residents did not run
afoul of the Privileges and Immunities Clause because the city
192
Id. (quoting the appellees’ brief).
Id. at 222.
194
Id.
195
Id.
196
Id. at 223.
197
Id.
198
Toomer v. Witsell, 334 U.S. 385, 396 (1948).
199
United Bldg. & Construction Trades Council of Camden County, 465
U.S. at 223.
193
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used only its own monies to purchase the services.200 However,
the Camden case, which involved projects “funded in whole or
in part by the city”, suggests there are limits to this deference.201
Importantly, the Privileges and Immunities Clause does not
apply to direct public employment because there is no privilege
or fundamental right to direct employment with a governmental
institution.202
States and localities seeking to adopt targeted hiring
measures that may discriminate against out-of-state workers may
thus wish to use such measures to remedy unemployment or
poverty in areas where those “local evils” can be shown to be
(a) higher than in other areas and (b) caused by out-of-state
workers occupying employment positions in the targeted sector.
However, states and localities may have more leeway than
Camden seems to suggest. The Seventh Circuit has noted
several kinds of evidence that a jurisdiction might use to justify
discrimination against out-of-state workers in the construction
sector, each relating principally to the benefit to the
jurisdiction.203 This evidence included: the unemployment rate in
[the jurisdiction’s] construction industry; what such
unemployment cost the jurisdiction; whether it would be
significantly increased by throwing open public construction
projects to nonresidents; and whether the costs—if any—to the
jurisdiction of allowing nonresident labor on such projects, costs
in higher unemployment or welfare benefits paid unemployed
construction workers or their families, were likely to exceed any
cost savings in public construction from hiring nonresident
204
workers.
An approach that likely creates a complete defense to a
200
Jones v. J.J. Sec., Inc. 767 F.Supp. 151 (E.D. Mich. 1991).
United Bldg. & Construction Trades Council of Camden County, 465
U.S. at 221.
202
Mass. Bd. of Retirement v. Murgia, 427 U.S. 307, 313 (1976); Salem
Blue Collar Workers Ass’n v. City of Salem 33 F.3d 265, 270 (3rd Cir.
1994).
203
W.C.M. Window Co. v. Bernardi, 730 F.2d 486, 498 (7th Cir.
1984).
204
Id.
201
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Privileges and Immunities challenge is to simply exempt out-ofstate workers from targeted hiring calculations, as the City of
Cleveland has done in its “Resident Employment Law.”205 That
law requires that contracts related to construction projects under
which the city provides more than $100,000 in assistance
contain a provision ensuring that city residents will perform at
least twenty percent of all “Construction Worker Hours.”206 The
law simply excludes hours worked by non-Ohio residents from
the definition of “Construction Worker Hours.”207 The Sixth
Circuit has held that the Cleveland Resident Employment Law
does not violate Title 23 C.F.R. § 635.117(b), which bars
contract requirements that discriminate against labor from other
208
states or territories. Notably, the court looked to Privileges
and Immunities jurisprudence to establish the vital distinction
between interstate and intrastate discrimination based on
residency.209
Given these options, policymakers should consider tracking
hours worked by out-of-state residents in the sector that will be
the subject of residency-based targeted hiring measures. Where
the emerging data shows that few out-of-state workers are
employed in the sector, policymakers may opt for the Cleveland
approach, thereby creating a legal defense to a Privileges and
Immunities challenge while causing minimal disruption to
targeted hiring goals. Alternatively, where the emerging data
shows a substantial number of out-of-state workers in the sector,
a locality may use that data as a basis for finding a particular
205
CLEVELAND, OH. ADMIN. CODE tit. XV, ch. 188 (2009).
Id. § 188.02.
207
Id. § 188.01(c).
208
City of Cleveland v. Ohio Dept. of Transport., 508 F.3d 827, 847
(6th Cir. 2007) (“Cleveland’s ordinance was drafted to avoid reaching
contractors who hire only out-of-state workers, so it does not ‘discriminate
against the employment of labor from [another] state.’”) (internal citation
omitted).
209
Id. at 847 (noting that in United Building & Construction Trades
Council v. City of Camden, 465 U.S. 208 (1984), the Court held that the
local hiring ordinance “could violate the Privileges and Immunities Clause
because it disadvantaged both in-state and out-of-state residents alike”).
206
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“source of evil” at which the targeted hiring measures are
properly aimed.
C. Conflict of Targeted Hiring Measures with the Commerce
Clause of Article I of the U.S. Constitution
State or local laws that burden or discriminate against
interstate or foreign commerce may be invalidated on the ground
that they violate the dormant or negative Commerce Clause.
“When a state statute directly regulates or discriminates against
interstate commerce, or when its effect is to favor in-state
economic interests over out-of-state interests, it will generally be
struck down without further inquiry.”210 “When, however, a
statute has only indirect effects on interstate commerce and
regulates evenhandedly, a court should examine whether the
state’s interest is legitimate and whether the burden on interstate
commerce clearly exceeds the local benefits.”211
Targeted hiring measures that contain a preference for local
residents may run afoul of the dormant Commerce Clause. In
W.C.M. Window Co. v. Bernardi, the Seventh Circuit held that
an Illinois statute requiring preference for Illinois residents in
hiring for all public works projects violated the dormant
Commerce Clause.212 The court observed that the statute had the
same general effect on the flow into Illinois of labor services
supplied by individuals unwilling to change their residence to
Illinois at least a year before beginning to work in the state as an
210
Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S.
573, 579 (1986).
211
Id. The Ninth Circuit has opined, “[e]ven in the context of dormant
commerce clause analysis, the Supreme Court has frequently admonished that
courts should not second-guess the empirical judgments of lawmakers
concerning the utility of legislation.” Pac. Nw. Venison Producers v. Smitch,
20 F.3d 1008, 1017 (9th Cir. 1994) (internal quotation omitted); see also
Alaska Airlines, Inc. v. City of Long Beach, 951 F.2d 977, 983 (9th Cir.
1991) (“For a facially neutral statute to violate the commerce clause, the
burdens of the statute must so outweigh the putative benefits as to make the
statute unreasonable or irrational.”).
212
730 F.2d 486, 494 (7th Cir. 1984).
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Illinois import tariff on coal would have on the flow of coal into
the state.213 After concluding that the market participation
exception was inapplicable, the Court held that the statute
violated the dormant Commerce Clause, reasoning that the state
had made no showing of actual or probable harm resulting from
non-residents obtaining public works construction jobs.214
The Supreme Court has recognized a market participation
exception to the application of the Commerce Clause.215 In White
v. Mass. Council of Construction Employers, the Supreme Court
considered a commerce clause challenge to an executive order
by the Mayor of Boston,216 which required that all construction
projects funded in whole or in part by city funds, or funds
which the city had the authority to administer, should be
performed by a work force consisting of at least half bona fide
residents of Boston.217 With respect to projects funded wholly
with city funds, the Court held that the city was acting as a
market participant and therefore immune from challenge under
213
Id.
Id. at 496.
215
See Reeves v. Stake, 447 U.S. 429, 436–37 (1980) (“The Commerce
Clause responds principally to state taxes and regulatory measures impeding
free private trade in the national marketplace. There is no indication of a
constitutional plan to limit the ability of the States themselves to operate
freely in the free market.” (internal citations omitted)).
216
The Executive Order specifically provided, “[o]n any construction
project funded in whole or in part by City funds, or funds which, in
accordance with a federal grant or otherwise, the City expends or
administers, and to which the City is a signatory to the construction contract,
the worker hours on a craft-by-craft basis shall be performed, in accordance
with the contract documents established herewith, as follows: a. at least 50%
by bona fide Boston residents; b. at least 25% by minorities; c. at least 10%
by women.” Only the residency requirement was challenged in the case
reviewed by the Court. White v. Mass. Council of Constr. Employers, 460
U.S. 204, 205 n.1 (1983).
217
Significantly, the Court found that, as a factual matter, none of the
city’s funds had been used to partially finance private projects. Thus the
Court limited its review to the propriety of applying the Mayor’s executive
order to projects funded wholly with city funds and projects funded in part
with federal funds. Id. at 209.
214
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the Commerce Clause.218 The Court observed that the executive
order covered “a discrete, identifiable class of economic activity
in which the city is a major participant,” such that “[e]veryone
affected by the order is, in a substantial if informal sense,
‘working for the city.’”219
States and localities wishing to apply targeted hiring
measures to green construction projects assisted with federal
Housing and Urban Development funds may also have some
insulation against dormant Commerce Clause challenges. With
respect to projects funded in part with federal funds, the Court
in White opined that where state or local government action is
specifically authorized by Congress, it is not subject to the
Commerce Clause even if it interferes with interstate
commerce.220 The Court examined applicable statutes related to
the funding from the U.S. Department of Housing and Urban
Development at issue221 and found that the funding was
“intended to encourage economic revitalization, including
improved opportunities for the poor, minorities, and
unemployed.”222 The Court concluded that, “the Mayor’s
executive order sounds a harmonious note; the federal
regulations for each program affirmatively permit the type of
parochial favoritism expressed in the order.”223
Thus, as with the Privileges and Immunities issue,
policymakers have a number of ways to avoid a dormant
218
Id. at 214–15.
Id. at 211, n.7.
220
Id. at 213 (citing Southern Pacific Co. v. Arizona, 325 U.S. 761, 769
(1945)).
221
The regulations provided that the city must “comply with . . . Section
3 of the Housing and Urban Development Act of 1968, as amended, and
implementing regulations at 24 C.F.R. Part 135.” 24 C.F.R.
§ 570.458(c)(14)(ix)(D) (1982). The regulations implementing that Act
provide that “to the greatest extent feasible opportunities for training and
employment arising in connection with the planning and carrying out of any
project assisted under any such program be given to lower income persons
residing in the area of such project . . . .” 24 C.F.R. § 135.1(a)(2)(i) (1982).
222
White, 460 U.S. at 213.
223
Id.
219
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Commerce Clause challenge. They may simply adopt targeted
hiring measures that are not residency-based, or may adopt the
Cleveland approach described above. Further, as one might
expect would occur in many cases, the targeted hiring measure
may properly be adopted as a part of market participation by the
subject locality.
D. Conflict of Targeted Hiring Measures with the Equal
Protection Clause of the Fourteenth Amendment to
the U.S. Constitution
The Equal Protection Clause provides that no state shall
“deny to any person within its jurisdiction the equal protection
of the laws.”224 A strict scrutiny standard of review applies to
government policies or laws that either (1) make distinctions on
the basis of certain inherently suspect characteristics (such as
race, ethnicity, national origin, and religion); or (2) restrict the
exercise of certain “fundamental” rights (such as the right to
vote or of access to the courts).225 If no suspect class or
fundamental right is involved, however, the statute at issue is
evaluated under a rational relationship test, and it is valid if “it
rationally furthers some legitimate, articulated state purpose and
therefore does not constitute an invidious discrimination in
violation of the Equal Protection Clause of the Fourteenth
Amendment.”226
Accordingly, targeted hiring measures that contain
preferences based on inherently suspect characteristics such as
race or ethnicity, if challenged, would likely be subject to strict
scrutiny review and may be unlikely to survive in the absence of
224
U.S. CONST. amend. XIV, § 1.
Plyler v. Doe, 457 U.S. 202, 216–17 (1982). If strict scrutiny is
required, the state must demonstrate that the statute at issue is narrowly
tailored to serve legitimate objectives and it is the least restrictive means of
accomplishing these objectives. Id.
226
San Antonio Independent Sch. Dist. v. Rodriguez, 411 U.S. 1, 17
(1973). Under this standard, “[a] statutory discrimination will not be set aside
if any state of facts reasonably may be conceived to justify it.” McGowan v.
Maryland, 366 U.S. 420, 426 (1961).
225
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56
a disparity study demonstrating past discrimination in the
relevant market.227 Perhaps in part for this reason, few targeted
hiring measures contain such preferences.
Far more common among targeted hiring standards, but still
implicating the Equal Protection clause, are preferences based
on residency. Such measures are likely to survive an Equal
Protection challenge. The Supreme Court has held that
municipal laws establishing local residency requirements for city
employment are subject to “rational basis” review under the
Equal Protection Clause228 and that, under that lenient standard,
such measures are constitutional.229 In Jersey City, the district
court denied a motion for summary judgment by the party
challenging on Equal Protection grounds the city ordinance
requiring subsidized developers to employ city residents.230 The
Court found that in the Equal Protection context, the right to
pursue a particular line of employment is not a fundamental
right231 and that non-residents do not constitute a suspect class.232
227
In Richmond v. J. A. Croson Co., the Supreme Court struck down a
city-adopted plan that required prime contractors to whom the city awarded
construction contracts to subcontract at least 30 percent of the dollar amount
of the contract to one or more Minority Business Enterprises. 488 U.S. 469
(1989). The purpose of the plan was to promote wider participation by
minority business enterprises in the construction of public projects. Id. at
470. Applying the two prongs of the strict scrutiny standard, the Court found
that the evidence did not point to any identified discrimination in the
construction industry. Id. at 471. The Court held that the city had failed to
demonstrate a compelling governmental interest in apportioning public
contracting opportunities on the basis of race or that its remedy had been
narrowly tailored to the achievement of that interest. Id. at 470.
228
Mass. Bd. of Retirement v. Murgia, 427 U.S. 307, 313 (1976); see
also Salem Blue Collar Workers Ass’n v. City of Salem, 33 F.3d 265, 271
(3d Cir. 1994).
229
McCarthy v. Philadelphia Civil Serv. Comm’n, 424 U.S. 645, 647
(1976); accord Salem Blue Collar Workers Ass’n v. City of Salem, 33 F.3d
265, 271 (3rd Cir. 1994).
230
Hudson Country Bldg. & Construction Trades Council v. City of
Jersey City, 960 F. Supp. 823, 831 (D.N.J. 1996).
231
Id. (citing Oklahoma Educ. Ass’n v. Alcoholic Beverage Laws
Enforcement Comm’n, 889 F.2d 929, 932 (10th Cir. 1989)).
232
Id. at 832.
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57
Applying a rational basis test, the court concluded that the
asserted purpose of reducing unemployment among city residents
was legitimate and held that a factual question remained as to
whether the ordinance rationally furthered that purpose, such
that summary judgment was improper.233
E. Conflict of Targeted Hiring Measures with Federal
Highway Administration Competitive Bidding Statute
and Regulations
Policymakers seeking to adopt residency-based targeted
hiring measures for projects funded by the Federal Highway
Administration (“FHWA”) confront a special set of concerns.
The federal statute governing funds administered by the FHWA
provides that the Secretary of Transportation must “require such
plans and specifications and such methods of bidding as shall be
effective in securing competition.”234 The FHWA has
promulgated regulations implementing this statutory provision
that may create obstacles to residency-based targeted hiring
measures: Title 23 C.F.R § 635.110(b) prohibits contract
requirements for bonds and other features that might restrict
competition; Title 23 C.F.R § 635.112(d) renders inapplicable to
federal-aid projects bidding procedures that discriminate, inter
alia, on the basis of national, state, or local boundaries;235 and
233
Id.
23 U.S.C.S. § 112(a) (2009); see also §112(b) (2009)
(“[C]onstruction of each project . . . shall be performed by contract awarded
by competitive bidding, unless the State transportation department
demonstrates, to the satisfaction of the Secretary, that some other method is
more cost effective or that an emergency exists. Contracts for the
construction of each project shall be awarded only on the basis of the lowest
responsive bid submitted by a bidder meeting established criteria of
responsibility.”).
235
Title 23 C.F.R § 635.112(d) states:
Nondiscriminatory bidding procedures shall be afforded to all
qualified bidders regardless of National, State or local boundaries
and without regard to race, color, religion, sex, national origin, age,
or handicap. If any provisions of State laws, specifications,
regulations, or policies may operate in any manner contrary to
234
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58
Title 23 C.F.R. § 635.117(b) bars contract requirements that
discriminate against labor from other states or territories.236
The Sixth Circuit has held that the Cleveland residents’
preference ordinance discussed above does not violate
§ 635.117(b) because, by design, it does not discriminate against
out-of-state residents.237 However, in a recent letter to the Mayor
of Cleveland, the Secretary of Transportation determined that
permitting an application of the Cleveland ordinance to FHWAfunded projects would be “inconsistent with the requirement to
secure competition.”238 The Secretary reasoned that “mandatory
local hiring preferences” in the ordinance would “discourage
contractors who are not based in the Cleveland area from
bidding” because they may have to hire and train a new
workforce.239
Federal requirements, including title VI of the Civil Rights Act of
1964, to prevent submission of a bid, or prohibit consideration of a
bid submitted by any responsible bidder appropriately qualified in
accordance with § 635.110, such provisions shall not be applicable
to Federal-aid projects. Where such nonapplicable provisions exist,
notices of advertising, specifications, special provisions or other
governing documents shall include a positive statement to advise
prospective bidders of those provisions that are not applicable.
Id.
236
Title 23 C.F.R § 635.117(b) (2009) states that “[n]o procedures or
requirement shall be imposed by any State which will operate to discriminate
against the employment of labor from any other State, possession or territory
of the United States, in the construction of a Federal-aid project.”
237
City of Cleveland v. Ohio Dept. of Transport., 508 F.3d 827, 847
(6th Cir. 2007) (“Cleveland’s ordinance was drafted to avoid reaching
contractors who hire only out-of-state workers, so it does not ‘discriminate
against the employment of labor from [another] state.’ 23 C.F.R.
§ 635.117(b) (2009). The plain text of the regulation certainly prohibits much
geographically-based discrimination, but it does not prohibit all such
discrimination. Conspicuously absent from the list ‘State, possession or
territory,’ is the phrase ‘or political subdivision,’ the word ‘locality,’ and any
other such term that would express an intent to proscribe intrastate
discrimination.”).
238
Letter from Ray LaHood, Sec’y of Transp., to Frank G. Jackson,
Mayor of Cleveland (June 5, 2009)(on file with the author).
239
Id.
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59
This reasoning seems excessively cautious given Cleveland’s
modest requirement that a mere 20% of the workforce be made
up of local residents, with out-of-state workers excluded from
the calculation.240Moreover, any number of existing policies—
including small business subcontracting or outreach
requirements, certain bonding and insurance requirements,
requirements related to supply chain or construction materials—
might be said to inhibit competition by discouraging bidding by
contractors to at least the degree that the Cleveland ordinance
does. Notably, at least one court has managed to reconcile anticompetitive bidding measures with local policy requiring
utilization of women and minority-owned businesses.241 And the
effect of a modest targeted hiring program on contractors
competing for work is arguably far more speculative than the
effect of the MBE/WBE utilization requirements at issue in that
case.
Nevertheless, until the Agency is persuaded to change its
“longstanding position” that “mandatory local hiring
preferences” run afoul of the anti-competitive bidding provisions
of the federal statute, policymakers would be well advised to
avoid applying residency-based targeted hiring measures to
projects funded with FHWA funds.
As the analysis above reveals, while the legal considerations
are several and not insubstantial, states and localities may adopt
lawful Green Construction Careers measures as policy. States
and localities may act with some assurance in adopting policies
that squarely advance the subject locality’s proprietary interests.
Further, with careful drafting properly tailored to the context,
policymakers may safely address many of the legal issues
discussed above.
CONCLUSION
As the concept of “green jobs” percolates through popular
240
See supra notes 205–06.
See generally Domar Electric, Inc. v. City of Los Angeles, 885 P.2d
934 (1994).
241
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4/10/2010 2:42 PM
consciousness, serious policymakers would do well to focus on
the fundamental questions: What jobs do we wish to create?,
Where? and For whom? With government initiatives rightly
focused on the green construction sector, a number of best
practices may be drawn from construction careers models, even
though they may be recently developed. As the above policy
examples and analysis of legal issues reveals, innovative and
lawful Green Construction Careers measures are available to
policymakers concerned with these questions. With the right
combination of carefully constructed policies, the term “green
jobs” may come to have real meaning in every corner of
society, as noteworthy numbers of low-income and otherwise
disadvantaged men and women embark on middle class green
construction careers.
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RETHINKING THE HOMEOWNERSHIP
SOCIETY: RENTAL STABILITY
ALTERNATIVE
By Arlo Chase*
INTRODUCTION
For more than 85 years, the United States government has
promoted homeownership through mortgage programs, tax
subsidies and popular rhetoric. The exhortations of
homeownership became even more pronounced throughout the
1990s and this decade. President George W. Bush’s campaign
for the “Ownership Society”1 represented the culmination of this
*Associate Adjunct Professor of Law, Brooklyn Law School; Senior
Vice President for Policy Initiatives, New York State Housing Finance
Agency/State of New York Mortgage Agency. The opinions expressed herein
are mine alone and do not represent those of my employers. I would like to
thank the following people for their helpful comments and suggestions:
Susanna Kohn, Oscar Chase, David Reiss, Christopher Serkin, Lee Ann
Fennell, Robert Ellickson, Martin Kohn and Vicki Been. I would also like to
thank the staff of The Journal of Law and Policy for their helpful editing.
Moira Skeados provided able and much appreciated research assistance.
1
See, e.g., Robert J. Schiller, American Casino, ATLANTIC, Mar. 2005,
available at http://www.theatlantic.com/doc/200503/shiller (detailing former
President George W. Bush’s proposed “ownership society,” which planned to
let people “own” their Social Security contributions, in the form of personal
retirement accounts; “own” their health care, through portable health savings
accounts; and own their homes in greater numbers, through bigger
homeowner subsidies, noting that such proposals would encourage individual
saving, but also increase the risk to which most American households would
be subject); see also Greg Ip et al., Housing Bust Fuels Blame Game, WALL
ST. J., Feb. 27, 2008 (quoting President George W. Bush as stating, as part
of the “ownership society” that, “we want everybody in America to own
their own home”).
61
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62
push for homeownership. While there are arguments to be made
in favor of facilitating homeownership for qualified households,
in recent decades such promotion went beyond qualified
households and thereby helped fuel a housing bubble that
ultimately burst, resulting in a severe economic recession and
the foreclosure of millions of households. For the past 30 years,
government programs and resources have largely ignored the
other dominant tenure form—renting.2 This neglect of rental
housing and rental households has helped create a troubling
situation in which nearly half of all rental households spend
more than the government recommends on housing,3 putting
such households at risk of having insufficient resources for other
necessities like food, medical care, transportation and education.
The current housing crisis offers a historical opportunity to
assess our national and local housing policies.4 In sum, the
continued focus on homeownership, to the exclusion of renting,
is in need of immediate revision. A policy shift is in order—
government needs to direct immediate attention and increased
resources to rental housing. Such a shift would belatedly
acknowledge the fact that, notwithstanding the last eight decades
2
See, e.g., Clean Benson, Building a Better Public Housing Policy,
CONG. Q. (July 17, 2009) available at http://www.cqpolitics.com/wmspage.
cfm?parm1=1&docID=news-000003168984 at 1–2 (quoting Bruce Katz,
stating that for the past eight years “[w]e had a really imbalanced housing
policy, not just in the private sector, but in the public sector, toward
homeownership”); see also Ip et al. supra note 1 (quoting Richard Styron,
former CEO of Freddie Mac stating “[w]e went crazy as a country with the
goals, saying everybody’s got to have a house”) (internal quotation marks
omitted).
3
See infra Section IV.AB.
4
See, e.g., Robert J. Shiller, A Time for Bold Thinking on Housing,
N.Y. TIMES, Nov. 25, 2007, at 4 (arguing that the current housing price
downturn indicates a need for innovation in housing, including better
management of risk); Press Release, Nat’l Found. for Credit Counseling,
Survey Reveals Long-Term Implications of Mortgage Meltdown (June 23,
2009), available at http://www.nfcc.org/NewsRoom/newsreleases/files09/
HomeownershipSurvey.pdf (finding that popular attitudes about benefits of
homeownership have changed dramatically in the wake of the foreclosure
crisis).
CHASE REVISED.DOC
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RETHINKING THE HOMEOWNERSHIP SOCIETY
63
and hundreds of billions of dollars encouraging and subsidizing
homeownership, almost one third of the households in the U.S.
currently rent, and at least 95% of all Americans rent at some
point in their lives.5 Specifically, additional resources and
programs are needed which promote opportunities for increased
rental stability and affordability. The need for these changes is
evidenced by (i) the excess demand for rental housing compared
with supply which has resulted in the affordability crisis for so
many rental households;6 and (ii) the number of households that
have overstretched their budgets in order to buy homes they
could not afford, often because the rental options available to
them were simply not stable and/or affordable enough.7
To address this increasingly untenable situation, I propose a
rental stability program that would offer tenants an option for
longer lease terms, rights to lease renewal, temporary regulation
of rent increases, and federal rental subsidies to cover rent
increases for rent-burdened low and moderate income
households.8 My proposal is essentially a modest one that
provides renters with additional opportunities for stable tenancy
and time limited price protection, while maintaining marketbased incentives for owners to create new rental housing units
and maintain existing ones.
A brief review of our current national housing policy—
provided in Part I of this article—will set the stage for the
reforms urged herein. I rely on existing literature for both Part I
and Part II, in which I examine the extraordinary societal
5
See Bruce Katz & Margery Austin Turner, Rethinking U.S. Rental
Housing Policy, BROOKINGS INSTITUTION, 2007 http://www.brookings.edu/
papers/2007/0228metropolitanpolicy_katz_Opp08.aspx; see also WILLIAM
APGAR, RETHINKING RENTAL HOUSING: EXPANDING THE ABILITY OF RENTAL
HOUSING TO SERVE AS A PATHWAY TO ECONOMIC AND SOCIAL OPPORTUNITY
1 (Dec. 2004) http://www.jchs.harvard.edu/publications/markets/w04-11.pdf
[hereinafter “Apgar 2004”].
6
See infra Section IV.A.
7
See infra Section IV.B.
8
See, e.g., Lee Anne Fennell, Homeownership 2.0, 102 NW. U. L. REV
1047, 1059 (2008) (“Longer and better leaseholds and reform of
homeownership’s tax advantages are worthy goals . . . .”).
CHASE REVISED.DOC
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64
benefits afforded to promote homeownership and the reasons
typically given for them. I discuss several poignant studies that
raise serious concerns about the degree to which U.S. policies
promoting homeownership actually serve the stated goals of
household and neighborhood stability. Currently, it must be
acknowledged, the immensity of the homeownership subsidies
provided is matched only by the immensity of the devastation
wrought on individual households and surrounding communities
by the current foreclosure crisis. In Part II, I integrate the
findings of several housing studies to argue that the goals
underlying the homeownership push can be met equally by
enhanced rental stability.
In Part III, I briefly review the enormously destabilizing
effects of the foreclosure crisis on both individuals and
communities. This leads into what I consider to be my real
contribution to the existing literature: Part IV in which I lay out
the factual case for expending more government resources and
creating new legal protections for renters. Part V details the
components of my proposed rental stability program and a
discussion of how it serves my goal. That goal is to create
increased opportunities for renters to obtain some meaningful
measure of security in their tenure while avoiding excessive
distortions in the rental market. I also evaluate the likely effects
of my proposed program and respond to some likely critiques.
Finally, in Part VI I examine three distinct recent policy
proposals to addressing the housing crisis.
I. U.S. HOUSING POLICY IS SKEWED TO HOMEOWNERSHIP
A. History
Since the Great Depression, our national housing policy has
been primarily aimed at increasing homeownership.9 These
9
See, e.g., Anthony Downs, Why Rental Housing Is the Neglected Child
of American Shelter in RETHINKING RENTAL HOUSING 78 (2008) [hereinafter
Downs, Why]; see also ALEX F. SCHWARTZ, HOUSING POLICY IN THE
UNITED STATES 48 (2006); Rachel D. Godsil & David V. Simunovich,
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65
efforts included the development of the Federal Housing
Administration (FHA) and U.S. Department of Veterans Affairs
(VA) homeownership loan programs, which guarantee up to
90% of the value of a home as collateral for loans from private
banks.10 Another Depression Era creation, the Federal National
Mortgage Association, more commonly known as Fannie Mae,
began in 1968 to offer similar mortgage guarantees to a broader
cross section of Americans.11 In 1990 the Federal Home
Mortgage Corporation, otherwise known as Freddie Mac, began
to offer similar products as those of Fannie Mae.12 Given their
hybrid status as government created but privately owned
corporations, Fannie Mae and Freddie Mac are known
collectively as Government Sponsored Enterprises, or GSEs.13
Perhaps more important than the mortgage insurance offered
by FHA, VA and the GSEs, these entities introduced and
standardized many aspects of the mortgage industry that we now
take for granted, such as the 30 year self-amortizing mortgage,
the standardized appraisal process and the reduction of the
downpayment required to 10% or lower.14 These advances,
combined with significant economic growth in the post WWII
Protecting Status: The Mortgage Crisis, Eminent Domain and the Ethic of
Homeownership, 77 FORDHAM L. REV 949, 956–57 (2008) (“[The] high rate
of homeownership is largely a product of the federal government’s
decision . . . to subsidize homeownership for the middle class.”).
10
See SCHWARTZ, supra note 9, at 50; Godsil & Simunovich, supra note
9, at 957–58.
11
See David Reiss, The Federal Government’s Implied Guarantee of
Fannie Mae and Freddie Mac’s Obligations: Uncle Sam Will Pick Up the
Tab, 42 GA. L. REV. 1019, 1030 (2008).
12
See id. at 1029 (“[Fannie Mae’s and Freddie Mac’s] purchasing
practices have since converged.”).
13
See Reiss, supra note 11, at n.22 (“The term GSE refers to a federally
chartered, privately owned, privately managed financial institution that has
only specialized lending and guarantee powers and that bond market investors
perceive as implicitly backed by the federal government.”) (internal citations
and quotation marks omitted).
14
See SCHWARTZ, supra note 9, at 5051; see also KENNETH JACKSON,
CRABGRASS FRONTIER: THE SUBURBANIZATION OF THE UNITED STATES
20318 (1987).
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66
years, were extremely successful in increasing homeownership
in this country. Between 1940 and 1970, the percentage of
American homeowners increased from 44% to 65% of all
households.15 Between 1970 and 1990 that rate stayed
substantially the same, but then increased to over 67% by 2000
and 69% at the end of 2004.16 With the foreclosure crisis
beginning in 2006, the homeownership rate has been contracting
from the previous highs and by the middle of 2009 was at
67.4%.17 The reduction from 69% to 67.4% of all households
may sounds small, but it represents over two million
households.18 Notably, this represents the first significant decline
in homeownership since the 1930’s.19
B. Homeownership Subsidies
In addition to the federal mortgage programs discussed
above, which are aimed at increasing the availability of home
financing, federal and state governments provide a number of
other direct and indirect financial benefits to homeowners. Most
significantly, homeowners are entitled to deduct from the income
on which they have to pay income taxes both the amount they
15
Godsil & Simunovich, supra note 9, at 957 n.22.
Gale et al., Encouraging Homeownership Through the Tax Code, 115
TAX NOTES 1171 (2007).
17
See U.S. Census Bureau News, Census Bureau Reports on Residential
Vacancies and homeownership, July 24, 2009, at 4, http://www.census.gov/
hhes/www/housing/hvs/qtr209/filesq209press.pdf; see also Kathleen M.
Howley, U.S. Home Vacancies Hit 18.7 Million on Bank Seizures,
BLOOMBERG.COM, July 24, 2009, http://www.bloomberg.com/apps/news?pid
+20601206&sid=ajlP7ROLo39w (describing that the homeownership rate
had dropped to 67.3%); John Leland, Homeownership Losses are Greatest
Among Minorities, Report Finds, N.Y. TIMES, May 13, 2009, available at
http://www.nytimes.com/2009/05/13/us/13homeowner.html.
18
See US Census Bureau Web Page, America’s Families and Living
Arrangements: 2008: Table H1—Households by Type and Tenure of
Householder for Selected Characteristics: 2008, Feb. 25, 2009,
http://www.census.gov/population/www/socdemo/hh-fam/cps2008.html
(estimating total number of American households).
19
See SCHWARTZ, supra note 9, at 14 fig. 2.2.
16
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67
pay in real property taxes20 and interest paid on a mortgage
secured by a personal residence.21 The mortgage interest
deduction includes second homes in addition to primary
residences, with an overall limit for each taxpayer of mortgages
totaling up to $1 million.22 Other tax benefits include the fact
that imputed rental income is not considered income for tax
purposes and therefore is not taxed.23 Furthermore, in 1996 the
tax code was amended at the initiation of the Clinton
Administration so that homeowners selling their primary
residence could exclude the first $250,000 of gain ($500,000 for
married couples) from their reported income.24 Acknowledging
all of these benefits to homeowners, two law professors
conclude that “[h]omeowners are afforded both significant
monetary benefits and social capital that renters are denied.”25
Scholars have identified a number of problems with the
mortgage interest deduction and other federal tax benefits
provided to homeowners. First, the current subsidies accrue
disproportionately to households in higher income brackets.26
20
26 U.S.C. § 164(a) (2009).
26 U.S.C. §§ 163(h), 164 (2000).
22
See id.
23
Imputed rent is a tax concept that refers to the amount of rental
income that the housing unit would generate if it were rented out. Imputed
rent is taxed in a number of countries, such as Italy, Norway, and Denmark.
See Fennell, supra note 8, at 1058 n.42 (citing sources); see also James R.
Follain & Lisa Sturman Melamed, The False Messiah of Tax Policy: What
Elimination of the Home Mortgage Interest Deduction Promises and a Careful
Look at What it Delivers, 9 J. HOUSING RES. 179 (1998) (discussing
importance of nontaxation of imputed rent).
24
26 U.S.C. § 121. This tax advantage can be claimed only once every
two years, and certain limited conditions must be met regarding the
ownership and use of the home. See Vikas Bajaj & David Leonhardt, Tax
Break May Have Helped Cause Housing Bubble, N.Y. TIMES, Dec. 19, 2008
(describing how this tax advantage coincided, and may have helped cause the
incredible run up in housing prices from 1997–2006).
25
Godsil & Simunovich, supra note 9, at 953.
26
See, e.g., Gale et al., supra note 16, at 9 (describing the deduction as
“upside down”); SCHWARTZ, supra note 9, at 72–76; Downs, Why, supra
note 9, at 910.
21
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68
Deductions increase in value as a household’s taxable income
increases, so that higher-income taxpayers in the 28 percent
marginal tax bracket save 28 cents for every dollar of mortgage
interest deduction, and lower income taxpayers in the 15 percent
marginal tax bracket saves 15 cents for every dollar of mortgage
interest deduction. As a result, in 2005 wealthy households
(earning more than $200,000 per year) took more than eight
times as much mortgage interest deduction than middle class
households (earning between $50-75,000).27 Also, more
significantly, homeowners who do not itemize their taxes do not
benefit at all from the mortgage interest and real property tax
deductions. Because many choose to take the standard deduction,
only half of all homeowners benefit from these crucial
government subsidies.28 Furthermore, other borrowers (such as
credit card borrowers) are not entitled to deduct interest
expenditures at all.29
The total annual cost to the federal government, in terms of
tax expenditures and indirect subsidies of the GSEs, is in the
$150 to $200 billion range annually. Even without the benefits
provided through the GSEs and FHA and VA, which are
difficult to quantify,30 the tax revenue lost annually to
27
See Gale et al., supra note 16, at 910.
See Roger Lowenstein, Tax Break: Who Needs the Mortgage Interest
Deduction, N.Y. TIMES, Mar. 5, 2006.
29
The Tax Reform Act of 1986 eliminated the deductibility of other
kinds of interest payments, including credit cards, pushing more homeowners
into increasing their mortgages. See Lowenstein, supra note 28.
30
The actual subsidy to the GSEs prior to 2008 was difficult to quantify
because most of the subsidy was the implicit federal guarantee of the GSEs’
obligations, which in turn allowed them to access capital at a cheaper cost.
Compare Gale et al., supra note 16, at 1777 (noting that to the extent it can
be quantified, the Congressional Budget Office estimated subsidy to GSEs at
$23 billion in 2003) with Reiss, supra note 11, at 104849 (noting that a
Federal Reserve researcher “has estimated that the present value of the
federal government’s subsidy of Fannie and Freddie is nearly $150
billion . . .”). In September 2008, the US Treasury Department announced
that Fannie Mae and Freddie Mac were in danger of falling into insolvency
and would be placed into conservatorship, governed by the newly created
Federal Housing Finance Agency. See James R. Hagerty et al., U.S. Seizes
28
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69
homeownership benefits was in excess of $155 billion for
2006,31 over $125 billion for 2007 and approximately $230
billion in 2009.32 It is far from clear how we as a society benefit
from these subsidies. Many economists believe that the tax
benefits simply push up the price of homes and do not increase
the levels of homeownership.33 Professor Schwartz of the New
School notes that homeownership rates in the United State are
comparable to those in Canada, Australia and several European
countries, despite the fact that none of those countries subsidize
homeownership nearly as much as the U.S.34 Most notably, none
of those countries provide for the deductibility of mortgage
interest or property taxes. In addition to having a dubious impact
on the rate of homeownership, the tax incentives encourage
Mortgage Giants, WALL ST. J., Sept. 8, 2008, at A1. While the Treasury
initially pledged $100 billion, it was quickly raised to $200 billion to cover
the losses of Fannie and Freddie. As of the date of this article that amount
has been increased to $400 billion [on source], with close to $85 billion
already distributed. See Chris Isidore, Fannie & Freddie: The Most Expensive
Bailout, CNNMONEY.COM, July 22, 2009, http://money.cnn.com/2009/07/
22/news/companies/fannie_freddie_bilout/index/htm.
31
See, e.g., Gale et al., supra note 16, at 1174. This includes
approximately $30 billion in benefits accumulated from the non-taxation of
imputed rent, as well as the deductibility of mortgage interest, property taxes
and the exclusion from capital gains of sales proceeds.
32
See Godsil & Simunovich, supra note 9, at 958 (regarding 2007). It is
unclear if this calculation includes the value of the non-taxation of imputed
rent). In Housing Bust, Government Increasingly Favors Homeowners Over
Renters, WALL ST. J., Nov. 17, 2009 (compared with $60 billion in aid to
renters for 2009).
33
See, e.g., Gale et al., supra note 16, at 1180 (“[T]ime series evidence
in the U.S. provides little reason to believe that the [mortgage interest
deduction] has a substantial influence on homeownership.”); Steven Malanga,
Obsessive Housing Disorder, CITY J., Spring 2009, at 10, available at
http://www.city-journal.org/2009/19_2_homeownership.html
(suggesting
elimination of the mortgage interest deduction); Edward Glaeser & Joseph
Gyourko, Two Ways to Revamp U.S Housing Policy, N.Y. TIMES, Dec. 16,
2008, http://economix.blogs.nytimes.com/2008/12/16/two-ways-torevamp-us
-housing-policy/.
34
See SCHWARTZ, supra note 9, at 76; see also Gale et al., supra note
16, at 118183.
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70
homeowners to buy more expensive houses and borrow more
(up to $1 million), thereby increasing their tax deductions.
These incentives are perverse in two ways: (i) they encourage
homeowners to over-leverage their properties; and (ii) they
encourage bigger and generally speaking more energy
consumptive housing.35
The critiques of the mortgage interest deduction come from
all sides of the political spectrum, including liberal housing
scholars like William Apgar,36 more conservative housing
economists from the American Enterprise Institute37 and the
Manhattan Institute,38 economists from the Brookings Institute
and MIT39 and an economic columnist from the New York
40
Times. While the effect of eliminating the mortgage interest
deduction is debated,41 along with what should replace it, these
35
See Andre F. Shashaty, Help Us Shape the Future of Affordable
Housing Policy, AFFORDABLE HOUSING FINANCE, Mar. 2008, at 24 (quoting
Brett Harvey).
36
See Apgar 2004, supra note 5, at 5–9.
37
See EDWARD GLAESER & JOSEPH GYOURKO, RETHINKING FEDERAL
HOUSING POLICY: HOW TO MAKE HOUSING PLENTIFUL AND AFFORDABLE
(AEI Press, 2008) (proposing that the mortgage interest deduction be
substantially reduced to a cap of $300,000 in large portions of the country
that restrict housing through local zoning and land use regulations). But see
Letter from Charles McMillan, President, Nat’l Assoc. of Realtors, to
President Obama (Feb. 26, 2009) (“The National Association of
REALTORS® believe the [Mortgage Interest Deduction] is the single most
important tax provision for our nation and our families.”)
38
See Steven Malanga, Obsessive Housing Disorder, CITY J., Spring
2009 at 10.
39
See Gale et al., supra note 16.
40
See Lowenstein, supra note 28.
41
See Follain & Melamed, supra note 23, at 19596 (arguing that the
elimination of the mortgage interest deduction might not produce the
predicted effects of equalizing the tax treatment of higher and lower income
households, since higher income households might be able to finance their
home purchases through other means like cash purchases and noting that the
nontaxation of imputed rent might be more important to address than the
mortgage interest deduction). Cf. Gale et al., supra note 16, at 16–17
(arguing that eliminating the mortgage interest deduction will increase
investment in rental properties, but will also encourage owners to sink more
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71
critiques have made it into reform proposals. For example, in
2005 President Bush’s Bipartisan Advisory Panel on Federal Tax
Reform proposed changing the mortgage interest deduction to a
15 percent credit and making it available to all tax filers,
regardless of itemization status.42 President Obama proposed a
similar plan during his campaign.43 As with other plans to
restrict or amend the mortgage interest deduction, neither
proposal has gathered momentum in Congress. Still, other
changes have been proposed. President Obama’s fiscal year
2010–11 budget proposal advanced the idea of reducing the rate
of mortgage and other deductions available to taxpayers in the
highest tax brackets.44 This budget proposal did not pass
however, as the National Association of Realtors and other real
estate interest groups responded with their usual predictions of
disaster if such a change were enacted.45
II. WHY DO WE SPEND ALL THIS MONEY TO SUPPORT
HOMEOWNERSHIP?
In the midst of the great depression, President Franklin
Roosevelt argued that, “special safeguards should be thrown
around home ownership as a guarantee of social and economic
stability.”46 But that begs the question. Assuming for a moment
that the various homeownership subsidies outlined above actually
equity into their homes and thus may end up in increasing total investment in
housing).
42
See Lowenstein, supra note 28, at 45.
43
See Nick Timiraos, Homeownership Push is Rethought, WALL ST. J.,
Sept. 12, 2008 (“Senator Obama has proposed a 10% mortgage interest tax
credit for homeowners who don’t itemize.”).
44
See OFFICE OF MANAGEMENT AND BUDGET, A NEW ERA OF
RESPONSIBILITY: RENEWING AMERICA’S PROMISE 29–30 (2009), available at
http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Res
ponsibility2.pdf.
45
See Press Release, Nat’l Ass’n of Realtors, NAR Opposes Mortgage
Interest Deduction Provision on Obama’s Budget Proposal, (Feb. 26, 2009),
available at http://www.realtor.org/government_affairs/mortgage_interest_
deduction/mid_obama_budget_proposal.
46
See Godsil & Simunovich, supra note 9, at 985 n.168.
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72
do increase the rate of homeownership, there still remains the
question of why our society should spend all these resources to
privilege homeownership over renting. The main reasons
proffered for supporting homeownership are: (i) homeownership
benefits individual households; and (ii) an increase in
homeownership creates positive externalities, or positive
spillover effects that are shared by the community surrounding
the homeowner households.
A. Homeownership Benefits Individuals
We can further divide the first claim—that households benefit
from homeownership—into two basic components. The first is
that enabling households to purchase homes will benefit those
households financially.47 The financial benefit is also
multifaceted. First, by having to make mortgage payments and
thereby gaining equity, homeownership “gives households a
default mechanism for savings.”48 That increased equity, in turn,
“permits the owner to leverage capital, which can help to buy
investment properties, start a new business, send a child to
college, or save for retirement.”49 In addition to promoting
savings and enabling households increased access to capital,
homeowners enjoy a measure of price protection against housing
cost increases that enable them to better plan financially.50 Of
course the price protections are not absolute: real estate taxes,
insurance
and
homeowners
association
or
cooperative/condominium dues may increase, as may borrowing
costs of borrowers who have taken out adjustable rate or
51
payment option mortgages. But, at least compared with renters
47
But see Nat’l Found. For Credit Counseling, supra note 4 (finding that
“almost half of all American adults, more than 100 million people, no longer
believe that homeownership is a realistic way to build wealth”).
48
See Shelter or Burden? ECONOMIST, Apr. 16, 2009 (quoting Richard
Green of the University of South Carolina).
49
See Godsil & Simunovich, supra note 9, at 954.
50
See Fennell, supra note 8, at 1054–55 (discussing price protection and
caveats).
51
See id. at 1055.
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73
who are subject to market based rent increases on annual
intervals, most homeowners’ housing costs are more predictable.
Scholars
also
attribute
increased
stability
to
52
homeownership. This is related to price stability, of course, but
the notion is somewhat broader than just price. The argument is
that homeowners enjoy a psychic benefit resulting from their
property rights to exercise dominion over their homes, exclude
outsiders, and to remain in perpetuity (subject, of course, to the
rights of lenders and governments to foreclose for non-payment
of mortgages or taxes).53 Furthermore, as Professors Godsil &
52
While most scholars identify increased stability as a positive effect,
there is some debate. Compare Apgar 2004 at 41–42 (“[R]esidential stability
not only appears to promote community involvement and development of
beneficial social capital but also effects educational outcomes.”) with Ingrid
Ellen & Brendan O’Flaherty How New York Housing Policies Are Different—
And Maybe Why, in THE WELFARE STATE IN NEW YORK CITY (Irwin
Garfinkel and Marcia Meyers eds., Russell Sage Foundation (forthcoming
2010), at 33 (“While stability may be good for neighbors and for children,
subsidizing it can create deadweight losses. Mobility gets workers to where
they are most productive.”); see also Robert C. Ellickson, The Mediocrity of
Government Subsidies to Mixed-Income Housing Projects, 16–17 & n.28
(Yale Law & Economics Research Paper No. 360, 2008), available at
http://ssrn.com/abstract=1217870 [hereinafter Ellickson, The Mediocrity]
(discussing mixed results of lock in effect resulting from rent regulation and
project based subsidies); Godsil & Simunovich, supra note 9, at
n.100 (noting negative effect on the efficiency of labor markets resulting
from housing stability; see also Sam Roberts, Slump Creates Lack of Mobility
for Americans, N.Y. TIMES, Apr. 22, 2009 (Census Bureau has found that
fewer people are moving in the recessionary economy, creating fears that jobrelated moves are getting suppressed and workers are not re-sorted to the jobs
that best use their skills). See Generally Robert C. Ellickson, Legal
Constraints on Households Moves: Should Footloose Americans Envy the
Rooted French, 6 n.8 (Yale Law & Economics Research Paper No. 300,
2009) available at http://ssrn.com/abstract=1445603 [hereinafter Ellickson,
Legal Constraints] (reviewing differences in moving patterns among countries
and discussing normative questions of which is preferable).
53
See Godsil & Simunovich, supra note 9, at 954–56 (citing
psychological benefits of homeownership); see also Gale et al., supra note
16, at 1171 (“Owning one’s home is widely viewed as an integral part of the
American Dream . . . Americans are taught from an early age to aspire to
homeownership . . . .”); Apgar 2004, supra note 5, at 56 (“Residential
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Simunovich write, once a down payment has been made and a
mortgage obtained, “the household tends to be less mobile
because the transaction costs associated with moving have been
increased. This reduced mobility . . . translates into both
commitment to place and stability for family.”54 And, for
children, “[i]n the educational arena, residential stability helps
students avoid the disruption linked to the relocation from one
school to another.”55 In sum, scholars find a number of positive
effects for households who achieve residential stability.
B. External Benefits of Homeownership
The positive community benefits associated with increased
homeownership are well summarized by Gale et al:
[m]ost importantly, homeowners may be more likely to
be active citizens working for long-term, communitywide
benefits. Homeowners may also take better care of their
houses than renters would. High rates of homeownership
may reduce crime in the area, perhaps because the
greater geographic stability of homeowners vs. renters
means that someone committing a crime would be
recognized. Any of these behaviors, if sufficiently
prevalent, could plausibly raise property values in the
community at large and hence provide a benefit to people
other than the homeowner.56
The general theory posits that the value of homes are so
dependent on the health of their surrounding community that
stability also enables parents to develop deeper and more meaningful
attachment to social support networks, and to access existing job and human
service referral networks.”).
54
Godsil & Simunovich, supra note 9, at 971–72.
55
See Apgar 2004, supra note 5, at 41 (citing Eric A. Hanushek et al.,
Disruption Versus Tiebout Improvement: The Costs and Benefits of Switching
Schools, 88 J. PUB. ECON. 1721–46 (2004)).
56
See Gale et al., supra note 16, at 6; see also Fennell, supra note 8, at
1098–99, n.209 & n.213; Godsil & Simunovich, supra note 9, at 970 (“A
range of empirical studies have concluded that homeownership does in fact
have salutary benefits for households and communities . . . .”).
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75
homeowners have a strong self interest in improving and
maintaining their neighborhoods.57
C. The Reasons for Supporting Homeownership Argue
Equally For Enhanced Rental Stability
Many of the arguments supporting homeownership follow
from the claim that homeownership is a more stable form of
tenure than renting. But there is no reason to think that the
positive effects for individual households and surrounding
communities associated with the stability offered by
homeownership are restricted to homeownership. As Apgar
states, while “the social/psychological aspects of housing are
discussed in terms of owner-occupied housing . . . there is
nothing inherent in the concept of ‘home’ that is necessarily
linked to homeownership.”58 And there is empirical support for
57
Godsil & Simunovich, supra note 9 at 972 (“Once a homeowner has
developed a financial stake in a particular dwelling, there is a close link
between that financial stake and the well-being of the community in which the
dwelling is located.”); see WILLIAM A. FISCHEL, THE HOMEVOTER
HYPOTHESIS 9–12 (2001) (arguing that homeowners are so concerned about
property values that they become risk averse to a fault, making homeowners
into “NIMBYs” even when a proposed change carries a positive expected
value). There is, however, substantial debate concerning whether increased
homeownership is merely correlated with these benefits or whether it in fact
causes such outcomes. See Fennell, supra note 8, at n.213 (“Selection bias
presents a difficulty in interpreting empirical results, however—do people
with good-neighbor characteristics just happen to become homeowners, or is
there something about homeownership that improves their neighborliness.”).
Gale et al., conclude that, “while there are some compelling arguments in
theory for external benefits from homeownership, there is little evidence in
practice to support those arguments. That does not prove that the arguments
are wrong, but the burden should be on advocates of homeownership
subsidies to make the case, and that case has not yet been made in a
compelling fashion.” See Gale et al., supra note 16, at 7; see also Apgar
2004, supra note 5, at 4 (“[P]olicy makers are often less than cautious in
interpreting the existing literature [regarding benefits of homeownership].”).
58
See Apgar 2004, supra note 5, at 15; see also Ellen & O’Flaherty,
supra note 52, at 33 (“To the extent that rent control and rent subsidies mean
that tenants realize consumer surplus from their apartments in New York,
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this assertion: a much cited study from two leading housing
economists finds that much of the positive spillover effect
associated with increased homeownership in fact results from
longer term residences, and not homeownership per se.59 This
finding is supported by a research report from the National
Association of Realtors, one of the biggest proponents of
homeownership subsidies.60
The findings of this study make intuitive sense. Long-term
tenants have the same interest as owners in living in clean and
safe neighborhoods with good schools. Thus, long-term tenants
are similarly likely to be engaged in civic affairs. While it is
true that renters do not have the same profit motive as
homeowners in creating desirable living conditions, it is
they have a stake in the outcome of local political decisions, and so are more
likely to participate intelligently in the development of those policies. This
argument is usually made for homeownership [citing sources], but if it is
true, then rent control and rent subsidies provide the same sort of
advantages.”); see also id at 31 (“Both rent control and subsidies to singlefamily owners help to further population stability.”); Margaret Jane Radin,
Property and Personhood, 34 STAN. L. REV. 957, 959 (1982) (“[T]enancy,
no less than a single-family house, is the sort of property interest in which a
person becomes self-invested; and after the self-investment has taken place,
retention of the interest becomes a priority claim over curtailment of merely
fungible interests of others.”).
59
Denise DiPasquale & Edward L. Glaeser, Incentives and Social
Capital: Are Homeowners Better Citizens?, 45 J. URB. ECON., 354–84,
(1999).
60
See Kristen David Adams, Homeownership: American Dream or
Illusion of Empowerment?, 60 S.C. L. REV. 573, 591 & n.91 (2009)
[hereinafter Adams, Homeownership] (quoting from Research Div., Nat’l
Ass’n of Realtors, Social Benefits of Homeownership and Stable Housing
(2006)),
http://www.realtor.org/research/research/homeownershipbenefits
(click “Social Benefits of Homeownership and Stable Housing” hyperlink)
(“[T]he purported benefits of homeownership may partly arise not directly
from the ownership, but from greater housing stability and social ties
associated with less frequent movements among homeowners. Therefore,
policies to boost homeownership can raise positive social outcomes, but only
to the extent that homeownership brings housing stability. Also, if it is in fact
the case that housing stability matters more than homeownership in bringing
social benefits, then the policy implication is not necessarily to promote
homeownership but to assist in residential stability.”).
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77
unreasonable to say the lack of such a motive would eliminate
the desire to live in good conditions for one’s family.61 Indeed,
one notable scholar, William Simon, argues that the increased
stability achieved by rent control in fact encourages more robust
long-term community involvement than homeownership because
it forces the tenant to stay in place to share the benefits of
community improvement, rather than enabling the resident to
benefit from those improvements by selling their home at a
premium.62 These studies suggest that a housing policy seeking
to strengthen residential stability should encourage longer term
stays in both owned homes and rentals. This would mean
focusing on increasing “sustainable” homeownership, as well as
increasing rental stability. This is the focus of my paper.
Now we turn briefly to measure our current level of
residential stability. In sum, the foreclosure crisis has had a
devastating impact on the stability of millions of American
households, their neighborhoods, and state and local
governments. The devastation wrought by this crisis belies the
notion that home ownership always promotes social and
economic stability.63
61
For the reasons identified above, I believe that Lawrence Summers,
the head of the President Obama’s Council of Economic Advisors is wrong to
compare renting a home to renting a car. See Conor Dougherty, In the
Exurbs, the American Dream Is Up for Rent, WALL ST. J., Mar. 31, 2009, at
A18. (attributing to Laurence Summers the following statement: “No one in
the history of the world ever washed a rental car”). My rejoinder is that
many people wash leased cars that they have for one year, which is more
akin to rental housing than renting a car for a weekend. Renting a car for a
weekend is better analogized to renting a hotel room for a weekend, which I
would agree, rarely gets cleaned by its occupants.
62
William H. Simon, Social-Republican Property, 38 UCLA L. REV.
1335, 1360 (1991); see also Benjamin D. Barros, Home as a Legal Concept,
SANTA CLARA L. REV. 225, 290 n.147 (discussing the Simon article and
economic and moral arguments involved in rent regulation).
63
See Shelter or Burden?, ECONOMIST, Apr. 16, 2009 (“[P]erversely,
the decade of obsession with homeownership may actually have reduced
neighborhood stability.”).
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78
III. THE FORECLOSURE CRISIS AND RESULTING INSTABILITY
A. Foreclosure Crisis: The Statistics
It was distressing to learn recently that, despite some
stabilization in home prices,64 the increase in foreclosures has
not abated. 65 In fact, the first six months of 2009 were the worst
on record. New foreclosure filings reached over 1.5 million for
the first half of 2009 according to RealtyTrac, the highest since
it began recording in 2005.66 A report issued by the Mortgage
Bankers Association on August 20, 2009 found that the
combined percentage of loans in foreclosure and those otherwise
delinquent was over 13% of all mortgages outstanding (more
than one in eight loans), “the highest ever recorded in the MBA
delinquency survey,” which commenced in its current form in
64
See David Streitfeld, Housing Perks Up, N.Y. TIMES, Aug. 26, 2009,
available at http://www.nytimes.com/2009/08/26/business/economy/26econ.
html?_r=1&sep+1&sq=housing%20perks%20up&st=cse
(citing
CaseSchiller index report showing modest increases in housing prices in June
2009 in 18 of the 20 major U.S. metropolitan areas).
65
The detailed causes of the foreclosure crisis have been much discussed
and debated. Neither of the thesis points in this paper, that our
homeownership policies have not resulted in a stable housing situation and
that a focus on rental housing is needed, are contingent on identifying the
exact causes and culprits. However, I do believe the causes are complex and
involve the following intertwined phenomenon: (i) the development of an
overheated secondary market for funding mortgage loans, (ii) the creation of
more exotic, complex and risky loan products that were designed for
subprime borrowers but were soon pushed on all borrowers; (iii) an
unparalleled run up in home prices; (iv) Americans taking out more and
bigger mortgage loans and home equity loans throughout the late 1990s and
early 2000; and finally (v) a severe economic recession and resulting job
losses. See generally Adams, supra note 60, at 599–607 (discussing above
mentioned causes of the foreclosure crisis); Raymond H. Brescia, Part of the
Disease or Part of the Cure: The Financial Crisis and the Community
Reinvestment Act, 60 S.C. L. REV. 617, 618, 620–27 (providing statistics on
the subprime mortgage crisis).
66
See Les Christie, 1.5 million homes in foreclosure in ‘09,
CNNMONEY.COM, July 16, 2009 http://money.cnn.com/2009/07/16/real_
estate/RealtyTrac_foreclosure_report/.
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79
1972.67 Notably, the foreclosure problems are increasingly
affecting prime borrowers who have lost their jobs, as opposed
to the 2006–2008 foreclosures which primarily affected those
with subprime and/or adjustable rate loans.68 Experts predict that
in 2009, 2.4 million homes will be lost to foreclosure or short
sales.69 Another 1.7 million homes were foreclosed in 2008.70
Overall, between 2009–2012, Credit Suisse estimates that
between 8 and 9 million homes will be foreclosed.71 And many
of these homes, once foreclosed, are lying dormant. In July
2009 the US Census Bureau estimated that more than 10% of all
homes were vacant.72
The foreclosure crisis demonstrates one of the downsides of
the constant push for homeownership. By creating incentives for
borrowers to incur more and more mortgage debt and shielding
the profits from capital gains tax, federal housing policy
67
See Press Release, Mortgage Bankers Association, Delinquencies
Continue to Climb, Foreclosures Flat in Latest MBA National Delinquency
Survey, (Aug. 20, 2009), available at http://www.mortgagebankers.org/
NewsandMedia/PressCenter/70050.htm.
68
See Peter Goodman & Jack Healy, Job Losses Push Safer Mortgages
to Foreclosure, N.Y. TIMES, May 24, 2009, at A1; Nick Timiraos, Souring
Prime Loans Compound Mortgage Woes, WALL ST. J., Aug. 21, 2009, at
A4. “Subprime” mortgages are intended “for borrowers with significant
credit history problems.” SCHWARTZ, supra note 9, at 234 (internal quotation
marks omitted).
69
Center for Responsible Lending, Subprime Spillover: Accelerating
Foreclosures to Cost Neighbors $502 Billon in 2009 Alone, May 7, 2009,
http://www.responsiblelending.org/mortgage-lending/research-analysis/
soaring-spillover-accelerating-foreclosures-to-cost-neighbors-436-billion-in2009-alone-73–4-million-homes-lose-5-900-on-average.html.
70
Simon, Banks Ramp Up Foreclosures, WALL ST. J., Apr. 15, 2009, at
A1 (citing estimates available at http://www.economy.com).
71
Rod Dubitsky et al., Foreclosure Update: Over 8 Million Foreclosures
Expected, CREDIT SUISSE, Dec. 4, 2008, at 1.
72
See U.S. Census Bureau News, supra note 17, at 1; see also Haya El
Nasser, Open House, Anyone? 1 in 9 Homes Sit Empty, USA TODAY, Apr.
10, 2009; cf. John Leland, With Advocates Help, More Squatters Are Calling
Foreclosures Home, N.Y. TIMES, Apr. 10, 2009, at A1 (describing growing
phenomenon in Philadelphia, Minnesota, Miami, where organized grassroots
efforts are placing homeless persons in foreclosed or abandoned homes).
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distorted the housing market and contributed to the real estate
bubble and subsequent crash. The millions of foreclosures have
had a devastating effect on the affected households, their
surrounding neighborhoods, and local governments.73 These
effects are reviewed below, beginning with individual
households.
B. Resulting Instability
1. Foreclosure Effects on Individuals
At its core, foreclosure leaves a family without a place to
live and increases the risk of homelessness. On a financial level,
foreclosure results in the loss of the largest financial asset most
households will ever own.74 This greatly compromises the
household’s ability to borrow for important investments like
higher education, retirement, or to provide for future
generations.75 The lowered credit score resulting from
73
Tad Friend, Cash for Keys, NEW YORKER, Apr. 6, 2009 (describing
the dramatic dislocation effects of foreclosure on individual households and
the potential for social upheaval as a result of foreclosure crisis); see, e.g.,
Prentiss Cox, Foreclosure Reform Amid Mortgage Lending Turmoil: A Public
Purpose Approach, 45 HOUS. L. REV. 683, 726–27 (2008) (describing the
devastating impact to individual households and neighborhoods, especially
where foreclosures are concentrated). See generally Florence Wagman
Roisman, The Right to Remain: Common Law Protections for Security of
Tenure: An Essay in Honor of John Otis Calmore, 86 N.C.L. REV. 817
(2008) (describing the impact of eviction on families and society at large).
74
NEIGHBORHOOD HOUS. SERVICES OF CHICAGO, PRESERVING
HOMEOWNERSHIP: COMMUNITY-DEVELOPMENT IMPLICATIONS OF THE NEW
MORTGAGE MARKET 21 (Mar. 25, 2004), available at http://www.nw.org/
network/neighborworksProgs/foreclosuresolutionsOLD/documents/preserving
HomeownershipRpt.pdf.
75
Lois R. Lupica, The Consumer Debt Crisis and the Reinforcement of
Class Position, 40 LOY. U. CHI. L.J. 557, 607 & n.274 (Spring 2009) (“At
the point where a consumer’s liabilities eclipse his or her assets, the
indicators of upward class mobility—economic equilibrium and stability, the
ability to enhance human capital in order to specialize, the wherewithal to
take risks and have a positive vision of the future, as well as the capacity to
offer
future
generations
greater
opportunities—correspondingly
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81
foreclosure makes future homeownership more difficult, may
decrease job prospects, and limits the ability to obtain insurance
or rental housing.76 The changes in school, friends and social
networks are disruptive to children’s development.77 The
accumulation of these decreased opportunities as a result of the
loss of one’s home affect an individual’s positive vision of the
future and ability to rebound—ultimately resulting in the loss of
middle class status.78
2. Foreclosure Effects on Neighborhoods
At a community level, foreclosures lead to blight and
disinvestment.79 Most immediately, foreclosures of multifamily
disappear . . . . Moreover, the loss of a home is the loss of an asset that
could have been handed down to the next generation.”).
76
Dan Immergluck & Geoff Smith, The External Costs of Foreclosure:
The Impact of Single-Family Mortgage Foreclosures on Property Values, 17
HOUSING POLICY DEBATE 57, 58 (2006); see also, NEIGHBORHOOD HOUS.
SERVICES OF CHICAGO, supra note 74, at 13–20.
77
See Christine Vidmar, Seven Ways Foreclosures Impact Communities,
NeighborWorks America, Aug. 2008, available at http://neighborworks.
issuelab.org/research/listing/seven_ways_foreclosures_impact_communities;
see also Phillip Lovell & Julia Issacs, The Impact of the Mortgage Crisis on
Children, FIRST FOCUS, May 2008, at 1, available at http://www.firstfocus.
net/Download/HousingandChildrenFINAL.pdf.
78
Jeannie Suk, Taking the Home, 20 CARDOZO STUD. LAW &
LITERATURE 291, 295 (“The social meaning of home loss is the loss of a
family’s economic stability, and with that the loss of middle-class status.”);
see also Robert Schiller, The Scars of Losing a Home, N.Y. TIMES, May 18,
2008, at 5 (“[I]t is important to consider the psychological trauma of
foreclosure [since homeownership is a] fundamental part of a sense of
belonging to a country.”); Brad Heath & Charisse Jones, In Denver,
Foreclosures and a Dramatic Exodus, USA TODAY, Apr. 2, 2008, at A1
(“For hundreds of homeowners in this mostly middle-class corner of
Denver—and an estimated 1.2 million more nationwide—the wave of
foreclosures battering U.S. financial markets is quickly unraveling the
American dream. Those who have lost homes here describe seeing their lives
crumble into anxiety and embarrassment.”).
79
See Prentiss Cox, Foreclosure Reform Amid Mortgage Lending
Turmoil: A Public Purpose Approach, 45 HOUS. L. REV. 683, 686 (2008)
(“Rising foreclosures have started to blight certain areas of American cities
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buildings usually result in the displacement of tenants. Secretary
Shaun Donovan of the U.S. Department of Housing & Urban
Development (HUD) recently stated that 40% of those displaced
to date from the foreclosure crisis have been renters.80 The
federal government has tried to address the effect of foreclosures
on tenants. Congress passed a new law in May 2009 that
protects tenants from immediate eviction by persons or entities
that become owners of property through foreclosure. Under the
law, the immediate successor in interest at foreclosure must:
(a) provide bona fide tenants with 90 days notice prior to
eviction; and, (b) allow bona fide tenants with leases to occupy
property until the end of the lease term, except the lease can be
terminated on 90 days notice if the unit is sold to a purchaser
who will occupy the property.81 In New Jersey and New
Hampshire, with statutes that restrict a landlord’s right to evict
for good cause, bona fide renters are protected when their
buildings are foreclosed.82 Despite these efforts to limit the
effects of foreclosure, communities surrounding foreclosed
homes have suffered greatly in the current crisis.
Increasingly, foreclosures result in vacancies, which in turn
lead to an array of public health concerns. These concerns
include arson, which in turn exposes lead paint, trash
accumulation, illegal dumping, and rodent infestations.83 In
hit hardest by the problem.”).
80
Erika Morphy, HUD Plays Key Role in Financial System Revamp,
GLOBE ST., June 18, 2009, available at http://www.globest.com/news/
1435_1435/washington/179338; see also, Abby Goodnough, Hard Times
Hitting New England Three Deckers, New England’s City Backdrop,
N.Y.TIMES, June 20, 2009, at A1 (chronicling how multifamily buildings in
New England’s cities are being foreclosed on as a higher rate than homes
overall); Vicki Been & Allegra Glasshauser, The Worst of Times:
Perspectives on and Solutions for the Subprime Mortgage Crisis, 2 ALB.
GOV’T L. REV 1, 2–3 (2009) (chronicling how foreclosure crisis is
“significantly impacting renters throughout the country” because most states
allow the purchaser at a foreclosure sale to evict the existing tenants).
81
See Helping Families Save Their Homes Act of 2009, Pub. L. No.
111–22, 123 Stat. 1632 (2009).
82
See Been & Glasshauser, supra note 80, at 16.
83
John P. Relman, Foreclosures, Integration, and the Future of the Fair
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83
addition, foreclosures result in higher crime rates for the
surrounding community.84 This type of blight decreases property
values of neighboring homeowners and thus dissuades further
investment.85 Community destabilization and disinvestment are
especially pronounced where foreclosures are geographically
concentrated.86
3. Foreclosure Effects on
Local Governments
Finally, foreclosures have a detrimental impact on the fiscal
stability of states and localities in which they occur. For
example, one study found that foreclosures in Chicago involve
Housing Act, 41 IND. L. REV. 629, 650 (2008) (“Foreclosures mean
abandoned homes; increased risks of fire, crime, and drugs; increases in
homelessness and job loss; deterioration of schools; and a crippling shortage
of city funds for existing social programs.”)
84
Dan Immergluck & Geoff Smith, The Impact of Single-Family
Mortgage Foreclosures on Neighborhood Crime, 21 HOUSING STUD. 851, 863
(2006) (“These findings suggest that foreclosures may have important social
and economic consequences on neighborhoods beyond effects on the finances
of households directly affected by the foreclosure. An increase in violent
crime is an important social cost, as well as an economic cost, that must be
incorporated into policy making concerning real estate and mortgage lending
policies and regulation.”); see also, Michael Powell & Janet Roberts,
Minorities Affected Most as New York Foreclosures Rise, N.Y. TIMES, May
16, 2009 (citing Immergluck & Smith).
85
See Immergluck & Smith, supra note 84, at 58; Soaring Spillover:
Accelerating Foreclosures to Cost Neighbors $502 Billon in 2009 Alone,
CENTER FOR RESPONSIBLE LENDING, May 7, 2009, http://www.responsible
lending.org/mortgage-lending/research-analysis/soaring-spillover-acceleratingforeclosures-to-cost-neighbors-436-billion-in-2009-alone-73-4-million-homeslose-5-900-on-average.html; see also Vidmar, supra note 77; Elsa Brenner,
Freeing Towns to Tackle Blight, N.Y. TIMES, Apr. 5, 2009, at RE9
(describing effect of foreclosures on local property values in affluent
neighborhoods of Mount Vernon, NY).
86
See Jenny Schuetz et al., Neighborhood Effects of Concentrated
Mortgage Foreclosures (NYU Center for Law and Economics, Working
Paper No. 08–41 2008), available at http://ssrn.com/abstract=1270121; Cox,
supra note 79, at 693.
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84
more than a dozen city agencies and generate costs that in some
cases exceeded $30,000 per property.87 Other effects include
declining property tax revenues resulting from declining
property values described above.88 Thus the foreclosures create a
downward spiral effect: just at the time that local governments
are called on to deal with the effects of the foreclosure crisis,
that very crisis has resulted in less tax revenue with which to
help.
In sum, the detrimental effects of the housing bubble and
crash have extended far beyond the foreclosed homeowners. One
category of victims of the foreclosure crisis, renters, have been
suffering from decades of government neglect.
IV. THE CRISIS IN RENTAL HOUSING
The damage wrought by millions of foreclosures has, among
other things, exposed the chronic crisis in the rental housing
market. There are two fundamental defects in the rental housing
market: (i) there is a desperate lack of rental housing affordable
to low- and moderate- income households; and (ii) there is a
need for increasing the options through which renters can obtain
economic and psychological stability in their housing. Each will
be explored in turn.
A. Need for More Affordable Rental Housing
As noted in the introductory section, almost one third of all
89
Americans (36 million households) are renters. Furthermore,
87
WILLIAM C. APGAR & MARK DUDA, WASH. DC: HOMEOWNERSHIP
PRESERVATION FOUND., COLLATERAL DAMAGE: THE MUNICIPAL IMPACT OF
TODAY’S MORTGAGE FORECLOSURE BOOM 4 (2005), http://www.995hope.
org/content/pdf/Apgar_Duda_Study_Short_Version.pdf.
88
Alan Weinstein, Current and Future Challenges to Local Governments
Posed by the Housing and Credit Crisis, 2 ALB. GOV’T L. REV. 259, 266
(2008) (describing challenges including revenue shortfalls and rising costs);
see also Vidmar, supra note 77 at 2–3.
89
See Donald R. Haurin et al., The Impact of Neighborhood
Homeownership Rates: A Review of the Theoretical and Empirical Literature,
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85
the number of households needing rental housing is expanding.
A recent report found that: “the number of renter households
jumped by 2.8 percent or nearly one million in 2007.”90 And
that trend had already begun before the worst of the foreclosure
wave hit—the foreclosure crisis has added many families to the
list of those who are in need of rental housing.91 All renters must
deal with the fact that the supply of rental units has not been
keeping up with demand.92 One study found that “84% of all the
new housing units built from 1990 to 2006 were single family
units . . . although an average of 34% of all households were
renters during that entire period.”93 A vast majority of these
single family units built were for sale and not offered as
rentals.94
The failure of the rental supply to meet the growing demand
has exacerbated the affordability gap that has long plagued many
rental households. Indeed, by the end of 2007 almost half of all
rental households in the United States were rent burdened95
(spending more than 30% of their gross income on housing
J. HOUSING RESEARCH 119–51 (2003); see also Apgar 2004, supra note 5, at
3; see also Katz & Turner, supra note 5, at 2.
90
See HARVARD UNIV. JOINT CTR. FOR HOUS. STUDIES, AMERICA’S
RENTAL HOUSING-THE KEY TO A BALANCED NATIONAL POLICY 2 (2008)
[hereinafter HARVARD UNIV. CTR. FOR JOINT HOUSING STUDIES, BALANCED
POLICY], available at http://www.jchs.harvard.edu/publications/rental/rh08_
americas_rental_housing/rh08_americas_rental_housing_bw.pdf; see also id.
at 8 (“Today’s mortgage makers woes will not only force many owners into
the rental market but also limit the homebuyers opportunities for other lowerincome renters.”); id. at 9 (“If foreclosures continue to rise, renter household
growth could return to levels not seen in a decade.”).
91
See id. at 8.
92
See, e.g., Benson, supra note 2, at 2 (“For years, growth in the
number of renters at all income levels has far outpaced the construction of
new rental units.”).
93
See Downs Why, supra note 9, at 7.
94
See id.
95
See SCHWARTZ, supra note 9, at 23. (“The most common standard of
housing affordability in the [U.S.] is 30% of income. Households spending
30% or more of their pre-tax income on housing are viewed as having a
excessive housing cost burden.”).
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86
costs) and 24% of all rental households were severely rent
burdened96 (spending more than 50% of their gross income on
housing costs).97 These numbers represented significant increases
from just seven years prior, in 2001.98 Looking at such numbers,
as well as the increased number of rental units needed to house
foreclosed households, Arthur Nelson, director of the University
of Utah’s Metropolitan Research Center, recently concluded that
half of all the units built in the coming years need to be
rentals.99 Whether or not that figure is precise, the larger point is
that the United States needs significant investment in rental
housing in order to correct the market imbalances and bring
rents more in line with families’ incomes.
Notably, two corollaries of the current housing crisis—the
glut of vacant homes and increased number of homes converted
from for sale to rental status—seem to be reducing market rents
charged.100 In Phoenix investors are reportedly purchasing
96
See id. (“Housing cost burdens are defined as severe when housing
expenses amount to 50% or more of income.”).
97
HARVARD UNIV. JOINT CTR. FOR HOUS. STUDIES, THE STATE OF THE
NATION’S HOUSING 2009 3 tbl.A–5 (2009), available at http://www.jchs.
harvard.edu/publications/markets/son2009/son2009.pdf [hereinafter JOINT
CTR. FOR HOUS. STUDIES, State of the Nation]; see Katz & Turner, supra
note 5, at 38 (“[G]ross rents . . . have grown faster than inflation while
median renter’s monthly income has declined 7.3 percent since 2000.”);
NAT’L LOW INCOME HOUS. COAL., OUT OF REACH 4 (2009) available at
http://www.nlihc.org/oor/oor2009/oor2009pub.pdf (calculating the current
“housing wage,” or the amount it takes to afford a modest two-bedroom
apartment at 30 percent of income, with the 2009 the national average
housing wage is $17.84 per hour, which was more than $3 in excess of the
average national hourly wage and more than $10 in excess of the national
minimum wage).
98
See HARVARD UNIV. CTR. FOR JOINT HOUSING STUDIES, STATE OF
THE NATION, supra note 97, at 38 tbl.A–5 (11.2% increase in households
rent burdened and 19.2% increase in those severely rent burdened).
99
See El Nasser, supra note 72 (noting that edges of metropolitan areas
will turn into “exurban ghettos” as many units are turned over to renters).
100
See Nick Timiraos, Apartment Glut Expands, WALL ST. J., Oct. 6,
2009 (citing a report showing 7.9% vacancy rate for apartments and a 2.7%
decrease in effective rental prices nationally); Shahien Nasiripour, Unable to
Sell Their Houses, Millions of Homeowners are Turning Into Landlords,
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87
foreclosed homes from banks at drastically reduced prices and
then renting them to the same households that have been
foreclosed.101 Along with others,102 Dean Baker of the Center for
Economic Policy Research has proposed that mortgage servicers
be forced to rent to delinquent homeowners at market rental
prices as a part of a negotiated foreclosure.103 Reportedly,
officials from the Obama Administration are considering Baker’s
proposal.104 While future substantial drops in rental prices may
occur, the real estate crisis thus far has resulted in only a
relatively small reduction in rental prices.105 There is no
evidence that the housing market has in any long lasting way
addressed the affordability crisis that has built up since the
1980s.106
HUFFINGTON POST, Sept. 14, 2009, http://www.huffingtonpost.com/2009/09/
14/unable-to-sell-their-hous_n_283655.html (describing 2.5 million units
being converted from for sale to rentals since 2007, although many may be
rentals only until the for sale market picks up).
101
See David Streitfeld, Amid Housing Bust, Phoenix Begins a New
Frenzy, N.Y. TIMES, May 24, 2009, at A1.
102
See, e.g., David Kappell, A Rental Model Could Solve The Housing
Crisis, NEWSDAY, Apr. 17, 2009, available at http://www.newsday.com/
opinion/a-rental-model-could-solve-the-housing-crisis-1.1219384. The author,
a former mayor on Long Island, notes the fact that millions of homes lie
dormant waiting for buyers while millions of households need housing as a
result of foreclosure, proposing that mortgage servicers agree to rent homes
in foreclosure to the current occupants.
103
See DEAN BAKER, THE RIGHT TO RENT PLAN (Ctr. for Econ. Policy
Research 2009), available at http://www.cepr.net/documents/publications/
right-to-rent-2009-07.pdf.
104
See Patrick Rucker, Obama Mulls Rental Option for Homeowners,
REUTERS, July 14, 2009, http://www.reuters.com/article/euRegulatoryNews/
idUSN1429055220090714.
105
See Timiraos, supra note 100 (citing a 2.7% decrease in effective
rental prices nationally); JOINT CTR. FOR HOUS. STUDIES, State of the Nation,
supra note 97 at 21 (real rents fell by 0.2 percent nationally in 2008).
106
See JOINT CTR. FOR HOUS. STUDIES, Balanced Policy, supra note 90,
at 3 (“With these large, unprecedented shifts on both the demand and supply
sides of the rental market, the direction of rents is impossible to predict.”);
see also Joint Center for Housing Studies, Fact Sheet-America’s Rental
Housing-The Key to a Balanced National Policy, Apr. 30, 2008 (noting new
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As detailed below, changes to U.S. government housing
policy107 over the past thirty years have resulted in fewer rental
units being built and maintained that are affordable to low and
moderate income households. The first of these changes has
been the dramatic decrease in federal funding appropriated
through HUD for rental subsidies.108 (As discussed in Section
I.B, this has been accompanied by a dramatic increase in federal
subsidies going to homeowners). Specifically, HUD has funded
virtually no new public housing units since 1980 and drastically
cut back on the number of projects receiving building wide
Section 8 assistance.109 Not only has new production of HUDassisted units diminished, but also hundreds of thousands of
previously HUD-assisted units have been removed by their
owners from the applicable governmental programs and brought
to market rate.110 In addition, changes to the Income Tax Law in
wave of foreclosed homes being rented but stating that “most renters do not
have adequate income to take advantage of these opportunities”); National
Low Income Housing Coalition, New Census Housing Data Confirm Number
of Renters Facing Housing Problems on the Rise, Sept. 23, 2009 (analyzing
national census data and finding that, from 2006 to 2008, median gross rents
increased from $763 to $824 and that the number of rent burdened
households increased by 600,000).
107
While I focus here on national housing policy, local governments have
also played a role in restricting the number of rental units. Many of the
suburban and exurban communities which have grown so quickly over the
past thirty years have increasingly restricted zoning to exclude larger
multifamily buildings, or even rentals at all. This drives up the price of land
in communities which do allow for rentals and thereby decreases the supply
and affordability of housing that can be built. See SCHWARTZ, supra note 9,
at 37.
108
See SCHWARTZ, supra note 9, at 40–42.
109
See id. at 42. Project based Section 8 was a HUD administered
program during the 1980’s which gave owners rent subsidies for all qualified
units.
110
See id. at 36; see also Benson, supra note 2, at 2 (“Beyond cutting
back the level of spending on public housing operations and maintenance, the
Bush administration set policies at HUD that effectively reduced the number
of rental vouchers in use. Meanwhile, demolitions under HOPE VI, signed
into law by President George Bush in 1992, have driven a net loss of about
165,000 public housing units since 1995.”).
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89
1986 eliminated most of the accelerated depreciation benefits
that had until then been provided to investors in all rental
housing projects, with even more generous benefits for investors
of low income rental housing.111 While the introduction of the
low income housing tax credit (LIHTC)112 has had some success
in replacing accelerated depreciation as an incentive for equity
investment in low income rental projects, LIHTC funded
projects have not been able to stem the overall loss of affordable
units.113 Overall, the federal government spends roughly $30
billion annually to support rental housing for low to moderate
income households.114 This is less than one fourth of what it
spends for homeownership programs.115 This disparity, together
111
See SCHWARTZ, supra note 9, at 63, 78–81. In addition to the
challenge to the equity side of the financing model presented by the Tax
Reform Act of 1986, debt financing for multifamily rental housing was
severely curtailed by the failure of so many thrifts on the 1980’s which had
been the primary lenders for such rental projects. See id. at 62. The
legislative response to the failure of thrifts (the S+L Crisis) exacerbated this
development, creating significantly more restrictions on lending to
multifamily buildings as compared with single family properties. See id. at
62–63.
112
See I.R.C. § 42 (LEXIS 1986).
113
See SCHWARTZ supra note 9, at 81.
114
See Gale et al., supra note 16, at 1172–73 (citing $30 billion number
for 2005, which includes grant funds administered through HUD and the
Department of Agriculture for farmer/rural housing as well as various tax
benefits administered by the Treasury Department which support the
investment in low income rental housing, note that some of the funding in
this category goes to support homeownership programs as well so getting the
exact amount spent on rental programs is difficult); see also SCHWARTZ,
supra note 9, at 69 (citing $30 billion in “direct” housing subsidies, as
opposed to tax expenditures, some small percentage of this includes
homeownership subsidies); Downs, Why, supra note 9, at 7 (reporting that
the total federal outlays on rental housing were approximately $32.3 billion
for 2005. The highest percentage of this category of federal spending is
forgone tax revenue supporting the LIHTC program, as well as federal
outlays made to fund Section 8 vouchers). Section 8 vouchers provide a
direct rental subsidy to households, enabling them to spend no more than
30% of their gross income on rent. Id.
115
See Apgar 2004, supra note 5, at 12. (“For example, in fiscal year
2001, program outlays for the U.S. Department of Housing and Urban
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with federal funding decisions begun after World War II which
have prioritized highways over mass transit and similar antiurban and anti-density measures, have distorted the market for
rental housing by favoring construction and ownership of single
family suburban and exurban homes.116
Beyond the need for more rental units generally, and
affordable units in particular, there is a further need for more
stable rental options for a growing number of households.
B. Need for Rental Stability
A report completed before the foreclosure crisis found that
the number of stable renters was already significant: “More than
a quarter of renter households surveyed in 2005 reported they
had lived in their units for five or more years.”117 With more
opportunities for stable tenure and some rent protection as
proposed below, that number would undoubtedly be significantly
higher. The category of households seeking stable tenancies
includes, at a minimum, low- to moderate-income families who
are looking to put down roots in a community, senior citizens
Development totaled $33.6 billion. In contrast, that same fiscal year federal
tax expenditures for housing totaled $121.2 billion with tax related
expenditures for homeowners (including mortgage interest and property tax
deductions, and capital gains exclusion) accounting for $106 billion of that
total.”); see also Section II.B and sources cited therein.
116
See Thomas J. Sugrue, The New American Dream: Renting, WALL
ST. J., Aug. 15, 2009 (“Federal housing policies changed the whole
landscape of America, creating the sprawlscapes that we now call home and
in the process, gutting inner cities . . . .”). See generally JACKSON, supra
note 14.
117
HARVARD UNIV. JOINT CTR. FOR HOUSing. STUDIES, THE STATE OF
THE NATION’S HOUSING 2008, supra note 52, at 23. Cf. Ellickson, The
Mediocrity, supra note 52, at 15 (stating that each year “about one-third of
U.S. tenant households move to new quarters” according to a 2003 study
from the U.S. Department of Commerce); Ellickson, Legal Constraints,
supra note 52, at 6 n. 8 (citing an annual moving rate in the United States of
32.5% for renters and 9.1% for owners, compared with annual moving rates
of 17% for French renters and 4% for French homeowners).
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and the disabled.118 In addition, the millions of foreclosures will
dramatically increase the number of tenants who need augmented
rental stability.119 To the extent that some of these households
can create sustainable homeownership solutions, such a result
would be a good outcome for those households. But there is
undoubtedly some significant percentage of the American
population for which homeownership does not make sense.120
Under our free market based economic and property systems,
many households do not have the financial means and/or the
desire to be homeowners, with the full set of responsibilities that
homeownership entails.121
118
See Courtney Gross, Affordable Housing Not Included, Gotham
Gazette, Oct. 5, 2009 (describing disabled woman whose rent in the
gentrified neighborhood of Williamsburg, Brooklyn was recently raised from
$550 to $2100 when her building was purchased by a new owner).
119
See supra notes 74–76 and accompanying text.
120
See Apgar 2004, supra note 5, at 5 (“Public policy should focus on
the larger goals of promoting access to decent and affordable housing, along
with expanding social and economic opportunity for all, and in doing so
recognize that promoting homeownership is just one of many possible means
for achieving these end goals.”). But see Dalton Connolly, Op Ed., Safe at
Home, N.Y. TIMES, Aug. 4, 2009 (arguing in favor of increased programs to
promote and protect homeownership options for low-income households).
121
See Godsil & Simunovich, supra note 9, at 969–70 for a discussion of
the rights and responsibilities of homeowners and renters (“[He or she] who
owns a fee simple possesses the largest possible share of the rights in the
iconic property bundle (use, possession, the right to exclude, and the right to
transfer), while a person or family who possesses a leasehold interest has
occupancy rights to the property only for a specified period of time . . . .
[T]he fee owner of a rental property is also subject to legally imposed
obligations to the leaseholder, like ensuring that the property is habitable.”);
see also Apgar 2004, supra note 5, at 10 (“[T]enant/landlord laws and
regulations govern the obligation of the property owner to meet certain
standards of service provision and process concerning rent setting and
eviction, as well as responsibilities of the tenant (including making rent
payments in a timely manner). At the same time, tenants retain the option to
vacate the property on relatively short notice . . . . Home owners generally
have a more expansive set of rights, but also more responsibilities. Local
zoning, building and health codes along with other land use regulations
impose responsibilities on owners . . . or otherwise place limitations on the
use of an owner occupied property.”).
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92
As demonstrated above, the demand for moderately priced
rental units exceeds supply in many parts of the United States.
This gives landlords enormous leverage over low to moderateincome rental households, and puts such tenants at a severe
disadvantage when trying to bargain for long-term rental
security. Thus many tenants are vulnerable to eviction on thirty
days notice at the end of their leases.122 Indeed, a study
completed in 1999 found that more than 97% of all private
market residential leases (outside jurisdictions with rent
regulation123) are for 1 year or less.124
Given the failure of the market to provide sufficient
affordable and stable rental units, it is understandable that many
families overstretched their budgets in the past 15 years to
purchase a home.125 One recent study demonstrated the
relationship between the lack of affordable and stable rental
options and the demand for homeownership by proving that
households use homeownership to insure or “hedge” against
predicted increases in future rent payments.126 The authors
122
See Chester Hartman & David Robinson, Evictions: The Hidden
Housing Problem, 14 HOUSING POL’Y DEBATE 461, 463 (“[F]ew lowerincome tenants have leases, and if there is no lease . . . a landlord can evict
without stating a reason, with only 30 days’ notice.”); Apgar 2004, supra
note 5, at 56 (“[M]any families with children presumably would also value a
chance to remain in their rental apartment for some time, but lacking a steady
and secure source of income struggle to do so.”).
123
In this paper I use the term “rent regulation” to refer generally to
local and state laws which restrict the ability of landlords to raise rents. Thus
rent regulation includes rent control, rent stabilization, rent restrictions and
the like.
124
See David Genesove, The Nominal Rigidity of Apartment Rents 16,
tbl.7 (Nat’l Bureau of Econ. Research, Working Paper No. 7137, 1999),
available at http://www.nber.org/papers/w7137 (using data obtained from the
Property Owners and Managers Survey).
125
See Apgar 2004, supra note 5, at 5 (“[M]any low-wealth and lowincome families are being ‘pushed’ into homeownership, not necessarily
because they fully appreciate the implications of their choices, but because
they perceive (or rather hope) that homeownership in and of itself will help
them achieve a better life.”).
126
Todd Sinai & Nichola S. Souleles, Owner-Occupied Housing as a
Hedge Against Rent Risk, 120 Q. J. ECON., 763 (2005); see also Fennell,
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93
summarized their findings by saying that “the rent-hedging
benefit substantially increases the demand for owner occupied
housing, for the population as a whole and especially for the
elderly.”127 This study, together with the inadequacy of the rental
options available to households at the lower end of the socioeconomic scale, suggest that improving the availability of
affordable and stable rental options would reduce the demand for
homeownership among such households. While such reduced
demand is inconsistent with housing policy of the past 20 years,
it is exactly the right response to the current foreclosure crisis.128
V. RENTAL STABILITY PROGRAM PROPOSED
Now is the time for policy makers to implement new
protections for rental households. The growing crisis for
families seeking affordable and stable rental options makes this a
crucial imperative. The harder question to answer is what kind
of rental protections are needed and what effect such protections
will have on the overall market for rental housing. In drafting
my proposal, my fundamental goal is to create increased
opportunities for renters to obtain some meaningful measure of
security in their tenure. Achieving stability of an infinite
129
(the present
duration, as promised by homeownership
supra note 8, at 1054–55 (“A much-cited advantage of owning a home is the
element of price protection it provides. In housing markets without rent
control, tenants face significant uncertainty about how much their current
housing will cost in future periods.”).
127
Sinai & Souleles, supra note 126.
128
See JOINT CTR. FOR HOUS. STUDIES 2009 at 25 (advocating for “new
recognition of the risks that homeownership brings” and suggesting that now
is a good time “to rethink federal affordable housing policy, which has until
recently strongly favored homeownership programs”). Cf. Joseph Williams,
President Shifts Focus to Renting, Not Owning, BOSTON GLOBE, Aug. 16,
2009 (quoting Massachusetts Representative Barney Frank as stating that “the
American dream should be a home—not homeownership”).
129
See Fennell, supra note 8, at 1056 (“In contrast [to renters], all
homeowners possess something very valuable—the option to remain in their
current homes for as long as they wish, provided they make the necessary
mortgage and tax payments.”).
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94
foreclosure crisis notwithstanding) is not my goal. Rather,
tenants should have the option to enter into leases for a
minimum of 5 years, and have rights to renew leases at
reasonable rental increases for some certain amount of time, I
propose ten years, absent certain changed or exigent
circumstances on the landlord’s side.130
A. Rental Stability Program Detailed
The Rental Stability Program (hereinafter “the RSP”) I
propose for states and localities to consider131 has a basic
structure akin to the rent stabilization regime currently in effect
in New York City,132 with some important differences that seek
to accomplish my goals of increasing rental stability without
undermining the basic market incentives for landlords. Under
the RSP, landlords of buildings with more than 5 rental units
would be required to register their rental units with an
administrative body at an initial rent set only by the market.
Landlords would be required to offer tenants the option to lease
for terms of at least 1, 2 or 5 years.133 No matter which term of
130
See Apgar 2004, supra note 5, at 56 (“To help families maintain
longer term occupancy, and make better use of available support services, it
would be useful to create model landlord tenant laws that include clearly
articulated and easily enforceable residential leases designed to promote
longer-term, more stable occupancy.”).
131
As detailed infra in Section V, my proposal would require enabling
legislation at the state level, and then be subject to adoption (or not) by
municipal governments. Since RSP is designed to be appropriate in a number
of urban housing markets, some of its parameters are subject to change as
dictated by choices by state and local governments.
132
For an introduction to New York City’s rent stabilization regimes, see
TIMOTHY COLLINS, AN INTRODUCTION TO THE NEW YORK CITY RENT
GUIDELINES BOARD AND THE RENT STABILIZATION SYSTEM (New York City
Rent Guidelines Bd. ed., 2006) (2001), available at http://www.housingnyc.
com/html/about/intro/toc.html.
133
With this requirement, I seek to adapt a small portion of the European
model of residential leases to the American context. France requires a
minimum lease term of 3 years for apartments owned by individuals, and 6
years for units owned by corporations, after which time the owner may
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lease is chosen by the tenant, each year rent increases134 would
be allowed up to the maximum permitted by a rent guidelines
board (hereinafter “RGB”), as is currently in place in New York
City.135 The RGB would consider all of the landlords’ legitimate
costs in operating buildings (taxes and other fees, maintenance,
utilities, labor, cost of capital) and calculate reasonable increases
for the coming year.136 Additional increases would be allowed
based on needed repairs completed to the individual unit or the
building. In addition to the rent increases to cover the landlords’
costs, the landlord would be permitted market-based increases at
the earliest of the following points in time: (i) ten years after the
initial lease date of that tenant; (ii) the commencement of the
fourth consecutive lease renewal by the same tenant; and
(iii) vacancy of the unit. At the end of the term of the lease,
absent certain good cause factors, the landlord would be
required to offer tenants a renewal lease with the same term
options (1, 2 or 5 years). New tenants would have the exact
same deal, that is, the initial rent would be set at market and the
terminate the lease or get market rent increases. See Jane Ball, Renting
Homes: Status and Security in the UK and France: A Comparison In the
Light Of the Law Commission’s Proposals, 67 CONV. & PROP. LAW. 50
(2003); see also Andrea Carroll, The International Trend Toward Requiring
Good Cause for Tenant Eviction: Dangerous Portents for the United States,
38 SETON HALL L. REV. 427, 440, 446 n.139 (2008) (discussing the reasons
a French landlord can terminate a lease and describing a 1978 Landlord
Tenant law which dictates that Italian leases cannot be less than 4 years).
134
The rationale for annual rent increases is based largely on my
interview with Marvin Markus, who explained that projecting costs more than
one year in advance in purely speculative. It was this rationale, Markus
stated, that led to a change in 1983 which limited the choice of New York
City Rent Stabilized tenants to one or two years; prior to the enactment of the
Omnibus Housing Act of 1983, tenants were given the additional option of
choosing three year leases. Interview with Marvin Markus, Chairman, Rent
Guidelines Bd. held at Markus’ offices at Goldman Sachs on June 1, 2009;
see COLLINS, supra note 132, at 35 (stating legal change but not asserting
rationale).
135
For an introduction to the RGB in New York City, see generally
COLLINS, supra note 132.
136
For a list of factors the New York RGB considers, on which my
proposal is based, see N.Y. Unconsol. Law § 26-510 (McKinney 2009).
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96
tenant would have the option of a 1, 2 or 5 year lease, with
annual increases set by the RGB.
To protect the settled economic expectations of certain
classes of tenants who desire long-term stability, an integral part
of the RSP is a new rental subsidy modeled loosely on New
York’s existing Senior Citizen Rent Increase Exemption.137
Tenants under a specific income threshold, which I suggest be
set at somewhere between 80-120% of the area median
income,138 would be entitled to a federally funded rental
subsidy139 to cover all rent increases from the initial registered
rent (which include the allowable increase for that year as set by
the RGB, as well as increases permissible for that specific
building or unit due to improvements). In addition to the income
137
See N.Y. Unconsol. Laws. Law § 26-509 (Mckinney 2009); see also
ANDREW SCHERER & FERN FISHER, RESIDENTIAL LANDLORD-TENANT LAW
IN NEW YORK §4:305 (2008) (summary of SCRIE law).
138
I suggest that the RSP rental subsidy be provided to households with
incomes at or below 80–120% of Area Median Income (AMI) for the
following reasons: First, for the 80% ceiling, HUD defines low income as
households at or below 80% of AMI and any low income household should
be included in the rental subsidy. A higher threshold of eligibility for the
RSP rental subsidy may be appropriate for areas which have exceptionally
high housing costs—for example, the City of New York Housing
Development Corporation has programs targeting households with incomes at
or below 130% of AMI, recognizing that in such an expensive city, higher
income households still need assistance with housing expenses. See New
York City Hous. Dev. Corp., New Housing Opportunities Program—New
HOP, http://www.nychdc.com/pdf/developers/new.hop.termsheet_2008.pdf
(last visited Sept. 30, 2009) (term sheet for the 2008 “New HOP” program).
As background, the website for Freddie Mac defines “Area Median Income”
as follows: “Midpoint in the family-income range for a metropolitan
statistical area or for the non-metro parts of a state. The figure often is used
as a basis to stratify incomes into low, moderate and upper ranges.” Cf.
Adams, Homeownership, supra note 60, at 577 (quoting Census Department
definition of Median income: “the amount which divides the income
distribution into two equal groups, half having incomes above the median,
half having incomes below the median”).
139
Cf. BRUCE KATZ & MARGERY AUSTIN TURNER, RETHINKING U.S.
RENTAL HOUSING POLICY 8–9 (Harvard University Joint Center for Housing
Studies 2007) (suggesting new pools of housing vouchers, akin to Section 8,
to address rental needs in high cost areas).
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97
threshold, receipt of the RSP rental subsidy would be available
only to households who do not already receive Section 8 or
other rental subsidies, and who affirm in a sworn statement that
(i) the rent exceeded 30% of the household’s gross income for
the year prior to lease renewal as reported on tax returns,140 and
(ii) they expected that the household’s income would remain
below the threshold income level for the coming year. Subsidies
for the future years of the lease term would be subject to the
tenant providing similar proof and affirmation to the RSP
administrative entity. When the landlord takes a market based
increase as allowed under the RSP (at the earlier of the fourth
consecutive lease renewal or the tenth year from the date of the
initial lease), then the rental subsidy would end. It may seem
counterintuitive for the RSP rental subsidy to terminate at the
point at which market based increases could be taken, since this
is the very point at which households would be most
vulnerable.141 However, ending the rental subsidy at this point is
consistent with the RSP’s overall structure as a modest, time
limited program which is designed to keep costs at a
minimum.142 The opposite policy of allowing the rental subsidy
to continue indefinitely would require the government to
subsidize potentially unlimited rent increases. This would lead to
budgetary challenges as well as a possible erosion of public
support.
B. The Fine Print: Legal/Administrative Structure of RSP
The RSP is shaped to adapt to many of the urban rental
140
Households spending more than 30% of gross income on housing
expenses are considered “rent burdened.” See SCHWARTZ, supra note 9, at
23.
141
I would suggest that the RSP be accompanied with programs similar
to those in effect in New York City protecting the elderly and disabled after
RSP protections and subsidies expire. See generally COLLINS, supra note 127
(describing the New York City Rent Guidelines Board and Rent Stabilization
System).
142
See infra Section V.C.
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98
housing markets throughout the United States.143 There are
important differences in these rental markets which impact not
only whether a regime like the RSP is good policy, but also the
exact contours the program should take.144 These decisions are
best left to state and local legislatures. Some of the pertinent
differences include the density of the locality,145 the kind and
size of rental projects that exist in each community,146 and, with
143
Even among some rent regulation defenders, there is some debate as
to whether it should apply outside of New York City. Interview with Marvin
Markus., Chairman, Rent Guidelines Bd., held at Markus’ offices at
Goldman Sachs on June 1, 2009). They point to New York City being unique
in terms of the importance and expense of rental housing to that City. Ellen
& O’Flaherty, supra note 52, at 19–36, offer an interesting discussion on this
question. They review the statistics comparing New York City to the nation’s
nine other biggest cities as well as the nine other most dense cities in terms
of percentage of persons who rent, the cost of housing, the length of the
rentals, and the density. On the percentage of renters, with 70% New York
City is at the top of the biggest cities, but is roughly equal to many smaller
cities such as Patterson, Jersey City, San Francisco and Cambridge.
Similarly, while New York City is near the top of the list in terms of cost of
housing, it is not the highest and when compared with income, is more in the
middle of the pack. The only 2 categories analyzed in which New York City
is an outlier is the level of density, and the length that New York City
households remain in their apartments. Thirty Five percent of New York City
renters remained in their apartments between 1990 and 2000, while the
comparable number for the U.S. as a whole was under ten percent. Notably,
none of the other 9 biggest cities exceeded 18%, and none of the other 9
densest cities exceeded 23%. See id. at 32 & 51 tbl.711.
144
There are a number of specific components of the rent stabilization
portion of RSP that need fleshing out, for example whether to allow
succession rights to units for cohabitating family members. As indicated
infra, the time limited nature of the rent regulation makes these questions less
crucial than under unlimited systems.
145
See Ellen & O’Flaherty, supra note 52, at 31 (noting that localities
might be more likely to try to promote residential stability in dense
“residential environments [where the] development of trust and social capital
among neighbors seems more critical”).
146
See JOINT CTR. FOR HOUS. STUDIES, State of the Nation, supra note
97, at 22 & tbl.W-7 (noting that less than 10% of rentals are in buildings
with at least fifty units, more than a third of rental units are single-family
homes, including condominiums, and more than half are in buildings with
fewer than five apartments; also stating that “[s]ize is important because
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99
respect to the households seeking rental accommodation, their
ideal degree of mobility and economic make-up. For example,
jurisdictions that have a very high percentage of owners and in
which most renters are transitory or temporary may not want or
need the RSP. On the other hand, these very communities many
have pent up demand for rental units, which would emerge if
more stable rental options were offered. Recall the study which
found that more than 97% of all residential leases in nonregulated markets are for one year or less.147
Since states and localities would both be involved in
implementing the RSP, legislative action at each level would be
appropriate. I suggest state legislatures pass authorizing
legislation that would enable, but not compel, localities to adopt
the RSP within certain state prescribed programmatic
parameters.148 Local governments would then choose whether or
not to adopt the RSP and if so, exercise discretion to choose the
best program within the state prescribed parameters. In addition,
I suggest that one state agency be designated as the regulatory
authority for each of the localities in the state that adopt the
RSP.149 This would ensure consistent statewide application and
enforcement of the RSP. That state agency could also supervise
the RGB that sets annual cost based increases.150
In addition, the use of federal funds for the RSP rent subsidy
requires a programmatic vehicle for distributing these funds. I
[different sized] rental buildings differ systematically in location, year of
construction, and types of households they attract”).
147
Genesove, The Nominal Rigidity of Apartment Rents, supra note 124.
148
See, e.g., N.Y. Unconsol. Law § 8605 (McKinney’s 2009) (better
known as the Urstadt Law, which prevents the City of New York from
enacting rent regulation in a manner more restrictive than that authorized by
the New York State Legislature).
149
In New York State, the Division of Housing & Community Renewal
is charged with this role. See N.Y. COMP. CODES R. & REGS. tit. 9,
§ 2520.1 (2009) (recognizing powers granted under Chapter 888 of the Laws
of New York of 1985).
150
As opposed to the practice in the State of New York, in which each
locality with rent regulation has its own rent setting board, I would suggest
one statewide RGB, with members appointed by the Governor, the tenant
community and the landlord community.
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100
would suggest that the RSP rental subsidy funds be distributed
by HUD as a block grant to each state.151 The amount provided
to each state would be determined by the number of rental
households in the state, a statistic gathered by the U.S. Census
Bureau. States that choose not to implement the RSP could use
the money for additional Section 8 Voucher Certificates, which
are distributed to very low income households to assist in
making rent payments.152
C. RSP Evaluation & Discussion: Primary & Secondary
Goals
1. Primary Goal
As stated above, the fundamental goal of the RSP is to
enable renting households to obtain more housing stability. How
will the results of the RSP match this goal? First, all renters
would have the option of longer lease terms, up to five years,
with rights to renew absent good cause for eviction by the
owner. Second, all renters would be protected from market
based rent increases (and low to moderate income households
who are rent-burdened would be protected from all rent
increases) for the shorter of ten years and the initiation of the
fourth consecutive lease renewal. Taken together, these first two
results meet my primary goal of providing more stable options
for renting households.
While the ten year limitation to the RSP’s rent benefits
would undoubtedly be a material hardship for some households,
there are compelling reasons to design the RSP in this way.
First, ten years of rent protection and rent subsidy (for eligible
households) provides families and individuals with sufficient
151
HUD administers a number of block grant programs which provide
grants to the states for certain prescribed uses, within which the states have
discretion to choose individual projects. The original program was the
Community Development Block Grant Program, enacted by Congress in
1974. See 24 C.F.R. 570.1 (2009).
152
For a brief description of the Section 8 Voucher Program, see supra
note 110.
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time to settle in a community, attach roots, and begin to climb
the economic ladder so that market-based rentals would not be
out of reach.153 If a family moved into the RSP protected
apartment when a child was eight, in third grade, the family’s
housing would be protected until the child became 18 and
scheduled to graduate from high school. Furthermore, most
renting households, whether in jurisdictions with rent regulation
or not, end up moving within ten years.154 The reform of the
federal welfare programs in the 1990’s provides an apt analogy.
These changes included eliminating a guarantee of eligibility for
the main cash welfare program (Aid to Families With Dependent
Children) as well as the addition or enhancement of other
benefits, including job training, child care and other resources
designed to enable recipient to gain increased economic
independence.155 By some accounts, these reforms helped push
153
Cf. Robert I. Lerman & Signe-Mary McKernan, Promoting
Neighborhood Improvement while Protecting Low-Income Families, 8 URB.
INST., OPPORTUNITY AND OWNERSHIP PROJECT 2 (2007), available at
http://www.urban.org/publications/311457.html (proposing 10 years as length
of guarantee for tenants of expected future benefits from renter insurance
product, discussed further infra Section VI.A). A valuable addition to RSP,
one wise commentator suggested to this author, would be a forced savings
program to run contiguously during the ten year period of rental regulation
and rental subsidy. This would help ensure that households were indeed more
able to afford market rents. Cf. Gale, supra note 16, at 1180–81 (proposing
savings program to encourage low and moderate-income households to save
for down payments as a part of a complete overhaul of the federal mortgage
interest deduction). While devising such a program is beyond the scope of
this paper, I note that the Obama Administration proposed a similar concept
as part of the 2010 Federal Budget as an alternative to the 401(k) employee
savings plans. See Pat Regnier, Why it’s Time to Create an Auto-IRA,
CNNMONEY.COM, Feb. 27, 2009, http://moneyfeatures.blogs.money.cnn.
com/2009/02/27/why-its-time-to-create-an-auto-ira/.
154
See Ellickson, Legal Constraints, supra note 52, at 8 (“Over a ten
year period, 83 percent of Chicago’s renting households changed dwellings,
compared to 65 percent of New York [City]’s.”); see also William M. Rohe
et al., The Social Benefits and Costs of Homeownership, JOINT CENTER FOR
HOUSING STUDIES OF HARVARD UNIVERSITY 13 (2001) (renters maintain their
residences for a median duration of 2.1 years).
155
See Ron Haskins, What Works is Work: Welfare Reform and Poverty
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millions of Americans into the work force; they also took away
much of the force of the conservative critiques of the existing
federal welfare program.156 Similarly, limiting the RSP rent
regulation and rental subsidy to ten years would likely push
households to increase economic self-sufficiency, thereby
helping to assuage potential conservative critics of the RSP.157
More generally, the ten year limitation fits within the RSP’s
overall structure as a modest program designed to have an
acceptably limited impact on the budget constrained federal
government as well as the applicable rental markets.158 The RSP
is thus designed to work within the existing governmental and
market parameters. The ten-year limitation thus increases the
likelihood that an RSP type program will be adopted. The
interest in rental housing demonstrated by the Obama
Administration provides hope that the RSP will receive a
sympathetic consideration in Washington.159
The RSP’s ten-year limit on rent protection reveals another
important point about what the RSP aims to achieve and what it
doesn’t. The RSP is not aimed at creating affordable housing
and should not be judged on such grounds. Why not? Because,
the RSP, and rent regulation generally, are not the proper tools
for creating or maintaining affordable housing for the long term.
While this is contrary to the arguments of some tenant advocates
and scholars,160 rent regulation regimes (including the RSP) are
Reduction, 4 NW. J. L. & SOC. POL’Y 30 (2009).
156
See id. at 46.
157
The ten year limitation would help assuage the conservative critiques
of government funded subsidy programs which are of an infinite duration.
See, e.g., the critiques coming from Ronald Utt of the Heritage Foundation,
objecting to Public Housing and Section 8 benefits as creating “a culture of
dependency that doesn’t encourage families to work or to improve their lot in
life.” Benson, supra note 2, at 4.
158
The importance of the ten year limitation to RSP’s limited impact on
markets is discussed more below.
159
See Joseph Williams, President Shifts Focus to Renting, Not Owning,
BOSTON GLOBE, Aug. 16, 2009 (detailing Administration’s plans to use
stimulus funds to create more rental housing affordable to low and moderate
income households).
160
See Chester Hartman, Evictions: The Hidden Housing Problem, 14
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too blunt to achieve the narrow tailoring that the most effective
affordable housing programs demand.161 For example, empirical
studies of New York City’s rent regulation have found that
households with higher incomes are more likely to live in rent
regulated housing as compared with low income households.162
The fact that wealthy households benefit from rent regulation in
addition to, or even more often than, poor households, does not
necessarily mean that that rent regulation should be
discontinued. Rather, it means that proponents of rent regulation
(and the RSP) must be able to identify important goals served by
such programs other than income redistribution.163 In this case,
the RSP serves the crucial goal of increasing tenant stability.164
The RSP is favorable to usual rent regulation schemes because it
has a more limited effect on the overall rental market and
because it features a federally funded rental subsidy which is
restricted to low to moderate income households.
While the RSP is not an affordable housing program, I
strongly support increased funding of the Section 8 Voucher
Program and other programs which enable low to moderate
HOUSING POL’Y DEBATE 461, 463 (2003).
161
See Edgar Olsen, Is Rent Control Good Social Policy?, 67 CHI. KENT
L. REV. 931, 938–40 (1991) (detailing studies showing that benefits of rent
regulation accumulate differently to different classes of people, and
concluding that due to such random effects, rent regulation “has no merit as a
redistributive device”).
162
See Ellen & O’Flaherty, supra note 52, at 9; see also Barros, supra
note 62, at 288.
163
Ellen & O’Flaherty, supra note 52, at 28 (identifying income
redistribution as one of the usual reasons for housing policy).
164
This is the view of Marvin Markus, chair of the Rent Guidelines
Board of New York City, who recently stated that New York City’s Rent
Stabilization regime is important as a “guarantee of tenure system . . . its
basic premise is not affordability. It is to protect the tenant in occupancy
from illegal and large-scale gouging.” See Eliot Brown, Rent Board Chief
Marvin Markus Pleads for ‘Rationality’, N.Y. OBSERVER, May 18, 2009,
available
at
http://www.observer.com/2009/real-estate/rent-board-chiefmarvin-markus-pleads-rationality; see also Greg Smithsimon, Rent
Regulation: The Right Tool for the Right Job, PLANETIZEN, May 14, 2007,
http:// planetizen.com/node/24451 (suggesting that rent regulation’s purpose
is to provide housing stability not affordable housing).
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income households obtain decent housing at rents they can
afford.165 Recent budget proposals and public statements by HUD
Secretary Donovan indicate that more resources for rental
housing are forthcoming.166 Increasing the strength of programs
like the Section 8 Voucher Program is the ultimate answer for
those households that are forced to move from the RSP-covered
housing after the ten years and are unable to afford market
rentals in acceptable areas.
2. Secondary Goal
Now I move to an evaluation of how the RSP serves my
secondary goal, which is avoiding excessive distortions in rental
housing markets and thereby maintaining market-based
incentives for landlords. The formulation of this goal is partially
based on sensible critiques of rent regulation.167 More
165
See generally Ed Koch & Robert Weiner, Renters Across America
Need More Help from Congress, DAILY NEWS (New York City), July 5,
2009, available at http://www.nydailynews.com/opinions/2009/07/05/200907-05_renters_across_america_need_more_help_from_congress.html
#ixzz0KTdnOBHC&C.
166
See, e.g., Eugene Gilligan, 90-Degree Turn: Stimulus Package
Redirects Housing Efforts to Affordable Rentals, MULTI-HOUSING NEWS,
Apr. 14, 2009 (describing how $13 billion in stimulus money is going to
HUD’s budget, including $2.3 billion in the Tax Credit Assistance Program
which will go to fill gaps in budgets for low income rental construction and
rehabilitation projects); Sule Aygoren Carranza, Experts Look at Housing
Under Obama Administration, GLOBEST.COM, Jan. 26, 2009, at 3,
http://www.globest.com/news/1332_1332/insider/176529-1.html (discussing
inclusion in stimulus bill of substantial resources to address multifamily rental
housing); Secretary Shaun Donovan, 2009–10 Housing and Urban
Development Budget (May 7, 2009) (stating that for too long there has been a
federal homeownership policy at expense of a federal policy aimed at
affordable rentals and detailing an increase in federal money for rental
program, including increased Section 8 voucher funding).
167
See, e.g., Richard A. Epstein, Rent Control and the Theory of
Efficient Regulation, 54 BROOK. L. REV. 741 (1988). Epstein’s piece was the
seminal article which drew 7 response papers, all printed in a volume of the
Brooklyn Law Review. See id at 1215–80; see also William Tucker, How
Rent Control Drives Out Affordable Housing, Cato Institute Policy Analysis
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105
specifically, the consequences I seek to avoid or at least
minimize with the RSP include the following: (i) disincentivizing
the creation and maintenance of rental housing;168 (ii) creating
No. 274 (May 21, 1997), available at http://www.cato.org/pubs/pas/pa274.html (stating that cities that do not use rent control policies are
“rewarded with a normal competitive housing market in which housing is
available at every price level but [t]hose cities that succumb to the disease of
rent control are doomed to never-ending, house-to-house warfare over an
ever-diminishing supply of unaffordable housing”); Michael H. Schill,
Comment on Chester Hartman and David Robinson’s Evictions: The Hidden
Housing Problem, Protection or Protraction?, 14 HOUSING POL’Y DEBATE
503, 513 (2003) (to properly address society housing problems, reforms must
work with the market system, and not it against it); c.f. Andrea B. Carroll,
The International Trend Toward Requiring Good Cause for Tenant Eviction:
Dangerous Portents for the United States, 38 SETON HALL L. REV. 427, 446
n.139 (2008) (making the case against adopting good cause requirements for
eviction, which are often but not always accompanied by rent regulation). But
see Margaret Jane Radin, Residential Rent Control, 15 PHILOSOPHY &
PUBLIC AFFAIRS 350, 365 (Autumn 1986) (“A tenancy, no less than a singlefamily house, is the sort of property interest in which a person becomes selfinvested; and after the self-investment has taken place, retention of the
interest becomes a priority claim over curtailment of merely fungible interests
of others.”). But see Michael J. Mandel, Does Rent Control Hurt Tenants?:
A Reply to Epstein, 54 BROOK. L. REV. 1267, 1273–74) (“It seems clear that
rent control is not a perverse public policy which hurts everyone. There are
winners and there are losers, and it is important to identify who is who. On
the landlord side the losers are people who owned rental housing at the time
the original rent control law was passed, and the winners are builders of new
apartments . . . . On the tenant side, the elderly and long-term stable
households benefit from the low levels of their original rent. People just
entering the rental market and renters who move frequently tend to pay
higher rents . . . or face long housing searches. Often this means that lowincome households do not receive as much protection from rent regulation.”);
Alyssa Katz, OUR LOT: HOW REAL ESTATE CAME TO OWN US 189 (2009)
(“[I]t’s impossible to make a blanket case for or against rent control . . . the
success or failure depends on gathering good information, exercising the
political will to calibrate the annoying details of administration and taking
leadership to reconcile conflict.”); Gregory S. Alexander et al., A Statement
of Progressive Property, 94 CORNELL L. REV. 743, 744 (2009) (property
decisions involve “plural values” and cannot be “adequately understood or
analyzed through a single metric”).
168
See Epstein, supra note 167, at 763–67 (criticizing rent control
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rules that are difficult for governments to administer or for
owners and tenants to understand and comply with;169
(iii) creating opportunities for abuse, or for shadow rental
markets to emerge; and (iv) incentivizing landlords and tenants
to dispute and litigate.170
regimes for, among other reasons, creating disincentives for housing
production and maintenance); see also Tucker, supra note 167, at 162.
However, the empirical case regarding the effects of rent regulation on new
construction and housing maintenance are disputed. See Ellen & O’Flaherty,
supra note 49, at 24 (citing various studies and concluding that “models that
forecast the effects of rent control and rental subsidies on the costs
of . . . uncontrolled rental housing . . . are extremely complex and do not
give unambiguous answers”); J. Gilderbloom & R. Appelbaum, RETHINKING
RENTAL HOUSING 57–67 (1988) (citing numerous studies of landlord behavior
and rental housing markets and finding a minimal effect of rent regulation on
levels of new construction and maintenance of existing housing); Kenneth K.
Baar, Would the Abolition of Rent Controls Restore A Free Market, 54
BROOK. L. REV. 1231, 1232–33 (1989) (citing numerous studies from the
1970s and 1980s, including many commissioned by governments, and
concluding that the reports that included data “on new apartment construction
in rent controlled jurisdictions have been mixed in their conclusions”); Olsen,
supra note 163, at 942–43 (“[T]he effect of rent control on the maintenance
of the controlled [housing] stock is ambiguous on theoretical
grounds . . . [and] the empirical literature contains no compelling
evidence.”); Collins, supra note 133, at 22 (finding that “New York [City’s]
two great housing booms . . . occurred during periods when strict rent
controls were imposed on existing units”); see also Peter D. Salins,
Reflections on Rent Control and the Theory of Efficient Regulation, 54
BROOK. L. REV. 775, 779 (1988) (opponents of rent regulation who make
this argument [as to inefficiency] have also relied too heavily on theory, and
too little on empirical proof); see also id. at 780 (“[N[o one has yet
discovered the research design that will succeed in definitively making the
deregulation case.”).
169
For an example of a well intentioned scheme that may be
administratively difficult see Megan J. Ballard, Legal Protections for Home
Dwellers: Caulking the Cracks to Preserve Occupancy, 56 SYRACUSE L. REV.
277, 307 (2006) (suggesting that, when considering an eviction, a decision
maker evaluate various prescribed factors to assess the degree to which a
subsidized tenant considers a dwelling to be a home and if so indicated, “the
burden should shift to the opposing stakeholder to justify the basis for
eviction”).
170
See Michael J. Mandel, Does Rent Control Hurt Tenants? A Reply to
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For this secondary goal, avoiding the above-described
unintended consequences, the RSP serves its purpose well, albeit
not perfectly. Generally, the RSP seeks to combine the best
aspects of existing rent regulation systems and rental subsidy
programs, with certain additions suggested by the commercial
leasing framework, specifically longer lease options with
periodic step up rent increases. Specifically, the RSP would
avoid unintended consequences by creating a stock of rental
units priced at or near market rents. Units would be priced at or
near market because under the RSP landlords could take market
increases, at a minimum, every ten years, as well as annual
increases to cover increased costs in maintaining and improving
their buildings. The protection for tenants is from market
increases during their tenancy, up to their fourth lease renewal
or ten years. By making the rent regulation time limited and
subjecting all units in a jurisdiction to its purview, the RSP
Epstein, 54 BROOK. L. REV. 1267, 1271 (1989) (“I agree with Epstein that
rent control leads to increased litigation between landlords and tenants. In
fact, the primary negative effect of rent regulation, from the viewpoint of
landlords, seems to be that it enmeshes them in a bureaucracy designed to
regulate housing prices, housing quality, and landlord-tenant relations.”).
Other critiques of rent control include the following: (i) it leads to the
misallocation of space (see Edward L. Glaeser & Erzo F.P. Luttmer, The
Misallocation of Housing Under Rent Control (Nat’l Bureau of Econ.
Research, Working Paper No. 6220, October 1997); Richard A. Epstein,
Rent Control Revisited: One Reply to Seven Critics, 54 BROOK. L. REV.
1281, 1289-90 (1988); (ii) that it is arbitrary, (iii) difficult to remove once
enacted and introduces politics into housing markets; and (iv) that it is a poor
toll for redistributing wealth. My response to these potential critiques of RSP
is as follows: (i) I agree that households which change in size during the ten
year maximum of rent regulation will have incentives to keep the unit and not
move to the appropriate sized unit, but given the important goals served by
RSP and the time limitation of this incentive, I am not terribly concerned;
(ii) RSP, by incorporating an income restricted rental subsidy, attempts to
address this arbitrariness; (iii) while it is important to consider the political
economy of rent regulation systems, as Epstein reminds us, like (i) above, in
light of the important goals furthered by RSP, ultimately this should not stop
any jurisdiction from adopting such a regime; (iv) I agree but as described
above, RSP is not aimed at wealth distribution but rather household and
neighborhood stability.
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would eliminate much of the difference in rents charged to
existing and new tenants. This is an important and positive
change to most existing rent regulation schemes, since it reduces
the current incentives for landlords to harass tenants into
leaving. The decreased harassment would likely reduce the
amount of landlord-tenant litigation, which in turn would reduce
the state’s administrative burden. Similarly, the ten-year limit on
rent regulation would greatly reduce the benefit of passing the
housing unit to a relative, and therefore the battles over
succession rights would be reduced. In addition, in another
positive change for landlord tenant relations, the RSP’s rent
subsidy for income and rent-burdened households would come at
the expense of the federal government and not landlords.
Finally, as an ancillary benefit, the federal funds for the RSP
rental subsidies would take one step towards achieving a more
balanced allocation of federal benefits allocated to renters and
owners.
D. RSP: Addressing Critiques & Concerns
The most basic question is why the RSP is needed. If it were
true, as Richard Epstein asserted in 1989, that those seeking
increased residential stability could simply purchase homes
instead of renting,171 then this would be a short paper indeed.
However, Epstein made this assertion prior to the foreclosure
crisis, and I am not sure that he would repeat the statement
today.172 It is evident from my arguments thus far that there are
171
See Epstein, supra note 167, at 1293 (“So long as the market is well
functioning, then persons who desire to have long-term attachments to
property can buy instead of rent.”).
172
However, Epstein has stated that much of the expense of housing
results from unneeded and unconstitutional government interference in the
housing market through building codes and zoning restrictions. See Epstein,
supra note 9, at 1287. It is possible that Epstein would argue that, free of
such constraints, the market would produce housing at all price points. While
such an assertion has a certain ideological appeal for Epstein, it would mean
that government would allow housing to be of questionable quality and
standard. See SCHWARTZ, supra note 9, at 37 (“It is not certain that the
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a certain percentage of households that simply do not have the
economic ability to be homeowners, no matter their desire for
stability.173
The more nuanced question is why renters who desire
increased stability do not negotiate for longer lease terms. There
is some disagreement among wise minds on this question.
Robert Ellickson asserts that landlords cannot find tenants to
take the longer leases,174 while Professors Fennell & Roin posit
that landlords are fearful of such arrangements since tenants
have significantly less at stake to hold them to the lease terms,
specifically just a security deposit, while landlords are compelled
to comply by the tenants’ presence and the availability of court
protection.175 Neither Ellickson nor Fennell & Roin cite
empirical findings to support their respective propositions but I
am inclined to join Fennell & Roin on this point, especially with
respect to tenants at the lower-end of the economic spectrum. As
removal of such [building code] restrictions would make housing affordable
to the lowest income households . . . society may not accept the changes in
building and community standards that would be necessary if housing costs
were to be reduced to such levels.”). The regulation of single room
occupancy or “flophouse” hotels in New York City and San Francisco in the
1970s is one example of the tensions governments must weigh between trying
to improving housing conditions and eliminating the market altogether. See
Supportive Housing Network of NY, What is Supportive Housing? available
at http://www.shnny.org/what_is_history.html (“SRO hotels in New York
City were particularly vulnerable to conversion or demolition because of a
city tax abatement program . . . [which] created incentives for converting
SRO units into market-rate apartments, commercial hotels, or offices. Federal
urban renewal programs like Title I also led to the condemnation and
demolition of the SRO stock, particularly in midtown Manhattan.”).
173
See supra Part IV.B.
174
See Robert C. Ellickson, Rent Control: A Comment on Olsen, 67
CHI.-KENT L. REV. 947, 951 (1991) (“A residential tenant could also stave
off the risk of a rent increase by negotiating a long-term lease; in practice,
however, residential landlords, not tenants, typically push to lengthen
leases.”).
175
See Lee Ann Fennell & Julie Roin, Controlling Residential Stakes 15
(Univ. of Chicago Law Sch., John M. Olin Law & Econ. Working Paper
No. 477, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract
_id=1452887 [hereinafter Fennell & Roin, Controlling].
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demonstrated in Section IV, because of the disparities in supply
and demand, low-income tenants have little leverage for decent
units priced at rents they can afford. Therefore, I suspect that
the landlords are dictating the lease terms in such cases. This
strongly implies that landlords are reluctant to enter into longerterm leases, since 97% of the leases in non-regulated markets
are for less than a year.176
RSP would also face critiques from scholars, like Ellickson
who have questioned the need for rent protection to increase
rental stability. Ellickson states, “[r]ather than opportunistically
exploiting tenants who have put down roots, landlords instead
seem to give them price breaks.”177 While it makes sense for
landlords to give some price break to long-term tenants who are
proven reliable, public policy cannot rely on such whimsical and
haphazard protection for a matter as dire as rental stability.
Indeed, if we could rely on landlords to maintain reasonable
rents for long-term tenants, landlords would not object to current
“moderate” rent regulation statutes, which allow for periodic
rental increases.178 If Ellickson’s statement were the full story,
176
See Genesove, supra note 124, at 123. It does seem reasonable that
some rental households are reluctant to sign long term leases, which require
them to pay for the unit without any “out” clause for changed economic or
personal circumstances. This assumed reluctance on the part of tenants might
be somewhat addressed by having the rental subsidy proposed by RSP for
income challenged tenants, as well as having reasonable rights to assign
and/or sublease the unit. For RSP, I would incorporate the New York State
Real Property Law Section 226-b. This law provides that a residential tenant
may not assign his/her lease without the written consent of the owner, unless
the lease expressly provides otherwise. It also provides that a tenant has the
right to sublet his/her apartment, even if subletting is prohibited in the lease,
provided that the tenant complies strictly with the provisions of the statute,
which requires detailed notice to owner. N.Y. REAL PROP. LAW § 226-b
(2006).
177
See Ellickson, supra note 174, at 951 (“Contrary to their unsavory
reputations, residential landlords are not apt to jack up the real rents charged
sitting tenants. Olsen cites five studies that indicate that longtime tenants tend
to pay lower rents than do more recently arrived tenants who move into
comparable housing units.”).
178
See Mandel, supra note 165, at 1269–70 (distinguishing “strict” rent
control systems “which do not allow pass-throughs of rising operating costs,
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rent regulation would simply enforce what landlords would be
doing anyway. The vehemence of the landlord’s objection to
rent regulation disproves this potential objection to the RSP.
Landlords subject to rent regulations that currently exempt
new units from regulation179 would, at least initially, object to
the RSP requirement of having rents on new units regulated.
However, this is a crucial feature of the RSP since it would
result in substantially one class of tenants and owners,
eliminating the two tiered or “shadow markets” phenomenon
occurring under rent stabilization that Epstein and others
decry.180 More nuanced critics and landlords will focus not on
the fact of regulation, but the nature of regulation. Under the
RSP all units must be registered and the initial rents will be set
by the market. Similarly, at year ten, or when the tenant vacates
or initiates his or her fourth lease renewal, the landlord would
be able to take a market increase. In between day one and year
ten (at the latest), landlords could take increases for increased
costs and repairs. While far from the unregulated market
preferred by Epstein and the landlord lobby, the RSP does not
impose unreasonable controls.
[resulting in landlords finding that] it may become unprofitable to maintain or
even keep the building, which leads to abandonment” and “moderate” rent
control, which “allow[s] regulated rents to rise with inflation and increased
operating costs” noting that moderate rent control laws are much more
common than strict rent control and not bad policy); see also GILDERBLOOM
& APPELBAUM, supra note 168, at 128–132 (distinguishing “strict” rent
control which sets price limits without guaranteeing any right of return from
moderate rent control, as defined by Mandel, and “strong” rent control,
which was in effect in the 1980s in Santa Monica, Berkley and West
Hollywood, which allow increases lower than the Consumer Price Index and
no vacancy decontrol).
179
Most current regulation programs exempt new construction from
regulation. This includes the programs in New York City, as well as all of
the California jurisdictions which have rent regulation. See Katz, supra note
5, at 192.
180
See Epstein, Rent Control Revisited, supra note 170, at 1287 (“[I]t is
not possible to run a well-functioning two-tiered market, with some
deregulated and some regulated units.”); see also Tucker, supra note 167, at
3–4 (discussing shadow markets).
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This leads us to consider another likely critique from
landlords in jurisdictions with no rent regulation or good cause
eviction laws. Such landlords could object to the interference of
government in their market. However, the RSP rests on solid
legal and programmatic precedent.181 Operating residential rental
housing in urban areas is a highly regulated enterprise, whether
or not rent regulation applies. Governments must be finely
attuned to the external effects of land uses, given the high levels
of density in urban areas.182 Therefore, owners of such
properties are familiar with government regulation in a number
of contexts.183 Almost all owners are subject to building code
regulations and most are subject to zoning constraints as to the
type of building and size of buildings that are allowed.184 In
addition, several states and many localities restrict owners’
rights to evict only for prescribed “good cause.”185 Finally,
many states and localities restrict owners’ ability to convert units
to condominium or cooperative status.186
Finally, there is no doubt that the RSP will come with
administrative costs. My proposal suggests that, in order to
ensure consistent statewide application, each state designate an
agency as the regulatory authority for each of the localities that
181
See Block v. Hirsch, 256 U.S. 135 (1921) (upholding Washington
D.C. rent regulation scheme from constitutional attack); Pennell v. City of
San Jose, 485 U.S. 1 (1988) (following Block v. Hirsch); Rent Stabilization
Ass’n v. Higgins, 83 N.Y.2d 156 (1993) (citing Block v. Hirsch as good
law).
182
See Ellen & O’Flaherty, supra note 52, at 31 (noting that localities
might be more likely to try to promote residential stability through regulation
in dense “residential environments [where t]he development of trust and
social capital among neighbors seems more critical”).
183
See Apgar 2004, supra note 5, at 10 (“[T]enant/landlord laws and
regulations govern the obligation of the property owner to meet certain
standards of service provision and process concerning . . . eviction . . . .
[Also] zoning, building and health codes along with other land use regulations
impose responsibilities on owners . . . or otherwise place limitations on the
use of an owner occupied property.”).
184
See Baar, supra note 168, at 1234–35.
185
See Roisman, supra note 73, at 834–35.
186
See 15A AM. JUR. 2D Condominiums § 16.
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adopt the RSP. Said state agency would also supervise the RGB
that sets annual cost based increases. The exact costs to state
government in administering the RSP would depend on a variety
of factors, including the number and population size of the
localities which adopt the RSP, the number of complaints and
disputes to be adjudicated and other factors. It is likely that there
would be a fairly significant amount of resources needed at the
commencement of the RSP; from then on a professional staff at
the agency would likely suffice. Localities could consider
funding the RSP through user fees assessed against landlords
and/or tenants, or through general purpose tax revenues.
When calculating whether to adopt the RSP, sophisticated
states and localities would focus on the potential benefits in
addition to the administrative costs. The benefits of the RSP
would be increased stability for tenant households and the
accompanying spillover benefits to the surrounding communities.
These include an increase in citizen participation in the
community, better maintenance of their houses, and lower rates
of neighborhood crime.187
In conclusion, the goals served by the RSP—increasing
tenant and neighborhood stability—outweigh the costs and
potential inefficiencies of the program.
VI. ALTERNATIVES TO THE RSP
Happily, I am far from alone in concluding that the current
state of housing policy needs substantial revision to assist rental
and owner households. Below are three examples of innovative
new approaches to housing policy formed in response to the
current crisis. While all three offer some improvement over the
current system, I argue that they all fall short of the RSP in
terms of alleviating housing instability.
A. Rental Insurance
Robert Lerman & Aigne-Mary McKernan have promoted the
187
See supra Section II.C.
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development of a financial risk or hedge product, which would
enable renters to buy protection against future rent increases,
based on some composite index of rents in the applicable
neighborhood or market.188 Their approach builds on the work of
Robert Shiller, who assisted in developing markets which enable
homeowners and other traders to purchase and sell insurance
tied to reductions in area house prices.189 Lerman & McKernan
seek to extend such a concept to renters.
The authors argue that such an approach is preferable to rent
regulations or rent subsidies. They cite the usual arguments
against rent regulations, namely that such regulation reduces
property owners’ incentives to maintain property and to invest in
added housing thereby “inducing shortages and higher prices for
uncontrolled units.” As to rent subsidies, the authors object to
the fact that subsidies in gentrifying neighborhoods will exceed
those in lower income areas. They argue that their approach
“improves on rent control and some subsidy approaches by
divorcing the compensation (for area rent increases) from the
renter’s subsequent choice of locations.”190
The idea proposed by Lerman & McKernan has a number of
elegant features. Most notably, after the market for such rental
insurance is created and perfected, government’s role can be
relatively minor. Indeed, regulating the market for such a
product should be much less involved than the administrative
role under the RSP in setting rent increases, monitoring
compliance and settling disputes. Furthermore, it creates no
incentives for conflict between landlords and tenants.
For all its theoretical advantages, however, the proposed
rental insurance product raises a number of unanswered
questions and concerns. First, who would pay for such a product
188
See Robert I. Lerman & Signe-Mary McKernan, Promoting
Neighborhood Improvement while Protecting Low Income Families, 8 URBAN
INST., May 2007, available at http://www.urban.org/UploadedPDF/311457_
Promoting_Neighborhood.pdf.
189
See Robert Schiller, Mortgages of the Future, N.Y. TIMES, Sept. 21,
2008, available at http://www.nytimes.com/2008/09/21/business/21view.
html.
190
See Lerman & McKernan, supra note 188, at 2.
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for low and moderate-income households?191 Second, the
complexity of the product proposed is worrisome.192 The product
seems difficult to create: it requires an extremely accurate
measure of rents down to a fairly granular level—zip code. It is
questionable whether reliable data for this index currently exists.
Even more problematic, the complexity of the product seems to
limit its usefulness for the intended beneficiaries, at least those
without a high degree of financial sophistication. As we have
seen from the subprime mortgage example, devising complex
financial products for low to moderate-income households
regarding their housing situation is fraught with risk. In this
case, the success of the insurance product depends on renters
choosing the right amount of coverage—not an easy task.
Perhaps these concerns can be addressed. For now, it
suffices to say that the RSP is a more viable program. No new
markets or inventions are needed and the households that are the
intended beneficiaries will be protected by a legal system that is
administered by a government agency specifically charged with
its enforcement.
B. Requiring Good Cause For Eviction
In her recent article,193 Florence Roisman identifies the lack
of restriction on landlords’ abilities to evict or fail to renew
leases as the primary problem for tenants. She advocates for
courts, through common law contract doctrines, to enact a
requirement that landlords have good cause before evictions. She
notes that protected tenancies should not be restricted to those
194
who can “negotiate long-term leases” but to all.
Roisman clearly shares my goals of providing additional
stability for rental households, however, she does not address
191
See Fennell & Roin, Controlling, supra note 175, at 19.
See id. at 19-22 (attempting to develop the proposal that Lerman &
McKernan sketched out, acknowledging a number of unanswered questions
and logistical difficulties).
193
Roisman, supra note 73.
194
Id. at 829.
192
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whether or how tenants would be shielded from eviction
resulting from an inability to pay for rent increases. The RSP
incorporates Roisman’s central point by requiring as an essential
component that landlords have good cause to evict or fail to
renew a lease. The RSP goes further by addressing the economic
side of the equation: specifically the RSP offers all tenants a
certain degree of rental protection for ten years, and to those
who are low- to moderate-income and rent burdened, a subsidy
to cover the allowable increases.195
C. New Models of Homeownership
Lee Ann Fennell of the University of Chicago Law School
has offered one of the most creative proposals aimed at
reforming the current model of homeownership, called
Homeownership 2 or H2.0.196 H2.0 is designed to enable
aspiring homebuyers to purchase a home but limit the extent of
their investment (and risk of loss) to factors within the
homeowner’s control. Specifically, H2.0 seeks to allocate to
homeowners the profit and loss properly tied to the condition
195
There are of course other rental models that could be considered. One
interesting example is that of Sweden, described in detail in One Nation’s
Dream, Another’s Realty: Housing Justice In Sweden, 22 BROOK. J. INT’L L.
63, 94–96 (1996). In Sweden, the government plays a much more significant
role in the rental market than in the U.S., significantly more than even those
jurisdictions under rent control. Construction and operation of most rental
housing in Sweden is financed by the government and therefore the rent
setting process and admissions process is heavily controlled by the
government as well. Among other aspects, Swedish tenants are protected
from eviction by good cause requirements and prospective tenants obtain
newer apartments by waiting list. Furthermore, “[r]ents are determined on an
annual basis pursuant to negotiations between the municipal housing
corporations and tenants’ associations.” Id. at 94–95. Kenn finds much to
admire in the Swedish model, but the amount of subsidies and degree of
governmental involvement required do not make it a good fit for the current
political and economic system in the United States. See also Roisman, supra
note 73, at 856 (“The provision of decent, affordable housing for poor people
is not an area for private enterprise. It is a government
responsibility . . . .”).
196
See Fennell, supra note 8.
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and improvements made to the house and site-specific factors
they can control. The risk and reward attributable to local offsite factors (schools, crime rates, neighborhood amenities) as
well as broader economic risks (real estate prices, economic
cycles) would be purchased by a market of investors.197 Thus,
Fennell envisions a new option for homebuyers—the right to
purchase a home and keep the equity based on payments made
and improvements to the house and site but to avoid the broader
economic investment that is currently required.198
Fennell’s proposal has a great deal of promise. I believe that
she accurately posits that a significant percentage of prospective
homebuyers would be interested in exchanging some of the
potential upside of their home investment for a product that
limits the potential downside as well. This is especially likely in
turbulent real estate market cycles such as the current one.
Indeed, if it could be perfected, H2.0 could be the kind of tool
that gets prospective buyers “off the sideline” as has been the
common refrain among real estate professionals and many
197
See id. at 1072.
As Fennell discusses, H2.0 is a variation on a more traditional shared
equity or shared appreciation type of homeownership program. See id. In
such a program, a public or private entity contributes part of the upfront cost
of purchasing a home. In exchange, such investor entity shares in any future
house appreciation. Public investors, usually municipal governments, use
such appreciation to enable low to moderate income households to purchase
the house when it is put up for re-sale. See id. at 1064–66. In Australia, a
privately created product called the Equity Finance Mortgage uses future
house appreciation to replace monthly payments on a second position loan
that is made to enable the household to afford the downpayment. See Equity
Finance Mortgage, http://www.efm.info/pdf/EFMBrochureV3.pdf (last
visited Sept. 30, 2009). When the household sells the property or refinances,
it must repay the principal balance of the second loan plus up to a 40% share
of any increase in the value of the property. See id. Other intriguing
proposals to revise the current model of homeownership include Robert
Schiller’s idea of the continually adjusting mortgage. This mortgage product,
to be offered by banks, would reduce defaults by automatically adjusting
payments due each month according to fluctuations in the economic and real
estate markets. See Robert Schiller, Mortgages of the Future, N.Y. TIMES,
Sept.
21,
2008,
available
at
http://www.nytimes.com/
2008/09/21/business/21view.html.
198
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118
economists in recent months. H2.0 has the additional promise of
maintaining the economic incentives for homeowners to improve
their property as well as the local conditions under their control.
This adds a layer of sophistication to her proposal.
However, H2.0 does not seek to address the crisis
experienced by millions of households who are seeking more
affordable and stable rental options.199 Indeed, by excluding
rental housing from its purview, I fear that H2.0 continues the
emphasis on homeownership as the Holy Grail for both
household satisfaction and economic recovery. To achieve the
balance between homeownership and rental programs, I would
urge adoption of the RSP or other rental programs as a
complement to H2.0.
CONCLUSION
Our current polices of prioritizing homeownership to the
exclusion of the needs of rental households have failed. We as a
society need to stop over subsidizing and promoting
homeownership as the only model for successful American
households. Changes to policy are particularly urgent now as
millions of Americans have been forced from homeownership
into rental housing as a result of the foreclosure crisis and the
economic recession.
The RSP offers one step towards reclaiming an equilibrium
in government preferences between homeownership and renting.
By enabling households to achieve stability while renting, the
RSP provides benefits for those households and also their
neighbors and larger communities. While the specific contours
of the RSP are subject to further conversation, this paper makes
199
Fennell and her colleague Julie Roin, propose revising the incentives
for both renters and homeowners. They seek to right size the incentives of
both understaked households, renters and homeowners with no or negative
equity, and “overstaked” homeowners who oppose sensible zoning ordinances
and other neighborhood changes. See generally Fennell & Roin, Controlling,
supra note 175. The authors urge that local governments have an important
stake in such “right staking” and, subject to state constitutional constraints,
engage in such efforts.
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119
clear that the conversation regarding our national housing policy
needs to be amended to include the needs of renters.
FISHER REVISED.DOC
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TARGET MARKETING OF SUBPRIME
LOANS: RACIALIZED CONSUMER
FRAUD & REVERSE REDLINING
Linda E. Fisher
This article, presented at Brooklyn Law School’s 2009
Sparer Public Interest Law Symposium on a panel
entitled Stopping the Next Subprime Crisis, is part of a
larger project of information and strategy-sharing among
academics, policy analysts and attorneys involved in
foreclosure and predatory lending prevention. The article
marshals and analyzes evidence of discriminatory and
deceptive marketing practices by subprime mortgage
lenders and brokers. It also supports current proposals
for policy reforms that could address the misuse of new
marketing technologies in this context.
INTRODUCTION
The subprime meltdown created many casualties. Foremost
among them are subprime borrowers themselves.1 While some
 Professor of Law, Seton Hall Law School. I would particularly like to
thank Arielle Cohen of the National Consumer Law Center (formerly with
the New Jersey Institute for Social Justice) for her assistance in researching
the practices I describe in this article. I am also grateful to Marc Poirier for
comments and suggestions on an earlier draft.
1
Michael Aleo & Pablo Svirsky, Foreclosure Fallout: The Banking
Industry’s Attack on Disparate Impact Race Discrimination Claims Under the
Fair Housing Act and the Equal Credit Opportunity Act, 18 B.U. PUB. INT.
L.J. 1, 1–8 (2008). Subprime loans are generally considered those with an
annual percentage rate (APR) on a first mortgage that is more than 3% above
the comparable Treasury rate. This figure is taken from the Federal
Reserve’s definition of high rate loans, which has developed into a shorthand
121
FISHER REVISED.DOC
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4/26/2010 11:40 PM
commentators disparage these borrowers for defrauding lenders
by misstating their incomes, the reality is much more
complicated: evidence is mounting that certain subprime lenders
deliberately sought out financially vulnerable borrowers for
deceptive sales tactics and predatory mortgage loans. In many
cases, loan officers and mortgage brokers—without borrowers’
knowledge—concocted false income and assets and ordered
inflated appraisals, all to obtain mortgages generating large
profits for themselves.2 For some lenders, these techniques were
standard operating practice.3 There was little incentive to
working definition of subprime loans. See Alan M. White, Borrowing While
Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing, 60 S.C.
L. REV. 677, 682 (2009) (citing 12 C.F.R. § 203.4(a)(12) and Robert B.
Avery et al., Higher-Priced Home Lending and the 2005 HMDA Data, FED.
RES. BULL. (Fed. Reserve Bd., Wash., D.C.), Sept. 8, 2006 at A123-24,
available
at
http://www.federalreserve.gov/pubs/bulletin/2006/hmda/
bull06hmda.pdf); see also Aleo & Svirsky, supra, at 1–8 (setting forth a
comprehensive definition of subprime mortgages).
My point here is not that all subprime lenders engaged in predatory
lending, or that subprime lending is equivalent to predatory lending, but
rather that predatory lending was quite prevalent among subprime lenders.
The distinction between the two has been explored at length elsewhere. See
NAT’L PREDATORY LENDING TASK FORCE, U.S. DEP’T. OF HOUS. AND
URBAN DEV. & U.S. TREASURY DEP’T., CURBING PREDATORY HOME
MORTGAGE LENDING 17 (2000), available at http://www.huduser.org/
Publications/pdf/treasrpt.pdf [hereinafter PREDATORY LENDING REPORT];
JAMES H. CARR & LOPA KOLLURI, FANNIE MAE FOUNDATION, PREDATORY
LENDING: AN OVERVIEW 5–6 (2001), available at http://www.knowledge
plex.org/kp/text_document_summary/article/relfiles/hot_topics/Carr-Kolluri.
pdf; Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for
the Rise in Foreclosures and Abandoned Properties, 2008 UTAH L. REV.
1169, 1174–75 (2008).
2
See infra text accompanying notes 69–81. Loan officers, mortgage
brokers and other originators were responsible at the ground level for
working with borrowers and preparing loan applications. See FINDING A
MORTGAGE FOR YOUR NEW HOME: BANKS VS. MORTGAGE BROKERS,
available
at
http://homebuying.about.com/cs/mortgagearticles/a/home_
lenders.htm. These terms are often used interchangeably. See infra note 44
(discussing the various ways in which originators and banks worked together
to fund mortgages).
3
For instance, Ameriquest and its affiliate Argent seem to have followed
FISHER REVISED.DOC
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123
underwrite carefully because the funding lenders rarely kept the
loans in their own portfolios, but rather assigned them to
upstream purchasers for packaging into pools of mortgagebacked securities.4
Many of those perpetrating these deceptions employed target
marketing techniques to generate business. “Target marketing”
refers to the practice of developing profiles of desired consumers
and using those profiles to designate an audience for a product
these practices. See infra note 69 and accompanying text.
4
See Kathleen C. Engel & Patricia McCoy, Turning a Blind Eye: Wall
Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039, 2040–49
(2007); Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO
L. REV. 2185, 2207–13 (2007); Patricia McCoy & Elizabeth Renuart, Legal
Infrastructure of Subprime and Nontraditional Home Mortgages 34–40 (Joint
Ctr. for Hous. Studies, Working Paper No. UCC08-5, 2008), available at
http://www.jchs.harvard.edu/publications/finance/understanding_consumer_cr
edit/papers/ucc08_5_mccoy_renuart.pdf; Benjamin J. Keys et al., Did
Securitization Lead to Lax Screening? 3 (Dec. 2008) (unpublished
manuscript, available at http://ssrn.com/abstract=1093137) (concluding that
portfolios that are more likely to be securitized default around 10–25% more
often than those of a similar risk profile group with a lower probability of
securitization); Amiyatosh Purnanandan, Originate-to-Distribute Model and
the Subprime Mortgage Crisis 2–3 (Apr. 27, 2009) (unpublished manuscript,
available at http://ssrn.com/abstract=1167786).
For an explanation of the structure of securitized trusts, see NOMURA
FIXED INCOME RESEARCH, NOMURA SEC. INT’L, INC., MBS BASICS (2006),
available at http://www.securitization.net/pdf/Nomura/MBSBasics_31Mar06.
pdf and Charles K. Whitehead, The Evolution of Debt: Covenants, The Credit
Market, and Corporate Governance, 34 J. CORP. L. 641, 655–56 (2009)
(“Banks . . . became less interested in holding loans to their maturity in light
of the growing ability to enhance returns by selling loan interests to
others.”).
I use the past tense to refer to subprime lending because most subprime
lending has ceased in the past couple of years. See Peter M. Zorn et al.,
From FHA to Subprime and Back, available at http://ssrn.com/abstract=
1365401. For example, twenty of the largest twenty-five subprime lenders are
no longer operating: some filed bankruptcy, some failed or are in
receivership, while others were purchased by larger entities. See John Dunbar
& David Donald, Who’s Behind the Financial Meltdown?, CENTER FOR
PUBLIC INTEGRITY, May 6, 2009, http://www.publicintegrity.org/
investigations/economic_meltdown/articles/entry/1286/.
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124
pitch.5 Employing techniques ranging from sophisticated
demographic analyses of defined geographic areas to
arrangements with local brokers in low-income urban
neighborhoods, these subprime lenders focused on borrowers
with little knowledge of mortgage lending in general and their
own financial options in particular.6 In fact, many subprime
borrowers apparently were sufficiently creditworthy to qualify
for prime loans, but were steered into higher cost subprime
loans anyway.7 Other lenders—or the brokers working with
them—specifically targeted borrowers already in financial
distress and foreclosure for refinancing.8 Mortgage loans with
unjustifiably high interest rates and higher principal balances
increased the stream of income for lenders and investors, and
resulted in larger commissions for loan officers and brokers;
higher points and fees added to the bottom line. This profit
5
See infra Part I.
This article focuses on the use of target marketing techniques in the
promotion of subprime loans in communities of color. Historically,
communities of color lacked access to mainstream financial institutions and
knowledge of the mortgage market. See Raymond H. Brescia, The Worst of
Times: Perspectives on and Solutions for the Subprime Mortgage Crisis, 2
ALB. GOV’T L. REV. 164, 172 (2009) (citing DAN IMMERGLUCK, CREDIT TO
THE COMMUNITY: COMMUNITY REINVESTMENT AND FAIR LENDING POLICY IN
THE UNITED STATES 87–108 (2004)) (analyzing discriminatory roots of the
subprime crisis and viability of reverse redlining claims under the Fair
Housing Act); Benjamin Howell, Comment, Exploiting Race and Space:
Concentrated Subprime Lending as Housing Discrimination, 94 CAL. L. REV.
101, 128–30 (2006).
Many homebuying and mortgage schemes have been perpetrated on
residents of black neighborhoods through the years, with their form varying
based on conditions at the time. E.g., BERYL SATTER, FAMILY PROPERTIES:
RACEL, REAL ESTATE, AND THE EXPLOITATION OF BLACK URBAN AMERICA
(2009) (recounting contract buying schemes in Chicago in the last century).
7
See CARR & KOLLURI, supra note 1, at 7 (“Credit quality
alone . . . does not fully explain the extreme reliance of black households on
the subprime market. Further research by Freddie Mac reports that as much
as 35 percent of borrowers in the subprime market could qualify for prime
market loans. Fannie Mae estimates that number closer to 50 percent.”);
White, supra note 1, at 688–89; infra, text accompanying note 50.
8
See infra note 103.
6
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125
making ultimately was detrimental to everyone, but perhaps
most of all to the borrowers, a high percentage of whom are or
will soon be in foreclosure.9
To further complicate the picture, African-American and
Latino borrowers took out disproportionately high rates of
subprime loans as compared to white borrowers.10 Of course, not
all subprime lending was predatory, but the incidence of
predatory practices such as those described here was
considerably higher for subprime as compared to prime
lending.11 The available evidence bears out this conclusion.12
A number of national studies, controlling for risk factors like
income and/or credit score, have substantiated the strong
correlation between race and subprime lending.13 Unsurprisingly,
9
See Associated Press, Mortgage Delinquencies Hit Record High in Q1,
N.J. STAR LEDGER, May 28, 2009 (“A record 12 percent of homeowners
with a mortgage are behind in their payments or in foreclosure . . . . At the
same time, almost half of all adjustable-rate loans made to borrowers with
shaky credit were past due or in foreclosure.”); Shane M. Sherlund, The
Past, Present, and Future of Subprime Mortgages 17 (Fed. Res. Bd.,
Working Paper No. 2008-63, 2008) available at http://www.federalreserve.
gov/Pubs/feds/2008/200863/200863pap.pdf. (“[M]ore recently originated
subprime loans are more likely to default, well ahead of their first mortgage
rate resets, and less likely to prepay (i.e., to refinance).”).
10
Brescia, supra note 6, at 173.
11
See PREDATORY LENDING REPORT, supra note 1. It is not my intent to
elide the distinction between predatory and subprime lending, but it is not a
primary focus of this paper. See supra note 1.
12
See infra text accompanying notes 70–90. The practices described
occurred almost exclusively with subprime and Alt-A loans, not prime loans.
See David Reiss, Regulation of Subprime and Predatory Lending,
INTERNATIONAL ENCYCLOPEDIA OF HOUSING AND HOME, available at
http://works.bepress.com/cgi/viewcontent.cg?.article=1027&context=david_
reiss.
13
See White, supra note 1, at 687–89; DEBBIE GRUENSTEIN BOCIAN ET
AL., CTR. FOR RESPONSIBLE LENDING, UNFAIR LENDING: THE EFFECT OF
RACE AND ETHNICITY ON THE PRICE OF SUBPRIME MORTGAGES 3 (2006)
available at http://www.responsiblelending.org/mortgage-lending/researchanalysis/unfair-lending-the-effect-of-race-and-ethnicity-on-the-price-ofsubprime-mortgages.html (“Our study analyzed subprime home loan prices
charged to different racial and ethnic groups while controlling for the effects
of credit scores, loan-to-value ratios, and other underwriting factors . . . .
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4/26/2010 11:40 PM
minority borrowers were significantly more likely than white
borrowers both to work with mortgage brokers and to take out
high-cost subprime loans.14 This correlation itself suggests
discrimination under either disparate treatment or disparate
impact theories; that is, African-Americans and Latinos were
either intentionally singled out for the worst loans or have
suffered disproportionately from the effects of facially neutral
lending policies.15 The phenomenon of singling out minorities for
Our findings show that, for most types of subprime loans, African-American
and Latino borrowers are at greater risk of receiving higher-rate loans than
white borrowers, even after controlling for legitimate risk factors.”); see
PREDATORY LENDING REPORT, supra note 1, at 3 (“HUD found that, even
after controlling for neighborhood income (although without controlling [sic]
for credit history or risk), people living in predominantly African-American
communities refinance in the subprime market much more often than people
living in predominantly white communities.”); NAT’L CMTY. REINVESTMENT
COAL., INCOME IS NO SHIELD AGAINST RACIAL DIFFERENCES IN LENDING II:
A COMPARISON OF HIGH-COST LENDING IN AMERICA’S METROPOLITAN AND
RURAL AREAS 3 (2008), available at http://www.ncrc.org/images/stories/
mediaCenter_reports/ncrc%20metro%20study%20race%20and%20income%2
0disparity%20july%2007.pdf (“[A]fter controlling for creditworthiness and
other housing market factors, minorities are receiving a disproportionately
large amount of high-cost loans.”); see generally MARGERY AUSTIN TURNER
& FELICITY SKIDMORE, THE URBAN INSTITUTE, MORTGAGE LENDING
DISCRIMINATION: A REVIEW OF EXISTING EVIDENCE (1999) available at
http://www.urban.org/UploadedPDF/mortgage_lending.pdf
(reviewing
existing studies and evidence).
14
[A] significant factor causing minorities to pay higher mortgage
rates is their greater likelihood of getting a mortgage through a
broker rather than by dealing directly with lenders . . . . [O]ne-half
to two-thirds of the pricing disparity between whites and minority
borrowers results from the greater likelihood that minority borrowers
end up getting mortgages from subprime lenders . . . .[Minority
borrowers] are more likely to borrow from lenders that specialize in
subprime mortgages . . . and more likely to borrow through brokers
interacting with wholesale lenders.
White, supra note 1, at 687–88.
15
This article does not delve into fine points of the doctrine of disparate
treatment or disparate impact discrimination, which others have assessed at
length. See, e.g., Timothy C. Lambert, Comment, Fair Marketing:
Challenging Pre-Application Lending Practices, 87 GEO. L.J. 2181 (1999).
FISHER REVISED.DOC
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predatory loans has been dubbed “reverse redlining.”16 This is a
reference to an inversion of the older practice of “redlining,” or
excluding minority neighborhoods altogether from mortgage
lending.17 Several state and local governments—in addition to
nonprofits and private plaintiffs—have sued subprime lenders
and brokers for engaging in these activities, alleging violations
of the federal Fair Housing and Equal Credit Opportunity Acts
and, in many cases, state consumer fraud statutes.18
The term racialized consumer fraud, as used in this article,
refers to the practice of aiming the most deceptive or
unconscionable lending practices at minorities. This article
focuses not only on evidence of this phenomenon, or on the link
between race and consumer fraud, but also on the extent to
16
See, e.g., City of Baltimore v. Wells Fargo Bank, N.A., No. L-08-62,
2009 U.S. Dist. LEXIS 56794, at *1 (D. Md. July 2, 2009) (motion to
dismiss denied July 2, 2009); City of Baltimore v. Wells Fargo Bank, N.A.,
__ F. Supp. 2d __, 2010 WL 46401 (D. Md., Jan. 6, 2010) (granting motion
to dismiss); see also Johnson, supra note 1, at 118127 (examining costs of
foreclosures to cities, and current legal responses, including nuisance suits
filed by Cleveland and Buffalo, as well as the Baltimore litigation against
Wells Fargo).
17
Assocs. Home Equity Servs. v. Troup, 778 A.2d 529, 537 (App. Div.
2001) (“The term ‘redlining’ is derived from the actual practice of drawing a
red line around designated areas in which credit is to be
denied. . . . Congress has reported that ‘reverse redlining’ . . . [is] the
targeting of residents of those same communities for credit on unfair terms.”)
(citations omitted); see also Howell, supra note 6, at 105–16 (recounting
history of “America’s Racial Geography,” including redlining).
18
See NAACP v. Ameriquest Mortgage Co., No. SACV 07-0794 AG,
2009 U.S. Dist. LEXIS 66117 (C.D. Cal. Jan. 12, 2009); Wells Fargo, 2009
U.S. Dist. Lexis at 56794; Commonwealth v. H&R Block, Inc., No. 20082474BLS1, 2008 Mass. Super. LEXIS 427 (Super. Ct. Nov. 25, 2008). In
particular, the litigation between the city of Baltimore and Wells Fargo has
received a great deal of recent attention because of its revelations of the sort
of broker and loan officer conduct that is described here. See Julie Bykowicz,
City Can Proceed with Wells Fargo Lawsuit, BALTIMORE SUN, July 3, 2009,
at 10A (stating that federal district court denied motion to dismiss on July 2,
2009). Recently, the State of Illinois filed a similar suit against Wells Fargo.
Amy Merrick, Illinois Sues Wells Fargo Over Mortgage Discrimination,
WALL ST. J., July 31, 2009, available at http://online.wsj.com/article/SB12
4906504187697487.html#.
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which target marketing techniques enabled these practices to
proliferate. Targeting did so by allowing the worst subprime
lenders to concentrate on consumers in narrowly defined
geographic or demographic niches and thus increased the
efficiency of predatory lending, afflicting entire neighborhoods.19
For example, patterns of residential segregation in this country
allow marketers to search by census tract, segments of a zip
code, or similar criteria to derive lists of potential customers that
strongly correlate with race, since residents of a single
neighborhood tend to be of the same race.20 In other words,
address often serves as a proxy for race. This paper also
suggests a possible link between the Furman Center’s findings,
as presented to this conference, of higher rates of subprime
lending to all borrowers living in predominantly minority
neighborhoods21 and the practices described herein; that is, when
majority minority areas are singled out and blanketed with
solicitations for predatory subprime loans, white residents of the
neighborhood can fall prey to these loans as well.22
19
See Alex Kotlowitz, All Boarded Up, N.Y. TIMES MAG., Mar. 8,
2009, at 28; Jenny Schuetz et al., Neighborhood Effects of Concentrated
Mortgage Foreclosures, 14–15 (Furman Ctr. for Real Estate and Urban
Policy, Working Paper 08–03, 2008), available at http://www.furmancenter.
org/files/foreclosures08-03.pdf.
20
See Ruth D. Peterson & Lauren J. Krivo, Race, Residence and Violent
Crime: A Structure of Inequality, 57 U. KAN. L. REV. 903, 908 (2009) (“[I]n
2000, an average of 65.2% of metropolitan blacks (or whites) would have to
move to a different neighborhood to achieve an even residential
distribution.”); see also DOUGLAS S. MASSEY & NANCY A. DENTON,
AMERICAN APARTHEID: SEGREGATION AND THE MAKING OF THE
UNDERCLASS 191 (1993).
21
Vicki Been et al., The High Cost of Segregation: Exploring Racial
Disparities in High-Cost Lending, 36 FORDHAM URB. L.J. 361, 380–81
(2009); see also Kathe Newman & Elvin Wyly, Geographies of Mortgage
Market Segmentation: The Case of Essex County, New Jersey, 19 HOUSING
STUD. 53 (2004).
22
Been et al., supra note 21, at 382 (“[B]lack and white borrowers are
more likely to get a high-cost loan when they are buying a home in a census
tract that has a high proportion of blacks. Blacks and whites, in other words,
appear to be at a mortgage-cost disadvantage by buying homes in
neighborhoods with more black residents.”).
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129
This targeting did not always involve a conscious motive to
discriminate. There is a distinction between target marketing that
explicitly uses race as a criterion and that which uses geography.
A further distinction exists between intentionally using
geography as a proxy for race and targeting low-income urban
neighborhoods, though both created inequitable results in an
entirely predictable fashion, with minority borrowers receiving
much worse loans than similar white borrowers.23
Part I of this article describes the range of current target
market techniques and their adaptation to the subprime lending
context. Part II provides evidence of racialized consumer fraud
in subprime lending, relying on evidence obtained by counsel in
reverse redlining and consumer fraud lawsuits, accounts
published by the media, and reports I have gathered as a
practitioner in the field. Finally, Part III briefly examines
selected lawsuits challenging these practices that have recently
survived motions to dismiss or resulted in preliminary injunctive
relief. Given the evidence, this article argues for increased
enforcement of fair housing and lending laws in the mortgage
lending context. In addition, consumer financial services reforms
must take into account the pernicious use of new targeting
technologies and develop means to stanch it.
I. TARGET MARKETING
A. Introduction
In recent decades marketing techniques have become quite
sophisticated. Marketers can identify audiences most likely to
purchase products ranging from retail goods to financial
services. By dividing the population into niches according to
characteristics such as household composition, income, age,
employment, consumer spending, area of residence, and
language spoken, marketers can pinpoint potential customers
23
This article does not engage in a full doctrinal analysis of disparate
treatment and disparate impact fair housing/fair lending claims regarding
mortgage lending. For that analysis, see Lambert, supra note 15, at 2193–
97.
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with great refinement.24 Financial institutions use this process of
market segmentation,25 as it is called, to solicit those most likely
to apply for various types of mortgages or credit cards.26
Companies typically compile lists of target customers by first
culling their own records to determine who bought similar
products from them in the past.27 Next, they purchase reports on
these individuals from private services such as credit bureaus
that, in turn, have mined information from public records and
other sources to build a profile of each individual in the
database.28 That profile frequently includes residential
information broken down as finely as ZIP + 4.29 The dataset is
24
For example, the major credit bureaus offer these services. See Trans
Union Corp. v. FTC, 81 F.3d 229 (D.C. Cir. 1996); Experian List Services
INSOURCE Enhancement and List Services, http://www.experian.com/
products/insource.html (last visited Sept. 12, 2009); TransUnion Business:
Prescreens and Lists, Sales Lead List Software, http://www.transunion.com/
corporate/business/serviceSolutions/marketingServices/prescreensLists.page
(last visited Sept. 12, 2009). Yahoo also offers marketing services for
businesses. Advertising Your Business with Yahoo! Search Marketing,
http://sem.smallbusiness.yahoo.com/searchenginemarketing/ (last visited Sept.
12, 2009).
25
See ART WEINSTEIN, HANDBOOK OF MARKET SEGMENTATION:
STRATEGIC TARGETING FOR BUSINESS AND TECHNOLOGY FIRMS (3rd Ed.
2004); Ross D. Petty et al., Regulating Target Marketing and Other RaceBased Advertising Practices, 8 MICH. J. RACE & L. 335 (2003).
26
See Dennis Gale, Subprime and Predatory Mortgage Refinancing:
Information Technology, Credit Scoring and Vulnerable Borrowers 9–10
(Fisher Ctr. for Real Estate and Urban Econ., Conference Paper C01-001,
2001), available at http://urbanpolicy.berkeley.edu/pdf/Gale.pdf (analyzing
effects of increasingly sophisticated technology, including “geodemographic
marketing tools” on predatory lending in early years of this decade).
27
Brad Stone, The Debt Trap: Banks Mine Data and Woo Troubled
Borrowers, N.Y. TIMES, October 22, 2008, fig. 1; Lambert supra note 15, at
2187–92 (1999) (describing these marketing techniques and assessing
applicability of fair housing and fair lending claims against their
discriminatory misuse).
28
Lambert, supra note 15, at 2187–88; see also Daniel J. Solove, Data
Mining and the Security-Liberty Debate, 75 U. CHI. L. REV. 343, 355–59
(2008) (discussing constitutional issues with respect to information collection
for data mining).
29
ZIP + 4 is a Post Office system of adding four additional digits after a
FISHER REVISED.DOC
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131
then analyzed to identify additional common characteristics of
the pool of purchasers.30 After purchasing a new dataset of
additional consumers, the companies score individuals in the
new set according to their attractiveness as targets for future
solicitations.31
For example, an entity named Claritas, which is affiliated
with Nielsen (best known for its television audience surveys),
sells demographic information that can be very finely sliced
according to a purchaser’s preferences.32 One of its products,
suggestively called P$YCLE, divides people into fifty-eight
segments, each with a memorable name, including:
29. Retirement Ready—The nearly-retired Americans in
this segment enjoy comfortable lifestyles on middle-class
incomes. Although not asset-rich, members of Retirement
Ready do invest in real estate and variable-rate annuities,
and they’ve built up enough home equity to take out
second mortgages and home equity loans . . . .33
50. Urban Essentials—With their lower-income wages
and low levels of assets, they rank at the bottom for
savings, investments and retirement accounts. And many
of these urban renters go without auto, life or medical
insurance as well. A racially diverse mix of young, urban
singles, couples and families, this group is generally
limited in its financial behavior to taking out student and
zip code to break the area down into smaller segments to facilitate mail
delivery. See http://en.wikipedia.org/wiki/ZIP_code; see also Direct
Marketing, Mail, Tele, Email and Fax Marketing Programs,
www.directmarketinglists.com/contentpages/mortgage.htm (last visited Sept.
18, 2009) [hereinafter Direct Marketing].
30
Stone, supra note 27, at fig.1.
31
Id.
32
Claritas—P$YCLE Segmentation System, http://www.claritas.com/
claritas/Default.jsp?ci=3&si=4&pn=psycle (last visited Sept. 10, 2009).
P$YCLE data is provided in a format that is designed to easily combine
credit information from the major credit bureaus and other information
sources to allow carefully targeted marketing. Id.
33
CLARITAS, IXPRESS FINANCIAL INSIGHT STANDARD COMPONENTS 162
(2007), available at www.claritas.com/collateral/data/col_ixpress_financial_
db.pdf.
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personal loans and using debit cards at ATMs. . . .34
54. City Strivers—The majority of residents are under 34
years old, have lower-middle incomes and have incomeproducing assets only a quarter of the national average.
Many are in debt paying off student, car or personal
loans—and with their modest bank accounts, they don’t
pursue long-term investments, retirement savings and life
insurance.35
Given the potential for misuse, segmentation becomes
problematic when race, or proxies for race, are incorporated
into defined categories. For instance, the last of P$YCLE’s
niches clearly references predominantly minority urban
populations:
58. Bottom-Line Blues—No segment has fewer incomeproducing assets, and few rank lower when it comes to
income or home ownership. Concentrated in inner-city
neighborhoods, the segment is the address for mostly
young, multi-ethnic singles and single-parent families
living in low-cost apartments.36
While ethnic segmenting is not illegal in itself, and can serve
seemingly legitimate purposes,37 it can be discriminatory when
combined with the other practices.38
34
Id. at 150.
Id.
36
Id. at 151. Arielle Cohen of the New Jersey Institute for Justice calls
this phenomenon “virtual redlining.” Correspondence from Arielle Cohen,
N.J. Inst. for Justice, to Linda E. Fisher, Professor of Law, Seton Hall Law
Sch. (September 23, 2008) (on file with author). This term alludes to the use
of information technology to cordon off demographic segments and deny
them the best credit opportunities. Id.
37
See, e.g., Target Market News, http://www.targetmarketnews.com
(last visited Aug. 27, 2009) (calling itself “The Black Consumer Market
Authority,” which serves as a conduit for products aimed at the black
community). I do not single out Claritas as an example of a particularly bad
actor—their services seem typical. See sources cited supra note 24.
38
See infra text accompanying notes 39–67.
35
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133
B. Target Marketing of Mortgages
As elaborated below, smaller scale, but similar, targeting
operations serve mortgage lenders exclusively and provide
consumer mortgage data to lenders and mortgage brokers.
Public records including recent home sales are merged with
mortgage data so that purchasers can identify prospective
customers for home equity loans or second mortgages.39 These
entities sell targeting lists containing name, address, date of sale,
current market value, loan amount, interest rate, credit score,
and foreclosure status. These lists may also offer telemarketing
scripts.40 Some combine neighborhood demographic and credit
39
See Direct Marketing, supra note 29.
First Mortgage File. This file contains homeowner information
dating back as early as the [sic] late 1988—over 50 million
properties spread across 50 states. From this database, selections can
be made on mortgage amount, origination date, lendable equity,
lender name and current home values. This database is primarily
used to identify homeowners with equity in their property that are
candidates for home equity loans.
Id. The company’s “Mortgage Profiling Credit Data” includes “Homeowner
Mortgage Leads,” described in relevant part as follows:
Sub-Prime: Sub-Prime auto prospects also make good home loan
refinance candidates. They are aware that their credit is not perfect
and are more flexible when it comes to interest rates, points, and
loan fees they are willing to pay to obtain financing.
Id.
40
See id. Another entity called Best Rate Referrals also sells mortgage
scripts for telemarketers pitching targeted loans:
Our mortgage lead generation system and telemarketing mortgage
scripts have helped numerous clients increase their business
nationwide through telemarketing . . .
Quick Mortgage Scripts: Our telemarketing mortgage scripts prompt
immediate interest in the homeowner and produce results. These
mortgage scripts are perfect for loan officers and telemarketers. We
have scripts for all types of mortgage marketing campaigns such as
reverse mortgage, refinance, debt consolidation, ARMs, and real
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data to create a credit profile for similar localities sharing
chosen characteristics.41 Thus, racial targeting can be easily
accomplished without knowing the race of individuals, given the
strong correlation between geography and race.42
On an even smaller scale, mortgage brokers also engage in
target marketing. They originated—or created—the majority of
mortgages in this country in the past decade, with even higher
percentages of subprime originations.43 Many subprime lenders
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Telemarketing scripts, http://www.bestratereferrals.com/consulting.html (last
visited Sept. 18, 2009) (emphasis in original).
41
Direct Marketing, supra note 29. The Sinclair Company, for instance,
informs customers: “[b]y combining summarized credit statistics with other
demographic selections you can identify the best candidates for your special
offer.” Id. But it also warns: “[l]ists developed with statistics must be used in
a positive or inclusive manner. The information cannot be used to deny or
exclude customers from any offer.” Id.
42
See supra text accompanying note 20.
43
See KEITH ERNST ET AL., CTR. FOR RESPONSIBLE LENDING, STEERED
WRONG: BROKERS, BORROWERS, AND SUBPRIME LOANS 6 (2008), available at
http://www.responsiblelending.org/mortgage-lending/research-analysis/
steered-wrong-brokers-borrowers-and-subprime-loans.pdf.
While mortgage brokers are active across the entire credit spectrum,
they have played a major role in the rapid growth of the subprime
mortgage market. . . . This growth was driven by the willingness of
FISHER REVISED.DOC
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135
worked primarily with brokers, rather than employing their own
loan officers to originate loans.44 Through their wholesale
lending divisions, the lenders relied on a variety of arrangements
to fund loans originated by brokers.45 Brokers were paid with
commissions or other premiums.46 The brokers in turn employed
numerous methods to find customers, including targeted
techniques such as those previously described.47 Notably, they
subprime lenders to rely on third-party originators. Rather than build
brick and mortar storefronts, subprime lenders have recruited
brokers and, to a lesser degree, correspondent lenders to market and
originate their loans. Together, the loans originated by these thirdparty originators are described as “wholesale” loans. . . . By
2006, . . . estimates from trade publications reported that such loans
accounted for 63 to 81 percent of all subprime loans.
Id.
44
Id. Lenders would reach out to brokers in a number of different ways,
including online business. Interview with Jon Steingraber, Realtor, in
Newark, N.J. (Sept. 2008). In some cases, lenders would advertise the
availability of mortgages with specified terms to borrowers meeting certain
profiles; brokers would respond if they had contact with a borrower meeting
the criteria. Id.
45
See Dominick A. Mazzagetti, Dealing with Mortgage Loan Brokers:
Legal and Practical Issues, 114 BANKING L.J. 923, 932 (1997). This excerpt
describes the varieties of lender/broker (often referred to as “originator”)
relationships, including:
Category 1: The lender purchases whole loans after closing. The
lender provides little or no input during the origination process.
Category 2: The lender purchases whole loans after closing but has
substantial input in underwriting, compliance, and documentation.
Category 3: The lender ‘table funds’ loans originated and closed in
the name of the originator.
Category 4: The lender ‘table funds’ loans originated and closed in
the name of the lender.
Category 5: The lender becomes involved in loans immediately after
application, issues commitments in its own name, and closes the
loans in its own name.
Id.
46
See infra text accompanying note 99.
47
On September 23, 2008, Arielle Cohen posted an inquiry on
LinkedIn—“How do mortgage brokers get leads?”—and received these
responses:
FISHER REVISED.DOC
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also depended heavily on local resources, such as realtors and
neighborhood word-of-mouth.48 Lenders could also choose to do
1. Hi. You can do title searches with title companies. Just give them
the criteria for the type of geography, tax liens, foreclosures, loan
amounts, lender, even Spanish speakers, loan origination dates etc.
They can usually do a detailed search for free. Of course they expect
your business [sic].
2. I’ve used leads generated from databases with homeowner
information, along with those that contained credit information. I’m
not sure the exact type of data you are looking for but feel free to
contact me with any specific questions you may have.
3. I agree with the above responses . . . . Most of the mortgage
brokers and loan officers that I work with get their leads/referrals
from realtors. However, I am also a great source of leads for
them... my company provides leads based on a number of variables
and criteria and are already scrubbed through the DNC [do not call]
list. These databases utilize category searches based on zip codes,
existing lender information, current interest rate and loan types, etc.
4. This is one of the biggest mailing list suppliers in the country:
http://www.usadata.com/?gclid=CKvs7uiI45UCFQgRFQodixHGfQ
[.] You can refine the search list as much as you want. The more
detailed list you want the more the list will cost. Meaning if you
want a list of men and women the price might be X. But if you want
a list of men and women between 25-35 the list might cost you
XXX. A lot of information can come with the list and it costs money
for each additional item. I am interested in what your [sic]
investigating. Don’t you work for a non-profit group.
5. At height of the market the most successful mortgage brokers
were getting the majority of their leads from strong relationships
with realtors. Although the amount of sales activity in almost every
market has decreased this is still the case. However, in this
environment you will need to make sure to develop a strong lender
network in order to capitalize on those relationships. It will also be
imperative to affiliate yourself with an FHA lender, as I believe this
will fill the void of the sub-prime business. In regards to using
databases, I have had clients that have been successful using leads
from title companies and lead generation companies. You can also
combine these lists with a refractive dialer, to maximize the results.
Posting of Arielle Cohen to LinkedIn profile page, http://www.linkedin.com
(Sept. 23, 2008) (on file with the author).
48
See id. In my own experience litigating predatory lending cases, the
brokers involved had connected with the borrower through local
FISHER REVISED.DOC
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137
business predominantly with brokers in selected neighborhoods.
The targeting techniques described in this article made
identification of those brokers simple.
C. Targeting of African-American and Latino Borrowers for
Subprime Mortgages
As described above, mortgage brokers played a particularly
pivotal role in subprime lending to minorities during the peak
years of subprime lending.49 In addition to obtaining lists of
potential customers in a designated area, the brokers utilized ties
to local institutions and informal networks to tailor their sales
pitches to residents’ perceived preferences and affiliations.50
Brokers’ neighborhood ties gave them direct access to
potential customers who might not respond as readily to direct
mail or telemarketing solicitations. Moreover, subprime brokers
frequently were of the same race as most residents of the
neighborhoods in which they worked, increasing the likelihood
that they would be trusted.51 The limited financial options
available to most black borrowers created vulnerability to these
pitches, augmenting their attractiveness.52 Moreover, borrowers’
neighborhood networks. See, e.g., Complaint at ¶ 31, Gibson v. Bethea, No.
L–5364–08 (N.J. Super. Ct. Law Div, Essex County Ct. 2008); Ted
Sherman, Investors File Lawsuit Alleging Mortgage Con, N.J. STAR LEDGER,
July 1, 2008.
49
See supra text accompanying notes 1538.
50
I was involved in a case in which the pastor of a church was himself a
mortgage broker peddling subprime loans to parishioners and others. Pitman
v. Stroedecke, et al., No. ESX-L-4083 (Sup. Ct. of N.J., Essex County,
2004). In other cases, local real estate developers worked hand in hand with
mortgage brokers to convince local homebuyers to trust them, because they
shared the same race and/or religion. E.g., Gibson Complaint, supra note 48,
at ¶ 36; see also Philip Shishkin, When Rescue Means Eviction, WALL ST. J.,
Feb. 25, 2009 (featuring a case I litigated in New Jersey and recounting other
cases around the country in which real estate brokers and developers gained
the trust of homeowners in trouble, bought their homes, and defrauded them).
51
See Barkley v. Olympia Mortgage Co., No. 04-CV-875, 2007 WL
2437810, at *11 (E.D.N.Y. Aug. 22, 2007); Hargraves v. Capital City
Mortgage Corp., 140 F. Supp. 2d 7, 21–22 (D.D.C. 2000).
52
See Dorothy A. Brown, Shades of the American Dream, 87 WASH U.
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lack of financial sophistication also increased the likelihood that
they would trust and believe salespeople who seemed genuinely
concerned for their welfare. When the homeowners were facing
bankruptcy or foreclosure, desperation often overrode their
better judgment.53
In one variation, predatory property flippers, working with
mortgage brokers and others, would solicit first-time minority
homebuyers with “one-stop shopping” schemes that involved
purchasing and financing sales of substandard homes.54 The
flippers make false promises to the buyers and misrepresent the
condition and cost of the homes. The brokers and their coconspirators then put the borrowers into predatory loans. Both
use the targeting techniques described in this article to lure in
unsuspecting buyers. A typical example is described in Barkley
v. United Homes.55 First, the flippers used targeted advertising
56
“featuring minority consumers.” They also “placed ads in the
Caribbean Life community newspaper that serves the West
Indian immigrant community, while not advertising in
community papers that are part of the same newspaper chain but
serve primarily white neighborhoods.”57 Finally, they used
“race-conscious outreach strategies” such as pairing salesmen
L. R. (forthcoming 2010) (manuscript at 20, 4950, available at
http://www.law.emory.edu/fileadmin/faculty_documents/dabrown7/Shades_La
w_Review_Version.doc_compatability_Mode_.pdf) (discussing [at n. 58 &
71] reasons why black renters have been less likely to apply for mortgages
than whites, and why, when investing, blacks have often preferred to invest
conservatively in real estate as opposed to stocks or bonds).
53
This has frequently been my own experience, as well as that of
consumer attorneys in general. See, e.g., Colson v. Reed, No. L-5294-97
(Sup. Ct. of N.J., Essex County), as well as the cases referred to supra.
54
See Barkley, 2007 WL 2437810. I have litigated similar cases in the
Newark area. See, e.g., Gibson v. Bethea, No. L–5364–08 (N.J. Super. Ct.
Law Div, Essex County Ct. 2008).
55
Barkley, 2007 WL 2437810 (denying motion to dismiss in property
flipping case with claims against scammers under 42 U.S.C. §§ 198182,
1985(3)).
56
Id. at *11.
57
Id.
FISHER REVISED.DOC
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139
and buyers of the same race.58 I have seen several such examples
in my own litigation practice in Newark.59
Certain subprime lenders bypassed brokers and directly
targeted their products to specific African-American and
Hispanic divisions, euphemistically referred to as “Emerging
Markets Departments.”60 Recent affidavits from former Wells
Fargo employees submitted in the City of Baltimore v. Wells
Fargo litigation, discussed infra, provide details.61 For instance,
58
Id. Other documented examples in reported cases include Hargraves v.
Capital City Mortgage Corp., 140 F. Supp. 2d 7, 21–22 (D.D.C. 2000)
(denying summary judgment where defendant mortgage company located its
offices in predominantly black communities, used local brokers, distributed
targeted flyers and ads in the same neighborhoods, and “exhibited photos of
famous black leaders standing with the company’s president in an alleged
‘attempt to convey a message to African-Americans that [the president] could
be trusted.’”); and Honorable v. Easy Life Real Estate Sys., Inc., 182
F.R.D. 553, 561 (N.D. Ill. Sept. 30, 1998) (certifying class in Fair Housing
Act case and relying on allegations that “defendants preyed on the plaintiff
class by targeting their advertising to unsophisticated, first-time home buyers
in the racially segregated Austin community, materially misrepresenting the
condition and value of homes offered for sale . . .”).
59
See Complaint, Gibson v. Bethea, No. L–5364–08 (N.J. Super. Ct.
Law Div, Essex County Ct. 2008).
60
See, e.g., Business Wire, Option One Appoints Larry Gilmore Vice
President of Emerging Markets, ALL BUS., April 7, 2006, http://www.all
business.com/banking-finance/banking-lending-credit-services-mortgage/
5466275-1.html.
Minority homeownership rates are still a fraction of that of the
general population, and shifting demographics and demographic
growth among all minorities make understanding the needs of
emerging markets more important now than ever . . . . “We’re
developing a long-term strategy in Emerging Markets that will
include the new type outreach and partnerships to provide the best
quality services,” said Gilmore. “We will also look at developing
unique products to meet the needs of our country’s diverse
population.”
Id.
61
See Affidavit of Elizabeth Jacobson, Mayor of Baltimore v. Wells
Fargo Bank, N.A., No. 08-cv-00062 (D. Md. June 1, 2009) (opposing Wells
Fargo’s motion to dismiss and submitted as Attachment M to Baltimore’s
Amended Complaint); Affidavit of Tony Paschal, Wells Fargo, No. 08-cv-
FISHER REVISED.DOC
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the Emerging Markets manager informed one employee that she
was “too white” to appear at a “wealth building” seminar in an
African-American community and discuss “alternative lending,”
the bank’s code for subprime lending.62 Another Wells
employee, who worked in a division targeting zip codes with
predominantly black populations, related that fellow employees
referred to subprime loans as “ghetto loans.”63 Further, he
explained that the bank had software to generate marketing
materials for minorities, including a flyer “to persons speaking
the language of ‘African-American.’”64
The lenders tailored their advertising and sales pitches to
these populations, and operated out of branch offices in or near
targeted neighborhoods.65 Some would blanket the neighborhoods
with flyers featuring photos of black or Latino customers and
public figures.66 Again, while targeting is not per se
00062 (opposing Wells Fargo’s motion to dismiss and submitted as
Attachment N to the Amended Complaint); see also Complaint, People v.
Wells Fargo & Co., No. 09CH26434 (Ill. Ch. Div., Cook County Ct. July
31,2009).
62
Jacobson Affidavit, supra note 61, at ¶ 29.
63
Pascal Affidavit, supra note 61, at ¶ 8.
64
Id. at ¶ 11.
65
See Ramirez v. Greenpoint Mortgage Funding, Inc., No. C080369,
2008 WL 2051018, at *1 (N.D. Cal. May 13, 2008) (noting lender branches
were located in white neighborhoods, while broker outposts were located in
minority neighborhoods, with brokers frequently charging more fees than
lenders); Johnson v. Equicredit Corp. of Am., No. 01C5197, 2002 WL
448991, at *1 (N.D. Ill. March 22, 2002) (noting prime lender Bank of
America located more often in white neighborhoods, while its subprime
subsidiary Equicredit had offices almost exclusively located in minority
neighborhoods). Two students of mine who were former employees of
subprime lenders confirmed these lender tactics with me, as did Tamara
Loatman-Clark, the attorney I have worked with who was interviewed by the
American News Project. Interviews with Aaron Gould (Dec. 22, 2008); D.B.
(July 15, 2007) and Tamara Loatman-Clark (May 4, 2009), Newark, New
Jersey.
66
See Hargraves v. Capital City Mortgage Corp., 140 F. Supp. 2d 7,
2122 (D.D.C. 2000). A former student of mine described a situation in
which acquaintances blanketed a minority neighborhood with racially targeted
flyers at the behest of a local mortgage broker. See Interview with Aaron
FISHER REVISED.DOC
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141
discriminatory, it easily becomes so when the loans offered
contain terms significantly worse than those offered to similarly
situated white borrowers, which was the norm in the instances I
recounted.67
II. CONSUMER FRAUD IN PREDATORY SUBPRIME LENDING
The phenomenon of predatory subprime lending is by now
well documented and has been defined and described in detail
68
elsewhere. Although no single definition of predatory lending
exists, the phenomenon generally encompasses a variety of
deceptive and unconscionable commercial practices that also
constitute violations of unfair and deceptive acts and practices—
or consumer fraud—statutes.69 In the mortgage lending context,
these practices usually began with solicitations and aggressive,
overbearing sales tactics employed against a financially
unsophisticated target population. Typically, borrowers in
foreclosure or those with low incomes but substantial equity in
their homes would be solicited for refinances. For example, the
Ninth Circuit upheld a jury verdict in a fraud class action
against First Alliance Mortgage Company, which employed
Gould, supra note 65.
67
See infra note 117 and accompanying text (describing the preliminary
injunction obtained by the Massachusetts Attorney General in a reverse
redlining suit against subprime lender Option One and H & R Block); see
also Press Release, Fed. Trade Comm’n, Mortgage Lender Agrees to Settle
FTC Charges that it Charged African-Americans and Hispanics Higher Prices
for Loans (Dec. 16, 2008), available at http://www. ftc.gov.
68
See generally RICHARD BITNER, CONFESSIONS OF A SUBPRIME
LENDER: AN INSIDER’S TALE OF GREED, FRAUD, AND IGNORANCE (2008)
(detailing the rise and fall of the subprime lending market); Johnson, supra
note 1, at 117880 (explaining predatory subprime loans); Frank Lopez,
Using the Fair Housing Act to Combat Predatory Lending, 6 GEO. J.
POVERTY L. & POL’Y 73, 76–80 (1999).
69
See generally CAROLYN CARTER & JONATHAN SHELDON, UNFAIR AND
DECEPTIVE ACTS AND PRACTICES (Nat’l Consumer Law Ctr. 7th ed., 2008).
A number of federal statutes, such as the Truth in Lending Act, 15 U.S.C.
§ 1601 et seq., may also apply. E.g., Real Estate Settlement Procedures Act
(RESPA), 12 U.S.C. § 1201 et seq.
FISHER REVISED.DOC
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142
scripted sales pitches to mislead mostly elderly borrowers about
loan costs.70 The jury also found Lehman Brothers liable for
aiding and abetting the fraud by financing the loans.71
Frequently, outright fraud was involved in the origination of
predatory loans: brokers or loan officers falsified income and
asset information on borrowers, and ordered inflated appraisals
that overstated the value of the property.72 Over and over again
in my litigation practice representing borrowers who unwisely
trusted local brokers, I have seen mortgage applications filled
out by brokers and loan officers—without borrower
involvement—that contain wild exaggerations of the borrowers’
income and assets.73 As a result of this fraud, the homeowners
70
See, e.g., In re First Alliance Mortgage Co., 471 F.3d 977 (9th Cir.
2006) (upholding jury verdict in fraud class action against mortgage company
that employed scripted sales pitch to mislead borrowers about loan costs; also
upholding verdict against Lehman Bros., which financed the loans).
Moreover, it should be noted that subprime borrowers were not
unwittingly pulled into bad loans, and some seem to have overstated their
income—rather than having a mortgage broker fill out their loan application.
However, I have not seen evidence of that in my own practice representing
borrowers in predatory lending litigation in New Jersey, although I do see
evidence of broker fraud regularly. See Kareem Fahim, In New Jersey,
Dreams of a Better Life Dashed by Foreclosure Crisis, N.Y. TIMES, May 19,
2009.
71
First Alliance, 471 F.3d at 989.
72
See, e.g., Road to Ruin: Mortgage Fraud Scandal Brewing, Huffington
Post, May 13, 2009 available at http://www.huffingtonpost.com/
2009/05/12/road-to-ruin-mortgage-fra_n_202016.html. Tamara LoatmanClark, a Brooklyn attorney and former employee of subprime lender Argent,
is interviewed in this video about the fraudulent practices she observed at
Argent; I am also interviewed. Id.; see also DENISE JAMES ET AL.,
MORTGAGE ASSET RESEARCH INST., ELEVENTH PERIODIC MORTGAGE FRAUD
CASE REPORT TO: MORTGAGE BANKERS ASSOCIATION (2009) (reporting that
incidents of mortgage fraud increased 26% between 2007 and 2008),
available at http://www.marisolutions.com/pdfs/mba/mortgage-fraud-report11th.pdf.
73
This practice has been documented by the FBI and others. See, e.g.,
FED. BUREAU OF INVESTIGATION, 2008 MORTGAGE FRAUD REPORT “YEAR IN
REVIEW” (2009) [hereinafter FBI 2008 REPORT], available at
http://www.fbi.gov/publications/fraud/mortgage_fraud08.htm#3 (describing
nature and incidence of current fraud schemes). This practice occurred in
FISHER REVISED.DOC
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143
were induced to take out mortgages with onerous terms that
were unsuited to them and impossible to repay.74
Thus, after paying unconscionable closing costs,75 borrowers
were saddled with mortgages whose principal balance exceeded
fair market value and whose terms were not disclosed to them.76
During the peak subprime lending years of 2004 through 2006,77
so-called “exotic mortgages” with high adjustable rates setting in
after a trial period, interest-only mortgages that were negatively
amortizing, and similarly onerous loans were taken on by many
borrowers who lacked a full understanding of the terms of their
loan.78 Moreover, many subprime borrowers actually had credit
scores sufficient to qualify for prime mortgages but were steered
into subprime loans that were more profitable to lenders.79
Others took out refinance loans with high fees that rolled
their unsecured credit card debt into secured debt.80 Indeed,
some lenders promoted this practice as part of their lending
strategy, and encouraged serial refinances because they made
additional fees on each transaction.81 Deceptive sales pitches that
almost every subprime lending case I have litigated in the last five years.
74
See Engel & McCoy, supra note 4 at 2043.
75
See MELISSA HUELSMAN, A BRIEF PRIMER ON PREDATORY LENDING
PRACTICES (ABA General Practice Section Newsletter, Sept., 2005),
available at http://www.abanet.org/genpractice/newsletter/lawtrends/0509/
business/predatorylending.html.
76
Over appraisals resulted in loans that were underwater from the
beginning, because the homes were never worth as much as the inflated
appraisal indicated. See generally BITNER, supra note 68 (discussing appraisal
fraud).
77
See Edmund L. Andrews, Fed Shrugged as Subprime Crisis Spread,
N.Y. TIMES, Dec. 18, 2007.
78
Engel and McCoy, supra note 4, at 2076.
79
See supra note 7.
80
See LISA JAMES & JABRINA ROBERTS, CTR. FOR RESPONSIBLE
LENDING, RISKING HOMES TO PAY OFF CREDIT CARDS 1–2 (2005), available
at
http://www.responsiblelending.org/credit-cards/research-analysis/ip012Risking_Homes_Credit_Cards-1105.pdf.
81
A former student of mine worked for HSBC’s subprime unit several
years ago. Interview with Aaron Gould, HSBC, in Newark, N.J. (Dec. 16,
2008). He described how the bank would draw people into high-interest loans
and solicit them again for mortgage refinancing after the original loans’ terms
FISHER REVISED.DOC
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4/26/2010 11:40 PM
misrepresented the terms and nature of these mortgage products
were frequently used.82 Whether lenders relied on brokers or
their own loan officers to originate loans, they often engaged in
scant underwriting and made few efforts to verify the legitimacy
of the applications and documentation presented to them.83
Because it was more profitable to flip the loans upstream than to
fully confirm the information provided on loan applications, that
step was bypassed and mortgages were quickly assigned to
securitizers.84
Although these widespread practices occurred before the
recent financial meltdown all but eradicated subprime lending, it
should be noted that mortgage fraud, far from abating, has only
85
expanded since the foreclosure crisis began. The perpetrators
became impossible to meet. Id. The strategy was to put borrowers into a
position of increasing financial desperation, which would break down their
resistance to taking out a new loan with unfavorable terms. Id. See also
Daniel Wagner, Bank Employees Protest “Anti-Consumer” Practices, ABC
NEWS,
June
29,
2009,
http://abcnews.go.com/Business/wireStory?
id=7961452 (“Bank of America and other large banks encouraged customer
service representatives and tellers to burden consumers with debt and enroll
them in high-fee programs . . . .”).
82
Engel & McCoy, supra note 4, at 2088; see also supra text
accompanying notes 49–57.
83
I have frequently seen loan applications containing obviously false
information accepted and funded by subprime and Alt-A lenders. Stories of
cases resulting in convictions around the country are reported daily by The
Mortgage Fraud Reporter, Mortgage Fraud News, http://www.mortgage
fraud.org/journal (last visited Aug. 27, 2009). See also Keys et al., supra
note 4 (listing lax underwriting at origination as a cause of later default).
84
See Engel & McCoy, supra note 4, at 2039–43.
85
See, e.g., FBI 2008 REPORT, supra note 73 (describing nature and
incidence of current mortgage fraud schemes); Press Release, U.S. Dep’t of
Treasury, Federal, State Partners Announce Multi-Agency Crackdown
Targeting Foreclosure Rescue Scams, Loan Modification Fraud, Apr. 6,
2009, available at http://www/treas.gov/press/releases/tg83.htm (describing
incidence of mortgage fraud). Recently, federal and state authorities have
been prosecuting foreclosure rescue scammers both criminally and civilly as
such schemes have proliferated, but I have been involved in litigating these
cases for over ten years. In April of this year, the President also signed into
law the Fraud Enforcement Recovery Act of 2009, which provides expanded
enforcement powers to federal prosecutors in this area. See Fraud
FISHER REVISED.DOC
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145
adapt to the times and craft their pitches to address changing
circumstances. In one variation—which began years ago but has
become quite common recently—mortgage brokers work with
foreclosure rescue scammers to target homeowners in
foreclosure, offering to “temporarily” purchase their homes and
rent them to the victims while they attempt to repair their credit.
A straw purchaser takes title and finances the purchase with a
mortgage arranged by the broker. The scammers then leave the
former owners without title to the home, may evict the tenants
and resell the property, use the sale to skim equity from the
home and then let it fall into foreclosure, or otherwise profit
from the transaction at the expense of the former homeowners.86
This pattern, as described in the New York case of Watson v.
Melnikoff, is typical and has been replicated across the country.87
Another prevalent variation involves loan modification
scams.88 In the wake of the widely-publicized efforts of
Enforcement Recovery Act of 2009, Pub. L. No. 111–21, 123 Stat. 1617
(2009); see also Howard Goodman, The Fraud Squad, HUFFINGTON POST,
June 22, 2009, www.huffingtonpost.com/2009/6/22/the-fraud-squad_n_
218910.html (describing the Act and current efforts to attack new mortgage
frauds in South Florida).
86
I have represented numerous clients victimized by similar scams, and
the New Jersey Attorney General’s office is currently proceeding against a
number of large foreclosure rescue rings. See, e.g., Press Release, N.J.
Office of the Attorney General, Attorney General Announces Mortgage Fraud
Lawsuits: 10 Defendants Charged in Two Separate Loan Modification Cases
(July 15, 2009), available at http://www.nj.gov/oag/newsreleases09/pr2009
0715a.html. Similar stories from across the country are common. See also
FBI REPORT, supra note 73 (describing the varieties of mortgage fraud).
87
Watson v. Melnikoff, 19 Misc. 3d 1130(A), (N.Y. Sup. Ct. 2008)
(quieting title in favor of plaintiff and voiding fraudulent mortgage and title
transfer). See also In Re Curriden, No. 05-38352, 2007 WL 2669431 (Bankr.
D.N.J. Sept. 6, 2007). Another current problem for homeowners is that
many subprime lenders failed to escrow for property taxes, leaving borrowers
unaware that their taxes were not being paid. Many tax foreclosures have
resulted. See Editorial, Another Way to Lose the House, N.Y. TIMES, Aug.
27, 2009.
88
See Tara Siegel Bernard, Avoiding Firms that Prey on Troubled
Homeowners, N.Y. TIMES, June 13, 2009; Peter S. Goodman, Subprime
Brokers Back as Dubious Loan Fixers, N.Y. TIMES, July 20, 2009, available
FISHER REVISED.DOC
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government and nonprofit agencies to assist homeowners to
modify their mortgages, a new generation of scammers has
rushed in.89 Many are former mortgage brokers90 who falsely
represent to borrowers that they must pay to obtain the services
of a loan expert. In this way, the scammers demand substantial
upfront fees.91 At best, these scammers do little more for
borrowers than make a few phone calls, or engage in other
efforts that borrowers could obtain elsewhere at no cost.92 At
worst, they just take the money and run, leaving homeowners
with false hopes and no avenue of redress.93
III. THE RACIALIZATION OF CONSUMER FRAUD & REVERSE
REDLINING
Predatory lending and consumer fraud occur when loan
terms and fees cross the threshold of unconscionability, or when
borrowers are enticed by deceptive sales practices and
misrepresentations.94 Unsurprisingly, these practices have often
been aimed at distinct segments of the population thought to be
financially vulnerable—minorities, seniors, and sometimes single
women.95 As recounted previously, black and Latino borrowers
at http://www.nytimes.com/2009/07/20/business/20modify.html.
89
See Bernard, supra note 88.
90
See Goodman, supra note 88.
91
See Bernard, supra note 88.
92
See Goodman, supra note 88.
93
See Bernard, supra note 88. Yet another recent variation involves
targeting senior citizens for reverse mortgages, by sending them officiallooking correspondence that appears to be from a government agency, cites
various federal laws, and seems to offer government benefits. For example,
a Sept. 4, 2009 letter from HECM Disbursement, Washington D.C., entitled
Section 255 of the National Housing Act (12 U.S.C. 1715z-20) is amended:
Notification of Eligibility: Identification Papers Issued to Received as Filed, is
actually from the Eagle Nationwide Mortgage Company (on file with author).
94
See supra text accompanying notes 68–69.
95
See PEDATORY LENDING REPORT, supra note 1, at 4–5 (“[M]inorities,
women, and the elderly bear the brunt of abusive mortgage lending practices,
particularly in predominantly minority or low-income neighborhoods that do
not have access to mainstream sources of credit.”).
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147
in particular received a disproportionate share of the highest-cost
subprime mortgages with less favorable terms than those made
to similar white borrowers, even after controlling for risk-related
factors.96 Targeted marketing of these mortgages amplified and
intensified the worst lending practices by increasing both the
pool of borrowers and their susceptibility to manipulative sales
pitches.
As set forth in many of the recent reverse redlining
complaints surviving motions to dismiss, subprime lenders
facilitated discriminatory lending by using discretionary pricing
policies that encouraged mortgage brokers and loan officers
working in minority neighborhoods to oversell.97 For instance,
brokers received yield spread premiums, a form of commission,
for placing borrowers into loans with higher interest rates than
par, the rate for which the borrowers actually qualified.98 The
96
See BOCIAN ET AL., supra note 13, at 3; PREDATORY LENDING
REPORT, supra note 1, at 3; see also Paul Jackson, NY AG: Mortgage
Brokers Admit to Fee Gouging, Discrimination, HOUSINGWIRE, Jan. 6, 2009,
http://www.housingwire.com/2009/01/06/ny-ag-firms-settle-predatory-lending
-claims/ (reporting that as part of settlement with the New York Attorney
General, brokers admitted charging higher fees to hundreds of black and
Latino borrowers).
97
See Brescia, supra note 6 (analyzing discriminatory roots of the
subprime crisis and viability of reverse redlining claims under the Fair
Housing Act); John L. Ropiequet & L. Jean Noonan, Recent Developments in
Fair Lending: The Dawn of a New Litigation Era?, 64 BUS. LAW. 563, 564
(2009); Stuart T. Rossman, The Foreclosure Crisis: Can Impact Litigation
Provide a Response?, in 13TH ANNUAL CONSUMER FINANCIAL SERVICES
LITIGATION INSTITUTE COURSE HANDBOOK, 195, 20204 (Practicing Law
Inst. Ed., 2008); Christopher J. Willis & Catherine S. Bernard, Recent
Subprime Mortgage Lending Class Actions Under the Equal Credit
Opportunity Act and Fair Housing Act: An Analysis of Class Certification
Issues, in 13TH ANNUAL CONSUMER FINANCIAL SERVICES LITIGATION
INSTITUTE COURSE HANDBOOK, 163, 165 (Practicing Law Inst. Ed., 2008).
Although the discretionary pricing policies were applicable to all borrowers,
brokers and loan officers working in minority neighborhoods allegedly
pushed local borrowers harder than white borrowers were pushed to take out
high-cost loans that yielded higher commissions. See, e.g., Martinez v.
Freedom Mortgage Team, Inc., 527 F. Supp. 2d 827, 835 (N.D. Ill. 2007).
98
Loan officers and brokers could be entitled to a percentage of the
difference in revenue to the lender resulting from the higher rate loan. Ware
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discretionary pricing policies also allowed brokers to profit from
charging additional non-risk based fees99 to borrowers.100 Brokers
were therefore incentivized to steer unwitting borrowers,
including those with good credit who could have qualified for
better terms, to the highest-cost loan products.101
Making matters worse, brokers—and some lenders—
frequently targeted minority neighborhoods because they
assumed residents would respond favorably to their pitches for
these high-cost loan products.102 This is because borrowers with
few financial options, or those unaware of other options, were
more likely to take out higher-rate loans through subprime
originators working in their neighborhoods.103 Moreover,
brokered loans tend to cost more than direct loans—generating
fees for brokers and lenders—and loans given in minority
neighborhoods were more likely to be brokered than in white
104
neighborhoods. The lenders funding these loans allegedly
v. Indymac Bank, 534 F. Supp. 2d 835, 839 (N.D. Ill. 2008).
99
See White, supra note 1.
100
Guerra v. GMAC LLC, No. 2:08–cv–01297, 2009 U.S. Dist. LEXIS
449153, at *4 (E.D. Pa. Feb. 20, 2009); Ramirez v. Greenpoint Mortgage
Funding, No. C08-0369, 2008 WL 2051018, at *4–5 (N.D. Cal. May 13,
2008).
101
Commonwealth v. H&R Block, No. 2008-2474BLS1, 2008 Mass.
Super. LEXIS 427, at *1 (Super. Ct. Nov. 25, 2008) (denying motion to
dismiss and granting preliminary injunction); Complaint at ¶¶ 40–43, People
v. Wells Fargo & Co., No. 09CH26434 (Ill. Ch. Div., Cook County Ct. July
31, 2009).
102
See Carol Necole Brown, Intent and Empirics: Race to the Subprime
27–42 (Univ. of N.C. Research Paper No. 1426142, 2009), available at
http://ssrn.com/abstract=1426142 (relying on cultural affinity hypothesis,
according to which lenders discriminate against borrowers with whom they
do not share a cultural affinity because they have no context to evaluate
creditworthiness, to explain racial targeting of subprime loans).
103
See supra note 6 and accompanying text.
104
Many of the complaints also include allegations that the defendant
lenders worked with brokers more frequently in minority than in white
neighborhoods, and knew that brokered loans were more expensive than
direct loans. See, e.g., Ramirez, 2008 WL 2051018 at *1; see also White,
supra note 1, at 687–88.
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149
knew of the disparate racial impact of their pricing policies.105
Compounding the problem, lenders failed to conduct serious
underwriting, which encouraged originators to use inflated
appraisals that overstated the market value of a home.106 The
lack of underwriting also encouraged originators to falsify loan
applications by inflating a borrower’s actual income and
assets.107 Perhaps the greatest broker profits, however, came
from commissions and fees earned from increased lending
volume.108 Greater loan volume is precisely where careful
targeting produced the greatest rewards.
A number of the reverse redlining suits have been framed
exclusively as civil rights violations, with liability theories
premised upon violations of both the federal Fair Housing and
Equal Credit Opportunity Acts, which prohibit, respectively,
racially discriminatory actions affecting housing or the
availability of credit.109 For instance, the plaintiffs in the
105
See, e.g., Ware v. Indymac Bank, 534 F. Supp. 2d 835, 840 (N.D.
Ill. 2008); Martinez v. Freedom Mortgage Team, 527 F. Supp. 2d 827, 835
(N.D. Ill. 2007).
106
Ware, 534 F. Supp. 2d at 838–39; Barkley v. Olympia Mortgage Co.,
No. 04-CV-875, 2007 WL 2437810, at 1* (E.D.N.Y. Aug. 22, 2007).
107
Ware, 534 F. Supp. 2d at 838–39.
108
See ERNST ET AL., supra note 43, at 33 (“Brokers have strong
incentives to originate mortgages in large volume and relatively little
incentive to scrutinize whether the loans will perform over time.”).
High sales volume was particularly important where subprime loans
were bundled and sold into securitized pools, id., since the pools had to be
filled within ninety days to comply with tax law.
109
For example, many of these cases involve claims under the Fair
Housing Act, 42 U.S.C. § 3601 et seq., and the Equal Credit Opportunity
Act, 15 U.S.C. § 1691 et seq. See Guerra v. GMAC LLC, No. 08-cv-01297,
2009 U.S. Dist. LEXIS 449153, at *1 (E.D. Pa. Feb. 20, 2009); Taylor v.
Accredited Home Lenders, 580 F. Supp. 2d 1062, 1064 (S.D. Cal. 2008);
Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 253 (D. Mass.
2008); Ramirez, 2008 WL 2051018, at *2; Zamudio v. HSBC N. Am.
Holdings, Inc., No. 07-c-4315, 2008 WL 517138, at *1 (N.D. Ill. Feb. 20,
2008); Jackson v. Novastar Mortgage, No. 06-2249, 2007 WL 4568976, at
*1 (W.D. Tenn. Dec. 20, 2007). Some of the complaints also allege
violations of 42 U.S.C. §§ 1981–82. See John Relman, Foreclosures,
Integration, and the Future of the Fair Housing Act, 41 IND. L. REV. 629
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representative disparate impact case of Miller v. Countrywide
Bank, N.A alleged that:
Countrywide’s Discretionary Pricing Policy has a
widespread discriminatory impact on African-American
applicants for home mortgage loans, in violation of the
Equal Credit Opportunity Act [citation omitted] and Fair
Housing Act [citation omitted]. That system . . . makes
African-Americans over three times more likely than
white borrowers to receive a high-APR [annual
percentage rate] home loan and two times more likely to
receive
a
high-APR
refinancing
loan.
The
disparity . . . is not fully explained by any objective
indicia of creditworthiness, such as credit history, credit
score, debt-to-income ratio, or loan-to-value ratio.
Instead, they argue that a significant portion of the
disparity is explained by Countrywide’s pricing policy,
which
explicitly
allows
for
subjective
price
markups . . . . These . . . have a disparate impact on
African-American home buyers.110
According to the court, these allegations sufficed to
withstand a motion to dismiss because the plaintiffs had
sufficiently pled that a specified policy was the proximate cause
of the racially disproportionate effects they challenged.111
The evidence in certain reverse redlining cases includes
practices that would constitute consumer fraud as well.112 The
City of Baltimore provided evidence that Wells Fargo employees
steered borrowers qualifying for prime loans to more costly
subprime loans by misleadingly telling minority applicants that
only subprime loans could be processed quickly and that
mandatory prepayment penalties could be waived, but not
113
informing them about the higher cost of subprime loans. State
(2008) (placing the Baltimore Wells Fargo litigation in broader legal context).
110
Miller, 571 F. Supp. 2d at 253 (internal citations omitted).
111
Id. at 255–58.
112
See supra text accompanying notes 72–84.
113
Jacobson Affidavit, supra note 61, at ¶¶ 12. Similar tactics apparently
extended to Wells Fargo’s efforts to hire loan officers. Several years ago, I
interviewed a former Wells Fargo subprime division employee who explained
FISHER REVISED.DOC
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151
statutes typically prohibit the use of false and deceptive sales
tactics such as these. For instance, the New Jersey Consumer
Fraud Act prohibits the “act, use or employment . . . of any
unconscionable commercial practice, deception, fraud, false
pretense, false promise, misrepresentation, or the knowing
concealment, suppression or omission, in connection with the
sale or advertisement of any merchandise or real estate.”114
These practices were perpetrated disproportionately upon
African-American and Latino borrowers, and cannot be justified
on neutral business necessity grounds because white borrowers
with similar credit scores and other risk characteristics received
better loans than the inferior, high-cost products foisted on
minority borrowers. Thus, the acts alleged could constitute race
discrimination, as well as consumer fraud.115
Some reverse redlining suits, however, have asserted both
civil rights and consumer fraud violations.116 A prominent
example is State of Massachusetts v. H & R Block, et al., in
which a state court denied a motion to dismiss and issued a
preliminary injunction requiring Attorney General approval
before proceeding with foreclosures on presumptively unfair
that the bank sought to hire loan officers by claiming it was providing
valuable credit opportunities to new and previously neglected pools of
borrowers, though these borrowers were actually taken advantage of and
given inferior products. Interview with P.T., in Montclair, N.J., (Feb.
2006).
114
N.J. STAT. Ann. §56:8–2 (2009).
115
See Lambert, supra note 15, at 220314 (analyzing the applicability
of both disparate treatment and disparate impact theories to claims of
discriminatory credit marketing). See also Aleo & Svirsky, supra note 1;
Peter E. Mahoney, The End(s) of Disparate Impact: Doctrinal
Reconstruction, Fair Housing and Lending Law, and the Antidiscrimination
Principle, 47 EMORY L.J. 409 (1998).
116
See, e.g., Ware v. Indymac Bank, 534 F. Supp. 2d 835, 838 (N.D.
Ill. 2008); Newman v. Apex Fin. Group, Inc., No. 07 C 4475, 2008 WL
130924, at *1 (N.D. Ill. Jan. 11, 2008); Martinez v. Freedom Mortgage
Team, Inc., 527 F. Supp. 2d 827, 834–35 (N.D. Ill. 2007); Johnson v.
Equicredit Corp. of Am., No. 01 C 5197, 2002 WL 448991, at *1 (N.D. Ill.
Mar. 22, 2002); Assocs. Home Equity Servs. v. Troup, 343 N.J. Super.
254, 262 (App. Div. 2001).
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152
categories of mortgage loans.117 The complaint alleged not only
that the defendants engaged in unfair lending practices, but also
that targeting was used to steer minority borrowers to inferior
mortgages:
[The defendants] produced and distributed to its [sic]
employees, loan officers, and brokers written marketing
and educational materials explaining that the limited
choices available to black and Latino borrowers made
them good candidates for the [defendants’] subprime loan
products and that loan originators should focus on the
“emerging
markets”
of
black
and
Latino
homebuyers . . . [The
defendants]
described
this
“emerging market” as potential buyers who may have
credit concerns, a lack of familiarity with the credit
system, and difficulty demonstrating conventional credit
history.118
The combination of both anti-discrimination and consumer
fraud claims better captures the reality of targeted predatory
lending.
Existing anti-discrimination and consumer fraud
statutes are sufficiently broad to encompass these targeting
practices, and the lawsuits I have described have the potential to
shape the law to effectively address those practices. The level
of enforcement efforts, however, has not kept pace with the
severity of the problem.119 The next section addresses recent
legislation and proposals that have the potential to increase both
the efficacy and level of enforcement efforts.
IV. FEDERAL RESPONSES TO REVERSE REDLINING
The use of target marketing to funnel mortgages with
disadvantageous terms to residents of minority neighborhoods
warrants further attention from regulators as well as courts.
117
Commonwealth v. H&R Block, Inc., No. 2008-2474BLS1, 2008
Mass. Super. LEXIS 427, at *92 (Super. Ct. Nov. 25, 2008).
118
Complaint at ¶¶ 120, 121, Commonwealth v. H&R Block, Inc., No.
2008-2474BLS1, 2008 Mass. Super. LEXIS 427 (Super. Ct. June 3, 2008).
119
See, e.g., Andrews, supra note 77.
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153
While sellers have identified potential buyers based on their
susceptibility to fine-tuned sales practices for centuries, today’s
highly refined marketing technologies have increased the
efficiency of sharp selling practices and functioned as tools for
discrimination.120 Unfortunately, the profit-making frenzy that
developed during the peak subprime lending years caused not
only low-level scammers to prey on black and Latino borrowers,
but also drew larger lenders and banks into the picture. The
need for increased enforcement of existing law is self-evident,
but new regulation that focuses particularly on the practices
addressed in this article could prevent future problems while
remedying past ones.
The federal government has recently taken steps to ensure
greater regulation of mortgage brokers through the Secure and
Fair Enforcement for Mortgage Licensing Act (the S.A.F.E.
Act). Part of the Housing and Economic Recovery Act of 2008,
the S.A.F.E. Act establishes uniform licensing and registration
requirements for “loan originators.”121 While reasonable
licensing requirements will likely help prevent some of the worst
originator abuses of the peak subprime lending years, more is
needed. Legislators and regulators also need to address the role
of lenders in pushing overly complex and predatory loans on
unsuspecting borrowers and ignoring standard underwriting
requirements in their rush to profit from assigning the mortgages
into securitized trusts.
The proposed Consumer Financial Protection Agency
(CFPA) could provide additional protections for borrowers.122
120
See Lambert, supra note 15, at 2203–14.
Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289,
§ 1502(1), 122 Stat. 2850 (2008). This legislation provides a regulatory floor
for states, and specifies that HUD will establish a system for noncompliant
states; see also Bob Tedeschi, Cracking Down on Certain Brokers, N.Y.
TIMES, June 7, 2009, at RE6 (“[T]he F.H.A. is tightening its review of
mortgage professionals who are permitted to originate its loans.”); Bob
Tedeschi, Monitoring Loan Officers, N.Y. TIMES, Aug. 23, 2009, at RE9.
122
Consumer Financial Protection Agency Act of 2009, H.R. 3126,
111th Cong. (2009). In June of 2009, the Obama administration proposed a
single agency to regulate consumer financial products. See Mike Allen &
Eamon Javers, Barack Obama to Create Consumer Financial Protection
121
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For the first time, the CFPA would consolidate regulation of all
consumer financial products—including mortgages—under the
aegis of a single agency whose sole mission and priority would
be to safeguard the rights of consumers.123 This agency’s
mandate would be to “promote transparency, simplicity,
fairness, accountability and access in the market for consumer
financial products or services.”124 It would have authority, inter
alia, to prohibit unfair and deceptive practices in the financial
Agency, POLITICO, June 17, 2009, http://www.politico.com/news/stories/
0609/23790.html; see also Regulatory Restructuring: Enhancing Consumer
Financial Products Regulation: Hearing on H.R. 3126 Before the H.
Financial Servs. Comm., 111th Cong. (2009). Elizabeth Warren, Leo
Gottlieb Professor of Law, Harvard University, has made public statements
supporting administration proposal for new Consumer Financial Protection
Agency:
If we don’t feed high-risk, high-profit loans into the system, those
risks will not get sliced and diced into questionable asset-backed
securities and sold throughout the financial system. If we had a
Consumer Financial Protection Agency five years ago, Liar’s Loans
and no-doc loans would never have made it into the financial
marketplace—and never would have brought down our banking
system. The economic system took on so much risk—one household
at a time—that it destabilized our entire economy.
Id.
123
See U.S. DEP’T OF THE TREASURY, FINANCIAL REGULATORY
REFORM, A NEW FOUNDATION 55–70 (2009),
available
at
http://www.financialstability.gov/docs/regs/FinalReport_web.pdf [hereinafter
TREASURY REPORT]; see also Binyamin Appelbaum, As Subprime Lending
Crisis Unfolded, Watchdog Fed Didn’t Bother Barking, WASH. POST, Sept.
27, 2009 (reporting that the Federal Reserve, which has enforcement
authority in this area, ignored evidence of subprime lending a abuses for
years); Edmund L. Andrews, Banks Balk at Agency Meant to Aid Consumers,
N.Y. TIMES, June 30, 2009, at B1; Press Release, Ctr. for Responsible
Lending, Top Policies for Addressing the Foreclosure Crisis (Aug. 2009),
available at http://www.responsiblelending.org/mortgage-lending/policylegislation/congress/mortgage-solutions-final.pdf (informing readers that while
other agencies have made consumer protection a low priority, this new
agency would have the single mission of protecting consumers from financial
abuses in mortgages, credit cards, bank overdraft fees, and other financial
products).
124
H.R. 3126 § 121.
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155
products market.125 Moreover, the CFPA would restrict the
ability of originators—whether brokers or subprime lenders—to
mislead borrowers with inordinately complex financial
products.126 Finally—and most critical to this article—the agency
would have the authority to curb reverse redlining and the
racialization of consumer fraud by enforcing the Equal Credit
Opportunity Act and the Community Reinvestment Act.127
Bringing enforcement of antidiscrimination law under the same
umbrella as enforcement of other consumer protection law
should amplify the power of each to eradicate the array of illegal
practices that enabled the current crisis. The complexities of the
problem demand that each issue not be addressed in isolation.
125
Id. at §§ 131–39. The Obama administration recently withdrew its
original proposal to give the new agency the power to require lenders to offer
“plain-vanilla” mortgages, with simpler and more straightforward pricing.
See TREASURY REPORT, supra note 123, at 66; Damian Paletta and Kara
Scannell, Democrats Soften Financial Bill, WALL ST. J., Sept. 24, 2009.
126
TREASURY REPORT, supra note 123, at 66.
127
Id. at 58–59, 69–70.
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COMMUNITY BENEFITS AGREEMENTS
AND COMPREHENSIVE PLANNING:
BALANCING COMMUNITY
EMPOWERMENT AND
THE POLICE POWER
Patricia E. Salkin and Amy Lavine*
I. INTRODUCTION
Traditionally, the states have empowered local governments
to develop plans and implement regulations for neighborhood
and community development. When accomplished at the local or
regional level, the interests and benefits of the community as a
whole are to be weighed against the detriments to individuals.
Much has been studied and written about the lack of meaningful
public participation in the planning and land use regulatory
process, suggesting that often low-income and minority
communities are not fully engaged in the process, even when it
may result in decisions negatively impacting their
1
neighborhoods. Case studies have also shown that governments
* Patricia E. Salkin is the Associate Dean, Director of the Government
Law Center and the Raymond & Ella Smith Distinguished Professor of Law
at Albany Law School. Amy Lavine is a staff attorney at the Government
Law Center and the author of the Community Benefits Blog
http://communitybenefits.blogspot.com.
1
See, e.g., Sheila Foster, Justice from the Ground Up: Distributive
Inequities, Grassroots Resistance, and the Transformative Politics of the
Environmental Justice Movement, 86 CAL. L. REV. 775, 831–837 (1998);
Alejandro Esteban Camacho, Mustering the Missing Voices: A Collaborative
Model for Fostering Equality, Community Involvement and Adaptive Planning
in Land Use Decisions Installment One, 24 STAN. ENVTL. L.J. 3, 15–36
(2005) [hereinafter Camacho I]. It should also be noted that planning and
157
SALKIN REVISED.DOC
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4/27/2010 8:24 PM
are sometimes so eager to stimulate local economic development
that they fail to fully engage communities in the project review
process, both to expedite development and to avoid confronting
local opposition.2 This emphasis on short-term economic growth,
however, may obscure a local government’s perception of the
social and environmental needs of particular communities. When
this occurs, formal planning processes have failed to accomplish
their goals of engaging community members and guiding future
growth in a manner that maximizes long-term benefits for the
common good.
zoning boards tend to be composed of community elites, who often have ties
to the development sector. AMERICAN PLANNING ASSOCIATION, GROWING
SMART LEGISLATIVE GUIDEBOOK: MODEL STATUTES FOR PLANNING AND THE
MANAGEMENT OF CHANGE 7–13 (2002) [hereinafter, GROWING SMART
LEGISLATIVE GUIDEBOOK]. See generally, Jerry L. Anderson, Is the Wheel
Unbalanced? A Study of Bias on Zoning Boards, 36 URB. LAW. 447 (2004)
(arguing that bias pervades zoning boards in favor of entrenched interests).
The lack of socioeconomic diversity is particularly acute in larger cities,
which
results
in
“a
pronounced
bias
toward
the
professional/technical/managerial class in our cities.” Id. at 464; see also
Jerry L. Anderson, A Study of American Zoning Board Composition and
Public Attitudes Toward Zoning Issues (Apr. 2008), http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1119582. But see Wayne Senville, Survey of
Planning Board Members Enlightening (Oct. 2002), http://www.planetizen.
com/node/66 (suggesting, in a less scientific survey, that greater diversity is
being achieved on planning board).
2
For example, plans for the Melrose Commons redevelopment project in
the South Bronx were initially formed without community involvement, and
they were poorly coordinated with the community’s needs. Changes were
made only after residents organized and presented their concerns to planning
officials. Eventually, the community’s initiative led to substantial
modifications, and the project is today viewed as a success. See SUSTAINABLE
COMMUNITIES NETWORK CASE STUDIES, URBAN RENEWAL in MELROSE
COMMONS, (Sept. 18, 1996), http://www.sustainable.org/casestudies/
newyork/NY_af_melrose.html; see also Amy Wideman, Replacing Politics
with Democracy: A Proposal for Community Planning in New York City and
Beyond, 11 J.L. & POL’Y 135, 197 (2002) (describing New York City’s
response to a community-based plan as “focus[ing] inordinately on economic
repercussions for the city and what the city’s role and expenses would be in
implementing aspects of the plan that could inhibit future industrial sitings in
the neighborhood”).
SALKIN REVISED.DOC
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159
New approaches to planning provide one response to
systemic public participation problems. The environmental
justice movement, for example, has sought to ensure a fair
distribution of both environmental burdens and environmental
goods by requiring local governments to make meaningful public
participation available to all community members. Communitybased planning efforts have attempted to improve the planning
process by focusing on small and distinct geographic areas and
by developing collaborative and inclusive planning programs.
Since the late 1990s, community benefits agreements (CBAs)
have offered another method to increase community input in the
development planning and review process.
CBAs, in their purest form, are private contracts between a
developer and a coalition of community interest groups.3 For
communities that have historically been excluded from the
planning process, CBAs can be a powerful tool to ensure that
neighborhood interests are addressed as an integral component
of development.4 By using CBAs, community coalitions can
make project sponsors respond to their needs and interests, and
they can bind developers to their promises through legally
enforceable contract terms. Perhaps more significantly, the
community is empowered to speak and make decisions for itself
on myriad issues, including negotiating for community amenities
that have traditionally been within the purview of the local
comprehensive planning regime. The result, ideally, is growth
3
See Julian Gross, Community Benefits Agreements: Definitions, Values,
and Legal Enforceability, 17 J. AFFORDABLE HOUSING & COMMUNITY DEV.
L. 35, 46 (2008).
4
See, e.g., Ryan Juskus & Elizabeth Elia, Long Time Coming, 150
SHELTERFORCE ONLINE (2007), available at http://www.nhi.org/online/
issues/150/longtimecoming.html (“A neighborhood famous for its vitality
under the constraints of segregation, Shaw was neglected and abused for so
many ensuing decades . . . . One DC and Shaw resident claimed these
blighted lots as community assets and declared that even these properties, if
jealously guarded, could be a source of neighborhood power and wealth. This
is the revolutionary idea of community-benefits agreements: that the
community members—even those without money or power, who are usually
ignored in development plans or manipulated like chess pieces—can be an
asset and a force with which to contend.”).
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and development that is accountable to the people it affects and
equitable in its distribution of benefits and burdens. However,
the people it affects are often a small subset of the municipal
jurisdiction and the equitable distribution sought in the CBAs is
limited to the proposed project area.
The legal relationship between CBAs and planning is
unclear. Critics may perceive CBAs as circumventing
government planning processes in order to put insular
neighborhood concerns ahead of broader metropolitan interests.5
Supporters, on the other hand, may view traditional planning
processes as inadequate and may see CBAs as a tool to advance
civic engagement.6 CBA coalitions have been accused of abusing
the tool when they fail to represent the full spectrum of
community stakeholders, but as yet no workable definition of the
“community” has been established.7
This article explores how the comprehensive planning
process and CBAs complement and contradict each other, and
how both could be improved by innovative and more inclusive
planning techniques. Part II provides a brief historical
background on comprehensive planning and community
development, including issues relating to community planning
and public participation. Part III examines CBAs and their role
in community empowerment, community development and the
promotion of social justice principles, including equitable
development. This part also provides examples of typical land
use related elements found in existing CBAs. Using these
examples, Part IV segues into a discussion regarding whether
private CBAs usurp the public planning process. The section
explores whether CBAs are just another type of communitybased plan and whether CBAs advance narrow interests at the
expense of the larger community. The question of what local
governments should do when presented with a CBA that is
inconsistent with the local comprehensive land use plan is
examined to determine whether amending the plan to incorporate
5
6
7
See infra Part IV.B.
Gross, supra note 3, at 38.
See infra Part III.A.1.
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the community vision as articulated through the CBA is
appropriate. The article concludes in Part V by pointing out that
shortcomings of the current regulatory system allow local
governments, intentionally or inadvertently, to exclude robust
public participation from the development and implementation of
comprehensive land use plans. This provides the impetus for
privately negotiated CBAs, but these agreements may not always
be ideal because not all parties to a CBA will have the best
interests of the neighborhood or the community as a whole at the
forefront of their agendas. While many CBAs have been
successful, a number of case studies also reveal pitfalls in the
process. The article concludes with the belief that local
governments must be more inclusive and accountable in the
public planning process to better meet the true goals of the
community benefits movement.
II. COMPREHENSIVE PLANNING AND COMMUNITY DEVELOPMENT
A. The Origins of Traditional Comprehensive Planning
The federal and state governments have long recognized the
role of municipalities in comprehensive planning for community
development.8 Planning, in this context, may be best described
as “an attempt to coordinate the development of all the
interrelated aspects of the physical environment, and all the
closely related aspects of the social and economic
environment.”9 At the First National Conference on City
Planning and the Problems of Congestion, which was convened
in Washington, D.C., in 1909, Frederick Law Olmstead, Jr.,
described city plans as “a compendium of all regulations on
building, physical development, ‘districting’ of land, health
ordinances, and ‘police rules’ for the use and development of
8
See generally SALKIN, AMERICAN LAW OF ZONING §§ 5:2, 5:11 (5th
ed. 2009) [hereinafter SALKIN, AMERICAN LAW OF ZONING].
9
NORMAN WILLIAMS, JR. & JOHN M. TAYLOR, AMERICAN LAND
PLANNING LAW, VOL. 1 10 (Thomson West 2003).
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land.”10 Almost 20 years later, Alfred Bettman described the city
plan as:
. . . a master design for the physical development of the
territory of the city. It constitutes the division of land
between public and private uses, specifying the general
location and extent of new public improvements, grounds
and structures . . . and, in the case of private
developments, the general distribution [of land areas]
amongst various classes of uses, such as residential,
business and industrial uses.11
Beginning with the Model Standard City Planning Enabling
Act in 1928 (“Standard Act”), local governments were vested
with authority to develop community-wide plans.12 The Act
provided for the establishment of a planning commission, which
would be vested with the responsibility “to make and adopt a
master plan for the physical development of the
municipality . . . including, among other things, the general
location, character, and extent of streets, viaducts, subways,
bridges, waterways, water fronts, boulevards, parkways,
playgrounds, squares, parks, aviation fields, and other public
ways . . . .”13 The Standard Act additionally included provisions
for the adoption of a master street plan, provisions for the
approval of all public improvements by the planning
commission, subdivision controls, and provisions for the
establishment of a regional planning commission and a regional
plan.14 Under the model set forth in the Standard Act, non10
JULIAN CONRAD JUERGENSMEYER & THOMAS E. ROBERTS, LAND USE
PLANNING AND CONTROL LAW 21 (West Group, 1998).
11
Id. at 22 (citing PLANNING PROBLEMS OF TOWN, CITY AND REGION:
PAPERS AND DISCUSSIONS OF THE TWENTIETH NATIONAL CONFERENCE ON
CITY PLANNING, reprinted in W. GOODMAN & E. FREUND, PRINCIPLES AND
PRACTICE OF URBAN PLANNING, 352–53 (4th ed. 1968)).
12
U.S. Department of Commerce, A Standard City Planning Enabling
Act (1928), available at http://myapa.planning.org/growingsmart/pdf/CP
EnablingAct1928.pdf.
13
Id. at 13–15.
14
Id.; see also, Ruth Knack et al., The Real Story Behind the Standard
Planning and Zoning Acts of the 1920s, Feb. 1996, at 4–6, available at
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elected officials dominated the local planning function.15 It was
believed that their arguably non-partisan status made them better
suited than elected politicians to take a hard look at challenging
planning issues.16
Most of the states adopted the Standard Act, and although
many of the states’ comprehensive planning statutes have been
modernized, the influence of the Standard Act continues to
resonate today.17 A process-oriented statute, one of the Standard
Act’s most significant influences was its preference for optional
rather than mandatory planning.18 While this led to the belief that
planning was not necessarily a prerequisite to the adoption of
zoning laws, Alfred Bettman explained that “[t]he zoning
ordinance is, of course, execution and the planning precedes
it . . . .”19
Today, a comprehensive land use plan20 commonly refers to
a written document that is formally adopted by a local legislative
body, which contains goals, objectives and strategies for the
future development and conservation of the community.21 It
http://myapa.planning.org/growingsmart/pdf/LULZDFeb96.pdf.
15
GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7–11.
16
Id.
17
See Rodney L. Cobb, Toward Modern Statutes: A Survey of State
Laws on Local Land-Use Planning, in MODERNIZING STATE PLANNING
STATUTES: THE GROWING SMART WORKING PAPERS 21 (1998).
18
DANIEL R. MANDELKER, LAND USE LAW §3.05 (5th ed., LexisNexis
Matthew Bender 2003).
19
Charles M. Harr, The Master Plan: An Impermanent Constitution, 20
LAW & CONTEMP. PROBS. 353, 362 (1955) (quoting an unpublished note
written by Bettman).
20
Depending upon local definition, the terms “comprehensive land use
plan,” “master plan” and “general plan” may be used interchangeably.
21
However, while either legally or intuitively the comprehensive plan
should be a written document, this is not the case in all states. For example,
in New York, the enabling statutes suggest that a comprehensive plan be a
written document. N.Y. Town Law § 272–a. (2009). However, the statutes
also recognize the validity of prior caselaw that allowed the concept of the
comprehensive plan to be a reflection of an ongoing planning process rather
than “pay slavish servitude to any particular document.” Udell v. Haas, 235
N.E.2d 897, 902 (1968).
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should represent the “big picture” of what the community looks
like today and what it aspires to look like in the future,22 and the
policies identified in the plan should guide development
regulations and decisions made under them.23 By providing a
baseline for consistency regarding local governments’ land use
decisions, the comprehensive plan helps to safeguard against
arbitrary, irrational, biased and ad hoc actions.24
Most states do not make the adoption of a comprehensive
plan a statutory pre-requisite to the adoption of zoning
regulations,25 but the notion that the plan precedes the regulation
is widely accepted as a best practice.26 Where there is a
comprehensive plan, the states also diverge on the question of
whether zoning must be consistent with it: some states give no
significance to the plan and do not require consistency; the
majority of states do not require consistency but do consider the
plan to be a factor in the evaluation of zoning regulations; and
the rest hold the plan to be controlling and require all land use
actions to be consistent with its goals and policies.27 Long a
22
See GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7-6.
JOHN R. NOLON, WELL GROUNDED: PRIMER FOR LOCAL OFFICIALS
AND CITIZENS 18 (1998); GROWING SMART LEGISLATIVE GUIDEBOOK, supra
note 1, at 7-7.
24
See GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7-7;
Daniel J. Curtin & Jonathan D. Witten, Windfalls, Wipeouts, Givings, and
Takings in Dramatic Redevelopment Projects: Bargaining for Better Zoning
on Density, Views, and Public Access, 32 B.C. ENVTL. AFF. L. REV. 325,
335 (2005) (discussing the importance of a comprehensive plan in preventing
manipulation of the planning process for private gain).
25
See Stuart Meck, The Legislative Requirement that Zoning and Land
Use Controls Be Consistent with an Independently Adopted Local
Comprehensive Plan: A Model Statute, 3 WASH. U. J.L. & POL’Y 295, 305
(2000) [hereinafter Meck, A Model Statute]. A survey published by the
American Planning Association in 1998 revealed that ten states made local
planning optional, twenty-five states made it conditionally mandatory (i.e.,
local governments would only be required to develop a plan if they created a
planning commission); and fifteen states made local planning mandatory.
Cobb, supra note 17, at 21–23.
26
See SALKIN, AMERICAN LAW OF ZONING, supra note 8 at § 5:1.
27
Edward J. Sullivan, Recent Developments in Comprehensive Planning
Law, 40 URB. LAW. 549, 549 (2008). The three approaches are referred to as
23
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minority position, the consistency approach has steadily been
gaining ground, with the result that “the comprehensive plan has
been invested with an increasing role in judging land use
regulations or actions so that . . . plans are required and, once
in place, are a significant, if not decisive, factor . . . .”28
The general goals and policies enunciated in modern
comprehensive plans are typically organized into separate
elements covering such issues as land use, housing,
transportation, public facilities, open space, and economic
development.29 The American Planning Association’s Growing
Smart Legislative Guidebook, which was intended to provide a
modern update of the Standard Act,30 recommends that state
planning enabling statutes reflect a three tiered approach to local
comprehensive plan elements: the most important elements, such
as housing and transportation, should be mandatory; important
elements that may not be appropriate for smaller local
governments, or for other good reasons, should have an opt-out
alternative; and elements that are not essential, but which the
state considers appropriate planning topics, should be optional.31
The states have taken varying approaches. For example,
Florida’s enabling statute is very detailed and includes
mandatory, opt-out and optional elements.32 In New York, by
the “unitary view” (plans not required and given no effect), the “planning
factor view” (plans are a factor in judging land use regulations), and the
“planning mandate view” (plans required and zoning must be consistent with
them). Id.; see also Curtin & Witten, supra note 24, at 331–37 (2005)
(discussing different state approaches to comprehensive planning).
28
Sullivan, supra note 27, at 549.
29
See GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7-61
to 7-66.
30
Recognizing that “[t]he planning approaches of the 1920s are incapable
of meeting the challenges of the twenty-first century[,]” the American
Planning Association decided to develop a new set of model guidelines. The
product culminated in the Growing Smart Legislative Guidebook, which
contains model planning statutes and commentary to help explain their
purposes and applications. GROWING SMART LEGISLATIVE GUIDEBOOK, supra
note 1, at xxix–xxx.
31
Id. at 7-62.
32
FLA. STAT. § 163.3177 (2009).
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contrast, the state has chosen to provide statutory guidance as to
the appropriate elements to be addressed in the comprehensive
plan, but the listing of elements is completely optional.33 Other
states fall somewhere in the middle. Arizona specifies both
mandatory and optional elements, which may vary depending on
the city’s size,34 and while Idaho’s statute is limited to
mandatory elements, it allows local governments to opt out if
they can explain why they should not have to address a
particular element.35 The elements specified in Maryland’s
planning legislation are almost all mandatory, with only one
optional topic,36 whereas New Hampshire requires only two
sections but provides a list of more than a dozen optional
elements.37
An important characteristic of the comprehensive planning
framework is that plans remain flexible and open to change,
allowing the creation of new planning goals and new strategies
to achieve existing ones. The Growing Smart Guidebook,
recognizing that plans must be continually reassessed in light of
changing physical assets and new social paradigms, recommends
that local governments review and revise their plans at least
once every five years.38 The statutory content of comprehensive
plans has similarly expanded over the years. Contemporary
elements have focused on such issues as affordable housing,39
alternative
transportation,40
mixed-use
development,41
33
N.Y. TOWN LAW § 272–a (2003).
ARIZ. REV. STAT. ANN. § 9–461.05 (2009).
35
IDAHO CODE ANN. § 67–6508 (2007).
36
MD. ANN. CODE art. 66B, § 1.04 (2009).
37
N.H. REV. STAT. ANN. § 674:2 (2008).
38
See GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7-230
to 7-233.
39
See, e.g., CAL. GOV’T CODE § 65583(c)(1)(B)(4) (Deering 2009);
NEV. REV. STAT. ANN. § 278.160(1)(e)(2) (West 2009).
40
See, e.g., ARIZ. REV. STAT. ANN. 9–461.05(E)(9); FLA. STAT.
§ 163.3177(3)(a)(6) (amended 2008); MD. CODE ANN., Art. 66B,
§ 3.05(a)(4)(iii)(2) (2009); NEV. REV. STAT. ANN. § 278.160(1)(q) (2009);
OR. ADMIN. R. 660-012-0020(2); S.C. CODE ANN. § 6-29-510(D)(8)
(amended 2007); WASH. REV. CODE § 36.70A.070(6)(a)(vii) (2005); WIS.
34
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environmental protection,42 disaster management,43 and water
resources.44 Community awareness regarding the impacts of
human development on climate change has recently prompted
some states to amend their planning statutes to include
alternative energy and sustainability goals.45 Local governments,
even where not required, have frequently adopted similar
elements in their general plans.46
STAT. § 66.1001(2)(c) (2009).
41
See, e.g., ARIZ. REV. STAT. § 11–821(C)(1)(b) (amended 2008);
CONN. GEN. STAT. ANN. § 8-23(c), (d)(1) (2009); FLA. STAT.
§ 163.3177(6)(a) (2009); NEV. REV. STAT. ANN. § 278.160(1)(f) (2009).
42
See, e.g., ARIZ. REV. STAT. §§ 11–821(D)(2), 9–461.05(E)(1)
(amended 2008); CAL. GOV. CODE § 65302(d); N.H. REV. CODE ANN.
§ 674:2(III)(d) (2009); MD. CODE ANN. art. 66B, § 3.05(a)(4)(ix) (amended
2009); MASS. GEN. LAWS ch. 41, § 81D(5) (amended 1998); N.H. REV.
STAT. ANN. § 674:2(III)(d). (2009); NEV. REV. STAT. ANN. § 278.160(1)(b)
(2009); 53 PENN. STAT. ANN. § 10301(a)(6) (2000); S.C. CODE ANN. § 6–
29–510(D)(4) (amended 2005); WIS. STAT. § 66.1001(2)(e) (2009).
43
See, e.g., CAL. GOV. CODE § 65302(g)(2009); FLA. STAT.
§ 163.3177(7)(h) (2009); N.H. REV. STAT. ANN. § 674:2(III)(e) (2009);
NEV. REV. STAT. ANN. § 278.160(1)(l).
44
See, e.g., ARIZ. REV. STAT. §§ 9–461.05(D)(5), 11–821(C)(3)
(amended 2008); COLO. REV. STAT.§ 30–28–106 sec. (3) (IV) (amended
2009); FLA. STAT. § 163.3177(6)(c)(2009); MD. CODE ANN. Art. 66B,
§ 3.05(a)(4)(vi) (amended 2009); 53 PENN. STAT. ANN. § 10301(b) (2000).
45
In 2008, for example, Florida amended its planning enabling act to
require local plans to consider methods to discourage urban sprawl, support
energy-efficient development patterns, and reduce greenhouse gases. See Act
of July 1, 2008, 2008 Fla. Laws ch. 191 (codified as amended at FLA. STAT.
§ 163.3177). Arizona also requires planning for energy efficiency and
renewable energy development. ARIZ. REV. STAT. §§ 11-821 (C)(4), 9461.05 (E) (10); see also N.J. STAT. § 40:55D-28 (b)(16) (West 2009);
COLO. REV. STAT. §§ 30-28-106 (3)(a)(VI), 31-23-206 (1)(f); 53 PENN.
STAT. ANN. § 10301.1 (2009).
46
Patricia E. Salkin, Sustainability and Land Use Planning: Greening
State and Local Land Use Plans and Regulations to Address Climate Change
Challenges and Preserve Resources for Future Generations, 34 WM. & MARY
ENVTL. L. & POL’Y REV. 121 (2009).
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B. Community-Based Planning
Despite a lack of guidance from most state comprehensive
planning statutes,47 “[t]here has long been a move away from
centralized planning in the urban context toward more
community-based planning.”48 Strongly influenced by the racial
and socioeconomic discrimination endemic in the implementation
of urban renewal plans, and the Civil Rights movement of the
1960s, Paul Davidoff articulated a theory of “advocacy
planning” in 1965 that remains applicable today:
The recommendation that city planners represent and
plead the plans of many interest groups is founded upon
the need to establish an effective urban democracy, one
in which citizens may be able to play an active role in
the process of deciding public policy. Appropriate policy
in a democracy is determined through a process of
political debate. The right course of action is always a
matter of choice, never of fact. In a bureaucratic age
great care must be taken that choices remain in the area
of public view and participation.49
The ideals of inclusiveness, democracy and public
participation remain fundamental to community-based planning,
47
Very few state planning enabling acts specifically provide for the
creation of small-scale comprehensive plans. Exceptions include Montana,
New Hampshire, and the District of Columbia. MONT. CODE ANN. § 76-1601(4) (2009) (requiring neighborhood plans to be consistent with the
municipality’s growth policy); N.H. REV. STAT. ANN. § 674:2(III)(j)
(requiring a master plan to be adopted before any neighborhood plan, and
requiring that plan to be consistent with the master plan); D.C. Code § 1306.03 (2009).
48
Sheila R. Foster, The City as an Ecological Space: Social Capital and
Urban Land Use, 82 NOTRE DAME L. REV. 527, 578; see also James
Jennings, Race, Politics, and Community Development in U.S. Cities: Urban
Planning, Community Participation, and the Roxbury Master Plan in Boston,
594 ANNALS AM. ACAD. POL. & SOC. SCI. 12, 13–14 (2004) (discussing the
origins of the community-based planning movement).
49
Paul Davidoff, Advocacy and Pluralism in Planning, 34(4) J. AM.
INST. PLANNERS 331 (1965), reprinted in READINGS IN PLANNING THEORY
211–12 (Scott Campbell & Susan S. Fainstein, eds., 2d ed. 2003).
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and they have become core principles of the community benefits
movement as well.50
Community-based planning recognizes that metropolitan
plans may not be adequate to meet the needs of individual
neighborhoods, as “[p]eople who are close to neighborhood
issues can clearly identify community needs and advocate
passionately for local concerns.”51 This type of planning is also
premised on a belief that a city’s general plan will be made
stronger by encompassing separately developed neighborhood
plans.52 In other words, it is community-driven, rather than “top
down.”53 This type of paradigm shift also requires a reappraisal
of the role that professional planners play in the land use
process. Gone are the “ostensibly omniscient” non-partisan
50
Gross, supra note 3, at 37–39.
Department of City Planning, Community Based Planning,
http://www.nyc.gov/html/dcp/html/community_planning/index.shtml
(providing an overview of the city’s 197-a community planning process) (last
visited Dec. 1, 2009).
52
Seattle’s neighborhood planning process has been thoroughly evaluated
and it was found to be a success. The program received a 93% approval
rating in a citizen survey, and the city found that it had positive impacts on
the coordination of public entities, provided valuable education to citizens
concerning the land use process, encouraged community-building, facilitated
ongoing citizen participation, and minimized public opposition and legal
challenges. The full report identified problems with the process and made
suggestions for improvements. Seattle Office of City Auditor, Revisit
Neighborhood Plan Implementation. http://seattle.gov/audit/docs/Published
NPI.pdf (last visited Oct. 16, 2009).
53
See New York City Community-Based Planning Task Force, Planning
for All New Yorkers, http://www.mas.org/planningcenter/atlas/pdf/
PlanningForAllNewYorkers_PlatformForAllNewYorkers.pdf.
The
Community-Based Planning Task Force, which is staffed by the Municipal
Art Society, “is a coalition of grassroots organizations, citywide civic groups,
community boards, elected officials, professional planners, and academics.
They were motivated to act after seeing that, in some cases, plans devised by
the city did not address neighborhood needs, while, at the same time, there is
no effective mechanism to implement the creative, proactive plans that
communities developed for their neighborhoods.” The Campaign for
Community-Based Planning: Task Force, http://communitybasedplanning.
wordpress.com/task-force/ (last visited Oct. 16, 2009).
51
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planners that implemented the Standard Acts; modern city
planners, in addition to developing regulatory standards and
synthesizing comprehensive planning goals, should act “as
facilitators, community organizers, and gatherers and
distributors of information . . . .”54
Because of the smaller scale of community-based plans, there
are often more opportunities for citizen engagement, whether
through formal public hearings, or through more informal
planning workshops and charettes.55 The New York City 197-a
planning process, for example, requires a number of public
hearings and approval by the planning commission and city
council before a community plan can be adopted.56 With the help
of proactive community boards and civic organizations such as
the Municipal Art Society, many plans have been shaped
through community outreach efforts and collaborative planning
57
sessions. Other cities, such as Minneapolis, offer funding and
54
Alejandro Esteban Camacho, Mustering the Missing Voices: A
Collaborative Model for Fostering Equality, Community Involvement and
Adaptive Planning in Land Use Decisions, 24 STAN. ENVTL. L.J. 269, 292
(2005) [hereinafter Camacho II].
55
Many cities have developed community-based planning frameworks,
whether referred to as neighborhood plans, specific plans, small area plans,
or community-based plans. See, e.g., San Jose Department of Planning,
Building & Code Enforcement, Specific Plans, Overview, http://www.san
joseca.gov/planning/spec_plan/default.asp (last visited Oct. 16, 2009); City of
Columbus, Guide to Area and Neighborhood Planning, http://assets.
columbus.gov/development/planning/PlanningGuide.pdf (last visited Oct. 16,
2009); Minneapolis Community Planning & Economic Development,
Neighborhood Guide for Developing Planning Documents, http://www.ci.
minneapolis.mn.us/cped/docs/NeighborhoodGuideforDevelopingPlanning.pdf
(last visited Oct. 16, 2009); Baltimore Neighborhood Planning Program,
http://www.ci.baltimore.md.us/neighborhoods/npp/index.html (last visited
Oct. 16, 2009).
56
New York City Charter § 197-a (2008).
57
See, e.g., The Municipal Art Society, A Vision for Midtown’s East
River Waterfront is Unveiled, Jun. 11, 2007, https://s12544.gridserver.
com/viewarticle.php?id=1731&category=46 (describing the results of a
charette intended to define goals for the development of the East River
waterfront); GREENPOINT 197-A COMMITTEE, GREENPOINT 197-A PLAN 6
(1998), available at http://www.gwapp.org/GWAPP/01-Introduction.PDF
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technical assistance for qualified community organizations that
wish to build public participation and develop small area plans.58
Innovative methods to involve people from all sectors of the
community are also being developed. The San Francisco
Planning Department organizes walking and bus tours to
encourage discussions about how residents want their
neighborhoods to develop,59 and San Jose has used an online
planning wiki to reach people who cannot attend (or do not want
to attend) planning meetings in person.60
Community-based, small scale planning has moved a long
way from the rigid and disconnected framework set up by the
Standard Act, but it shares with more conventional planning
models the basic idea that communities benefit from long range
planning based on common goals and visions. The
comprehensive plan, in the context of community-based
frameworks, is a more dynamic tool, however. As law professor
Alejandro Esteban Camacho explains:
The collaborative model recognizes that modern land use
planning and development are not static enterprises, but
rather a continuing process that must be flexible in order
to maximize effectiveness. Adaptable planning and
permitting, which are natural extensions of a problem
solving orientation, draw on a pragmatic notion of
decision-making as an ongoing, iterative process of
(“Through public forums, workshops, discussions, petitions, and local
newspapers, collaboration between community-based groups, merchants,
residents, manufacturers, new and old immigrants, and the young and the old
began to revitalize the community by means of this local planning process.”).
58
See CITY OF MINNEAPOLIS, COMMUNITY PLANNING AND ECONOMIC
DEVELOPMENT DEPARTMENT, CITIZEN PARTICIPATION PROGRAM GUIDELINES
(2006), available at http://www.ci.minneapolis.mn.us/cped/docs/citizen_
participation_guidelines.pdf.
59
San Francisco Planning Department, Better Neighborhoods, The
Planning Process, http://www.sfgov.org/site/planning_index.asp?id=25172
(last visited Oct. 16, 2009).
60
Press Release, City of San Jose, San Jose Harnesses Web 2.0
Technology to Help Determine City’s Future and Growth (July 31, 2009),
available at http://www.sanjoseca.gov/pdf/WikiplanningReleaseFINAL.pdf.
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design, implementation, and evaluation. Adaptability
applies not just to plans and agreements but also to the
regulatory process itself; as the process matures, it is
evaluated and adjusted to incorporate information such as
the value of different forms of participation in facilitating
informed decision-making, community cooperation, and
valuable land use.61
Another significant difference between traditional and
community-based comprehensive planning relates to the timing
and duration of community engagement. Most state enabling
statutes indicate that it is sufficient to hold one public hearing
during the development of a comprehensive plan, and one
hearing during the legislative process for its adoption.62 Some
states, however, have specifically provided for increased public
participation in the preparation and adoption of local plans.63 The
American Planning Association’s Growing Smart Legislative
Guidebook adopts this approach:
The processes for engaging the public in planning are not
made clear in many planning statutes. Requirements for
public notice, public hearings, workshops, and
distribution and publication of plans and development
regulations are often improvised. Consequently, the
public may find its role and the use of its input uncertain,
and it may be suspicious of plans and decisions that
emerge. Planning should be doing the opposite; it should
be engaging citizens positively at all steps in the planning
process, acknowledging and responding to their
comments and concerns. Through collaborative
61
Camacho II, supra note 54, at 295.
See, e.g., N.Y. TOWN LAW § 272-a (2009).
63
See PATRICIA E SALKIN, COLLABORATIVE PROCESSES FOR PREPARING
AND ADOPTING A LOCAL COMPREHENSIVE PLAN, in MODERNIZING STATE
PLANNING STATUTES: THE GROWING SMART WORKING PAPERS, vol. 2
(American Planning Association 1998) (noting a number of statutory
approaches to achieving a more collaborative and inclusive planning process,
including a requirement in the State of Washington for cities and counties that
plan under the Growth Management Act to establish and disseminate a public
participation program, see R.C.W. sec. 36.70A.140).
62
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approaches, planning should build support for outcomes
that ensure that what the public wants indeed will
happen.64
Community-based planning, moreover, recognizes that there
is a continuing need for public participation throughout the
plan’s implementation. This is especially true given the
increasing popularity of development agreements, planned unit
developments (PUDs), special overlay districts, and similar
long-term land use controls. Unlike zoning ordinances, which
are intended to be applied uniformly, the express purpose of
these controls is to make the planning process more flexible and
more easily tailored to specific properties. However, while
“these negotiated processes provide[] the applicant-developer
with substantial opportunities to participate in the decision
process, public input . . . has not advanced beyond a traditional
command and control model that only provides access to the
process at the local agency’s final approval of the agreement.”65
To the extent that these regulatory techniques affect a
community’s long-term goals, as embodied in the adaptive
comprehensive plan, the community arguably should have a
66
more significant role in the decision making process.
C. Environmental Justice
One of the hallmarks of the environmental justice
movement67 is “meaningful involvement,” which requires that:
(1) people have an opportunity to participate in decisions
about activities that may affect their environment and/or
64
GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at xlvii.
Camacho I, supra note 1, at 17.
66
See Camacho II, supra note 54, at 297–99.
67
The U.S. Environmental Protection Agency defines environmental
justice as “[t]he fair treatment and meaningful involvement of all people
regardless of race, color, national origin, or income with respect to the
development, implementation, and enforcement of environmental laws,
regulations, and policies.” United States Environmental Protection Agency,
Basic Information, http://www.epa.gov/compliance/basics/ej.html (last visited
Oct. 16, 2009).
65
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health; (2) the public’s contribution can influence the
regulatory agency’s decision; (3) their concerns will be
considered in the decision making process; and (4) the
decision makers seek out and facilitate the involvement of
those potentially affected.68
While the comprehensive planning framework allows more
opportunities for public participation than does an ad hoc zoning
process,69 and community-based planning can encourage even
more public involvement, communities are still overlooked70—
especially those “discrete and insular minorities” that may be
more in need of protection than other groups.71
In additional to meaningful involvement, the environmental
justice movement seeks to ensure fair treatment, meaning “that
no group of people should bear a disproportionate share of
negative environmental consequences resulting from industrial,
governmental and commercial operations or policies.”72 Fair
treatment also requires an equitable distribution of environmental
goods, such as parks, open spaces, and cultural and historical
resources. Too often, the low income and minority communities
that are excluded from the planning process are the same
communities that are burdened by negative environmental
impacts and provided with few environmental benefits. One
model approach proposes to address this reality by
68
Id.
Wideman, supra note 2, at 191–92 (“[Comprehensive] plans,
especially when they result from an inclusive process, do more to foster
public participation and simultaneously decrease the potential for corruption
because of the diversity of opinions shaping the decisions. Some argue that ad
hoc zoning, in contrast, is vulnerable to domination by factions.”).
70
See, e.g., id. at 135, 144 (“Indeed, the [New York City Planning]
Commission’s processes seem designed to discourage public participation—
public hearings take place at ten o’clock on Wednesday mornings, making the
hearings inaccessible to those with daytime obligations such as work or
family, and calendar notices and subscriptions are available at a large fee.”).
71
See United States v. Carolene Products Co., 304 U.S. 144, 153 n.4
(1938).
72
United States Environmental Protection Agency, Basic Information,
http://www.epa.gov/compliance/basics/ejbackground.html (last visited Oct.
16, 2009).
69
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175
recommending the appointment of a public participation
coordinator to work with various communities and stakeholders
to invite and encourage broader participation.73
It has been noted that, “the next frontier for both the
[environmental justice] movement and the focus of
environmental justice scholarship . . . is land use planning.”74
California has been a pioneer in incorporating environmental
justice concerns into the local land use planning process.75
Ensuring meaningful participation by all cross-sections of the
community is important to give credibility and respect to the
process. “Providing for active involvement by people-of-color
and low-income residents in developing the goals of a locality’s
comprehensive plan, at least as it relates to their own
neighborhoods, will help to ensure that local zoning laws or
ordinances are developed and/or amended to reflect the desires
of these communities.”76 As professor Craig Anthony “Tony”
Arnold argues, “land use planning and regulation foster choice,
self-determination, and self-definition for local neighborhoods,
not paternalism that insists that there is a single correct
environmental justice goal.”77
In 1991, the First National People of Color Environmental
Leadership Summit was held. The conference delegates drafted
seventeen principles that better define environmental justice, and
these principles have served as a pioneering document for the
73
SALKIN, supra note 63, at 151.
Craig Anthony Arnold, Planning Milagros: Environmental Justice and
Land Use Regulation, 76 DENV. U. L. REV. 1 (1998).
75
See Chapter 762 of the California Laws of 2001, which required the
Governor’s Office of Planning and Research to publish guidelines for the
incorporation of environmental justice issues in the general plans of
municipalities.
76
NATIONAL ACADEMY OF PUBLIC ADMINISTRATION, ADDRESSING
COMMUNITY CONCERNS: HOW ENVIRONMENTAL JUSTICE RELATES TO LAND
USE PLANNING & ZONING 44 (2003), available at http://www.napawash.org/
Pubs/EJ.pdf.
77
Craig Anthony Arnold, Land Use Regulation and Environmental
Justice, 30 ENVTL. L. REP. 10427 (June 2000).
74
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rapidly expanding movement.78 A number of these principles are
directly applicable to community development. For example,
Principle Five states: “[e]nvironmental [j]ustice affirms the
fundamental right to political, economic, cultural, and
environmental self-determination of all peoples.”79 This principle
is related to both community planning and CBAs because both
processes emphasize community-driven planning and often
include the desire and promise to improve local economic and
environmental
situations.
Principle
Twelve
states:
“[e]nvironmental [j]ustice affirms the need for urban and rural
ecological policies to clean up and rebuild our cities and rural
areas in balance with nature, honoring the cultural integrity of
all our communities, and provide[s] fair access for all to the full
range of resources.”80 This is both an example of an aspirational
goal appropriate for inclusion in local comprehensive plans, and
in the CBA process, project applicants often offer environmental
benefits such as park and open space and green building designs.
The equitable development movement, which is closely
related to the environmental justice movement, is grounded in
four principles: integrating people strategies and place strategies;
reducing local and regional disparities; promoting “double
bottom line” investments that produce fair returns for investors
as well as benefits for the community, and ensuring meaningful
community participation, leadership and ownership.81 As
discussed more fully below, CBAs are noted as one effective
strategy to achieving equitable development.82
78
PRINCIPLES OF ENVIRONMENTAL JUSTICE, FIRST NATIONAL PEOPLE OF
COLOR ENVIRONMENTAL LEADERSHIP SUMMIT, Apr. 6, 1996, http://www.
ejnet.org/ej/principles.html.
79
Id.
80
Id.
81
Angela Glover Blackwell, Equitable Development, in BUILDING
HEALTHY COMMUNITIES: A GUIDE TO COMMUNITY ECONOMIC
DEVELOPMENT FOR ADVOCATES, LAWYERS AND POLICYMAKERS (Roger A.
Clay, Jr. & Susan R. Jones, eds., 2009).
82
Id.
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III. THE DEVELOPMENT OF THE COMMUNITY BENEFITS
AGREEMENTS MOVEMENT
The CBA movement originated in California in the late
1990s as a way to make large-scale development projects more
accountable to the neighborhoods that they impact.83 The basic
model is simple: community groups form a coalition and use its
capacity for building public support to persuade the project
developer to provide amenities and mitigations desired by local
residents, business owners, and employees. After negotiations,
agreements between the coalition and the developer are
memorialized in a legally enforceable bilateral contract.84 In
states where local governments are authorized to enter into
development agreements, CBAs are often incorporated into these
documents so that municipal authorities, in addition to
community representatives, have the power to enforce the
developer’s promises.85
A. The Overlap of CBAs and Comprehensive Plans
From the outset, CBA coalitions have aspired to achieve
environmental and social justice goals for the communities they
represent, seeking to bind developers to commitments for living
wages, local hiring policies, and increased environmental
standards, among other things.86 Like community-based planning
83
Patricia Salkin & Amy Lavine, Understanding Community Benefits
Agreements: Equitable Development, Social Justice and Other Considerations
for Developers, Municipalities and Community Organizations, 26 UCLA J.
ENVTL. L. & POL’Y 291, 301–306 (discussing the Hollywood and Highland
CBA).
84
Id. at 293–94.
85
Id. at 295. Development agreements are authorized in about a dozen
states. See David L. Callies & Julie A. Tappendorf, Unconstitutional Land
Development Conditions and the Development Agreement Solution:
Bargaining for Public Facilities After Nollan and Dolan, 51 CASE W. RES. L.
REV. 663, 671 n.32 (2001).
86
See generally Julian Gross et al., Community Benefits Agreements:
Making Development Projects Accountable, GOOD JOBS FIRST & THE
CALIFORNIA PARTNERSHIP FOR WORKING FAMILIES (2005), available at
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programs, they have drawn attention to the fact that the planning
and development review process often fails to address the needs
of historically disempowered low income, minority, and nonEnglish speaking communities.87 While supporters of
community-based planning have sought to change the planning
and development review process to make it more inclusive and
accessible, the CBA contract model allows community coalitions
to bypass the traditional planning process entirely.
Many of the commitments contained in CBAs relate
primarily to labor standards and corporate operations (e.g.,
wage and hiring provisions), but other CBA promises involve
the same concerns that have historically been addressed through
the planning and zoning process. Provisions relating to land use,
housing, transportation, environmental standards, and small
business development have all become common in CBAs. In
many cases, and particularly in California and other states that
recognize development agreements, this has led to positive
results, with community, government and private sector
representatives working together in a sort of extra-publicprivate-partnership. Yet, in other cases, CBA coalitions have
failed to gain the support of a broad enough cross section of
community interests to be considered legitimate. This has been
especially problematic in New York, where local governments
are not formally authorized to engage in development
negotiations.88 CBAs negotiated under such circumstances are
http://www.goodjobsfirst.org/pdf/cba2005final.pdf.
87
Gross, supra note 3, at 37–38 (2008) (“Community-based
organizations often assert that low-income neighborhoods, non-Englishspeaking areas, and communities of color have little voice in the development
process. Laws concerning public notice and participation are sometimes
poorly enforced, and official public hearings are often held during the
workday.”).
88
In New York, any zoning changes offered by a city in exchange for
development amenities must be undertaken according to a general incentive
zoning ordinance applying to all property developments. N.Y. GEN. CITY
§ 81–d (2003). However, development often occurs not with the assistance of
local governments, but under the aegis of either a state or local economic
development authority. These quasi-public agencies have broad authority to
condition various types of subsidies, including zoning overrides, on certain
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179
often depicted as “developer-driven,” and they may interfere
with the planning process rather than improving it.
The following subsections describe how various CBAs have
incorporated community development issues usually reserved as
part of the comprehensive or neighborhood planning process.
For purposes of this section, several agreements that are only
arguably “CBAs” will be discussed.89 These, problematic
“CBAs,” which have not encouraged inclusiveness, transparency
and accountability in the development review process, are
discussed in the next Part.90
1. Meaningful Public Participation and
Equitable Development
The community benefits movement, like community-based
planning and environmental justice, has made meaningful
community involvement in the development process a priority
goal. The act of forming a coalition and demanding that
developers be accountable to the neighborhoods that they impact
is in itself a form of public participation, and the agreements
obtained through CBA negotiations often include provisions to
ensure that coalition groups will continue to be heard in the
future.
Under most CBAs, the developer must maintain continued
contact with the coalition and keep it apprised of the project’s
status. An advisory committee is often set up, including
development conditions, and to memorialize such agreements in bilateral
contracts. See N.Y. GEN. MUN. § 858 (powers of industrial development
agencies); N.Y. UNCONSOL. Ch. 252 § 5 (powers of the Empire State
Development Corporation).
89
CBA advocates have attempted to define the CBA concept as “a
legally binding contract (or set of related contracts), setting forth a range of
community benefits regarding a development project, and resulting from
substantial community involvement.” Gross, supra note 3, at 37. This
definition excludes all of the New York CBAs.
90
The Gateway Center at Bronx Terminal Market and Columbia
University CBAs have been criticized for their lack of community
involvement and it has been forcefully argued that they are not, in fact,
community benefits agreements. See id. at 41–44.
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developer and coalition representatives, and this committee may
make recommendations on project plans or implementation
measures.91 This type of framework gives community
representatives a formal role in the project’s development, but a
few CBAs have gone a step farther by giving coalitions a larger
role in the general planning process. The coalition that
negotiated the Ballpark Village CBA, for example, secured
$100,000 from the developer for a professionally prepared
economic impact study. The study was directed to address “the
effects of new construction and rising land values in downtown
San Diego on the Neighboring Communities and [to] recommend
specific policy measures to encourage investment as well as
protect long-term, Low-Income Local Residents from
displacement.”92 In Pittsburgh, a CBA concerning the new
Penguins Arena included funding for the creation of a
neighborhood master plan, which will cover issues relating to
land use, community services, parks and open space, housing,
social and environmental impacts, urban design, education,
91
The Staples Center CBA, for example, established an Advisory
Committee to provide input to the developer about the construction
management plan, the traffic management plan, the waste management plan,
the neighborhood traffic protection plan, and other environmental concerns
(e.g. pedestrian safety, air quality, green building). Staples Center,
COMMUNITY BENEFITS AGREEMENT, at sec. XI, A-13 (2001), available at
http://www.communitybenefits.org/downloads/Los%20Angeles%20Sports%2
0and%20Entertainment%20District%20Project.pdf [hereinafter Staples CBA];
see also Dearborn Street Implementation Committee, EXECUTED SETTLEMENT
AGREEMENT, at art. 5, http://www.communitybenefits.org/article.php?id=
1464 [hereinafter Dearborn Street CBA]; Hunters Point Implementation
Committee, COMMUNITY BENEFITS AGREEMENT, at 14 (2008), http://www.
communitybenefits.org/downloads/Bayview%20Hunters%20Point%20CBA.pd
f [hereinafter Hunters Point CBA]; Pacoima Community Oversight
Committee, PLAZA PACOIMA PROJECT COMMUNITY BENEFITS AGREEMENT, at
sec. X [hereinafter Pacoima Plaza CBA]; Park East Community Advisory
Committee, PARK EAST REDEVELOPMENT COMPACT, http://www.community
benefits.org/downloads/PERC.pdf [hereinafter Park East Redevelopment
Compact].
92
Ballpark Village Project, COMMUNITY BENEFITS AGREEMENT, at 12
(2005), available at http://www.communitybenefits.org/downloads/Ballpark%
20Village%20CBA.pdf [hereinafter Ballpark Village CBA].
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economic development, traffic, arts and culture, historic
preservation and uses for vacant property. The Penguins,
moreover, agreed to postpone the submission of further
development proposals until after the plan’s completion.93
The site-specific nature of CBAs also offers an effective way
to impose mitigation requirements on developers in order to
ensure a more equitable distribution of negative environmental
impacts.94 Many CBAs, for example, include provisions to limit
construction impacts such as diesel exhaust, particulate
emissions and dust.95 The CBA covering the LAX airport
93
One Hill Neighborhood Coalition & Sports and Exhibition Authority
of Pittsburg, HILL DISTRICT COMMUNITY BENEFITS AGREEMENT, at 5–6
(2008), http://www.communitybenefits.org/article.php?id=1463 [hereinafter
Penguins CBA]. To be specific, the Penguins only agreed to postpone further
development proposals until February 2010.
94
See Larissa Larsen, The Pursuit of Responsible Development:
Addressing Anticipated Benefits and Unwanted Burdens through Community
Benefits Agreements 6 (Ctr. For Local State, and Urban Policy Working
Paper Series, No. 9, 2009) (stating that “spatial inequity is central to the
environmental justice movement” and “relevant to the site-specific nature of
CBAs”) (citing DAVID HARVEY, JUSTICE, NATURE AND THE GEOGRAPHY OF
DIFFERENCE (Blackwell Publishing 1996)).
95
See, e.g., Atlantic Yards, COMMUNITY BENEFITS AGREEMENT, at 35,
http://www.buildbrooklyn.org/pr/cba.pdf [hereinafter Atlantic Yards CBA]
(requiring a plan for minimizing truck idling); Ballpark Village CBA, supra
note 92, at 6, 17, 22, 24–25, 28, 30 (requiring contaminated soils will not be
shipped to treatment facilities in urban neighborhoods or that have adverse
compliance histories, restrictions in pesticide use in landscaping, prohibition
on onsite incineration, minimized idling, and designated construction routes);
Pacoima Plaza CBA, supra note 91 (requiring trucks to minimize idling, and
requiring the developer to give preference to contractors that use low
emission equipment); LAX Master Plan Program, COMMUNITY BENEFITS
AGREEMENT, at 17, 20, 22, 28, 29, available at http://www.laxmasterplan.
org/commBenefits/pdf/LAX_CBA_Final.pdf
[hereinafter
LAX
CBA]
(requiring electrified cargo gates to reduce emissions, $500,000 to replace
high emission equipment, requirement to phasing out airport vehicles and
replacing them with low emission or alternative vehicles, no idling, that for
diesel equipment best available emissions control devices be used for diesel
equipment as well as ultra low sulfur fuel, that rock crushing will be located
away from the communities neighboring LAX in order to reduce dust,
designated construction routes); Columbia University, COMMUNITY BENEFITS
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expansion also included special protections for communities
located next to the airport, which had long suffered from the
airport’s noise and pollution. The airport authority agreed to
fund an air quality study and a health impact study, the latter
focusing on upper respiratory diseases and hearing loss.
Nighttime departures were also restricted to limit noise, and
more than $4 million was allotted for soundproofing nearby
homes and schools.96 Since the LAX CBA was completed in
2004, air quality monitoring requirements have been included in
several other agreements.97
For industrial projects that create extensive negative
environmental impacts, Good Neighbor Agreements (“GNAs”)
can also be used to mandate protections for nearby
communities.98 GNAs use the same community-corporation
contract framework as CBAs, but they typically focus on the
complex technical mitigation solutions required by heavy
industrial facilities such as oil refineries, mines, chemical plants,
foundries, and large-scale agricultural operations. Most GNAs
require information about plant operations to be made available
AGREEMENT 34, http://www.columbia.edu/cu/gca/pdf-files/CBAAgreement
.pdf [hereinafter Columbia CBA] (ultra low sulfur fuels); Purina Site
Development, Community Benefits Agreement, http://amy.m.lavine.
googlepages.com/FINALPDFLongfellowCBA-Feb.242008.pdf
[hereinafter
Longfellow CBA]; COMMUNITY BENEFITS AGREEMENT: CONCERNING THE
CHRISTINA AVENUE COMPOSTING FACILITY BY AND BETWEEN PENINSULA
COMPOST CO., LLC AND THE S. WILMINGTON COALITION 9–10 (2007)
[hereinafter Peninsula Compost CBA] (prohibiting truck traffic in adjacent
residential communities and requiring that trucks must be covered).
96
LAX CBA, supra note 95, at 6.
97
In the Gateway Center CBA, for instance, the developer agreed to
work with the New York City Department of Environmental Protection to
test for particulate emissions. Gateway Center at Bronx Terminal Market,
COMMUNITY BENEFITS AGREEMENT 33 [hereinafter Gateway Center CBA],
available at http://www.bronxgateway.com/documents/copy_of_community_
benefits_agreement/Signed_CBA_2_1_06.pdf; see also Ballpark Village CBA,
supra note 92.
98
See generally CPN, Good Neighbor Agreements: A Tool For
Environmental and Social Justice, http://www.cpn.org/topics/environment/
goodneighbor.html (last visited Oct. 16, 2009) (explaining the purpose,
benefits, and general scope of good neighbor agreements).
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to the public, and they often require facilities to be open to
inspection by designated community members or third parties.
Other provisions directly restrict corporate signatories. They
may be required to formulate accident prevention and
preparedness plans, covering such contingencies as chemical
spills and fires, and they may have to implement various
pollution prevention strategies. Although some GNAs have
included provisions relating to local hiring, union neutrality, and
funding for health centers and parks,99 they do not usually
address the variety of issues covered by most CBAs.100 Another
difference is that some GNAs are voluntary agreements that seek
primarily to build relationships and create dialogues about
pollution reduction and community health,101 whereas the CBA
movement makes enforceability a paramount concern.102
The close connection between CBAs, GNAs, and
environmental justice is evident in Connecticut’s 2008 law
regarding environmental justice communities103—the only general
99
The Unocal GNA included funding for health studies and for a clinic,
a commitment to improve the site’s landscaping and construct a bike path,
funding for vocational training at the local high school, a hiring preference
for local employees, $4.5 million for transportation infrastructure
improvements, and $300,000 annually for 15 years to go into a community
fund. Good Neighbor Agreement: Unocal (on file with author). A promise to
donate certain conservation easements was included in the Stillwater Mine
GNA, as well as a promise that any land acquired by the company after the
GNA was signed would be encumbered with a conservation easement
restricting residential subdivisions. The GNA also limited permissible
locations for mine-sponsored housing. Good Neighbor Agreement: Stillwater
Mining Company, http://www.northernplains.org/files/2005amendedgna (last
visited Dec. 1, 2009).
100
See Gross, supra note 3, at 40, n.22.
101
See, e.g., The Southeast Como Improvement Association: Ritrama
Agreement, http://secomo.org/drupal/index.php?q=ritrama-agreement (last
visited Dec. 1, 2009); The Southeast Como Improvement Association: Rock
Tenn.
Agreement,
http://secomo.org/drupal/index.php?q=rock-tennagreement (last visited Dec. 1, 2009).
102
Gross, supra note 3, at 39 (2007–2008) (“[L]egal enforceability
should be a prerequisite for something to be termed a CBA.”).
103
Conn. P.A. 08-94, S. 1, (codified as CONN. GEN. STAT. § 22a–20a
(2008)).
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state or local law yet to be enacted that attempts to regulate
CBA-like agreements.104 The statute defines a “community
environmental benefit agreement” (“CEBA”) as:
[A] written agreement entered into by a municipality and
an owner or developer of real property whereby the
owner or developer agrees to develop real property that
is to be used for any new or expanded affecting facility
and to provide financial resources for the purpose of the
mitigation, in whole or in part, of impacts reasonably
related to the facility, including, but not limited to,
impacts on the environment, traffic, parking and noise.105
Unlike CBAs, these CEBAs are only implicated in the
construction of “affecting facilities,” which are defined as heavy
106
industrial facilities that are major pollution generators. While a
local government can enter into a CEBA regarding any affecting
facility, the law’s requirements apply only when an affecting
facility is being located in an “environmental justice
community,”107 defined as a census tract designated as distressed
under state law or with at least 30% of residents at or below
200% of the poverty line.108 When the law does apply, the
developer must consult with the local government regarding the
need for a CEBA,109 which may include provisions for on and
off site mitigations and “[f]unding for activities such as
environmental education, diesel pollution reduction, construction
104
In Milwaukee and Atlanta, local laws have been passed requiring
community benefits to be included in certain developments. While the
Connecticut legislation is a general law, applying throughout the state, both
the Milwaukee and Atlanta CBA are limited to specific sites within their
jurisdictions. See Salkin & Lavine, supra note 83, at 319; Amy Lavine,
Atlanta Beltline Community Benefits, COMMUNITY BENEFITS AGREEMENTS
BLOG, May 19, 2008 (updated Aug. 16, 2009), http://communitybenefits.
blogspot.com/2008/05/atlanta-beltline-community-benefits.html.
105
CONN. GEN. STAT. § 22a–20a(a)(4) (2008).
106
CONN. GEN. STAT. § 22a–20a(a)(2) (2008) (defining “affecting
facility”).
107
CONN. GEN. STAT. § 22a–20a(b)(1) (2008).
108
CONN. GEN. STAT. § 22a–20a(a)(1).
109
CONN. GEN. STAT. § 22a–20a(b)(1).
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185
of biking and walking trails, staffing for parks, urban forestry,
support for community gardens or any other negotiated benefit
to the environment in the environmental justice community.”110
The developer is also required to file a “meaningful public
participation plan,”111 which should cover issues relating to
“appropriate opportunities” for public participation, methods for
seeking out and facilitating public input, and assurances that
public comments will be considered as part of the agency’s
decision.112
2. Sustainable Development and
Pedestrian/Transit Oriented Design
As the public’s awareness of sustainability issues has grown
in recent years, planners have increasingly begun to incorporate
into community plans provisions encouraging green building,
energy and water efficiency, alternative transportation and
alternative energy.113 CBAs, too, have attempted to address
many of these issues.
The most common sustainability features found in CBAs
relate to green building standards. Typically, they require the
developer to meet the eligibility requirements for LEED
certification.114 Some require actual certification, usually at the
Silver level or lower, while others require only that the project
be eligible for LEED certification.115 Specific green building
110
CONN. GEN. STAT. § 22a–20a(c).
CONN. GEN. STAT. § 22a–20a(b)(1) (2008).
112
CONN. GEN. STAT. § 22a-20a(a)(3) (2008) (defining “meaningful
public participation”).
113
Salkin, supra note 46.
114
U.S. Green Building Council, LEED, http://www.usgbc.org/Display
Page.aspx?CategoryID=19 (last visited Oct. 16, 2009).
115
See, e.g., Pacoima Plaza CBA, supra note 91 (requiring LEED
silver); Penguins CBA, supra note 93, at 17 (requiring LEED certification);
LAX CBA, supra note 95, at 29 (requiring LEED to the extent practicable);
Longfellow CBA, supra note 95, at 8 (requiring LEED or Minnesota
standards); Gateway CBA, supra note 97, at 31 (requiring LEED Silver
goal); Columbia CBA, supra note 95, at 32 (requiring minimum LEED
111
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features may also be set forth in the CBA, whether part of the
LEED system or not. The Ballpark Village CBA, for example,
requires that windows must use bird-reflective glass,116 and the
Columbia University CBA specifies that the university will
“evaluate the use of green roof technology and managed
vegetated areas” as a way to control storm water runoff.117
The Minneapolis Longfellow Station CBA stands out as an
example of sustainability planning in CBAs because of its
emphasis on transit oriented design (TOD) and amenities for
pedestrians and bicyclists. Similar to the broad goals and
principles that are typically included in comprehensive plans, the
CBA recites a list of guiding TOD principles,118 as well as more
specific project requirements. In order to promote alternative
transportation and advance the project’s TOD goals, the
developer agreed in the CBA to provide free one-month transit
passes to residential tenants and to ensure that transit fare can be
purchased onsite.119 The development must also include bicycle
storage and parking facilities, and dedicated parking spaces for
Zipcars.120 To discourage automobile use, the CBA limits
parking to a maximum of one space per residential unit and 4.5
spaces for every 1,000 square feet of commercial space, and it
requires parking spaces to be leased separately from residential
units.121 Walkability and “placemaking” principles are also
included in the Longfellow Station CBA to promote human scale
silver); Ballpark Village CBA, supra note 92, at 5 (requiring LEED certified
minimum, developer must try for better); Atlantic Yards CBA, supra note
95, at 35 (requiring “prudent environmentally sound building practices”).
116
Ballpark Village CBA, supra note 92, at 7. It also requires pest
management, including using naturally pest-repellent vegetation and less toxic
pesticides. Id. at 31.
117
Columbia CBA, supra note 95, at 34.
118
Longfelllow CBA, supra note 95, at 5–6. The guiding principles
include: urban intensity; height, density, and public/green space; economic
vitality; urban form; urban uses; retail location; reverse the normal parking
rules; walkability; transit connectivity; and neighborhood connectivity.
119
Longfellow CBA, supra note 95, at 14.
120
Id. at 14–15
121
Id. at 14–15
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187
design.122 Pedestrians are favored by requirements for paths,123
wayfinding signs,124 landscaped public gathering spaces,125 and
safety measures such as traffic calming infrastructure.126
Sustainability principles also play a significant role in the
Columbia University CBA, which states that:
In decisions regarding the Project Area, [the university] shall
be guided by the following goals: protecting the biosphere; the
sustainable use of renewable natural resources; the reduction of
waste and the safe disposal of waste; energy conservation;
greenhouse gas emission reduction; environmental risk reduction
to [Columbia] staff, students and the surrounding community;
and correcting damage, if any; reducing the use of products that
cause environmental damage; and reducing impacts to air quality
in the surrounding area, with a particular sensitivity to the
impacts to people suffering from asthma.127
Among other things, the CBA includes promises to use
energy efficient appliances, mitigate the heat island effect,
reduce storm water runoff, and plant street trees.128
122
Id. at 18–19. Pedestrian-scale design requirements are also included in
the Gateway Center at Terminal Market CBA. Gateway Center CBA, supra
note 97, at 32–33, 35 (providing specifically for street trees, lighting, wide
sidewalks).
123
124
Id. at 16; see also Dearborn Street CBA, supra note 91, at 7
(providing for way-finding signs).
125
Longfellow CBA, supra note 95, at 16–17.
126
Id. at 14–15.
127
128
Id. at 32–33; see also Ballpark Village CBA, supra note 92, at 7
(providing for “commercially feasible” development of passive infiltration for
storm water); SunQuest, COMMUNITY BENEFITS AGREEMENT, at 3,
http://www.communitybenefits.org/article.php?id=1474
[hereinafter
SunQuest CBA] (requiring roofs and pavement must be light in color to avoid
the heat island effect); Dearborn Street CBA, supra note 91, at 10–11
(ensuring construction of permeable sidewalks).
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188
3. Community Facilities and
Neighborhood Improvements
Comprehensive plans often contain a community facilities
element that discusses public buildings, infrastructure, and
“those facilities that contribute to the cultural life or physical
and mental health and personal growth of a local government’s
residents (e.g., hospitals, clinics, libraries, and arts centers).”129
Most CBAs include some type of community amenity that would
fall within this planning area, such as dedicated space and
funding for community centers,130 neighborhood improvements,131
open/public spaces,132 child care facilities133 and medical
129
GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1, at 7-111.
See, e.g., Dearborn Street CBA, supra note 91, at 6, 9–10 (5,000
square feet for community nonprofits and community events; $200,000 for a
community center and Vietnamese cultural center); Longfellow CBA, supra
note 95, at 17 (space for public information display, a community room for
meeting, and 500 square feet for nonprofits at reduced rent); Columbia CBA,
supra note 95, at 38–39 (space for Community Board 9); MARLTON SQUARE
REDEVELOPMENT PROJECT DEVELOPER COMMUNITY BENEFITS PROGRAM 3,
available
at
http://www.communitybenefits.org/downloads/cba_marlton
square.pdf (space for community meetings and other community activities);
Penguins CBA, supra note 93, at 11 (commitment to assist YMCA to
develop and sustain a multi-purpose center for youth, family and seniors in
the community); Atlantic Yards CBA, supra note 95, at 28 (developer will
provide child care, youth and senior centers).
131
Dearborn Street CBA, supra note 91, at 9 ($50,000 for right of way
improvements); SunQuest CBA, supra note 128, at 4–5 ($150,000 for a
neighborhood improvement fund; youth center).
132
Staples CBA, supra note 91, at A-2–3 (needs assessment and $1
million for parks; street level public plaza); Longfellow CBA, supra note 95,
at 16–17 (landscaped public gathering places); Atlantic Yards CBA, supra
note 95, at 30 (6 acres of open space).
133
Columbia CBA, supra note 95, at 38 (5,000 square feet for a
nonprofit day care center for income eligible families); North Hollywood
Mixed-Use Redevelopment Project, COMMUNITY BENEFITS PROGRAM 2 (Nov.
2001), available at http://amy.m.lavine.googlepages.com/NoHo20CBA.pdf
(developer will build onsite childcare center, find a tenant, and require the
tenant to provide care for at least 50 low-moderate income families).
130
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189
centers.134 Several CBAs also require the developer to either
market project space to businesses needed by the community,
such as grocery stores and banks,135 or to restrict the availability
of project space to businesses like pawnshops that have been
deemed detrimental to the community.136
4. Housing
Housing is an important component in both comprehensive
plans137 and CBAs. When CBAs cover projects involving
substantial housing components, they typically require the
developer to build more affordable units than would otherwise
be required.138 As an alternative to including affordable housing
134
See, e.g., Columbia CBA, supra note 95, at 39 (funding to expand
existing medical facilities); Atlantic Yards CBA, supra note 95, at 26
(developing a health care center providing comprehensive quality primary
care).
135
Pacoima Plaza CBA, supra note 91, at 9 (developer will market space
to traditional banks); Penguins CBA, supra note 93, at 8 ($2 million for a
grocery store that must include a pharmacy and a selection of healthy foods);
Ballpark Village CBA, supra note 92, at 12 (developer will use good faith
efforts to rent to a grocery store).
136
See Dearborn Street CBA, supra note 91, at 7 (no payday lenders or
pawnshops); Pacoima CBA, supra note 95 (no payday lenders); Gateway
Center CBA, supra note 97, at 34 (no Wal-Mart); Ballpark Village CBA,
supra note 92, at 18 (no hotel); Longfellow CBA, supra note 95, at 12–13
(no big boxes or stores that do not accept food stamps); Front Range
Economic Strategy Center, GATES-CHEROKEE REDEVELOPMENT COMMUNITY
BENEFITS AGREEMENT (2008), http://communitybenefits.blogspot.com/2008/
01/gates-cherokee-redevelopment-cba.html [hereinafter Gates Cherokee CBA]
(no big boxes).
137
See GROWING SMART LEGISLATIVE HANDBOOK, supra note 1, at ch. 4
(housing element).
138
See Steve Brandt, Minneapolis Neighborhood Makes a Deal and
History, STARTRIBUNE.COM, Mar. 4, 2008, http://www.startribune.com/
local/16240642.html (noting that the Longfellow Station CBA requires more
affordable housing than the Minneapolis inclusionary zoning ordinance). If a
project is not subject to inclusionary housing minimums, CBAs generally call
for the developer to maximize the amount of affordable housing included in
the project. See, e.g., Dearborn Street CBA, supra note 91, at 8 (200 of 400
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within the project, some developers have committed to building
offsite affordable housing in order to mitigate the displacement
and/or gentrification caused by the project.139
Most CBA housing provisions specify levels of housing
affordability and the length of time for which units must remain
affordable.140 Some provide requirements for the types of
units must be affordable); Staples CBA, supra note 91, at A-9 (20%
affordable); Longfellow CBA, supra note 95, at 7 (30% affordable housing);
Gates Cherokee CBA, supra note 136 (10% of for sale units and 20% of
rental units); Ballpark Village CBA, supra note 92, at 10 (developer will
maximize affordable housing).
139
See, e.g., Columbia CBA, supra note 95, at 10 ($20 million for
affordable housing to address the impact of the project); Ballpark Village
CBA, supra note 92, at 11 ($1.5 million for affordable housing in
neighboring communities); Hunters Point CBA, supra note 91, at 8 ($27.3
million for a “Community First Housing Fund” to buy market rate properties
inside and outside the project for income eligible residents); Grand Avenue
Committee, GRAND AVENUE COMMUNITY BENEFITS PROJECT (2008),
http://www.
grandavenuecommittee.org/community.html [hereinafter Grand Avenue]
(revolving loan fund of at least $750,000 for affordable housing
development); Staples CBA, supra note 91, at A-11 ($650,000 revolving loan
fund for affordable housing development).
140
Dearborn Street CBA, supra note 91, at 9 (120 of the 200 units must
be affordable at AMI 50% and the other 80 must be affordable at AMI 80%;
50 years affordability); Hunters Point CBA, supra note 91, at 7 (providing a
schedule of housing affordability requirements); Grand Avenue, supra note
139 (half of the affordable units will be priced at not more than 80% AMI,
and the other half at 50%; affordability is required for 55 years for rental
units and 45 years for for sale units); Staples CBA, supra note 91, at A-10
(30% of affordable units will be for 50% AMI, 35% will be for 51–60%
AMI, and 35% will be for 61–80% AMI; minimum 30 years affordability);
Longfellow CBA, supra note 95, at 7 (20% of all units to be affordable at
50% AMI and 10% to be affordable at 40–60% AMI; affordability required
for 30 years); Gates Cherokee CBA, supra note 136 (units must remain
affordable for at least 40 years); Ballpark Village CBA, supra note 92, at 10
(average AMI of affordable units can be no more than 47%); Atlantic Yards
CBA, supra note 95, at 24 (units are to be affordable for 30 years); Oak to
Ninth Community Benefits Coalition and the Redevelopment Agency, OAK TO
NINTH COOPERATION AGREEMENT, at 3 (2006) http://www.urbanstrategies.
org/programs/econopp/documents/FinalOaktoNinthCooperationAgreeementwit
hCoalitionfinalexecution.pdf [hereinafter Oak to Ninth CBA] (“[A]ll Project
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191
affordable units to be included in the development (e.g.,
different unit sizes, rental versus for sale units, senior restricted
housing, etc.)141 and the location of affordable units, both in
relation to the project and in relation to other affordable housing
units.142 Other CBAs give preferences for affordable units to
people displaced by the project, low-income residents or local
residents.143 CBAs may also seek to expedite the construction of
Units shall be provided at no greater than an Affordable Rent to households
earning from 25 percent to 60 percent of Area Median Income for at least 55
years.”).
141
See, e.g., Oak to Ninth CBA, supra note 140, at 3 (no more than
25% of affordable units can be senior restricted, at least 30% must be threebedroom units, and at least 20% must be two-bedroom units); Longfellow
CBA, supra note 95, at 7 (requiring a mix of studios, and one, two and three
bedroom units); Gates Cherokee CBA, supra note 136 (requiring 10% of for
sale units and 20% of rentals to be affordable); Dearborn Street CBA, supra
note 91 (requiring 50 units of affordable “family housing”); Ballpark Village
CBA, supra note 92, at 10–11 (some units in the offsite affordable housing
project must be reserved for seniors); Atlantic Yards CBA, supra note 95, at
25 (10% of affordable units reserved for seniors); Hunters Point CBA, supra
note 91, at 9–10 (average affordable unit size of 2.5 bedrooms and requiring
some units to be for seniors or disabled residents).
142
See, e.g., Longfellow CBA, supra note 95, at 7 (prohibiting any one
building from containing more than 65% affordable housing so as “to prevent
a concentration of affordable housing in any particular building in the
development”); Gates Cherokee CBA, supra note 136 (buildings are to be
inclusionary); Ballpark Village CBA, supra note 92, at 10 (75% of the
affordable units at one building will be 2 or 3 bedroom units, other building
will be devoted to single rooms and transitional housing); Staples CBA, supra
note 91, at A-10 (affordable units will be either on or offsite, but offsite units
will be within a 3 mile radius); Oak to Ninth CBA, supra note 140, at 5
(permitting the redevelopment agency to construct a maximum of 77 offsite
affordable units and limiting them to the immediate area).
143
See, e.g., Staples CBA, supra note 91, at A-16 (giving priority given
to displaced residents); Ballpark Village CBA, supra note 92, at 11 (requiring
that 10% of the restricted units will be targeted to households with at least
one person who has worked in downtown San Diego for one year, 60% shall
be targeted to people from neighboring communities, 30% may be targeted to
anybody); Hunters Point CBA, supra note 91, at 9–10 (requiring priority
marketing for the affordable units for existing local residents, displaced
residents, etc.); Grand Avenue, supra note 139 (giving priority for rentals for
displaced residents).
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192
affordable units by requiring them to be finished before work is
started on other parts of the project.144
5. Aesthetics and Building Design
Community character is often shaped by a neighborhood’s
“look,” and for this reason, aesthetics and architecture often
play a role in community planning.145 While most CBAs do not
contain detailed aesthetic or design regulations, a number of
CBAs do address specific aesthetic issues. Several include
limitations on signs and blank facades, both of which can give a
community a dull or garish appearance.146 For similar reasons,
147
the
the Pacoima Plaza CBA prohibits barred windows,
Peninsula Compost CBA requires project facilities to be
screened from view,148 and the Longfellow Station agreement
149
prohibits vinyl siding and drive through windows.
In contrast to these preemptive measures, other CBAs
include provisions intended to affirmatively foster community
character, such as space and funding requirements for public
144
See, e.g., Oak to Ninth CBA, supra note 140, at 5 (requiring
construction of any offsite units to be commenced prior to commercial parts
of the project); Hunters Point CBA, supra note 91, at 7; Dearborn Street
CBA, supra note 91, at 8 (stating the city will not be obligated to grant a
certificate of occupancy for the retail space until the developers can show that
construction has commenced on at least 200 housing units, including at least
80 affordable units; developer agrees that within 4 years of the issuance of
the certificate of occupancy, construction must be commenced on the other
200 units).
145
See GROWING SMART LEGISLATIVE HANDBOOK, supra note 1, at 7168 to 7-172 (community design element).
146
Gateway Center CBA, supra note 97, at 32 (requiring that there not
be any blank walls); Dearborn Street CBA, supra note 91, at 6 (requiring
facades of stores are unique and distinct and specific sign restrictions);
Ballpark Village CBA, supra note 92, at 6.
147
Pacoima Plaza CBA, supra note 91, at 7.
148
See also Longfellow CBA, supra note 95, at 19 (requiring screening
of machinery, loading docks, and trash areas).
149
Id.
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193
art.150 Recognizing the unique character of Seattle’s Little Saigon
neighborhood, the Dearborn CBA (although the project was later
cancelled151) included $200,000 for the construction of a
Vietnamese cultural center, and provisions intended to help
existing small businesses run by Vietnamese merchants.152
Similarly, Columbia agreed to preserve several of the
neighborhood’s historic buildings and to help create a multidisciplinary historic preservation and development strategy.153
“Placemaking” is an important part of the Longfellow
Station CBA. While the design guides are in part intended to
promote walking and transit use, as noted above, they are also
intended to “encourage interaction and connection at a human
scale . . . through creation of a welcoming, safe, and accessible
environment.”154 The project is to “be urban, not suburban, in
feel and function” and buildings must be “designed to have a
pedestrian feel at street level. Scale, massing and relationships
of buildings shall be designed to relate to the users (not
overwhelm the users).”155 Additionally, the project is to be
designed so as to facilitate outdoor dining and shopping, and
high quality exterior building materials are required in order to
150
See, e.g., Pacoima Plaza CBA, supra note 91 (developer will comply
with CRA’s public art policy); Columbia CBA, supra note 95, at 36 (5,000
square feet of space for use by local artists); Ballpark Village CBA, supra
note 92, at 12 (requires a good faith effort to use local artists); Longfellow
CBA, supra note 95, at 17 (space for public art).
151
Emily Heffter, $300M Project at Seattle Goodwill Site Canceled,
SEATTLE TIMES, Apr. 24, 2009, http://seattletimes.nwsource.com/html/
localnews/2009116421_webgoodwill24.html.
152
Dearborn Street CBA, supra note 91, at 6, 9–10 (70,000 square feet
set aside for small retail stores that each occupy less than 5,000 square feet
and at least 5,000 square feet to one or more non-profit organizations who
primarily provide services to the Vietnamese Community); see also Stuart
Eskenazi, Coalition Talks Reach Deal on Goodwill Site, SEATTLE TIMES,
http://seattletimes.nwsource.com/html/localnews/2008152450_dearborn02m.ht
ml.
153
Columbia CBA, supra note 95, at 39–40.
154
155
Id. at 19.
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establish “a sense of permanency.”156
6. Parking & Traffic
CBAs do not generally include detailed transportation plans,
but some agreements have included provisions relating to
parking, traffic and transit facilities. (Unlike the TOD provisions
described above, which are intended to promote transit and
discourage driving, these transportation requirements are aimed
at mitigating congestion and improving infrastructure.) Examples
of transportation-related community benefits include the
establishment of a residential parking permit program,157 the
158
construction of additional parking facilities, and subway, bus
stop and other infrastructure improvements.159 The Columbia
CBA also authorizes funding for a transportation needs
assessment study, which may cover such issues as public
transportation, parking needs, traffic calming devices, and air
quality.160
7. Small Business Development
Comprehensive plans frequently address economic
development,161 and “[a] growing number of communities are
including in their comprehensive plans an intention to preserve
and strengthen locally owned businesses, limit commercial
development to the downtown or other existing retail districts,
156
Id.
See, e.g., Staples CBA, supra note 91, at A-3.
158
See, e.g., Peninsula Compost CBA, supra note 95, at 4
(neighborhood parking lot); Columbia CBA, supra note 95, at 36 (adding 72
public parking spaces).
159
See, e.g., Dearborn Street CBA, supra note 91, at 9 ($150,000 for
traffic mitigation); Columbia CBA, supra note 95, at 35–36 (subway and bus
stop improvements).
160
161
See, e.g., GROWING SMART LEGISLATIVE GUIDEBOOK, supra note 1,
at 7-127 to 7-135.
157
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195
and restrict the proliferation of corporate chains.”162 With or
without the guidance of such policies, community coalitions have
often sought CBA benefits to encourage the growth of small and
local businesses.
Many CBAs set goals for awarding contracts to local
businesses, and these provisions usually include a preference for
minority and women owned businesses—frequently referred to
as minority-owned business enterprises (“MBEs”), womenowned business enterprises (“WBEs”) or minority-womenowned business enterprises (“MWBEs”).163 CBAs relating to
projects with retail or commercial components have included
space set-asides for small and local businesses164 and in a few
CBAs, big boxes and large chain stores have been effectively
prohibited by retail size caps.165
162
See New Rules, Comprehensive Plans, http://www.newrules.org/
retail/rules/comprehensive-plans (last visited Dec. 1, 2009).
163
See, e.g., Atlantic Yards CBA, supra note 95, at 17–18 (goals to
award at least 5% of preconstruction contracts (e.g., architectural,
engineering, legal) to MBEs and 3% to WBEs (by total value of contracts),
goals to award at least 20% of construction contracts to MBEs and 10% to
WBEs (by total value of contracts), with a preference for community based
businesses, goals to award at least 20% of post construction purchasing and
service contracts to MWBEs).
164
See, e.g., Atlantic Yards CBA, supra note 95, at 19 (15% set aside
for small businesses, with below market rents); Dearborn Street CBA, supra
note 91, at 6 (70,000 square feet set aside for small retail stores greater than
5,000 square feet and at least two non-formula businesses); Gateway Center
CBA, supra note 97, at 29 (18,000 square feet for small businesses);
Longfellow CBA, supra note 95, at 12–13 (national chains can occupy no
more than 70% of the project and 10% must be reserved for “community
based small businesses”); San Jose CIM Project Community Benefits
Agreement 121–22 (Dec. 12, 2002), http://www.communitybenefits.org/
article.php?id=1476 (goals of 30% San Jose retailers and 30% regional
retailers, with a set aside of 10% of the available retail space for existing
small business in the downtown); Columbia CBA, supra note 95, at 22
(18,000 square foot set aside for small businesses).
165
See, e.g., Gates Cherokee CBA, supra note 136, at 2 (size cap at
75,000 square feet); Gateway Center CBA, supra note 97 (manuscript at 34)
(no Wal-Mart); Longfellow CBA, supra note 95, at 19 (large retail cap at
30,000 square feet); Columbia CBA, supra note 95, at 22 (retail rental size
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196
Other benefits to small and local businesses include low
interest loan programs,166 provisions requiring contracts to be
unbundled (to level the playing field for smaller businesses),167
and programs to better inform local businesses about the
project’s business opportunities.168 The Penguins Arena CBA, for
example, will seek to increase community business involvement
in the project by requiring the developer to notify the coalition
of pre-bid activities and meetings with contractors. Local
business owners will also be invited to business opportunity
workshops provided by the Penguins, which will help them to
take advantage of opportunities for concessions, retail space,
suppliers, vendors and subcontractors.169
IV. DO PRIVATE CBAS USURP THE PUBLIC PLANNING PROCESS?
The inclusion in CBAs of community amenities that resemble
items normally found in comprehensive plans and/or
implementing regulations raises a number of critical community
planning issues that have not yet been addressed.
A. Are CBAs Another Type of Community-Based Plan?
When considered as a whole, CBAs are not synonymous
with comprehensive land use plans or smaller scale communitybased plans. CBAs involve issues not contemplated by planning
documents, such as increased wage requirements, union
neutrality, local hiring goals, and job training programs. These
provisions, moreover, are core issues of the community benefits
170
CBA coalitions also have the potential to
movement.
cap at 2,500 square feet).
166
See, e.g., Atlantic Yards CBA, supra note 95, at 20; LAX CBA,
supra note 95, at 31 (revolving loan fund for small businesses).
167
See, e.g., Atlantic Yards CBA, supra note 95, at 20.
168
See, e.g., Atlantic Yards CBA, supra note 95, at 20–21 (targeted
outreach to local small businesses and “Meet the General Contractor”
meetings, a series of technical assistance workshops for local MWBEs).
169
See Penguins CBA, supra note 93, at 12–13.
170
See, e.g., CommunityBenefits.org, A New Urban Agenda for
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encourage more public participation than traditional planning
processes by building a sense of community empowerment.
Rather than the development of the community vision being
facilitated by a government employed planning staff, CBAs are
usually developed and facilitated by members of the impacted
community.171 Community-based planning and coalition
organizing have much in common, however, as both seek out
diverse stakeholders using non-conventional outreach techniques.
As project-specific documents, the impact of CBAs is also
spatially limited,172 unlike comprehensive plans, which apply to
America: Rebuild the Middle Class, http://communitybenefits.org/downloads/
A%20New%20Urban%20Agenda%20for%20America.pdf (last visited Oct.
15, 2009) (“The standard menu of progressive urban policy initiatives focuses
on addressing identified needs of poor families by reestablishing the social
safety net and improving job training and education programs. The new
urban agenda adds an important and often missing component by addressing
one of the main causes of urban poverty: the prevalence of low-paying, lowquality employment and the dearth of middle-class job opportunities.”).
171
However, in states where the government is more directly involved
with CBAs, such as in California, the planning staff may be more intimately
involved in the process. For example, staff at the Los Angeles Community
Redevelopment Agency are routinely involved in the development of CBAs.
172
The requirement that CBAs be limited to one development is intended
to distinguish the tool from:
redevelopment plans, general plans, specific plans, zoning laws, and
other land use documents that might encourage or require specified
community benefits for particular geographic areas. This requirement
also excludes from the definition of CBA single-issue policies that
cover a range of projects, such as typical inclusionary housing
policies or local hiring policies.
Gross, supra note 3, at 39. However, legislative CBA provisions may require
multiple developers to provide specific community benefits lobbied for by the
community, as in the Milwaukee Park East Redevelopment Compact. This
document requires the developers of county-owned land to provide living
wages and job training programs, and to use green building techniques. Park
East Redevelopment Compact, supra note 91. See also Amy Lavine,
Milwaukee Park East Redevelopment CBA, COMMUNITY BENEFITS
AGREEMENTS
BLOG,
http://communitybenefits.blogspot.com/2008/01/
milwaukee-park-east-redevelopment-cba.html (Jan. 3, 2008). Alternatively, a
legislative CBA provision may require multiple developers to negotiate CBAs
in the future. This approach was taken in relation to Atlanta’s Beltline
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all of the residents and businesses in a given city or metropolitan
area. CBAs that involve commitments of planning-related
amenities and accommodations may be placed on the spectrum
close to small-scale comprehensive plans, especially when they
include the types of broad policy statements that are commonly
used to guide community-based plans.
Despite the similarities between CBAs and small-scale
community-based plans, the unregulated CBA negotiation
process should not be permitted to displace thorough and
accountable government planning. In this regard, the CBA for
Atlantic Yards, a proposed arena project and mega-development
located in Brooklyn, has been particularly maligned. The CBA
has demonstrated that specious appearances of community
involvement can legitimate departures from the normal planning
process when, in fact, the CBA’s effect may be to make
development projects less accountable, less transparent, and
more exclusionary than they otherwise would be.
In the case of Atlantic Yards, the project’s government
partner, a state economic development authority, overrode all of
the local zoning and planning laws in order to expedite the
development.173 As a result, the project’s approval was left
174
primarily to the state authority’s unelected board, with no city
project, requiring developers that accept financial incentives to “reflect,
through the development agreements or funding agreements that accompany
such projects, certain community benefit principles[.]” ATLANTA, GA.,
ORDINANCE 05-O-1733 § 19 (2005).
173
Lance Freeman, Atlantic Yards and the Perils of Community Benefits
Agreements, PLANETIZEN, May 5, 2007, http://www.planetizen.com/node/
24335. Authority for the override of local zoning and planning laws is found
in the New York State Urban Development Corporation Act, N.Y.
UNCONSOL. LAW § 6255 (2006).
174
The project also required a land deal with the Metropolitan
Transportation Authority, another unelected authority, as well as approvals
from the Public Authorities Control Board (“PACB”), which does include
several representatives from the state legislature. See N.Y. State Gov’t
website, About the Public Authorities Control Board, http://www.budget.
state.ny.us/agencyGuide/pacb/aboutPACB.html. The PACB’s role is limited,
however, to approving project financing; it is not authorized to make
planning and development decisions.
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199
officials ever having had a chance to review the project and
condition or reject it.175 The CBA, moreover, was finalized
before an environmental impact statement had been prepared for
the project, meaning that the CBA signatories may have been
unaware of the extent of the project’s impacts.176
The Atlantic Yards CBA does include promises of significant
community amenities, such as hundreds of affordable housing
units, open space, job training, and a health center, but it has
been widely criticized as being unrepresentative of the
community.177 Negotiations were conducted secretly, with many
175
Normally, the city’s uniform land use review process would give local
community boards, the borough president, the planning commission, and the
city council a chance to review the development application. New York City
Dept. of City Planning, The Uniform Land Use Review Procedure (ULURP),
http://www.nyc.gov/html/dcp/html/luproc/ulpro.shtml (last visited Dec. 1,
2009).
176
The Atlantic Yards CBA was signed in 2005. Atlantic Yards CBA,
supra note 95, at 1. The EIS was adopted in 2006. New York State’s Empire
State Development, Atlantic Yards Draft Environmental Impact Statement
(DEIS)—July 18, 2006, http://www.empire.state.ny.us/Subsidiaries_Projects/
Data/AtlanticYards/AdditionalResources/AYDEIS/AYDEIS.html (last visited
Mar. 9, 2010). FEIS was adopted on November 27, 2006. New York State’s
Empire State Development, Atlantic Yards Final Environmental Impact
Statement (FEIS)—Corrected and Amended November 27, 2006,
http://www.empire.state.ny.us/Subsidiaries_Projects/Data/AtlanticYards/Addi
tionalResources/AYFEIS/AYFEIS.html (last visited Mar. 9, 2010).
177
Only eight community groups joined the CBA coalition, as compared
to the more than 50 groups that are opposed to the project. Develop—Don’t
Destroy Brooklyn, The Opposition, http://dddb.net/php/opposition.php (last
visited Oct. 14, 2009) (listing opposition groups). Testimony made on behalf
of Good Jobs New York recognized that “[p]erhaps the most striking is that
elsewhere CBAs are negotiated by one broad coalition of groups that would
otherwise oppose a project, a coalition that includes labor and community
organizations representing a variety of interests . . . . In the BAY [Brooklyn
Atlantic Yards] case, several groups, all of which have publicly supported the
project already, have each engaged in what seem to be separate negotiations
on particular issues.” Public Hearing of the New York City Council Comm.
on Econ. Dev. on the Proposed Brooklyn Atlantic Yards Project (May 26,
2005) (comments of Bettina Damiani, Project Dir., Good Jobs New York),
available at http://www.goodjobsny.org/testimony_bay_5_05.htm [hereinafter
Damiani testimony]; see also Develop—Don’t Destroy Brooklyn, Where is
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stakeholders excluded, and all of the coalition community groups
have received funding from the developer.178 Additionally, some
of the most important commitments in the agreement are likely
unenforceable.179
For the community groups that were not given a chance to
participate in defining the developer’s public responsibilities—
and there are many such groups180—the CBA was a wholly
the Community in “CBA”?, Apr. 20, 2007, http://www.dddb.net/php/
latestnews_Linked.php?id=696.
178
See, e.g., Damiani testimony, supra note 177, (“The negotiations
surrounding the development of the BAY project have been marked by
secrecy . . . . Unsurprisingly, this process has contributed to a fragmentation
of community responses, as some groups have been able to work with the
‘designated developer’ to advance their concerns while others have not.”);
Jess Wisloski, Ratner Invites Chosen Few to Draft Agreement, BROOKLYN
PAPER, Oct. 2, 2004, http://www.brooklynpaper.com/stories/27/38/
27_38nets2.html (discussing the secrecy and exclusivity of CBA
negotiations); Norman Oder, Atlantic Yards Process a “Modern Blueprint”?
Only if the Times Ignores the Evidence, TIMES RATNER REPORT, Oct. 13,
2005, http://timesratnerreport.blogspot.com/2005/10/atlantic-yards-processmodern.html) (calling the Atlantic Yards and its CBA “a national model in
public manipulation and broken promises”); Norman Oder, With $1.5M
Grant/Loan, FCR Bails Out National ACORN, Parent of Major CBA Partner,
ATLANTIC YARDS REPORT, Dec. 2, 2008, http://atlanticyardsreport.blogspot.
com/2008/12/with-15m-grantloan-fcr-bails-out.html (reporting that the
developer gave one of the CBA signatories a $1.5 million bailout); Norman
Oder, AY CBA Witness Bloomberg Blasts CBAs as Extortion; Signatory
Nimmons Brushes off Questions from The Local, ATLANTIC YARDS REPORT,
Aug. 26, 2009, http://atlanticyardsreport.blogspot.com/2009/08/ay-cbawitness-bloomberg-blasts-cbas-as.html (“On July 22, Forest City Ratner
executive Mary Anne Gilmartin confirmed at a public meeting that the
developer provides funds to all of the signatories of the Community Benefits
Agreement.”).
179
See, e.g., Norman Oder, More Criticism of the Atlantic Yards
Community Benefits Agreement: It (Mostly) Doesn’t Apply if Ratner Sells the
Project, ATLANTIC YARDS REPORT, Mar. 30, 2009, http://atlanticyardsreport
.blogspot.com/2009/03/more-criticism-of-atlantic-yards.html (explaining that
many provisions in the CBA would not apply if the developer were to sell the
project). Additionally, it is not clear that the CBA, and especially its
affordable housing promises, would be enforceable if only the arena were to
be built.
180
See, e.g., The Opposition, supra note 177 (listing opposition groups).
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201
inadequate substitute for the city’s land use review process, even
if that process is not ideal for large scale developments.181 As
urban planning professor Lance Freeman has explained:
While the CBA does at least give some of the most
disenfranchised residents an opportunity to reap some
benefits from the project . . . there is no mechanism to
insure that the “community” in a CBA is representative
of the community. If the signatories to the CBA were
simply viewed as another interest group, that might be
ok. But the CBA is being presented as illustrative of the
development’s community input. Public officials are
posing for pictures with the developer and signatories to
the CBA, giving the impression that the community had
significant input into the planning [of] Atlantic Yards.
This is not necessarily the case.
[T]he CBA . . . cannot be viewed as a substitute for a
true planning process that includes community input. If a
developer is proposing a project that will unduly burden
181
See, e.g., Norman Oder, Catching Up with Coney Island: How CBAlike Trade-offs May Have Sacrificed the Amusement Area, ATLANTIC YARDS
REPORT, Aug. 7, 2009, http://atlanticyardsreport.blogspot.com/2009/08/
catching-up-with-coney-island-how-cba.html (noting that the city’s uniform
land use review process failed to “resolve opposing views” regarding the
Coney Island rezoning); Norman Oder, Flashback, 2005: Roger Green Says
AY Area “Not Blighted;” Academic Says AY a Far Cry from Times Square
Blight, ATLANTIC YARDS REPORT, Feb. 19, 2009, http://atlanticyardsreport.
blogspot.com/2009/02/flashback-2005-roger-green-says-ay-area.html (quoting
state Assemblyman Daniel O’Donnell as calling the city’s planning review
process a “horse and pony show” because the city council often ignores the
recommendations of local community boards); Norman Oder, HPD Official
Says Development Trade-offs Should Be Transparent (and Implicitly Indicts
the AY Approval Process), ATLANTIC YARDS REPORT, Nov. 7, 2008,
http://atlanticyardsreport.blogspot.com/2008/11/hpd-official-says-development
-trade.html (quoting an official from the city Department of Housing
Preservation as explaining that “ULURP is awfully late to start a
conversation about a large project. It’s one thing if you’re talking about a
small project, and you’re going to tweak a floor . . . or affordability,
slightly. If you’re talking about a large-scale project, ULURP is simply too
late to really have that dialogue”).
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202
the community, exacting benefits in exchange for
tolerating these burdens is fine idea. Ideally, this would
be done as part of a democratic planning process. When
negotiated by private organizations, however, this is
symptomatic of a flawed planning process. When CBAs
are used in place of an inclusive planning process they
run the risk of legitimating the very process they are
supposed to counteract, planning and development that
disenfranchises.182
Since the Atlantic Yards CBA was signed in 2005, public
officials involved in the Atlantic Yards development have
admitted that the project should have gone through the local
planning process.183 Mayor Bloomberg, who enthusiastically
endorsed the CBA in 2005 has now come full circle, stating that
he is “violently opposed to community benefits agreements” and
that a “small group of people, [who] feather their own
nests. . . [and] extort money from the developer” is “just not
good government.”184 Even the developer has removed the CBA
182
Freeman, supra note 173 (emphasis added); see also Norman Oder,
Push for AY Development Trust Begins; How Much Power Would it Have?,
ATLANTIC YARDS REPORT, June 17, 2008, http://atlanticyardsreport.blogspot.
com/2008/06/push-for-ay-development-trust-begins.html (quoting a city
council member as remarking that “[t]he fundamental mistake that was made
here, really the original [mistake] of this project, is that it was approved in a
way that went around all the usual process[es] for approving a big project . .
. . We never had a chance to fix all the problems.”); Norman Oder,
ACORN’s Lewis Gets Fiery as “Affordable Housing” Debate Heats Up,
ATLANTIC YARDS REPORT, Mar. 1, 2006, http://atlanticyardsreport.blogspot.
com/2006/03/acorns-lewis-gets-fiery-as-affordable.html (commenting on the
controversy that the CBA and the lack of local review has engendered, law
professor Vicki Been opined that “[o]ne of the take home messages is we
need to use this opportunity to figure out how to fix the [planning] system
more broadly so we’re not having these kinds of fights later in the year or
decades”).
183
See, e.g., Norman Oder, After Doctoroff Admits AY Should’ve Gone
Through ULURP, Will Bloomy, Burden Follow?, ATLANTIC YARDS REPORT,
Dec. 12, 2007, http://atlanticyardsreport.blogspot.com/2007/12/after-doctor
off-admits-ay-shouldve-gone.html.
184
Norman Oder, AY CBA Witness Bloomberg Blasts CBAs as Extortion;
Signatory Nimmons Brushes Off Questions from The Local, ATLANTIC YARDS
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203
from its website,185 which at one point prominently displayed
information about the project’s community benefits.186
This CBA experience is used to demonstrate that not all
CBAs are “textbook” illustrations of the true benefits of
meaningful CBA processes and results. In some cases, it is
possible that the CBA framework could provide a viable
alternative to more conventional planning techniques. But, as
illustrated by this example, such a process is susceptible to
capture and manipulation.
B. Do CBAs Advance Narrow Interests at the Expense of the
Larger Community?
While comprehensive land use plans are designed to benefit
the community as a whole, and community-based plans are
generally intended to be incorporated into more general planning
documents, CBAs are negotiated to benefit small neighborhoods
within a metropolitan area. Because of their targeted focus, it
has occasionally been contended that CBA coalitions divert
resources for themselves at the expense of the larger
community. When projects covered by CBAs receive significant
public subsidies, as they often do, this perception is all the more
heightened.187
REPORT, Aug. 26, 2009, http://atlanticyardsreport.blogspot.com/2009/08/aycba-witness-bloomberg-blasts-cbas-as.html.
185
See Barclay’s Center Brooklyn, http://www.barclayscenter.com (last
visited Oct. 14, 2009).
186
The developer, in fact, touted the CBA in many of the project’s
promotional materials. See, e.g., Norman Oder, In Seventh Slick Brochure,
Forest City Ratner Touts “Historic” CBA, ATLANTIC YARDS REPORT, Mar.
3, 2008, http://atlanticyardsreport.blogspot.com/2008/03/in-seventh-slickbrochure-forest-city.html (discussing a brochure calling the CBA “historic”).
187
See Matthew Schuerman, The C.B.A. at Atlantic Yards: But Is It
Legal?, N.Y. OBSERVER, Mar. 14, 2006, http://www.observer.com/node/
34377 (“Carl Weisbrod, the former president of the city Economic
Development Corporation, criticized the use of CBA’s in projects that receive
public funds—one of which is Atlantic Yards—as fundamentally
undemocratic. ‘If the public is putting money into the project and the
developer is allocating that money in private deals with the community, it is
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CBA supporters have made persuasive arguments against this
premise, explaining that CBAs can produce social and economic
goods that ultimately benefit their surrounding regions. As
explained by the Partnership for Working Families, a national
organization that promotes CBAs, “Community benefits tools
maximize returns on local government investments . . . .
Community benefits programs can transform regions through
stronger, more equitable economies . . . . The community
benefits model works for developers, too . . . . Public input
results in better projects that benefit the whole community . . . .
Community benefits are part of a smart growth agenda.”188
Indeed, the CBA framework is inherently pro-development, and
it can help to obtain project approvals where NIMBYism might
otherwise prevail.189 Additionally, CBAs, like development
agreements,190 can add a measure of certainty to development
projects by setting up mechanisms to resolve community
concerns that might arise during buildout, before they ripen into
public opposition or litigation.191
As with the question of whether CBAs distort the planning
not government setting the priorities. Generally speaking, it is city taxpayer
dollars that are being spent in not necessarily high priority areas,’ he said. ‘It
shouldn’t be some local community groups making these decisions. It should
be a cross-section of the community and city government.’”).
188
THE PARTNERSHIP FOR WORKING FAMILIES, COMMUNITY BENEFITS:
PRACTICAL TOOLS FOR PROACTIVE DEVELOPMENT 3, available at
http://communitybenefits.org/downloads/CB%20Tools%20for%20Proactive%
20Development.pdf.
189
See, e.g., id. at 3 (“CBA advocates are pro-growth . . . . Once an
agreement is achieved, the developer can feel confident that they [sic] have
real community support [for] the project, easing the approvals process for
everyone.”).
190
See Michael B. Kent, Jr., Forming a Tie That Binds: Development
Agreements in Georgia and the Need for Legislative Clarity, 30 ENVIRONS
ENVTL. L. & POL’Y J. 1, 8–9 (2006) (explaining how development
agreements provide certainty in the land development process).
191
Most CBAs provide for mediation and/or binding arbitration in the
case of a dispute between the coalition and the developer. See, e.g.,
Longfellow CBA, supra note 95, at 24 (mediation); LAX CBA, supra note
95, at 33 (arbitration).
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205
process and produce counterproductive results, the effect of a
CBA on the allocation of metropolitan resources will vary
depending on the circumstances surrounding its adoption and the
terms that it embraces. A CBA that is negotiated by a
historically disempowered community for a development that
will have significant negative impacts will advance equity and
fairness goals, rather than inhibit them. But other situations can
be easily imagined in which CBAs could lead to private
windfalls and misallocations of public and private resources.
While this has not been a problem in California, the New York
CBAs have not demonstrated as much integrity.
One situation in which CBAs may lead to windfall benefits
occurs when coalition community groups receive a direct
financial benefit in exchange for their support of a project. This
occurred in relation to the Atlantic Yards CBA, as noted above.
The director of the Partnership for Working Families,
responding to this situation, stated: “[a]s a matter of principle,
groups in our network don’t take money from developers. We
want to avoid any appearance of a conflict of interest . . . .”192
Ideals may be important to the community benefits movement,
but without conflict of interest regulations to protect the integrity
of CBAs, the movement will continue to be susceptible to
developer-coalition collusion.
It is also possible that communities could demand excessive
benefits from developers eager to obtain public support and
quick project approvals. While there is nothing unlawful about
this in the context of a purely private agreement, especially
where the community will suffer definite and negative
development impacts, the effect that such a CBA may have on
government decision-makers raises ethical and constitutional
problems. Ethical considerations come into play where coalitions
are used as a proxy for politicians seeking particular community
amenities for specific constituent groups. Again, the trouble has
192
Norman Oder, Conflict of Interest? $350K to CBA Signatories Shows
Departure From L.A. Model, ATLANTIC YARDS REPORT, June 8, 2006,
http://atlanticyardsreport.blogspot.com/2006/06/conflict-of-interest-350k-tocba.html.
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206
been caused by New York CBAs, and similar sorts of
agreements even prompted a New York City Bar Association
report in 1988. The report unequivocally counseled against
permitting CBA-type deals:
The ad hoc payment of money or services in return for
favorable governmental action also adversely affects the
decision-making process. In egregious cases, the decision
maker is corrupted. In less egregious cases, satisfying the
wish list for a borough president, community board or a
mayor enhances the recipient’s political power. The
decision-maker may accept the project in order to get the
unrelated amenities, when perhaps it should be voted
down. Thus integrity is eroded, of the government in
general and of the zoning laws and land use regulations
in particular.193
These ethical concerns also contribute to the reasoning
behind the Supreme Court’s doctrine prohibiting development
exactions,194 which “has its roots in the allegations of coercion
and illicit motive that long have animated judicial and academic
debate about exactions and more generally, about the
unconstitutional conditions doctrine.”195 Development agreements
permit local governments to avoid the exactions ban by
negotiating for developer concessions, usually traded for a
guarantee that zoning and land use regulations will not be
changed in a manner that prevents successive phases of a
project. Because these agreements are voluntary, development
approvals are not considered to be conditioned on the provision
of development amenities, even if this is the de facto (and often
196
desired) result. Local governments are currently authorized to
193
Matthew Schuerman, C.B.A.’s: Coming to a Bar Near You, N.Y.
OBSERVER, Jan. 13, 2006, http://www.observer.com/node/34098.
194
See Dolan v. City of Tigard, 512 U.S. 374 (1994); Nollan v. Cal.
Coastal Comm’n, 483 U.S. 825 (1987).
195
Vicki Been, “Exit” as a Constraint on Land Use Exactions:
Rethinking the Unconstitutional Conditions Doctrine, 91 COLUM. L. REV.
473, 475 (1991).
196
See generally Callies & Tappendorf, supra note 85.
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207
enter into development agreements in about a dozen states, but
such arrangements have also been upheld in states where no
statutory authority for development agreements exists, as in
Texas and Massachusetts.197 In some states where development
agreements have not been approved, either by statute or judicial
fiat, the development process is often dominated by other types
of negotiated agreements between developers and planning
entities, often resulting from environmental mitigation measures
where local environmental review occurs.
The problem with unauthorized and unregulated bilateral
government-developer negotiations is that they open up the
possibility that “‘needy’ cities and towns [may] see their zoning
powers as for sale to the highest bidder.”198 And where this is
the case, short term economic goals may be just as likely to
motivate local government decision makers as are the types of
social and environmental policies that require foresight and longterm planning.199 In the states that have enacted development
agreement statutes, on the other hand, the comprehensive plan
acts as a safeguard to ensure that development agreements
further the community’s broad goals and policies for future
development.200 States such as California, which require
consistency between zoning and the comprehensive plan, also
require consistency in the negotiation of development
agreements. The development agreement framework has also
allowed planning agencies, community organizations and
197
See Curtin & Witten, supra note 24, at 340, 338–39 (discussing
recent Massachusetts cases that “conclude that a promise by a petitioner is
different from a requirement imposed as a condition precedent by the
municipality”); Kent, Jr., supra note 190, at 6, n.25 (2006) (citing cases
permitting development agreements in the absence of enabling legislation
from Alabama, Nebraska, and New Mexico).
198
See Curtin & Witten, supra note 24, at 338.
199
See Camacho II, supra note 54, at 271 (“While modern bilateral
negotiation attempts to address some of the intrinsic inefficiencies of the
traditional command and control approach . . . bilateral negotiation
approaches promote adversarial and self-interested behavior while ignoring
the long-term community engagement that is essential to the legitimacy of
local decision-making processes.”).
200
Curtin & Witten, supra note 24, at 345.
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208
developers to work together in building CBAs, while in other
states local governments have struggled to determine where they
fit into the CBA process.
Four New York CBAs have been negotiated to date, relating
to Atlantic Yards, the Gateway Center at Bronx Terminal
Market, Yankee Stadium, and the expansion of Columbia
University.201 In each of these cases, the lack of strong and
inclusive community coalitions and the amount of influence
wielded by public officials suggests that there were, at the very
least, opportunities for this sort of bargaining away of the city’s
comprehensive planning goals.202
201
See Salkin & Lavine, supra note 83, at 308–17.
Atlantic Yards continues to be promoted with much zeal by the
Empire State Development Corporation, even though its public benefits have
decreased substantially since the project was approved in 2006. Frank Gehry
is no longer the architect, for example; the project’s affordable housing
component has been significantly delayed; and a renegotiated land deal with
the Metropolitan Transportation Authority has resulted in an arguably less
valuable package for the authority (and for New York City subway riders). In
May 2009, the New York City Independent Budget Office (“IBO”) concluded
that changes in the project’s commercial component and increased subsidies
rendered the arena a net money loser for the city. See Norman Oder, Senate
Hearing: No Tough Questions for ESDC, ATLANTIC YARDS REPORT, May 29,
2009, http://atlanticyardsreport.blogspot.com/2009/05/senate-hearing-no-tou
gh-questions-for.html. Despite this revelation, and despite increasingly loud
calls for more transparency in the project, the Empire State Development
Corporation refuses to release its updated cost-benefit analysis until after the
project’s next board approval. As a result, the public will not get a chance to
comment on the situation. What’s more, while refusing to provide a
meaningful response to serious allegations that the project may no longer be
in the public’s best interest, ESDC has “not looked closely at that [the IBO’s]
report.” Norman Oder, ESDC, FCR Face, Answer, Evade Tough Questions,
ATLANTIC YARDS REPORT, July 23, 2009, http://atlanticyardsreport.blogspot.
com/2009/07/esdc-fcr-face-answer-evade-tough.html.
In the Bronx, it was revealed last year that the mayor’s office had
pressured the Yankees to provide a free luxury suite for the mayor and other
high-ranking officials. State Senator Richard Brodsky, who has been urging
reforms, asked “what is the public interest here and who’s protecting it?”
David W. Chen, City Pressed for Use of Yankee Luxury Suite, N.Y. TIMES,
Nov. 30, 2008, available at http://www.nytimes.com/2008/11/30/nyregion/
30stadium.html. The project has been riddled with other controversies, from
202
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209
In states that do not allow development agreements, the
exactions issue also raises the question of the most appropriate
way for public officials to react when faced with a developer
that refuses to negotiate a CBA with a strong and broadly
inclusive CBA coalition: the local official can become involved
in CBA negotiations and try to persuade the developer into
negotiating, which might raise exactions problems if that
persuasion amounts to coercion; or she can remain on the
sidelines and hope that the parties reach a deal. In Pittsburgh,
the mayor and county executive became very involved in
negotiations for the Penguins CBA, to the point where they
committed $1 million in matching funds to help secure a grocery
store and YMCA for the community. Both of these facilities are
sorely needed in the underserved community located near the
arena site, and the CBA coalition was one of the largest and
most inclusive coalitions formed to date. In short, this was an
ideal situation for the negotiation of a CBA. But the city has
changed its tune toward CBAs since its legal department
concluded that “[w]hile [CBAs] could provide benefits to the
community, they are simply not a part of what the Planning
Commission may consider when reviewing master-development
plans and project-development plans.”203
a U.S. Congressional inquiry to its tax-exempt bonding scheme (which
resulted in an IRS move to close certain loopholes), to an 18-month delay in
implementing the CBA. With the old Yankee Stadium still standing after 311
days, preventing the construction of parks to replace the ones covered over
by the new stadium, some people have begun referring to the “Yankee
Stadium Death Watch.” Neil deMause, Yankee Stadium Death Watch: Day
331, N.Y. NEWS BLOG, http://blogs.villagevoice.com/runninscared/archives/
2009/08/yankee_stadium_3.php. With problems such as these it seems fair to
inquire into the propriety of the CBA, which was completed with no
community participation and which is very likely unenforceable.
The Gateway Center at Bronx Terminal Market and the Columbia
University expansion have both raised controversies of their own, but their
CBAs have received less criticism.
203
Chris Togneri, Updated North Shore Plan Approved, PITTSBURG
TRIBUNE REV., June 10, 2009, http://pittsburghlive.com/x/pittsburghtrib/
news/pittsburgh/s_628882.html. See also Oro Valley Town Council Minutes,
Regular Session, Aug. 27, 2008 (“Town Attorney Tobin Rosen explained that
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C. How Should a Local Government Respond if a CBA is
Inconsistent with the Comprehensive Plan?
To the extent that CBAs cover land use and community
development issues, they may produce a different vision for the
neighborhood than the vision articulated in a legally adopted
comprehensive plan covering the entire community. A recent
example from the Bronx highlights how CBA provisions can
conflict with government planning efforts in this manner. The
Kingsbridge Armory Redevelopment Alliance (“KARA”), the
first truly inclusive grassroots CBA coalition in New York City,
raised this problem in the summer of 2009 when, during
negotiations, it demanded a ban on new grocery stores in the
development. To some community members, the provision was
intended to protect existing businesses and the jobs they
provided; but to others, the ban was viewed as interfering with
the community’s need for grocery stores with more healthy and
organic food.204 For the redevelopment project to proceed, the
205
site will need to be rezoned to C4-4 —a general commercial
designation consistent with the comprehensive plan206 that
typically permits grocery and other retail food stores.207
Accordingly, the CBA poses the question of whether local
groups should be able to modify generally applicable zoning
these agreements are great if neighbors and developers are willing to agree to
it. He pointed out that the Town cannot require the agreement if the
developer meets the requirements of the Zoning Code.”).
204
Terry Pristin, Proposed Supermarket Divides Bronx Community, N.Y.
TIMES, Sept. 29, 2009, available at http://www.nytimes.com/2009/09/30/
realestate/commercial/30armory.html?_r=1.
205
EXECUTIVE SUMMARY OF THE SHOPS AT THE ARMORY PROJECT Fig.
S-4, http://www.nyc.gov/html/oec/downloads/pdf/08DME004X/08DME004
X_FEIS/08DME004X_FEIS_00_Executive_Summary.pdf (last visited Dec. 1,
2009).
206
The Kingsbridge Armory Redevelopment Alliance Proposal Fig. S-4,
S-6, http://www.nyc.gov/html/oec/downloads/pdf/08DME004X/08DME004X
_FEIS/08DME004X_FEIS_00_Executive_Summary.pdf (last visited Dec. 1,
2009).
207
NEW YORK CITY PLANNING COMMISSION, ZONING RESOLUTION 534
(2009), available at http://www.nyc.gov/html/dcp/pdf/zone/allarticles.pdf.
SALKIN REVISED.DOC
4/27/2010 8:24 PM
211
regulations via private agreement, even if the city has
specifically decided to apply those general regulations to the
site. Although in many cases this type of use restriction would
resemble a simple restrictive covenant, the city in the
Kingsbridge case must implicitly approve any CBA related to
the development because of the extensive subsidies being given
to the developer.208 Can the city with one hand apply a uniform,
general regulation, and with the other approve a private pact
limiting the reach of the general law?
Another hypothetical could be imagined where a
comprehensive plan and implementing land use regulation
articulates a preference for recreational facilities in designated
areas, but such facilities are not planned for a neighborhood
where a coalition has just negotiated a private CBA to include a
neighborhood park. Such a CBA could be viewed as inconsistent
with the comprehensive plan, raising the question of who speaks
for the neighborhood. A core principle of the social justice
movement is that the community speaks for itself. What then, is
the appropriate role of the government? If in fact the community
coalition is representative of the views of the neighborhood it
purports to represent, and where the neighborhood, speaking
through its coalition representatives expresses the desire for a
certain amenity that is inconsistent with the comprehensive plan,
whether the coalition and the project sponsor should legally
agree to the amenity may be an open question. Going back to
the notion that the local government is responsible for the
development, adoption and implementation of the comprehensive
plan, where a CBA contains items that are inconsistent with that
plan, should the locality view the CBA as public input and begin
a process to amend the plan and regulations to make them
consistent with such views? Or should the government refuse to
amend the comprehensive plan, thereby preventing the project
208
See, e.g., Ivonne Salazar, Live Blogging From Armory IDA Hearing:
Tax Breaks Approved, Land Use Review to Begin, BRONX NEWS NETWORK,
Mar. 11, 2009, http://www.bronxnewsnetwork.org/2009/03/live-bloggingfrom-armory-ida-hearing_11.html (discussing the last phase of the project
going through the city’s land use review process).
SALKIN REVISED.DOC
212
4/27/2010 8:24 PM
sponsor from fulfilling its promises? This is a critical question
for all private parties involved in the negotiation of a CBA.
Legally binding CBAs arguably should not be entered into where
one party lacks the legal ability to deliver on a promise, given
that such situations are susceptible to manipulation and bad faith.
Across the country there is a wide disparity as to the level of
government involvement in the development and “acceptance”
of CBAs as a condition of development approval. As noted
above, local governments in California are likely to be at least
tangentially involved in CBA negotiations. In these cases, the
government’s involvement may lead to information for the
parties indicating that land use related terms of the CBA may
not be enforceable absent an adjustment to current planning
documents and regulations.
In states such as New York, where the government is not
involved in purely private CBA negotiations, or at least is better
advised not to be, the municipality must decide how, if at all, it
should embrace the community coalition’s articulated desires for
certain community amenities that are not currently part of the
land use regulatory regime. At a minimum, the planning
department within the municipality will be on notice that the
needs of certain sections of the community are not being met by
the overall plan and vision for the community as a whole. This
information should be the basis for a re-evaluation of the
comprehensive plan—either specific aspects of the plan or the
plan as a whole—to make sure that the plan and its
implementing regulations are serving the best interests of the
jurisdiction as a whole. Nevertheless, as explained above,
conditioning project approvals on criteria not included in the
zoning ordinances or comprehensive plan may, if coercive
enough, make the action unlawful.
Further support for the notion that CBAs should inform and
influence the comprehensive planning process, which should be
ongoing and continuously evolving, is that the methodology used
for the development of a CBA tends to be more inclusive than
that used for the development of a comprehensive plan, at least
where no community-based planning programs exist. The
protocols used in coalition building for the purposes of
SALKIN REVISED.DOC
4/27/2010 8:24 PM
213
negotiating a CBA, including the consensus building process for
articulating community desires, are more empowering than the
typical opportunities for public participation in the development
and implementation of a comprehensive plan.
While it can be argued that local governments give up
planning authority by yielding to the community desires
expressed in CBAs that are inconsistent with the existing plan, it
may be better viewed as the government doing exactly what it is
supposed to be doing—viewing the planning process as ongoing
and engaging public involvement.
V. CONCLUSIONS
When CBAs are negotiated by broad based, inclusive
coalitions that are truly representative of community interests,
and such agreements result in a community planning vision that
dramatically differs from the existing traditional comprehensive
plan and implementing regulations for the area, it indicates that
existing governmental planning processes may be inadequate,
and the most appropriate action for a local government to take
209
may be to reform the way that it plans. As described above, a
new paradigm of community-based planning and environmental
justice has emerged that places an increased focus on
209
See Oro Valley Town Council Minutes, Regular Session, Aug. 27,
2008, available at http://lexicon.orovalleyaz.gov/ACK/ArchiveSearch/
ArchiveSearch.htm (select Option 2; search minutes; enter date 08/27/08;
select study session) (“Bill Adler, Town resident and member of the Planning
& Zoning Commission presented information about Community Benefit
Agreements. He explained that the current process of meeting with
neighborhoods and developers could be formalized, bridging communication
between neighbors, the Town and developers. He explained the importance of
citizens first meeting without the applicant so they can be educated on the
development review process, Zoning Code and entitlements and where effect
of change can take place on the development so that they have an
understanding of the process before meeting with the developer. Terry
Parish, Town resident, encouraged the Council to formalize the process so
that developers know upfront that the goal is to come to an agreement with
neighbors and require neighbors to be educated on the development
process.”).
SALKIN REVISED.DOC
4/27/2010 8:24 PM
214
transparency,
accountability,
and
meaningful
public
participation, within the existing planning process. As explained
by law professor Alejandro Esteban Camacho, there are four
underlying reasons for developing more participatory planning
models:
(1) that an open negotiation process can thwart the
corruption and unfair dealing so closely associated with
conventional negotiated land use regulation; (2) that
participatory processes are necessary to obtain important
information about the interests and preferences of
affected parties; (3) that fostering meaningful
participation has a positive impact on both participants’
and the general public’s satisfaction with the regulatory
process and outcomes; and (4) that direct participation
serves the important goal of enhancing accountability for
governmental services and decisions.210
In California, local governments have responded to CBA
campaigns by working closely with community groups and
consistently incorporating CBAs into development agreements.
The result, more often than not, has been an improved planning
process for all parties. In New York and the many other states
where development agreements have not been formally
authorized, either by statute or judicial order, the CBA model is
less ideal for fostering this type of collaboration. Other ways
must be found to educate the public about the development
process and make it more transparent, democratic and
accountable.
Fortunately, local governments and planning commissions
already have the tools to improve the way that planning
decisions are made. To list just a few methods to encourage
community-based planning, local governments can:
(1) make planning information easily accessible online
and at designated public facilities in all communities and
neighborhoods;
(2) provide hearing notices that are actually designed to
210
Camacho II, supra note 54, at 279.
SALKIN REVISED.DOC
4/27/2010 8:24 PM
215
reach impacted community members, rather than the
“rudimentary public notice”211 mandated by state or local
law;
(3) hold hearings in locations close to impacted
neighborhoods and at times of day when community
members are likely to be available;
(4) hold additional public meetings, workshops, and other
events in order to reach a diverse cross section of
community members;
(5) partner with existing neighborhood associations, civic
organizations, and faith based entities which typically
have established community networks;
(6) make clear that planners will be responsive to
neighborhood residents’ concerns and desires regarding
future growth; and
(7) express a commitment to ensure that communitybased planning is an integral part of the planning process
and will, to the greatest extent practical, be incorporated
into the comprehensive plan.
Development controversies can also be headed off by
including the community in discussions about proposed projects
early enough in the process so that impacted stakeholders can
help to shape project plans. Too often, communities do not get a
chance to participate in the planning process until the developer
has already worked out its financials and the local government
has invested substantial resources in preliminary planning
reviews, making it likely that the project’s fate has already been
decided. The CBA movement has clearly demonstrated the
importance of having a system in place whereby community
members can feel that they play an important role not just in the
planning process, but also in the development review process.
Especially in those states that do not permit development
agreements, leaving community involvement unregulated in the
hands of private developers carries substantial risks that the
CBA concept will be co-opted, abused, or ignored. Recognizing
211
Id. at 279–80.
SALKIN REVISED.DOC
216
4/27/2010 8:24 PM
this, local governments, as part of
comprehensive planning function, should
developing alternative planning processes
community benefits movement’s goals
democracy, and accountability.
their continuous
be proactive in
that advance the
of inclusiveness,
STANTON 2D REVISION.DOC
5/8/2010 4:06 PM
THE FAILURE OF FANNIE MAE AND
FREDDIE MAC AND THE FUTURE OF
GOVERNMENT SUPPORT FOR THE
HOUSING FINANCE SYSTEM
Thomas H. Stanton*
In devising the government’s response to the Great
Depression, President Franklin Roosevelt turned not only to
bankers, economists and lawyers, but also to scholars and
practitioners in the field of public administration such as Charles
Merriam and Louis Brownlow.1 This article seeks to build on
that tradition. While other disciplines concern themselves with
devising appropriate policies, public administration focuses more
on trying to ensure that those policies are effectively
implemented.
Lessons from public administration, and especially the art of
organizational design, provide insight about the failure of Fannie
Mae and Freddie Mac and also suggest more stable means for
government to support today’s troubled housing finance system.
*Thomas H. Stanton is a Fellow of the Center for the Study of American
Government at Johns Hopkins University. He is a member of the board of
directors of the National Academy of Public Administration and a former
member of the federal Senior Executive Service. His publications include two
books on government-sponsored enterprises (GSEs) and two edited books on
federal organization and management. Concerns expressed in A State of Risk:
Will Government Sponsored Enterprises be the next Financial Crisis?
(HarperCollins, 1991) helped lead to the enactment of several pieces of
legislation and the creation of a new GSE regulator, the Office of Federal
Housing Enterprise Oversight (OFHEO). Mr. Stanton’s B.A. degree is from
the University of California at Davis, M.A. from Yale University, and J.D.
from the Harvard Law School.
1
See, e.g., PERI E. ARNOLD, MAKING THE MANAGERIAL PRESIDENCY:
COMPREHENSIVE REORGANIZATION PLANNING, 1905–1996, at 81–117 (1998).
217
5/8/2010 4:06 PM
218
Part I of this Article outlines how the two companies failed
as a result of high leverage, poor business decisions, and weak
regulatory supervision. Part II describes inherent vulnerabilities
of the government-sponsored enterprise (GSE) as an
organizational form. Specifically, GSE officers and directors
have a legal obligation to serve shareholders and this can
conflict with pressure from other stakeholders to serve the public
purposes for which the GSE is chartered. Often this tension is
manageable but at key times it is not. The GSE uses its
government backing to gain so much power as to dominate
virtually any system of financial accountability that government
might try to establish. Part III evaluates the GSE as an
organizational form. While the GSE may possess greater
capacity and flexibility than a wholly owned government
corporation or other government agency, it is subject to only
limited accountability and displays significant vulnerabilities as it
evolves over its organizational life-cycle.
Part IV recommends that the two GSEs be placed into
receivership and converted into wholly owned government
corporations. The article concludes that the two government
corporations should either be terminated after five years or, if
policymakers believe that there is yet further value to be gained
from them at that time, that they be organized into a single
government corporation and reauthorized on a five-year cycle to
periodically determine whether their public benefits still
outweigh their public costs. Caution is merited here because of
the systemic implications of concentrating so much financial risk
into a single specialized financial institution, whether in the
public or private sector.
I. WHY FANNIE MAE AND FREDDIE MAC FAILED
On September 7, 2008, Fannie Mae and Freddie Mac
voluntarily went into conservatorship.2 As they recognize their
2
See, e.g., 12 U.S.C. § 4617 (2008) (prescribing the terms of
conservatorship of Fannie Mae and Freddie Mac through the Federal Housing
Enterprise Safety and Soundness Act of 1992); James B. Lockhart, Dir., Fed.
5/8/2010 4:06 PM
FAILURE OF FANNIE MAE AND FREDDIE MAC
219
losses it becomes clear that taxpayer costs from the government
backing of the two companies will be substantial.3
The two companies are government-sponsored enterprises,
privately owned companies that, before their failure, benefitted
from the perception that the government would back their debt
obligations and mortgage-backed securities (MBSs).4 There are
Hous. Fin. Agency, Statement of FHFA Director James B. Lockhart (Sept.
7,
2008),
http://money.cnn.com/2008/09/07/news/economy/lockhart_
statement/index.htm (“In order to restore balance between safety and
soundness and mission, FHFA has placed Fannie Mae and Freddie Mac into
conservatorship.”); Henry M. Paulson, Jr., Sec’y, Treasury Department,
Statement on Treasury and Federal Housing Finance Agency Action to
Protect
Financial
Markets
and
Taxpayers
(Sept.
7,
2008),
http://www.ustreas.gov/press/releases/hp1129.htm (“I support the Director’s
decision as necessary and appropriate and had advised him that
conservatorship was the only form in which I would commit taxpayer dollars
to the GSEs.”). The law prescribes that the regulator should use
conservatorship to restore the companies to financial health. See, e.g., FED.
HOUS. FIN. AGENCY, FACT SHEET: QUESTIONS AND ANSWERS ON
CONSERVATORSHIP 2 (2008) (“A conservatorship is the legal process in
which a person or entity is appointed to establish control and oversight over a
Company to put it in a sound and solvent condition. In a conservatorship, the
powers of the Company’s directors, officers, and shareholders are transferred
to the designated Conservator.”).
3
See Dawn Kopecki, Fannie, Freddie Won’t Repay All Aid, Lockhart
Says, BLOOMBERG, July 30, 2009, http://www.bloomberg.com/apps/
news?pid=20601103&sid=aEwoLtQMHq5Y (“Fannie Mae and Freddie
Mac, the largest U.S. mortgage-finance companies, won’t be able to repay all
of the $84.9 billion in federal aid they have received since being seized by
the government last year, their regulator said.”).
4
More formally, a government-sponsored enterprise is a government
chartered, privately owned and privately controlled institution that, while
lacking an express government guarantee, benefits from the perception that
the government stands behind its financial obligations. See Ronald C. Moe &
Thomas H. Stanton, Government Sponsored Enterprises as Federal
Instrumentalities:
Reconciling
Private
Management
with
Public
Accountability, 49 PUB. ADMIN. REV. 321, 321–22 (1989); accord 2 U.S.C.
§ 622(8) (2009) (definition Congress enacted in amendments to the
Congressional Budget Act of 1974). The Treasury purchase of stock in
Fannie Mae and Freddie Mac on September 7, 2008, and its commitment to
infuse up to $200 billion into the companies as needed, made the
government’s backing explicit rather than implicit, as it had been before the
220
5/8/2010 4:06 PM
five GSEs: Fannie Mae, Freddie Mac, the Federal Home Loan
Bank System, the Farm Credit System and a small GSE known
as Farmer Mac.5 Fannie Mae, Freddie Mac, and Farmer Mac
are investor-owned. The Farm Credit System and Federal Home
Loan Bank System are cooperatives, owned by their memberborrowers.6 A sixth GSE, Sallie Mae, which funds student
loans, gave up its government sponsorship and became a
completely private investor-owned company.7
The housing bubble was an unprecedented increase in
housing prices averaging over 100 percent from 2000–2006 in
urban areas, followed by a substantial drop in prices.8 The
failure of Fannie Mae and Freddie Mac cannot be attributed
solely to the housing credit bubble and collapse. Rather, it
appears that the collapse of the housing credit bubble was a
precipitating event with consequences that could have been
avoided by more prudent practices by the two GSEs and their
management, and that revealed shortcomings in the GSE as an
institutional form.
Fannie Mae and Freddie Mac committed serious
misjudgments that helped to bring about their insolvency. The
most serious misjudgments involved the companies’ resistance to
accepting more effective supervision and capital standards.9 For
companies went into government hands.
5
THOMAS H. STANTON, GOVERNMENT-SPONSORED ENTERPRISES:
MERCANTILIST COMPANIES IN THE MODERN WORLD 1 (2002) [hereinafter
STANTON, MERCANTILIST COMPANIES].
6
Thomas H. Stanton, Government-Sponsored Enterprises: Reality
Catches up to Public Administration Theory, 69 PUB. ADMIN. REV 632, 632
(2009) [hereinafter Stanton, Public Adminstration Theory].
7
Thomas H. Stanton, Reducing Government Involvement in a Market:
Lessons from the Privatization of Sallie Mae, 28 PUB. BUDGETING. & FIN.
101–23 (2008) [hereinafter Stanton, Reducing Government Involvement].
8
See, e.g., MARK ZANDI, FINANCIAL SHOCK: A 360º LOOK AT THE
SUBPRIME MORTGAGE IMPLOSION, AND HOW TO AVOID THE NEXT FINANCIAL
CRISIS (2009).
9
Among the bills that the GSEs helped to defeat in the years 2000–2007
were Fed. Hous. Enterprise Regulatory Reform Act, S. 1100, 110th Cong.
(2007) (enacted); Fed. Hous. Fin. Reform Act, H.R. 1427, 110th Cong.
(2007) (enacted); Fed. Hous. Fin. Reform Act, 109th Cong. (2005)
5/8/2010 4:06 PM
221
years, starting with their successful efforts to weaken the
legislation that established their regulator, the Office of Federal
Housing Enterprise Oversight (OFHEO),10 the two companies
managed to fend off capital standards that would have reduced
their excessive leverage and provided a cushion to absorb
potential losses.11 In 2007 Freddie Mac concluded a stock
buyback program that further weakened the company’s ability to
withstand a financial shock.12 As late as March 2008, Freddie
(enacted); Fed. Hous. Enterprise Regulatory Reform Act, S. 190, 109th
Cong. (2005); Fed. Hous. Enterprise Oversight Modernization Act, S. 1656,
108th Cong. (2003); Leave No Securities Behind Act, H.R. 2022, 108th
Cong. (2003); Secondary Mortgage Market Enterprises Regulatory
Improvement Act, H.R. 2575, 108th Cong. (2003); Hous. Fin. Regulatory
Restructuring Act, H.R. 2803, 107th Cong. (2002); Secondary Mortgage
Market Enterprises Regulatory Improvement Act, H.R. 1409, 107th Cong.
(2001); Hous. Fin. Regulatory Improvement Act, H.R. 3703, 106th Cong.
(2000).
10
Many reports document the successful efforts of Fannie Mae and
Freddie Mac at weakening the legislation creating OFHEO and prescribing
their capital standards. See, e.g., Kenneth H. Bacon, Privileged Position:
Fannie Mae Expected to Escape Attempt at Tighter Regulation, WALL ST. J.,
June 19, 1992, at A1; Stephen Labaton, Power of the Mortgage Twins:
Fannie and Freddie Guard Autonomy, N.Y. TIMES, Nov. 12 1991, at D1;
Carol Matlack, Getting Their Way, NAT’L L.J., Oct. 27, 1990, at 2584–88;
Jill Zuckman, Bills to Increase GSE Oversight Move Ahead in House, Senate,
CQ WEEKLY, Aug. 3, 1991, http://www.cq.com/display.do?dockey=/
cqonline/prod/data/docs/html/weeklyreport/102/wr404032.html@allnewsarchi
ve&metapub=CQ-WEEKLYREPORT&searchIndex=5&seqNum=6.
11
See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors of Fed.
Reserve Sys., Address at the UC Berkley/UCLA Symposium: The Future of
Mortgage Finance in the U.S. (Oct. 31, 2008) (“For example, the GSEs were
reluctant earlier this year to raise capital and to expand their operations, even
though this would have helped financial and macroeconomic stability at a
time of much-reduced mortgage availability. The GSEs’ disinclination to
support the mortgage market was motivated by the fact that raising additional
capital would have diluted the values of the holding of the existing private
shareholders.”).
12
FREDDIE MAC, 2007 ANN. REP. at 25 (“On March 23, 2007, we
announced that our board of directors had authorized us to repurchase up to
$1 billion of outstanding shares of common stock. The repurchase program
was completed in August 2007.”).
5/8/2010 4:06 PM
222
Mac defied calls to increase its capital cushion.13 As late as
summer 2008, Fannie Mae continued to resist legislation that
would give a federal regulator the discretion to set higher capital
standards.14 As a result the two companies were far too weak
financially to cope with any significant financial stress that might
occur.
The companies fought for high leverage because it benefited
their shareholders and managers, at least until the companies
failed.15 Freddie Mac reported returns on equity of over 20
percent in most years since becoming an investor-owned
company in 1989, reaching highs of 47.2 percent in 2002 and
39.0 percent in 2000.16 Fannie Mae reported earnings of almost
17
as much, reaching a high of 39.8 percent in 2001. The two
companies fought higher capital requirements because more
capital would have diluted those returns to shareholders.18
Fannie Mae and Freddie Mac compounded the problem of
their self-inflicted structural vulnerabilities with a series of
misjudgments that involved taking on excessive risk just at the
19
point that housing prices were peaking. According to press
reports, the chief executives of both Fannie Mae and Freddie
Mac disregarded warnings from their risk officers and greatly
increased their purchases of risky loans to catch up with the
13
David S. Hilzenrath, Chief Says Freddie Won’t Raise Capital:
Mortgage Financer Cites Responsibility to Shareholders, Won’t Increase Loan
Capacity, WASH. POST, Mar. 13, 2008, at D04.
14
Steven Sloan, Fannie CEO Details Issues with GSE Bill, AM. BANKER,
June 5, 2008, http://www.americanbanker.com/issues/173_109/-3544971.html.
15
Bernanke, supra note 11.
16
FED. HOUS. AGENCY, REPORT TO CONGRESS 110, 127 (2008) (Freddie
Mac).
17
Id. at 127.
18
19
See James B. Lockhart, Dir., Fed. Hous. Fin. Agency, FHFA’S First
Anniversary and Challenges Ahead (July 30, 2009) (transcript available in the
National Press Club) (“Fannie Mae and Freddie Mac did not create the
housing price bubble, but their procyclical actions further inflated the bubble,
despite our regulatory efforts to curtail their growth.”).
5/8/2010 4:06 PM
223
market.20 The following excerpts from their annual reports
indicate that the two GSEs took on substantial risk from
purchasing subprime mortgages (i.e., those with borrowers who
failed to meet traditional standards of creditworthiness), “Alt-A”
mortgages (i.e., “Alternative-A” mortgages which lacked
verification of crucial data about creditworthiness such as the
borrower’s income), “interest-only” mortgages (those that
permitted borrowers to continue to accrue mortgage principal
without paying it down in a timely fashion), and adjustable rate
mortgages (ARMs) (those that allowed mortgage interest rates
and borrowers’ required monthly payments to increase over time
according to a stated index even though the borrower might have
qualified only to make monthly payments on the mortgage at a
lower interest rate).21 Freddie Mac reported in its 2007 Annual
Report that:
[t]he proportion of higher risk mortgage loans that were
originated in the market during the last four years
increased significantly. We have increased our
securitization volume of non-traditional mortgage
products, such as interest-only loans and loans originated
with less documentation in the last two years in response
to the prevalence of these products within the origination
market. Total non-traditional mortgage products,
including those designated as Alt-A and interest-only
loans, made up approximately 30% and 24% of our
single-family mortgage purchase volume in the years
20
See., e.g., Charles Duhigg, The Reckoning: Pressured to Take More
Risk, Fannie Reached Tipping Point, N.Y. TIMES, Oct. 5, 2008,
http://www.nytimes.com/2008/10/05/business/05fannie.html;
Charles
Duhigg, At Freddie Mac, Chief Discarded Warning Signs, N.Y. TIMES, Aug.
5, 2008, http://www.nytimes.com/2008/08/05/business/05freddie.html; David
S. Hilzenrath, Fannie’s Perilous Pursuit of Subprime Loans: As It Tried to
Increase Its Business, Company Gave Risks Short Shrift, Documents Show,
WASH. POST, Aug. 19, 2008, at D01.
21
Among the most financially risky ARMs were those with initial low
rates (so-called “teaser rates”) that reset to much higher rates after two or
three years.
5/8/2010 4:06 PM
224
ended December 31, 2007 and 2006, respectively.22
Fannie Mae’s 2007 Annual Report states:
[w]e are experiencing high serious delinquency rates and
credit losses across our conventional single-family
mortgage credit book of business, especially for loans to
borrowers with low credit scores and loans with high
loan-to-value (“LTV”) ratios. In addition, in 2007 we
experienced particularly rapid increases in serious
delinquency rates and credit losses in some higher risk
loan categories, such as Alt-A loans, adjustable-rate
loans, interest-only loans, negative amortization loans,
loans made for the purchase of condominiums and loans
with second liens. Many of these higher risk loans were
originated in 2006 and the first half of 2007.23
Fannie Mae reported that purchases of interest-only and
negative amortizing ARMs amounted to 7% of its business
volume in 2007 and 12% in both 2006 and 2005.24 Moreover,
Alt-A mortgage loans “represented approximately 16%
of . . . single-family business volume in 2007, compared with
approximately 22% and 16% in 2006 and 2005, respectively.”25
Both companies also invested in highly rated private-label,
mortgage-related securities, backed by Alt-A or subprime
mortgage loans, amounting to total holdings by the two
companies of over $200 billion in 2007.26
In short, the mix of private incentives and government
backing created a dynamic leading not only to the hubris that
brought about the meltdown of internal controls at both Fannie
27
Mae and Freddie Mac a few years ago, but also to their
22
FREDDIE MAC, 2007 ANN. REP., at 13.
FANNIE MAE, 2007 ANN. REP., at 24.
24
Id. at 128.
25
Id. at 129.
26
FANNIE MAE, 2007 ANN. REP. 93 (2008); FREDDIE MAC, 2007 ANN.
REP. 94 (2008).
27
Thomas H. Stanton, The Life Cycle of the Government-Sponsored
Enterprise: Lessons for Design and Accountability, 67 PUB. ADMIN. REV.
837, 840 [hereinafter Stanton, Lessons for Design and Accountability] (2007).
23
5/8/2010 4:06 PM
225
insolvency in 2008.
That said, Fannie Mae and Freddie Mac did not cause the
housing bubble or the proliferation of subprime and other
mortgages that borrowers could not afford to repay. In analyzing
the dynamics of Fannie Mae and Freddie Mac, I discovered a
phenomenon that can be called Stanton’s Law: risk will migrate
to the place where government is least equipped to deal with it.28
Thus, the capital markets arbitraged across regulatory
requirements and sent literally trillions of dollars of mortgages
to Fannie Mae and Freddie Mac,29 where capital requirements
were low and federal supervision was weak.30
However, the capital markets also found other places where
government could not manage the risk,31 including structured
investment vehicles of commercial banks, private securitization
conduits, and collateralized debt obligations that were virtually
unregulated except by the vagaries of the rating agencies and
exuberance of the market during the housing bubble.32 Huge
28
I first presented this dynamic in 1989 testimony before the Senate
Banking Committee, where I pointed out that increases in stringency of
capital requirements and government supervision for thrift institutions after
the savings and loan debacle would drive many billions of dollars of
mortgages from the portfolios of savings and loan associations to Fannie Mae
and Freddie Mac because their capital standards and government oversight
were much weaker. The Safety and Soundness of Government Sponsored
Enterprises: Hearing Before the S. Comm. on Banking, Housing, and Urban
Affairs, 101st Cong. 41, 52 (1989) (statement of Thomas H. Stanton,
Attorney at Law).
29
See, e.g., Report to Congress 2008, supra note 16, at 111 tbl.4
(Fannie Mae), 128 tbl.11 (Freddie Mac) for the annual growth of Fannie Mae
and Freddie Mac.
30
31
See, e.g., Ben S. Bernanke, Chairman, Bd. of Governors of Fed.
Reserve Sys., Address at the Federal Reserve Bank of Chicago Conference
on Bank Structure and Competition: Lessons of the Financial Crisis for
Banking Supervision (May 7, 2009).
32
See, e.g., Markus Brunnermeier et al., The Fundamental Principles of
Financial Regulation, Geneva Reports on the World Economy 11,
Preliminary Conference Draft, Centre for Economic Policy Research
(CEPR), Jan. 2009, app. A “The Boundary Problem in Financial
Regulation,” at 63–69.
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226
volumes of subprime, Alt-A, interest-only and other “toxic
mortgages” went to these parts of the market.33 As the bubble
reached its limits and began to deflate, the GSEs tried to catch
up and regain the market share that they had lost to the new
competition. Former Freddie Mac CEO Richard Syron explained
the pressures on the GSEs:
The subprime market was developed largely by private
label participants, as were most non-traditional mortgage
products. Freddie Mac entered the non-traditional slice of
the market because, as the private lending sector shifted
toward those types of loans, Freddie needed to participate
in order to carry out its public mission of promoting
affordability, liquidity and stability in housing finance. In
addition, if it had not done so, it could not have
remained competitive or even relevant in the residential
mortgage market we were designed to serve.34
II. LESSONS FROM THE FAILURE OF FANNIE MAE AND FREDDIE
MAC
Many other kinds of financial institutions have failed in the
current debacle, including commercial banks, thrift institutions,
mortgage companies, and insurance companies. Among all of
these, the GSE has specific shortcomings that call the value of
this institutional form into doubt.
In making their mistakes, Fannie Mae and Freddie Mac
revealed the inherent vulnerabilities of the GSE as an
organizational model. First, the GSE lives or dies according to
its charter and other laws that determine the conditions under
35
which it operates. That means that GSEs must balance their
33
Id.
The Role of Fannie Mae and Freddie Mac in the Financial Crisis:
Hearing Before the H. Comm. on Oversight & Government Reform, 110th
Cong. 17–22 (2008) [hereinafter Syron Statement] (statement of Richard F.
Syron, Former CEO of Freddie Mac), available at http://oversight.house.
gov/story.asp?ID=2252.
35
See, e.g., FANNIE MAE, 2007 ANN. REP., at 29–31 (“As a federally
chartered corporation, we are subject to the limitations imposed by the
34
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227
profit goals against public purposes and those interests of
stakeholders which can influence their charters.
Second, the GSE combines private ownership with
government backing in a way that creates a political force that
can dominate virtually any safety-and-soundness framework.
GSEs select chief officers, in good part, based on their ability to
manage political risk,36 rather than on their ability to manage
two of the largest financial institutions in the world. This article
will consider these issues in turn.
A. GSEs Are Inherently Difficult if Not Impossible to Manage
The GSE business model, involving private ownership and
public purposes, is difficult, if not impossible, to manage.
Fannie Mae and Freddie Mac were more vulnerable than
commercial banks or other federal instrumentalities to the
contradictions between the requirement to serve private
shareholders and the need to serve public purposes that other
stakeholders, including members of Congress, guarded and
Charter Act, extensive regulation, supervision and examination by OFHEO
and HUD, and regulation by other federal agencies, including the Department
of the Treasury and the SEC. We are also subject to many laws and
regulations that affect our business, including those regarding taxation and
privacy. In addition, the policy, approach or regulatory philosophy of these
agencies can materially affect our business.”).
36
For example, in the mid-1990s the Congressional Budget Office
reported on some of Fannie Mae’s activities:
In keeping with its fiduciary responsibility to shareholders and its
own financial interests, the management of the housing GSEs has
devoted a significant (but undisclosed) portion of the enterprises’
resources to countering—or hedging—that political risk . . . . Fannie
Mae, in particular, makes no secret of its attempts to influence
federal policy toward the GSEs as a means of controlling political
risk . . . . Significantly, too, Fannie Mae explicitly includes the
contribution to preserving its ‘franchise’ when evaluating the
performance of executive staff.
CONG. BUDGET OFFICE, ASSESSING THE PUBLIC COSTS AND BENEFITS OF
FANNIE MAE AND FREDDIE MAC 36–37 (1996) (internal citations omitted).
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228
enforced.37
It has long been recognized that GSEs are a special type of
federal instrumentality.38 Other federal instrumentalities include
most commercial banks and thrift institutions and other for-profit
and nonprofit institutions chartered to serve public purposes.39 In
contrast to those other instrumentalities, the officers and
directors of Fannie Mae and Freddie Mac seem to have had a
much more difficult time balancing their fiduciary
responsibilities to shareholders against the public purposes of
their charter acts.40 Pressure from stakeholders to carry out
public purposes,41 too, has conflicted with the GSEs’
responsibility to maintain themselves as sources of long-term
37
Richard Syron, Freddie Mac’s former CEO, pointed to this issue:
Freddie Mac is a shareholder-owned corporation, chartered for the
public purpose of supporting America’s mortgage finance markets,
and operating under government mandates. We had obligations to
Congress and to the public to promote our chartered purposes of
increasing affordability, liquidity and stability in housing finance,
which included some very specific low-income housing goals.
Syron Statement, supra note 34.
38
STANTON, MERCANTILIST COMPANIES, supra note 5, at 13–32 ch.2.
39
See, e.g., THOMAS H. STANTON, A STATE OF RISK: WILL
GOVERNMENT-SPONSORED ENTERPRISES BE THE NEXT FINANCIAL CRISIS?
App. A, at 205–07 (1991) [hereinafter STANTON, A STATE OF RISK]; Thomas
H. Stanton, Federal Supervision of Safety and Soundness of GovernmentSponsored Enterprises, 5 ADMIN. L.J. 395 (1991) [hereinafter Stanton,
Federal Supervision].
40
Richard Syron, Freddie Mac’s former CEO, faced this problem:
Freddie Mac chief executive Richard F. Syron . . . said yesterday
that conflicting demands on the government-chartered mortgage giant
have made his job “almost impossible.”
On the eve of Freddie Mac’s quarterly earnings report, Syron said
that the McLean company has been whipsawed by the dual tasks of
creating profit for private investors and serving the public by
boosting the housing market. “What this organization is all about is
balancing among the different missions,” Syron said in an interview.
“It makes the job almost impossible.”
Jeffrey H. Birnbaum & David S. Hilzenrath, Freddie CEO Feels Strain of
Firm’s Twin Missions, WASH. POST, Aug. 6, 2008, at D01.
41
See, e.g., Syron Statement, supra note 34.
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229
strength to the housing market.42
Perhaps most eloquent on this issue was Daniel Mudd, the
former CEO of Fannie Mae, who testified in December 2008:
I would advocate moving the GSEs out of No Man’s
Land. Events have shown how difficult it is to balance
financial, capital, market, housing, shareholder,
bondholder, homeowner, private, and public interests in
a crisis of these proportions. We should examine whether
the economy and the markets are better served by fully
private or fully public GSEs.43
There were several reasons why Fannie Mae and Freddie
Mac were susceptible to being whipsawed between their
fiduciary obligations to shareholders and their public purposes.
One source of mischief was the fact that the two companies
were chartered by an act of Congress rather than by an
independent federal administrative agency. Members of
Congress could constantly pressure Fannie Mae and Freddie
Mac to undertake unwise lending policies. The two GSEs
complied as a way to buy loyalty from the relevant
congressional committees that otherwise might accede to
requests from the Treasury or others to impose higher capital
requirements or other restrictions that were unwelcome to
shareholders. For example, Mr. Mudd testified that he felt
pressure to increase Fannie Mae’s market activity even as other
42
[W]e have to confront the future of the secondary mortgage
market, which will, I believe, shape the other decisions. That has to
be the first principle as we . . . evaluate the options for Fannie
Mae’s and Freddie Mac’s future. A second principle is that the
Enterprises or any successors should have a well-defined and
internally consistent mission based on their fundamental role in the
mortgage market. Their mission activities should not require
excessive risk taking as it did in the past.
Lockhart, supra note 19.
43
The Role of Fannie Mae and Freddie Mac in the Financial Crisis:
Hearing Before H. Comm. on Oversight and Government Reform, 110th
Cong. 25–26 (2008) (written statement of Daniel H. Mudd, Former Interim
CEO of Fannie Mae), available at http://oversight.house.gov/story.
asp?ID=2252.
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230
institutions were stepping back because of declining market
conditions.44 Stakeholder pressure to serve public purposes was
substantial; by contrast, far fewer stakeholders pushed to ensure
effective supervision of safety and soundness.45
In addition, the GSEs selected a political strategy of
achieving short-term goals at the potential cost of longer term
achievements. Their refusal to accept bank-type capital
requirements and a bank-type supervisory framework for
accountability has already been mentioned.46 The GSEs
marshaled so much political power that they simply dominated
their environment and dampened feedback signals that might
have helped company officials to make better decisions.47 In
return, however, the GSEs had to buy off stakeholders with
large volumes of mortgage purchases that they, or at least their
risk officers, knew were unwise.48
In their governance shortcomings, the two GSEs
compounded the more general problem that the current debacle
has revealed. Former Federal Reserve Chairman, Alan
Greenspan, put it best:
I made a mistake in presuming that the self interest of
organizations, specifically banks and others, was such
44
Id.
JONATHAN G.S. KOPPELL, THE POLITICS OF QUASI-GOVERNMENT:
HYBRID ORGANIZATIONS AND THE DYNAMICS OF BUREAUCRATIC CONTROL
107, Cambridge University Press (2003).
46
See sources cited supra notes 9–17.
47
This problem is analyzed with respect to the two GSEs’ failed internal
controls in Stanton, Lessons for Design and Accountability, supra note 27.
48
See sources cited supra note 20. Confidential company documents
released by the House Committee on Oversight and Government Reform on
December 9, 2008 detail some of the pressures on the companies and the
mistakes made by the GSEs during 2005 through 2007. In particular, these
documents indicate that the GSEs sought yield and market share despite
added risk from nontraditional mortgage products and warnings from risk
officers. Fannie Mae Office of Corporate Strategy, Memorandum to Daniel
Mudd . . . from Gary Friend, Subject: CONFIDENTIAL Cambridge
Summary, July 7, 2006, available at http://oversight.house.gov/documents/
20081209131806.pdf (“Single Family’s strategy is to say ‘yes’ to our
customers by increasing purchases of sub-prime and Alt-A loans . . . .”).
45
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231
that they were best capable of protecting their own
shareholders and the equity in the firms.49
There are significant governance implications of this
admission, coming as it does from a firm believer in the
efficiency of market forces.50 Not only GSEs, but other financial
firms also sought ways to increase their leverage and reduce the
quality of their government supervision.51 There was a
difference, though. As they served the perceived interests of
their shareholders, banks and other investors were filled with the
irrational exuberance of the market bubble. In addition, the
GSEs faced (and failed to manage) stakeholder pressure to
engage in activities that they probably knew (as their risk
officers did), could inflict serious harm on the companies.52
B. GSEs Gain Virtually Unstoppable Political Power
The GSE combines private ownership with government
backing in a way that creates a political force that can dominate
virtually any safety-and-soundness framework. The statutory
framework of GSEs also creates special financial vulnerability
because of incentives that GSEs have to appoint CEOs and
senior management that are politically adept and who may not
necessarily be experienced at managing a major financial
49
Kevin G. Hall, Greenspan Takes Some Blame for Financial Meltdown,
MCCLATCHY NEWSPAPERS, Oct. 23, 2008, available at http://www.
mcclatchydc.com/staff/kevin_hall/v-print/story/54712.html.
50
Alan Greenspan, Chairman, Fed. Res. Bd., Speech to the Federal
Reserve Bank of Chicago’s Forty-first Annual Conference on Bank Structure:
Risk Transfer and Financial Stability (May 5, 2005) (“Except where market
discipline is undermined by moral hazard, for example, because of federal
guarantees of private debt, private regulation generally has proved far better
at constraining excessive risk-taking than has government regulation.”).
51
See, e.g., Stephen Labaton, The Reckoning: Agency’s ‘04 Rule Let
Banks Pile Up New Debt, N.Y. TIMES, Oct. 3, 2008 (reporting an SEC rule
change which allowed investment banks to increase leverage significantly,
enacted at behest of the regulated firms).
52
See sources cited supra note 20.
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232
institution.53
A GSE lives or dies according to the terms of its enabling
legislation.54 Especially GSEs such as Fannie Mae and Freddie
Mac that are directly chartered by Congress have tended (albeit
not invariably) to select CEOs because of their ability to manage
political risk rather than the risks that derive from their financial
activities.55 This was seen in the newest GSE, Farmer Mac,
which returned to Congress several times since its original
authorization in 1987 requesting adjustments to its charter
powers so that it could offer increasingly profitable financial
services. Farmer Mac has never been a strong success in public
policy terms56 and has invested heavily in assets that have
57
nothing to do with meeting public needs.
53
KOPPELL, supra note 45, at 101 (“ . . . Fannie Mae and Freddie Mac
rosters boast numerous alumni of the executive and legislative branches . . .
Furthermore, there is an impressive history of GSE executives crossing back
into government service, giving the company advantages in terms of access,
and sympathy, at the highest levels.”).
54
STANTON, MERCANTILIST COMPANIES, supra note 5, at 70–75 (“From
mercantilist times, companies with special charter privileges have understood
that their ultimate success or failure hinges even more on politics than on the
efficient provision of services.”).
55
KOPPELL, supra note 45, at 99 (“[S]ince every aspect of their
operations can be affected by congressional action, Fannie Mae and Freddie
Mac have powerful incentives to devote significant attention to Congress and
politics in general. Thus one can conclude that GSEs will possess resources
and motive to expend these resources for political advantage.”) (emphasis in
original).
56
U.S. GEN. ACCT. OFFICE, REP. TO THE CHAIRMAN, SUBCOMMITTEE
ON CAPITAL MARKETS, SEC. AND GOV’T-SPONSORED ENTERPRISES,
COMMITTEE ON BANKING AND FIN. SERVICES, HOUSE OF REPRESENTATIVES,
FARMER MAC: REVISED CHARTER ENHANCES SECONDARY MARKET
ACTIVITY, BUT GROWTH DEPENDS ON VARIOUS FACTORS, GAO/GGD-99-85
(May 1999).
57
Among other investments having nothing to do with its public purpose,
in September 2008 Farmer Mac held in its investment portfolio $50.0 million
of Fannie Mae floating rate preferred stock and $60.0 million of Lehman
Brothers senior debt securities. After taking losses on these investments the
GSE was recapitalized on September 30, 2008 by issuing new stock to
institutions of the Farm Credit System, another GSE, and thereby averted
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233
Fannie Mae and Freddie Mac made a practice of mastering
political risk, both by providing blandishments to favored
members of the political establishment and other stakeholders,
and by aggressively containing threats to what the companies
considered their franchise value.58 The GSEs are active
participants in the process of influencing policymakers,
especially those who are in positions to affect their charter
legislation.59 On April 19, 2006, Freddie Mac paid a record fine
to the Federal Election Commission to settle charges that the
company violated federal law by using company resources to
hold some $1.7 million in fundraisers, many involving the thenChairman of the House Financial Services Committee.60 That
Committee is responsible for the legislation that created both
Fannie Mae and Freddie Mac and periodically considered
legislation to address shortcomings in their supervision.61
insolvency. See Farmer Mac, Quarterly Report (Form 10-Q), at 44 (Nov. 10,
2008).
58
This has been a long-standing policy. In 1991 Representative Jim
Leach (R-IA) stated:
[I]t is not surprising that Fannie and Freddie are beginning to exhibit
that arrogant characteristic of a duopoly, controlling 90% of the
market. Such market dominance allows for heavy-handed approaches
to competitors, to financial intermediaries, and to consumers.
Competitors such as community based savings and loan associations
and commercial banks are also users of GSE services. They are
understandably apprehensive about expressing reservations about
their practices in fear of retaliation. Likewise, would-be competitors
such as securities firms run well known market risks if they object
or attempt to compete with Fannie and Freddie. The two GSEs
distribute billions of dollars of business on Wall Street and have a
reputation of not cottoning to challengers of the status quo.
H.COMM. ON BANKING, FINANCE AND URBAN AFFAIRS, H.R. Rep. No. 102206, at 122 (1991) (Dissenting Views of Representative Jim Leach from
Report to accompany H.R. 2900 on the Government-Sponsored Housing
Enterprises Financial Safety and Soundness Act of 1991).
59
KOPPELL, supra note 45, at 99.
60
See, e.g., Stanton, Lessons for Design and Accountability, supra note
27.
61
Id. Almost all of the legislation cited supra in note 9, falls within the
jurisdiction of the House Financial Services Committee.
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234
Professor Jonathan Koppell notes that “the characteristics
that distinguish government-sponsored enterprises from
traditional government agencies and private companies endow
Fannie Mae and Freddie Mac with unique political resources.”62
The potential inability of government to supervise safety and
soundness of the GSEs has long been recognized. The Treasury
pointed this out in a 1991 study of GSEs:
The problem of avoiding capture appears to be
particularly acute in the case of regulation of GSEs. The
principal GSEs are few in number; they have highly
qualified staffs; they have strong support for their
programs from special interest groups; and they have
significant resources with which to influence political
outcomes. A weak financial regulator would find GSE
political power overwhelming and even the most
powerful and respected government agencies would find
regulating such entities a challenge.63
The Treasury knew whereof it spoke. There are at least two
cases on record where the Treasury Department, which had no
safety-and-soundness regulatory authority over Fannie Mae and
Freddie Mac, reportedly came under pressure and agreed to
make its reported views more congenial to the two companies.64
62
KOPPELL, supra note 45, at 97.
TREASURY DEPARTMENT, 1991 REPORT OF THE SECRETARY OF THE
TREASURY ON GOVERNMENT-SPONSORED ENTERPRISES 8 (1991).
64
On the weakening of a 1996 Treasury report on desirability and
feasibility of removing government sponsorship from Fannie Mae and
Freddie Mac, see, for example, Jackie Calmes, Federal Mortgage Firm Is
Facing New Assault to Privileged Status: But Fannie Has Clout to Counter
the Agencies That Seek to Privatize It, WALL ST. J., May 14, 1986, at 1;
Chairman Richard Baker, comments, U.S. House of Representatives,
Committee on Banking and Financial Services, Subcommittee on Capital
Markets, Securities, and Government-Sponsored Enterprises, Oversight of the
Federal National Mortgage Association [Fannie Mae] and the Federal Home
Loan Mortgage Corporation [Freddie Mac], 104th Congress, 2nd session
136–41 (July 24, 1996). For discussion of possible pressure in 1991 on
Treasury to state that HUD would be an appropriate regulator of Fannie Mae
and Freddie Mac, see Thomas H. Stanton, Increasing the Accountability of
Government-Sponsored Enterprises: Next Steps, 51 PUB. ADMIN. REV. 572
63
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235
Thanks to the lobbying power of Fannie Mae and Freddie
Mac, OFHEO was, at its creation, an institution that lacked the
capacity to do its job.65 OFHEO was limited by the
appropriations process and had a budget that was much smaller,
in comparison to its responsibilities, than the budgets of federal
bank regulators.66
Whenever OFHEO tried to do its job well, as in the 2004
Special Examination Report on Fannie Mae, it experienced
political pressure.67 Fannie Mae lobbyists generated a
congressional request for the Inspector General (IG) of the
Department of Housing and Urban Development (HUD) to
investigate OFHEO’s conduct of the special examination.68
Between October 2002 and June 2004, there were three other
congressional requests for IG investigations of OFHEO.69 Fannie
Mae lobbyists also tried to use the appropriations process to
force a change in the leadership of OFHEO. They convinced the
relevant Senate Appropriations Subcommittee to try to withhold
$10 million from OFHEO’s appropriation until a new OFHEO
director was appointed.70
The enactment of a stronger supervisory framework in 2008
meant that the new regulator, the Federal Housing Finance
Agency (FHFA), was no longer subject to the appropriations
process.71 However, the political strength of the GSEs was
reflected in the fact that the new legislation, improving as it did
(1991), and articles cited therein.
65
STANTON, MERCANTILIST COMPANIES, supra note 5, at 42.
66
27.
67
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT, REPORT OF
THE SPECIAL EXAMINATION OF FANNIE MAE 273–77 (May 2006), available at
http://www.fhfa.gov/webfiles/747/FNMSPECIALEXAM.pdf.
68
Id. at 273.
69
Id.
70
Id. at 284.
71
Section 1106 of the Housing and Economic Recovery Act of 2008
(HERA), Pub. L. 110-289, amended the 1992 Federal Housing Enterprises
Safety and Soundness Act to remove the new regulator from the
appropriations process.
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236
on the old law, continued to deny the regulator the mandate,
discretion, or authority to regulate safety and soundness that
federal bank regulators have long possessed.72
The new Housing and Economic Recovery Act of 2008
(“HERA”) became law less than two months before Fannie Mae
and Freddie Mac failed.73 Ultimately the two GSEs were not
well-served by their tradition of selecting politically capable
CEOs who could fend off the kind of supervision that a more
capable regulator might have been able to provide.74
Because of their government backing and low capital
requirements in their charters, Fannie Mae and Freddie Mac
gained immense market power.75 They doubled in size every five
76
years or so until their failure in 2008, when the two companies
had funded over $5 trillion of mortgages—over 40 percent of the
mortgage market.77
Their market power gave them political power. Whenever
someone would urge regulatory reform, such as higher capital
standards to reduce the GSEs’ dangerous leverage, huge
numbers of constituents could be expected to flood Capitol
Hill.78 In turn, that political power further entrenched the GSEs’
72
To give but one example, the new law required the new regulator to
conduct an estimated 25–30 rulemakings, often with short deadlines, to
implement key provisions of the act. The bank regulators have discretion in
many of the areas where HERA sought to impose inflexibility upon the
FHFA through required rulemakings.
73
President Bush signed HERA into law on July 30, 2008; Fannie Mae
and Freddie Mac went into conservatorship on September 7, 2008.
74
27, at 844 (“What does effective accountability mean? First, feedback is
essential for effective operations . . . . Many examples exist, in both the
private and public sectors, of how too much autonomy can lead to subsequent
failure.”).
75
STANTON, MERCANTILIST COMPANIES, supra note 5, at 70–75.
76
See, e.g., figures presented in STANTON, supra note 5, at 4.
77
See, e.g., Nelson D. Schwartz, A History of Public Aid During Crises,
N.Y. TIMES, Sept. 7, 2008, at A27.
78
Observers have long noted this pattern. David A. Vise, The Money
Machine: How Fannie Mae Wields Power, WASH. POST, Jan. 16, 1995, at
A14 (“Builders, real estate brokers and bankers across the country rely so
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market power.
The failure of Fannie Mae and Freddie Mac shows the
shortcomings of the GSE as an organizational model. However
sound the accountability structure may be when the organization
begins, the incentive to satisfy private owners will lead a GSE to
try to weaken safety and soundness oversight and reduce capital
standards. Both Fannie Mae and Freddie Mac arguably had
more effective accountability structures when they were
chartered as GSEs than when they were supervised by OFHEO.
Between 1968 and 1992, when OFHEO was established, both
companies had successfully removed government controls that
they considered unacceptable.79
In short, the drive to satisfy shareholders is intense and can
easily overwhelm considerations for the financial system, the
housing system, and American taxpayers.
III. EVALUATING THE GSE AS AN ORGANIZATIONAL FORM
A. Four Criteria Help to Evaluate Organizations That Carry
Out Public Purposes: Capacity, Flexibility,
Accountability, and Life-Cycle
Four criteria are helpful in evaluating the quality of
government agencies and instrumentalities that carry out public
purposes:80
heavily on Fannie Mae for mortgage funds that they live in fear of offending
the firm and routinely defend it in Washington.”).
79
For example, when Freddie Mac was chartered as a GSE in 1970 its
board of directors consisted of three federal officials rather than a
shareholder-controlled board; when Fannie Mae was chartered in 1968 its
charter contained provisions permitting the HUD Secretary to fix the
capitalization of the GSE at 6.6 percent, significantly higher than the 2.5
percent permitted by the 1992 Act.
80
See, e.g., Thomas H. Stanton, Moving Toward More Capable
Government: A Guide to Organizational Design, in MEETING THE
CHALLENGE OF 9/11: BLUEPRINTS FOR MORE EFFECTIVE GOVERNMENT 25
(2006) [hereinafter Stanton, Moving Toward More Capable Government];
Thomas H. Stanton, The Administration of Medicare, 60 WASH. & LEE L.
REV. 1373 (2003) [hereinafter Stanton, Administration of Medicare].
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Capacity: What is the capacity of the organization, in
terms of people, administrative budget, systems, and
organization, to carry out its public purposes?
Flexibility: What flexibility does the organization have,
under the law and in practice, to carry out its public
purposes?
Accountability: How well is the organization held
accountable for (1) carrying out its public purposes, and
(2) its stewardship of public resources?
Life Cycle: As the organization matures, what strengths
and shortcomings manifest themselves?
For different organizations, different measures will become
more critical than others in understanding strengths and
weaknesses. As a general rule, to the extent that weaknesses
appear, government agencies may have difficulty with the
measures of capacity and flexibility, while privately owned
instrumentalities may have difficulty with accountability.81
Numerous organizations of all types have difficulty with lifecycle, and the ability to remain active, focused, and useful over
many years.82
Government-sponsored enterprises are privately owned
institutions free from the budgetary and other constraints
imposed on government agencies.83 As such, they tend to
develop significant capacity and flexibility compared to
government agencies that serve the same economic sector.84 A
comparison of mortgage operations of Fannie Mae and Freddie
Mac, on the one hand, and the Federal Housing Administration
81
Stanton, Moving Toward More Capable Government, supra note 80, at
25; Stanton, Administration of Medicare, supra note 80.
82
Stanton, Moving Toward More Capable Government, supra note 80, at
25; Stanton, Administration of Medicare, supra note 80.
83
Thomas H. Stanton & Ronald C. Moe, Government Corporations and
Government Sponsored Enterprises, in TOOLS OF GOVERNMENT: A GUIDE TO
THE NEW GOVERNANCE 85 (Lester M. Salamon ed., 2002) [hereinafter
Stanton & Moe] (“Indeed, GSEs can, and usually do, become virtually
autonomous from the government that charters them.”).
84
Stanton, Reducing Government Involvement, supra note 7.
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(FHA), on the other, displays this pattern. While Fannie Mae
and Freddie Mac were able to dedicate substantial resources to
building their automated underwriting and other mortgagerelated systems, the federal budget process has constrained FHA
from making similar needed investments even though they are
essential to the future success of the agency.85
On the other hand, the issue of accountability is salient for
GSEs, and for Fannie Mae and Freddie Mac in particular. As
private companies operating with substantial government
subsidies, GSEs often grow to dominate their markets.86 Market
power leads to political power,87 which in turn leads to favorable
changes to the GSE’s charter that help expand its market power
and reduce the effectiveness of any accountability framework
government may seek to apply to the GSEs.
Finally, the issue of life cycle is also important for the
GSEs. The rapid growth of GSEs combined with their ability to
dominate their government regulator and other accountability
measures and avoid being required to adopt prudent capital
standards can lead to flawed business decisions.88 The current
crisis in the mortgage market highlights problems of GSE
accountability and life cycle with special force.
B. GSE Vulnerabilities Will Not Disappear Merely by
Changing Regulation or Governance
Proposals to craft special rules such as regulating the GSEs
as public utilities89 or limiting them to cooperative ownership90
85
Steve Preston, Secretary, HUD, Prepared Remarks at the National
Press Club (Nov. 19, 2008), available at http://www.hud.gov/news/speeches/
2008-11-19.cfm.
86
STANTON, MERCANTILIST COMPANIES, supra note 5, at 3 (“Thanks to
their special government benefits, GSEs have grown rapidly to dominate
many market segments, especially in housing (Fannie Mae, Freddie Mac, and
the Federal Home Loan Banks) and student loans (Sallie Mae).”).
87
See supra note 78.
88
27.
89
See, e.g., Steven Sloan & Emily Flitter, Paulson’s Third Way: GSEs
240
5/8/2010 4:06 PM
will not overcome the vulnerabilities of the GSE as an
institutional form that is based on political dominance. Such
proposals to create a different accountability framework or
governance structure for Fannie Mae and Freddie Mac do not
change the assessment of the GSE’s organizational form. Most
importantly, the issue of political dominance of the GSEs over
their regulators, and GSE influence over their congressional
authorizing committees, would not go away even if these
changes were actually implemented.
Some have suggested that Fannie Mae and Freddie Mac can
be regulated as public utilities. This suggestion has several
defects. First, utility regulation is designed to address the
problem that public utilities benefit from scale economies that
may give them characteristics of monopolies;91 price regulation
by a public utility commission seeks to prevent a public utility
from imposing monopoly pricing on its customers.92
In other words, rather than limiting the size of a public
utility, government accepts a utility’s dominant market position
and seeks to limit the high prices that could result. But taxpayers
are at risk if the GSEs grow to hold a dominant position in the
mortgage market.93 The need to control monopoly pricing is not
Taking Utility Role, AM. BANKER, Jan. 8, 2009. The public utility model is
described in R. S. Seiler, Jr., Fannie Mae and Freddie Mac as InvestorOwned Utilities, 11 J. PUB. BUDGETING, ACCT. & FIN. MGMT. 117 (1999).
90
At the time of this writing, such proposals are circulating informally
among federal agencies and stakeholder groups.
91
Seiler, supra note 89, at 121, 124 (“[T]he utility industries have
generally exhibited economies of scale . . . . The superior technology and
monopoly franchise of a traditional utility gives the firm considerable market
power.”).
92
Id. at 124 (“[W]hen only one firm is allowed to serve a market, the
company has an incentive to set prices above marginal cost, restrict output,
and engage in price discrimination, in order to earn monopoly profits. To
limit these incentives, governments traditionally imposed limits on the rates
of return that utilities could earn and required that their rate structures be fair
and equitable.”).
93
Stanton, supra note 27, at 840 (“As the GSEs have grown Treasury
Secretary John Snow, Comptroller General David M. Walker, Congressional
Budget Office Director Douglas Holtz-Eakin, and Federal Reserve Chairmen
5/8/2010 4:06 PM
241
as much a concern for today’s taxpayers as is the need to limit
the size of GSEs and their accompanying financial risks. The
public utility model, with its focus on price regulation, is not
relevant to that problem. Indeed, a regulator with authority to
supervise pricing could potentially decide to permit a GSE to
charge high prices as a way to build a strong capital cushion.94
Secondly, regulated companies too often capture their
regulators.95 As political scientist Marver Bernstein noted,
regulatory commissions are frequently dominated by the interests
that they are supposed to regulate.96 Thus, under any new
regulatory scheme, the GSEs would simply shift the application
of their political power from domination of their past regulators
to the new public utility regulator.
Third, the creation of a separate utility-type regulator for the
GSEs would not combine GSE
supervision with the
responsibilities of a regulator that supervises banks and thrifts as
Alan Greenspan and Ben Bernanke have warned about the possibility of
financial failure at a GSE spreading to the many holders of GSE obligations
such as commercial banks and foreign central banks. This is what is known
as systemic risk, which is the possibility that a failure at one institution
causes market turmoil that spreads to other institutions in the financial
system, with potentially serious effects for the performance of the U.S.
economy.”).
94
This is similar to the position of Gary Gorton, Slapped in the Face by
the Invisible Hand: Banking and the Panic of 2007 5 (Federal Reserve Bank
of Atlanta Conference Paper, 2009), available at http://www.frbatlanta.org/
news/CONFEREN/09fmc/gorton.pdf (creating a stable banking structure
“will require that a valuable charter be recreated for firms that are deemed
‘banks’”).
95
See, e.g., Willem H. Buiter, Lessons from the North Atlantic Financial
Crisis 36–38 (May 28, 2008), available at http://www.newyorkfed.
org/research/conference/2008/rmm/buiter.pdf
(paper
prepared
for
presentation at the conference “The Role of Money Markets” jointly
organized by Columbia Business School and the Federal Reserve Bank of
New York on May 29–30, 2008).
96
MARVER BERNSTEIN, REGULATING BUSINESS BY INDEPENDENT
COMMISSION 92 (1955) (“During old age the working agreement that a
commission reaches with the regulated interests becomes so fixed that the
regulatory agency has no creative force left to mobilize against the regulated
groups.”).
5/8/2010 4:06 PM
242
well as GSEs. Rather, it would encourage the preferential capital
and supervisory requirements that lie at the core of GSE
financial vulnerability.97
In short, application of a public utility model to Fannie Mae
and Freddie Mac would perpetuate many of the vulnerabilities
and large-scale risks of the GSE model that lie at the root of
their failure in 2008.
Another idea being discussed informally, though not yet
published in a formal treatment, is to change the governance
structure of Fannie Mae and Freddie Mac so that they would be
owned and controlled by companies that do business with
them—a cooperative structure. The cooperative governance
structure also fails to add quality to the GSE model. This was
seen among the GSEs in the financial failure of the Farm Credit
System in the mid-1980s and the troubled financial condition of
the Federal Home Loan Banks today.98 While the investor-owned
GSE seeks to increase risk to serve its investor owners, the
cooperative GSE has an incentive to serve the cooperative
owners who use its services.99 That incentive led the Farm
97
See, e.g., Thomas H. Stanton, Government Sponsored Enterprises
(GSEs): Why is Effective Government Supervision Hard to Achieve?,
Address to the 37th Annual Conference on Bank Structure and Competition,
Federal Reserve Bank of Chicago (May 10, 2001) (“ . . . (1) the government
subsidy allows GSEs to expand and increase their risk-taking without facing
the market discipline that constrains other companies; (2) the GSEs have both
incentive and ability to influence or dominate the political process; and (3)
the unusual legal structure of GSEs involves complexities that policymakers
may not fully understand. This paper contends that all of these factors make
government supervision difficult, if not impossible.”).
98
Steven Sloan, Insurance Fund for FHLBs is on the Table: Idea Could
Help Instill Confidence, Provide Backstop, AM. BANKER, June 3, 2009, at 1
(“As the Federal Home Loan banks continue to struggle with charges on their
mortgage holdings, the Federal Housing Finance Agency is considering the
creation of an insurance fund that could absorb losses at a troubled Home
Loan bank.”).
99
See, e.g., Stanton, Moving Toward More Capable Government, supra
note 80, at 75 (“For the cooperative, governance by a board of directors
means attention to the needs of the owners that use the cooperative’s services.
Thus, a cooperative such as the Farm Credit System in the past showed a
tendency to underprice its services . . . .”).
5/8/2010 4:06 PM
243
Credit System to provide credit to its cooperative borrowers
below the GSE’s own cost of funds.100 Such an approach was not
sustainable and led to the system declaring insolvency in the
mid-1980s. The experience of the cooperative GSEs shows that
turning Fannie Mae and Freddie Mac into cooperatives would
not reduce their incentives or capacity to dominate the GSE
regulator and avoid prudential requirements such as bank-type
capital standards.
IV. WHAT TO DO WITH THE GSES NOW THAT THEY ARE IN
GOVERNMENT HANDS
As instruments of government policy,101 the future of Fannie
Mae and Freddie Mac should depend on the amount and kind of
support that the markets actually need. More substantial
government support is needed in the next few years, as the
effects of the collapsing housing credit bubble make themselves
felt in a weakened mortgage market, rather than in five years or
so, when the housing markets have returned to greater strength
and stability.
A. The Government Should Place Fannie Mae and Freddie
Mac into Receivership
The government placed Fannie Mae and Freddie Mac into
conservatorship rather than receivership. Unlike receivership,
the voluntary acceptance of conservatorship by Fannie Mae or
102
Freddie Mac was not subject to litigation, which could have
100
Stanton, Lessons for Design and Accountability, supra note 27, at
421–23.
101
Political scientist Lester Salamon considers the GSEs to be what he
calls “tools of government.” A GSE, although not a government agency or
other part of the formal government, is a tool of government that helps to
carry out public purposes. See Stanton & Moe, supra note 83.
102
Section 1369(b)(4) (“Appointment of Conservators”) of the 1992 Act
provides that “[a]ppointment of a conservator pursuant to consent of the
enterprise under subsection (a)(2) shall not be subject to judicial review under
this subsection.” Codified at 12 U.S.C. § 4619(b)(2)(2008).
5/8/2010 4:06 PM
244
further troubled the financial markets at a difficult time.
Placing a failed financial institution directly into
conservatorship violates the customary practice of the federal
bank and thrift regulators who first place an institution into
receivership, then separate the assets into a “good-bank/badbank” structure and send the good bank, cleaned out of troubled
assets, into conservatorship or bridge-bank status.103 Placing an
institution into receivership removes the shareholders of the
defunct institution. Thus, when IndyMac, a large thrift
institution with over $32 billion in assets, failed,104 it was placed
into receivership.105 The receiver then transferred the deposits
and most of the assets to a newly chartered thrift, IndyMac
Federal Bank,106 with the FDIC as conservator.107
It is now time to place Fannie Mae and Freddie Mac into
receivership. As past losses materialize and are recognized by
the two GSEs, it is clear that both institutions have lost much
more than their entire net worth.108 Placing both companies into
103
Appointment of a receiver for an insolvent bank or thrift institution
with federally insured deposits is required under conditions specified in 12
U.S.C. § 1831o(h)(3)(C) (2008). Authority to establish a bridge bank is
found in 12 U.S.C. § 1821(m)(2008).
104
Press Release, Fed. Deposit Ins. Corp., FDIC Establishes IndyMac
Fed. Bank, FSB as Successor to IndyMac Bank, F.S.B., Pasadena, Cal. (July
11, 2008), available at http://www.fdic.gov/news/news/press/2008/pr08056.
html.
105
See, e.g., Chief Financial Officer’s (CFO) Report to the Board,
Executive Summary Third Quarter 2008, Fed. Deposit Ins. Corp., available
at http://www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/exec_
summary.html (“During the third quarter of 2008, the FDIC was named
receiver for . . . IndyMac Bank of Pasadena, California.”).
106
Sheila C. Bair, Chairman, Fed. Deposit Ins. Corp., A Review of
Foreclosure Mitigation Efforts Before the Fin. Servs. Comm. U.S. House of
Representatives (Sep. 17, 2008), available at http://www.fdic.gov/news/
news/speeches/archives/2008/chairman/spsep1708.html (“As the Committee
knows, the former IndyMac Bank, F.S.B., Pasadena, California, was closed
July 11. The FDIC is conservator for a new institution, IndyMac Federal
Bank, F.S.B. (IndyMac Federal), to which the accounts and assets of the
former IndyMac Bank, F.S.B. were transferred.”).
107
Id.
108
Fannie Mae Seeks $10.7B in US Aid After 2Q Loss, N.Y. TIMES,
5/8/2010 4:06 PM
245
receivership will help to remove an inherent conflict in the
government’s position. Technically, conservatorship means that
the government is working to restore the companies to financial
health;109 the government has preserved the shareholders in the
two companies and allowed their stock to trade freely. This is
inconsistent with key aspects of the government’s need to use
the two companies to support the mortgage market, now that the
value of the holdings of private shareholders in the companies is
zero.110 Until shareholders are removed from the equation,
officers and directors of the two companies will be conflicted as
to their fiduciary responsibilities. Do they price mortgage
purchases low to support the market or do they price higher to
111
The two
replenish the companies’ shareholder value?
companies and their managers appear to be caught in the strong
contradiction between their obligations to serve their remaining
shareholders and the needs of the housing market.112
If the government placed both companies into receivership,
Aug. 7, 2009, http://dealbook.blogs.nytimes.com/2009/08/07/fannie-maeseeks-107-billion-in-aid-after-loss/?scp=1&sq=fannie&st=cse
(“Fannie
Mae’s new request for $10.7 billion from the Treasury Department will bring
the total for Fannie and Freddie to nearly $96 billion.”).
109
“The FHFA, as Conservator, may take all actions necessary and
appropriate to (1) put the Company in a sound and solvent condition and (2)
carry on the Company’s business and preserve and conserve the assets and
property of the Company.” FEDERAL HOUSING FINANCE AGENCY, FACT
SHEET: QUESTIONS AND ANSWERS ON CONSERVATORSHIP 2 (2008),
http://www.fhfa.gov/webfiles/35/FHFACONSERVQA.pdf.
110
Kopecki, supra note 3.
111
The two companies themselves complain of the conflict in their roles
in conservatorship. See Fannie Mae, Quarterly Report (Form 10-Q), at 7
(Sept. 30, 2008); Freddie Mac, Quarterly Report (Form 10-Q), at 5 (Sept.
30, 2008).
112
Zachary A. Goldfarb, Government-Picked Leader Resigns as Losses
Pile Up, WASH. POST, Mar. 3, 2009, at D01 (“The government-appointed
chief executive of Freddie Mac announced yesterday that he is stepping
down . . . . David M. Moffett’s resignation comes amid growing losses at
the McLean mortgage-finance company and unresolved questions about
whether it should follow the path of a private firm trying to make its way
back to profitability or that of a government agency whose overriding goal is
carrying out public policy.”).
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246
then it could use Fannie Mae and Freddie Mac as agents of
reform for the mortgage market.113
B. Fannie Mae and Freddie Mac Should Not Again
Become GSEs
To best support the mortgage market, Fannie Mae and
Freddie Mac should not again become privately owned
organizations that operate with federal backing.
For many reasons, it is important to now end the GSE status
of Fannie Mae and Freddie Mac. First, the GSEs have now
squandered a policy tool that government had used for decades:
the perception of an implicit rather than explicit federal
guarantee of their debt obligations.114 That means that
government would need to provide some form of express
guarantee if the GSEs were to be restored; providing an express
government guarantee to only two companies, or even a few
companies, would raise fundamental issues of fairness. Second,
as was seen in the savings and loan debacle115 and now with the
GSEs,116 the government has great difficulty managing the risks
when it insures the liabilities of a specialized financial
institution. If policymakers want to support the mortgage
113
For examples of government corporations successfully helping to
address the consequences of earlier crises, see MARK K. CASSELL & SUSAN
M. HOFFMAN, IBM CENTER FOR THE BUSINESS OF GOVERNMENT, MANAGING
A $700 BILLION BAILOUT: LESSONS FROM THE HOME OWNERS’ LOAN
CORPORATION (2009), http://www.businessofgovernment.org/pdfs/Cassell
Report.pdf.
114
Stanton, Public Adminstration Theory, supra note 6, at 636 (“ . . . the
Treasury’s infusion of capital starting on September 7, 2008, creates the
perception of an explicit federal guarantee for the GSEs.”).
115
See, e.g., R. DAN BRUMBAUGH, JR., THRIFTS UNDER SIEGE at 179
(1988) (“Now, economic volatility and widespread information distribution
are facts of life, and exogenous and endogenous economic volatility for thrifts
and banks are rendering deposit insurance, with its implicit taxpayer burden,
and balance-sheet regulation increasingly untenable.”).
116
See, e.g., STANTON, A STATE OF RISK, supra note 39, at 8–12
(comparing the institutional characteristics of savings and loan associations
(S&Ls) with GSEs).
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247
market, they should authorize government guarantees of
mortgages, or at most, mortgage-backed securities.
Third, the government should not provide special charters to
a limited number of specialized institutions. As the GSEs have
shown, it is virtually impossible to protect the regulator of a few
private institutions from being dominated.117 This is especially
true if the regulated institutions operate under a law such as
HERA,118 which provides for different rules, especially for
capital, but also for other aspects of safety and soundness, than
those applicable to other institutions in the same lines of
business.119 Fourth, proposals to craft special rules such as trying
to regulate the GSEs as public utilities or by limiting them to
cooperative ownership will not overcome the vulnerabilities of
the GSE as an institutional form that is based on political
dominance. Consider each of these issues in turn.
1. The End of the Implicit Government
Guarantee of GSE Obligations
In earlier years, government was careful to preserve the
option that it would decline to bail out holders of GSE
obligations and GSE-guaranteed mortgage-backed securities.120
117
See, e.g., U.S. GEN. ACCOUNTING OFFICE, GOVERNMENT-SPONSORED
ENTERPRISES: A FRAMEWORK FOR LIMITING GOVERNMENT’S EXPOSURE TO
RISKS, GAO/GGD-91-90, May 1991, at 45 (“We also believe a regulator that
oversees a single regulated entity may have difficulty remaining at arm’s
length from that entity.”).
118
Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289,
(2008).
119
For example, a federal financial regulator needs discretion to set and
adjust capital standards according to events as they occur. Compare the
rulemaking requirements of HERA, section 1111(d)(3), with the much more
flexible authority of the federal bank regulators at 12 U.S.C.
§ 3907(a)(2)(2008) (“Each appropriate Federal banking agency shall have the
authority to establish such minimum level of capital for a banking institution
as the appropriate Federal banking agency, in its discretion, deems to be
necessary or appropriate in light of the particular circumstances of the
banking institution.”).
120
Thus, the Fannie Mae Charter Act contains a requirement that:
248
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Government officials regularly used careful language indicating
that the government’s involvement merely created the perception
of an implicit guarantee rather than an actual guarantee.121 These
niceties began to erode with the financial rescue of the failed
Farm Credit System in the mid-1980s and the government’s rush
to support obligations of the Financing Corporation (FICO) in
1996.122 With the government support of holders of Fannie Mae
and Freddie Mac debt obligations and mortgage-backedsecurities as part of the government’s rescue of Fannie Mae and
Freddie Mac on September 7, 2008, the perception of implicit
government backing of GSEs has become an anachronism.123
One consequence of the destruction of the implicit guarantee is
that in the future, government will be required to provide either
an express guarantee, backed by the full-faith and credit of the
United States, or none at all. Another consequence is that,
unlike the former implicit federal guarantee, explicit government
guarantees are included in the federal budget. Thus, the Office
The corporation shall insert appropriate language in all of its
obligations issued under this subsection clearly indicating that such
obligations, together with the interest thereon, are not guaranteed by
the United States and do not constitute a debt or obligation of the
United States or any agency or instrumentality thereof other than the
corporation.
12 U.S.C. § 1719(b) (2008). The corresponding Freddie Mac Charter
provision is found at 12 U.S.C. § 1455(h)(2) (2008).
121
See, e.g., U.S. GEN. ACCOUNTING OFFICE, HOUSING ENTERPRISES:
POTENTIAL IMPACTS OF SEVERING GOVERNMENT SPONSORSHIP, GGD-96-120,
May 1996, at 25 (“The most important benefit that the enterprises receive
from their government-sponsored status, however, is an implicit one
stemming from investors’ perception that the federal government would not
allow the enterprises to default on their obligations.”).
122
On the former, see, STANTON, A STATE OF RISK, supra note 39, at
124. On the latter see, e.g., Associated Press, House Panel Backs Rescue of
S & L. Fund, N.Y. TIMES, July 26, 1996, http://www.nytimes.com/1996/
07/26/business/house-panel-backs-rescue-of-s-l-fund.html?scp=55&sq=%22
financing+corporation%22&st=nyt&pagewanted=print.
The
Financing
Corporation is authorized by 12 U.S.C. § 1441 (2008).
123
Stanton, Public Adminstration Theory, supra note 6, at 636 (“ . . . the
Treasury’s infusion of capital starting on September 7, 2008, creates the
perception of an explicit federal guarantee for the GSEs.”).
5/8/2010 4:06 PM
249
of Management and Budget (OMB) (which administers
budgeting for credit programs for the Executive Branch),124 is
likely to score borrowing by Fannie Mae and Freddie Mac (or
their successor organizations performing similar functions) as a
part of credit reform, comparable to the budget treatment of
financial guarantees issued by Ginnie Mae (a wholly owned
government corporation located in the Department of Housing
and Urban Development that guarantees mortgage-backed
securities insured or guaranteed by FHA or other government
agencies).125 The days of the GSE as a source of an off-budget
government subsidy for housing finance are coming to an end.
2. The Risks of Insuring Liabilities of
Specialized Financial Institutions
As periodic failures of federal guarantee programs have
shown,126 the government can, and sometimes does, lose the
capacity to supervise use of its financial guarantee. Losses occur
when a federal program incurs defaults on loans that an agency
guarantees, or on direct loans that an agency provides.127 For
124
OFFICE OF MGMT. AND BUDGET, EXEC. OFFICE OF THE PRESIDENT,
CIRCULAR NO. A-129, POLICIES FOR FEDERAL CREDIT PROGRAMS AND NONTAX RECEIVABLES (2000).
125
Ginnie Mae, the Government National Mortgage Association, was
chartered in 1968 as a wholly owned government corporation at the time that
Fannie Mae was chartered as a GSE. Both organizations are successors to the
original Federal National Mortgage Association that until 1968 was a wholly
owned government corporation. 12 U.S.C. § 1717 (2008).
126
See generally, LEONARD DOWNIE, JR., MORTGAGE ON AMERICA 143
(Praeger Publishers 1974) (discussing the failure of HUD single-family and
multifamily programs in the early 1970s).
127
Credit budgeting requires a calculation of the so-called credit
subsidy, i.e., the budgetary outlays that will be required to fund new
loans or loan guarantees that the government provides each fiscal
year. Credit reform recognizes that a loan’s true cost is . . . the net
value of its cash flows over the life of the loan. This value is the
loan’s “subsidy cost”, [sic] which is the net present value of a loan’s
expected cash inflows and outflows over the life of the loan. For
example, if the estimated present value of a direct loan’s cash
250
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example, the FHA’s single-family mortgage insurance program128
currently would seem to be especially at risk of incurring high
rates of defaults on mortgages that the FHA insures.129
However, a guarantee of assets rather than liabilities has
several advantages for the government and taxpayers. First,
asset guarantees are subject to oversight through the federal
budget and the application of credit budgeting.130 This allows the
Office of Management and Budget to monitor the risks involved
in extending the guarantee and to provide regular feedback to
the agency and program through the annual process of reestimating the budgetary costs.131
Such supervision and discipline is lacking for federal
outflows equals $100 and the present value of its inflows equals $90,
its subsidy cost is $10 and its subsidy rate is 10 percent. If an
agency proposed to make $2,000 of these loans, it would seek an
appropriation of 10 percent of the desired face value, or $200.
Budgeting for loan programs with this present value-based
accounting system represented a significant departure for the
otherwise cash-based Federal budget.
THOMAS H. STANTON, Loans and Loan Guarantees, in TOOLS OF
GOVERNMENT, supra note 83, at 384.
128
The FHA program is explained on the HUD website. HUD, Federal
Housing Administration, http://www.hud.gov/offices/hsg/fhahistory.cfm (last
visited Aug. 10, 2009) (“The Federal Housing Administration, generally
known as ‘FHA’, [sic] provides mortgage insurance on loans made by FHAapproved lenders throughout the United States and its territories. FHA
insures mortgages on single family and multifamily homes including
manufactured homes and hospitals. It is the largest insurer of mortgages in
the world, insuring over 34 million properties since its inception in 1934.”).
129
See, e.g., Preston, supra note 85; Barry Meier, As FHA’s Role
Grows, So Does the Risk of Fraud, N.Y. TIMES, Dec. 10, 2008.
130
131
The Office of Management and Budget annually estimates the risk of
each federal credit program and the amount of subsidy that would need to be
provided to offset the risk of loans and loan guarantees originated during the
year. For data on credit programs for the most recent Fiscal Year, see
Federal Credit Supplement: Budget of the U.S. Government Fiscal Year
2010, available at http://www.whitehouse.gov/omb/budget/fy2010/assets/
cr_supp.pdf (last visited Nov. 1, 2009).
5/8/2010 4:06 PM
251
programs that guarantee liabilities rather than financial assets.132
Thus, the Federal Deposit Insurance Corporation (“FDIC”) has
been able to guarantee hundreds of billions of dollars of debt in
response to the financial crisis, including obligations of troubled
institutions such as Citigroup and Bank of America, without
being accountable through the federal budget.133 Similarly,
guarantees of corporate pension plan liabilities by the Pension
Benefit Guaranty Corporation (“PBGC”) are not subject to
budget constraints.134
Second, it is less difficult to monitor the risks inherent in a
guarantee of assets than in a guarantee of liabilities. For a
guarantee of assets, the government must monitor the quality of
origination, servicing, and collections, and the credit quality of
the assets themselves.135 By contrast, monitoring a guarantee of
liabilities of a financial institution involves trying to assess the
quality of the institution’s management, its capitalization, its
accounting practices, and many other potential sources of risk
besides the quality of its assets.
Third, as was seen most clearly in the savings and loan
132
F. Stevens Redburn, How Should the Government Measure Spending?
The Uses of Accrual Accounting, 53 PUB. ADMIN. REV. 228 (1993).
133
OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT,
ANALYTICAL PERSPECTIVES: BUDGET OF THE UNITED STATES GOVERNMENT,
FISCAL YEAR 2009 69 (2008). The “Credit and Insurance” chapter is
instructive when one compares budget treatment of credit programs, including
direct loans and federal guarantees of financial assets, with guarantees of
liabilities such as the FDIC guarantee of obligations of insolvent financial
institutions.
134
Estimated losses on guarantees by the PBGC were estimated at $47
billion. Again, the Analytical Perspectives “Credit and Insurance” chapter is
instructive when one compares budget treatment of credit programs, including
direct loans and federal guarantees of financial assets, with guarantees of
liabilities by the PBGC. See id. The law states that liabilities of the PBGC
are not backed by the United States. 29 U.S.C. § 1302(g)(2) (2008) (“The
United States is not liable for any obligation or liability incurred by the
corporation.”). As with the backing of GSE obligations that the GSEs
disavow in their loan documentation, no one believes this. See supra note
120.
135
Stanton, Public Adminstration Theory, supra note 6.
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252
debacle, a federal guarantee of an institution’s liabilities creates
adverse incentives. When the government guarantees obligations
of a financial firm through deposit insurance, for example,
insured depositors lose incentive to monitor the safety and
soundness of the institution to which they are lending money
when they make a deposit. Unless the government supervises
them closely, owners of such a financial institution, can in turn,
take much greater risks than if investors were more vigilant in
their obligations. This can greatly compound the government’s
risk exposure, compared to the actual volume of liabilities that
government believes it is guaranteeing.136 By contrast, when
government guarantees financial assets or even pools of financial
assets, it can provide for risk sharing that, at least in principle,
can reduce the government’s potential losses.
For all of these reasons, if government can avoid
guaranteeing the liabilities of a private institution, it should do
so. In the case of providing support for the residential mortgage
market, this conclusion is bolstered by the fact that federal
mortgage insurance, or perhaps a federal guarantee of pools of
mortgages, with appropriate risk-sharing with the loan
originator, can provide needed support for the mortgage market
without incurring the risks involved in trying to guarantee the
liabilities of a GSE.137 It also seems prudent that the future
structure of housing finance must take account of the difficulty
that both public and private sector managers can have in trying
to manage a large volume of assets and mortgage-backed
securities.
136
For example, that was the case with the savings and loan debacle.
See, e.g., BRUMBAUGH, supra note 115; STANTON, A STATE OF RISK, supra
note 39, at 8–12.
137
See, e.g., Stanton, Public Adminstration Theory, supra note 6, at 636
(“The benefit of this option is that it cleanly removes shareholders and
current management from the equation and allows the government to pump
federally backed funds into the mortgage market on a prudent basis.”).
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253
3. Special Charters and the Problem
of Regulatory Capture
Regulatory capture is a major problem for federal regulators
in many parts of the economy.138 The problem is especially acute
for a regulator of only a few institutions. Such a regulator can
be expected to assume a parochial point of view compared to a
regulator with responsibility for supervising a plethora of
institutions with varying interests and perspectives.139
The problem becomes especially acute for institutions such
as GSEs that fall into a hybrid category between other
organizational types.140 Take, for example, the issue of
appropriate capital standards: should GSE capital standards be
set according to bank-type standards or according to the
standards that state regulators apply to private mortgage-backed
securities conduits? Economist Willem Buiter argues that what
he calls “cognitive regulatory capture” can bring financial
138
See BERNSTEIN, supra note 96, at 295 (“By insulating themselves
from popular political forces, the commissions have subjected themselves to
undue influence from the regulated groups and tend to become protective
spokesmen for the industries which they regulate.”); see also Buiter, supra
note 95, at 36–41 (showing the power of what he calls “cognitive regulatory
capture”).
139
The GAO has made similar observations and earlier recommended
that all of the GSEs be supervised by a single high-level regulator:
Because of its important responsibility to supervise the safety and
soundness of all the enterprises, the members of the independent
regulator’s board need to have sufficient status, respect in
government and business, and financial expertise. GAO proposes a
three-member board composed of a full-time chairperson who acts as
the chief executive officer of the regulatory staff, the Secretary of
the Treasury, and the Chairman of the Federal Reserve System.
CHARLES BOWSHER, GOVERNMENT SPONSORED ENTERPRISES:
A
FRAMEWORK FOR LIMITING GOVERNMENT’S EXPOSURE TO RISKS GAO/GGD91–90, May 1991, at 8. This recommendation failed to be adopted, in part
because it could have placed congressional jurisdiction over the regulator into
a broad-based committee such as the House Ways and Means Committee
rather than in the hands of the GSE authorizing committees.
140
STANTON, supra note 5, at 1.
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254
regulators into the cognitive mindset of the institutions that they
regulate.141 Cognitive capture is not a product of corruption, but
rather a process by which the regulator or relevant congressional
actors internalize “as if by osmosis, the objectives, interests, and
perception of reality of the vested interests they are meant to
regulate and supervise . . . .”142 The dynamic of Buiter’s
cognitive regulatory capture means that over time, a regulator
can grow to favor the institutions that it regulates. Thus, a
regulator with responsibility for supervising only the housing
GSEs under a statute with a unique statement of capital
requirements compared to other financial institutions, can gain
motivation to move towards lower capital standards.143 This
opens the door to regulatory arbitrage and the likelihood that the
GSEs once again would resume their excessive growth, based on
their regulatory advantages rather than on whether it makes
sense to concentrate so much risk in a few specialized financial
institutions.
The inability of the Congress to set bank-type capital
standards for Fannie Mae and Freddie Mac or to create for them
a supervisory framework that was at least as strong as the
supervisory framework for banks,144 stands as a warning of the
political dynamics that are at play here. As specialized
institutions,145 GSEs tend to be the province of parochial
141
Buiter, supra note 95, at 37.
Id.
143
See supra note 71 and accompanying text. In contrast to HERA,
which maintains a distinct statutory framework for the GSEs, there are now
consolidated statutory requirements for the bank and thrift regulators. The
Federal Deposit Insurance Corporation Act, as amended, in 12 U.S.C.
§ 1813(q) (2008) defines “Appropriate Federal Banking Agency” to include
the Office of Thrift Supervision (the thrift regulator) as well as the bank
regulators and, in 12 U.S.C § 1818 (2008), grants common supervisory
authority and imposes common responsibility upon each “appropriate federal
banking agency” to apply remedies to deal with troubled institutions that are
under their supervision.
144
See Stanton, Public Adminstration Theory, supra note 6, at 634–35.
145
See, e.g., STANTON, MERCANTILIST COMPANIES, supra note 5, at 8
(“Like thrifts, government-sponsored enterprises are specialized lenders. In
return for their statutory benefits they are limited by law to serving
142
5/8/2010 4:06 PM
255
committees or subcommittees of the Congress that are attuned to
the benefits of GSEs for the stakeholders whom they serve, and
are relatively insensitive to the need to protect ordinary
taxpayers from having to pay for an expensive rescue.146
The prospect of differential capital and other supervisory
requirements that permit regulatory arbitrage means that GSEs
again can evolve to become not only “too big to fail,” but also
too big to succeed.147 The failure of internal controls at both
GSEs was revealed at Freddie Mac in 2003 and at Fannie Mae
in 2004,148 when they were much smaller than they were when
they failed completely several years later. More recently, Fannie
Mae and Freddie Mac have shown, at great cost to the
residential mortgage market and larger financial system, that the
GSEs and their politically oriented managers lack the ability to
manage such large institutions.
One should not ignore the fact that many other kinds of
financial institutions, including banks, thrifts, and investment
banks and their holding companies also failed in the recent
debacle. The point here is that the GSE can be replaced by a
wholly owned government corporation to provide comparable
prescribed kinds of borrowers or dealing in specified kinds of loans.”).
146
Thus, when considering whether to create the first safety-andsoundness regulator for Fannie Mae and Freddie Mac (which became
OFHEO in 1992), members of the House Banking Committee joked about
whether the legislation was necessary. Asked one Representative, “I’m just
not sure exactly what we’re doing . . . . I still want to know what basic
problem we’re attempting to fix.” Answered another, “Palpitations in the
Treasury Department, cause unknown.” Jill Zuckman, Bills To Increase GSE
Oversight Move Ahead in House, Senate, CONG. Q., Aug. 3, 1991, at 21–39.
147
See, e.g., GARY H. STERN & RON J. FELDMAN, TOO BIG TO FAIL:
THE HAZARDS OF BANK BAILOUTS 26 (Brookings Institution Press 2004)
(defining institutions that are too big to fail as so large, complex, or
intertwined with the rest of the financial system that policymakers support the
institution’s uninsured creditors—despite having no legal obligation to do so—
for fear that the institution’s failure could cause an unacceptable amount of
damage to other institutions and the larger financial system. Economic costs
accrue “when weak market discipline associated with too big to fail induces
banks to make suboptimal decisions.”).
148
Stanton, supra note 27, at 840–42.
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256
support to the mortgage market without incurring the political
and financial risks inherent in the GSE’s hybrid organizational
form.
C. The Government Should Turn Fannie Mae and Freddie
Mac into Wholly Owned Government Corporations
The government should promptly end Fannie Mae and
Freddie Mac as investor-owned companies with perceived
federal backing and turn them into wholly owned government
corporations.149 At some specified time—say five years from
now, when the mortgage market stabilizes once again—
policymakers can decide the extent to which government support
for the secondary mortgage market would be useful or
affordable.
The wholly owned government corporation is a special type
of government agency that is intended to operate in a
businesslike way.150 Government corporations are supposed to be
financially self-sustaining, or at least potentially self-sustaining.
They keep their books similar to a private firm and submit
business-type budgets rather than government budgets each year.
The idea of a government corporation is that it should seek to
fund itself from its operations. If Congress decides to add
noneconomic programs to a government corporation charter,
then it should appropriate money to enable the government
corporation to carry out these activities.
In the current environment, when many people express
concerns about the large size of government, it is helpful to
remember that GSEs combine the involvement of government
with the incentives of private owners to create a much larger,
and economically more distorting, presence in the mortgage
149
Government Corporation Control Act, 31 U.S.C.A. § 9101 (2008)
(defining the contours of the term “wholly owned government corporation”).
150
See, e.g., Stanton & Moe, supra note 83, at 81; Office of
Management and Budget, Memorandum on Government Corporations, M-9605, at 3 (Dec. 8, 1995); U.S. Government Accountability Office,
Government Corporations: Profiles of Existing Government Corporations,
GGD-96-14, at 5 (1995).
5/8/2010 4:06 PM
257
market than occurs if a government corporation were quietly
serving its mission without the drive to constant expansion that
systematically occurs with any GSE.151
Transformed into government corporations, Fannie Mae and
Freddie Mac could carry out significant activities during the next
five years. They could:
1. Lower the cost of mortgages to help consumers
refinance out of adjustable rate and other kinds of
mortgages that are proving difficult for many
homeowners to repay.
2. Serve as vehicles to deliver improved federal support
for homeowners who are forced into foreclosure by
losing their jobs.
3. Provide essential consumer protections for borrowers,
such as Alex Pollock’s one-page mortgage disclosure
form.152
4. Devise and impose requirements that primary lenders
and other participants in the mortgage process have
appropriate
financial
strength
and
capability,
accountability, and that they engage in appropriate risksharing before they are allowed to do business with the
two companies. Implementation of some of these
requirements may need to be deferred until the housing
and mortgage markets regain some semblance of
stability.
5. Adapt their Automated Underwriting Systems, and
perhaps other systems and capabilities, for use by other
federal agencies, starting with the FHA, and perhaps
Ginnie Mae and the direct loan program for homeowners
(part of the disaster loan program) of the Small Business
151
See, e.g., Stanton & Moe, supra note 83, at 82; see also STANTON,
MERCANTILIST COMPANIES, supra note 5, at 4–6, (showing statistics of how
all of the GSEs, whether investor-owned or cooperatives, virtually doubled in
size every five years).
152
ALEX POLLOCK, THE BASIC FACTS ABOUT YOUR MORTGAGE LOAN
(American Enterprise Institute 2007), available at http://www.aei.org/docLib/
20070913_20070515_PollockPrototype.pdf.
5/8/2010 4:06 PM
258
Administration.153
In short, the government could turn the collapse of Fannie
Mae and Freddie Mac into an opportunity to fashion important
rules of conduct for those types of participants in the housing
market that have served American consumers and taxpayers so
poorly. The government also could use the GSEs to help shore
up the FHA by providing technical and IT systems support.
Once they become wholly owned government corporations
without the need to serve a mix of public and private objectives,
Fannie Mae and Freddie Mac could play major roles in
supporting the housing market.
Congress would be well advised to place a sunset provision
of perhaps five years into each government corporation charter.
A sunset date, which formally would terminate the corporation
charter and require an end to its operations, provides an
opportunity for policymakers to determine whether the enabling
legislation should be reauthorized and, if so, in what form. As
the sunset approaches, and the mortgage debacle is hopefully
behind us, policymakers can decide whether further support for
the mortgage market is required, and which organizational form
is most suitable.
If they decided to wind up two government corporations at
the end of five years, policymakers would address both the
capacity and the life-cycle disadvantages that can otherwise
accompany the creation of wholly owned government
corporations. Having a five year sunset period would allow the
wholly owned government corporations to provide support for
154
the mortgage market at a critical time. The experience of the
Resolution Trust Corporation (“RTC”) indicates how a
temporary government corporation can develop the capacity to
153
Thomas H. Stanton, Strengthening Government’s Ability to Deal With
the Financial Crisis IBM CENTER FOR THE BUSINESS OF GOVERNMENT (2009)
[hereinafter Stanton, Strengthening Government’s Ability], at 13, available at
http://www.businessofgovernment.org/pdfs/StantonFinancial.pdf. (discussing
FHA’s need for enhanced capacity).
154
As GSEs, Fannie Mae and Freddie Mac in 2009 fund almost three
quarters of new residential mortgage originations. See, e.g., Lockhart, supra
note 19, at 10.
5/8/2010 4:06 PM
259
deal with complex financial issues. It does this by attracting
high-quality talent that might not contemplate a longer term
career in government.155 The RTC was impressive in the way
that it evolved constant improvements in its approach to its
mission.156
Even though the Congress could allow one or both of the
government corporations to sunset at the end of their charter
terms, this is not a foregone conclusion. The continuation of a
government corporation could appeal to some policymakers, for
example because of the ability to use revenues from mortgage
operations to support affordable housing.157
In 1996, the General Accounting Office undertook a study to
examine the consequences for the housing market if Fannie Mae
and Freddie Mac ceased to operate as firms with any
government backing at all. The GAO concluded that the effects
would be limited:
Privatization would likely change the behavior of market
participants and increase average interest rates on fixedrate, single-family mortgages within an average range of
about 15 to 35 basis points. However, privatization
would not mean the end of the secondary mortgage
market, a return to regional disparities in mortgage
interest rates that were not based on differences in risk,
or a lack of mortgage credit in the economy during parts
of the business cycle. It would probably mean that
mortgage rates would increase in areas with higher risks,
for houses with higher loan-to-value ratios, and in
155
Accord Stanton, supra note 6, at 636 (“Life cycle is also an issue.
After some years the government corporations could ‘ossify,’ i.e., begin to
display some of the kinds of bureaucratic infirmities that FHA (for example)
has manifested in recent years.”).
156
See, e.g., Thomas H. Stanton, Lessons Learned: Obtaining Value
From Federal Asset Sales, 23 PUB. BUDGETING & FIN. 22 (2003).
157
Section 1131 of HERA, Pub. L. 110–289, established a Housing
Trust Fund that Fannie Mae and Freddie Mac would fund with contributions.
It would be possible to build such an affordable housing program into a
government corporation that serves the mortgage market. See supra note 6, at
636.
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260
periods of high mortgage demand.158
Just as one must question whether a GSE or other private
institution is properly manageable once it funds, say, a trillion
dollars of mortgages,159 one must also question whether
managers of wholly owned government corporations will be up
to the task. As a matter of protecting taxpayers from excessive
financial risk it would be prudent to limit the size of both public
and private institutions that provide financial support to the
mortgage market. One clear lesson of the current debacle is that
it is risky to maintain immense financial institutions of any kind
over the long term.160
One possible way would be to use a government corporation
to provide government support for limited purposes, such as a
30-year fixed-rate mortgage for selected borrowers such as firsttime homebuyers. Alternatively, concern about size and risk
could lead policymakers to sunset the government corporations
after the mortgage market is back on its feet. In either event, the
model of the wholly owned government corporation would
158
U.S. General Accounting Office, Housing Enterprises: Potential
Impacts of Severing Government Sponsorship, GGD-96-120, May 1996, at
70. A “basis point” is one-one-hundredth of a percentage point.
159
Economist Joseph Stiglitz makes this point about banks:
[T]he problem of too-big-to-fail institutions remains. There are but
two solutions: breaking up the institutions or regulating them
heavily. For reasons that I will make clear, we need to do both.
The only justification for allowing these huge institutions to continue
is that there are significant economies of scope or scale that
otherwise would be lost. I have seen no evidence to that effect . . .
we have little to lose, and much to gain, by breaking up these
behemoths, which are not just too big to fail but also too big to save
and too big to manage.
Too Big to Fail or Too Big to Save? Examining the Systematic Threats of
Large Financial Institutions: Hearing Before the Joint Economic Committee,
111th Cong. 25–26 (2009) (statement of Joseph Stiglitz, 2001 Nobel Prize
Recipient & Professor, Columbia University), available at http://jec.senate.
gov/index.cfm?FuseAction=Hearings.HearingsCalendar
(follow
“April
21st—Too Big to Fail or Too Big to Save?” hyperlink; then follow “Joseph
Stiglitz” hyperlink).
160
See id.
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261
remain available when needed to provide government support
for the mortgage market in the event of any future crisis.
CONCLUSION: USE THE FORMER GSES EXTENSIVELY AT FIRST
AND THEN FOR MORE LIMITED SUPPORT OF THE MORTGAGE
MARKET
The government-sponsored enterprise has outlived its
usefulness as an instrument of government policy. While other
financial institutions have also shown vulnerability, the GSE
appears to be especially prone to dominating and ultimately
evading any reasonable accountability structure. GSEs are
simply too powerful for their own good. Fannie Mae and
Freddie Mac, now demonstrably insolvent, should be placed into
receivership and turned into wholly owned government
corporations that could sunset after perhaps five years. As such
they could support the mortgage market, not only through their
access to government funding, but also by imposing rules for
consumer and investor protection, capital requirements on
mortgage market participants, and other protective measures that
policymakers could apply to the rest of the housing finance
system. Also, they could help to shore up potentially vulnerable
government agencies such as the FHA that are playing
increasingly important roles in the mortgage market. After that,
when circumstances have improved, policymakers can decide
whether the needs of the housing market should be served by a
government corporation, and how to shape that government
corporation to address those needs. Especially for the next few
years, but also potentially for the longer term, the wholly owned
government corporation is an organizational form that offers
great promise as a source of support for the mortgage market.
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ELIMINATING RACIAL DISCRIMINATION
IN THE SUBPRIME MORTGAGE MARKET:
PROPOSALS FOR FAIR LENDING REFORM
By Winnie F. Taylor*
INTRODUCTION
Lending discrimination has been a national problem for
decades. Before Congress enacted the Equal Credit Opportunity
Act (ECOA) in 1974 to combat it, lenders routinely denied
credit to potential borrowers because of their race, gender, age,
marital status and other personal characteristics unrelated to
creditworthiness standards.1 For instance, some creditors based
their lending decisions on stereotypical assumptions about
whether women in certain age groups would have children or
return to work after childbirth.2 Others excluded minority
communities from their lending areas by literally drawing red
lines on maps around neighborhoods where mostly African
Americans and Hispanics resided.3 The ECOA is a fair lending
law that proscribes lending practices that impede credit
opportunities for women, racial minorities and others who have
* Professor of Law, Brooklyn Law School. I am grateful to Bethany
Walsh, Dylan Gordon, and Adrienne Valdez for their helpful research
assistance. I also thank the Brooklyn Law School faculty research fund for
its support.
1
See Winnie F. Taylor, Meeting the Equal Credit Opportunity Act’s
Specificity Requirement: Judgmental and Statistical Scoring Systems, 29
BUFF. L. REV. 73, 74–81 (1980).
2
See NATIONAL COMMISSION ON CONSUMER FIN., CONSUMER CREDIT IN
THE UNITED STATES, 151, 152–53 (1972).
3
Gene A. Marsh, Lender Liability for Consumer Fraud Practices of
Retail Dealers and Home Improvement Contractors, 45 ALA. L. REV. 1, 15
(1993) (discussing historical origin of the term “redlining”).
263
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264
historically experienced credit discrimination.
Credit discrimination issues have emerged from the rise and
fall of the subprime housing market. The problems stem from
the race-based practices of overzealous subprime lenders in the
selling of home loans. This discriminatory lending behavior is
one of many factors that contributed to the market’s collapse. It
is therefore imperative that policy makers concerned about
preventing another crisis consider the impact that racial
discrimination can have on igniting or exacerbating a mortgage
lending disaster. Legal scholars and other commentators have
highlighted the discriminatory underpinnings of the crisis,4
noting in particular that some subprime lenders aggressively
targeted minority neighborhoods for the purpose of making
unaffordable home loans that were destined for delinquency,
default, and foreclosure.5 Because of these and other abusive
lending tactics, racial minorities received the lion’s share of
subprime loans during the housing boom that preceded the
crisis.6 After the bubble burst, massive foreclosures followed
with a disproportionate share concentrated in minority
communities. Consequently, these communities experienced the
brunt of the devastation that resulted from the subprime
4
See Raymond H. Brescia, Subprime Communities: Reverse Redlining,
the Fair Housing Act and Emerging Issues in Litigation Regarding the
Subprime Mortgage Crisis, 2 ALB. GOV’T L. REV. 164 (2009); Brian Gilmore
et al., The Nightmare on Main Street for African-Americans: A Call for a
New National Policy Focus on Homeownership, 10 BERKELEY J. AFR.-AM.
L. & POL’Y 262, 262–65 (2008) (discussing the impact of racial
discrimination on the housing crisis).
5
Linda E. Fisher, Target Marketing of Subprime Loans: Racialized
Consumer Fraud & Reverse Redlining, 18 J.L. & POL’Y __ (2009).
6
DEBBIE GRUENSTEIN BOCIAN ET AL., CTR. FOR RESPONSIBLE LENDING,
UNFAIR LENDING: THE EFFECT OF RACE AND ETHNICITY ON THE PRICE OF
SUBPRIME MORTGAGES (2006), available at http://www.responsiblelending.
org/mortgage-lending/research-analysis/rr011-Unfair_Lending-0506.pdf;
Christopher Mayer & Karen Pence, Subprime Mortgages: What, Where, and
to Whom 2 (Nat’l Bureau of Econ. Research, Working Paper No. 14083,
2007) (discussing subprime loan originations in 2005 and concluding that
subprime mortgages during this time period were concentrated in locations
with high proportions of black and Hispanic residents).
TAYLOR REVISED.DOC
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265
“meltdown.”7
Some creditors use unscrupulous marketing and underwriting
practices that earn them the label “predatory lenders.”8 Among
these lenders are “equal opportunity abusers,” that is, creditors
who indiscriminately mistreat minority and non-minority
borrowers. Others engage in race-based lending practices that
are not only abusive but also illegal under the ECOA. For
example, two loan originators employed by a major bank with a
significant subprime department before the mortgage market
collapsed, described in affidavits how the bank solicited African
American customers and charged them more than necessary for
mortgage loans because of their race.9 These former bank
employees also reported how African American customers were
7
See Matthew Price, Baltimore’s Tale of Sub-prime Woe, BBC NEWS,
June 28, 2009, http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8118376.stm
(describing the devastation to the Baltimore community).
8
The term “predatory lending” describes various onerous lending
practices, which are often targeted at vulnerable populations. Predatory
lending has been defined as a syndrome of abusive loan terms or practices
that involve one or more of the following five problems: (1) loans structured
to result in seriously disproportionate net harm to borrowers; (2) harmful
rent-seeking; (3) loans involving fraud or deceptive practices; (4) other forms
of lack of transparency in loans that are not actionable as fraud; and (5) loans
that require borrowers to waive meaningful legal redress. See Kathleen C.
Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and
Economics of Predatory Lending, 80 TEX. L. REV. 1255, 1259–1261 (2002).
9
See affidavit of Tony Paschal, an employee of Wells Fargo, describing
practices where employees engaged in marketing specifically targeted at
minorities, even going as far as printing out flyers in what they referred to as
the “African American” language. Affidavit of Tony Paschal at ¶ 11, Mayor
of Baltimore v. Wells Fargo, No. 1:08-cv-00062 (D. Md. June 3, 2009).
Another employee described practices where Wells Fargo employees would
push subprime loans onto minority customers who were eligible for the lower
priced prime rates by deceptive practices ranging from convincing people it
was the only way to get the paperwork finished quickly to offering a donation
to the church of the customers’ choice. Affidavit of Elizabeth Jacobson at ¶
12, Mayor of Baltimore v. Wells Fargo, No. 1:08-cv-00062 (D. Md. June 3,
2009). This same employee testified that once she received a referral for a
customer, she was only permitted to offer them a subprime loan, even if they
were eligible for a prime loan. Id. at ¶ 3.
TAYLOR REVISED.DOC
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266
sometimes steered to subprime loans10 even though such
customers qualified for less expensive prime loans.11 The ECOA
specifically prohibits disparate treatment on the basis of race.12
This Article proposes action the federal government should
take to better protect minority consumers in the subprime market
from discriminatory lending practices. First, more impact
litigation is needed to encourage compliance with the ECOA and
to generate sanctions for subprime creditors who violate fair
lending laws. Second, current fair lending laws and regulations
designed to ferret out creditors who discriminate on the basis of
race need to be revised to better assist federal prosecutors in
their litigation efforts.
As explained more fully below, claims of racial
discrimination in mortgage credit are not new; however, the
context of the problem has changed. Initially, the primary
concern was denial of home loans to residents of minority
communities.13 Today, the dominant concern is excessive bad
credit in these communities that is perversely tied to mortgage
lenders who intentionally made improvident loans.14 As creditors
become more creative in devising discriminatory practices, the
10
A “subprime loan” is a loan that features higher costs than a prime
loan, both upfront and throughout the life of the loan. The defining
characteristic of the subprime mortgage is the higher interest rate it carries
over a prime loan. See Michael Aleo & Pablo Svirsky, Foreclosure Fallout:
The Banking Industry’s Attack on Disparate Impact Race Discrimination
Claims Under the Fair Housing Act and the Equal Credit Opportunity Act, 18
B.U. PUB. INT. L.J. 1, 5 (2008) (discussing subprime loans). The higher
rates are presumably to compensate lenders for the added risks associated
with lending to borrowers with weaker credit histories. See ALLEN J.
FISHBEIN & PATRICK WOODALL, SUBPRIME LOCATIONS: PATTERNS OF
GEOGRAPHIC DISPARITY IN SUBPRIME LENDING 1 (2006), available at
www.consumerfed.org/pdfs/SubprimeLocationsStudy090506.pdf.
11
Prime loans are loans with interest rates and fees that conventional
banks charge their best customers. See CAL. REINVESTMENT COALITION ET
AL, PAYING MORE FOR THE AMERICAN DREAM, A MULTI-STATE ANALYSIS
OF HIGHER COST PURCHASE LENDING, app. (2007), available at
http://www.calreinvest.org/system/assets/47.pdf.
12
See Equal Credit Opportunity Act, 15 U.S.C. §1691 (2006).
13
See supra note 3.
14
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267
federal response should include enhancement of fair lending
enforcement and stronger consumer protection laws.
In exploring the proposals presented herein, the first part of
this Article emphasizes the importance of government litigation
as a means of combating lending discrimination in the subprime
housing market. For almost two decades, ECOA enforcement
authorities have litigated race-based mortgage lending claims.
This section reviews that litigation and argues for more federal
prosecution of subprime lenders that discriminate on the basis of
race.
The second part argues for regulatory reform. Specifically,
this part proposes amending Regulation C,15 which implements
16
the Home Mortgage Disclosure Act (HMDA), by adding credit
scores to the information subprime lenders must report to federal
regulatory agencies regarding their home mortgage lending
experience. Currently, certain lenders must collect and report
demographic and pricing data that federal officials analyze to
determine if discriminatory lending patterns exist that violate fair
lending laws. Including credit score data in the analysis would
enhance the ability of these officials to make this determination.
As explained in greater detail in Part II below, adding credit
risk information to the HMDA reporting requirements might
cause some lenders to make fewer subprime loans, especially
those concerned about greater exposure to lawsuits and more
regulatory scrutiny. However, if subprime lenders cut back
significantly in making mortgage loans, credit-impaired
borrowers, who are their primary customers, will be further
17
limited in home financing options. To address this concern, I
15
12 C.F.R. § 203 (2009).
12 U.S.C. §§ 2801–2810 (2006).
17
The subprime lender specializes in issuing high-interest mortgages to
families with few credit options. See Elizabeth Warren, The Economics of
Race: When Making It to the Middle Is Not Enough, 61 WASH. & LEE L.
REV. 1777, 1792–94 (2004) (discussing the history of subprime lending).
Most subprime refinance borrowers use the collateral in their homes for debt
consolidation and other consumer credit purposes. See FISHBEIN &
WOODALL, supra note 10, at 1 (discussing subprime borrowers who refinance
home loans).
16
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argue that the federal government should provide funds to credit
unions for the purpose of increasing their subprime lending.
This public funding proposal is attractive for several reasons.
First, if some subprime lenders reduce mortgage credit because
the Federal Reserve Board (FRB) adds credit scores to their
HMDA reporting requirements, credit unions may be able to fill
the void by expanding their subprime lending to more qualified,
higher-risk borrowers in under-served communities. Given their
non-profit, quasi-governmental status, credit unions are unlikely
to reduce subprime mortgage lending because of a new credit
score reporting requirement.18 Second, expanding the credit
union subprime market would provide potential borrowers with
viable alternatives to abusive home mortgage providers. Third,
such expansion would provide competition to predatory
subprime lenders.
By focusing on remedies and strategies for combating the
racial discrimination problem in subprime lending, this Article
brings issues of race and ethnicity to the forefront of the
mortgage crisis where they belong. Developing effective
responses to prevent its reoccurrence demands consideration of
all factors that led to the market’s demise, especially those
indicative of unlawful conduct.
I. IMPACT LITIGATION AND ACCOUNTABILITY
Congress gave ECOA enforcement authority to the FRB, the
Department of Justice (DOJ), the Federal Trade Commission
19
(FTC), and a number of other federal agencies. Claims of
18
See Ronald H. Silverman, Toward Curbing Predatory Lending, 122
BANKING L.J. 483 (2005); see also infra text accompanying note 107.
19
Enforcement authority under the ECOA is divided between federal
agencies. The U.S Department of Justice may initiate a lawsuit under the
ECOA where it believes a creditor has engaged in a pattern or practice of
discrimination. With respect to claims against national banks, and Federal
branches, enforcement authority is with the Office of the Comptroller of the
Currency (OCC); for claims against member banks of the Federal Reserve
System (other than national banks), and commercial lending companies
owned or controlled by foreign banks, enforcement authority is with the
Board of Governors of the Federal Reserve System; for claims against banks
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269
racial discrimination in the subprime mortgage market present
the latest regulatory challenge to these authorities. In addition to
investigating and examining creditors for fair lending
compliance, government agencies should use litigation
vigorously to address discrimination claims. Their sustained
litigation efforts will likely encourage fair lending compliance by
sending a clear message to the lending industry that ECOA
violators will be relentlessly pursued, prosecuted, and held
accountable for engaging in unlawful conduct.
The DOJ and the FTC already have experience litigating
ECOA claims similar to many of those that have emerged from
the mortgage crisis, including those involving discriminatory
pricing. Some of their groundbreaking cases are summarized in
the next section. All of the cases were settled. Nevertheless,
these cases helped establish novel lending discrimination
theories20 and demonstrate that litigation can be an effective
means of combating racial discrimination in mortgage lending.
To achieve this end, litigation efforts must be relentless.
A. Redlining
At the federal level, efforts to eliminate home mortgage
discrimination have been ongoing for almost two decades. In
1992, the DOJ filed its first ECOA mortgage-lending lawsuit
against a Georgia bank. The complaint charged the bank with
“redlining,” that is, refusing to make loans in certain
geographical areas because of the racial composition of its
21
residents. Specifically, DOJ attorneys alleged that Decatur
Federal Savings & Loan “devised ways to avoid dealing with
insured by the Federal Deposit Insurance Corporation (other than members of
the Federal Reserve System) and insured State branches of foreign banks,
enforcement authority is with the Board of Directors of the Federal Deposit
Insurance Corporation; for claims against credit unions enforcement authority
resides with the Administrator of the National Credit Union Administration.
See Equal Credit Opportunity Act, 15 U.S.C. § 1691c(a)(1)(A)–(C) (2006).
20
See NATIONAL CONSUMER LAW CENTER, THE CREDIT AND SALES
LEGAL PRACTICE SERIES § 12.4.1 (4th ed. 2005).
21
See supra note 3.
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African Americans in the Atlanta area and avoided making
mortgage loans in black communities.”22 To support the claim
that Decatur Federal intentionally denied banking services to
African Americans, the complaint further alleged that none of
the bank’s 48 branch offices were located in predominately
African American neighborhoods.23 The consent decree that
settled the case required the bank to pay $1 million to
compensate 48 rejected credit applicants and to take a series of
corrective measures to ensure compliance with the ECOA,
including opening up a branch office in a predominately black
neighborhood.24
Since 1992, the DOJ has filed and settled a myriad of
redlining lawsuits against banks and other financial institutions.
In one such case involving a bank in the District of Columbia,
DOJ attorneys alleged that Chevy Chase Bank refused to market
mortgage loans in predominately African American communities
in Washington, D.C., because of the racial identity of those
neighborhoods.25 As it did in Decatur, the DOJ’s litigation
strategy included focusing on the location of bank branch offices
to support its contention that the bank intentionally excluded
blacks from receiving its mortgage lending services.
Accordingly, the complaint alleged that 70 of the 74 Chevy
Chase branch offices were located in predominately white
communities.26 The settlement agreement required the bank to
pay $11 million to establish a special loan program so that
mortgage-lending services could be provided to the neglected
areas. The agreement also required the bank to open up branch
27
offices in minority neighborhoods.
Similarly, the DOJ sued Albank for redlining in violation of
22
Complaint at ¶¶ 8–16, United States v. Decatur Fed. Sav. & Loan
Assoc., No. 92-CV-2198 (N.D. Ga. 1992).
23
Id. at ¶¶ 4, 9.
24
Consent Decree at ¶¶ 2–48, Decatur, No. 92-CV-2198 (N.D. Ga.
1992).
25
Complaint at ¶ 12, United States v. Chevy Chase Fed. Sav. Bank, No.
94-CV-01829 (D.D.C. 1994).
26
Id. at ¶ 13.
27
Consent Decree, Chevy Chase, No. 94-CV-01829.
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the ECOA. In this 1997 case, DOJ attorneys contended that the
bank refused to take mortgage loan applications from areas in
Connecticut and Westchester County, New York, with
significant minority populations. Further, the government
attorneys claimed that the bank could provide no reason for
carving out minority communities from its lending areas.28 The
consent decree that ended this litigation required the bank to
provide $55 million in loans at below market rates to the
communities that it refused to service previously and to
implement a non-discriminatory lending policy.29
More recently, the DOJ prosecuted two mid-western banks
for redlining. In 2004, the agency resolved a lawsuit it filed
against First American Bank. The DOJ attorneys claimed that
the bank unlawfully failed to market its mortgage credit and
other lending products to predominately minority neighborhoods
in the Chicago and Kankakee, Illinois, metropolitan areas.30
Additionally, the prosecutors alleged that of the nearly $288
million in single family residential real estate loans that the bank
funded between 1999 and 2001, only 4.5% went to properties
located in minority census tracts.31 The terms of the consent
order required First American to open four new full-service
branch offices, three of which had to be located in majority
African American census tracts in the Chicago area and one in a
majority Hispanic census tract. Further, it required the bank to
invest $5 million in a special financing program for residents
and businesses in the minority communities of the
Chicago/Kankakee areas.32
In 2006, DOJ attorneys filed the other mid-western bank
case and subsequently resolved redlining allegations against
28
Complaint at ¶ 14, United States v. Albank, FSB, No. 97-CV-1206
(N.D.N.Y 1997).
29
Consent Decree at § III(1), Albank, No. 97-CV-1206.
30
Id. (consent decree). Complaint at ¶¶ 17–21, United States v. First
Am. Bank, No. 04-CV-4585 (N.D. Ill. July 13, 2004) [hereinafter First
American Consent Decree]. The DOJ’s complaint alleged that all but four of
the bank’s 34 branches were located in a minority area. Id. at ¶ 15.
31
Id. at ¶ 28.
32
First American Consent Decree, supra note 30, at § III.
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Centier Bank in Indiana. At the time of the litigation, Centier
Bank was one of the largest residential lenders in the Gary,
Indiana, metropolitan area.33 The complaint alleged that the bank
avoided serving the mortgage credit needs of neighborhoods
where the majority of the residents are African American or
Hispanic, especially in the cities of Gary, East Chicago, and
Hammond.34 The settlement agreement that ended this lawsuit
required the bank to open or acquire at least two full service
offices within designated African American and Hispanic areas.
It also required the bank to provide the same services offered at
its majority white suburban locations to all branches regardless
of their location. Further, the bank had to invest a minimum of
$3.5 million in special financing programs for residential and
small business loans.35
The above redlining cases highlight the historical lack of
conventional mortgage lending sources in minority communities
and the efforts of government attorneys to remove racial barriers
to minority homeownership and residential refinancing. They
also demonstrate how racial discrimination can create a dual
system of mortgage lending that can lock minority borrowers out
of lower-cost mortgage credit that conventional lenders typically
provide. When these lenders refuse to lend in minority
neighborhoods, a void is created that abusive lenders fill by
charging excessive rates and imposing other unfavorable loan
terms. Thus, conventional lenders can play a significant role in
making minority borrowers especially vulnerable to predatory
subprime lenders. To prevent such exploitation, ECOA
enforcement authorities must remain vigilant in combating
redlining.
B. Reverse Redlining
In contrast to redlining, the claims of racial discrimination in
33
Complaint at ¶¶ 3–6, United States v. Centier Bank, No. 06-CV-344
(N.D. Ind. Oct. 13, 2006).
34
Id. at ¶ 10.
35
Consent Order at ¶ 23, Centier Bank, No. 06-CV-344.
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mortgage lending that emerged from the subprime crisis focus
on an abundance of mortgage credit in minority neighborhoods;
however, this credit has been notoriously burdensome. These
“reverse redlining”36 complaints allege that some predatory
subprime lenders target minority neighborhoods for the purpose
of making mortgage loans that are saddled with unfavorable
terms, especially price inequities. Although federal prosecutors
began litigating reverse redlining claims more than a decade
before the subprime crisis, the foreclosure epidemic that has
caused devastation to many minority neighborhoods37 is likely to
precipitate a notable increase in the filing of these cases.
Importantly, the government’s reverse redlining cases have
created a template that private litigants can use to structure
arguments for proving disparate impact38 and disparate
treatment39 lending discrimination claims.
36
“Reverse redlining” is the practice of extending credit on unfair terms
to specific geographic areas due to the income, race or ethnicity of its
residents. Assoc. Home Equity Servs., Inc. v. Troup, 778 A.2d 529, 537
(N.J. Super. Ct. App. Div. 2001) (citations omitted).
37
See Fisher, supra note 5.
38
Disparate impact discrimination occurs when creditors use neutral
policies or practices that have a disproportionate adverse affect on persons in
the ECOA protected classes. This framework for proving lending
discrimination has a burden-shifting approach. The first step under this
approach requires the plaintiff to prove that a creditor practice or policy
created a disparity on an ECOA prohibited basis. If the plaintiff establishes
this prima facie case, the burden shifts to the creditor to prove that the policy
is justified by a business necessity. At the final stage, the plaintiff prevails if
there is sufficient evidence that an alternative policy or practice could serve
the creditor’s same business purpose with less discriminatory effect. See
Griggs v. Duke Power Company, 401 U.S. 424 (1971); Albemarle Paper
Company v. Moody, 422 U.S. 405 (1975) (discussing the approach in the
context of employment discrimination); see also infra notes 70–74 and
accompanying text.
39
Disparate treatment discrimination occurs when creditors treat some
borrowers or potential borrowers less favorably than others because of ECOA
protected class characteristics such as race or sex. Under this theory, proof of
the lender’s discriminatory intent is crucial. In employment law, burdenshifting approach is used to prove disparate treatment cases. See McDonnell
Douglas Corp. v. Green, 411 U.S. 792, 804–806 (1973).
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In 1996, the DOJ brought a reverse redlining lawsuit against
Long Beach Mortgage Company challenging its mortgage
pricing policies. Long Beach is a subprime mortgage affiliate of
Washington Mutual Savings Association.40 The complaint alleged
that the mortgage company directed its marketing efforts
primarily toward persons and neighborhoods of color that
lending officials believed might be susceptible to higher prices.41
Also, DOJ attorneys contended that the mortgage company’s
loan originators typically emphasized low monthly payment
amounts when discussing loan prices with minority borrowers
rather than interest rates, points, and annual percentages rates.42
Further, the complaint asserted that Long Beach allowed both its
employee loan officers and its independent loan brokers the
discretion to charge subprime mortgage borrowers a commission
of up to 12% above the lender’s base price for the loan
amount.43 The DOJ attorneys contended that this discretionary
pricing policy resulted in disparate treatment of minorities and
other borrowers protected under the ECOA. In particular, the
DOJ alleged that African American females over the age of 55
were 2.6 times more likely than white males under the age of 56
to be charged fees and points under Long Beach’s lending
policies.44
In the mortgage lending industry, pricing disparities often
arise from “overages,” that is, discretionary authority of
employees or brokers who originate loans to charge higher rates
than the lender’s set rate.45 Because they usually receive
40
Some major banks engage in subprime mortgage lending through
subsidiary companies. For instance, NationsCredit and EquiCredit are Bank
of America’s subprime affiliates and Citigroup is Citibank’s subprime lending
subsidiary.
41
Complaint at ¶ 18, United States v. Long Beach Mortgage Co., No.
96 Civ. 6159 (C.D. Cal. Sept. 5, 1996) [hereinafter Long Beach Complaint].
42
Id.
43
Id. at ¶ 15.
44
Id. at ¶ 19.
45
“Overage” or “yield spread,” refers to the practice of allowing loan
personnel to charge customers a higher interest rate than the lender’s base or
minimum rate. As an incentive for bringing in loans at a higher rate, lenders
frequently share the overage with the loan originator. See NATIONAL
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additional compensation when borrowers agree to pay prices
above the lender’s set rate, loan originators have an incentive to
make loans at the highest rate possible. In Long Beach, the
government claimed that the discretionary pricing policy resulted
in disparate treatment of minorities and other borrowers
protected under the ECOA.46 Moreover, the DOJ claimed that
the mortgage company was liable not only for the discriminatory
pricing of its loan officers but also for that of the independent
brokers. The DOJ concluded that the lender should be liable for
the brokers’ conduct because the mortgage company was
ultimately responsible for underwriting the loans and hiring the
brokers.47 In settlement, Long Beach agreed to pay $3 million
to 1,200 borrowers and to spend $1 million on educational
programs.48
In 1996, the DOJ again confronted the issue of
discriminatory pricing in a reverse redlining case when it
prosecuted two mortgage companies. The complaints alleged that
loan officers at Fleet Mortgage Company in Brooklyn, New
York, and Huntington Mortgage Company in Cleveland, Ohio,
charged African American and Hispanic borrowers higher upfront fees for mortgages than they charged similarly situated
white borrowers.49 Further, the complaint alleged that the higher
CONSUMER LAW CENTER, THE CREDIT AND SALES LEGAL PRACTICES SERIES
§ 12.4.3.9 (3d ed. 2002).
46
Long Beach Complaint, supra note 41, at ¶ 24.
47
Settlement Agreement, United States v. Long Beach Mortgage Co.,
No. 96-CV-6159 (C.D. Cal. Sept. 5, 2009) [hereinafter Long Beach
Settlement]. Also, the role that independent mortgage brokers played in the
subprime crisis is being scrutinized with an eye toward regulation and
oversight. It is the alleged abusive conduct of brokers that has led to many
proposals for regulatory reform in the subprime mortgage market. See Alan
M. White, The Case for Banning Subprime Mortgages, 77 U. CIN. L. REV.
617 (2008); Lloyd T. Wilson, Jr., Sometimes Less is More: Utility,
Preemption, and Hermeneutical Criticisms of Proposed Federal Regulation of
Mortgage Brokers, 59 S.C. L. REV. 61 (2007).
48
Long Beach Settlement, supra note 47.
49
Complaint at ¶ 9, United States v. Fleet Mortgage Corp., No. 96-CV2279 (E.D.N.Y. May 7, 1996) [hereinafter Fleet Complaint]; Complaint at ¶
9, 12, 14, United States v. Huntington Mortgage Co., No. 95-CV-2211
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prices, which resulted from a compensation incentive program
similar to the one in Long Beach, could not have occurred by
chance and were unrelated to the qualifications of the minority
borrowers or the risk to the lender.50 The DOJ attorneys did not
challenge the legality of the employee/broker incentive program.
Instead, they claimed that the two mortgage companies illegally
used the program to extract higher prices from minorities
because of their race.51 Private litigants have followed the lead
of DOJ attorneys in making ECOA price discrimination claims
against subprime lenders with broker/employee incentive
programs like that in Long Beach.52
In another high-impact, reverse-redlining lawsuit, three
government agencies jointly prosecuted a major subprime
lender. The three agencies—the U.S. Attorney for the Eastern
District of New York (DOJ), the Department of Housing and
Urban Development (HUD), and the FTC—filed a reverse
redlining lawsuit against Delta Funding Corporation. At the time
of this litigation, most of Delta’s business was concentrated in
the minority residential areas of Brooklyn and Queens, New
York.53 Among other allegations, the government claimed that
Delta violated the ECOA by granting loans with higher broker
fees to African American women than those of similarly situated
white men, by allowing unreasonable broker fees, by engaging
in asset-based lending, by paying kickbacks to brokers to induce
them to refer loan applicants to Delta, and by approving loans
without regard for the borrower’s ability to repay.54 Further, the
complaint alleged that Delta targeted minority neighborhoods
(N.D. Ohio Oct. 18, 1995) [hereinafter Huntington Complaint].
50
Fleet Complaint, supra note 49, at ¶ 10; Huntington Complaint, supra
note 49, at ¶¶ 12–14.
51
See Fleet Complaint, supra note 49, at ¶ 11; Huntington Complaint,
supra note 49, at ¶ 15.
52
See Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 253 (D.
Mass. 2008); Garcia v. Country Wide Fin. Corp., No. 07-CV-1161, 2008
U.S. Dist. LEXIS 106675, at *2 (C.D. Cal. Jan. 17, 2008).
53
Complaint at ¶ 8, United States v. Delta Funding Corp., No. 00-CV01872 (E.D.N.Y. 2000).
54
Id. at ¶¶ 12, 14–15, 17–19.
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with abusive practices, thereby placing borrowers thousands of
dollars in debt and exposing them to unwarranted risk of default
and foreclosure.55 The complaint described a number of Delta’s
victims as African American widows living in Brooklyn who
had little or no outstanding debt before refinancing their
mortgages at prices they could not afford.56 The settlement
agreement that ended the case required Delta to provide
monetary relief of up to $12 million to victims of its lending
practices.57
In 2008, the FTC filed an ECOA action individually against
Gateway Funding Diversified Mortgage Services Corporation
and its general partner, Gateway Funding.58 Among the FTC’s
allegations was the claim that Gateway used discriminatory
pricing practices in both prime and subprime mortgage loans
that resulted in African American and Hispanic customers being
charged higher interest rates and up-front fees than white
customers.59 The settlement required Gateway to pay $2.9
million, however, all but $200,000 was suspended because of
Gateway’s inability to pay.60
C. Establishing ECOA Precedents
Private litigants have also filed reverse redlining lawsuits
against subprime lenders with allegations similar to those in the
above government cases.61 As these cases work their way up
55
Id. at ¶ 17.
Press Release, Dep’t of Justice, Delta Funding Corporation Settles
U.S. Charges for Fair Lending and Consumer Law (Mar. 30, 2000),
available at http://www.usdoj.gov/opa/pr/2000/March/154cr.htm.
57
Settlement Agreement at § 5, Delta, No. 00-CV-01872.
58
Complaint, FTC v. Gateway Funding Diversified Mortgage Servs.,
L.P., No. 08-CV-5805 (E.D. Pa. Dec. 17, 2008).
59
Id. at ¶ 18.
60
Final Judgment at § VI(A), Gateway, No. 08-CV-5805.
61
See, e.g., NAACP v. Ameriquest Mortgage Co., No. 07-CV-0794
(C.D. Cal. Jan. 12, 2009) (order denying defendants’ motion to dismiss).
The NAACP alleged disparate impact and disparate treatment discrimination
in violation of ECOA.
56
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through the courts, they may establish much needed precedent
on the legal issues surrounding the targeting of minority
neighborhoods. Precedential value could also come if
government reverse redlining lawsuits lead to full-fledged
litigation instead of settlement. Although the advantages of
settlement (e.g., lower cost, certainty of outcome,
expeditiousness) are important, it would also be tremendously
beneficial for courts to decide whether the government’s
redlining and reverse redlining claims are meritorious.
Established precedent can reveal gaps in the current laws and
provide guidance regarding appropriate ways to fill them, such
as whether new legislation is needed to further federal fair
lending policy objectives.
There are additional advantages to having judicial opinions in
reverse redlining cases. For instance, victims likely receive a
psychological benefit when courts find lenders liable for
discrimination. This benefit is absent when cases are settled
because settlement agreements contain no admission to or
finding of illegal conduct. Also, it would be helpful to know
how courts would impose damages against subprime lenders
found liable for targeting minority neighborhoods and engaging
in discriminatory pricing practices in violation of the ECOA.
The settlement agreements mentioned above require lenders to
pay millions of dollars to compensate consumers and establish
funding for various programs.62 These amounts seem to reflect
both actual and punitive damages. However, if ECOA claims
are fully litigated and lenders are subsequently found liable for
discrimination, it is unclear whether courts could award similar
damages.
Currently, ECOA violators are subject to civil liability for
actual and punitive damages in individual and class actions.
Liability for punitive damages is limited to $10,000 in individual
actions and the lesser of $500,000 or one percent of the
63
creditor’s net worth in class actions. In determining the amount
of punitive damages, the Act requires courts to consider, among
62
63
See, e.g., supra text accompanying notes 48, 57, and 60.
15 U.S.C. § 1691e (2006).
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279
other relevant factors, the amount of any actual damages
awarded, the frequency and persistence of failures of compliance
by the creditor, the resources of the creditor, the number of
persons adversely affected, and the extent to which the creditor’s
failure of compliance was intentional.64 Although courts may
find that millions of dollars in punitive damages should be
imposed against lenders in some reverse redlining cases, it is
unclear whether the $500,000 statutory ceiling will preclude
such awards in actions brought by federal prosecutors. In private
lawsuits, the ECOA specifically caps punitive damages at
$500,000. The statute is silent, however, on whether the cap
applies when administrative agencies successfully sue lenders.
The ECOA’s statutory language merely states that the agencies
may recover “relief as may be appropriate,” including actual
and punitive damages.65
The Federal Reserve Board, which implements the ECOA
through Regulation B,66 should clarify whether punitive damages
in administrative agency actions can exceed $500,000. If the cap
does apply, Congress should amend the ECOA to increase it or
allow judges to decide each case without a cap. The $500,000
ceiling on punitive damages is insufficient to punish subprime
lenders who egregiously fail to comply with the ECOA by
targeting minority neighborhoods for unaffordable loans that are
likely to lead to foreclosure. Also, this amount is inadequate to
deter other subprime lenders from devastating minority
communities by engaging in reverse redlining lending practices.
To determine an appropriate amount, consideration should be
given to a lender’s net assets. For instance, Bank of America’s
67
profits in the first quarter of 2009 were $2.4 billion and Wells
Fargo had a 50% surge in net income during the same period,
68
exceeding more than a billion dollars. Also, during the second
64
Id.
Id. at § 1691e(h).
66
12 C.F.R. § 202 (2003).
67
Dan Fitzpatrick, For B of A, a $4.2 Billion Profit Isn’t a Fix, WALL
ST. J., Apr. 21, 2009, at C1.
68
Matthias Rieker & Damian Paletta, Banks Get Boost from Wells
Fargo, WALL ST. J., Apr. 21, 2009, at C1.
65
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280
quarter of 2009, the profits for JP Morgan/Chase Bank were
$2.7 billion.69 With quarterly profits like these, a $500,000
penalty for an ECOA violation is grossly inadequate as a
punishment or a deterrent.
D. Litigation Challenges In Pursuing Reverse
Redlining Cases
Government attorneys who litigate reverse redlining claims
on the merits may have difficulty proving some of their
allegations in court. For instance, claims that certain subprime
lending practices adversely impact people and communities of
color present litigation challenges. The primary challenge stems
from the uncertainty about whether ECOA plaintiffs can use the
disparate impact theory to prove their lending discrimination
claims.
As
mentioned
previously,
disparate
impact
discrimination occurs when a lender applies a neutral practice
equally to credit applicants but the practice has a
disproportionate adverse effect on applicants from the ECOA
protected groups.70 To prove such claims, plaintiffs must
demonstrate that there is a significant disparity in outcomes
between minorities and similarly situated non-minorities.71
Recently, the United States Supreme Court decided that the
disparate impact analytical framework is appropriate to use when
proving age discrimination cases.72 However, the Court has not
decided whether impact analysis can be used to prove lending
discrimination claims. Although most federal courts allow
73
ECOA plaintiffs to use statistical impact proof methods,
69
Robin Sidel, J.P. Morgan Posts $2.7 Billion in Profit, WALL ST. J.,
July 17, 2009, at C1.
70
See Griggs v. Duke Power Company, 401 U.S. 424 (1971).
71
See supra note 38.
72
See Smith v. City of Jackson, Miss., 544 U.S. 228, 239–240 (2005).
73
See, e.g., Smith v. Chrysler Fin. Co., No. 00-CV-6003, 2003 WL
328719 (D.N.J. 2003) (deciding that the ECOA permits disparate impact
theory); Coleman v. General Motor Acceptance Corp., 196 F.R.D. 315
(M.D. Tenn. 2000); Osborne v. Bank of Am., Nat’l Assoc., 234 F. Supp. 2d
804 (M.D. Tenn. 2002). Cf. Latimore v. Citibank Fed. Sav. Bank, 151 F. 3d
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281
commentators strongly debate whether the Supreme Court would
reverse those decisions if given the opportunity.74 Fully litigated
reverse redlining lawsuits that use impact proof methods could
present the Court with such an opportunity.
E. Summary
Vigilance in protecting homeowners from lending
discrimination not only fosters a fair lending compliance
environment, it also promotes public trust. It is therefore
especially important for the federal government to prosecute
egregious violators of the ECOA. Subprime lenders that cause
devastation to individuals because of their race, and communities
because of their racial composition, should know that
government attorneys will sue them. Such impact litigation will
signal to the public and the credit industry that eliminating racial
discrimination in mortgage lending is a national priority.
II: LEGISLATIVE REFORM: INCREASED ENFORCEMENT AUTHORITY
AND HMDA AMENDMENT
A. Reporting Credit Score Information
Congress enacted HMDA in 1975 due to its concern that
disproportionate home ownership among various racial groups
might stem from biased lending practices or other discriminatory
conduct in the mortgage industry.75 To address this concern,
712 (7th Cir. 1998) (rejecting ECOA disparate impact claim).
74
See, e.g., Peter N. Cubita & Michelle Hartmann, The ECOA
Discrimination Proscription and Disparate Impact—Interpreting the Meaning
of the Words That Actually Are There, 61 BUS. LAW. 829 (2006).
75
The Home Mortgage Disclosure Act (HMDA) was enacted by
Congress in 1975 and is implemented by the Federal Reserve Board’s
Regulation C. This regulation provides the public loan data that can be used
to assist in determining whether financial institutions are serving the housing
needs of their communities; assisting public officials in distributing publicsector investments so as to attract private investment to areas where it is
needed, and in identifying possible discriminatory lending patterns. See
FEDERAL DEPOSIT INSURANCE CORPORATION, COMPLIANCE HANDBOOK, 9.1,
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4/26/2010 10:35 PM
HMDA requires creditors to collect and report basic attributes of
the mortgage applications they receive in metropolitan statistical
areas.76 Under Regulation C, which the Federal Reserve Board
wrote to implement HMDA, lenders must disclose to federal
regulatory agencies and the general public, information
regarding the race, ethnicity, sex, and income of mortgage
applicants and borrowers.77 In addition to demographic
information, Regulation C requires lenders to report certain
pricing information.78 Federal officials analyze the HMDA data
to see if they identify mortgage lenders with racial or ethnic
lending patterns that indicate discrimination in violation of the
ECOA or other fair lending laws.
Initially, the FRB did not require lenders to report pricing
information with other HMDA data. The FRB amended
Regulation C in 2002 to add this information because it wanted
insight into the possible connection between the cost of mortgage
loans and the borrower’s race.79 The pricing information,
coupled with HMDA demographic data, informs the FRB of not
only who receives mortgage credit, but also who pays the most
for it. Pursuant to the loan-pricing reporting requirement,
lenders must now report information on “higher-cost” loans.
Although both prime and subprime lenders must report the
pricing data, this requirement primarily affects subprime lenders
since most high-cost loans are made in the subprime market.80
9.2 (2006).
76
12 U.S.C. § 2803(a)(1) (2006). The HMDA requires lenders to use
census tracts to capture these data.
77
12 C.F.R. § 203.4(a)(10), (b)(1) (2009).
78
Id. at § 203.4(a)(12)(i).
79
Edward M. Gramlich, Governor, Fed. Reserve Sys., Remarks to the
National Association of Real Estate Editors (June 3, 2005).
80
Beginning with 2004 data, lenders are now required to compare the
annual percentage rate (APR) on each loan made to the current interest rate
on U.S. Treasury securities of the same maturity. If the difference (“spread”)
between the loan’s APR and the interest rate on the Treasury securities is
three percentage points or more (for a first-lien loan), then the spread for that
loan must be reported in the lender’s HMDA data.” CAL. REINVESTMENT
COALITION ET AL., supra note 11, app. In the lending industry, such loans
are referred to as “higher-cost loans” or “higher-priced loans.” Id. Many
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283
By all accounts, the addition of pricing information to the
HMDA reporting requirements has been a tremendous benefit to
ECOA enforcement officials. In recent reports to Congress, the
agencies have emphasized the importance of this information to
their fair lending enforcement efforts, noting in particular how
invaluable it has been in helping to identify lenders that may be
engaging in race-based lending practices.81
However, the HMDA data do not include all variables
lenders use to set loan prices, such as loan-to value ratios, debtto-income ratios, or credit scores.82 Given this underinclusiveness, the HMDA data are insufficient to determine
whether a lender has actually violated the ECOA’s antidiscrimination requirements. Thus, instead of proving
discrimination, the data serve as a screening device to identify
which lenders should be investigated and further scrutinized for
people use the terms “subprime loans” and “higher-cost” loans
interchangeably, although there are many subprime loans (subprime because
their interest rates and/or fees are greater than those of prime loans) with
APRs that are below the HMDA-reporting threshold used to identify “highercost” loans. Id.
81
See, e.g., GRACE CHUNG BECKER, U.S. ATTORNEY GEN., THE
ATTORNEY GENERAL’S 2007 ANNUAL REPORT TO CONGRESS PURSUANT TO
THE EQUAL CREDIT OPPORTUNITY ACT AMENDMENTS OF 1976 6 (2008),
available at http://www.usdoj.gov/crt//housing/documents/ecoa2007.pdf;
LORETTA KING, U.S. ATTORNEY GEN., THE ATTORNEY GENERAL’S 2008
ANNUAL REPORT TO CONGRESS PURSUANT TO THE EQUAL CREDIT
OPPORTUNITY ACT AMENDMENTS OF 1976 6 (2009), available at http://www.
usdoj.gov/crt/housing/documents/ecoa_report_2008.pdf;
Rooting
Out
Discrimination in Mortgage Lending: Using HMDA as a Tool for Fair
Lending Enforcement: Hearing Before the Subcomm. on Oversight and
Investigations of the H. Comm. on Financial Servs., 110th Cong. 38, 42,
(2007) (statements of Sandra L. Thompson, Director of the Division of
Supervision and Consumer Protection, Federal Deposit Insurance Corporation
and Calvin R. Hagins, Director of Compliance Policy, Office of the
Comptroller of Currency) [hereinafter Rooting Out Discrimination Hearing].
82
See Robert B. Avery et al., New Information Reported Under HMDA
and Its Application in Fair Lending Enforcement, 91 FED. RES. BULL. 344,
385–87 (2005) [hereinafter Avery, New Information]. A credit score is a
mechanically determined credit rating that signifies whether an applicant is
creditworthy based on key attributes of the applicant and aspects of the credit
transaction. See Taylor, supra note 1, at 88.
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284
possible discriminatory conduct.83 In short, HMDA data provide
a list of suspects. But the omission of all credit risk criteria from
HMDA analyses hinders the data’s effectiveness, even as a
screening tool. Lenders can capitalize on this shortcoming. For
instance, if HMDA data show significant price disparities along
racial lines, the subprime lending industry can point out that the
findings are misleading because legitimate credit risk factors that
are omitted from the analysis could possibly justify the result.
More specifically, lenders can say that credit scores, rather than
race or ethnicity, are the cause of the racial disparities.
Undoubtedly, credit risk factors can justify racial disparities
in the HMDA data of some mortgage lenders and can help to
identify others whose disparities result from discriminatory
lending practices. Despite this benefit, there are no credit risk
data in the HMDA analysis. The absence of such data makes it
more difficult to determine which lenders are engaging in illegal
conduct, since racial disparities, standing alone, do not prove
discrimination. Because credit scores may easily explain the
disparities, this credit risk information ought to be included in
the HMDA data. The addition of credit score data would permit
more nuanced analyses that would reveal more about whether
race, credit risk or something else drives the observed
differences in the price that people of color pay for mortgage
loans.84
Because credit history information will result in an analysis
of HMDA data that is more indicative of where fair lending
violations are likely to be found, the FRB should require the
reporting of credit scores, at least for subprime lenders. More
stringent scrutiny of this sector of the home mortgage market is
needed because of the serious questions that have emerged
regarding the link between the mortgage crisis and
85
discriminatory pricing methods of predatory subprime lenders.
83
Avery et al., supra note 82, at 387.
Kathleen Engel & Patricia McCoy, HMDA Reporting of Credit Scores,
CREDIT SLIPS, Dec. 12, 2006, http://www.creditslips.org/creditslips/2006/12/
hmda_reporting_.html.
85
See generally Melissa LaVenia, Note, Predatory Lending’s Role in the
Subprime Mortgage Crisis, 27 REV. BANKING & FIN. L. 101 (2008)
84
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285
Allegations that these lenders targeted minority neighborhoods
and intentionally made numerous unaffordable mortgage loans to
their residents are among the frequently cited abuses.86 There is
public concern that these and other discriminatory lending
practices played a significant role in the foreclosure catastrophe
that devastated minority neighborhoods after the subprime
market collapsed.87 Moreover, for the fifth consecutive year
since lenders began reporting pricing information to federal
regulators, the HMDA data have indicated that a higher
percentage of black and Hispanic borrowers have received highcost home loans than have white borrowers.88 These troubling
outcomes reinforce the need for greater scrutiny of the subprime
market.
By amending Regulation C to require subprime lenders to
report credit score information, the FRB and other fair lending
enforcement agencies can identify potential ECOA violators
more accurately and therefore use their resources more
efficiently to investigate subprime creditors for discriminatory
lending practices. With a sharper tool to assist in identifying
creditors who may be over-charging minorities for home loans,
federal agencies will be able to make subprime lenders more
accountable for their lending decisions. Banking regulators are
apparently aware that credit score data can enhance their fair
lending enforcement efforts. During the 2007 Congressional
hearings on discrimination in mortgage credit, a representative
from the OCC stated that the members of the Federal Financial
(analyzing the relationship between predatory lending and foreclosures of
subprime mortgages).
86
See, e.g., Rooting Out Discrimination Hearing, supra note 81, at 106–
11.
87
See Fisher, supra note 5.
88
See New Information, supra note 82, at 376–82; Robert Avery et al.,
Higher Priced Home Lending and the 2005 HMDA Data, 92 FED. RES.
BULL. 123, 158–165 (2006) [hereinafter 2005 HMDA Data]; Robert B.
Avery et al., The 2006 HMDA Data, 93 FED. RES. BULL. 73, 94–97 (2007)
[hereinafter 2006 HMDA Data]; Robert B. Avery et al., The 2007 HMDA
Data, 94 FED. RES. BULL. 107, 135–39 (2008) [hereinafter 2007 HMDA
Data].
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286
Institutions Examination Council (FFIEC)89 intended to jointly
purchase “an external database of credit scores” to help in the
general assessment of fair lending risks.90 Whether the agencies
actually purchased the database and precisely how they are using
it if they did, is unknown. What seems clear is that ECOA
enforcement authorities recognize that credit scores can assist
their efforts to combat discrimination in the subprime mortgage
market. Thus, the FRB ought to require subprime lenders to
report credit scores in addition to their current HMDA data
reporting requirements.
B. Costs and Benefits
Before imposing an additional reporting requirement on
subprime lenders, the FRB must weigh the costs and benefits of
doing so. On the positive side, the credit risk information would
permit federal regulatory agencies to focus their investigations
more efficiently when investigating lenders suspected of mixing
91
race and risk in violation of the ECOA. This information may
benefit some subprime lenders as well, since the analyzed credit
score data could partially explain some racial disparities in
pricing. Although these explanations would not be conclusive,
they could make some lending patterns with racial disparities
look less suspicious.92
89
Federal banking examiners that comprise the FFIEC are the Office of
the Comptroller of the Currency, the National Credit Union Administration,
the Federal Reserve Board, the Federal Deposit Insurance Corporation, and
the Office of Thrift Supervision. About the FFIEC, http://www.ffiec.gov/
about.htm (last visited Oct. 16, 2009). Congress established the FFIEC in
1979 as an interagency body to prescribe uniform examination procedures,
and to promote uniform supervision, among the federal agencies responsible
for the examination and supervision of financial institutions. Id. In 1980,
Congress gave the FFIEC responsibility for public access to HMDA data. See
2006 HMDA Data, supra note 88 at 73.
90
Rooting Out Discrimination Hearing, supra note 81, at 450 (response
to questions submitted by Calvin R. Hagins).
91
Id. at 42.
92
The argument that the HMDA data do not prove discrimination cuts
both ways. These data also do not exonerate lenders from discrimination.
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287
Despite the advantages of including credit history
information in HMDA data, limitations will continue to exist
because the credit score is only one of many risk assessment
variables lenders use to price loans. It must therefore be
remembered that adding credit scores to HMDA data analyses
will not transform these data into something other than the
screening tool Congress envisioned. Yet the additional
information will make the screening tool sharper in that it will
be able to do a better job of identifying potential discrimination.
This enhancement to federal oversight of the subprime market is
appropriate given the concern that discriminatory practices are
part of the foundation of the mortgage foreclosure crisis. Still,
other concerns must be considered.
1. Increased Lender Vulnerability to Litigation
Credit score data would likely make some lenders vulnerable
to fair lending lawsuits by individuals who believe that HMDA
data, without more, conclusively identify discriminatory pricing.
Even if lenders could successfully defend such lawsuits by
providing additional credit risk or other explanations that
sufficiently justify the pricing disparities, the expense of
defending unsubstantiated claims can be costly.93 Additionally,
the reputational harm that could result from accusations of racial
discrimination may be difficult to repair. Another negative
consequence for subprime lenders would be the cost of adjusting
their systems for the reporting of the additional HMDA data.
This cost is unknown and certainly must be considered,
However, credit score data would reduce the possibility that racial disparities
reflect discriminatory treatment. Also, some legal scholars question whether
credit scores are racially biased. See Chi Chi Wu, Credit Scoring and
Insurance: Costing Consumers Billions and Perpetuating the Economic Racial
Divide. 1–18 (2007), available at http://www.consumerlaw.org/reports/
content/InsuranceScoring.pdf.
93
Engel & McCoy, supra note 84. Kathleen Engel & Patricia McCoy
discussed the reporting of credit score information with a representative from
the lending industry who implied that exposure to frivolous lawsuits was a
downside to collection of these data. Id.
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288
however, given the need for greater insight into the lending
practices in the subprime market, this cost should not justify
keeping credit score data from fair lending regulators at the time
they receive the HMDA data.94
2. Consumer Privacy
Consumer privacy concerns are sometimes cited as a
justification for omitting credit score information from HMDA
data reporting requirements.95 Unfortunately, HMDA data can
now be matched with other information (e.g., public records of
property transfers) to determine the identity of individual
borrowers. Adding credit score information to the HMDA data
requirements could further compromise the privacy of borrowers
because once the matching is done and the borrowers are
identified, it would be possible to learn their credit scores.
Obviously, consumers should not have to worry about their
credit scores becoming publicly available because they applied
for a mortgage loan. Given the validity of the privacy concern,
it is difficult to argue that it is outweighed by the usefulness of
the additional credit score data. This, however, should not end
the discussion.
Efforts should be made to address consumer privacy
concerns in a manner that is consistent with requiring lenders to
report credit score information. What is needed is a solution to
the credit score reporting issue that does not compromise
consumer privacy. According to two legal scholars, the United
States Census Bureau has developed ways to protect privacy so
that researchers can gain access to individual level census data
without reporting a respondent’s identity.96 The FRB should
examine these methods to see if they are suitable for
safeguarding consumer privacy in the context of reporting credit
94
If credit score information is captured and analyzed with current
HMDA data, banking regulators should be able to identify more expeditiously
financial institutions with suspicious lending patterns. This approach may
therefore reduce inefficiency in fair lending enforcement.
95
See Gramlich, supra note 79.
96
See supra note 84.
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289
score data. Another approach that is ripe for exploration is for
subprime lenders to report the credit score information to the
FRB for its internal use only. The FRB analysts would crunch
the data and initiate investigations if racial disparities persisted
after taking credit histories into account.97 By restricting the data
disclosure to the FRB only, public disclosure is avoided and
consumer privacy is maintained. Additionally, both the Census
Bureau approach and the FRB internal use approach would avoid
exposing lenders to frivolous lawsuits.98
The FRB should explore these or comparable privacy
safeguards that would remove barriers to obtaining credit scores
at the same time demographic and other HMDA data are
obtained. Adding credit scores would promote greater
transparency of the lending practices in the subprime mortgage
market and in turn will likely increase ECOA compliance efforts
of subprime lenders. The HMDA analyses that include credit
scores will help explain to banking regulators whether any racial
disparities are due to legitimate nondiscriminatory factors or to
illegal discrimination.99
3. Access to Credit: The Government’s Role
A credit score reporting requirement might cause some
subprime lenders to curtail the availability of credit to higherrisk borrowers. The risk of bad public relations, litigation, and
more regulatory scrutiny would undoubtedly influence these
decisions. Yet racial minorities may be hurt if subprime lenders
cut back on making loans, as would other ECOA group
100
members who are protected by the fair lending laws. To be
97
See id.
See id.
99
See Rooting Out Discrimination Hearing, supra note 81, at 89
(prepared statement of Calvin R. Hagins).
100
Home Mortgage Disclosure Act: Newly Collected Data and What it
Means: Hearing Before the Subcomm. on Financial Institutions and
Consumer Credit of H. Comm. on Financial Servs., 109th Cong. 138 (2006)
(prepared statement of Professor Michael E. Staten, Director, Credit
Research Center, McDonough School of Business, Georgetown University)
98
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sure, subprime lending is an important element of our financial
system because it provides a way for many people with
blemished credit records, minority and non-minority, to become
homeowners or obtain home financing who may otherwise be
unable to do so.101 Given their defective credit histories, and
perhaps other vulnerabilities, subprime borrowers have few
financial options available and thus are more susceptible to
predatory lending practices.102 Paradoxically, the question
becomes whether the “access to credit” concern outweighs the
benefit of having HMDA data that can more accurately identify
possible ECOA violators.
As discussed in Part I above, the legacy of redlining
discrimination where traditional lenders have failed to serve
minority communities is a contributing factor to the problem of
predatory subprime lending and discrimination in these
communities.103 Denying loans to minority borrowers at
reasonable and fair rates creates voids that can be quickly filled
by predatory lenders that charge exorbitant mortgage rates and
fees. In essence, a large part of the problem for minority
borrowers who turn to predatory subprime lenders is that in
many minority neighborhoods there is very little, if any,
competition for mortgage loans.104 These lenders sometimes use
[hereinafter HMDA New Data Hearing]. Professor Staten voices the concerns
of Federal Reserve Board Governor Susan Schmidt Bies about reducing
mortgage credit availability for higher-risk borrowers in his testimony on the
misuse of the HMDA pricing data. Id.
101
See Mayer & Pence, supra note 6, at 3 (finding that subprime loans
appear to provide credit in locations where credit might be more difficult to
obtain); see also Christopher R. Childs, Comment, So You’ve Been
Preempted—What Are You Going To Do Now?: Solutions for States
Following Federal Preemption of State Predatory Lending Statutes, 2004
BYU L. REV. 701, 709 (discussing what is predatory lending and why it is
harmful).
102
See Warren, supra note 17 (discussing the effects of predatory
lending).
103
See supra Part I.
104
See Problems in Community Development, Banking, Mortgage
Lending Discrimination, Reverse Redlining, and Home Equity Lending:
Hearings Before the S. Comm. on Banking, Housing, and Urban Affairs,
TAYLOR REVISED.DOC
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291
abusive and discriminatory lending practices. But not all
subprime lending is predatory or discriminatory, which means
that all subprime borrowers are not victims.105 As Federal
Reserve Governor Susan Schmidt Bies admonished, if expanded
HMDA data requirements lead to the “unwarranted tarnishing of
a lender’s reputation, this could reduce the willingness of that
lender or another to remain in, or enter, certain higher-priced
segments of the market.”106 Indeed, the possibility of cutting off
some legitimate subprime mortgage credit sources of people with
already limited credit options is something that must be carefully
considered before expanding HMDA to include credit scores.
On the other hand, adding credit score information to the
HMDA reporting requirement of subprime lenders could help
federal regulators better identify subprime lenders who use
racially discriminatory lending practices.
One way out of this conundrum is for the federal
government to provide subprime borrowers with additional
mortgage credit sources. This approach addresses the diminished
credit problem and consequently removes this obstacle to
allowing regulators to obtain credit score data that could better
assist them in overseeing the subprime mortgage market. Along
these lines, Professor Ronald Silverman has proposed an
attractive idea that merits serious consideration. He suggests that
Congress tackle the predatory lending problem by providing
funding to credit unions for the purpose of making additional
subprime mortgage loans.107 This proposal has several
103d Cong. 392 (1993) (written testimony of John B. Long and Thomas W.
Tucker, Partners, Dye, Tucker, Everitt, Wheale & Long; and David E.
Hudson, Partner, Hull, Towill, Norman & Barrett).
105
The terms “subprime” and “predatory” lending are frequently and
erroneously used interchangeably to refer to abusive and unscrupulous
lending practices. While subprime loans certainly pose inherent financial
risks, and lenders are susceptible to engaging in predatory practices,
subprime loans are not inherently abusive or predatory but serve an
appropriate function in the market. See Andre K. Gray, Comment, Caveat
Emptor: Let the Borrower Beware of the Subprime Mortgage Market, 11 U.
PA. J.L. & SOC. CHANGE 195, 195 (2008).
106
See HMDA New Data Hearing, supra note 100, at 138.
107
Silverman, supra note 18, at 585–87.
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292
advantages. First, it would provide competition to predatory
subprime lenders, including those who use discriminatory
lending practices. As a result, subprime minority borrowers will
have alternative means of obtaining mortgage credit through
legitimate sources. This would help to eliminate racial
discrimination in the subprime market. Second, credit unions are
regulated at the state or federal level and are subject to the
ECOA’s anti-discrimination mandate. Consequently, the
subprime lending that credit unions provide is already, and will
continue to be, examined for fair lending compliance. Third, as
non-profit depository institutions with a long history of
providing financial services to people of modest means, credit
unions are likely to imbue public trust.108 Finally, as Professor
Silverman so aptly notes, “a supportive government presence
need not involve the federal government as the lender of either
first or last resort.”109 Thus, the federal government would not
become a mortgage bank under the credit union funding
approach.
Congress should fully examine the idea of a government
supported subprime mortgage loan alternative to predatory
lenders. Buying a home is the most expensive purchase most
consumers will ever make. Because of the substantial investment
borrowers make when purchasing or refinancing a home, it is
imperative that they enter mortgage transactions in an
environment of trust and honesty. By providing funding to credit
unions, Congress can assist minority borrowers in avoiding
lenders that use abusive and racially discriminatory practices. At
the same time, the FRB could move forward with requiring
subprime lenders to report credit score data without jeopardizing
home mortgage credit for subprime borrowers.
CONCLUSION
Predatory lenders are destroying the reputation of legitimate
subprime lenders who provide valuable mortgage services to
108
109
See id. at 582–585.
Id. at 586.
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293
various segments of the population that would otherwise be
unable to afford or refinance a home. These predators bring to
subprime lending not only abusive tactics but discriminatory
practices as well—a combination that can wreak havoc on people
and communities of color. As we continue to seek solutions to
predatory lending, we should not forget the role that racial
discrimination plays in the abusive subprime market. This
persistent problem must be addressed if solutions for stopping
the next subprime crisis are to be effective. Part of the solution
at the federal level is to bolster enforcement of consumer
protection laws. Accordingly, government attorneys should bring
more enforcement actions against subprime lenders that engage
in discrimination in violation of the ECOA. Additionally, the
FRB should facilitate these litigation efforts by providing ECOA
enforcement authorities with a better means of identifying
predatory lenders that discriminate unlawfully. Requiring
subprime lenders to report credit score data would be an
invaluable tool in uncovering discriminatory conduct. Moreover,
Congress can help solve this problem by changing the
environment in which predatory lenders thrive, namely, in
places where borrowers have few mortgage lending alternatives
to unscrupulous home loan providers. By funding credit unions,
the federal government can facilitate competition in the subprime
market and thus provide viable mortgage funding options to
vulnerable consumers. While growing calls for stopping
predatory subprime mortgage lending are positive steps in the
right direction, effective solutions must include holding subprime
lenders liable and accountable for lending discrimination on the
basis of race and other illegal factors.
ISAACS REVISED.DOC
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MIRANDA’S APPLICATION TO THE
EXPANDING TERRY STOP
Daniel C. Isaacs*
INTRODUCTION
1
In Miranda v. Arizona, the Supreme Court interpreted the
Fifth Amendment privilege against self-incrimination by holding
that police may not interrogate a person taken into custody without
first reading to the suspect their now-familiar Miranda rights.2 The
question of what constitutes “police custody” is particularly vexing
in the context of “Terry stops:” warrantless searches and seizures
based upon reasonable suspicion, limited in scope, to determine
whether a person is armed or in the midst of criminal activity.3 As
the lawful scope of a Terry stop has expanded beyond its narrow
and limited genesis in Terry v. Ohio,4 federal circuits have been
unable to reach a consensus regarding whether a lawful Terry stop
may constitute Miranda custody.5 The First and Fourth Circuits
hold that a suspect is not in Miranda custody if the Terry stop was
lawful, i.e. reasonable.6 Conversely, the Second, Seventh, Eighth,
Ninth, and Tenth Circuits hold that the reasonableness of a Terry
stop is irrelevant as to Miranda custody; if the circumstances of a
* J.D. Candidate, Brooklyn Law School, 2010; B.A., Binghamton
University, 2007. Special thanks to my parents and Laura for their
encouragement, the entire staff of the Journal of Law and Policy for their
endless editing assistance, and my friends for listening.
1
Miranda v. Arizona, 384 U.S. 436 (1966).
2
Id. at 444.
3
Terry v. Ohio, 392 U.S. 1, 27–31 (1968).
4
See infra Part I(B).
5
E.g., United States v. Newton, 369 F.3d 659, 673 (2d Cir. 2004).
6
E.g., United States v. Leshuk, 65 F.3d 1105, 1110 (4th Cir. 1995).
383
ISAACS REVISED.DOC
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384
Terry stop meet the threshold of Miranda custody, then Miranda
warnings are required before the suspect of a Terry stop may be
interrogated.7
This note argues that the determination of whether a suspect is
in “Miranda custody” does not turn on the legality of the Terry
stop. Part I will review Terry v. Ohio and present the dramatic
expansion of the scope of a Terry stop.8 Part II will review
Miranda v. Arizona and explain how courts have neglected to
clarify the definition of Miranda custody.9 Part III will survey the
circuit split regarding Miranda’s application to a Terry stop.10 Part
IV will argue for the Second Circuit’s independent approach, and
finally Part V will evaluate documented criticisms of this
proposal.11
I. TERRY V. OHIO
A. “Stop and Frisks:” An Exception to Probable Cause
Under the Fourth Amendment,12 warrantless searches and
seizures are presumed unreasonable.13 However, the Supreme
Court has created several exceptions to the presumptive warrant
requirement.14
The Warren Court sanctioned one such exception in Terry v.
7
Newton, 369 F.3d at 673.
See infra Part I.
9
See infra Part II.
10
See infra Part III.
11
See infra Part IV; Part V.
12
U.S. CONST. amend. IV (“The right of the people to be
secure . . . against unreasonable searches and seizures, shall not be violated, and
no Warrants shall issue, but upon probable cause . . . .”).
13
Katz v. United States, 389 U.S. 347, 357 (1967).
14
See, e.g., Brigham City v. Stuart, 547 U.S. 398, 403 (2006)
(permitting a warrantless entry of a home when police have an objectively
reasonable basis for believing that a person within the home is seriously
injured or threatened with injury); United States v. Watson, 423 U.S. 411,
414 (1976) (permitting a public arrest in the absence of a warrant); Warden
v. Hayden, 387 U.S. 294, 310 (1967) (permitting a warrantless search that is
justified when officers are in “hot pursuit”).
8
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MIRANDA’S APPLICATION TO TERRY STOPS
385
Ohio.15 “Where a police officer observes . . . conduct which
leads him reasonably to conclude . . . that criminal activity may
be afoot and that the persons with whom he is dealing may be
armed and presently dangerous . . . he is entitled for the
protection of himself and others . . . to conduct” a search
reasonably related in scope to the initial justification for the
search.16 In Terry, a police officer observed two pedestrians,
Terry and Chilton, conducting “elaborately casual and oftrepeated reconnaissance” in front of a store window.17 The
officer approached the two pedestrians, along with a third man
with whom they were meeting, identified himself as a police
officer, patted down the outside of Terry’s clothing, and found a
18
.38-caliber revolver. He discovered another revolver in
Chilton’s overcoat pocket.19 After disarming the men, Chilton
and Terry were formally charged with carrying concealed
weapons.20
The issue presented to the Warren Court was whether “in all
the circumstances of this on-the-street encounter, [Terry’s] right
to personal security was violated by an unreasonable search and
seizure.”21 The Court analyzed the reasonableness of the search
by balancing the government’s interest in law enforcement and
public safety with the “nature and quality of the intrusion on
individual rights.”22
First, the Court “emphatically”23 rejected the notion that a
24
“stop and frisk” did not implicate the Fourth Amendment.
15
Terry v. Ohio, 392 U.S. 1, 30 (1968).
Id. at 30.
17
Id. at 6.
18
Id. at 7.
19
Id.
20
Id.
21
Id. at 9.
22
Id. at 24.
23
Id. at 16.
24
Id.
It must be recognized that whenever a police officer accosts an
individual and restrains his freedom to walk away, he has “seized”
that person. And it is nothing less than sheer torture of the English
16
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Second, the Court considered the societal importance of
permitting police officers to investigate their suspicions of
criminal or dangerous activity with less than probable cause.25
Chief Justice Warren noted that while law enforcement has an
interest in effective crime prevention and detection,26 there is an
additional, more “immediate interest” concerning a police
officer’s safety and assurance that he is not dealing with an
armed individual.27 Thus, the Court agreed that police officers
must be afforded an effective tool to protect themselves and the
public in situations where they may lack probable cause for a
search or arrest.28
Finally, the Court balanced the needs of law enforcement
and public safety against the intrusion of privacy.29 Chief Justice
Warren acknowledged that “even a limited search of the outer
clothing for weapons constitutes a severe, though brief, intrusion
upon cherished personal security, and it must surely be an
annoying, frightening, and perhaps humiliating experience.”30
Regardless, the proper compromise between the competing
interests of law enforcement and civil rights permitted a narrow
exception to the Fourth Amendment’s probable cause
requirement.31 The Court stressed that “[t]he sole justification”
of a Terry stop is the “protection of the police officer and others
nearby . . . .”32
language to suggest that a careful exploration of the outer surfaces of
a person’s clothing all over his or her body in an attempt to find
weapons is not a “search.” Moreover, it is simply fantastic to urge
that such a procedure performed in public by a policeman while the
citizen stands helpless . . . is a petty indignity.
Id.
25
26
27
28
29
30
31
32
Id.
Id.
Id.
Id.
Id.
Id.
Id.
Id.
at 22.
at 23.
at 24.
at 29.
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B. The Expansion of Terry
The permissible degree of intrusion during a “stop and frisk”
has significantly expanded since 1968.33 In Terry, the Court
permitted a “carefully limited search of the outer
clothing . . . in an attempt to discover weapons which might be
used to assault [the police officer].”34 Early cases following
Terry interpreted this rule narrowly, hesitant to stray too far
from this limited exception to the probable cause requirement.35
In United States v. Strickler, for example, because police
officers encircled the defendant in his car with their weapons
raised,36 the Ninth Circuit found it impossible to “equate [this]
armed approach to a surrounded vehicle whose occupants have
been commanded to raise their hands with the ‘brief stop of a
suspicious individual in order to determine his identity or to
maintain the status quo momentarily while obtaining more
information’ . . . .”37 Accordingly, the Terry stop was
unreasonable.38
In United States v. McLemure, the Tenth Circuit rejected the
government’s argument that an officer acted reasonably when he
drew his weapon, forced the defendant to lie face down, and
39
conducted a pat down. Construing Terry narrowly, the court
33
See United States v. Chaidez, 919 F.2d 1193, 1198 (7th Cir. 1990).
Terry, 392 U.S. at 30.
35
See United States v. O’Looney, 544 F.2d 385, 390 (9th Cir. 1976)
(finding a Terry stop valid, in part because of the absence of drawn weapons,
handcuffs, force, and threats thereof); see also United States v. McLemure,
573 F.2d 1154 (10th Cir. 1978); United States v. Strickler, 490 F.2d 378
(9th Cir. 1974).
36
Strickler, 490 F.2d 378–79. The Ninth Circuit concluded that “[t]he
restriction of Strickler’s ‘liberty of movement’ was complete when he was
encircled by police and confronted with official orders made at
gunpoint . . . [n]o significant, new restraint was added when Officer Ripley,
a few moments later, handcuffed Strickler and formally pronounced him
‘under arrest.’” Id. at 380 (internal citations omitted).
37
Id.
38
Id.
39
United States v. McLemure, 573 F.2d 1154, 1156 (10th Cir. 1978).
34
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concluded the Terry stop was unreasonable.40 Similarly, the
defendant in Dunaway v. New York 41 was transported against his
will to the local police station and held in an interrogation room
where he was not free to leave.42 The Court held the police
conduct exceeded the brief detention authorized by Terry
because “in contrast to the brief and narrowly circumscribed
intrusions involved in those cases, the detention of petitioner
was in important respects indistinguishable from a traditional
arrest.”43
More recently, however, the permissible degree of intrusion
permitted during a Terry stop has expanded far beyond the “stop
and frisk” originally upheld by the Supreme Court,44 presumably
45
as courts responded to rising violent crime. In Florida v.
46
Royer, the Court acknowledged, “the predicate permitting
seizures on suspicion short of probable cause is that law
enforcement interests warrant a limited intrusion on the personal
security of the suspect,”47 but opened the door to Terry’s
expansion by explaining in dicta that “the scope of the intrusion
will vary” with the circumstances of each case.48 In United
40
Id.
Dunaway v. New York, 442 U.S. 200 (1979).
42
Id. at 202–03.
43
Id.
44
The cases discussed in this section are not intended to be exhaustive,
but merely describe the willingness of courts to permit increasingly coercive
police conduct during Terry stops.
45
“The number of police officers killed annually in the line of duty has
tripled since Terry was decided; the number of those assaulted and wounded
has risen by a factor of twenty.” United States v. Micheletti, 13 F.3d 838,
844 (5th Cir. 1994).
46
Florida v. Royer, 460 U.S. 491 (1983). In Royer, the defendant
purchased an airline ticket under an assumed name. He was questioned by
police officers and his suitcases were searched. Royer moved to suppress the
evidence obtained by the search of his suitcases. The Court ultimately
determined that the detainment and search of Royer exceeded the legal scope
of an investigative stop, and the evidence was suppressed. Id. at 493–501.
47
Id. at 500.
48
Id.
41
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States v. Perdue,49 police officers approached the defendant’s car
with their weapons drawn and ordered the defendant to step out
and lie facedown on the ground.50 Then, the police allegedly
handcuffed the defendant and questioned him.51 The Tenth
Circuit concluded that while the officers’ warrantless seizure of
Perdue “border[ed] on an illegal arrest,” it was nonetheless a
reasonable Terry stop because the intrusion was justified by the
potentially dangerous circumstances of the encounter.52
In United States v. Quinn,53 police parked their cars behind
the defendant’s vehicle, blocked his exit, and questioned him for
twenty minutes until more officers arrived with drug-sniffing
dogs.54 The court concluded that the Terry stop was lawful and
saw “no way that the agents could have greatly shortened their
inquiry if they were to ‘confirm or dispel their suspicions’
meaningfully.”55 Additionally, the Quinn court observed the
emerging patchwork of law regarding the lawfulness of Terry
stops:
49
United States v. Perdue, 8 F.3d 1455 (10th Cir. 1993).
Id. at 1458–59.
51
Id.
52
Id. at 1462 (“It was not unreasonable under the circumstances for the
officers to execute the Terry stop with their weapons drawn. While Terry
stops generally must be fairly nonintrusive [sic], officers may take necessary
steps to protect themselves if the circumstances reasonably warrant such
measures. ‘[T]he use of guns in connection with a stop is permissible where
the police reasonably believe [the weapons] are necessary for their
protection.’ United States v. Merritt, 695 F.2d 1263, 1273 (10th Cir. 1982).
Similarly, other circuits have held that police officers may draw their
weapons without transforming an otherwise valid Terry stop into an arrest.
See, e.g., United States v. Alvarez, 899 F.2d 833, 838 (9th Cir. 1990);
United States v. Taylor, 857 F.2d 210, 214 (4th Cir. 1988); United States v.
Serna-Barreto, 842 F.2d 965, 968 (7th Cir. 1988); United States v. Jones,
759 F.2d 633, 638 (8th Cir. 1985); United States v. Jackson, 652 F.2d 244,
249 (2d Cir. 1981).”) (internal citations omitted). “The Fourth Amendment
does not require that officers unnecessarily risk their lives when encountering
a suspect whom they reasonably believe to be armed and dangerous.” Id. at
1463.
53
United States v. Quinn, 815 F.2d 153 (1st Cir. 1987).
54
Id. at 155–56.
55
Id. at 158.
50
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[a]dmittedly, Terry, Dunaway, Royer, and Place,56
considered together, may in some instances create
difficult line-drawing problems in distinguishing an
investigative stop from a de facto arrest . . . . But our
cases impose no rigid time limitation on Terry stops.
While it is clear that “the brevity of the invasion of the
individual’s Fourth Amendment interests is an important
factor in determining whether the seizure is so minimally
intrusive as to be justifiable on reasonable
suspicion,” . . . we have emphasized the need to
consider the law enforcement purposes to be served by
the stop as well as the time reasonably needed to
effectuate those purposes.57
Thus, Quinn acknowledged the increasing deference given to
law enforcement in their administration of a Terry stop.
A year later, in United States v. Serna-Barreto, Judge
Posner, writing for the Seventh Circuit, deemed a Terry stop
valid when the investigating officer “pointed his gun at . . . [the
defendant] . . . [and] ordered her out of the car.”58 The court
upheld the stop, in large part because “many drug traffickers are
armed and they sometimes shoot policemen”59 and because the
defendant “testified that she was not scared by the gun.”60
Similarly, in United States v. Greene61 and United States v.
62
Hardnett, the Ninth and Sixth Circuits, respectively, deemed a
56
United States v. Place, 462 U.S. 696 (1983).
Quinn, 815 F.2d at 159 (footnotes citing cases mentioned therein
added).
58
United States v. Serna-Barreto, 842 F.2d 965, 967 (7th Cir. 1988).
59
Id. at 967.
60
Id. at 968.
Although subjective belief is not determinative on whether an
ostensible stop is actually an arrest, Serna-Barreto’s testimony is
strong evidence in an otherwise sketchy record that, if Officer
Dailey did in fact point his gun at her, he did so in a manner that
protected him without unduly threatening her.
Id.
61
United States v. Greene, 783 F.2d 1364 (9th Cir. 1986).
62
United States v. Hardnett, 804 F.2d 353 (6th Cir. 1986).
57
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warrantless investigative stop valid under Terry even though the
officer’s weapons were drawn.63
The Seventh Circuit’s reasoning in United States v. Tilmon64
best illustrates the scope of the expansion of Terry.65 In Tilmon,
police were looking for a suspected bank robber.66 A police
officer spotted the vehicle described in the radio dispatch and
called for back-up units; he noted the driver “‘slid down in the
drivers seat’ as the police car approached . . . .”67 Next,
the police cars activated their flashing lights and Tilmon
pulled over. Over a loud speaker, Tilmon was
informed . . . that he should get out of the car with his
hands up and lie face down on the shoulder of the road.
Tilmon immediately complied. (According to Officer
Klanderman, some of the weapons were pointed at
Tilmon, and some were pointed at his car.) After he lay
down as directed, Tilmon was handcuffed and placed in a
squad car. A shotgun was pointed at Tilmon’s head while
he was handcuffed, searched and seated in the squad car
. . . . At the scene of the highway stop, Tilmon’s car had
been effectively blocked. There were at least five squad
cars abreast of and behind his car, and another police car
stopped one-quarter mile ahead of Tilmon’s car on the
shoulder of the road . . . . Officer Klanderman testified
that drawing weapons was standard procedure for a
felony stop “for the safety of the officers and any other
persons that may be in the area.”68
In rejecting Tilmon’s argument that the warrantless stop was
so forceful as to constitute a de facto arrest, and thus a violation
63
See Greene, 783 F.2d at 1367; Hardnett, 804 F.2d at 357.
United States v. Tilmon, 19 F.3d 1221 (7th Cir. 1993).
65
Id. Tilmon has been cited as recently as April 11, 2008, specifically
for its proposition that if found to be justified, requiring a suspect to lie face
down while being handcuffed and/or briefly detained in an officer’s squad car
does not convert a Terry stop into an arrest. Jewett v. Anders, 521 F.3d 818,
825–26 (7th Cir. 2008).
66
Tilmon, 19 F.3d at 1223.
67
Id.
68
Id.
64
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of the Fourth Amendment, the court recited the elements of a
valid Terry stop:
[t]he reasonableness of an investigatory stop may be
determined by examining: (1) whether the police were
aware of specific and articulable facts giving rise to
reasonable suspicion; and (2) whether the degree of
intrusion was reasonably related to the known facts. In
other words, the issue is whether the police conduct—
given
their
suspicions
and
the
surrounding
circumstances—was reasonable.69
The court concluded that the “police justifiably held a reasonable
suspicion that the car and its driver were involved in a bank
robbery.”70 Moreover, it found that based on the circumstances
of this particular matter—specifically that the suspect was
thought to be an armed felon—the scope of the intrusion was
reasonable.71 The court emphasized the risks posed to law
72
enforcement, particularly in a “felony stop:”
[w]hen effecting a Terry stop . . . police officers must
make a quick decision about how to protect themselves
and others from possible danger. They are not
necessarily required to “adopt alternative means to ensure
their safety in order to avoid the intrusion involved in a
Terry encounter.” A court in its assessment “should take
care to consider whether the police are acting in a swiftly
developing situation, and in such cases the court should
not indulge in unrealistic second-guessing.”73
Thus, “[t]o require an officer to risk his life in order to
make an investigatory stop would run contrary to the intent of
Terry v. Ohio.”74 Finally, the Tilmon court took notice of
Terry’s expansion:
69
Id. at 1224 (citing Terry v. Ohio, 392 U.S. 1, 19–20 (1968)).
Id. at 1225.
71
Id. at 1227.
72
Id. at 1225–26.
73
Id. at 1225 (citations omitted).
74
Id. at 1226 (citing United States v. Maslanka, 501 F.2d 208, 213 n.10
(5th Cir. 1974)).
70
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[i]n the recent past, the “permissible reasons for a stop
and search and the permissible scope of the intrusion
[under the Terry doctrine] have expanded beyond their
original contours.” The last decade “has witnessed a
multifaceted expansion of Terry,” including the “trend
granting officers greater latitude in using force in order
to ‘neutralize’ potentially dangerous suspects during an
investigatory detention.” For better or for worse, the
trend has led to the permitting of the use of handcuffs,
the placing of suspects in police cruisers, the drawing of
weapons and other measures of force more traditionally
associated with arrest than with investigatory detention.75
The court’s language makes clear that the justifications for
the stark departure from Terry’s narrow holding are the same as
the policy considerations that encouraged its advancement in the
first place. The increase in violent crime, gun violence,
America’s war on illegal drugs, and criminal sophistication since
1968 has enhanced the dangers associated with law
enforcement.76 Once the Supreme Court permitted an exception
to the probable cause requirement, lower courts that evaluated
the legality of officers’ actions on a case-by-case basis felt
compelled to maximize the tools officers had to protect their
safety.77
75
Id. at 1224–25 (citations omitted) (emphasis added).
“The number of police officers killed annually in the line of duty has
tripled since Terry was decided; the numbers of those assaulted and wounded
have risen by a factor of twenty.” United States v. Michelletti, 13 F.3d 838,
844 (5th Cir. 1994).
77
In sum, in 1963, Officer McFadden stopped a person he reasonably
believed to be preparing for a robbery and frisked his outer clothing for the
presence of a weapon that could serve to harm the police officer or the
public. Terry v. Ohio, 392 U.S. 1, 7, 23, 28 (1968). In 1992, Spencer Ray
Tilmon was surrounded by five police cars and numerous police officers
whose arms were drawn, laid down on the ground on an interstate highway,
handcuffed while a shotgun was pointed at his head, and placed in a squad
car during the search of his car. United States v. Tilmon, 19 F.3d 1221,
1223 (7th Cir. 1994). Both courts found the officers had the requisite specific
and articulable facts to support reasonable suspicion of the defendants’
propensity for crime or imposition of public danger, and both courts
76
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II. MIRANDA V. ARIZONA: PROTECTING THE PRIVILEGE AGAINST
SELF-INCRIMINATION
A. Miranda v. Arizona
Two years before Terry, the Warren Court addressed the
Fifth Amendment privilege against self-incrimination78 in
Miranda v. Arizona.79 In the consolidated cases decided in
Miranda, police questioned a suspect in custody at the precinct
for an extended period of time, eventually eliciting a
confession.80 The Court set out to decide the trial admissibility of
statements obtained from questioning which shared certain
“salient features [including] incommunicado interrogation of
individuals in a police-dominated atmosphere [that] result[ed] in
self-incriminating statements without full warnings of
constitutional rights.”81
The Warren Court sought to ensure that suspects’ Fifth
Amendment privilege against self-incrimination was adequately
protected during the course of custodial interrogation.82 Miranda
responded to the coercive nature that a police-dominated
environment has on the will of a suspect in custody;83 that is,
when police conduct psychologically coercive in-custody
interrogation techniques, procedural safeguards must be
employed to offset their effect. First, the Court reiterated that
the Fifth Amendment privilege is available “outside of criminal
court proceedings and serves to protect persons in all settings in
which their freedom of action is curtailed in any significant way
concluded that the intrusiveness of the subsequent search was reasonable
under the circumstances and sufficiently limited in scope. See Terry, 392
U.S. at 30; Tilmon, 19 F.3d at 1225, 1228.
78
U.S. CONST. amend. V (“No person shall be compelled in any
criminal case to be a witness against himself . . . .”).
79
Miranda v. Arizona, 384 U.S. 436, 439 (1966).
80
Id. at 440.
81
Id. at 445.
82
Id. at 439.
83
See id. at 443.
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from being compelled to incriminate themselves.”84 Second, the
court emphasized that “an understanding of the nature and
setting of this in-custody interrogation is essential” to the
Court’s holding.85 In light of the one-sided nature of police
interrogation and the value of the privilege against selfincrimination,86 the Court held that the “prosecution may not use
statements, stemming from custodial interrogation of the
defendant unless it demonstrates the use of procedural
safeguards effective to secure the privilege against selfincrimination.”87 These required procedural safeguards must
inform the defendant that “he has the right to remain silent, that
any statement he does make may be used as evidence against
him, and that he has the right to the presence of an attorney.”88
Accordingly, Miranda warnings are required when the subject is
(1) in police custody and (2) interrogated by the police.89 The
Court defined custodial interrogation as “questioning initiated by
law enforcement officers after a person has been taken into
custody or otherwise deprived of his freedom of action in any
90
significant way.” Subsequent lower courts have struggled to
identify the appropriate threshold of custody and interrogation
that triggers Miranda.
1. Miranda Custody
The Supreme Court specifically addressed whether an
84
Id. at 467.
Id. at 445. The Court commented on the history of physically abusive
interrogation tactics, but stressed that coercion can be mental as well as
physical. See id. at 446, 449. In the Court’s own words, the compulsion
directed towards suspects stems from the individual being “swept from
familiar surroundings,” being “surrounded by antagonistic forces,” and being
“subject to techniques intended to subjugate the individual to the will of his
examiner.” Id. at 457, 461.
86
Id. at 468.
87
Id. at 444.
88
Id.
89
Id.
90
Id. The Court did not articulate with further specificity factors
indicative of custodial interrogation.
85
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arrestee was in sufficient custody as to warrant Miranda
warnings in Orozco v. Texas.91 Justice Black rejected the state’s
argument that since the suspect was in familiar surroundings (his
bedroom), Miranda did not apply.92 Instead, the Court laid down
a bright-line rule: if a person is arrested, he is in custody for
purposes of Miranda.93
In California v. Beheler,94 the suspect agreed to accompany
police officers to the police station for questioning.95 The suspect
was informed he was not under arrest. He left, unrestrained,
after the questioning.96 The Court stated:
although the circumstances of each case must certainly
influence a determination of whether a suspect is “in
custody” for purposes of receiving of Miranda
protection, the ultimate inquiry is simply whether there is
a “formal arrest or restraint on freedom of movement” of
the degree associated with a formal arrest . . . [b]ut we
have explicitly recognized that Miranda warnings are not
required “simply because the questioning takes place in
the station house, or because the questioned person is one
whom the police suspect.”97
Accordingly, the Court found that Beheler was not in
custody for Miranda purposes, forcefully explaining, “it is
beyond doubt that Beheler was neither taken into custody nor
significantly deprived of his freedom of action. Indeed,
91
Orozco v. Texas, 394 U.S. 324 (1969).
Id. at 326.
93
Id. at 326–27. Justice White’s dissent expressed disdain that the
custody requirement of Miranda was “dilute[d].” Id. at 330. Relying on the
language in Miranda that focused on the extremes and coerciveness of inhouse custodial interrogations, Justice White argued that Miranda and the
policies underlying it were not meant to reach beyond the police station and
criticized the majority for assuming, without discussion, that it did so. Id. at
329.
94
California v. Beheler, 463 U.S. 1121 (1983).
95
Id. at 1122.
96
Id.
97
Id. at 1125.
92
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Beheler’s freedom was not restricted in any way whatsoever.”98
The Supreme Court’s next significant decision regarding
Miranda custody came in Berkemer v. McCarty.99 In this case,
an Ohio state highway patrolman stopped a suspect weaving in
and out of a highway lane.100 At the scene of the traffic stop, the
officer asked the suspect if he had been using intoxicants and the
suspect replied that he had “consumed two beers and had
smoked several joints of marijuana . . . .”101 The suspect was
arrested and later sought to have those statements suppressed on
the grounds that he was not first read his Miranda rights at the
scene of the traffic stop before his arrest.102 The Court held that
“roadside questioning of a motorist detained pursuant to a
routine traffic stop” was not “custodial interrogation.”103 The
Court acknowledged that a usual traffic stop is analogous to a
Terry stop and the nature of these detentions (Terry stops)
“explains the absence of any suggestion in our opinions that
Terry stops are subject to the dictates of Miranda.”104 The Court
concluded, “fidelity to the doctrine announced in Miranda105
requires that it be enforced strictly, but only in those types of
situations in which the concerns that powered the decision are
implicated.”106
107
In United States v. Brown, the Eighth Circuit suggested six
indicia for determining whether a suspect is in custody for
Miranda purposes:
98
Id. at 1123.
Berkemer v. McCarty, 468 U.S. 420 (1984).
100
Id. at 423.
101
Id.
102
See id. at 424.
103
Id. at 435. Berkemer also established an objective test to determine
whether a suspect was “subjected to treatment that renders him ‘in custody:’”
the “relevant inquiry is how a reasonable man in the suspect’s position would
have understood his situation.” Id. at 440, 442.
104
Id. at 440.
105
Id. at 437. Specifically, the Court was referring to the phrase
“deprived of his freedom of action in a significant way.” Id. at 428.
106
Id. at 437.
107
United States v. Brown, 990 F.2d 397 (8th Cir. 1993).
99
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(1) whether the suspect was informed at the time of
questioning that the questioning was voluntary, that the
suspect was free to leave or request the officers to do so,
or that the suspect was not considered under arrest; (2)
whether the suspect possessed unrestrained freedom of
movement during questioning; (3) whether the suspect
initiated contact with authorities or voluntarily acquiesced
to official request to respond to questions; (4) whether
strong arm tactics or deceptive stratagems were employed
during questioning; (5) whether the atmosphere of the
questioning was police dominated; and (6) whether the
suspect was placed under arrest at the termination of the
questioning.108
Even if a person is in custody, however, he or she must still
be “interrogated” in order to trigger Miranda.109
2. Miranda Interrogation
Miranda defined interrogation as “questioning initiated by
law enforcement officers,”110 but the Court has maintained that
investigatory tactics other than direct questioning can be
“interrogation.” In Rhode Island v. Innis,111 the Court held that
“the term ‘interrogation’ under Miranda refers not only to
express questioning, but also to any words or actions on the part
of the police (other than those normally attendant to arrest and
custody) that the police should know are reasonably likely to
elicit an incriminating response from the suspect.”112
108
Id. at 399. “The presence of the first three indicia tends to mitigate
the existence of custody at the time of questioning” while the “presence of
the last three indicia aggravate the existence of custody.” Id.
109
See Alston v. Redman, 34 F.3d 1237, 1244 (3d Cir. 1994).
110
111
Rhode Island v. Innis, 446 U.S. 291 (1980).
112
Id. at 301.
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III. THE CIRCUITS’ SPLIT OVER MIRANDA’S APPLICABILITY TO
TERRY STOPS
Terry’s expansion to permit increasingly coercive searches
and seizures113 has caught up to Miranda. The First and Fourth
Circuits reason that if the Terry stop is lawful under the Fourth
Amendment, then the suspect is not in Miranda custody.114
Conversely, the Second, Seventh, Eighth, Ninth, and Tenth
Circuits consider the Fourth and Fifth Amendment questions
separately, holding that a Terry stop may be lawful under the
Fourth Amendment, but may still rise to a degree of intrusion
that constitutes Miranda custody.115
A. The First and Fourth Circuits’ Categorical Approach
The First and Fourth Circuits extend the holding of
Berkemer from traffic stops to all lawful Terry stops, holding
that if a Terry stop based upon reasonable suspicion is lawful at
inception and in scope, then the suspect is not in Miranda
custody.116 In other words, they apply a categorical rule that only
if a Terry stop rises to the level of a de facto arrest, and thus is
no longer a lawful Terry stop, would Miranda warnings be
required.
In United States v. Trueber,117 for example, police officers
garnered reasonable suspicion that Trueber was smuggling
drugs.118 Officers spoke with Trueber for ten-to-fifteen minutes
113
See supra Part I(B).
United States v. Trueber, 238 F.3d 79 (1st Cir. 2001); United States
v. Leshuk, 65 F.3d 1105 (4th Cir. 1995).
115
In United States v. Artiles–Martin, Judge Hodges noted that “[t]he
First [and] Fourth . . . Circuits hold that so-called Terry reasonableness
means Miranda warnings are not required, even if the stop was
coercive . . . [while] the Second, Seventh, Ninth and Tenth Circuits hold that
a coercive Terry stop requires warnings but still is deemed a valid Terry
stop.” United States v. Artiles–Martin, No. 5:08-cr-14-Oc-10GRJ, 2008 WL
2600787, *11 n.38 (M.D. Fla. June 30, 2008).
116
Trueber, 238 F.3d 79; Leshuk, 65 F.3d 1105.
117
Trueber, 238 F.3d 79.
118
Id. at 82.
114
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after pulling his truck over, and then for approximately one hour
and twenty minutes further at his motel room.119 Agents kept
Trueber under constant surveillance.120 Trueber was then
arrested.121 The lower court suppressed all statements made by
Trueber before his arrest, reasoning that “for purposes of
Miranda, Trueber was in custody when questioned and,
therefore, all statements violated Miranda and should be
suppressed.”122
On appeal, the First Circuit concurred with Berkemer that
“routine traffic stops are more analogous to a Terry stop than to
a formal arrest, and, therefore, are not custodial for purposes of
Miranda.”123 The court concluded that “the investigatory stop
was justified at its inception and reasonably related in scope to
the circumstances which justified the interference in the first
place . . . [w]hat occurred was thus a permissible Terry stop.”124
Since “[n]othing the agents did or said sufficed to convert the
investigatory stop into an arrest requiring the administration of
Miranda warnings,” the statements’ suppression was
125
overturned. Trueber’s focus, on whether the stop was lawful
or whether it exceeded the scope of a Terry stop to become a de
facto arrest thus requiring Miranda warnings,126 suggests that
only upon the latter circumstance, and never upon the former,
would Miranda warnings be required.127
The Fourth Circuit also applies a categorical rule with regard
to Miranda’s applicability to Terry stops. In United States v.
119
Id. at 84–85.
Id.
121
Id. at 87.
122
Id. at 91.
123
Id. at 92 (citing Berkemer v. McCarty, 468 U.S. 420, 440 (1984)).
124
Id. at 95 (internal quotation marks and citation omitted).
125
Id.
126
Id.
127
A lower court in the First Circuit appears to have deviated from
Trueber’s holding. In United States v. Massaro, the district court asserted
that the First Circuit would recognize that “even during a lawful Terry stop,
the restraint of a suspect can amount to a formal arrest.” United States v.
Massaro, 560 F. Supp. 2d 96, 105 (D. Mass. 2008).
120
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Leshuk,128 a turkey hunter uncovered marijuana growing in the
woods.129 He alerted the police, and deputy sheriffs found the
two defendants nearby with two backpacks and a brown plastic
garbage bag in their possession.130 The deputies ordered the
defendants to raise their hands, frisked them, and “determined
they were not armed.”131 The deputies then asked several
questions that the defendants answered.132 On appeal, Leshuk
argued that his statements made during the deputies’ questioning
at the scene, before his arrest, “should be suppressed because
the deputies improperly interrogated him without administering
warnings pursuant to Miranda.”133 The Leshuk court found that
the officers’ conduct did not exceed the scope of a lawful Terry
stop.134 The court distinguished a Terry stop from a custodial
interrogation by noting that a Terry stop “must last no longer
than necessary to verify or dispel the officer’s suspicion.”135
In sum, the First and Fourth Circuits have adopted a
categorical rule that extends Berkemer’s holding: if the Terry
stop was lawful, then the suspect was not in Miranda custody.
However, not all circuits agree with this approach.
B. The Second, Seventh, Eighth, Ninth, and Tenth Circuits’
Independent Approach
These circuits reason that because a lawful Terry stop may
include behavior commensurate with a formal arrest, a detainee
of a lawful Terry stop, that is, a stop that does not rise to the
level of a de facto arrest, may still be entitled to Miranda
warnings.
128
129
130
131
132
133
134
135
United States v. Leshuk, 65 F.3d 1105 (4th Cir. 1995).
Id. at 1106–07.
Id.
Id. at 1107.
Id.
Id. at 1108.
Id. at 1110.
Id. at 1109.
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1. Second Circuit
In United States v. Newton,136 three parole officers and three
police officers arrived at the Wrights’ apartment upon word that
the Wrights’ son, Newton, had threatened to kill the Wrights.137
The officers handcuffed Newton without advising him of his
Miranda rights, explaining that it was for his and the officers’
safety, and that he was not under arrest.138 Newton thereafter
told the police that he had a gun in his apartment and where it
was.139 On appeal to the Second Circuit, Newton asserted that
his responses to inquiries from the officers ought to have been
suppressed because his restraint rose to a degree consistent with
that of formal custody but was not preceded by Miranda
warnings.140
The court rejected the categorical approach of the First and
Fourth Circuit—that “where an investigatory stop is reasonable
under the Fourth Amendment, the seized suspect is not ‘in
custody’ for purposes of Miranda.”141 Rather, the Second Circuit
found that Fourth Amendment reasonableness is not the standard
for resolving Miranda custody challenges.142 In other words,
“whether a ‘stop’ was permissible under Terry v. Ohio . . . is
irrelevant to the Miranda analysis. Terry is an ‘exception’ to the
Fourth Amendment probable cause requirement, not to the Fifth
Amendment protections against self-incrimination.”143 Instead,
the Second Circuit asked whether a “reasonable person in
defendant’s position would have understood himself to be
subjected to the restraints comparable to those associated with a
144
formal arrest.” Facts the court deemed relevant included:
(1) the length of time involved in the stop; (2) its public
136
137
138
139
140
141
142
143
144
United States v. Newton, 369 F.3d 659 (2d Cir. 2004).
Id. at 663.
Id.
Id. at 663–64.
Id. at 668.
Id. at 673 (citing Trueber and Leshuk).
Id.
Id.
Id. (citing United States v. Ali, 69 F.3d 1467, 1472 (2d Cir. 1995)).
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403
or private setting; (3) the number of participating law
enforcement officers; (4) the risk of danger presented by
the person stopped; and (5) the display or use of physical
force against the person stopped, including firearms,
handcuffs, and leg irons.145
The court’s willingness to extend Miranda protections to
lawful Terry stops did not invalidate the lawfulness of the Terry
stop: “the Fourth Amendment permits the officer to take
‘necessary measures . . . to neutralize the threat’ without
converting a reasonable stop into a de facto arrest.”146
Accordingly, the Terry stop was reasonable under the Fourth
Amendment, but “nevertheless placed him in custody for
purposes of Miranda.”147
2. Seventh Circuit
United States v. Smith148 considered whether a suspect
detained and handcuffed during a Terry stop should have been
read Miranda warnings.149 The court explained, “[t]he purpose
of permitting a temporary detention without probable cause or a
warrant is to protect police officers and the general
public . . . [but] [t]he purpose of the Miranda rule, however, is
145
Id. at 674.
Id. This is consistent with the Second Circuit’s decision in United
States v. Ali, 68 F.3d 1468, 1473 (2d Cir. 1995):
Terry is an “exception” to the Fourth Amendment probable cause
requirement, not to the Fifth Amendment protections against selfincrimination . . . . The fact that the seizure and search of a suspect
comports with the Fourth Amendment under Terry simply does not
determine whether the suspect’s contemporaneous oral admissions
may be used against him or her at trial.
147
Id. at 677. However, since these statements fell within the public
safety exception to Miranda, under New York v. Quarles, 467 U.S. 649
(1984), the court did not err in refusing to suppress Newton’s statements.
United States v. Newton, 369 F.3d 659, 677 (2d Cir. 2004).
148
United States v. Smith, 3 F.3d 1088 (7th Cir. 1993).
149
Id. at 1094. “We will not substitute our judgment for that of the
officers as to the best methods to investigate.” Id. (quoting United States v.
Boden, 854 F.2d 983, 993 (7th Cir. 1988)).
146
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404
not to protect the police or the public . . . [but to] protect the
fairness of the trial.”150 Thus, the court read Berkemer to stand
for the proposition that Miranda rights may be triggered even if
a defendant has not been subjected to an arrest or a de facto
arrest.151
3. Eighth Circuit
In United States v. Martinez, a suspect was placed in
handcuffs, patted down for weapons, detained, and interrogated
about his possession of weapons and cash.152 The court ruled that
the encounter was a valid Terry stop, but nonetheless continued
to analyze whether the suspect was in Miranda custody.153 After
rejecting the government’s argument “that so long as the
encounter remained a Terry stop, no Miranda warnings were
required,”154 the court “followed the Supreme Court’s cue” and
read Berkemer to imply that the dispositive consideration is not
whether the encounter was a valid Terry stop, but what the
circumstances of the stop were.155 The court ultimately
determined that the detainee, despite not being under arrest
during the lawful Terry stop, was entitled to Miranda
warnings.156
4. Ninth Circuit
In United States v. Kim,157 the Ninth Circuit held that the
lower court correctly suppressed the defendant’s statements
150
Id. at 1097.
Id.
152
United States v. Martinez, 462 F.3d 903, 906 (8th Cir. 2006).
153
Id. at 908 (“Whether Martinez was ‘in custody’ for purposes of
Miranda after being handcuffed during the Terry stop is a separate question
from whether that handcuffing constituted an arrest for which probable cause
was required.”).
154
Id. at 909 (emphasis added).
155
Id.
156
Id.
157
United States v. Kim, 292 F.3d 969 (9th Cir. 2002).
151
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405
during the course of a Terry stop because “under the totality of
circumstances, a reasonable person in Kim’s circumstances
would not have felt free to leave,” and therefore Kim was in
Miranda custody.158 The court ruled so, despite the fact the
defendant was not under arrest, because “the circumstances
during the questioning of the defendant warranted advising [her]
of her rights.”159
5. Tenth Circuit
In United States v. Perdue,160 police conducting an
investigative stop ordered the defendant and his fiancée to get
out of their stopped car and lie face down.161 The officers drew
their guns as the defendant made various statements regarding
marijuana in his vehicle.162 The defendant appealed the district
court’s decision not to suppress his statements, challenging the
lower court’s conclusion that since he was interrogated during a
valid Terry stop, Miranda warnings were not required.163
The Perdue court concluded that the district court “merged
several distinct constitutional inquiries into one.”164 The court
first held that the officer’s investigative stop of Perdue was a
valid Terry stop.165 Next, the court acknowledged that Miranda
rights might be implicated during a valid Terry stop because
“[p]olice officers must make a choice—if they are going to take
highly intrusive steps to protect themselves from danger, they
must similarly provide protection to their suspects by advising
158
Id. at 978.
Id. at 973.
160
United States v. Perdue, 8 F.3d 1455 (10th Cir. 1993).
161
Id. at 1458.
162
Id. at 1459.
163
Id. at 1461.
164
Id.
165
Id. at 1463. The court concluded that under the circumstances, the use
of drawing their weapons and displaying some force was reasonable. Id. at
1462. The court also noted that this conduct “border[ed] on an illegal arrest.”
Id.
159
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them of their constitutional rights.”166 Because “[a] reasonable
man in Mr. Perdue’s position could not have misunderstood the
fact that if he did not immediately cooperate, his life would be
in danger . . . [and] [a]ny reasonable person in Mr. Perdue’s
position would have felt completely at the mercy of the police,”
Perdue was in Miranda custody.167
Thus, contrary to the categorical rule adopted by the First
and Fourth Circuits, the above circuits have adopted an
independent approach by which the Fourth and Fifth
Amendment issues are analyzed separately.
IV. THE INDEPENDENT APPROACH HAS IT RIGHT
Ultimately, evaluating Miranda custody separately and
distinctly from the legality of the underlying Terry stop best
balances law enforcement interests with suspects’ Fourth and
Fifth Amendment rights. The First and Fourth Circuits’
categorical rule that Terry detainees are not in Miranda custody
ignores the extension of Terry stops from a simple stop-and-frisk
to police seizures that include drawn weapons, limited force,
168
interrogation, and detention. As a result, their approach fails
to recognize that these intrusive techniques approach precisely
the sort of coercive atmosphere that sparked the need for
Miranda’s prophylactic rule. Alternatively, the independent
approach, adopted by the Second Circuit and others, supports
the policy justifications behind Terry and Miranda. This
approach, coupled with courts continuing their efforts to clarify
what restraints constitute Miranda custody and applying the
169
public safety exception promulgated in New York v. Quarles to
Terry stops, minimizes burdens on law enforcement.
166
167
168
169
Id. at 1465.
Id. (quoting United States v. Berkemer, 468 U.S. 420, 438 (1984)).
See generally id. at 1462.
New York v. Quarles, 467 U.S. 649 (1984).
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A. The Second Circuit’s Approach Best Balances Suspects’
Rights with Law Enforcement Interests
Newton’s approach, shared by the Seventh, Eight, Ninth, and
Tenth Circuits,170 displays more sensible constitutional law by
acknowledging and accepting the increasingly coercive nature of
the Terry stop and applying distinct Miranda analysis without
disturbing it.
First, an independent approach concedes that different values
underlie Terry and Miranda. Terry values the balance between
an individual’s right to privacy against law enforcement’s goal
of public safety.171 Miranda values a suspect’s privilege against
172
self-incrimination. Just as a prophylactic rule protecting a
person’s Fifth Amendment privilege against self-incrimination is
distinct from a person’s Fourth Amendment right against
unreasonable search and seizure, so too should Miranda custody
analysis be distinct from Fourth Amendment reasonableness. Put
simply, just because a Terry stop may be reasonable, the police
officer’s conduct may still (lawfully) rise to the level imagined
by Chief Justice Warren in Miranda. To disregard the possible
applicability of Miranda warnings to this type of Terry stop
ignores the values that motivated Miranda.
Second, in Miranda, the Court held that warnings are not
just applied to arrest custody, but also to custodial detentions
that detain the suspect in any significant way.173 While Berkemer
held that routine traffic stops do not rise to the level of detention
imagined by Miranda,174 the facts of Berkemer are
distinguishable from the ultra-coercive Terry stops described in
Newton and Perdue. While these coercive Terry stops may still
not constitute de facto arrests, their use of limited force, drawn
weapons, handcuffs, and extended duration certainly resemble
the compelling environment of an arrest more than a traffic stop.
170
171
172
173
174
See supra Part III(B).
Terry, 392 at 23–28.
Id. at 444.
Berkemer v. McCarty, 458 U.S., 420, 437–40 (1984).
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408
Third, categorical denial of Miranda to Terry stops assumes,
incorrectly, that all Terry stops are intrusions on personal liberty
not worthy of the prophylactic protections of Miranda.175 Just
like not all arrests are the sort of police-dominated stationhouse
interrogations imagined by Miranda, not all Terry stops are the
minor intrusions on personal liberty imagined by Terry.
Fourth, Chief Justice Warren, in Miranda, failed to actually
define “custody” as an “arrest.”176 In fact, he failed to define
“custody” at all.177 It is reasonable to conclude that the two were
not intended by the Court to be synonymous. Analogously, just
as Miranda was framed in the in-station police-dominated
environment, Miranda warnings are now given to all arrests
regardless of the degree of coerciveness of the environment.
Since Miranda left the confines of the police station, it is not
incongruous to argue it should leave the confines of a formal or
de facto arrest.178
Finally, the Berkemer Court admitted that a bright-line rule
stating Miranda does not apply until a suspect is officially placed
under arrest would “enable the police to circumvent the
constraints on custodial interrogations established by
Miranda.”179 By denying Miranda’s application to Terry stops,
police may find incentive to put off an arrest until after they
have finished questioning a detainee.
B. More Concretely Define the Scope of Miranda Custody
Courts applying the independent approach must clarify what
restraints actually constitute Miranda custody in order to
minimize the burdens on law enforcement that include overcomplication and exclusion of evidence at trial. In Newton, the
175
Richard A. Williamson, The Virtues (and Limits) of Shared Values:
The Fourth Amendment and Miranda’s Concept of Custody, 1993 U. ILL. L.
REV. 379, 409 (1993).
176
Miranda, 384 U.S. 436.
177
Id.
178
See generally Williamson, supra note 175 (explaining the expansion of
Miranda warnings beyond the traditional bounds of a formal arrest).
179
Berkemer, 458 U.S. at 441.
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Second Circuit noted the “difficulty of determining ‘custody’ for
purposes of Miranda and the Supreme Court’s lack of clear
guidance on the issue.”180 At least one commentator has noted
that when Miranda was decided, the legal terms “custody” and
“arrest” meant roughly the same thing.181 This is no longer the
case,182 in part due to exceptions to the warrant requirement and
increasing ambiguity as to the role and permissible substance of
a Terry stop. If a court accepts the proposition that Miranda
custody can be achieved without an arrest, it is irresponsible to
expect police officers to determine when to deliver Miranda
warnings based on an admittedly vague standard, and then
punish their incorrect judgment by excluding statements made
during the encounters.
In Miranda, the Court stated specifically that an
“understanding of the nature and setting of [an] in-custody
interrogation is essential to” their decision.183 Since the nature
and setting of interrogations has changed,184 so must the analysis
of whether Miranda applies.
While the Second and Eighth Circuits have identified factors
to determine whether Miranda custody was met,185 these
180
United States v. Newton, 369 F.3d 659, 670 (2d Cir. 2004) (citing
Cruz v. Miller, 255 F.3d 77, 86 (2d Cir. 2001)).
181
Mark A. Godsey, When Terry Met Miranda: Two Constitutional
Doctrines Collide, 63 FORDHAM L. REV. 715, 741 (1994).
182
Id.
183
184
Supra Part II(A)(i).
185
See Newton, 369 F.3d at 674 (“Among the facts generally deemed
relevant are (1) the length of time involved in the stop; (2) its public or
private setting; (3) the number of participating law enforcement officers;
(4) the risk of danger presented by the person stopped; and (5) the display or
use of physical force against the person stopped, including firearms,
handcuffs, and leg irons.”); United States v. Brown, 990 F.2d 397, 399 (8th
Cir. 1993) (“(1) [W]hether the suspect was informed at the time of
questioning that the questioning was voluntary, that the suspect was free to
leave or request the officers to do so, or that the suspect was not considered
under arrest; (2) whether the suspect possessed unrestrained freedom of
movement during questioning; (3) whether the suspect initiated contact with
authorities or voluntarily acquiesced to official request to respond to
questions; (4) whether strong arm tactics or deceptive stratagems were
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multiple-factor analyses do little to assist the police officer
engaging in a spontaneous and fast on-the-street encounter.
Common sense suggests that police officers asked to rely on
such a multiple-factor analysis would in fact be relying on
intuition—where the cost of an officer’s wrong intuition is
exclusion,186 a firmer standard, designed for the needs of police
officers conducting rapidly developing investigative stops, is
imperative.
C. The Application of Quarles’ Public Safety Exception to
Terry Stops
Quarles’ public safety exception permits statements made to
police, before the reading of Miranda warnings, to be included
as evidence in an ensuing criminal trial so long as the
questioning by the police was reasonably prompted by an
immediate concern for the safety of the police or public.187 Given
this exception, Miranda warnings are only required during a
Terry stop when police interrogation is targeted at gathering
evidence, and not required before questions directed at resolving
an immediate threat to public and officer safety. The public
safety exception mitigates burdens on law enforcement, bolsters
the policies that justify Terry stops, and balances the detainee’s
civil right to Miranda warnings against public and officer safety.
In Quarles, a woman told two police officers in Queens,
New York, that she was just raped; she described the man and
told the officers he had just entered a nearby supermarket and
188
was armed. An officer reached the suspect in the store, frisked
him, and discovered an empty shoulder holster.189 After
employed during questioning; (5) whether the atmosphere of the questioning
was police dominated; or, (6) whether the suspect was placed under arrest at
the termination of the questioning.”). See also supra Part II(A)(i).
186
Mapp v. Ohio, 367 U.S. 643, 660 (1961) (disallowing the admission
of evidence seized pursuant to an unlawful search during the trial of the
subject of the unlawful search).
187
New York v. Quarles, 467 U.S. 649 (1984).
188
Id. at 651–52.
189
Id.
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handcuffing him, the officer asked where the gun was—the
suspect “nodded in the direction of some empty cartons and
responded, ‘the gun is over there.’”190 The officer then placed
the suspect under arrest and read him his Miranda rights.191
Quarles sought to have his statement, “the gun is over
there,” excluded from trial because the officer had not yet given
him his Miranda warnings.192 The Court noted that this case
presented a situation where “concern for public safety must be
paramount to adherence to the literal language of the
prophylactic rules enunciated in Miranda,”193 and thus
established a “public safety” exception to Miranda.194 The Court
was largely persuaded by the realities of the encounter:195 first,
in apprehending the suspect, the officers were confronted with
the immediate necessity of discovering the location of a hidden
gun in a public place. The situation posed dangers to the public
because an accomplice might use it, or a customer or employee
may find it.196 Second, the Court noted that if the police are
“required to recite the familiar Miranda warnings before asking
the whereabouts of the gun, suspects in Quarles’ position might
well be deterred from responding.”197 The police officer “needed
an answer to his question not simply to make his case against
Quarles but to insure that further danger to the public did not
result from the concealment of the gun in a public area.”198
190
Id.
Id.
192
See id.
193
Id. at 653.
194
Id. at 655. The Court also clarified that the availability of this
exception does not depend upon the individual motivations of the police. Id.
at 656. “In a kaleidoscopic situation such as the one confronting these
officers, where spontaneity rather than adherence to a police manual is
necessarily the order of the day, the application of the exception which we
recognize today should not be made to depend on post hoc findings at a
suppression hearing concerning the subjective motivation of the arresting
officer.” Id.
195
See id. at 657.
196
Id.
197
Id.
198
Id. (emphasis added).
191
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412
Third, the Court recognized the importance of an easily
workable rule “to guide police officers, who have only limited
time and expertise to reflect on and balance the social and
individual interests involved in the specific circumstances they
confront.”199 Finally, while admitting that the present exception
muddied Miranda’s bright-line rule, the Court concluded that
this exception would not be difficult for police officers to apply
because in each case police should be able to distinguish
between questions necessary to secure personal or public safety
and questions designed to elicit testimonial evidence.200
Thus, if Terry stops may rise to Miranda custody, then
Quarles’ public safety exception permits police to interrogate
Terry detainees regarding immediate threats to public or officer
safety without first delivering Miranda warnings. Since Terry
stops are limited to resolving officers’ reasonable suspicions that
a suspect is dangerous or about to commit a crime, it is likely
that Miranda warnings will be excepted under Quarles during
most Terry stops. Indeed, the Newton court took such an
approach, ruling that although the defendant was in custody
during his interrogation, the questioning, which was directed to
the recovery of a gun, fell within the Quarles public safety
exception to Miranda and survived suppression.201
V. POSSIBLE CRITICISMS OF THE INDEPENDENT APPROACH
A. The Costs of Issuing Miranda Warnings During a Terry
Stop Outweigh the Benefits of the Prophylactic Rule
Delivering Miranda warnings outside police station custodial
interrogations can impose a significant cost and undermine
202
effective law enforcement:
199
Id. at 658 (citing Dunaway v. New York, 442 U.S. 200 (1979)).
Id. at 658–59.
201
United States v. Newton, 369 F.3d 659, 677 (2d. Cir. 2004)
(“[A]lthough Newton was in custody at the time of the challenged
interrogation, questioning preliminary to the officers’ recovery of the charged
firearm fell within the public safety exception to Miranda.”).
202
Note, Custodial Engineering: Cleaning Up The Scope of Miranda
200
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[t]he mere recital of a Miranda warning formalizes a
police-civilian interaction, which “may discourage
citizens from cooperating with the police” . . . the recital
of the warning and the detainee’s likely responses also
delay an on-the-scene investigation, which may endanger
the police and public . . . vague Miranda requirements
jeopardize on-the-scene inquiries by causing uncertainty
for the police officers who must administer the warning,
the subject who receives it, and the courts that must
review it . . . empirical evidence demonstrates that the
Terry stop, frisk, and inquiry “should not be
underestimated” as a deterrent to crime . . . it would
threaten the unstructured and spontaneous nature of the
Terry stop by formalizing the inquiry . . . it would block
the proper execution of Terry by increasing the potential
for unconstitutional delay during the brief stop . . . [all
are] additional burdens on a Terry stop [that] would
diminish its utility to law enforcement, and that result
contradicts the recent efforts by courts to ensure that
Terry stop, frisk, and inquiry remains a viable
investigative option.203
The Warren Court recognized the burdens that law
enforcement officials must bear,204 but remained adamant that the
privilege
against
self-incrimination
demanded
certain
205
sacrifices. Thus, as Terry stops increasingly resemble the type
of intrusive conduct the Miranda Court deemed serious enough
to warrant a prophylactic rule, society must accept the sacrifices
Miranda requires in the context of a Terry stop. Moreover,
Quarles’ public safety exception mitigates these potential costs to
safety by excepting questions directed towards resolving an
immediate danger to public or officer safety. And while issuing
Custody During Coercive Terry Stops, 108 HARV. L. REV. 665 (1995).
203
Id. (emphasis added).
204
205
Id. at 479. “The quality of a nation’s civilization can be largely
measured by the methods it uses in the enforcement of its criminal law.” Id.
at 480, n.50 (citing Walter V. Shaefer, Federalism and State Criminal
Procedure, 70 HARV. L. REV. 1, 26 (1956)).
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414
Miranda warnings to a suspect may result in a failure to obtain
evidence that would otherwise be collected, this cost to society
is tempered by the prevention of the coercive means by which
that evidence would have been obtained.
B. Police Will Be Unable to Determine Whether They Have
Placed a Suspect in Miranda Custody
Before the permissible scope of a Terry stop expanded, the
concepts of “arrest” and “custody” were closely related and
Terry stops looked nothing like the behavior that constituted
Miranda custody.206 Simply, officers knew Miranda warnings
were not required during a lawful Terry stop. However, if
Miranda applies to Terry stops, police officers must determine
more than whether they have the requisite reasonable suspicion
to conduct an investigative stop. In addition, they must consider
whether the level of coerciveness with which they are
conducting the search constitutes a custodial or non-custodial
investigative stop for Miranda purposes, as well as whether their
questions are directed at gathering evidence or resolving an
immediate public safety suspicion.
While these additional requirements complicate the
orchestration of a Terry stop, they are necessary to balance the
privilege against self-incrimination against the safety of the
public and police officers. The difficulty of determining Miranda
custody could be answered more easily with firmer guidelines
from courts.207 Further, inquiry into the purpose of an officer’s
questioning will not significantly impose on law enforcement
efforts. As the Court explained in Quarles, “[w]e think police
officers can and will distinguish almost instinctively between
questions necessary to secure their own safety or the safety of
the public and questions designed solely to elicit testimonial
208
evidence from a suspect.”
206
207
208
Williamson, supra note 175.
See supra Part IV(B).
New York v. Quarles, 467 U.S. 649, 658–59 (1984).
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415
C. Terry Should Be Returned to Its Original Contours
One commentator proposes resolving the Circuit split
regarding the application of Miranda to Terry by returning “the
Terry doctrine to its pre-expansion dimensions, and thereby
diffus[ing] the tension that has recently been created between
Terry and Miranda.”209 In short, the commentator argues that the
best option to resolve the question of Miranda applicability to
Terry is to reverse the expansion of Terry for two reasons:
“(1) it is contrary to relevant Supreme Court authority, and
(2) it has not been supported by persuasive or logical
rationales.”210 Further “any frustration of police investigatory
tactics caused by reversing Terry’s uncalled-for expansion would
be counteracted by the efficiency and bright-line nature of the
resulting rule.”211
This argument does not attack the soundness of the circuits’
differing views, but rather identifies a misstep by courts in
permitting an environment to develop that is capable of fostering
212
the present disagreement. Although the simplicity of this
approach is attractive, it ignores the reason that Terry expanded:
an evolution of the type and rate of crime in this country since
the Warren Court’s decisions.213 Regardless of the virtues of
Terry’s expansion, courts must take steps to protect suspects
Fifth Amendment rights.214
209
Godsey, supra note 181, at 741 (emphasis added).
Id.
211
Id. at 747.
212
A response that fully addresses this argument is most appropriate for
another case comment or article.
213
United States v. Michelletti, 13 F.3d 838, 844 (5th Cir. 1994).
214
United States v. Perdue, 8 F.3d 1455, 1465 (10th Cir. 1993) (“Police
officers must make a choice–if they are going to take highly intrusive steps to
protect themselves from danger, they must similarly provide protection to
their suspects by advising them of their constitutional rights.”).
210
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416
CONCLUSION
In August of 2008, the Attorney General of New Mexico
filed a petition for certiorari to the United States Supreme Court
requesting review of the New Mexico Court of Appeals’
decision in State v. Snell,215 which adopted the independent
approach and required Miranda warnings be read to a suspect
detained in a squad car at a Terry traffic stop.216 The Court of
Appeals stated that if a “motorist who has been detained
pursuant to a traffic stop thereafter is subjected to treatment that
renders him ‘in custody’ for practical purposes, he will be
entitled to the full panoply of protections prescribed by
Miranda.”217 Challenging this decision, the Attorney General
cited to the First and Fourth Circuit’s approach in Trueber and
Leshuk to support its position that New Mexico’s high court
misapplied Berkemer and Miranda.218 The State’s petition
acknowledged that
[c]ourts and commentators alike have struggled with the
manner in which the concept of arrest intersects the
Fourth and Fifth Amendments . . . . The question
seemingly left open by Berkemer, and on which both
federal and state courts disagree, is whether Miranda
extends to investigative detentions in which police
officers use a greater than normal level of force in
response to safety or other law enforcement concerns
without effecting a de facto arrest.219
The petition was denied on December 1, 2008,220 and thus the
question will continue to be reserved for states and lower courts.
215
New Mexico v. Snell, 166 P.2d 1106 (2007).
Id. at 1111–12.
217
Snell, 166 P.3d at 1111.
218
Petition for Writ of Certiorari at 24, State v. Snell, 129 S. Ct. 626
(2008) (No. 08-196), available at 2008 WL 3833284.
219
Id. at 7. The petition also noted that the Second Circuit recognized a
circuit split and broke from the First and Fourth Circuit in their approach to
the application of Miranda to Terry stops. Id.
220
State v. Snell, 129 S. Ct. 626 (2008).
216
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417
As the constitutional guidelines governing criminal
procedures evolve, it is imperative that the new rules reflect the
actual changes and practices of law enforcement. Mindful of the
changes in nature of a Terry stop, courts ought to apply Miranda
to the context of a lawful Terry stop that rises to the level of
custody imagined by Miranda.
MORRIS REVISED.DOC
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HOW STREAMING AUDIO AND VIDEO
CHANGE THE PLAYING FIELD FOR
COPYRIGHT CLAIMS
Melissa L. Morris*
INTRODUCTION
From reel-to-reel tape recorders to recordable compact discs
(CDs), and from BetaMax tapes to writeable DVDs,
technologically-savvy customers have always clamored for the
newest technologies to record their favorite music and television
1
shows for personal use. The omnipresence of the Internet has
provided users and entrepreneurs with an exciting yet sometimes
confusing forum through which this accumulation of data can
subject parties to liability for copyright infringement.2
As digital music and videos have become smaller and easier
* J.D. Candidate, Brooklyn Law School, June 2010; B.A., Psychology
and Italian, University of Texas, 2005. I would like to thank Joseph Cizmar,
Allison Romosarek, and my parents, brother, grandparents, aunts, uncles,
and cousins for all their support over the years. Without you all, I would not
be where I am today and I cannot thank you all enough. Additionally, I
would like to thank Vicky Lee for her invaluable help in the editing process.
1
See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417,
423 (1984) (finding that owners of BetaMax Video Recorders engaged in
widespread television recording).
2
See Katie Allen, Survey Finds Pirate Downloads at All-Time High and
Set to Rise, GUARDIAN, July 30, 2007, http://www.guardian.co.uk/business/
2007/jul/30/newmedia.musicnews; see also W. David Gardner, Top
Cyberspace Lawyer Challenges RIAA’s Music-Sharing Lawsuits,
INFORMATION WEEK, Nov. 18, 2008, http://www.informationweek.com/
story/showArticle.jhtml?articleID=212100538.
419
MORRIS REVISED.DOC
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420
to transfer, illegal downloading through peer-to-peer services3
has steadily increased.4 In response to this trend, music and
video copyright holders have utilized new and existing
technology in an effort to combat widespread copyright
infringement.5 One of the most promising technologies is the use
of digital streaming.6 Through digital streaming, copyright
owners can control access to their copyrighted material by
deciding when and how the consumer accesses the audio and
video content. Record companies have jumped at the chance to
utilize such services as Pandora7 and Lala8 to allow users to
“test” music before they buy it.9 Similarly, television
companies, even non-broadcast television companies, have also
utilized free, streaming services on their websites in order to
provide users an avenue through which to see television shows
in a controlled environment—often one laden with
3
Peer-to-peer (P2P) file sharing is a system whereby one user directly
shares his or her files with another user, without the use of an intermediary.
What is P2P File Sharing?, http://www.tech-faq.com/p2p-peer-to-peer-filesharing.shtml (last visited Oct. 3, 2009). Popular P2P systems formerly
included “big names” such as, KaZaA, Morpheus, Grokster, and Napster.
4
See Patrick Foster, Young People Ignoring Attempts to Combat Illegal
Music Downloading, TIMES ONLINE (London), Aug. 10, 2009,
http://technology.timesonline.co.uk/tol/news/tech_and_web/the_web/article67
89409.ece.
5
See generally John Borland, Sony CD Protection Sparks Security
Concerns, CNET, Nov. 17, 2005, http://news.cnet.com/Sony-CD-protectionsparks-security-concerns/2100-7355_3-5926657.html
(using
CD
copy
protection to prevent users from copying their CDs onto their computers);
Peter Cohen, iTunes Store Goes DRM-Free, MACWORLD, Jan. 6, 2009 (using
Digital Rights Management (DRM) as a way to prevent iTunes and Amazon
users from playing—and thus sharing—songs on more than five computers).
6
For a discussion on streaming, see text accompanying notes 58–59.
7
About Pandora, http://www.pandora.com/corporate (last visited Oct. 3,
2009).
8
Lala, http://www.lala.com (last visited Oct. 3, 2009).
9
See, e.g., Anthony Ha, Internet Radio Reaches Deal with Record
Industry, Pandora Saved, DIGITALBEAT, July 7, 2009, http://digital.venture
beat.com/2009/07/07/internet-radio-reaches-deal-with-record-industry-pandora
-saved/.
MORRIS REVISED.DOC
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AUDIO AND VIDEO COPYRIGHT CLAIMS
421
advertisements—before the shows come out on DVD.10
However, although streaming music and video are cheap and
pervasive, many consumers still want to “own” copyrighted
materials.11 Record companies and television studios have been
so successful at shutting down many popular free peer-to-peer
services that consumers are using streaming feeds to obtain
copies of copyrighted works at no cost.12 As a result, a host of
programs have developed to allow a consumer to download
streaming audio or visual works onto their computer for
permanent use.13
This Note examines the various copyright implications for
individuals who use programs to download streaming audio and
video. Part I details the creation and development of the Internet
and discusses how the music industry and its consumers have
utilized technology to make music more accessible. Part II
explains the copyright landscape in which both holders and
potential infringers currently find themselves. This section
outlines the rights of copyright holders and how they are most
commonly protected and licensed. Part III surveys the potential
liability for the developers of programs that allow users to
download streaming audio and video. This section looks at
previous litigation and examines potential liabilities in light of
the unique developmental characteristics of the programs.
Lastly, Part IV focuses on the potential liabilities of the end user
of a program that allows the user to download streaming audio
or video. This section analyzes prior litigation and examines
whether a “fair use” argument justifies streaming audio and
video. Ultimately, I propose that through careful crafting,
software developers who create software that allows users to
10
See generally Louis Hau, Hulu’s Here, FORBES, Oct. 29, 2007,
http://www.forbes.com/2007/10/28/hulu-online-video-biz-media-cx_lh_1029
bizhulu.html (stating that several television companies have gotten together to
put much of their content on a single website); see also, e.g., NBC,
www.nbc.com (last visited Oct. 3, 2009).
11
See generally Roy Furchgott, Free Music Downloads Without the
Legal Peril, N.Y. TIMES, Sept. 3, 2008 at C6.
12
Id.
13
Id.
MORRIS REVISED.DOC
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422
download streaming audio and video can avoid both direct
liability and secondary liability for the infringement of their
users. However, software users will continue to be liable for
their direct infringement claims and will find themselves unable
to escape liability by claiming they were using the music legally
within the confines of copyright law.
I. THE INTERNET AND MUSIC: THEN AND NOW
Since its shadowy beginnings, the Internet has long been a
14
mysterious place for the common user. The Internet began in
1969 as a project started by the U.S. Department of Defense.15
The Advanced Research Projects Agency Network (ARPANET)
was created to keep military facilities in metropolitan areas
operational and in communication with each other in the event
16
of a nuclear attack. Over the next ten years, researchers at
universities across the country devoted significant time and
resources to developing an operational system through the use of
radio waves, telephone lines, satellite communications, and
Ethernet.17 From this work was born the Internet, a synthesis of
ARPANET and the National Science Foundation’s network
(NSFNET).18
Early public Internet Providers, known as online electronic
information services, provided modem owners with the means to
communicate with each other through a small group of computer
servers.19 Through this system, users sent digital information
14
Mark Ward, How Well Can You Use the Web?, BBC NEWS, Mar. 29,
2004, http://news.bbc.co.uk/2/hi/technology/3578149.stm.
15
AL KOHN & BOB KOHN, KOHN ON MUSIC LICENSING 1263 (3d ed.
2002).
16
Id. The ARPANET was in operation until 1989 and served as a
primary testing site for many networking ideas, such as email and instant
messaging. J.R. OKIN, THE INTERNET REVOLUTION: THE NOT-FOR-DUMMIES
GUIDE TO THE HISTORY, TECHNOLOGY, AND USE OF THE INTERNET 53
(2005).
17
KOHN & KOHN, supra note 15, at 1264.
18
Id.
19
Id. at 1261–62. Examples of early electronic information services are
America Online (AOL), Prodigy, Microsoft Networks (MSN), and
MORRIS REVISED.DOC
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423
(encoded as bytes in binary form) to a modem, which then
converted it to an analog format that could be transmitted to
another modem on the system operator’s server that reversed the
process.20 By dialing the system operator’s specific Internet
Protocol (IP) address, users could connect with each other, send
emails, and communicate in real-time.21 In a process known as
uploading, a user could send any type of computer file to the
server of the system operator, where it would immediately be
available to another user for download, or copying, onto the
second user’s personal computer.22
The Internet, as it exists today, is a product of improvements
to both the ARPANET system and the early electronic
information services.23 In 1989, a computer scientist24 working at
CERN (the European Organization for Nuclear Research) in
Switzerland developed a new system that used hypertext to make
information-sharing easier.25 This system came to be known as
the World Wide Web and it enabled users to access documents
on other computers by pointing and clicking on certain words or
phrases of text, called hyperlinks.26 In 1993, computer
CompuServe. Id.
20
Id.
21
Id. “Real-time” is a term describing communication that is
instantaneous. What is Real Time?, http://www.webopedia.com/TERM/r/
real_time.html (last visited Dec. 3, 2008). Under such an operating system,
the user will input data and the system will respond immediately. Id.
22
23
See id. at 1261–68.
24
Tim Berners-Lee is a British computer scientist who completed the
first successful communication between an http client and a server. OKIN,
supra note 16, at 109. He is currently the director of the World Wide Web
Consortium, a company that oversees the continual development of the
Internet, and is involved in a myriad of other projects. Tim Berners-Lee,
http://www.w3.org/People/Berners-Lee/ (last visited Nov. 30, 2008). In
2007, he was named Telegraph Magazine’s greatest living genius, along with
Albert Hoffman, the creator of LSD. Top 100 Living Geniuses, TELEGRAPH,
Oct. 30, 2007, http://www.telegraph.co.uk/news/uknews/1567544/Top-100living-geniuses.html.
25
OKIN, supra note 16, at 100–01.
26
KOHN & KOHN, supra note 15, at 1264–65.
MORRIS REVISED.DOC
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424
programmers at the University of Illinois developed the first
“browser” software, a graphical user interface that navigated the
World Wide Web.27 This program was known as Mosaic, and
later became commercially available to the public as early
versions of Netscape Navigator and Microsoft Internet
Explorer.28
The creation of Mosaic, and others like it,29 have made the
Internet accessible beyond its intended use of communication
between researchers and military bases.30 Each website is now
the functional equivalent of an early America Online (AOL) or
Prodigy, enabling users to get more information from a wider
number of sources.31 This has also meant astronomical
developments in electronic commerce in the form of
advertisements, retail, electronic publishing, financial services,
music, and videos.32 The Internet has become more pervasive
than ever before, and with this has come increased digital
transmission of music.33
The earliest digital music files were large compared to
today’s standards, with the average three-and-one-half minute
song being approximately forty megabytes in size.34 However, in
27
OKIN, supra note 16, at 110.
29
Today, there are a number of Internet web browsers, such as
Microsoft’s Internet Explorer (used by 39.6% of users), Mozilla’s Firefox
(46.6%), Google’s Chrome (7.1%), Apple’s Safari (3.6%), and Opera
(2.2%). W3Schools, Browser Statistics, http://www.w3schools.com/
browsers/browsers_stats.asp (last visited Oct. 19, 2009).
30
31
Id. at 1266.
32
Id.
33
In its 2009 report, the International Federation of the Phonographic
Industry (IFPI) estimates that over one trillion songs are downloaded
worldwide. INT’L FED. OF THE PHONOGRAPHIC INDUS., DIGITAL MUSIC
REPORT 2009 (2009). The IFPI similarly estimates that over 95% of these
downloads are illegal. Id. at 3. However, other studies have shown that, at
least in the United Kingdom, the rate of legal downloads is almost equal to
that of illegal downloads. Marc Beja, New Study Shows Decrease in Illegal
Music Downloading, CHRONICLE OF HIGHER EDUC., July 13, 2009.
34
KOHN & KOHN, supra note 15, at 1269. Today, that same three-and28
MORRIS REVISED.DOC
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425
1996 a group of college students began to develop computer
technology that took the large files from a CD and converted
them into smaller, more accessible MP3 files.35 This new
technology cut the time necessary to send and download a file
using a fifty-six kilobyte modem36 from three hours to less than
one hour.37 Software developers and entrepreneurs quickly
created programs and websites to accommodate a growing
demand for MP3 software and files.38 As this software became
more widely distributed, the number of MP3s available
worldwide grew, and most popular songs became available
through servers, websites, and other programs.39 Users also
began to use email programs and FTP40 servers to share music
one-half minute song is a little over three megabytes, or about ninety percent
smaller than its earlier counterpart. Id.
35
Id. at 1268. MP3 is short for Motion Pictures Experts Group 1, Audio
Layer 3. Id. at 1269. It was created by the Motion Pictures Experts Group
and the Fraunhofer-Gesellschaft Group as a way to compress audio and visual
files. Id. The idea is that an MP3 file represents a filtered version of the
larger file, with all of the inaudible binary information removed. Id. This
results in a file size ninety percent smaller than the original. Id.
36
A fifty-six kilobyte modem is a modem that can send information at a
maximum of 57,600 bits per second (bps). What is modem? http://www.
webopedia.com/TERM/m/modem.html (last visited Dec. 3, 2008). These
modems, and those with slower speeds, were originally the only modems
through which an early Internet (AOL) user could access the operating
system. KOHN & KOHN, supra note 15, at 1269.
37
KOHN & KOHN, supra note 15, at 1269–70. Now that most computers
access the Internet using faster connections, the download time for an MP3
can be just a few minutes. I. Fred Koenisgberg et al., Music, the Internet,
and the Music Industry, in 1 MUSIC ON THE INTERNET: UNDERSTANDING THE
NEW RIGHTS & SOLVING NEW PROBLEMS 11, 12–13 (2001).
38
39
Id. at 1270–71.
40
FTP is short for File Transfer Protocol. DOUGLAS COMER,
INTERNETWORKING WITH TCP/IP: PRINCIPLES, PROTOCOLS, AND
ARCHITECTURES 499 (4th ed. 2005). Through FTP, a user could turn his
computer into a server for files, instead of uploading them onto a third
party’s server. Id. at 500–02. FTP servers can be dangerous, because
although there are some protections, such as requiring passwords to access
the server, a user running an FTP server that allows others to contribute files
cannot control what files others put onto the server, including viruses. See id.
MORRIS REVISED.DOC
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4/26/2010 9:59 PM
with each other for no more than the cost of their internet
service.41
As a way to save time and money, college students began
developing programs that would search files available on
different university networks and link a user to the file for
download.42 The larger public demand for MP3s led to the
creation of Napster, one of the earliest and arguably most
pervasive programs to facilitate file sharing.43 The original
version44 of Napster allowed users to share the MP3s available
on their hard drives (regardless of how they were obtained) with
users on other computers.45 Napster’s MusicShare software
allowed each user to access an index of the files shared by all
users connected at any given time, which could then be used to
search for a specific title, artist, or keyword encoded in any of
the original file names.46 The program would then connect to a
server and pull up a list of matching results found on every
other user’s computer, allowing a user to select a file to
download.47 Users could use the results to connect to the
computer of the file’s owner and download the file from his or
her computer without paying a penny to either Napster or the
copyright owner.48
It was not long before a group of nine record labels sued
at 500–04.
41
42
Id. at 1270–71.
43
Id.
44
This paragraph describes the features of the original Napster program.
Napster was forced to drastically change its business model after the Ninth
Circuit issued an injunction against the company in A&M Records, Inc. v.
Napster, 239 F.3d 1004 (9th Cir. 2001). The current version of Napster
functions more as a subscription service, where users pay a fee per month for
unlimited access to streaming music and can download selected songs for an
additional fee. See Napster, www.napster.com (last visited Dec. 2, 2008).
45
PAUL GOLDSTEIN, COPYRIGHT’S HIGHWAY: FROM GUTENBERG TO THE
CELESTIAL JUKEBOX 165–66 (Stanford Univ. Press 2003) (1995).
46
Id.
47
Id.
48
KOHN & KOHN, supra note 15, at 1272. For more on copyright
ownership see infra, Part II.
MORRIS REVISED.DOC
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427
Napster for copyright infringement,49 and after an injunction shut
Napster down, a host of similar programs were developed to
replace it.50 Programs such as Grokster and Morpheus subjected
users and their creators to liability for copyright infringement
claims from large companies, such as Elektra Records51 and
Capitol Records,52 and from even some small, independent
recording labels.53
The large potential for, and incidence of, copyright
infringement has led many audio and video copyright holders to
utilize streaming technology in an effort to allow users to enjoy
the content in a protected environment and to prevent them from
obtaining exact digital copies of their works.54 Companies such
as NBC, ABC, and Viacom have turned to streaming and have
made much of their television content available without cost on
their respective websites.55 In fact, large television companies
49
A&M Records, Inc., Geffen Records, Inc., Interscope Records, Sony
Music Entertainment, Inc., MCA Records, Inc., Atlantic Recording Corp.,
Island Records, Inc., Motown Record Co., and Capitol Records, Inc. brought
suit against Napster. Napster, 239 F.3d 1004.
50
Almost immediately after Napster shut down, Grokster and Morpheus
were created in its stead. Metro-Goldwyn-Mayer Studios, Inc. v. Grokster,
Ltd., 545 U.S. 913, 923–24 (2005). Later, other programs such as KaZaA
and LimeWire were also developed to help fill the demand for MP3s. Kazaa
3.0 vs. LimeWire 4.8.1, http://www.cdrinfo.com/Sections/Reviews/Specific.
aspx?ArticleId=15064 (last visited Nov. 13, 2009).
51
See Elektra Entm’t Group, Inc. v. Santangelo, No. 06-CV-11520,
2008 WL 4452393 (S.D.N.Y. Oct. 1, 2008).
52
See Capitol Records, Inc. v. Foster, No. 04-CV-1569, 2007 WL
1223826 (W.D. Okla. Apr. 23, 2007).
53
See e.g., Nicolas Jondet, French Independent Music Labels Sue
Morpheus Azureus, FRENCHLAW.NET, June 16, 2007, http://french-law.
net/french-independent-music-labels-sue-morpheus-azureus.html;
Yahoo!
Settles Copyright Infringement Suit with EMI Music, BUSINESS WIRE, Oct. 2,
2003, http://www.allbusiness.com/media-telecommunications/movies-soundrecording/5763733-1.html.
54
Real Networks, Inc. v. Streambox, Inc., No. 2:99-CV-02070, 2000
WL 127311, at *2 (W.D. Wash. Jan. 18, 2000).
55
NBC’s list of streaming television shows are listed on its website and
are free of cost. NBC, Video Library, http://www.nbc.com/Video/library/
(last visited Sept. 6, 2009). Similarly, ABC also has streaming shows
MORRIS REVISED.DOC
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4/26/2010 9:59 PM
have even begun to team up with each other to create streaming
media conglomerates, like Hulu,56 in an effort to guarantee that
users are watching the television companies’ versions of their
copyrighted works.57
Streaming, an alternative to downloading, is accomplished by
subdividing a file (usually an audio or video file) into small
packets of information that each travel to a user’s computer.58
These small packets travel through different pathways and are
placed in a temporary holding place, or “buffer,” which allows
the user to listen or watch the file while his or her computer
continues to retrieve packets of information.59 This differs from
downloading, in that once a packet has been heard or viewed, it
is erased from the buffer and replaced with a new packet of
information.60 By the end of the file, there is nothing left in the
buffer and all traces of the file have been removed from the
computer.61 Through streaming, companies can control what
content is available, whether consumers pay a fee to access the
content, and the amount of advertising a consumer sees.62
Even with the proliferation of streaming and encryption
technology, computer programmers have worked to develop
programs that can be used to circumvent encryption protections
in order to help users retain personal copies of copyrighted
material.63 A simple Google search for “download streaming
available on its website. ABC, Shows, http://abc.go.com/watch (last visited
Sept. 6, 2009). Lastly, most of Viacom’s various television stations—such as
Comedy Central and MTV—also stream full episodes of popular televisions
shows on their websites. See Comedy Central, Exclusive Videos and Show
Clips, http://www.comedycentral.com/funny_videos/index.jhtml (last visited
Sept. 6, 2009); MTV, Free Music, Show and Movie Videos,
http://www.mtv.com/videos/home.jhtml (last visited Sept. 6, 2009).
56
Hulu, http://www.hulu.com (last visited Nov. 13, 2009).
57
Hau, supra note 10.
58
W. Jonathan Cardi, Über-Middleman: Reshaping the Broken
Landscape of Music Copyright, 92 IOWA L. REV. 835, 860–61 (2007).
59
Id. at 861.
60
See id.
61
Id.
62
See KOHN & KOHN, supra note 15, at 1258.
63
See Furchgott, supra note 11.
MORRIS REVISED.DOC
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429
audio” yields over eighteen million results64 and the results for
“download streaming video” were almost twice as large.65 Free
programs—like OrbitDownloader, KeepVid, and Audacity—and
paid programs—like WM Capture—allow users to permanently
record audio and/or video content while it is simultaneously
being streamed to their computers.66 For copyright holders, this
means that despite their best efforts to protect their works from
infringement, any audio or video stream is permanently
available, at the click of a button, to anyone with enough free
time to learn to use the program.67 This accessibility could result
in personal ownership of not only television shows with limited
broadcast distribution, but also web content never meant for
widespread release.68
64
A
search
was
conducted
using
www.google.com
for
“download+streaming+audio” on Oct. 26, 2009 and retrieved over
18,400,000 results.
65
A
search
was
conducted
using
www.google.com
for
“download+streaming+video” on Oct. 26, 2009 and retrieved over
29,400,000 results.
66
See, e.g., Audacity, http://audacity.sourceforge.net/ (last visited Oct.
24, 2009); KeepVid, http://keepvid.com/ (last visited Oct. 24, 2009); Orbit
Downloader 2.0, http://www.orbitdownloader.com/ (last visited Oct. 24,
2009); WM Capture, http://www.wmrecorder.com/wm_capture.php (last
67
68
This could include features like “The Office” webisodes, currently
available through the NBC website, at http://www.nbc.com/The_Office/
episodes/. However, much of this content has not made it to DVD yet, likely
because NBC has been hesitant to give the writers money for these shorts.
Liz Gannes, Strike Really Over: The Office Webisodes Come Back,
NEWTEEVEE, July 8, 2008, http://newteevee.com/2008/07/08/strike-reallyover-the-office-webisodes-come-back/.
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II. “MODERN”69 COPYRIGHT LAW
Every song embodies two copyrightable works: a musical
work and a sound recording.70 The “musical work” aspect of a
song is the musical score and any written words.71 The
songwriter is generally the copyright holder of the musical
work, and he usually exercises his rights by assigning them to a
music publisher72 or other group that issues such licenses.73 The
“sound recording” aspect of a song is embodied in a particular
artist’s version of that song.74 So, when Don Henley wrote75 and
recorded “The Boys of Summer” in 1984,76 it embodied both a
musical work and sound recording.77 The Ataris’s cover of “The
69
Many commentators have expressed distaste for modern copyright law
as an outdated and outmoded regulatory regime. See Cardi, supra note 58, at
837; R. Anthony Reese, Copyright and Internet Music Transmissions:
Existing Law, Major Controversies, Possible Solutions, 55 U. MIAMI L. REV.
237, 238–40 (2001).
70
Reese, supra note 69, at 240.
71
Id.
72
Music publishers historically functioned to connect song composers
with artists, to secure recording deals, and to promote their writers’ songs.
Cardi, supra note 58, at 840. However, modern music publishers are the
primary contact when one is looking to obtain various licenses, including
mechanical licenses among others. Id. at 841.
73
Id. at 841. The Harry Fox agency, which was established in 1927, is
“the foremost mechanical licensing, collection, and distribution agency for
U.S. music publishers.” Harry Fox Agency, About HFA, http://www.harry
fox.com/public/HFAHome.jsp (last visited Nov. 13, 2009). It acts as the
licensing arm for the National Music Publishers Association and wields great
power in the musical industry. See Cardi, supra note 58, at 841; Reese,
supra note 69, at 243 n.18.
74
75
“Boys of Summer” was actually co-written by Don Henley and Mike
Campbell, but in the name of simplicity, I will treat the song as if it were
written by Henley alone. DON HENLEY, The Boys of Summer, on BUILDING
THE PERFECT BEAST (Geffen Records 1984).
76
“The Boys of Summer” can be found on Don Henley’s 1984 album
entitled Building the Perfect Beast. HENLEY, supra note 75.
77
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Boys of Summer” in 2003,78 then, represented simply a new
sound recording of Henley’s original musical work.79 This
important distinction lays the groundwork for the exercise of
each copyright holder’s rights in relation to the work.80
The Copyright Act,81 and its subsequent amendments,82 gives
owners of a copyrighted work several general rights.83 These
rights allow an owner to protect the work from theft, to protect
from changes in technology, and to collect royalties on any uses
of the work.84 The owner of a copyright enjoys a variety of
rights, most importantly: to reproduce the work in
phonorecords, to distribute copies of the work, to perform the
works publicly, and to perform the work by means of digital
85
audio transmission.
78
“The Boys of Summer” can be found on The Ataris’s 2003 album
entitled So Long, Astoria. THE ATARIS, The Boys of Summer, on SO LONG,
ASTORIA (Sony 2003).
79
This is because instead of making a new and original musical work,
The Ataris used the musical score and words of Henley’s version and created
their own distinct sound recording. See generally Reese, supra note 69, at
240–42.
80
The same distinction holds true for television shows or movies. When
a writer pens a screenplay or a television show, he—or his employer—owns
the copyright to the script. STEPHEN BREIMER, THE SCREENWRITER’S LEGAL
GUIDE 21 (Allworth Press, 3d ed. 2004). The writer can then assign his rights
under copyright law to various people or companies. Id. at 22. For example,
the writer of a screenplay can assign his right of adaptation to another
screenwriter who wants to make a sequel to the first movie. Id. at 21.
Additionally, he could assign his performance right to a motion picture
company in order to make a movie from the original screenplay. Id. at 21–
22. The same writer would also be able to assign the right to public display
of the work to the actors and actresses in the production, as they will be in
the individual frames of the work. Id. at 22.
81
17 U.S.C.A. §§ 101–1332 (West 2009).
82
The Copyright Act was originally enacted in 1790 to protect books,
maps, and charts. U.S. Copyright Office, Information Circular, http://www.
copyright.gov/circs/circ1a.html (last visited Nov. 13, 2009). The Act has
been overhauled and amended several times throughout history, most notably
in 1831, 1909, and 1978. Id.
83
See generally 17 U.S.C.A. §§ 101–1332 (West 2009).
84
GOLDSTEIN, supra note 45, at 4, 26.
85
17 U.S.C. § 106(1), (3)–(4), (6) (2006). The right to perform the
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First, the right to reproduce gives a copyright owner the
ability to produce and reproduce his original work.86 Thus in the
case of Don Henley’s “The Boys of Summer,” Henley has the
exclusive ability to reproduce his musical work and sound
recording.87 Before the Ataris recorded their 2003 version, they
had to obtain a mechanical license from Henley.88 Such a license
permits the group to reproduce Henley’s original musical work
and to create a new sound recording of the piece, of which they
were the sole copyright owners.89 Such mechanical licenses are
compulsory, meaning that the fees to obtain licenses are fixed.90
Once a copyright holder has authorized distribution, a user may
use the song without obtaining permission from the holder,
provided that the user puts the copyright holder on notice of his
or her use and pays the statutory royalty.91 Conversely, a
copyright holder, or his or her assignee, has complete discretion
in deciding whether to authorize reproduction of a sound
recording and in deciding how much to charge for the license,
given that it is not subject to compulsory licensing.92
Second, the right to distribute copies of a work allows a
copyright owner to profit from, and to control, the distribution
of his or her original work.93 A copyright owner can issue a
distribution license to authorize someone else to distribute the
copyrighted work on his or her behalf.94 Generally, a copyright
owner assigns ownership of his or her copyright to a music
work publicly via digital transmission was added in 1995 through the Digital
Performance Right in Sound Recordings Act of 1995. Cardi, supra note 58,
at 849–50.
86
Id. at 839.
87
See 17 U.S.C. § 106(1).
88
Most likely, they had to obtain the license from the Harry Fox
Agency, or another group, to which he assigned his right. See supra notes
72–73.
89
Cardi, supra note 58, at 839.
90
The fee is currently fixed at 9.1 cents per song, or 1.75 cents for each
minute of playing time, whichever is larger. 37 C.F.R. § 255.3 (2009).
91
92
Id. at 243.
93
See Cardi, supra note 58, at 839.
94
Id. at 840.
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publisher who then contracts with a distributor for distribution of
the work.95 The right of distribution is similarly subject to a
compulsory licensing scheme.96 This means that after a user has
authorized distribution, a potential distributor need only pay the
statutory royalty97 and notify the owner before exercising
unfettered access.98
Third, copyright owners are also given the exclusive right to
perform the work publicly.99 For the copyright holder of a
musical work or sound recording, this allows him or her to
authorize or license another to perform the work publicly in a
variety of contexts.100 This not only includes the ability to
perform the song live in concert, but also the ability to play a
recording of it in public, perhaps at a restaurant or bar.101 Unlike
the rights of reproduction and distribution, performance rights
are not subject to compulsory licenses.102 This means that for
someone interested in performing a musical work or sound
recording publicly, he or she cannot simply pay a royalty and
put the owner on notice.103 In fact, the copyright holder decides
what fee to charge (if any) and whether to even grant a
license.104 Generally, performing-rights organizations (PROs)105
control the distribution of performance licenses.106 These PROs
95
Id.
Id. at 843.
97
This royalty is also determined by 37 C.F.R. § 255.3.
98
99
17 U.S.C. § 106(4) (2006).
100
See KOHN & KOHN, supra note 15, at 908.
101
Id.
102
See Cardi, supra note 58, at 843.
103
104
105
PROs are non-profit organizations (or very low profit companies)
composed of copyright holders. KOHN & KOHN, supra note 15, at 905–07.
These groups—the largest of which are the American Society of Composers,
Authors and Publishers (ASCAP), Broadcast Music Incorporated (BMI) and
Society of European State Authors and Composers (SESAC)—formed to
protect their members’ public performance rights from rampant infringement.
Id.
106
96
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have been avid enforcers of copyright infringement on behalf of
the copyright holders they represent.107 Through the years, these
organizations have shown up at small restaurants and even at
Boy Scout campouts to enforce the holder’s right to public
performance.108
For a potential licensee looking to obtain a public
performance license for a musical work from a PRO, he or she
will often be given only one option: purchasing a blanket
license.109 A blanket license gives the licensee the entitlement to
publicly perform any sound recording assigned to the PRO.110
With their large market shares,111 PROs provide radio stations
with easy access to licenses allowing them to play a wide variety
of music.112 However, this arrangement can cost as much as two
percent of a station’s gross receipts.113 For smaller businesses,
many PROs offer annual flat fees, which can also be costly.114
Lastly, copyright owners are given the right to perform the
work digitally.115 This relatively new right arose out of concerns
from the music industry about the ever-increasing ability of
radio stations and other users to perform copyrighted music over
the Internet without paying royalties to the copyright owner.116
Congress responded by passing the Digital Performance Right in
Sound Recordings Act of 1995 (DPRSRA), which gave
copyright owners the right to perform their works digitally.117
Digital performance rights give the copyright holder the
107
Id. at 844.
Noah W. Bailey, ASCAP Can Cripple Small Venues, DALLAS
OBSERVER, Jan. 9, 2008.
109
110
Id.
111
ASCAP represents fifty-four percent of the market, BMI represents
forty-three percent of the market, and SESAC represents an additional three
percent. Id. at 843–44.
112
Id. at 849.
113
Id.
114
115
17 U.S.C. § 106(6) (2006).
116
117
108
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exclusive right “to perform [or authorize performance of] the
copyrighted work publicly by means of a digital audio
transmission.”118 Unlike reproduction and distribution licensing,
this right is not subject to compulsory licensing regulations.119
Some publishing companies—including the Harry Fox
Agency120—have interpreted this to mean that streaming services
are now subject to licensing requirements and therefore have
begun to charge large royalties.121 In fact, the Harry Fox Agency
has taken the position that royalties should be paid for each
packet of information that is retained in the buffer during a
streaming audio or video transmission.122
III. LIABILITY OF SOFTWARE COMPANIES
A. Direct Liability
Under the Copyright Act,123 copyright infringement occurs if:
(1) the work is original, sufficiently creative, and within the
subject matter of copyright;124 (2) the plaintiff is the registered
owner of a valid copyright;125 and (3) the defendant has copied
118
17 U.S.C. § 106(6).
See 17 U.S.C.A. §§ 114–15 (West 2009).
120
For more information on the Harry Fox Agency, see supra note 73.
121
122
Harry Fox Agency, Licensee Digital Licensing, http://www.harryfox.
com/public/licenseeServicesDigital.jsp (last visited Nov. 13, 2009). The
Harry Fox Agency currently distributes mechanical licenses for various
digital formats, including permanent digital downloads, limited use
downloads (i.e. those that can be played 10 times and then no longer work),
and streaming music. Id.
123
17 U.S.C.A. §§ 101–1332 (West 2009).
124
17 U.S.C. § 102 dictates which works are copyrightable—in that
“original work[s] of authorship, fixed in a tangible form, [that] come within
the subject matter of copyright law” are copyrightable. 17 U.S.C. § 102
(2006). There must be some form of creativity on the part of the author,
although the threshold is low and the copyrighted work need not be novel.
Feist Publ’ns v. Rural Tel. Serv. Co., 499 U.S. 340, 345 (1991).
125
Feist, 499 U.S. at 361.
119
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constituent elements of the work that are copyrightable.126 The
third element, copying, is established if the owner can show:
(1) direct copying of the work; (2) access to the copyrighted
work and substantial similarity between the plaintiff’s work and
the defendant’s work; or (3) striking similarity of the works.127
However, programs and devices that allow users to infringe on
copyrighted works cannot be held directly liable under a theory
of copyright infringement for those infringing activities.128
In 1999, Congress passed the Digital Millennium Copyright
Act (DMCA)129 to combat the growing problem of copyright
infringement and the growing number of computer programs
facilitating this infringement.130 The DMCA prohibits persons
from “circumvent[ing] a technological measure that effectively
controls access to a work . . . .”131 The statute was initially used
to prevent modifications to Sony PlayStations that allowed users
to modify the rules of a game and to play unauthorized copies of
video games.132 It has also been used to combat a decryption
program that allowed users to circumvent encryption protection
on DVDs, thereby enabling them to copy the content of their
DVDs onto their computer hard drive.133
The DMCA does not hold such “persons” liable for their
circumvention of technological measures under a traditional
copyright infringement theory.134 Instead, a “person” may be
126
Segrets, Inc. v. Gillman Knitwear Co., 207 F.3d 56 (1st Cir. 2000);
T.B. Harms Co. v. Eliscu, 339 F.2d 823 (2d Cir. 1964). These rights are
granted to him under 17 U.S.C. § 106.
127
Towler v. Sayles, 76 F.3d 579 (4th Cir. 1996); Robert R. Jones
Assoc. v. Nino Homes, 858 F.2d 274 (6th Cir. 1988).
128
Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913,
930 (2005); Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S.
417, 434 (1984).
129
17 U.S.C. § 1201 (2008).
130
131
17 U.S.C. §1201(a) (2008).
132
Sony Computer Entm’t Am. Inc. v. Gamemasters, 87 F. Supp. 2d
976, 987–88 (N.D. Cal. 1999).
133
Universal City Studios, Inc. v. Reimerdes, 82 F. Supp. 2d 211
(S.D.N.Y. 2000).
134
17 U.S.C. § 1201(a) (2006).
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found to have violated the statute if they (1) have circumvented
a technological measure (2) that effectively worked to control
access to (3) a work protected under the Copyright Act.135 A
“person” circumvents a technological measure when he works to
“descramble a scrambled work, to decrypt an encrypted work,
or otherwise avoid, bypass, remove, deactivate, or impair a
technological measure, without the authority of the copyright
owner.”136 Further, a technological measure “‘effectively
controls access to a work’ if the measure, in the ordinary course
of its operation, requires the application of information, or a
process or a treatment, with the authority of the copyright
owner, to gain access to the work.”137
For programs that are designed to allow their users to obtain
copies of streaming audio or video, liability under the DMCA
will rest with how the program and its advertising are
138
139
designed. Real Networks, Inc. v. Streambox, Inc. was one of
the first cases involving liability under the DMCA. Real
Networks concerned an early program that allowed users to
directly download streaming audio or video from Real Player.140
That program was named StreamboxVCR,141 and it worked by
tapping into the information stream and circumventing specific
encryption measures instituted by Real Player to protect
copyrighted material.142 More specifically, StreamboxVCR
“spoke” to Real Player’s encryption mechanism, thereby
allowing its users to download previously protected streaming
135
Id.
Id. § 1201(a)(3)(A).
137
Id. § 1201(a)(3)(B).
138
See, e.g., Real Networks, Inc. v. Streambox, Inc., No. 99-CV-2070,
2000 WL 127311 (W.D. Wash. Jan. 18, 2000).
139
Id.
140
Real Player is a media player developed by Real Networks, Inc. and
introduced in 1995 to play a variety of audio and video files on multiple
operating systems. Real Neworks, About Us, http://realnetworks.com/aboutus/index.aspx (last visited Oct. 25, 2009).
141
StreamboxVCR was a program created by Streambox, Inc. to allow
its users to circumvent protective features of Real Player and to download
videos from a streaming feed. Real Networks, 2000 WL 127311 at *4.
142
Id. at *4.
136
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files.143 Real Networks, Inc. maintained that this feature of
StreamboxVCR subjected the program to liability under the
DMCA.144 The Western District of Washington agreed and found
that these features circumvented technological measures of Real
Networks, Inc. that were designed to control access to
copyrighted works, thereby subjecting Streambox, Inc. to
liability.145
Since Real Networks, programs have developed to avoid the
problems faced by StreamboxVCR.146 Instead of piggybacking
onto or circumventing encrypted streaming audio or video, many
new programs operate differently by acting like a tape recorder
or VCR.147 For example, programs like WM Capture148 and
149
CamStudio allow users to record whatever is playing over the
speakers or on the screen at any particular moment.150 While
seemingly more primitive, these programs often allow users to
modify the settings of the program to maximize the quality of
the finished download.151 Some audio programs, such as
Audacity,152 allow a user to control the amount of outside noise
recorded and the amount of noise that is recorded from
computer-generated sounds, thus easily minimizing external
noises and allowing the program to record only internal noises.153
Further, video programs—like WM Capture—go as far as to
actually allow the user to select the exact window they wish to
record, thus avoiding a border of non-video content.154
143
Id.
Id.
145
Id. at *9.
146
147
See Audacity, supra note 66; CamStudio Suite, http://camstudio.org/
(last visited Nov. 13, 2009); WM Capture, supra note 66.
148
WM Capture, supra note 66.
149
CamStudio Suite, supra note 147.
150
WM Capture, supra note 66; CamStudio supra note 147.
151
See, e.g., Audacity: Features, http://audacity.sourceforge.net/about/
features (last visited Sept. 30, 2009).
152
Audacity, supra note 66.
153
Id.
154
144
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While courts have not decided issues related to whether the
new generation of programs would be directly liable under the
DMCA, it is unlikely that they will be held liable. Even a broad
reading of the DMCA that is consistent with case law—such as
Real Networks, Inc. v. Streambox, Inc.—indicates that these
programs do not violate the statute because they do not interfere
with the data stream, but rather copy it: an activity not
prohibited by the DMCA as currently written.155
Many copyright holders have attempted to remedy illegal
downloading of their copyrighted works by making them
available for little or no cost through their own protected
services.156 Consequently, copyright holders have put in place
technological measures that would effectively control access to a
work, such as developing encryption software that prevents a
user from downloading the stream directly from the host site.157
158
The copyright holders do not flout their security measures.
Instead, NBC and other networks offer users some downloadable
content, but require users to stream the larger body of works
that are unavailable for download.159 For this reason, courts will
find that any such copyright holder will have made out the
second and third elements of a claim under the DMCA.160
155
See, e.g., The Complete List of Sites to Stream TV From,
http://www.randomn3ss.com/the-complete-list-of-websites-to-stream-full-tvshows-and-movies-from/ (last visited Sept. 7, 2009).
157
The concept is similar to that of Real Player, given that they
specifically developed a “Copy Switch” that allowed the original copyright
owner to determine whether to allow the user to download the stream or to
simply watch the stream through Real Player. Real Networks, Inc. v.
Streambox, Inc., No. 99-CV-02070, 2000 WL 127311, at *2 (W.D. Wash.
Jan. 18, 2000).
158
See Jacqui Cheng, Hulu Tries HTML Encoding Trick to Protect
Streaming Content, ARS TECHNICA, Apr. 2, 2009, http://arstechnica.com/
media/news/2009/04/hulu-tries-html-encoding-trick-to-protect-streamingcontent.ars.
159
NBC, Frequently Asked Questions, http://www.nbc.com/frequentlyasked-questions/?section=video#video (last visited Nov. 13, 2009).
160
The second and third elements of a DMCA claim are (1) that the
“person” (2) effectively worked to control access (3) to a work protected
156
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However, the copyright holder must still show that the program
acted to circumvent a technological measure.161
As defined by statute, in order to “circumvent a
technological measure,” the program must work to “descramble
a scrambled work, to decrypt an encrypted work, or otherwise
avoid, bypass, remove, deactivate, or impair a technological
measure, without the authority of the copyright owner.”162
Programs with features similar to WM Capture, which allow
users to record what they see on their computer screens, do not
work by descrambling a scrambled work or decrypting an
encrypted work, as did StreamboxVCR.163 Further, they are
specifically crafted not to remove, deactivate, or impair a
technological measure put in place by a copyright holder.164
Thus, a court would turn to whether such programs act to
“avoid, bypass, remove, deactivate, or impair a technological
measure” put in place by the copyright holder.
Given that these programs do not work to remove,
deactivate, or impair any technological measures, courts will
focus solely on whether they act to “avoid” or “bypass” a
technological measure.165 Courts that have reached the issue have
routinely found the technological measures are only “avoided”
or “bypassed” when the allegedly infringing programs act to tell
the technological measures not to function.166 WM Capture does
under the Copyright Act. 17 U.S.C. § 1201(a) (2006). It is clear that
programs such as Audacity and WM Capture function in a way to download
(or “control access”) to copyrighted audio and video (or, “works protected
under the Copyright Act”). See Audacity Features, supra note 151; WM
Capture, supra note 66.
161
17 U.S.C. § 1201(a).
162
Id. § 1201(a)(3)(A).
163
See WM Capture, supra note 66.
164
The makers of Audacity and WM Capture have designed their
programs so that they do not specifically tamper with any encryption
technology or other technological measure put in place by the copyright
holder to protect their work from infringement. See generally Audacity,
supra note 66; WM Capture, supra note 66.
165
See 17 U.S.C. § 1201(a)(3)(A).
166
See, e.g., 321 Studios v. Metro Goldwyn Mayer Studios, Inc., 307 F.
Supp. 2d 1085 (N.D. Cal. 2004).
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not work to tell the technological measures not to function, but
instead works alongside the technological measures to produce a
copy of the work. For this reason, without legislative
intervention, carefully designed programs can likely avoid
liability under the DMCA. In fact, some count on it.167
B. Secondary Liability
Under copyright law, programs and devices that allow users
to infringe on copyrighted works cannot be held directly liable
under a traditional theory of copyright infringement for those
infringing activities.168 Therefore, courts have traditionally found
programs or machines facilitating copyright infringement to be
liable for the actions of their users under a theory of secondary
liability.169 Under a secondary liability theory, programs that
allow users to download streaming audio or video can be held
liable under theories of contributory or inducement liability.170
1. Contributory Liability
Contributory liability occurs when one intentionally induces
or encourages the direct infringement of another.171 Unlike its
counterpart, the Patent Act,172 the Copyright Act does not have a
specific provision to punish contributory infringers.173 In Sony
Corporation of America v. Universal City Studios, Inc., the
167
WM Capture claims on its website to be “100% legal worldwide.”
168
929–30 (2005) (citing Sony Corp. of Am. v. Universal City Studios, Inc.,
464 U.S. 417, 434–86 (1984)).
169
Grokster, 545 U.S. at 930.
170
See id. at 930, 935.
171
Id. at 930 (citing Gershwin Pub. Corp. v. Columbia Artists Mgmt
Inc., 443 F.2d 1159, 1162 (2d Cir. 1971)).
172
The Patent Act provides for a specific cause of action against those
who actively induce infringement of a patent as an infringer himself. 35
U.S.C. § 271 (2006).
173
Sony, 464 U.S. at 435.
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442
Supreme Court found that because there was a close relationship
between copyright and patent law, and because vicarious liability
is found in nearly every area of the law, it was proper for the
Court to “develop” a cause of action for contributory copyright
infringement in absence of a statute.174
In Sony, Universal City Studios, Inc.—representing a
conglomerate of television and movie copyright owners—brought
suit against Sony to enjoin Sony’s sale and distribution of the
BetaMax VTR (“BetaMax”).175 Sony manufactured and
advertised BetaMax as a home recording device.176 An
overwhelming majority of BetaMax owners reported using the
machine to “time-shift,” or to record television programs for
viewing again, or for the first time, at a later date.177 The
Supreme Court held that a manufacturer could be held liable
under a theory of contributory infringement if it was “in a
position to control the use of copyrighted works by others and
had authorized the use without permission from the copyright
owner.”178
Further, the Court found that in patent law, contributory
liability was confined to the knowing sale of an item that was
specifically made for use to infringe on the patent.179 Analogizing
to contributory liability, the Court found that an object could not
contributorily infringe on the copyright of another if it was
“capable of substantial non-infringing uses.”180
In Sony, the Court found that the BetaMax was capable of
“substantially non-infringing uses” because it could be used to
record programs without copyrights or programs whose owners
181
freely authorized recording. Under this standard, many of the
programs today would avoid liability, as long as they are
174
175
176
177
178
179
180
181
See id.
Id. at 420.
Id. at 419–20.
Id. at 424 n.4.
Id. at 437–38.
Id. at 440.
Id. at 442.
Id.
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443
capable of substantially non-infringing uses.182
Indeed, many recording programs are capable of such uses.183
Programs used to record streaming audio could be used to
record class lectures, personal audio recordings, copyrighted
audio for which the user has permission, or to record uncopyrighted audio. The same can be said for programs that
allow the user to record streaming video. Coaches and teachers
can use the feature to record for educational purposes; families
can use the programs to edit their family videos; or users can
record non-copyrighted materials or materials for which there is
authorization. If a court could be persuaded that these uses are
substantial, it would find that these programs are also not
contributorily liable for the infringement of their users.
2. Inducement Liability
Inducement liability occurs “when one induces commission
of infringement by another, or ‘entic[es] or persuad[es] another’
to infringe.”184 The “classic” case of inducement liability is
when a program or device advertises its infringing uses and
thereby encourages others to commit violations.185 To be found
liable through inducement theory, there must be clear evidence
that the distributor of the product intended and encouraged it to
be used to infringe on copyrights.186 In addition, the distributor
must have knowledge that the product was used to infringe on
the copyrights of others.187 In MGM v. Grokster, the Court found
that Grokster, Inc. and StreamNetworks, Inc. distributed their
programs (Grokster and Morpheus, respectively) with the intent
that they be used to download copyrighted materials, in violation
of the rights of the copyright holders.188 In addition, through
182
Id.
See, e.g., Audacity, supra note 66; WM Capture, supra note 66.
184
935 (2005) (quoting BLACK’S LAW DICTIONARY 790 (8th ed. 2004)).
185
Id. at 937.
186
Id. at 936–37.
187
See id. at 937.
188
Id. at 939–40.
183
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advertisements and interoffice memoranda, the companies were
found to have openly encouraged their users to infringe, even
profiting through the use of streaming advertisements.189
Although Grokster and Morpheus had potentially non-infringing
uses, it was clear that not only were they aware that users were
downloading files illegally, but that ninety percent of files
available through either program were available in violation of
copyright laws.190
Newer programs, like Audacity and WM Capture, have
developed in the wake of Grokster and have carefully crafted
their programs to avoid the same problems faced by Morpheus
and Grokster.191 Both Audacity, which advertises itself
192
exclusively as sound editing software, and WM Capture,
which advertises itself as a way to “record video from ANY
web site . . . [and] DVD[] playing on your [computer,]”193 are
194
cautious not to promote or encourage copyright infringement.
There is no suggestion on the Audacity website or in the help
section that the program could be used for infringing uses.195 In
fact, WM Capture has a section that explicitly encourages users
not to use its software for infringing purposes.196 Therefore,
courts would be hard-pressed to find that these programs
induced their users to use them in an illegal manner.
However, if a program blatantly advertises its infringing
uses, as did both Morpheus and Grokster,197 it is more likely to
189
Id. at 924–26.
Id. at 922.
191
192
About Audacity, http://audacity.sourceforge.net/about (last visited
Dec. 2, 2008).
193
194
See About Audacity, supra note 192; WM Capture, supra note 66.
195
See Audacity, supra note 66; Audacity: Documentation and Support,
http://audacity.sourceforge.net/help/ (last visited Nov. 13, 2009).
196
WM Capture, Legal Note, http://www.wmrecorder.com/wm_capture.
php#legal (last visited Nov. 13, 2009).
197
Both Morpheus and Grokster not only advertised themselves as
Napster replacements, but they also actively encouraged copyright
infringement through their websites and web forums. Metro-Goldwyn-Mayer
Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 939–40 (2005).
190
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be found liable for vicarious infringement.198 The more blatant
the encouragement, the more likely the programmers will be
found liable for the infringing uses of its users.199
IV. LIABILITY OF USERS
A. Direct Liability
Although the recording and television/movie industries have
200
instituted lawsuits against individual copyright infringers, they
have focused mainly on college-aged students.201 Even now that
the media industries have begun to work with Internet Service
Providers (ISPs) to catch those who download illegally,202
pursuing litigation may prove to be unwise. On the one hand,
most owners or assignees of audio or video copyrights could
easily obtain a per se judgment in their favor against an alleged
downloader.203 Record companies could and do subpoena records
from ISPs in order to prove the necessary elements of a
198
Id. at 939–40.
See generally id. (finding intent to promote copyright infringement
through marketing directed toward previous users of Napster and the failure
to develop “filtering tools” to reduce infringing activity).
200
See generally Elektra Entm’t Group, Inc. v. Santangelo, No. 06-CV11520, 2008 WL 4452393 (S.D.N.Y. Oct. 1, 2008); Capitol Records, Inc. v.
Foster, No. 04-CV-1569, 2007 WL 1223826 (W.D. Okla. Apr. 23, 2007);
Chris Gaither, Group Sues 261 Over Music-Sharing 46 are Accused in Boston
Area, BOSTON GLOBE, Sept. 9, 2003, at A1; Kevin Maney, Music Industry
Doesn’t Know What Else to Do As It Lashes Out at File Sharing, USA
TODAY, Sept. 10, 2003 at 3B.
201
See Gardner, supra note 2.
202
Nate Anderson, No More Lawsuits: ISPs to Work with RIAA, Cut off
P2P Users, ARS TECHNICA, Dec. 19, 2008, http://arstechnica.com/techpolicy/news/2008/12/no-more-lawsuits-isps-to-work-with-riaa-cut-off-p2pusers.ars.
203
The music industry has successfully brought suit against many alleged
infringers, although most victories were by way of settlement or summary
judgment. See John Borland, RIAA Sues 261 File Swappers, CNET NEWS,
Sept. 8, 2003, http://news.cnet.com/2100-1023_3-5072564.html; David
Kravets, File Sharing Lawsuits at a Crossroads, After 5 Years of RIAA
Litigation, WIRED, Sept. 4, 2008.
199
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copyright infringement claim, namely: the user had access and
the file on the defendant’s computer was an exact copy of the
original.204 Although there are defenses that may be effectively
used to insulate the user from liability,205 it is unlikely that these
defenses would help defendants in these lawsuits.206 Such
lawsuits would allow the copyright owner to vindicate his
ownership rights and would likely deter similarly situated users
from infringing on the copyrights of others.207
On the other hand, such lawsuits garner enormous ill will
toward the recording and film industries.208 Potential buyers will
feel betrayed regardless of whether they routinely purchase
copyrighted works, thus causing the recording and film
industries to lose customers, especially young customers with
years of consumer purchases ahead of them.209 Often, users and
buyers use downloading as a way to “preview” songs and
CDs,210 and if recording companies intend to prosecute
indiscriminately,211 many customers will be even more hesitant to
204
See supra notes 124–25. The last element of a valid copyright,
whether the holder had a valid copyright, should likewise not be difficult for
a record company to prove. See supra text accompanying note 126.
205
See infra Part IV(B).
206
See id.
207
Infringement theory dictates that a user is likely to evaluate his or her
illegal behavior in light of the relative risks of getting caught and the strength
of the punishment. TOM R. TYLER, WHY PEOPLE OBEY THE LAW 56
(Paperback ed., 2006). Therefore, if the recording industry makes people
believe that they are more likely to be caught, many users should—at least in
theory—discontinue their illegal downloading. Id.
208
Alvin Chan, The Chronicles of Grokster: Who Is the Biggest Threat In
the P2P Battle?, 15 UCLA ENT. L. REV. 291, 318–19 (2008).
209
Id.
210
There are a large amount of users who use downloading as a way to
listen to music before they purchase a CD. File Swappers Buy More Music,
BBC NEWS, July 9, 2003, http://news.bbc.co.uk/1/hi/entertainment/music/
3052145.stm. This seems to make sense considering that the price of a CD
can approach $15-$18 and that sometimes only one or two songs are
“singles” that play on the radio. See id.
211
The Recording Industry Association of America (RIAA) brought suit
against thousands of individuals across the country, mostly college students
and others who did not have the resources to properly defend themselves.
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pay for a CD with fifteen songs they have never heard before.
B. Fair Use and Why It Would Not Protect Users
Users that would otherwise be held liable for direct
copyright infringement may sometimes escape liability by
invoking the defense of “fair use.”212 The doctrine of fair use
protects those from direct infringement liability who, in theory,
do not harm a copyright owner by using the work for “fair”
reasons, such as photocopying educational materials.213 The fair
use doctrine was codified by Congress in 1976214 and was at
issue in the landmark case of Sony Corporation of America v.
Universal City Studios, Inc.215 In Sony, the Supreme Court
balanced four factors to hold that “time-shifting”—using the
BetaMax to record copyrighted shows for later, private
viewing—constituted a fair use of a copyrighted work.216 In order
for a court to find an infringing use to be a fair use, it must
balance four factors: (1) the purpose and character of the use;
(2) the nature of the copyrighted work; (3) the amount and
substantiality of the portion used in relation to the copyrighted
work as a whole; and (4) the effect of the use upon the potential
market for or value of the copyrighted work.217
Gardner, supra note 2. However, the RIAA has not stopped with college
students and has brought copyright infringement charges against many others,
including a grandmother, Rhonda Crain, for rap and hip-hop songs a
grandchild downloaded onto her computer. Eric Bangeman, RIAA v.
Grandma, Part II: The Showdown That Wasn’t, ARS TECHNICA, Dec. 16,
2007. Ms. Crain has since settled. Id.
212
Charles B. Vincent, BitTorrent, Grokster, and Why Entertainment and
Internet Lawyers Need to Prepare for the Fair Use Argument for
Downloading TV Shows, 10 J. INTERNET L. 1, 11 (2007).
213
See Paul Goldstein, Symposium: Fair Use: “Incredibly Shrinking” or
Extraordinarily Expanding?, 31 COLUM. J.L. & ARTS 433, 434 (2008).
214
17 U.S.C. § 107 (2006).
215
Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417,
454–55 (1984).
216
See id. at 450–56.
217
17 U.S.C. § 107.
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Factor 1: Purpose and Character of Use
When examining the purpose and character of the infringing
use, a court will focus on (1) whether the use simply replaces
the original or transforms the original into a new work; and
(2) whether the use is commercial or non-commercial.218 In A&M
v. Napster, the Northern District of California found that
downloading an audio or video file did not transform the
work.219 The Ninth Circuit upheld this finding, in light of the
reluctance of courts to find fair use when the original work is
simply “transform[ed]” into the same work on another
medium.220 The proper inquiry is whether the work is
transformed by infusing it with new meaning or new
understandings.221 That inquiry is not modified just because a
user is downloading a streaming video or song instead of
downloading a video or song from another user.222 Simply
transforming the media from one format into another—such as
transforming streaming bits of information into a single file—
does not transform the work.223
A court will turn its attention next to whether the allegedly
218
17 U.S.C. § 107(1); see also Campbell v. Acuff-Rose Music, Inc.,
510 U.S. 569, 579 (1994).
219
See A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896, 912
(N.D. Cal. 2000), aff’d 239 F.3d 1004, 1015 (9th Cir. 2000).
220
A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1015 (9th Cir.
2000); see also UMG Recordings, Inc. v. MP3.com, Inc., 92 F. Supp. 2d
349 (S.D.N.Y. 2000) (finding that reproduction of a CD into MP3 format
does not constitute sufficient transformation to find fair use).
221
See Acuff-Rose, 510 U.S. at 579.
222
This would be because the ultimate product is still a perfect digital
copy of the original work, just downloaded from another source. KOHN &
KOHN, supra note 15, at 1245.
223
See A&M Records, 239 F.3d at 1015; see also Infinity Broad. Corp.
v. Kirkwood, 150 F.3d 104, 108 (2d Cir. 1994) (finding that simply
transmitting a former radio broadcast of a telephone line is not
transformative); UMG Recordings, Inc. v. MP3.com, Inc., 92 F. Supp. 2d
349, 351 (S.D.N.Y. 2000) (finding that a song available on a CD was not
transformed simply because it was also available on a website).
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infringing use is commercial or non-commercial.224 While
language in Sony suggests that a commercial user may never
obtain fair use protection,225 courts have since found that
commercial use weighs heavily against fair use, but is not
dispositive.226 Courts consider financially motivated transactions,
like a transaction to avoid paying the purchase price of a
copyrighted item, to be a commercial use.227 The benefit from
such a transaction need not be direct economic benefit, such as
the saving of money or earning money from illegally distributing
copyrighted works, but can be trade or other non-economic
transaction benefits.228 In Napster, the Ninth Circuit found that
both Napster and its users were commercially using the program
by avoiding paying royalties to music companies in the form of
record sales.229 However, in Sony, the Supreme Court found that
users engaging in time-shifting of a broadcast program were
non-commercial users.230
Commentators who suggest that downloading television
shows is analogous to time-shifting using a BetaMax VTR231 not
only neglect to take into account the key developments in
technology,232 but also key aspects of the Sony holding. When a
224
17 U.S.C. § 107(1) (2006); see also Acuff-Rose, 510 U.S. at 578.
451 (1984) (“[E]very commercial use of copyrighted material is
presumptively . . . unfair . . . .”).
226
Acuff-Rose, 510 U.S. at 584; see also A&M Records, 239 F.3d at
1015.
227
See A&M Records, 239 F.3d at 1015.
228
See id.
229
Id.
230
Sony, 464 U.S. at 449–50.
231
Vincent, supra note 212, at 12; see also Sheila Zoe Lofgren Collins,
Sharing Television Through the Internet: Why the Courts Should Find Fair
Use and Why It May Be a Moot Point, 7 TEX. REV. ENT. & SPORTS L. 79,
86 (2006).
232
Developments, such as the ability to watch television on the Internet,
to record television onto a computer, to record using a Digital Video
Recorder (DVR), or even to record television using a DVD recordable disc
(DVD-R), have changed the way many television watchers view their
televisions. See generally Intel, The Changing TV Experience,
225
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copyright holder allows their copyrighted works to stream over
the Internet, they are, in effect, giving anyone with a computer
and Internet connection continuous, uninterrupted access to their
work until it is taken down.233 Even when the work is taken
down, users are almost guaranteed that even the least successful
television show will come out on DVD.234 A user in 1984 had a
larger necessity to “time-shift” a particular program—i.e. to
record it for later viewing—because there was a significant
chance he or she would never see that program again. Now a
television watcher may purchase a DVD of virtually any
program at a later date if he or she is patient enough.235
Allowing a user to download a streaming file would permit the
user to completely circumvent the copyright holder’s wishes
when choosing to restrict access to the public until the public
release of the DVD.236
Further, the key to unlocking the Sony holding could be its
focus on advertising and the revenues broadcast television earn
as a result of making a quality television show.237 In 1984,
BetaMax allowed its users to pause a recording in order to skip
over advertising, but only if they were physically present to
press the button.238 However, most BetaMax users actually
http://www.intelconsumerelectronics.com/Consumer-Electronics-3.0/TheChanging-TV-Experience.aspx (last visited Oct. 3, 2009) (outlining the
various ways in which television users utilize DVR and other television
features).
233
This is generally true, although it is conceivable that a company could
limit the viewing periods to certain times of certain days.
234
See generally Mike Snider, Old TV Shows Never Die . . . They Grow
More Popular on DVD, USA TODAY, Oct. 19, 2004, available at
http://www.usatoday.com/life/television/news/2004-10-17-tv-dvds-main_x.
htm.
235
Id.
236
Id.
237
This argument is less applicable for radio stations, which are
generally not owned by recording companies. However, television companies
generally own the television stations on which they play their copyrighted
works and therefore earn advertising that is directly correlated with the
failure or success of the copyrighted work itself.
238
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451
utilized its time-shifting functions when they were not at home,
were occupied with other tasks or were viewing another
program at the time of broadcast, and therefore they were
unable to skip the commercials.239 Although the BetaMax was
equipped with a fast forward function that allowed users to skip
past commercials, the Court noted that seventy-five percent of
BetaMax users chose not to skip the advertisements.240 This
likely meant that the targets of the advertising were actually
watching it.241
Modern technology has far surpassed the BetaMax.242
Although streaming video on NBC’s website has commercials,243
almost all programs allow for pausing or later editing of the file
to remove the commercials.244 This means that even less users
will actually see the advertisements, thus circumventing the
process by which television broadcast companies “receive”
royalties.245 This is essentially the same conduct Napster found to
be commercial: a complete circumvention of paying royalties.246
Thus, a court would likely find that a user of a program
allowing him or her to download streaming audio or video is a
423 (1984).
239
Id. at 424.
240
Id. at 453 n.36.
241
See id.
242
DVD Players and Recorders not only display movies at a better
quality, but they also allow for more content than did BetaMax or VCRs.
DVD Demystified, DVD FAQ, http://www.dvddemystified.com/dvdfaq.
html#1 (last visited Oct. 25, 2009).
243
See generally NBC Video Library, http://www.nbc.com/Video/
library/ (last visited Oct. 26, 2009)
244
See e.g., Audacity, supra note 66; KeepVid, supra note 66; Orbit
Downloader 2.0, supra note 66; WM Capture, supra note 66.
245
The idea is that although the user does not pay directly for broadcast
television, he or she does pay for the television show through the imposition
of advertising. Vincent, supra note 212, at 13. The less users that watch the
show legitimately, the less broadcast companies make. Id. This is because the
amount of money a television company can charge an advertiser is based
primarily on the popularity of the program. Id.
246
2000).
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452
commercial user. Although the user may not be selling his copy
for profit, he is still participating in a financially motivated
transaction in so far as he can trade his newly recorded show for
others through programs that allow end users to share potentially
infringing videos with each other. Courts have not hesitated to
find that this behavior tips heavily against fair use.247
Factor 2: The Nature of the Copyrighted Work
When looking at the nature of use, a court will examine
whether the works are creative or factual in nature.248 Those that
are inherently more creative are closer to the core of intended
copyright protection, and therefore, would likely not be found to
be fair use.249 Both audio and video files represent intrinsically
creative works and both represent the unique product of a
creative mind.250 Thus, a court would find that this factor weighs
against a finding of fair use.
However, if a user could show that he would have been able
to view the show without cost, he or she could tip the balance in
favor of fair use, claiming that “the product has not
changed[, but] rather[,] downloads of broadcast shows are
merely delivered in a different medium.”251 However, it seems
illogical that a court would find that just because a user could
watch a television show on broadcast television or through a
website without paying a premium, downloading the show from
a streaming source would favor fair use. Especially because a
show is available to stream through the broadcast network’s
website for several weeks after it originally airs, but it will
rarely be available again until the company releases the DVD of
the entire season.252
247
See, e.g., id. at 1015.
17 U.S.C. § 107(2) (2008); see also Napster, 239 F.3d at 1016.
249
Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 586 (1994).
250
See generally id.
251
Vincent, supra note 212, at 12.
252
See generally ABC, FAQ, http://www.abc.go.com/site/faq (last
visited Sept. 7, 2009).
248
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Factor 3: The Portion Used in Relation to the Whole
Similar to commercial use, copying the entirety of a
copyrighted work does not preclude a user from claiming fair
use, but it certainly weighs heavily in finding against fair use.253
Streaming users typically copy the entirety of the copyrighted
work.254
Although time-shifting of movies is one of the rare instances
of wholesale copying that is also fair use, courts will draw a
distinction between time-shifting using VHS tapes and using
personal computers. Such a finding will be influenced by the
easy transferability of computer files. Whereas VHS tapes
required a purchase and money to share (i.e., postage),
computer files can be easily transferred from one computer to
another within minutes. A user who downloads a streaming feed
therefore retains an entire work for repeated use and easy
distribution, thus tipping against a finding of fair use.
Factor 4: The Effect of Use Upon the Market
Lastly, fair use will only be found when copying the work
does not materially impair its marketability.255 Similar to the
other factors in the fair use analysis, a finding of market
impairment is not dispositive of fair use.256 However, a court
will rarely find fair use when the copying impairs the
marketability of the original, unless the other three factors weigh
very heavily in favor of fair use.257 For a commercial user,258
253
2000); Worldwide Church of God v. Phila. Church of God, 227 F.3d 1110,
1118 (9th Cir. 2000).
254
See Vincent, supra note 212, at 12.
255
Napster, 239 F.3d at 1016.
256
Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590 (1994).
257
See generally id. at 591.
258
Even though I previously concluded that the courts would find users
of these programs to be commercial users, for the sake of argument, I will
presume that the end user is not considered a commercial user.
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454
market impairment is presumed.259
One commentator has argued that downloading streaming
files actually increases the marketability of broadcast television
shows.260 Somehow, despite precedent to the contrary,261 some
believe that because downloading increases a show’s exposure, a
court would be willing to dismiss the act of infringement.262
However, in Napster, the Ninth Circuit explicitly rejected this
idea in reference to music downloads.263 The court reasoned that
even if all users who downloaded a song on Napster eventually
bought the CDs from which they came, fair use would not tip
conclusively in favor of a potential infringer.264 Most courts
would agree that increased sales should not deprive a copyright
holder of the right to license his material.265
A court would not find that users who downloaded and
retained files actually contributed to the marketability of the file.
Logic dictates that most users are markedly less likely to buy a
DVD or watch a streaming, advertisement-laden broadcast over
the Internet when they could simply watch the copy they have
expertly procured on their computer.266 Furthermore, even if
users did eventually erase the files they had taken great pains to
obtain, technology, such as writable DVD drives, has made it
unnecessary for a user to purchase the official DVD distributed
by the copyright owner.267 By writing the files to a DVD, a user
259
See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S.
417, 451 (1984).
260
261
See, e.g., Napster, 239 F.3d at 1016–17.
262
263
Napster, 239 F.3d at 1018.
264
Id.; see A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896,
914 (N.D. Cal. 2000), aff’d 239 F.3d 1004, 1018 (9th Cir. 2000).
265
See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1018 (9th
Cir. 2000); Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 591 (1994).
266
Studies have shown that people, especially the upper middle class, are
very skeptical of advertising. SIDNEY J. LEVY, BRANDS, CONSUMERS,
SYMBOLS, & RESEARCH 304 (1999). If people are already skeptical of
advertising, putting even more advertising into a streaming television show
may make viewing it unpleasant. See generally id.
267
Users are able to buy and use DVD-Recordable Discs to make copies
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455
can completely circumvent the copyright holder’s legitimate
market.268
Further, there is much to consider with respect to a user’s
purposeful circumvention of advertisements. Most television
viewers and streaming audio and video users view advertising as
a nuisance269 and may not be aware of the very specific purpose
advertising plays in the availability of broadcast television.
Simply put, without advertising, users would be required to pay
a subscription fee to see any show.270
Every time a fan of a television show chooses to watch a
downloaded version of that program in lieu of watching a rerun
or the streaming copy available on the websites of most
271
the broadcast channel is deprived of
broadcast channels,
272
advertising revenue. This could have a potentially devastating
effect on the market for television shows. Depriving broadcast
companies of this revenue could put television shows in danger
because advertising companies may be unwilling to advertise
of a show. How Do I Burn a DVD?, http://www.tech-faq.com/burn-dvd.
shtml (last visited Sept. 7, 2009). Users can download episodes of a
television series onto their computer and use this technology to make their
own full-season DVD sets that will play on any DVD player. Id.
268
If a user is simply interested in having a portable copy of a television
series, a user who has made his or her own full-season DVD has no financial
incentive to purchase a DVD released by the copyright holder. Id.
269
Marketing Vox, Our Challenge, http://www.marketingvox.com/our_
challenge_43_say_online_advertising_is_a_nuisance-012302/
(last
visited
Sept. 7, 2009). Marketing Vox found that in 2003, 53% of Americans found
online advertising a nuisance and 65% found television advertising to be a
nuisance. Id.
270
271
NBC, ABC, Fox, and CBS all have a majority of their shows
available for streaming on their websites. See NBC, Video Library,
http://www.nbc.com/Video/library/ (last visited Sept. 6, 2009); ABC, Shows,
http://abc.go.com/watch (last visited Sept. 6, 2009); FOX, On Demand,
http://www.fox.com/fod/index.htm?src=menu_item_full_episodes
(last
visited Sept. 6, 2009); CBS, All Videos, http://www.cbs.com/video/ (last
272
Liz Gannes, Streaming TV on ABC and MTV is Profitable,
NEWTEEVEE, Mar. 18, 2009, http://newteevee.com/2009/03/18/streaming-tvon-abc-and-mtv-is-profitable/.
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during shows that are popular among people who watch the
show from their personal file.273 Given the huge impact, courts
would not find “time-shifting” vis-à-vis downloading streaming
audio or video to be a “fair use.”
CONCLUSION
The world of copyright is continuously changing and
Congress—as well as other international legislative bodies—
constantly revisits copyright law to accommodate evolving
274
technology and to protect copyright holders from infringement.
Copyright holders have a large number of solutions before them
to help combat infringement, but with every potential solution a
new problem is created.
First, television companies could choose not to pursue
infringers and to instead recoup lost revenue by reducing the
average length of television shows and replace that time with
additional advertisements. Similarly, record and movie
companies could simply increase the amount of advertising that
comes along with streaming audio and video. This, however,
could lead to even less patronage and even less revenue, as
viewers’ least favorite part about watching television or listening
to music would become even more prominent.275 This might be
difficult for audio copyright owners, given that they can only
insert advertising before or after a song, as a song should not be
broken up to accommodate for additional advertising.
Alternatively, broadcast companies could increase product
placement in television shows to make up for lost revenues.
However, television shows with high rates of product placement
might be onerous to watch—even for those who view them
without commercials—and such nuisance may not do much to
273
How Does Television Advertising Work?, http://www.marketingmine
field.co.uk/traditional-marketing/television-advertising/1-overview.html (last
274
See generally Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd.,
545 U.S. 913, 928–29 (2005) (finding it necessary to balance the interests of
advancing technology with those of the copyright holder).
275
See supra note 269.
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457
foster legitimate viewership.276
Third, absent zealous prosecution of copyright infringers,
copyright holders are forced to constantly modify their
encryption technology to stay ahead of software developers
looking to exploit their vulnerabilities. This means millions of
dollars constantly spent on research and development could be
better spent on improving the creative quality of music,
television, and movies.
The goal of the copyright holder should be to flood the
market with widely available free and low cost streaming content
in order to prevent users from downloading and infringing on
their copyrighted works. This might be difficult to achieve,
given that software producers have carefully crafted their
programs to avoid liability under the DMCA and to avoid
secondary liability under traditional copyright principles.277
Software producers, although generally not charging for their
programs, have enough of a financial incentive to continue to
make software and actively market and encourage users to use it
to infringe on copyrights. However, if the copyright holder can
convince the individual user that it is both cost-effective and safe
to utilize a myriad of legal alternatives, the copyright holder can
shift the user from illegal activity, for which he may be liable,
to legal viewing activities in order to protect their copyright
from active infringement.
276
277
See supra Part III.
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LOCKING DOWN OUR BORDERS: HOW
ANTI-IMMIGRATION SENTIMENT LED TO
UNCONSTITUTIONAL LEGISLATION AND
THE EROSION OF FUNDAMENTAL
PRINCIPLES OF AMERICAN GOVERNMENT
Jamie Nielsen*
I. INTRODUCTION
A. History of the Real ID Act
Feeding off of the wave of anti-immigration sentiment
following the events of September 11th 2001, the Real ID Act
was designed to quell illegal immigration by implementing a
national ID card system and bolstering border security. The Act
was first introduced by Wisconsin U.S. Representative James
Sensenbrenner as part of the Intelligence Reform and Terrorism
1
Prevention Act of 2004. Due to heavy opposition in the Senate,
2
the Real ID provisions were dropped prior to passage.
However, it was reintroduced in 2005 and attached to legislation
that House leaders were certain would pass in the Senate.3 Thus,
* B.S., Bryant University, 2001; J.D., Brooklyn Law School, expected
2010. The author wishes to thank her parents for providing endless support
and encouragement, as well as the members of the Journal of Law and Policy
for all of their hard work.
1
Intelligence Reform and Terrorism Prevention Act of 2004, Pub. L.
No. 108–458, § 7212, 118 Stat. 3638 (2004).
2
Media Matters, O’Reilly Misleadingly Claimed Real ID Act Passed
Senate 100-0, MEDIA MATTERS, May 13, 2005, http://mediamatters.org/
items/200505130002.
3
“[A]pparently recognizing that the stand-alone bill lacked support in the
Senate, the House leadership attached the legislation to the House version of
459
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the bill was passed as a rider to the Emergency Supplemental
Appropriations Act for Defense, the Global War on Terror, and
Tsunami Relief, 2005.4 As noted by one legal scholar, “[i]t
would have been a serious political liability for a congressperson
to vote against funding for the war on terror and tsunami relief.
So it is unsurprising that there was no debate on, no hearings
on, and no public vetting of the act.”5
The Real ID Act is most notorious for requiring a national
identification card system, which in turn requires states to fund
and implement a system of federally standardized drivers
licenses.6 The cards will contain the personal information of the
holder and will be equipped with machine-readable technology,
allowing them to be scanned.7 The cards will not only be
necessary for activities such as flying or visiting federal
buildings, but also for “‘everyday transactions,’ such as
receiving government benefits, voting, or applying for a job.
The private sector will also begin mandating a Real ID card for
everyday purposes.”8 In order to obtain the new cards, people
will be required to present documentation to their state
Department of Motor Vehicles proving their “name, date of
birth, Social Security number, their principal residence . . . and
9
that they are lawfully in the U.S.” In addition to excluding
many individuals living within the states from receiving an ID
card,10 the law will be outrageously costly.11
the emergency funding bill.” Id.
4
Emergency Supplemental Appropriations Act for Defense, the Global
War on Terror, and Tsunami Relief, Pub. L. No. 109–13, 119 Stat. 231
(2005).
5
Anita Ramasastry, Why the ‘Real ID’ Act, Which Requires National
Identity Cards, is a Real Mess, FINDLAW, Aug. 10, 2005, http://writ.news.
findlaw.com/ramasastry/20050810.html.
6
Emergency Supplemental Appropriations Act §§ 201–207.
7
Id. at § 202(b).
8
New York Civil Liberties Union, Why Oppose the Real ID Act?,
http://dev.nyclu.org/realid/why_oppose (last visited Sept. 30, 2009).
9
Ramasastry, supra note 5; see also Emergency Supplemental
Appropriations Act § 202(c)(1)–(2).
10
The documentation requirements will prevent not only illegal
immigrants already residing in the United States from receiving ID cards, but
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LOCKING DOWN OUR BORDERS
461
While opponents have voiced strong criticism regarding the
cost, invasion of privacy, identity theft, and immigrant
discrimination that accompany the identification cards,12 little has
been said about the other provisions of the Act—in particular
Section 102(c)13, designed to amend Section 102(c) of the Illegal
Immigration Reform and Immigrant Responsibility Act of
1996.14 Section 102 of the Illegal Immigration Reform and
Immigrant Responsibility Act of 1996 aimed to deter illegal
crossings at United States borders with two protective fences
“along the 14 miles of the international land border of the
United States, starting at the Pacific Ocean and extending
eastward.”15 This project was expanded following September
11th, when Congress began to play off of America’s terrorism
also many legal immigrants. See NAT’L IMMIGRATION LAW CTR., QUESTIONS
AND ANSWERS ABOUT DRIVER’S LICENSES NOW THAT FINAL REAL ID
REGULATIONS HAVE BEEN ISSUED (2008), available at http://www.nilc.org/
immspbs/DLs/QA_re_DLs_post-regs_2008-02-27.pdf. Further, legal citizens
may have difficulty obtaining the required documents due to factors such as
age or poverty. See Joan Fridland, Nat’l Immigration Law Ctr., Presentation
at the Immigration Advocates Network Webinar: Immigrants, Driver’s
Licenses, and the Real ID Act: Requirements, Implementation, and Options
Available to States (Dec. 15, 2006), available at http://www.democracyin
action.org/dia/organizationsORG/NILC/images/REAL ID webinar NILC.ppt.
11
The DHS [Department of Homeland Security] originally estimated
that the law would cost $23.1 billion. The final regulations slash this
estimate to $9.9 billion over 11 years by relying on the ridiculous
premise that only 75 percent of licensed drivers will seek to obtain a
Real ID. As of February 2008, Congress had set aside only $80
million to help pay for implementing Real ID across the entire
country.
N.Y. Civil Liberties Union, supra note 8.
12
See, e.g., id.; Real Nightmare, Opposition Voices, http://www.real
nightmare.org/opposition/9/ (last visited Sept. 24, 2009).
13
Section 102 of the Real ID Act is titled “Waiver of Legal
Requirements Necessary for Improvement of Barriers at Borders.”
Emergency Supplemental Appropriations Act § 102.
14
8 U.S.C.A. § 1103 note (c) (West 2009) (Improvement of Barriers at
Border).
15
Omnibus Consolidated Appropriations Act, Pub. L. No. 104–208,
§ 102(b)(1), 110 Stat. 3009 (1996).
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462
fears in order to strengthen immigration controls. Amendments
such as those made in the Secure Fence Act of 200616 provided
for “reinforced fencing along not less than 700 miles of the
southwest border.”17
Similarly, while the Illegal Immigration Reform and
Immigrant Responsibility Act originally provided for waiver of
provisions of the Endangered Species Act of 1973 and the
National Environmental Policy Act of 1969 “to the extent the
Attorney General determines necessary to ensure expeditious
construction of the barriers and roads,”18 Section 102(c)(1) of
the Real ID Act amended this to read:
IN GENERAL.—Notwithstanding any other provision of
law, the Secretary of Homeland Security shall have the
authority to waive all legal requirements such Secretary,
in such Secretary’s sole discretion, determines necessary
to ensure expeditious construction of the barriers and
roads under this section. Any such decision by the
Secretary shall be effective upon being published in the
Federal Register.19
The Department of Homeland Security was created as an
executive agency by President Bush following September 11th
and assumed several functions previously held by other
governmental agencies.20 In particular, the authority previously
granted to the Attorney General in Section 102 of the Illegal
Immigration Reform and Immigrant Responsibility Act of 1996
was assigned to the Secretary of Homeland Security.21 Under the
new provisions of Section 102 of the Real ID Act, the Secretary
16
Secure Fence Act of 2006, Pub. L. No. 109–367, § 3, 120 Stat. 2638
(2006).
17
8 U.S.C.A. § 1103 note (b)(1)(A) (West 2009) (Improvement of
Barriers at Border).
18
Omnibus Consolidated Appropriations Act § 102(c).
19
War on Terror, and Tsunami Relief, Pub. L. No. 109–13, § 102(c)(1), 119
Stat. 231 (2005).
20
See Homeland Security Act of 2002, Pub. L. No. 107–296, § 1511,
1517, 116 Stat. 2135 (2002).
21
Id.
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463
now has sole discretion to waive any and all laws he deems
necessary for expeditious construction of the border fence, 670
miles of which had a completion deadline of December 31,
2008.22 Additionally, the Real ID Act significantly narrows
judicial review of the Secretary’s discretionary decisions:
IN GENERAL.—The district courts of the United States
shall have exclusive jurisdiction to hear all causes or
claims arising from any action undertaken, or any
decision made, by the Secretary of Homeland Security
pursuant to paragraph (1). A cause of action or claim
may only be brought alleging a violation of the
Constitution of the United States. The court shall not
have jurisdiction to hear any claim not specified in this
subparagraph . . . . Any cause or claim brought pursuant
to subparagraph (A) shall be filed not less than 60 days
after the date of the action or decision made by the
Secretary of Homeland Security. A claim shall be barred
unless it is filed within the time specified . . . . An
interlocutory or final judgment, decree, or order of the
district court may be reviewed only upon petition for a
writ of certiorari to the Supreme Court of the United
States.23
Thus, as this Note will argue, Section 102(c) of the Real ID
Act is unconstitutional, violating the separation of powers
doctrine by granting entirely too much power to one individual
while leaving little room for judicial review. Additionally, when
given the opportunity to review the constitutionality of the Act
22
8 U.S.C.A. § 1103 note (b)(1)(B) (West 2009) (Improvement of
Barriers at Border). The Illegal Immigration Reform and Immigrant
Responsibility Act specified “370 miles, or other mileage determined by the
Secretary” shall be completed by December 31, 2008. Id. The Department of
Homeland Security committed to having 670 miles of fencing completed by
December 31, 2008 (370 miles of pedestrian fencing and 300 miles of vehicle
fencing). OFFICE OF THE INSPECTOR GEN., DEP’T OF HOMELAND SEC., OIG09-56, PROGRESS IN ADDRESSING SECURE BORDER INITIATIVE OPERATIONAL
REQUIREMENTS AND CONSTRUCTING THE SOUTHWEST BORDER FENCE 15
(2009).
23
Emergency Supplemental Appropriations Act § 102(c)(2).
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464
in Defenders of Wildlife v. Chertoff,24 the Supreme Court denied
certiorari and failed to perform its job as a check on legislative
power. The Note will begin with an overview of Chertoff and
the district court’s rationale in upholding the Real ID Act. Part
II will examine the historical importance of the separation of
powers doctrine, including application of the doctrine in
significant case law. Part III will demonstrate the
unconstitutionality of the Real ID Act by comparing the Real ID
Act to other separation of powers cases. Part IV examines the
devastating results of such legislation and the Supreme Court’s
inaction. Finally, Part V proposes a solution to redress the
consequences of the Court’s inaction.
B. Defenders of Wildlife v. Chertoff
In September of 2007, at the direction of the Department of
Homeland Security, the Army Corps of Engineers began
construction of the border fence, along with a road and drainage
structures, in an area known as the San Pedro Riparian National
Conservation Area (SPRNCA) in Arizona.25 The SPRNCA
consists of approximately 57,000 acres of public land in Cochise
County, Arizona.26 The San Pedro River, “one of the last freeflowing rivers in the United States”27 runs though the SPRNCA
and the area has been described as “one of the most biologically
diverse areas of the United States.”28 Congress officially
24
Defenders of Wildlife v. Chertoff, 527 F. Supp. 2d 119 (D.D.C.
2007), cert. denied, 128 S. Ct. 2962 (2008).
25
Id. at 121.
26
United States Department of the Interior, San Pedro RNCA, http://blm
.gov/az/st/en/prog/blm_special_areas/ncarea/sprnca.html (last visited Sept.
30, 2009) [hereinafter San Pedro RNCA].
27
Press Release, Defenders of Wildlife & Sierra Club, Conservation
Groups Ask Federal Government to Consider Border Fence’s Overall Impact
to Wildlife, Public Lands in Arizona (Oct. 1, 2007), available at http://www.
defenders.org/newsroom/press_releases_folder/2007/10_01_2007_groups_app
eal_to_feds_on_border_fence.php?ht=.
28
Defenders of Wildlife, 527 F. Supp. 2d at 121 (internal quotation
marks omitted).
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designated it as a conservation area on November 18, 1988.29
Recognizing the ecological significance of the SPRNCA and
the potential damage of fencing,30 Defenders of Wildlife filed a
motion for a temporary restraining order in district court. The
motion alleged that the Bureau of Land Management (the agency
charged with managing the SPRNCA) conducted an inadequate
Environmental Assessment prior to granting a perpetual right of
way to the Department of Homeland Security for fence
construction31 and that the bureau also erred in determining that
an Environmental Impact Statement was not required by the
National Environmental Policy Act of 1969.32 Defenders of
Wildlife further argued that the right-of-way grant violated the
Arizona-Idaho Conservation Act of 1988, which required the
Bureau of Land Management to “manage the SPRNCA ‘in a
manner that conserves, protects, and enhances the riparian area
and the aquatic, wildlife, archeological, paleontological,
scientific, cultural, educational, and recreational resources of the
29
San Pedro RNCA, supra note 26.
The primary purpose for the special designation is to protect and
enhance the desert riparian ecosystem, a rare remnant of what was
once an extensive network of similar riparian systems throughout the
American Southwest. One of the most important riparian areas in the
United States, the San Pedro River runs through the Chihuahuan
Desert and the Sonoran Desert in Southeastern Arizona. The river’s
stretch is home to 84 species of mammals, 14 species of fish, 41
species of reptiles and amphibians, and 100 species of breeding
birds. It also provides invaluable habitat for 250 species of migrant
and wintering birds and contains archaeological sites representing the
remains of human occupation from 13,000 years ago.
Id.
30
Defenders of Wildlife, 527 F. Supp. 2d at 121 n.1 (“The challenged
fence construction requires excavation on up to 225 of the SPRNCA’s 58,000
acres, and the proposed fence segments will cover approximately 9,938 feet
at the border when completed.”).
31
Id. at 121. The Bureau of Land Management “concluded that the
proposed fencing would have no significant impact on the environment when
paired with certain mitigation measures and that an Environmental Impact
Statement (‘IS’) was not therefore required by the National Environmental
Policy Act of 1969 (‘NEPA’).” Id. (citations omitted).
32
Id.
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conservation area’ and to ‘only allow such uses of the
conservation area’ that further the purposes for which it was
established.”33 The court granted the temporary restraining
order, noting that “plaintiffs had demonstrated a substantial
likelihood of success on the merits with respect to their NEPA
claims and that the balance of equities favored plaintiffs,”34 and
construction of the border fence was halted.35
However, approximately two weeks later, the Secretary of
Homeland Security, Michael Chertoff, used his discretionary
powers to waive twenty statutes in their entirety (most of them
environmental) in order to continue the fence construction.36
33
Id.
Id.
35
Id.
36
On October 26, 2007, the Secretary’s decision to waive the following
statutes was announced in the Federal Register: The National Environmental
Policy Act (Pub. L. 91–190, 83 Stat. 852 (Jan. 1, 1970) (42 U.S.C. 4321 et
seq.)), the Endangered Species Act (Pub. L. 93–205, 87 Stat. 884 (Dec. 28,
1973) (16 U.S.C. 1531 et seq.)), the Federal Water Pollution Control Act
(commonly referred to as the Clean Water Act) (Act of June 30, 1948, c.
758, 62 Stat. 1155 (33 U.S.C. 1251 et seq.)), the National Historic
Preservation Act (Pub. L. 89–665, 80 Stat. 915 (Oct. 15, 1966) (16 U.S.C.
470 et seq.)), the Migratory Bird Treaty Act (16 U.S.C. 703 et seq.), the
Clean Air Act (42 U.S.C. 7401 et seq.), the Archeological Resources
Protection Act (Pub. L. 96–95, 16 U.S.C. 470aa et seq.), the Safe Drinking
Water Act (42 U.S.C. 300f et seq.), the Noise Control Act (42 U.S.C. 4901
et seq.), the Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. 9601
et seq.), the Federal Land Policy and Management Act (Pub. L. 94–579, 43
U.S.C. 1701 et seq.), the Fish and Wildlife Coordination Act (Pub. L. 73–
121, 48 Stat. 401, 16 U.S.C. 661 et seq.), the Archaeological and Historic
Preservation Act (Pub. L. 86–523, 16 U.S.C. 469 et seq.), the Antiquities
Act (16 U.S.C. 431 et seq.), the Historic Sites, Buildings, and Antiquities
Act (16 U.S.C. 461 et seq.), the Arizona-Idaho Conservation Act of 1988
(Pub. L. 100–696, 16 U.S.C. 460xx et seq.), the Wild and Scenic Rivers Act
(Pub. L. 90–542, 16 U.S.C. 1281 et seq.), the Farmland Protection Policy
Act (7 U.S.C. 4201 et seq.) and the Administrative Procedure Act (5 U.S.C.
551 et seq.). Determination Pursuant to Section 102 of the Illegal
Immigration Reform and Immigrant Responsibility Act of 1996 as Amended
by Section 102 of the REAL ID Act of 2005 and as Amended by the Secure
34
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Additionally, Chertoff stated that he reserved the “authority to
make further waivers from time to time.”37 Using the highly
subjective standards set forth in the Act, Chertoff stated that the
SPRNCA “is an area of high illegal entry” in which “there is
presently a need to erect fixed and mobile barriers . . . and
roads.”38 Therefore, he deemed it “necessary” to exercise his
waiver authority and, as a result, the temporary restraining order
was vacated.39
In response, Defenders of Wildlife filed an amended
complaint in district court, alleging “that the waiver provision of
the REAL ID Act violates separation of powers principles
embodied in Articles I and II of the Constitution because it
‘impermissibly delegates legislative powers to the DHS
Secretary, a politically-appointed Executive Branch official.”40
Specifically, the plaintiffs argued that the case fell precisely
within the Court’s holding in Clinton v. City of New York,41
where provisions of the Line Item Veto Act were found
unconstitutional because Presidential repeal of laws is not
constitutionally permissible.42 The defendants moved to dismiss
the complaint43 on grounds that the Real ID Act’s waiver
provisions constituted a permissible delegation of legislative
power to the Executive Branch under the Court’s
“nondelegation” jurisprudence because “it provides the Secretary
with an ‘intelligible principle’ that ‘clearly delineate[s] the
general policy, the public agency which is to apply it, and the
boundaries of th[e] delegated authority.’”44 Additionally, the
defendants set forth the argument that “‘Congress may delegate
in even broader terms’ than otherwise permissible in matters of
Fence Act of 206, 72 Fed. Reg. 60,870 (Oct. 26, 2007).
37
Id.
38
Id.
39
Defenders of Wildlife, 527 F. Supp. 2d at 123.
40
Id.
41
Id. at 124 (citing Clinton v. City of New York, 524 U.S. 417 (1998)).
42
Clinton v. City of New York, 524 U.S. 417, 438 (1998).
43
Defendants moved to dismiss under FED. R. CIV. P. 12(b)(1) and
12(b)(6). Defenders of Wildlife, 527 F. Supp. 2d at 123.
44
Id.
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immigration policy, foreign affairs, and national security,
because ‘the Executive Branch already maintains significant
independent control’ over these areas.”45
In issuing its opinion, the district court quickly dismissed the
plaintiff’s comparison to Clinton.46 The court held that the
repeal of laws in Clinton was distinguishable from the waiver of
laws at issue here.47 Whereas in Clinton repeal meant the
affected laws no longer had “any ‘legal force or effect’ under
any circumstance,”48 the waived laws at issue “retain[] the same
legal force and effect [they] had when [] passed by both houses
of Congress and presented to the President.”49 The court further
stated:
The fact that the laws no longer apply to the extent they
otherwise would have with respect to the construction of
border barriers and roads within the SPRNCA does not,
as plaintiffs argue, transform the waiver into an
unconstitutional ‘partial repeal’ of those laws. By that
logic, any waiver, no matter how limited in scope, would
violate Article I because it would allow the Executive
Branch to unilaterally ‘repeal’ or nullify the law with
respect to the limited purpose delineated by the waiver
legislation.50
With regard to the plaintiffs’ separation of powers argument,
the court cited the rationale from Smith v. Fed. Reserve Bank of
N.Y. that “‘the Supreme Court has widely permitted the
Congress to delegate its legislative authority to other branches,’
so long as the delegation is accompanied by sufficient
guidance.”51 Further, that delegation is permitted where
“Congress ‘lay[s] down . . . an intelligible principle to which
45
Id.
Id. at 124.
47
Id.
48
Id.
49
Id.
50
Id.
51
Id. at 126 (citing Smith v. Fed. Reserve Bank of N.Y., 280 F. Supp.
2d 314, 324 (S.D.N.Y. 2003)).
46
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469
the person or body authorized to [exercise the delegated
authority] is directed to conform . . . .’”52 The Chertoff court
held that the provisions requiring that fencing be erected
specifically in areas “of high illegal entry,”53 “to deter illegal
crossings,”54 and that the Secretary only exercise his waiver
authority as he “determines necessary to ensure expeditious
construction of the barriers and roads”55 constituted “clearly
delineated” boundaries under which the Secretary was
authorized to act.56
The Chertoff court also found that the broad scope of the
Secretary’s power to waive “all legal requirements”57 that he
deems necessary in his “sole discretion”58 was not
59
Despite finding a lack of historical support
unconstitutional.
for such sweeping waiver authority,60 the court found that it was
constitutional because “under the nondelegation doctrine, the
relevant inquiry is whether the Legislative Branch has laid down
an intelligible principle to guide the Executive Branch, not the
scope of the waiver power.”61 The court further agreed with the
62
defendants that legislative delegations may be broader when the
subject matter is one over which the Executive Branch already
52
Id. at 127 (citing Mistretta v. United States, 488 U.S. 361, 372
(1989)).
53
8 U.S.C.A. § 1103 note (a) (West 2009) (Improvement of Barriers at
Border).
54
Id.
55
Id. note (c)(1).
56
57
8 U.S.C.A. § 1103 note (c)(1) (West 2009) (Improvement of Barriers
at Border).
58
Id.
59
60
The Court cited a Congressional Research Service Memorandum
which stated “the REAL ID Act’s waiver provision appears to be
unprecedented in that it ‘contains notwithstanding language,’ provides a
secretary of an executive agency the authority to waive all laws such
secretary determines necessary, and directs the secretary to waive such
laws.” Id. at 128.
61
Id. at 129.
62
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possesses considerable constitutional power.63 Therefore, because
the border fence falls under the Executive controlled areas of
foreign affairs and immigration control,64 the broad delegation of
authority to the Secretary of Homeland Security by the
legislature was constitutionally permissible.65
Following the district court’s dismissal with prejudice,
Defenders of Wildlife exercised the only available option under
the Act and petitioned for a writ of certiorari to the Supreme
Court.66 Fourteen members of the U.S. House of
Representatives, numerous distinguished law professors, and
various organizations (ranging from environmental groups to the
United Church of Christ) filed Amicus briefs in support of the
67
petitioners. However, in June of 2008, the Supreme Court
denied certiorari.68 In a public statement, House Representative
Lamar Smith criticized the Supreme Court’s decision as allowing
border fences to be built “without legal restrictions or
interference from environmentalists.”69
Rule 10 of the Rules of the Supreme Court of the United
States sets forth basic guidelines for the Court to grant a petition
63
“When the area to which the legislation pertains is one where the
Executive Branch already has significant independent constitutional authority,
delegations may be broader than in other contexts.” Defenders of Wildlife,
527 F. Supp. 2d at 129 (citing Sierra Club v. Ashcroft, Civ. No. 04–272,
2005 U.S. Dist. LEXIS 44244, at *17 (S.D. Cal. Dec. 12, 2005)).
64
Id. at 129.
65
Id.
66
Petition for Writ of Certiorari, Defenders of Wildlife v. Chertoff, 128
S. Ct. 2962 (2008) (No. 07-1180).
67
Brief for Fourteen Members of the U.S. House of Representatives as
Amici Curiae in Support of Petitioners, Defenders of Wildlife, 128 S. Ct.
2962 (No. 07–1180); Brief of William D. Araiza et al. as Amici Curiae in
Support of Petitioners, Defenders of Wildlife, 128 S. Ct. 2962 (No. 07–
1180); Brief of the National Advocacy Center of the Sisters of the Good
Shepherd et al. as Amici Curiae Support of Petitioners, Defenders of Wildlife,
128 S. Ct. 2962 (No. 07–1180).
68
Defenders of Wildlife, 128 S. Ct. 2962.
69
Gary Martin, Court’s Fence Ruling Strengthens Government Power,
SAN ANTONIO EXPRESS-NEWS, June 28, 2008, at 9B.
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for certiorari.70 Of those standards, one is particularly
pertinent—where “a state court or a United States court of
appeals has decided an important question of federal law that has
not been, but should be, settled by this Court, or has decided an
important federal question in a way that conflicts with relevant
decisions of this Court” the court should grant certiorari.71 The
Court’s denial of certiorari without explanation has left
commentators at a loss, with some speculating that “the decision
served as a death knell for future legal challenges to the
fence,”72 and others holding out “hope that a second, separate
legal challenge may yet succeed.”73 Nevertheless, it is clear that
the Court should have granted certiorari because the district
court’s decision to uphold Section 102(c) of the Act “conflicts
with relevant decisions of”74 the Supreme Court by violating the
fundamental doctrine of separation of powers.
II. SEPARATION OF POWERS AND CHECKS AND BALANCES
A. Historical Significance of Separation of Powers
The Constitution clearly divides the power of the federal
government into three distinct branches, with Article I granting
legislative power to Congress,75 Article II giving executive
power to the President,76 and Article III vesting judicial power in
77
the Supreme Court. In The Federalist No. 47, James Madison
70
SUP. CT. R. 10.
Id. at 10(c).
72
Martin, supra note 69.
73
Border Fence Legal Waivers Still Under Threat in Second Lawsuit,
DEF. ENV’T ALERT, Jul. 8, 2008.
74
SUP. CT. R. 10(c).
75
“All legislative Powers herein granted shall be vested in a Congress of
the United States which shall consist of a Senate and a House of
Representatives.” U.S. CONST. art. I, § 1.
76
“The executive Power shall be vested in a President of the United
States of America. U.S. CONST. art. II, § 1, cl. 1.
77
“The judicial Power of the United States, shall be vested in one
supreme Court, and in such inferior Courts as the Congress may from time to
time ordain and establish.” U.S. CONST. art. III, § 1.
71
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wrote that “the accumulation of all powers, legislative,
executive, and judiciary, in the same hands, whether of one, a
few, or many, and whether hereditary, self-appointed, or
elective, may justly be pronounced the very definition of
tyranny.”78 Thus, the founding fathers recognized that in order
to maintain this democratic form of government, a reliable
method of reigning in branch power was essential.79
Thus, the constitutional system of checks and balances was
created, whereby “the President . . . may veto legislation; the
Senate may confirm or deny the President’s appointment of his
or her principal executive officers as well as federal judges; and
Congress, by exercising its impeachment power, may remove
judges and executive officers, including the President.”80 In
addition to these explicit grants of authority, the power of
judicial review stands as one of the most important
constitutionally implied checks.81 Chief Justice Marshall
categorically reinforced this principal in Marbury v. Madison,82
holding that “it is emphatically the province and duty of the
judicial department to say what the law is.”83
78
THE FEDERALIST NO. 47, at 313 (James Madison) (Sherman F. Mittell,
ed., 1938).
79
But the great security against a gradual concentration of the
several powers in the same department, consists in giving to those
who administer each department the necessary constitutional means
and personal motives to resist encroachment of the others . . . .
Ambition must be made to counteract ambition . . . . If men were
angels, no government would be necessary. If angels were to govern
men, neither external nor internal controls on government would be
necessary. In framing a government which is to be administered by
men over men, the great difficulty lies in this: you must first enable
the government to control the governed; and in the next place oblige
it to control itself.
THE FEDERALIST NO. 51, at 337 (James Madison) (Sherman F. Mittell, ed.,
1938).
80
CALVIN MASSEY, AMERICAN CONSTITUTIONAL LAW 333 (2d ed.
2005).
81
Id.
82
Marbury v. Madison, 5 U.S. 137 (1803).
83
Id. at 177.
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473
The separation of powers doctrine, and its accompanying
system of checks and balances, is a fundamental characteristic of
the American government. As stated by Professor Thomas
Sargentich, the doctrine continues to “serve the highly valued
ends of avoiding undue concentration of governmental power,
expanding representation and access to power, as well as
promoting deliberation and counteracting factional influence on
the government.”84 In Sargentich’s analysis of the separation of
powers, the “normally emphasized”85 function of “prevention of
concentrated power”86 is only part of the greater purpose served;
the doctrine also brings together different actors in an effort to
develop public policy. Legislation must filter through three
distinct arenas before impacting society.87 Thus, public policy
evolves from a broad base, more representative of the needs and
values of American citizens.88
The separation of powers doctrine “also multiplies the points
of access for citizens who wish to get involved . . . [and]
expands access to power in a society with great diversity and
89
Complementing
this
principle
of
social
division.”
comprehensive representation is Sargentich’s point that the
doctrine encourages discourse on varying societal attitudes.90 By
forcing the branches to deliberate, differing viewpoints are
expressed and compromises are inevitably made, thus
84
Thomas O. Sargentich, The Contemporary Assault on Checks and
Balances, 7 WIDENER J. PUB. L. 231, 240 (1998).
85
Id. at 236.
86
Id. at 237.
87
The second value served by the separation of powers and checks
and balances is to bring together three main governmental actors in
the development of public policy: the House of Representatives,
elected from local districts; the Senate, elected from the states; and
the President, elected in a national electoral contest.
Id. at 239.
88
See id.
89
Id.
90
“[T]he separation of powers and checks and balances tend to promote
deliberation about public values and public purposes.” Id.
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minimizing the possible influence of special interest groups.91 It
would be impossible and, perhaps, counterproductive to draw a
clean line between each branch of government. The separation
of powers doctrine “did not mean that these departments ought
to have no partial agency in, or no control over, the acts of each
other.”92 Therefore, the Supreme Court has consistently
solidified the importance of the separation of powers doctrine
and the necessity of judicial review, while recognizing the need
for some interaction among the branches.
B. Application of the Doctrine in Case Law
In J.W. Hampton, Jr., & Co. v. United States93 the Court set
forth the enduring rule governing when Congress may tip the
delicate balance between the three separate powers and delegate
its authority.94 While reaffirming that “Congress may not
delegate its purely legislative power to a commission,”95 the
Court held that legislative delegation is permissible when
Congress has set forth an “intelligible principle”96 to which the
authorized party must adhere.97 Years later, in Mistretta v.
United States,98 the Court reaffirmed Congress’s constitutional
power to delegate its authority in certain situations. Recognizing
that “in our increasingly complex society, replete with ever
changing and more technical problems, Congress simply cannot
do its job absent an ability to delegate power under general
91
See id. at 239–40. “The key idea is that the requirement of having
each of the named constitutional actors agree on a new statutory standard
makes it harder for a [special interest group] to capture the government.” Id.
at 240.
92
THE FEDERALIST NO. 47 (James Madison), supra note 78, at 314
(emphasis in original).
93
J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394 (1928)
(upholding congressional delegation of power to the President to increase or
decrease duties according to the Tariff Act of 1922).
94
Id. at 409.
95
Id. at 408.
96
Id. at 409.
97
Id.
98
Mistretta v. United States, 488 U.S. 361 (1989).
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directives,”99 the Court permitted Congress to delegate drafting
of the federal sentencing guidelines to the United States
Sentencing Commission,100 an independent agency under the
judicial branch of the government.101 Reaffirming the
“intelligible principal”102 doctrine, the Mistretta Court held that
“Congress’ delegation of authority to the Sentencing
Commission [was] sufficiently specific and detailed to meet
constitutional requirements.”103 While upholding congressional
delegations that are sufficiently narrow and precise enough not
to violate the separation of powers, the Supreme Court has
diligently protected the doctrine and struck down legislation that
strays beyond these specifications, or grants too much power to
one branch.104
In recent years, the Court has exercised its power of judicial
review in several cases involving legislation bearing a marked
resemblance to Section 102(c) of the Act.105 For example, in INS
v. Chadha,106 the Court declared a legislative provision
unconstitutional for violating the separation of powers.107 At
issue in Chadha was Section 244(c)(2) of the Immigration and
Nationality Act,108 which allowed either House of Congress to
veto, or invalidate, a decision by the Executive Branch to
99
Id. at 372.
Id. at 374 (upholding Sentencing Reform Act of 1984, Pub. L. No.
98-473, 98 Stat. 1837 (1987) (codified as amended in 18 U.S.C. § 3551 et
seq. (1988) and 28 U.S.C. §§ 991–98 (1988))).
101
An Overview of the United States Sentencing Commission,
http://www.ussc.gov/general/USSC_Overview_200906.pdf
(last
visited
November 14, 2009).
102
J.W. Hampton, 276 U.S. at 409.
103
Mistretta, 488 U.S. at 374.
104
See, e.g., Clinton v. City of New York, 524 U.S. 417 (1998);
Immigration & Naturalization Serv. v. Chadha, 462 U.S. 919 (1983).
105
See, e.g., Chadha, 462 U.S. 919 (holding a congressional veto
provision of the Immigration and Nationality Act unconstitutional).
106
Id.
107
Id. at 959.
108
Immigration and Nationality Act § 244(c)(2), 8 U.S.C. 1254(c)(2)
(repealed by the Omnibus Consolidated Appropriations Act, Pub. L. No.
104-208, § 308(b)(7), 110 Stat. 3009-615 (1996)).
100
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suspend deportation of an alien residing in the United States.109
The Court began by noting that “[the] principle of separation of
powers was not simply an abstract generalization in the minds of
the Framers: it was woven into the document that they drafted in
Philadelphia in the summer of 1787.”110 In analyzing the
provision, the Court held that the House action authorized under
Section 244(c)(2) was essentially legislative action, requiring
conformance with constitutionally established procedures.111
Therefore, the Court held the “congressional veto provision in
§ 244 (c)(2) . . . unconstitutional.”112 The Court felt that the
provision granted too much power to one House of Congress113
and again emphasized the importance of maintaining the specific
constitutional powers of each branch:
The bicameral requirement, the Presentment Clauses, the
President’s veto, and Congress’ power to override a veto
were intended to erect enduring checks on each Branch
and to protect the people from the improvident exercise
of power by mandating certain prescribed steps. To
preserve those checks, and maintain the separation of
109
Id. The Immigration and Nationality Act contained a valid
congressional delegation of Executive Power to the Attorney General. Id.
§ 244(a)(1). The delegation set forth an intelligible principle under which the
Attorney General was authorized to suspend the deportation of an alien
provided that said alien met explicit requirements of the Act, specifically, a
continuous physical presence in the United States during the immediately
preceding seven years, good moral character, and extreme hardship to the
alien or a family member (a United States citizen or lawful permanent
resident) upon deportation. Id.
110
Chadha, 462 U.S. at 946 (citing Buckley v. Valeo, 424 U.S. 1, 124
(1976)).
111
The single House action authorized under Section 244(c)(2) did not
fall under any of the four constitutional exceptions allowing one House of
Congress to act alone. Id. at 955.
112
Id. at 959.
113
See id. In his concurrence, Justice Powell argued that such cases,
involving legislative veto provisions, should be decided on a narrower basis,
but nonetheless agreed with the outcome. Justice Powell stated, “when
Congress finds that a particular person does not satisfy the statutory criteria
for permanent residence in this country it has assumed a judicial function in
violation of the separation of powers.” Id. at 960 (Powell, J., concurring).
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powers, the carefully defined limits on the power of each
Branch must not be eroded.114
Further evidence of the Court’s customary protection of the
doctrine can be found in the more recent case Clinton v. City of
New York.115 Despite the district court’s contrary holding in
Defenders of Wildlife v. Chertoff,116 the legislation struck down
in Clinton is strikingly similar to Section 102(c) of the Act.117 In
the well-known Clinton case, the Court held as unconstitutional
the Line Item Veto Act of 1996118 which gave the President the
power to cancel, or veto, any provision of a bill signed into law
that fell under one of three specified categories.119 The Court,
reaffirming Chadha, held that “[r]epeal of statutes, no less than
enactment, must conform with Art. I,”120 and noted that “[t]here
is no provision in the Constitution that authorizes the President
to enact, amend, or repeal statutes.”121 Presidential veto power is
authorized only before a bill becomes law and, even then, it
may be “overridden by a two-thirds vote in each House.”122 The
Court further clarified the difference between a permissible
Presidential veto and unconstitutional repeal:
There are important differences between the President’s
“return” of a bill pursuant to Article I, § 7, and the
114
115
116
Id. at 957–58 (majority opinion).
Clinton v. City of New York, 524 U.S. 417 (1998).
Defenders of Wildlife v. Chertoff, 527 F. Supp. 2d 119, 129 (D.D.C.
2007).
117
See Clinton v. City of New York, 524 U.S. 417 (1998).
Line Item Veto Act of 1996 § 204, 2 U.S.C.S. § 691 (2008),
invalidated by Clinton v. City of New York, 524 U.S. 417 (1998).
119
The Line Item Veto Act provided for presidential cancellation of any
provision consisting of “(1) any dollar amount of discretionary budget
authority; (2) any item of new direct spending; or (3) any limited tax
benefit,” provided that the cancellation would “(i) reduce the Federal budget
deficit; (ii) not impair any essential Government functions; and (iii) not harm
he national interest” and that the President adhere to explicit guidelines in
considering the cancellation. Id.
120
Clinton v. City of New York, 524 U.S. 417, 438 (1998) (citing
Immigration & Naturalization Serv. v. Chadha, 462 U.S. 919, 954 (1983)).
121
Id.
122
Id.
118
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exercise of the President’s cancellation authority pursuant
to the Line Item Veto Act. The constitutional return takes
place before the bill becomes law; the statutory
cancellation occurs after the bill becomes law. The
constitutional return is of the entire bill; the statutory
cancellation is of only a part. Although the Constitution
expressly authorizes the President to play a role in the
process of enacting statutes, it is silent on the subject of
unilateral Presidential action that either repeals or amends
parts of duly enacted statutes.123
The Court interpreted this silence as “equivalent to an
express prohibition.”124 Because the Framers went to such
lengths to specify the procedures necessary for statutory
enactment, the Court found that the omission of any language
authorizing post-enactment repeal prohibits such action.125 Thus,
the Court held that the end result of legislation affected by the
Line Item Veto Act would not be “the product of the ‘finely
wrought procedure’ the Framers designed.”126 Justice Kennedy
clearly articulated the non-delegation principle, asserting that
“[b]y increasing the power of the President beyond what the
Framers envisioned, the statute compromises the political liberty
of our citizens, liberty which the separation of powers seeks to
secure.”127 Notably, Kennedy’s statement also describes Section
102(c) of the Act, which has not been struck down and is still in
force today.
III. UNCONSTITUTIONALITY OF SECTION 102(C) OF THE REAL ID
ACT
A. Comparison to Clinton v. City of New York
Similar to the Line Item Veto Act, Section 102(c) of the
123
124
125
126
127
Id. at 438–39.
Id. at 439.
See id.
Id. at 440.
Id. at 452 (Kennedy, J., concurring).
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Real ID Act vests too much power in one individual. Moreover,
because the power is vested in the secretary of an administrative
agency, a politically appointed position, the statute represents an
especially drastic deviation from the Framers’ vision.128 Further,
the power granted to the President under the Line Item Veto Act
was subject to more restrictions than that granted to the
Secretary of the Department of Homeland Security under Section
102(c) of the Real ID Act. While the Line Item Veto Act set
forth specific requirements for the provisions subject to
cancellation,129 it also provided for a built in check on the
President’s cancellation power.130 By contrast, the Real ID Act
provides no specific requirements for the waiver of laws; the
Secretary is granted “authority to waive all legal requirements
such Secretary, in such Secretary’s sole discretion, determines
necessary to ensure expeditious construction of the barriers and
roads.”131
There is no built in check on the Secretary’s power. The
Secretary’s waiver decision can only be examined through
judicial review;132 therefore, unless a party with standing files
suit, the decision will go unchecked. Significantly, even if a
party with standing seeks judicial review, the narrow
requirements for such a suit make it highly unlikely to
128
See supra note 79.
See supra note 119.
130
A cancellation takes effect upon receipt by Congress of the
special message from the President. If, however, a “disapproval
bill” pertaining to a special message is enacted into law, the
cancellations set forth in that message become “null and void.” The
Act sets forth a detailed expedited procedure for the consideration of
a “disapproval bill” . . . . A majority vote of both Houses is
sufficient to enact a disapproval bill. The Act does not grant the
President the authority to cancel a disapproval bill, but he does, of
course, retain constitutional authority to veto such a bill.
Clinton v. City of New York, 524 U.S. 417, 436–37 (1998) (citing 2
U.S.C.S. § 691).
131
War on Terror, and Tsunami Relief, Pub. L. No. 109-13, § 102(c)(1), 119
Stat. 231 (2005).
132
129
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succeed.133 Though the separation of powers violations in the
Real ID Act are more flagrant than those embodied in the Line
Item Veto Act, the two statutes, nevertheless, bear remarkable
similarities.
The Court in Clinton explicitly stated that “[t]he cancellation
of one section of a statute may be the functional equivalent of a
partial repeal even if a portion of the section is not cancelled.”134
In Clinton, a partial repeal was held unconstitutional under
Article I, Section 7.135 A “partial repeal” is precisely what the
Secretary of Homeland Security is authorized to do under the
Real ID Act.136 By refusing to apply any and all statutes he
deems necessary along the border, the Secretary is in effect
partially repealing these statutes.137 While the district court held
that this did not constitute a partial repeal because a waived law
“retains the same legal force and effect as it had when it was
passed by both houses of Congress and presented to the
President,”138 this is clearly not the case. When statutes,
particularly environmental ones, are enacted they are intended to
protect specific places or things deemed especially valuable to
society and to ensure the safety and health of citizens.139 How
can it logically be argued that these statutes are not being
partially repealed when they exempt over 700 miles of United
States land,140 containing various endangered species141 and
133
See id.
135
Id. at 444.
136
Plaintiff’s Opposition to Defendants’ Renewed Motion to Dismiss,
Defenders of Wildlife v. Chertoff, 527 F. Supp. 2d 119 (D.D.C. 2007) (No.
07-1801); Plaintiff’s Lodged Surreply to Defendants’ Renewed Motion to
Dismiss, Defenders of Wildlife, 527 F. Supp. 2d 119 (No. 07-1801).
137
Plaintiff’s Opposition to Defendants’ Renewed Motion, supra note
136; Plaintiff’s Lodged Surreply, supra note 136.
138
139
See supra note 36.
140
8 U.S.C.A. § 1103 note (b)(1)(A) (West 2009) (Improvement of
Barriers at Border).
141
Defenders of Wildlife, Border Fence Construction: San Pedro
Riparian
NCA,
http://www.defenders.org/programs_and_policy/in_the_
courts/legal_docket/border_fence_construction_san_pedro_riparian_nca.php
134
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specifically designated as a conservation area?142 When statutes
are not applied to several of the items they were designed to
protect, they are being partially repealed.
While the district court stated that labeling the Secretary’s
actions under the Real ID Act a partial repeal would invalidate
“numerous other statutory authorizations of executive
waivers,”143 this reasoning is flawed. The statutory waiver
authorizations cited by the district court in support of this
proposition were far more specific and detailed than the
sweeping authorization in Section 102(c) of the Real ID Act.144
Further, the Line Item Veto Act “require[d] the President to
adhere to precise procedures whenever he exercises his
cancellation authority. In identifying items for cancellation he
must consider the legislative history, the purposes, and other
relevant information about the items,”145 while the Real ID Act
requires no such consideration and is entirely discretionary on
(last visited Sept. 30, 2009).
142
See supra note 29.
143
144
The court cited:
10 U.S.C. § 433 (Secretary of Defense, “in connection with a
commercial activity,” may waive compliance with “certain Federal
laws or regulations pertaining to the management and administration
of Federal agencies” if they would “create an unacceptable risk of
compromise of an authorized intelligence activity”); 15 U.S.C.
§ 2621 (EPA may waive compliance with Toxic Substances Act
“upon a request and determination by the President that the
requested waiver is necessary in the interest of national defense.”);
20 U.S.C. § 7426(e) (Secretaries of the Interior, Labor, Health and
Human Services, and Education “[n]otwithstanding any other
provision of law. . . shall have the authority to waive any regulation,
policy, or procedure promulgated by [their] department” necessary
for the integration of education and related services provided to
Indian students); 22 U.S.C. § 7207(a)(3) (President may waive a
statutory prohibition on assistance to certain countries “to the degree
[he] determines that it is in the national security interest of the
United States to do so, or for humanitarian reasons”).
Id. at 125 n.5.
145
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the part of the Secretary.146 This raises the obvious question of
why there is such incongruence between the Supreme Court’s
management of the two Acts. After declaring the Line Item Veto
Act unconstitutional, the Court declined to test the
constitutionality of the Real ID Act,147 thereby permitting a
violation of the separation of powers.
B. Comparison to INS v. Chadha
Similar inconsistency can be seen when comparing the
Court’s inaction in Defenders of Wildlife to its holding in
Immigration and Naturalization Service v. Chadha.148 The
legislative veto at issue in Chadha was, as the Court conceded, a
“convenient shortcut.”149 However, while acknowledging that a
one House veto was “on its face, an appealing compromise,” the
Court stated that “it is crystal clear from the records of the
Convention, contemporaneous writings and debates, that the
Framers ranked other values higher than efficiency.”150 Allowing
the Secretary of the Department of Homeland Security to waive
“all legal requirements . . . [he] determines necessary to ensure
expeditious construction”151 of border fences and roads clearly
has the appeal of swift action. During the period of increasing
xenophobia following September 11th, the rapid completion of
border reinforcements became desirable to many government
152
officials and American citizens alike. However, as the Court
146
War on Terror, and Tsunami Relief, Pub. L. No. 109–13, § 102(c)(1), 119
Stat. 231 (2005).
147
Defenders of Wildlife v. Chertoff, 128 S. Ct. 2962 (2008).
148
Immigration & Naturalization Serv. v. Chadha, 462 U.S. 919 (1983)
(holding one-House veto provision of the Immigration and Nationality Act
unconstitutional).
149
Id. at 958.
150
Id. at 958–59.
151
152
See Jeffrey M. Jones, Nearly Half of Americans Say Immigration
Levels Should Be Decreased, GALLUP, July 10, 2003, http://www.gallup.
com/poll/8815/Nearly-Half-Americans-Say-Immigration-Levels-ShouldDecreased.aspx.
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noted in Chadha, “[t]he choices we discern as having been made
in the Constitutional Convention impose burdens on
governmental processes that often seem clumsy, inefficient, even
unworkable, but those hard choices were consciously made by
men who had lived under a form of government that permitted
arbitrary governmental acts to go unchecked.”153 Of course it is a
convenient shortcut to waive any and all statutes that would
interfere with border reinforcements, most of which are
environmental and would require surveys and the possible
alteration of construction plans. However, the separation of
powers doctrine forbids such an unrestrained grant of power to
one individual and, as the Court stated in Chadha, “[t]here is no
support in the Constitution or decisions of this Court for the
proposition that the cumbersomeness and delays often
encountered in complying with explicit constitutional standards
may be avoided, either by Congress or by the President.”154
Simply put, no branch of government may discount the carefully
constructed constitutional system of separation of powers and
checks and balances in the interest of efficiency.
This tension between expediency and constitutionality is not
the only parallel between Section 244(c)(1) of the Immigration
and Nationality Act and Section 102(c) of the Real ID Act.155
Both acts deal with the power to nullify constitutionally valid
decisions or statutes.156 Clearly, the doctrine of checks and
balances places great emphasis on the value of internal
government regulation.157 However, this process was carefully
laid out in the Constitution and the power to nullify proposed
158
legislation was delegated to the President. This delegation of
power “was based on the profound conviction of the Framers
that the powers conferred on Congress were the powers to be
153
Chadha, 462 U.S. at 959.
Id. (referencing Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S.
579 (1952)).
155
156
See supra text accompanying notes 19, 109.
157
See supra note 79.
158
U.S. CONST. art. I, § 7, cl. 2.
154
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484
most carefully circumscribed.”159 Because no such veto power
was conferred elsewhere, the Court in Chadha held that the
ability of one House of Congress to void a constitutionally valid
decision of the Executive Branch was unconstitutional.160
Similarly, the ability of one Executive Branch administrative
agency officer to waive any and all statutes he deems necessary
far exceeds the Framers’ precisely carved out veto provision.161
The current system is far from perfect, but as the Court aptly
stated in Chadha, “[w]ith all the obvious flaws of delay,
untidiness, and potential for abuse, we have not yet found a
better way to preserve freedom than by making the exercise of
power subject to the carefully crafted restraints spelled out in the
Constitution.”162
It is when these explicit constitutional procedures begin to
erode in the name of convenience that the entire system of
government is in danger. While there exists a natural push and
pull between the three branches, it is expected that when
legislation extends beyond constitutional boundaries, the Court
will step in and perform its function as a legislative check.163
These decisions will not always be straightforward. As the Court
stated in Chadha, “[q]uestions may occur which we would
gladly avoid; but we cannot avoid them. All we can do is, to
exercise our best judgment, and conscientiously to perform our
duty.”164 However, instead of performing its constitutionally
appointed duty, the Court chose to avoid the issue in Defenders
of Wildlife. Section 102(c) of the Real ID Act should have been
evaluated by the Court and declared unconstitutional for
violating the separation of powers doctrine, specifically its
nondelegation doctrine.
159
Immigration & Naturalization Serv. v. Chadha, 462 U.S. 919, 947
(1983).
160
161
162
163
164
Id. at 959.
See U.S. CONST. art. I, § 7, cl. 2.
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C. The Intelligible Principle Requirement of the
Nondelegation Doctrine
Recognizing that, in an ever-changing, complicated society,
circumstances would necessarily arise in which congressional
delegation of authority was warranted, the Supreme Court set
forth strict guidelines for such delegation in J.W. Hampton Jr.,
& Co. v. United States.165 Under the nondelegation doctrine,
Congress may enact legislation delegating some of its
rulemaking authority to administrative agencies as long as the
legislation sets forth an “intelligible principle” to which the
agency must adhere.166 Because Congress had provided explicit
167
guidelines in the Tariff Act of 1922, its delegation of tariff
adjustment duties to the President was held constitutional in
Hampton.168 Specifically, the President was only permitted to
169
adjust tariffs when certain requirements were met. Congress
also provided a detailed list of factors for the President to
consider in making his determination.170 Investigations were
165
J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394 (1928).
Id. at 409.
167
Tariff Act of Sept. 21, 1922, ch. 356, § 315, 42 Stat. 941–943
(repealed 1930).
168
J.W. Hampton, 276 U.S. 394.
169
When the difference between the domestic production cost of a
product and the production cost of the product in a competing foreign country
was not equalized by the current tariff, the President was authorized to adjust
the tariff in order to achieve equalization. Id. at 401.
170
(c). That in ascertaining the differences in costs of production,
under the provisions of subdivisions (a) and (b) of this section, the
President, in so far as he finds it practicable, shall take into
consideration (1) the differences in conditions in production,
including wages, costs of material, and other items in costs of
production of such or similar articles in the United States and in
competing foreign countries; (2) the differences in the wholesale
selling prices of domestic and foreign articles in the principal
markets of the United States; (3) advantages granted to a foreign
producer by a foreign government, or by a person, partnership,
corporation, or association in a foreign country; and (4) any other
advantages or disadvantages in competition.
Id. at 401–02 (quoting Tariff Act Sept. 21, 1922, ch. 356, § 315, 42 Stat.
166
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required prior to the tariff adjustments, including public
hearings.171 Further, Congress included restrictions prohibiting
the “transfer of an article from the dutiable list to the free list or
from the free list to the dutiable list, [or] a change in form of
duty” and specified that the adjustments were subject to reversal
when the requirements were no longer met.172 Thus, Congress
delegated its power under detailed criteria in the Tariff Act and
the Court utilized these standards when setting forth the
“intelligible principle” doctrine.173
The Court further defined the “intelligible principle” concept
in the more recent case, Mistretta v. United States, where it
stated that in order for a delegation to be constitutionally valid,
Congress must “clearly delineat[e] the general policy, the public
agency which is to apply it, and the boundaries of this delegated
authority.”174 The Court again found a constitutional delegation
because in delegating authority to the United States Sentencing
Commission to promulgate sentencing guidelines under the
Sentencing Reform Act of 1984,175 Congress set forth numerous
parameters. Using a formula similar to the Tariff Act, Congress
articulated precise requirements for the formation of the
sentencing guidelines,176 provided factors to be considered by the
941–943 (repealed 1930)).
171
Investigations to assist the President in ascertaining differences in
costs of production under this section shall be made by the United
States Tariff Commission, and no proclamation shall be issued under
this section until such investigation shall have been made. The
commission shall give reasonable public notice of its hearings and
shall give reasonable opportunity to parties interested to be present,
to produce evidence, and to be heard.
Id. at 402.
172
Id.
173
See id. at 409.
174
Mistretta v. United States, 488 U.S. 361, 372–73 (1989) (quoting
Am. Power & Light Co. v. SEC, 329 U.S. 90, 105 (1946)).
175
Sentencing Reform Act of 1984, 18 U.S.C. § 3551 et seq., 28 U.S.C.
§ 991–98 (2008).
176
Congress instructed the Commission that these sentencing ranges
must be consistent with pertinent provisions of Title 18 of the United
States Code and could not include sentences in excess of the
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487
Commission,177 and set forth specific restrictions.178 Additionally,
the Commission was given a list of what the newly formed
guidelines were required to include.179 Because, “in addition to
statutory maxima. Congress also required that for sentences of
imprisonment, “the maximum of the range established for such a
term shall not exceed the minimum of that range by more than the
greater of 25 percent or 6 months, except that, if the minimum term
of the range is 30 years or more, the maximum may be life
imprisonment.” Moreover, Congress directed the Commission to use
current average sentences “as a starting point” for its structuring of
the sentencing ranges.
Mistretta, 488 U.S. at 374–75 (citing 28 U.S.C. § 994).
177
To guide the Commission in its formulation of offense categories,
Congress directed it to consider seven factors: the grade of the
offense; the aggravating and mitigating circumstances of the crime;
the nature and degree of the harm caused by the crime; the
community view of the gravity of the offense; the public concern
generated by the crime; the deterrent effect that a particular sentence
may have on others; and the current incidence of the offense.
Congress set forth 11 factors for the Commission to consider in
establishing categories of defendants. These include the offender’s
age, education, vocational skills, mental and emotional condition,
physical condition (including drug dependence), previous
employment record, family ties and responsibilities, community ties,
role in the offense, criminal history, and degree of dependence upon
crime for a livelihood.
Id. at 375–76 (citing 28 U.S.C. § 994).
178
“Congress also prohibited the Commission from considering the ‘race,
sex, national origin, creed, and socioeconomic status of offenders,’ and
instructed that the guidelines should reflect the ‘general inappropriateness’ of
considering certain other factors, such as current unemployment, that might
serve as proxies for forbidden factors.” Id. at 376 (citing 28 U.S.C. § 994).
179
Congress mandated that the guidelines include: “(A) a
determination whether to impose a sentence to probation, a fine, or a
term of imprisonment; (B) a determination as to the appropriate
amount of a fine or the appropriate length of a term of probation or
a term of imprisonment; (C) a determination whether a sentence to a
term of imprisonment should include a requirement that the
defendant be placed on a term of supervised release after
imprisonment, and, if so, the appropriate length of such a term; and
(D) a determination whether multiple sentences to terms of
imprisonment should be ordered to run concurrently or
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these overarching constraints, Congress provided even more
detailed guidance to the Commission,”180 the Court found that
the intelligible principal standard had actually been exceeded and
“in actuality [Congress] legislated a full hierarchy of
punishment.”181 Nonetheless, the “intelligible principle” doctrine
was reaffirmed and further elucidated by the Court.182 It is clear
from both Hampton and Mistretta that in order to be
constitutional, a congressional delegation must set forth more
than a general directive.183 Rather, it must include definite
standards to guide the agency in its decision-making.184
The absolute lack of standards in Section 102(c) of the Real
ID Act is a glaring violation of the nondelegation doctrine. In
fact, it is difficult to compare the Act to Hampton and Mistretta
because there are virtually no guidelines in Section 102(c) on
which to base a comparison.185 Both the Tariff Act and the
Sentencing Reform Act began with specific requirements that
had to be met in order for the designated authority to act.186 The
only requirement in Section 102(c) is the wholly discretionary
opinion of the Secretary that the action is “necessary to ensure
expeditious construction of the barriers and roads.”187 This is
hardly the same kind of standard upheld in Hampton and
Mistretta. While the Illegal Immigration Reform and Immigrant
Responsibility Act sets forth several factors to be considered in
erecting the border fences,188 the Secretary is not directed to
consecutively.”
Id. at 374 n.8 (citing 28 U.S.C. § 994(a)(1)).
180
Id. at 376.
181
Id. at 377.
182
Id. at 372–77.
183
See id.; J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394
(1928).
184
See Mistretta, 488 U.S. 361; J.W. Hampton, 276 U.S. 394.
185
See Emergency Supplemental Appropriations Act for Defense, the
Global War on Terror, and Tsunami Relief, Pub. L. No. 109–13,
§ 102(c)(1), 119 Stat. 231 (2005).
186
187
188
In general. In carrying out this section, the Secretary of
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489
consider any factors in making his determination of statutory
waivers.189 Thus, while the Secretary may choose to consider the
aforementioned factors, the language of the Real ID Act does
not require him to.190 Rather, the only guiding principle is his
“sole discretion.”191 He is simply authorized to “waive all legal
requirements.”192 This absence of any meaningful restriction on
the Secretary’s authority is an unprecedented deviation from the
“intelligible principle” standard.
The district court’s finding that the specifications of areas of
“high illegal entry,” deterring “illegal crossings,” and
“necessary to ensure expeditious construction” constitute
sufficient guiding principles is not convincing.193 Imagine a
similar directive in Mistretta. Surely the Court would not have
upheld a delegation to the Sentencing Commission to promulgate
sentencing guidelines that the Commission, in its sole discretion,
deemed necessary to punish criminals. Likewise, the Tariff Act
delegation in Hampton would not have passed constitutional
muster had it delegated power to the President to adjust any
tariffs he deemed necessary in the interest of equality between
domestic and foreign production or, even more akin to
Defenders of Wildlife v. Chertoff, allowed the President to waive
such tariffs. The holding in Defenders of Wildlife v. Chertoff is
clearly at odds with both landmark nondelegation cases.
At the same time, Section 102(c) of the Real ID Act bears a
striking resemblance to legislation the Court has previously
Homeland Security shall consult with the Secretary of the Interior,
the Secretary of Agriculture, States, local governments, Indian
tribes, and property owners in the United States to minimize the
impact on the environment, culture, commerce, and quality of life
for the communities and residents located near the sites at which
such fencing is to be constructed.
8 U.S.C.A. § 1103 note (b)(1)(C)(i) (West 2009) (Improvement of Barriers at
Border).
189
See Emergency Supplemental Appropriations Act § 102(c)(1).
190
Id.
191
Id.
192
Id.
193
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struck down on nondelegation grounds.194 In Panama Refining
Co. v. Ryan, the Court found the congressional delegation under
Section 9(c) of the National Industrial Recovery Act of 1933195
“without constitutional authority.”196 In an effort to regulate the
national oil industry, Section 9(c) delegated power to the
President to enforce limits on oil transportation.197 However,
similar to Section 102(c) of the Real ID Act, this delegation
lacked a sufficient intelligible principle.198 The Court noted,
“Section 9(c) does not state whether, or in what circumstances
or under what conditions, the President is to [act under the given
authority] . . . . It establishes no criterion to govern the
President’s course . . . [and] does not require any finding by the
President as a condition of his action.”199 Likewise, Section
102(c) of the Real ID Act provides no guide for when the
Secretary may or may not exercise his statutory waiver
authority. The district court found that the phrase “areas of high
illegal entry,” in reference to fencing sites, constituted a
194
See Panama Refining Co. v. Ryan, 293 U.S. 388 (1935).
National Industry Recovery Act, Pub. L. No. 73–67, § 9(c), 48 Stat.
195, 200 (1933), invalidated by A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495 (1935).
196
Panama Refining, 293 U.S. at 433.
197
(c) The President is authorized to prohibit the transportation in
interstate and foreign commerce of petroleum and the products
thereof produced or withdrawn from storage in excess of the amount
permitted to be produced or withdrawn from storage by any state
law or valid regulation or order prescribed thereunder, by any
board, commission, officer, or other duly authorized agency of a
State. Any violation of any order of the President issued under the
provisions of this subsection shall be punishable by fine of not to
exceed $ 1,000, or imprisonment for not to exceed six months, or
both.
National Industry Recovery Act § 9(c).
198
“As to the transportation of oil production in excess of state
permission, the Congress has declared no policy, has established no standard,
has laid down no rule. There is no requirement, no definition of
circumstances and conditions in which the transportation is to be allowed or
prohibited.” Panama Refining, 293 U.S. at 430.
199
Id. at 415.
195
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sufficient guideline.200 However, there is no definition for this
term anywhere within the Real ID Act.201 It is mentioned but
once in the Illegal Immigration Reform and Immigrant
Responsibility Act, without providing even general criteria.202
The other guideline, what the Secretary deems “necessary,”203 is
even more subjective, open to almost limitless interpretation.
The Court’s characterization of Section 9(c) in Panama Refining
Co. is an all too apt description of Section 102(c) of the Real ID
Act.204 Section 9(c) actually provided more direction by
furnishing distinct rules for the President to follow,205 whereas
the Real ID Act relegates decision-making to the Secretary’s sole
discretion. Nonetheless, the Court in Panama Refining Co. held
the delegation unconstitutional because it provided “the President
an unlimited authority to determine the policy and to lay down
the prohibition, or not to lay it down, as he may see fit.”206 This
is precisely the type of authority Section 102(c) of the Real ID
Act grants to the Secretary of Homeland Security.
Panama Refining Co. is not the only example of the Court’s
207
incongruous treatment of Defenders of Wildlife v. Chertoff. In
A. L. A. Schechter Poultry Corp. v. United States, the Court
200
2007).
201
Global War on Terror, and Tsunami Relief, Pub. L. No. 109-13, 119 Stat.
231 (2005).
202
Border).
203
204
Id.; see also supra notes 198–99 and accompanying text.
205
The President was required to use state laws, regulations, or orders as
the benchmark for permitted transportation quantities. National Industry
Recovery Act, Pub. L. No. 73-67, § 9(c), 48 Stat. 195, 200 (1933),
invalidated by A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495 (1935).
206
Panama Refining Co. v. Ryan, 293 U.S. 388, 415 (1934).
207
See, e.g., Mistretta v. United States, 488 U.S. 361 (1988); A.L.A.
Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935); J.W.
Hampton, Jr., & Co. v. United States, 276 U.S. 394 (1928).
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struck down another unconstitutional congressional delegation.208
The legislation at issue in Schechter, Section 3 of the National
Industrial Recovery Act,209 again bore a strong resemblance to
Section 102(c) of the Real ID Act. Under Section 3, the
President was granted authority to approve industry codes of
“fair competition.”210 “Fair competition” was not defined in the
National Industrial Recovery Act,211 just as “high illegal entry”
and “necessary” are not defined in the Real ID Act.212 Due to
208
A.L.A. Schechter Poultry, 295 U.S. 495.
National Industry Recovery Act § 3.
210
Id.
(a) Upon the application to the President by one or more trade or
industrial associations or groups, the President may approve a code
or codes of fair competition for the trade or industry or subdivision
thereof, represented by the applicant or applicants, if the President
finds (1) that such associations or groups impose no inequitable
restrictions on admission to membership therein and are truly
representative of such trades or industries or subdivisions thereof,
and (2) that such code or codes are not designed to promote
monopolies or to eliminate or oppress small enterprises and will not
operate to discriminate against them, and will tend to effectuate the
policy of this title: Provided, That such code or codes shall not
permit monopolies or monopolistic practices: Provided further, That
where such code or codes affect the services and welfare of persons
engaged in other steps of the economic process, nothing in this
section shall deprive such persons of the right to be heard prior to
approval by the President of such code or codes. The President may,
as a condition of his approval of any such code, impose such
conditions (including requirements for the making of reports and the
keeping of accounts) for the protection of consumers, competitors,
employees, and others, and in furtherance of the public interest, and
may provide such exceptions to and exemptions from the provisions
of such code, as the President in his discretion deems necessary to
effectuate the policy herein declared.
Id. § 3(a).
211
The Court struggled to find a definition, referencing sources such as
the common law and the Federal Trade Commission Act. A.L.A. Schechter
Poultry, 295 U.S. at 531–35.
212
Global War on Terror, and Tsunami Relief, Pub. L. No. 109-13, 119 Stat.
231 (2005).
209
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the ambiguous language, the Court in Schechter found that
Section 3 supplied “no standards for any trade, industry or
activity.”213 Further, the Court held that it lacked sufficient
guidelines “aside from the statement of the general aims of
rehabilitation, correction and expansion described in section
one.”214 A “statement of general aims” is precisely what
Congress set forth in Section 102(c) of the Real ID Act. The
Secretary is directed to use his discretion in furtherance of the
broad goals of “deter[ing] illegal crossings”215 and “ensur[ing]
expeditious construction” of barriers.216 It was exactly this sort
of directive in Schechter that led the Court to hold, “[i]n view of
the scope of that broad declaration, and of the nature of the few
restrictions that are imposed, the discretion of the
President . . . is virtually unfettered” and, therefore, “an
unconstitutional delegation of legislative power.”217 This begs the
obvious question of why the Court did not come to the same
conclusion in Defenders of Wildlife v. Chertoff. The Secretary’s
limitless statutory waiver authority is a clear violation of the
nondelegation doctrine. Given the Court’s intelligible principle
jurisprudence, it is clear that the congressional delegation in
Section 102(c) of the Real ID Act is unconstitutional.
IV. DETRIMENTAL RESULTS OF THE SUPREME COURT’S INACTION
A. Environmental Effects
The Secretary’s vast power is only exacerbated by the
drastically limited options for review provided by the Real ID
218
Given the narrow restrictions placed on judicial
Act.
213
A.L.A. Schechter Poultry, 295 U.S. at 541.
Id.
215
Border).
216
Id. § 1103 note (c)(1).
217
A.L.A. Schechter Poultry, 295 U.S. at 541–42.
218
War on Terror, and Tsunami Relief, Pub. L. No. 109-13, § 102(c)(2), 119
Stat. 231 (2005).
214
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intervention,219 the Court’s denial of certiorari was especially
troublesome. Unfortunately, the Court’s inaction will likely have
a lasting effect on the environment. Defenders of Wildlife
warned that construction of the border fence in the SPRNCA
would “fragment[] critical corridors for wildlife, including
jaguars, black bear . . . and many other species.”220 This
presents an especially dire situation for the endangered jaguars
whose long-term survival is dependent upon their ability to roam
over a large area.221 In addition, the fence would block
“numerous desert washes feeding the San Pedro River and
floodplain, resulting in erosion and sedimentation into the river,
which provides habitat for hundreds of breeding, migratory, and
wintering bird species, as well as more than 80 species of
mammals.”222
Further, the Bureau of Land Management, whose initial
Environmental Assessment (EA) found “no significant
environmental impact,”223 subsequently issued a supplemental
memorandum following a visit to the fence site.224 The memo
expressed serious concerns about floods resulting from debris
build-up on the fence.225 It continued, “[t]he timing and intensity
of seasonal flood flows in the San Pedro River are essential for
maintaining riparian function as well as recharging the alluvial
aquifer. Regardless of the maintenance commitments by Border
Patrol, the proposed/existing fence could inadvertently act as a
flood control structure altering natural flood characteristics.”226
219
Border Fence Construction, supra note 141.
221
Joe Zentner, Jaguars on the Fence, DESERT USA, http://www.desert
usa.com/mag06/dec/jaguars.html.
222
Border Fence Construction, supra note 141.
223
2007).
224
Memorandum from the Bureau of Land Management, BLM EA #AZ420-2007-051 Supplement (Oct. 4, 2007), available at http://www.biological
diversity.org/programs/public_lands/rivers/san_pedro_river/pdfs/blm-foiaresp-040808-BLM-concerns-100407.pdf.
225
Id.
226
Id.
220
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Notably, the supplemental memo was issued several weeks prior
to Chertoff’s waiver.227 Chertoff only cited to the initial EA’s
finding of “no significant environmental impact” in support of
his waiver decision.228
Unfortunately, the memo proved to be an accurate predictor.
In July of 2008, the combination of heavy rains and border
fencing in southwestern Arizona resulted in severe flooding at
the Organ Pipe Cactus National Monument.229 According to
news reports, the flooding was caused by “debris and water
backup [at the fence] during a . . . storm.”230 Just as many fence
opponents feared,
[r]apidly moving runoff in washes dislodged or eroded
large chunks of concrete foundations, and debris stacking
up against the fence itself created barriers or dams
redirecting the water, creating gullies and causing even
more erosion . . . . It created backwater pools up to
seven feet deep and lateral flows several hundred feet
wide that moved out of the washes, eroding some areas
along patrol roads. The waters even scoured some fence
and vehicle barrier foundations.231
Despite these seemingly prophetic events, fence construction
at the SPRNCA continued. Unlike Organ Pipe Cactus National
Monument, the plans for SPRNCA include movable barriers in
the riverbed that may be removed to minimize affecting water
227
Determination Pursuant to Section 102 of the Illegal Immigration
Reform and Immigrant Responsibility Act of 1996 as Amended by Section
102 of the REAL ID Act of 2005 and as Amended by the Secure Fence Act
of 206, 72 Fed. Reg. 60,870 (Oct. 26, 2007).
228
Press Release, Dep’t of Homeland Sec., Department of Homeland
Security: Statement Regarding Exercise of Waiver Authority (Oct. 2007),
available at http://www.biologicaldiversity.org/programs/public_lands/rivers/
san_pedro_river/pdfs/dhs-EXEMPTION-statement-200710.pdf.
229
The flooding occurred at the port of entry at Lukeville, Arizona and
Sonoyta Sonora, Mexico. Arthur H. Rotstein, Border Fence Causing
Flooding Trouble, TUCSON CITIZEN, Aug. 24, 2008, http://www.tucson
citizen.com/ss/local/94705.php.
230
Id.
231
Id.
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flow.232 However, recognizing the irony of placing removable
barriers in an area known for flash floods, one critic stated,
“[i]t’s a joke . . . [l]ike they’re going to anticipate when it’s
going to flood and they’re going to go out and remove them.”233
Thus, the SPRNCA remains vulnerable to destruction similar to
that experienced at Organ Pipe.234
B. Political Consequences
While the environmental effects of the Court’s inaction are
potentially devastating, so are the political ramifications if the
Court stays this course. The “separation of powers framework
was designed to prevent special interests from co-opting the
government . . . . [T]hese special interests must convince three
different groups with three different constituencies of the
correctness of their proposals.”235 Consequently, the erosion of
the separation of powers doctrine by Section 102(c) of the Real
ID Act provides special interest groups with the ability to wield
extensive influence simply by swaying the judgment of one
individual. In Chadha, the Court recognized the danger in such
a situation, noting that the purpose of congressional power to
override a presidential veto is to “preclud[e] final arbitrary
action of one person.”236 However, final arbitrary action is
precisely what Chertoff exercised in his waiver of the twenty
statutes.237
While the direct effects of Section 102(c) are disconcerting,
232
Howard Fischer, BLM: Border Barriers Would Harm San Pedro Area,
EAST VALLEY TRIBUNE, Apr. 27, 2008, http://www.eastvalleytribune.
com/story/114902.
233
Id. (quoting Sandy Bahr, Sierra Club).
234
235
Michael G. Locklar, Is the 1996 Line-Item Veto Constitutional?, 34
HOUS. L. REV. 1161, 1179 (1997).
236
Immigration & Naturalization Serv. v. Chadha, 462 U.S. 919, 951
(1983).
237
See Determination Pursuant to Section 102 of the Illegal Immigration
Reform and Immigrant Responsibility Act of 1996 as Amended by Section
102 of the REAL ID Act of 2005 and as Amended by the Secure Fence Act
of 206, 72 Fed. Reg. 60,870 (Oct. 26, 2007).
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an even larger potential problem exists if the Court stays the
course of inaction while similar unconstitutional legislation is
enacted. The danger in violating the separation of powers
doctrine and, thus, allowing special interest groups increased
power over legislation is embodied in the very title of these
groups. Special interests strive to further the goals of specific
sects of society, as opposed to the general public.238 Because
these groups vary in size and funding, the more powerful groups
tend to be those with the most funding.239 A system that
facilitates the interests of the affluent while ignoring those with
less means drastically deviates from the Framers’ vision of equal
representation and protection from “improvident laws.”240
However, well-funded special interests are not the only
danger associated with the deterioration of the separation of
powers doctrine. Political parties also represent different sects of
society, at times greatly at odds with one another. Upon its first
introduction, the Real ID Act was passed in the House of
Representatives with ninety-six percent of Republicans voting for
it and seventy-eight percent of Democrats voting against it.241
238
Some well known special interest groups include the National
Association for the Advancement of Colored People (NAACP), AntiDefamation League, and Gay and Lesbian Advocates and Defenders
(GLAD). Political Advocacy Groups, A Directory of United States
Lobbyists,
http://www.vancouver.wsu.edu/fac/kfountain/alpha.html
(last
239
A Fortune Magazine survey confirmed “the more money a group
spent on its plain old lobbying efforts in Washington, the more influence it
wielded.” Jeffrey H. Birnbaum, Follow the Money. Hard Money. Soft
Money. Lobbying Money. Which Buys the Most Influence in Washington?
FORTUNE’s Power 25 Survey Attempts an Answer and Ranks the Top
Lobbying Groups, FORTUNE, Dec. 6, 1999. According to Fortune’s Power 25
survey, the American Association of Retired Persons (AARP) was the most
powerful lobbying group, while the National Rifle Association was tied for
second place. Id.
240
241
Brian Murphy, The Real ID Act of 2005: Tightening the Burden on
Asylum Seekers, Federal Standards for Driver’s Licenses, and Patching a
Hole in a Border Fence at the Cost of Other Legislation, 19 GEO. IMMIGR.
L.J. 191, 191 (2004) (citations omitted). The bill was not passed due to
opposition in the Senate. See supra note 2 and accompanying text.
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This disparity illustrates the profound divide between the two
political parties. It also serves as a warning against granting
sweeping authority to one individual. Despite the expected
uneven distribution of representatives in Congress, the presence
of both parties encourages dialogue and debate regarding
important legislative matters. In stark contrast, the delegation of
broad authority to one individual requires no debate. Legislation,
such as Section 102(c) of the Real ID Act, leaves important
legislative matters to the discretion of one individual and,
consequently, the unfettered will of one political party.
Ironically, the Court’s negligence in addressing this violation of
separation of powers means that the solution will likely come
from exertion of political party power.
V. A CONGRESSIONAL SOLUTION TO THE COURT’S FAILURE AS A
LEGISLATIVE CHECK
Fortunately, some legislators are aware of the
unconstitutionality of Section 102(c).242 As illustrated by the
original House vote in 2005, the majority of those legislators are
Democrats.243 In fact, in June of 2007 U.S. Rep. Raul Grijalva,
D-Ariz., introduced legislation that would have repealed the
Secretary’s waiver authority granted under the Real ID Act.244
The Borderlands Conservation and Security Act245 not only
provided for the outright repeal of Section 102(c) of the Illegal
Immigration Reform and Immigrant Responsibility Act of 1996,
but also required the Secretary to:
develop a border protection strategy that supports the
border security needs of the United States in a manner
that best protects—(A) units of the National Park System;
(B) National Forest System land; (C) land under the
242
Forty-eight U.S. Representatives, all of whom were Democrats, cosponsored the Borderlands Conservation and Security Act that, if passed,
would have repealed Section 102(c) of the Real ID Act. Borderlands
Conservation and Security Act of 2007, H.R. 2593, 110th Cong. (2007).
243
244
H.R. 2593.
245
Id.
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jurisdiction of the Bureau of Land Management; (D) land
under the jurisdiction of the United States Fish and
Wildlife Service; and (E) other relevant land under the
jurisdiction of the Department of the Interior or the
Department of Agriculture.246
U.S. Rep. Earl Blumenauer, a fellow Democrat, expressed
support for the bill, stating “[i]t is unprecedented that a single
person can be above the law without any judicial appeal or
remedy . . . . And it is absurd to claim that he must waive the
Safe Drinking Water Act and Clean Air Act, to name a few, in
order to build this border fence.”247 Unfortunately, the bill
stalled in committee shortly after its introduction.248 As a result it
was “cleared from the books” upon termination of the 110th
congressional session.249 There is still hope that the Democratic
250
victory in the recent election may revive the bill or lead to
similar legislation.251 This corrective legislative action is
necessary due to the Court’s failure to perform its duty as a
legislative check. While such congressional action would correct
246
Id. § 4(a)(1). The Secretary is directed to develop the protection plan
in cooperation with the Secretary of the Interior and the Secretary of
Agriculture. Id.
247
David McLemore, Fight Over Border Fence Environmental Waivers
Could Reach Supreme Court, DALLAS MORNING NEWS, Apr. 15, 2008,
(quoting U.S. Rep. Earl Blumenauer, D-Ore.).
248
The Bill was referred to the Committee on Homeland Security,
Committee on Natural Resources, and Committee on Agriculture on June 6,
2007. H.R. 2593.
249
GovTrack, H.R. 2593: Borderlands Conservation and Security Act of
2007, http://www.govtrack.us/congress/bill.xpd?bill=h110-2593 (last visited
Sept. 28, 2009).
250
The Democratic Party won majority control of both Houses of
Congress in 2008. House of Representatives Big Board Election Results 2008,
N.Y. TIMES, Dec. 9, 2008, http://elections.nytimes.com/2008/results/house/
votes.html; Senate Big Board Election Results 2008, N.Y. TIMES, Dec. 9,
2008, http://elections.nytimes.com/2008/results/senate/votes.html.
251
Legislation has already been introduced in the House and Senate that
would repeal Title II of the Real Id Act, the section requiring national ID
cards. REAL ID Repeal and Identification Security Enhancement Act of
2009, H.R. 3471, 111th Cong. (2009); Providing for Additional Security in
States’ Identification Act of 2009, S. 1261, 111th Cong. (2009).
NIELSEN REVISED.DOC
4/28/2010 11:39 AM
500
the separation of powers violation, it is likely too late to mitigate
the damage to border lands and wildlife. The 670 miles of
border fence originally slated for December 31, 2008
completion252 are now nearly finished.253 Additionally, Rep.
Grijalva admits that the poor state of the economy254 means the
Act is no longer a congressional priority.255 Unfortunately,
Section 102(c) of the Real ID Act may now be relegated to
serving as a warning beacon for future legislators.
If Congress recognizes its prior error, it may be more
cautious before enacting future legislation that threatens the
separation of powers doctrine. As Professor Jonathan Turley, a
constitutional law scholar at George Washington University
explained, “there is no evidence Congress considered the
implications of giving Homeland Security such broad waiver
power.”256 As Congress now realizes the consequences of
granting such sweeping authority, it may be more diligent in
analyzing the effects of future delegations. The full
environmental cost of this lesson remains to be seen, but its
252
See Department of Homeland Security, Southwest Border Fence
Construction Status Map, http://www.cbp.gov/linkhandler/cgov/newsroom/
highlights/fence_map.ctt/fence_map.pdf (last visited Sept. 29, 2009).
254
See Edmund L. Andrews, Fed Chief Defends Steps Taken to Contain
Crisis, N.Y. TIMES, Feb. 18, 2009.
255
“There’s a shift in priorities now with the economy . . . . Throwing
$450 million at a fence pales in comparison to fixing our economy.” Melissa
Del Bosque, Back to the Wall, TEXAS OBSERVER, Feb. 6, 2009 (quoting U.S.
Rep. Raul Grijalva).
256
McLemore, supra note 247 (quoting Prof. Jonathan Turley, George
Washington University). Professor Turley:
is a nationally recognized legal scholar who has written extensively
in areas ranging from constitutional law to legal theory to tort law . .
. . He has served as a consultant on homeland security and
constitutional issues, and is a frequent witness before the House and
Senate on constitutional and statutory issues as well as tort reform
legislation.
George Washington University Law School, Jonathan Turley, http://www.
law.gwu.edu/Faculty/profile.aspx?id=1738 (last visited Sept. 30, 2009).
253
NIELSEN REVISED.DOC
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501
significance should not be underestimated.257 As one Defender’s
of Wildlife representative stated, “[w]hen you disregard
environmental laws, it leads to real adverse impacts . . . . It’s
not just an academic argument.”258
257
Del Bosque, supra note 255 (quoting Defenders of Wildlife federal
lands associate Noah Kahn).
258
SOUTHARD REVISED.DOC
4/26/2010 10:03 PM
ONE STEP FORWARD, TWO STEPS BACK:
HOW MANDATING THE HUMAN
PAPILLOMAVIRUS VACCINE WILL
INCREASE THE USE OF VACCINE
EXEMPTIONS AND NEGATIVELY IMPACT
OUR NATION’S HEALTH
By Katharine Southard*
INTRODUCTION
A 7-year-old boy went on a family trip to Switzerland in
January 2008.1 Upon arriving back home to San Diego, he
caused a measles outbreak in the city.2 His parents had chosen
not to vaccinate him or his siblings,3 and as a result, he infected
at least eleven additional children, ranging in age from ten
months to nine years old.4 All eleven cases were unvaccinated,
including eight whose parents had claimed personal belief
exemptions.5
*B.A., Harvard University, 2003; J.D., Brooklyn Law School, expected
2010. The author wishes to thank her husband, Eric, for his encouragement,
love and patience. She also wishes to thank her parents for their constant
support, love and guidance. Finally, she would like to thank the Journal of
Law and Policy for their editorial assistance.
1
A. Hassidim et al., Outbreak of Measles—San Diego, California,
January-February 2008, 57 MORBIDITY & MORTALITY WEEKLY REPORT,
203, 203 (2008).
2
Rong-Gong Lin II & Sandra Poindexter, California Schools’ Risks Rise
as Vaccinations Drop, LOS ANGELES TIMES, Mar. 29, 2009.
3
Id.
4
Miriam E. Tucker, San Diego Measles Outbreak Shows the Effect of
Vaccine Exemptions, PEDIATRIC NEWS, Mar. 1, 2008, at 14.
5
Id.
503
4/26/2010 10:03 PM
504
The development of vaccines has greatly improved our
nation’s health.6 In order to realize the full benefits of the
vaccines, states within the United States have mandated vaccines
since the nineteenth century;7 however, not all children are
necessarily subject to these mandates.8 All fifty states allow for
medical exemptions from vaccine requirements, such as a
serious allergy to a vaccine component, and most states also
allow for religious exemptions.9 For example, in August 2008,
Rita Palma, a mother from Bayport, Long Island, requested that
the town’s Board of Education allow her son to enter the sixth
grade without being immunized, claiming that vaccinations were
against her religious beliefs.10 She stated that “[v]accinations
represent fear, anxiety and mistrust in God,” and that the idea of
vaccinations “contradicts the peace and balance [she] seek[s] in
[her] journey to God.”11
Besides medical and religious exemptions, twenty-one states
also grant exemptions for parents who claim philosophical or
personal objections to immunization.12 Some states make these
philosophical exemptions easy to obtain, while other states
require “notarization, annual renewal, a signature from a local
health official, or a personally written letter from a parent.”13
Additionally, many parents of young children are worried that
6
See LAWRENCE O. GOSTIN, PUBLIC HEALTH LAW: POWER, DUTY,
RESTRAINT 376 (2d ed. 2008).
7
See James G. Hodge, Jr. & Lawrence O. Gostin, School Vaccination
Requirements: Historical, Social, and Legal Perspectives, 90 KY. L.J. 831,
851 (2002) (“The Commonwealth of Massachusetts incorporated its own
school [smallpox] vaccination law in 1855, New York in 1862, Connecticut
in 1872, and Pennsylvania in 1895.”).
8
Paul Offit, Fatal Exemption: Relationship Between Vaccine Exemptions
and Rates of Disease, CENTERS FOR DISEASE CONTROL AND PREVENTION,
Jan. 29, 2007, http://www.cdc.gov/vaccines/vac-gen/laws/fatal-exemption.
htm.
9
Id.; see infra note 132 and accompanying text.
10
Joie Tyrrell, Taking Another Shot, NEWSDAY, Aug. 13, 2008, at A08.
11
Id.
12
Bloomberg News, More Kids Not Getting Shots, NEWSDAY, May 7,
2009, at A25.
13
Offit, supra note 8.
4/26/2010 10:03 PM
ONE STEP FORWARD, TWO STEPS BACK
505
vaccinations may cause autism, and therefore cite this as a
personal reason not to vaccinate their child.14 Many parents,
including Erin Micklo from Illinois, believe that the measles,
mumps and rubella (“MMR”) vaccination had a negative effect
on their children.15 Micklo recalls that “[w]ithin a couple of days
of being vaccinated, the 18-month-old boy developed a high
fever and a rash and became extremely lethargic.”16 Her son was
later diagnosed with autism.17 In the face of frequent parental
concern, the Centers for Disease Control (“CDC”) report that
“vaccines are not associated with [autism].”18 Regardless, more
parents are opting not to have children vaccinated with all of the
shots health officials recommend.19
14
Neil Osterweil, US Measles Increase Due to Declining Vaccinations,
MEDSCAPE MEDICAL NEWS, Aug. 28, 2008, http://www.medscape.com/
viewarticle/579800. Autism is a “severe developmental disorder” that may
begin at birth or within the first few years of life. What is Autism?,
http://www.autism.com/autism/index.htm (last visited Sept. 25, 2009). Most
autistic children engage in puzzling behavior that differs from behavior of
typical children. Id. There is no single best treatment for all children with
autism, but research shows that early intervention treatment services can
greatly improve a child’s development. Centers for Disease Control and
Prevention, Treatment of Autism Spectrum Disorders, http://www.cdc.gov/
ncbddd/autism/treatment.html (last visited Sept. 25, 2009).
15
Deborah L. Shelton & Deanese Williams-Harris, Kids’ Vaccinations
Face Risky Resistance Pediatricians Fear That Concerns About Immunization
Will Allow Once Vanquished Childhood Diseases to Return, CHI. TRIB., Aug.
26, 2008, at 1.
16
Id.
17
Id.
18
Centers for Disease Control and Prevention, Topics Related to Autism
Spectrum Disorders, http://www.cdc.gov/ncbddd/autism/topics.html (last
visited Sept. 25, 2009) [hereinafter CDC, Topics Related to Autism].
Scientists at Columbia University Mailman School of Public Health’s Center
for Infection and Immunity and researchers at the Centers for Disease
Control and Prevention, Massachusetts General Hospital, and Trinity College
Dublin also conducted a study, which showed no connection between the
MMR vaccine and autism. See Study Firmly Shows No Connection Between
Measles, Mumps, Rubella MMR Vaccine and Autism, HEALTH & MED. WK.
3384 (2008).
19
Bloomberg News, supra note 12.
4/26/2010 10:03 PM
506
Due to these parents’ decisions to withhold their children
from receiving certain vaccinations, the number of unvaccinated
children is growing in states that allow parents to exempt their
own kids for personal reasons, leading to outbreaks of measles
and pertussis (whooping cough).20 During the first seven months
of the year 2008, 131 measles cases in the United States were
reported to the CDC.21 This is the highest level of infection
during the same period in any year since 1996.22 Of those 131
measles cases, 112 victims were either unvaccinated or had no
evidence of inoculation.23 Two thirds of the cases did not receive
the measles vaccination for religious or philosophical reasons.24
With decreasing vaccination rates, two population groups are
most susceptible to an epidemic because they are most likely to
not be vaccinated: home schooled children and those who hold
certain beliefs that do not allow vaccination.25 Additionally,
because measles “is so contagious, [it] is one of the first
diseases to reappear when immunization coverage declines.”26
This importance of the MMR vaccine is illustrated by the fact
that measles caused approximately 450 annual deaths and 48,000
hospitalizations in the United States before the creation of the
measles vaccine in the mid-1960s.27
20
Id.
Editorial, Measles Returns, N.Y. TIMES, Aug. 24, 2008, at WK8.
22
Id.
23
Osterweil, supra note 14.
24
Id.
25
US Measles Increase Caused by Vacc Scare, PHARMA
MARKETLETTER, Sept. 1, 2008.
26
Editorial, supra note 21.
27
Osterweil, supra note 14. Common symptoms of measles include
rash, fever, cough, and runny nose. Centers for Disease Control and
Prevention, Overview of Measles, http://www.cdc.gov/measles/about/
overview/html (last visited Sept. 25, 2009). However, approximately 20% of
those infected report more serious complications including ear infections (one
out of every 10 children), pneumonia (one out of 20 children), and
encephalitis (one out of every 1,000 children). Id. Encephalitis is an
inflammation of the brain that can lead to convulsions and can cause a child
to become deaf or mentally retarded. Centers for Disease Control and
Prevention, Complications of Measles, http://www.cdc.gov/measles/about/
21
4/26/2010 10:03 PM
507
Similarly, whooping cough cases have also increased
recently.28 A recent study suggests that children are twenty-three
times more likely to get whooping cough if they are not
vaccinated against the disease.29 The co-authors of the study state
that, “[t]he results dispel vaccine-refusing parents’ belief ‘that
their children are not at risk for preventable diseases.’”30
Measles and whooping cough are just two of the many
diseases that children are vaccinated against.31 In recent years,
the number of mandated vaccinations has increased so that
children now may get as many as thirty-three inoculations to
prevent fifteen diseases.32 A new vaccine has recently been
added to that list.33 In June 2006, the Food and Drug
Administration (FDA) announced the approval of Gardasil®,
“the first vaccine developed to prevent cervical cancer,
precancerous genital lesions and genital warts due to human
complications.html (last visited Sept. 25, 2009). Further, for every 1,000
children who get measles, one or two will die from it. Id. “Measles also can
make a pregnant woman have a miscarriage, give birth prematurely, or have
a low-birth-weight baby.” Id.
28
Study: Pertussis Shots Work, NEWSDAY, May 26, 2009, at A29. “In
2007, 10,454 cases were reported nationwide, including 10 children who
died.” Id.
29
Id.
30
Id.
31
See ANDREW T. KROGER ET AL., CTRS. FOR DISEASE CONTROL AND
PREVENTION,
GENERAL
RECOMMENDATIONS
ON
IMMUNIZATION:
RECOMMENDATIONS OF THE ADVISORY COMMITTEE ON IMMUNIZATION
PRACTICES 3 (2006). The Advisory Committee on Immunization Practices
(ACIP) “develops written recommendations for the routine administration of
vaccines to children and adults in the civilian population; recommendations
include age for vaccine administration number of doses and dosing interval,
and precautions and contraindications.” Centers for Disease Control and
Prevention,
Vaccines:
ACIP,
http://www.cdc.gov/vaccines/recs/acip/
default.htm (last visited Sept. 25, 2009) [hereinafter CDC, Advisory
Committee on Immunization Practices].
32
33
See Press Release, Food and Drug Admin., FDA Licenses New
Vaccine for Prevention of Cervical Cancer and Other Diseases in Females
Caused by Human Papillomavirus (June 8, 2006), available at http://www.
fda.gov/NewsEvents/Newsroom/PressAnnouncements/2006/ucm108666.htm.
4/26/2010 10:03 PM
508
papillomavirus (HPV) types 6, 11, 16 and 18.”34 During the
following year, in 2007, “at least 24 states and D.C. introduced
legislation to specifically mandate the HPV vaccine for
school.”35 Among these twenty-four states, only Virginia and
D.C. have moved toward requiring sixth-grade girls to receive
the vaccination.36 Both Virginia and D.C. passed laws in 2007,
but “pushed back their start dates to [2009] to allow more study
of the vaccine.”37
Although the HPV vaccine may reduce the incidence of HPV
and cervical cancer, there is great debate over mandating the
vaccine.38 Parents and guardians object to the HPV vaccine for
different reasons than those who object to vaccines such as the
MMR vaccine.39 While some opponents of mandatory HPV
vaccination for school admission maintain that mandatory
vaccination preempts parental authority to make health decisions
for one’s child, or that the safety of the vaccine is still in doubt,
others morally object to required vaccines for a sexually
transmitted disease.40 According to the first national survey
34
Id.
National Conference of State Legislatures, HPV Vaccine, http://www.
ncsl.org/IssuesResearch/Health/HPVVaccineStateLegislation
(last
visited
Sept. 25, 2009) [hereinafter NCSL, HPV Vaccine].
36
Dena Potter, HPV Vaccine a Suggestion, Not Mandate in DC, VA,
NEWSDAY, Sept. 1, 2009, at A35.
37
Id. The Virginia legislature passed a school vaccine requirement in
2007, and considered a bill that would delay that requirement, but the Senate
Committee declined to take action on the bill. NCSL, HPV Vaccine, supra
note 35; S. 722, 2008 Session (Va. 2008).
38
See, e.g., Cheryl A. Vamos et al., The HPV Vaccine: Framing the
Arguments FOR and AGAINST Mandatory Vaccination of All Middle School
Girls, 78 J. SCH. HEALTH 302 (2008); Linda Marsa, Gardasil’s Chorus of
Doubters, L.A. TIMES, Aug. 11, 2008, at 1.
39
See generally Amanda Gardner, Many Moms Unwilling to Have
Younger Daughters Get HPV Vaccine, HEALTH DAY (May 5, 2008) (finding
that parents are likely to object to vaccination because of doubts of its
effectiveness to prevent cervical cancer and because they believed it would
cause the child to engage in riskier sexual behavior).
40
Rachel Meisterman, Note, The Aftermath of the Introduction of the
Human Papillomavirus Vaccination, 3 J. HEALTH & BIOMEDICAL L. 313, 331
35
4/26/2010 10:03 PM
509
measuring attitudes towards the HPV vaccine since its FDA
approval in 2006, “only half of American mothers intend to
have their teenaged daughters vaccinated against human
papillomavirus (HPV) if the girls are under the age of 13,
despite government guidelines that suggest the opposite.”41
Further, “[u]nlike other diseases for which state legislatures
have mandated vaccination for children, HPV is neither
transmissible through casual contact nor potentially fatal during
childhood.”42
Because of the differences between the HPV vaccination and
vaccinations that prevent airborne diseases, the District of
Columbia and Virginia—who have passed legislation requiring
the HPV vaccination for females—have included broad opt-out
provisions in their statutes.43 The District of Columbia’s
legislation allows the parent or legal guardian to opt out “for
any reason.”44 Similarly, Virginia’s legislation allows parents or
guardians to refuse the HPV vaccination for their daughter
“after having reviewed materials describing the link between the
human papillomavirus and cervical cancer approved for such use
by the Board.”45 Because of the current resistance by parents to
vaccinate their daughters at a young age,46 many parents will
likely exercise their right to opt-out.
This Note argues that the ease of which a parent can decide
against vaccinating their child with the HPV vaccine may then
(2007).
41
Gardner, supra note 39. The CDC currently recommends the vaccine
for all eleven and twelve-year-old girls, and for females aged thirteen through
twenty-six years old who have not been previously vaccinated or who have
not completed the full series of shots. Centers for Disease Control and
Prevention, HPV Vaccine-Questions & Answers for the Public, http://www.
cdc.gov/vaccines/vpd-vac/hpv/hpv-vacsafe-effic.htm (last visited Oct. 18,
2009) [hereinafter CDC, Questions & Answers for the Public].
42
Gail Javitt et al., Assessing Mandatory HPV Vaccination: Who Should
Call the Shots?, 36 J.L. MED. & ETHICS 384, 384 (2008).
43
See VA. CODE ANN. § 32.1–46(D) (West 2008); see also D.C. CODE
§ 7–1651.04(b)(1)(B)(iii)(2001).
44
D.C. CODE § 7–1651.04(b)(1)(B)(iii).
45
VA. CODE ANN. § 32.1–46 (D)(3).
46
4/26/2010 10:03 PM
510
encourage parents to seek exemptions for other vaccines, thus
causing re-emergence of diseases like measles and whooping
cough. Partly due to parents’ concerns that vaccines are linked
to rising rates of autism, more parents are opting not to have
their children vaccinated.47 Giving parents the option to decline
the HPV vaccine with such ease may provide additional
encouragement for parents to decline other vaccinations for their
children as well. Including such broad opt-out provisions in state
statutes, as the District of Columbia and Virginia have done,
may ultimately result in a disastrous return of childhood
diseases.
Part I of this Note provides background information on HPV
and its link to cervical cancer, as well as information on the
HPV vaccine, Gardasil®. Part II examines the foundational case
of Jacobson v. Massachusetts48 and the current use of
exemptions in the anti-vaccination movement. Part III discusses
the actions taken thus far by state legislatures regarding the HPV
vaccine and the various objections to mandating the HPV
vaccine for school entry. Part III further concludes that
mandating the HPV vaccine with broad opt-out provisions could
encourage parents and guardians to then seek exemptions to
other previously mandated vaccines which protect against
diseases that are communicable in a school setting. Finally, Part
IV concludes that although the approval of a vaccine against
cancer-causing HPV strains is a tremendous development,
mandating the HPV vaccine for school entry while including
broad opt-out provisions may actually undermine our nation’s
health.
I. BACKGROUND
A. Human Papillomavirus Virus
Each year 6.2 million people become infected with human
papillomavirus (HPV), the most common sexually transmitted
47
48
197 U.S. 11 (1905).
4/26/2010 10:03 PM
511
infection.49 Seventy-four percent of those infected are between
the ages of fifteen and twenty-four.50 This is in addition to the
approximately twenty million Americans who are already
infected.51 Over fifty percent of sexually active men and women
acquire genital HPV at some point throughout their lives,52 and
women have an eighty percent chance of getting HPV by the
time they are fifty years of age.53
At least thirty of the more than 100 types of HPV can be
passed from one person to another through sexual contact.54
Since most HPV infections are asymptomatic,55 many people are
unaware when they have become infected with HPV.56 As a
result, most infected individuals do not realize that they are
passing the virus to a partner since the virus may be transmitted
even when it’s asymptomatic.57 In ninety percent of cases, “the
body’s immune system clears the HPV infection naturally within
two years;”58 however, some cases of HPV infection persist for
many years and may cause cell abnormalities, increasing a
woman’s risk of developing cervical cancer.59
HPV types can be classified into two types: “low-risk” and
49
Centers for Disease Control and Prevention, Genital HPV Infection,
http://www.cdc.gov/std/HPV/STDFact-HPV.htm (last visited Oct. 24, 2009)
[hereinafter CDC, Genital HPV].
50
LAURI E. MARKOWITZ ET AL., CTRS. FOR DISEASE CONTROL AND
PREVENTION, QUADRIVALENT HUMAN PAPILLOMAVIRUS VACCINE 4 (2007).
51
CDC, Genital HPV, supra note 49.
52
Id.
53
CDC, Questions & Answers for the Public, supra note 41.
54
National Cancer Institute, Human Papillomavirus and Cancer,
http://www.cancer.gov/cancertopics/factsheet/Risk/HPV/ (last visited Oct.
24, 2009) [hereinafter NCI, HPV and Cancer]. Although the surest way to
avoid risk of developing HPV is to refrain from sexual contact, a study
among newly sexually active college women demonstrated a 70 percent
reduction in HPV infection when their partners used condoms. MARKOWITZ
ET AL., supra note 50, at 7.
55
NCI, HPV and Cancer, supra note 54.
56
57
Id.
58
Id.
59
4/26/2010 10:03 PM
512
“high-risk,” depending on whether or not they cause lesions that
develop into cancer.60 “Both high-risk and low-risk types of
HPV can cause the growth of abnormal cells, but only the highrisk types [such as types sixteen and eighteen] of HPV lead to
cancer.”61 The American Cancer Society estimates that in 2009,
11,270 women will be diagnosed with cervical cancer, and
approximately 4,070 women will die from cervical cancer in the
United States.62
Still, the incidence of cervical cancer in the United States is
very low compared with other parts of the world.63 Each year,
eighty-five percent of the roughly 473,000 cervical cancer cases
worldwide afflict women in developing countries.64 Of those
65
473,000 cases, an estimated 253,500 lead to deaths. In many
developing countries, cervical cancer is the greatest cause of
cancer-related deaths among women,66 primarily because
developing countries lack the screening and treatment programs
that exist in the United States.67
B. Gardasil® Vaccine
In 2006, the FDA approved Merck & Co.’s Gardasil®, a
vaccine for females that is effective in preventing infection with
HPV types six, eleven, sixteen, and eighteen.68 The vaccine does
60
Id.
Id. “These high-risk types of HPV cause growths on the cervix that
are usually flat and nearly invisible, as compared with the external warts
caused by low-risk types HPV-6 and HPV-11.” Id.
62
American Cancer Society, Detailed Guide: Cervical Cancer,
http://www.cancer.org/docroot/CRI/content/CRI_2_4_1X_What_are_the_key
_statistics_for_cervical_cancer_8.asp?rnav=cri (last visited Sept. 25, 2009).
63
See National Cervical Cancer Coalition, http://www.nccc-online.org
64
Id.
65
Id.
66
Id.
67
Javitt et al., supra note 42, at 385.
68
U.S. FOOD AND DRUG ADMIN., GARDASIL PACKAGE INSERT (2009)
[hereinafter GARDASIL PACKAGE INSERT]. GlaxoSmithKline is awaiting FDA
61
4/26/2010 10:03 PM
513
not protect against all strains of HPV, but HPV types sixteen
and eighteen are responsible for about seventy percent of
cervical cancer cases worldwide.69 The CDC currently
recommends the vaccine for all eleven- and twelve-year-old
girls, and for females aged thirteen through twenty-six years old
“who have not been previously vaccinated or who have not
completed the full series of shots.”70 The vaccine consists of
three injections, during a six-month period, and may be given at
the same time as other vaccines.71 While the CDC claims that
the HPV vaccine does not appear to cause any major side
effects,72 there were 15,037 reports of adverse events following
Gardasil® vaccination made to the CDC’s Vaccine Adverse
Event Reporting System (VAERS) as of September 1, 2009.73 Of
these, ninety-three percent were classified as reports of nonserious events,74 and seven percent as serious events.75 Common
complaints include pain, redness or swelling at the injection
site.76 However, there have been 44 U.S. reports of death among
approval on its vaccine, Cervarix. NCSL, HPV Vaccine, supra note 35.
69
NCI, HPV and Cancer, supra note 54. The other two HPV types
targeted by the vaccine—HPV-6 and HPV-11—cause approximately ninety
percent of the cases of genital warts. Id.
70
Ctrs. for Disease Control and Prevention, HPV Vaccine- Questions &
Answers, http://www.cdc.gov/vaccines/vpd-vac/hpv/vac-faqs.htm (last visited
Oct. 18, 2009). The recommendation “allows for vaccination to begin at age
nine” and the CDC stresses that the “vaccine is most effective for
girls/women who get vaccinated before their first sexual contact.” Id.
71
Id.
72
Press Release, Ctrs. for Disease Control and Prevention, HPV
Vaccine: What You Need to Know (Feb. 2, 2007), available at
http://www.cdc.gov/vaccines/pubs/vis/downloads/vis-hpv.pdf.
73
Centers for Disease Control and Prevention, Reports of Health
Concerns Following HPV Vaccination, http://www.cdc.gov/vaccinesafety/
vaers/gardasil.htm (last visited Oct. 24, 2009) [hereinafter CDC, Health
Concerns Following Vaccination]. As of September 1, 2009, more than 26
million doses of Gardasil were distributed in the United States. Id.
74
Id. Non-serious adverse events have included fainting, arm pain and
swelling at the injection site, headache, nausea and fever. Id.
75
Id.
76
Id. Eight out of ten individuals complain of pain at the injection site
and one out of four individuals complain of redness or swelling at the
514
4/26/2010 10:03 PM
females who have received the vaccine.77 Still, of the 27 reports
of death that have been confirmed, there was nothing to suggest
that they were caused by the vaccine.78
Guillain-Barré Syndrome (GBS), a rare neurological disorder
that causes muscle weakness, has also been reported in
individuals following vaccination with Gardasil®.79 There were
36 reported cases of GBS by girls after HPV vaccination in the
U.S. from 2006 to 2008.80 In seventy-five percent of those
cases, the disorder occurred within six weeks after receiving the
vaccination.81 However, the CDC reports that there is no
evidence that Gardasil® has increased the rate of GBS above that
expected in the population,82 but “the fact that most of [the]
cases occurred within six weeks of vaccination does warrant
careful monitoring for any additional cases and continued
analysis.”83 Further, while thromboembolic disorders (blood
clots) have been reported to VAERS, most of these individuals
had risk factors for blood clots, such as use of oral
contraceptives, which are known to increase the risk of
84
clotting.
However, one known side effect associated with the HPV
vaccine, fainting, caused the FDA to require that vaccine
manufacturer Merck & Co. add a warning to the vaccine’s
package insert.85 The warning now recommends that patients be
injection site. Id.
77
Id.
78
Id.
79
Id.
80
Researchers: Guillain-Barre Syndrome After HPV Vaccine Needs
Monitoring, OBESITY, FITNESS & WELLNESS WK. 3272 (2009) [hereinafter
Monitoring of Guillain-Barre Syndrome]. As of September 1, 2009, more
than 26 million doses of Gardasil were distributed in the United States. CDC,
Health Concerns Following Vaccination, supra note 73.
81
Id.
82
CDC, Health Concerns Following Vaccination, supra note 73. GBS
“occurs in 1–2 out of every 100,000 people in their teens.” Id.
83
Monitoring of Guillain-Barre Syndrome, supra note 80.
84
CDC, Health Concerns Following Vaccination, supra note 73.
85
Steven Reinberg, 25% of Teen Girls Vaccinated for HPV, HEALTH
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515
observed “for 15 minutes after administration” of the vaccine.86
The CDC and the FDA plan to continue to monitor the safety of
Gardasil® as is customary with approved vaccines.87
II. HISTORY OF VACCINATION AND SCHOOL VACCINATION
REQUIREMENTS
A. The Foundations of Public Health Law and Mandatory
Immunizations: Jacobson v. Massachusetts88
The Tenth Amendment of the U.S. Constitution states: “the
powers not delegated to the United States by the Constitution,
nor prohibited by it to the States, are reserved to the States
respectively, or to the people.”89 These powers include a state’s
“police powers” which “relate to the safety, health, morals and
general welfare of the public.”90 While protecting the public’s
health, a state “is limited by individual rights to autonomy,
privacy, liberty, property, and other legally protected
interests.”91 Balancing an individual’s constitutional rights with
the duty of the state to protect the public’s health “poses an
enduring problem for public health law.”92
Vaccination programs are a “core component” of public
health in the United States, supported by state legal
requirements, federal funding and oversight.93 Each state has
school vaccination laws mandating vaccination of children for
certain diseases.94 Communicable diseases, for which there are
DAY, Oct. 9, 2008.
86
GARDASIL PACKAGE INSERT, supra note 68.
87
CDC, Health Concerns Following Vaccination, supra note 73.
88
197 U.S. 11 (1905).
89
U.S. CONST. amend. X.
90
Lochner v. New York, 198 U.S. 45, 53 (1905).
91
GOSTIN, supra note 6, at 11.
92
Id.
93
Hodge & Gostin, supra note 7, at 833.
94
See CTRS. FOR DISEASE CONTROL AND PREVENTION, CHILDCARE AND
SCHOOL IMMUNIZATION REQUIREMENTS, 2005–2006 (2006), available at
http://www.cdc.gov/vaccines/vac-gen/laws/downloads/izlaws05-06.pdf
516
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vaccines, have dramatically decreased since the introduction of
school vaccination laws.95
Mandatory immunization laws in the United States first
appeared in the early nineteenth century96 in an effort to combat
outbreaks of smallpox.97 In 1827, Boston became the first city to
require vaccination for all children entering public schools98 and
by the late nineteenth century, the trend toward compulsory
child vaccination as a condition of school attendance spread to
the midwestern and western states.99
In 1905, the U.S. Supreme Court made what is “widely
regarded as the seminal decision in American public health
law”100 in Jacobson v. Massachusetts,101 and set the standard for
102
Proceeding under the
state mandatory vaccination laws.
statutes of Massachusetts, the Board of Health of Cambridge
adopted a regulation mandating the smallpox vaccination for “all
the inhabitants of Cambridge” in February 1902.103 Jacobson,
who refused the vaccination, argued that “a compulsory
vaccination law is unreasonable, arbitrary, and oppressive, and
therefore, hostile to the inherent right of every freeman to care
for his own body and health in such way as to him seems
best. . . .”104 However, the Court did not rule in Jacobson’s
[hereinafter CDC, SCHOOL IMMUNIZATION REQUIREMENTS].
95
96
Id. at 849.
97
Id. at 850. Smallpox is a “serious, contagious, and sometimes fatal
infectious disease.” Centers for Disease Control and Prevention, Smallpox
Disease Overview, http://www.bt.cdc.gov/agent/smallpox/overview/diseasefacts.asp (last visited Sept. 25, 2009). Unlike HPV, smallpox can be
transmitted through the air. Id. Generally, direct and prolonged face-to-face
contact is necessary to spread smallpox from one individual to another;
however, smallpox has also been spread through the air in enclosed settings.
Id.
98
99
Id.
100
KENNETH WING ET AL., PUBLIC HEALTH LAW 59 (2007).
101
197 U.S. 11 (1905).
102
See WING ET AL., supra note 100, at 59.
103
Jacobson, 197 U.S. at 12.
104
Id. at 26.
4/26/2010 10:03 PM
517
favor and decided that “[t]he safety and health of the people of
[the state] are, in the first instance, for [the state] to guard and
protect.”105 The Jacobson case “upholds the constitutional
validity of the state’s curtailment of individual liberty in the
interests of public health.”106
Notably, the Supreme Court in Jacobson recognized the
limits of a state’s power and imposed certain criteria that must
be met when requiring vaccinations.107 First, there must be a
public health necessity.108 The state cannot exercise its power in
“an arbitrary, unreasonable manner”109 and may not go “beyond
what was reasonably required for the safety of the public.”110
Second, there must be a reasonable relationship between the
intervention and the objective.111 The methods employed by the
state must have a “real or substantial relation to the protection of
the public health and the public safety”112 and cannot be “a
plain, palpable invasion of rights secured by the fundamental
law.”113 Third, the law cannot be “wholly disproportionate to the
expected benefit.”114 The state may not use its police powers to
115
create regulations that are “arbitrary and oppressive.” Fourth,
the law may not require that an adult who is not “a fit subject of
105
Id. at 38.
WING ET AL., supra note 100, at 59.
107
Id. at 62.
108
Jacobson, 197 U.S. at 28. The court in In re Christine M., a 1992
New York case, declined to require inoculation of the child against smallpox
due to the fact that “the urgency previously created by the [measles] epidemic
or outbreak” had decreased. In re Christine M., 595 N.Y.S.2d 606, 618
(N.Y. Fam. Ct. 1992).
109
110
Id.
111
See id. at 28; see also GOSTIN, supra note 6, at 127 (analyzing the
approach of the Jacobson Court in its adoption of the means/ends test which
necessitates “a reasonable relationship between the public health intervention
and the achievement of a legitimate public health objective.”).
112
113
Id.
114
115
106
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518
vaccination” get vaccinated.116 Requiring vaccination that would
impair one’s health “would be cruel and inhuman in the last
degree.”117 Finally, although “[t]he facts in Jacobson did not
require the Supreme Court to enunciate a standard of fairness
under the Equal Protection Clause of the Fourteenth
Amendment[,]”118 the federal courts had already developed a
standard of fairness in an earlier case, Jew Ho v. Williamson.119
Therefore, “while Jacobson stands firmly for the proposition
that police powers authorize states to compel vaccination for the
public good,”120 the state may only require its inhabitants to be
vaccinated when it was “necessary for the public health or the
public safety.”121
Although there have been many objections to mandatory
vaccinations, “[t]he early successes of school vaccination laws
against most political, legal, and social challenges helped lay the
122
Since the
foundation for modern immunization statutes.”
introduction of smallpox vaccination laws, statutes have
continuously added new vaccines to the mandatory school
vaccination lists.123 The criteria set forward in Jacobson provide
116
Id. at 39.
Id. at 38–39.
118
119
Id. In Jew Ho v. Williamson, 103 F. 10 (N.D. Cal. 1900), the court
struck down a quarantine that was made to operate exclusively against the
Chinese community in San Francisco. Id. at 26. In striking down the
quarantine, the federal district court said it was “unreasonable, unjust, and
oppressive, . . . and . . . it [was] discriminating in its character. . . .” Id.
120
121
Jacobson v. Massachusetts, 197 U.S. 11, 27 (1905).
122
123
Although state laws differ, most states require immunizations such as:
Diphtheria, Tetanus, and acellular Pertussis (DTaP), Hepatitis A, Hepatitis B,
Haemophilus influenzae Type b, Measles, Mumps, and Rubella (MMR), and
Polio for school age children. See CDC, SCHOOL IMMUNIZATION
REQUIREMENTS, supra note 94. In October 2008, New Jersey became the
first state to mandate flu shots for children from 6 months to 5 years old who
attend day care or preschool. Ridgely Ochs, NJ Flu Shot Mandate Sparks
Protest, NEWSDAY, Oct. 17, 2008, at A2. This requirement resulted in
various protests and “freedom of choice rall[ies]” by parents and other
117
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519
the guidelines for the introduction of these new vaccination
laws.124
B. The Recent Debate Concerning School Vaccination
Requirements and the Use of Exemptions
CDC officials estimate that “over time [the country’s
vaccination] program has prevented about 14 million cases of
vaccine-preventable diseases and 33,000 premature deaths.”125
Incidences of vaccine-preventable disease are near historical
lows.126 Childhood illnesses for which there are now vaccines,
such as measles, pertussis, mumps, rubella, diphtheria, tetanus
and polio, “once accounted for a substantial proportion of child
morbidity and mortality.”127 Yet, since the development of
vaccines, the incidence of these illnesses has “significantly
declined.”128 However, although most infants are vaccinated,
many under-immunized children remain, potentially causing
disease outbreaks.129
Parents and guardians who object to vaccinating their
children often take advantage of vaccination law exemptions.130
These exemptions have been growing at a “disturbing” rate.131
activists. Id.
124
See WING ET AL., supra note 100, at 59.
125
Centers for Disease Control and Prevention, Press Briefing
Transcripts, http://www.cdc.gov/media/transcripts/2008/t080905.htm (last
126
Centers for Disease Control and Prevention, Vaccines &
Immunizations, http://www.cdc.gov/vaccines/default.htm (last visited Sept.
30, 2009).
127
128
Id.
129
Centers for Disease Control and Prevention, Vaccines & Preventable
Diseases, http://www.cdc.gov/vaccines/vpd-vac/default.htm (last visited Sept.
30, 2009).
130
Jennifer Steinhauer & Gardiner Harris, Rising Public Health Risk
Seen As More Parents Reject Vaccines, N.Y. TIMES, Mar. 21, 2008, at A1.
131
Id. For example, in California, more than 10,000 kindergartners
started school in fall 2008 with vaccine exemptions, up from about 8,300 in
fall 2007. Lin & Poindexter, supra note 2. “In 1997, when enrollment was
520
4/26/2010 10:03 PM
All fifty states have medical exemptions to vaccine
requirements, and forty-eight states have religious exemptions.132
In addition, twenty-one states allow parents to exempt their
children for personal reasons, sometimes related to an unproven
concern that vaccines are linked to autism.133 According to Saad
B. Omer, an assistant scientist at the Johns Hopkins Bloomberg
School of Public Health, “[i]n 1991, less than 1 percent of
children in the states with personal-belief exemptions went
without vaccines based on the exemption; by 2004, the most
recent year for which data are available, the percentage had
increased to 2.54 percent.”134 Dr. Omer and other vaccine
experts have discovered that “the easier it is to get an
exemption . . . the more people opt for them.”135
There are also differences in immunization coverage within
states.136 As a result of the use of exemptions, “[t]here tend to be
geographic clusters of ‘exempters’ in certain counties or even
neighborhoods or schools.”137 This may cause individuals who
are part of an unvaccinated cluster to infect a broad community,
higher, the number of exempted kindergartners was 4,318.” Id.
132
Offit, supra note 8. Although state requirements vary for what is
necessary to prove a medical or religious exemption, Virginia’s statute grants
a medical exemption if “[t]he parent or guardian presents a statement from a
physician licensed to practice medicine in Virginia, or a licensed nurse
practitioner, that states that the physical condition of the child is such that the
administration of one of more of the required immunizing agents would be
detrimental to the health of the child.” VA. CODE ANN. § 32.1–46(D)(2)
(West 2008). A religious exemption may be granted in Virginia if “[t]he
parent or guardian of the child objects thereto on the grounds that the
administration of immunizing agents conflicts with his religious tenets or
practices, unless an emergency or epidemic of disease has been declared by
the Board.” Id. at § 32.1–46(D)(1).
133
See Bloomberg News, supra note 12.
134
Steinhauer & Harris, supra note 130, at A1.
135
Id.
136
Id.
137
Id. “[E]xemption rates of 15 percent to 18 percent have been found in
Ashland, Ore[gon], and Vashon, Wash[ington]. In California, where the
statewide rate is about 1.5 percent, some counties were as high as 10 percent
to 19 percent of kindergartners.” Id.
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521
which includes people who have been inoculated.138
The increased use of philosophical objections to mandatory
vaccine statutes is largely due to concerns that vaccinations are
linked to autism.139 Even though “[t]he American Academy of
Pediatrics, the CDC, the World Health Organization and the
Institute of Medicine all agree that there’s probably no
relationship between autism and vaccines,”140 concern among
parents remains.141
The suspicion that there exists a link between vaccines and
autism is partly due to the fact that parents are “bombarded
with” information on the Internet, “making it tough to separate
good science from bad.”142 This information can frequently “take
138
Id.
See Alice Park, How Safe Are Vaccines?, TIME, June 2, 2008, at 36.
Although the autism issue has been driving the debate over vaccine safety,
parents also object to the mandatory nature of the shots and the fact that
certain illnesses, which kids are being inoculated against, are rarely seen
anymore. Id. There tend to be two separate issues concerning vaccines and
autism. Martin F. Downs, Autism-Vaccine Link: Evidence Doesn’t Dispel
Doubts, WEBMD, Mar. 31, 2008, http://www.webmd.com/brain/autism/
searching-for-answers/vaccines-autism. One issue arises from objections to
the MMR vaccine, and the other issue is regarding thimerosal, “which
contains a form of mercury that has been suspected of causing autism and has
recently been removed from most vaccines.” Id.
140
Id. In February 2009, a panel of court-appointed experts “denied
compensation for three families who claimed thimerosal-containing vaccine
combinations caused their children’s autism.” Christina Hernandez & Delthia
Ricks, Vaccine-Autism Link Not Seen, NEWSDAY, Feb. 13, 2009, at A08.
These three “test” cases are among more than 4,800 families nationwide who
are part of the Omnibus Autism Proceedings before the U.S. Court of
Federal Claims in Washington D.C. Id. The experts found that the families
failed to demonstrate that “thimerosol-containing vaccines can contribute to
causing immune dysfunction, or that the MMR vaccine can contribute to
causing [autism].” Id.
141
142
Downs, supra note 139. The battle over vaccine safety has also been
present in the tabloids and on television. Lin & Poindexter, supra note 2.
Actress Jenny McCarthy, whose son was diagnosed as autistic, “has been
outspoken in her beliefs that children are given too many vaccines too soon.”
Id.
139
4/26/2010 10:03 PM
522
a life of its own online.”143 Some parents who have withheld
vaccinations from their children said they did so after hearing
about possible side-effects in the media, online and through
other parents.144 Lee Sanders, MD, MPH, associate professor of
pediatrics at the University of Miami Miller School of Medicine,
explains that “[i]n the absence of any answers from the scientific
community, any scintilla of suggestion is going to get magnified
by the social process of talking it out.”145 Further, in May 2008,
the U.S. government acknowledged that a 9-year-old Georgia
girl with a preexisting cellular disease received inoculations
when she was an infant, which “significantly aggravated” the
condition, resulting in a brain disorder with autism-like
symptoms.146 Even though the CDC states that there is likely no
relationship between vaccines and autism,147 confused parents
continue to opt out of vaccines altogether.148
Still, autism concerns are not the only reason parents are
increasingly opting out of vaccinations for their children. Parents
“object to the mandatory nature of the shots—and the fact that
their child’s access to education hinges on compliance with the
immunization regulations.”149 In addition, others consider certain
“tame” diseases to be innocuous “rite[s] of passage” for
children.150 Individuals may also “overestimate the frequency of
rare risks,” such as adverse events following vaccination, or
“underestimate the frequency of common risks,” such as the
143
Downs, supra note 139.
Lin & Poindexter, supra note 2.
145
Downs, supra note 139.
146
Park, supra note 139.
147
CDC, Topics Related to Autism, supra note 18.
148
149
Id.
150
Sean Coletti, Taking Account of Partial Exemptors in Vaccination
Law, Policy, and Practice, 36 CONN. L. REV. 1341, 1359 (2004). To
illustrate, some parents purposefully expose their children to chicken pox:
“[s]ome parents even have ‘chicken pox parties’—when one child comes
down with the chicken pox, parents from all over the neighborhood bring
their children to catch the disease and start the immunity process ‘naturally.’”
Id.
144
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523
devastating effects of disease.151 This distortion may be due to
the fact that while one can easily remember recent adverse
reactions to vaccinations, it is difficult to remember adverse
effects of diseases, such as smallpox and polio, that were largely
eliminated decades ago.152 Regardless of the reasons behind the
increased use of philosophical exemptions, this trend could cause
disease outbreaks.153
III. HPV VACCINATION
A. State Legislative Activities
The Advisory Committee on Immunization Practices
(“ACIP”), whose members provide advice on the control of
154
vaccine-preventable diseases, began to recommend the HPV
vaccination for girls between the ages eleven and twelve in June
2006.155 This recommendation created a flood of state legislative
activity regarding whether or not vaccinations should be required
for these girls.156
Michigan was the first state to introduce legislation in
September 2006, requiring the HPV vaccine for girls entering
sixth grade.157 The bill, however, was not enacted.158 Similarly,
Ohio’s legislation in late 2006 requiring the vaccine also failed
due to the controversial nature of the vaccine.159 As of
September 2009, “[l]egislators in at least 41 states and D.C.
have introduced legislation to require, fund or educate the public
151
Id. at 1369.
Id.
153
See CDC, Vaccines & Preventable Diseases, supra note 129.
154
CDC, Advisory Committee on Immunization Practices, supra note 31.
155
MARKOWITZ ET AL., supra note 50, at 16.
156
See NCSL, HPV Vaccine, supra note 35. Although most state
legislatures decide the issues related to school vaccination requirements, some
state legislatures have granted regulatory bodies such as the Health
Department the power to require vaccines. Id.
157
NCSL, HPV Vaccine, supra note 35.
158
Id.
159
Id.
152
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524
about the HPV Vaccine and at least 19 states have enacted this
legislation.”160
Iowa and Illinois, for example, have passed legislation
regarding public HPV education.161 Iowa’s education standards
require that the health curriculum for grades seven through
twelve “shall include age-appropriate and research-based
information regarding the characteristics of sexually transmitted
diseases, including HPV and the availability of a vaccine to
prevent HPV.”162 In Illinois, the Communicable Disease
Prevention Act requires that “the Department of Health must
provide all female students who are entering the sixth grade and
their parents or legal guardians written information about the
link between human papillomavirus (HPV) and cervical cancer
and the availability of a HPV vaccine.”163 Illinois has also
introduced legislation requiring funding of the vaccine: “the
Department of Public Health shall establish and administer a
program, commencing no later than July 1, 2011, under which
any eligible individual shall, upon the eligible individual’s
request, receive a series of HPV vaccinations as medically
indicated, at no cost to the eligible individual.”164
Even more controversial than the legislation passed to fund
or educate the public about the HPV vaccine is the fact that at
least twenty-four states and the District of Columbia introduced
legislation to specifically mandate the HPV vaccine for school in
2007.165 Among these twenty-four states, only Virginia and D.C.
have moved toward required vaccinations for sixth-grade girls.166
Both Virginia and D.C. passed laws in 2007, but “pushed back
167
their start dates to [2009] to allow more study of the vaccine.”
160
Id.
See IOWA CODE § 256.11 (2008); see also 410 ILL. COMP. STAT.
315/2e(a) (2008).
162
IOWA CODE § 256.11.
163
410 ILL. COMP. STAT. 315/2e(a).
164
20 ILL. COMP. STAT. 2310/2310–617(b) (2008).
165
NCSL, HPV Vaccine, supra note 35.
166
Potter, supra note 36.
167
Id. The Virginia legislature passed a school vaccine requirement in
2007, and considered a bill that would delay that requirement, but the Senate
161
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525
In April 2007, Virginia passed a law requiring the HPV
vaccine for females where the first dose must be administered
before the child entered the sixth grade.168 The act lists the HPV
vaccination requirement directly after the previously mandated
vaccines in the state, including the tetanus toxoid, measles,
mumps, rubella and polio vaccines.169 However, the law makes a
special exception for the HPV vaccine:
[b]ecause the human papillomavirus is not communicable
in a school setting, a parent or guardian, at the parent’s
or guardian’s sole discretion, may elect for the parent’s
or guardian’s child not to receive the human
papillomavirus vaccine, after having reviewed materials
describing the link between the human papillomavirus
and cervical cancer approved for such use by the
Board.170
Thus, parents or guardians are not required to vaccinate their
child against HPV so long as they read the relevant materials.171
The District of Columbia also enacted a bill mandating HPV
vaccination for female sixth-graders within the District.172 This
173
requirement took effect at the start of the 2009 school year.
Similar to the exemptions offered for the other mandatory
vaccines, the statute offers both a medical exemption and a
religious exemption to the HPV vaccination requirement.174
However, due to the vast differences between the HPV
vaccination and previously mandated vaccines, the law allows
Committee declined to take action on the bill. NCSL, HPV Vaccine, supra
note 35; S. 722, 2008 Session (Va. 2008).
168
VA. CODE ANN. § 32.1–46(A)(12) (West 2008).
169
See id. at § 32.1–46(A).
170
Id. at § 32.1–46(D)(3).
171
See id. Female students are asked to bring in documentation if they
got the vaccine. Potter, supra note 36. If they do not bring documentation,
officials assume parents chose not to get the vaccination. Id.
172
D.C. CODE § 7–1651.04(b)(1) (2001).
173
Id.
174
Id. at § 7–1651.04(b)(1)(B)(i)–(ii); see also National Vaccine
Information Center, State Vaccine Requirements, http://www.nvic.org/
Vaccine-Laws/state-vaccine-requirements.aspx (last visited Sept. 25, 2009).
4/26/2010 10:03 PM
526
for an extremely broad opt-out provision.175 The statute states
that a child is exempted from the HPV vaccine requirement if
“[t]he parent or legal guardian, in his or her discretion, has
elected to opt out of the HPV vaccination program, for any
reason, by signing a form . . . that states the parent or legal
guardian has been informed of the HPV vaccination requirement
and has elected not to participate.”176 In addition to the broad
opt-out option, the statute “[r]equires all communications from
the Department of Health on the HPV vaccination program to
prominently feature information pertaining to the ability of
parents or guardians to opt out of the program.”177 This,
combined with the mere requirement of signing a form, indicates
a strong effort to advertise the voluntary nature of the HPV
vaccination. Thus, although both Virginia and D.C. now require
HPV vaccinations for sixth-grade girls, the broad opt-out
provisions make the vaccine “more of a suggestion than a
mandate.”178
B. Objections to Mandating the HPV Vaccine
1. The HPV Vaccine Differs from Traditional
Infectious Disease Vaccines
Since Jacobson, courts have continued to rule that states can
mandate vaccination of their citizens.179 Yet, in these cases, the
vaccine was used to combat an airborne disease, such as
175
See D.C. CODE § 7–1651.04(b)(1)(B)(iii).
Id. If the female students haven’t either gotten the shot or turned in a
form saying their parents opted out, the “girls will be held out of classes.”
177
D.C. CODE § 7-1651.04(a)(2).
178
179
In Zucht v. King, the United States Supreme Court upheld a local
mandate for vaccination as a prerequisite for public school attendance. Zucht
v. King, 260 U.S. 174, 176–77 (1922). State supreme courts have also
upheld school vaccination requirements. See, e.g., People ex rel. Hill v. Bd.
of Educ., 195 N.W. 95, 99 (Mich. 1923).
176
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527
smallpox.180 HPV is different from other types of diseases which
mandatory vaccines are designed to protect. Joseph Zanga, a
professor of pediatrics, summed it up as follows:
If a kid with measles is sitting in a classroom, he or she
is going to infect many other classmates. A kid with
HPV infects no one other than one she might have sex
with . . . . We’re not protecting the public health in the
same way that we protect public health when we require
measles vaccine.181
With mandatory vaccinations, the state’s interest is “in
protecting the public against diseases that frequently occur in
school-based epidemics or threaten school attendance when an
epidemic manifests. . . .”182 The HPV vaccine, on the other
hand, is a sexually-transmitted disease that will not spread in a
conventional school setting.183
2. The Vaccine Does Not Protect Against All
Types of HPV That Cause Cancer
In the United States, cervical cancer screening has reduced
the number of cervical cancer cases.184 Even with the
introduction of the HPV vaccination, cervical cancer screening
will still be necessary because the vaccine does not protect
180
See, e.g., Hill, 195 N.W. at 99. While “[t]he driving force behind
compulsory vaccination laws was a series of outbreaks of smallpox,” the
existence of “measles in schools in the 1960s and 1970s” prompted modern
immunization statutes. GOSTIN, supra note 6, at 379.
181
Susan Levine & Hamil R. Harris, Wave of Support for HPV
Vaccination of Girls; D.C., Md., Va. Proposals Part of National Effort to
Prevent Cervical Cancer, WASH. POST, Jan. 12, 2007, at B01.
182
Lane Wood, A Young Vaccine For Young Girls: Should the Human
Papillomavirus Vaccination Be Mandatory For Public School Attendance?, 20
NO. 5 HEALTH LAW. 30, 33 (2008).
183
See CDC, Genital HPV, supra note 49.
184
American Cancer Society, supra note 62. Mostly due to the increased
use of the Pap test, the cervical cancer death rate declined by seventy-four
percent between 1955 and 1992. Id. “The death rate from cervical cancer
continues to decline by nearly 4% a year.” Id.
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528
against all types of HPV that cause cancer.185 In addition, women
who are vaccinated will still need cervical cancer screening
because some women may not get all required doses of the
vaccine, and because women may have already acquired a
vaccine HPV type, preventing them from obtaining the vaccine’s
full benefits.186 Indeed, some doctors and parents worry that
blanket immunizations could create a false sense of security
causing women to neglect regular screening,187 which might
actually raise cervical cancer rates.188 Further, “even doctors
who helped devise the vaccine point out that Pap screening may
be more effective in cutting cervical cancer rates.”189 These
doctors note that vaccinating every single twelve-year-old
“should reduce by half the number of cervical cancers in the
next 35 years,” whereas Pap screening would reduce the
incidence of cervical cancer by nearly seventy-five percent.190
Thus, given the existence of the screening measures already
available, mandating the HPV vaccination is an unnecessary
step.
3. HPV Is Sexually Transmitted
The HPV vaccine is different from most other vaccines, in
that it protects against a disease which is sexually transmitted.191
Thus, one concern is that required vaccinations will promote
premarital sex and risky sexual behavior.192 Janet Gilsdorf,
Director of Pediatric Infectious Diseases and Immunology at the
University of Michigan C.S. Mott Children’s Hospital, says that
185
MARKOWITZ ET AL., supra note 50, at 17. The vaccine protects
against four types of HPV, including two that cause about 70% of cervical
cancer. Id.
186
CDC, Questions & Answers for the Public, supra note 41.
187
Marsa, supra note 38.
188
Id.
189
Id.
190
Id. (quoting Dr. Diane Harper, Director of the Gynecological Cancer
Prevention Research Group at Dartmouth Medical School in Hanover, N.H.).
191
192
Vamos et al., supra note 38.
4/26/2010 10:03 PM
529
“[t]he reality is, many children get shots and they don’t ask
what they’re for.”193 Therefore, the HPV vaccination does not
need to result in “a major parent-child discussion about sex.”194
Yet, another view is that this lack of openness may be
inconsistent with the goal of preventing HPV and cervical cancer
and that education is a key to preventing the disease.195 In
addition, not only do parents worry that requiring the HPV
vaccine for adolescent girls will encourage sexual behavior, but
also that mandating the vaccine infringes “on the decisionmaking powers of parents . . . regarding what is acceptable
medical and sexual behavior.”196
4. The HPV Vaccine Is Still New—Studies
Are Inconclusive
Others object to the vaccine’s mandatory use because “there
are too many unknowns.”197 During testing, only 1184 of the
25,000 patients in the clinical trial were preteen girls,198 the age
group that is targeted in proposed, as well as approved,
legislation.199 The co-founder of the National Vaccine
Information Center remarked that “that’s a thin base of testing
upon which to make a vaccine mandatory.”200 Further, it is not
yet known how long the immunity will last, or whether
eliminating some strains of cancer-causing virus will decrease
193
Levine & Harris, supra note 181.
Id.
195
196
Vamos et al., supra note 38, at 304.
197
Id. See, e.g., Marsa, supra note 38 (Sandra Levy has “serious
reservations” about having her eleven-year-old daughter inoculated with the
HPV vaccine since “we really don’t know if it’s 100% safe.”).
198
199
Virginia’s statute requires that “[t]he first dose shall be administered
before the child enters the sixth grade.” VA. CODE ANN. § 32.1–46(a)(12)
(West 2008). Similarly, the District of Columbia.’s statute requires parents of
females “enrolling in grade 6 for the first time” to submit vaccination
certification. D.C. CODE § 7–1651.04(b)(1) (2008).
200
194
4/26/2010 10:03 PM
530
the body’s natural immunity to other strains of the virus.201
In addition, although there have not been many serious
adverse reactions to the vaccine,202 it is likely that “all possible
side effects of the vaccine have not been determined.”203
Moreover, the known adverse effects such as Guillain-Barré
Syndrome (GBS) and blood clots are “a sobering reminder that
rare adverse events may surface as the vaccine is administered
to millions of girls and young women.”204 Because of these
medical unknowns, “Gardasil’s side effects have made some
pediatricians more reluctant to recommend it for their youngest
patients.”205 As one research associate at Judicial Watch stated,
“It’s hard to say right now how effective [the vaccination] is.
Making it mandatory is using the U.S. as a public health
experiment.”206
5. The Consequences of HPV Are Not Sufficient
To Mandate Vaccination for School Entry
Although the states are advised by the CDC regarding which
vaccines should be required, “states should mandate vaccines
primarily for diseases that are highly contagious, cause
significant morbidity and mortality, and pose a major health
threat to students, teachers, or the community.”207 Many of the
previously mandated vaccinations were required in order to
protect children from devastating diseases.208 For example,
201
Elisabeth Rosenthal, Researchers Question Wide Use of HPV Vaccine,
N.Y. TIMES, Aug. 20, 2008, http://www.nytimes.com/2008/08/21/health/
21vaccine.html.
202
See supra Part I.B.
203
204
205
Susan Todd, Merck Pressing for OK to Market Gardasil for Males,
THE STAR-LEDGER, Jan. 12, 2009.
206
Victoria Stagg Elliott, HPV Vaccine Talk Shifts From Fanfare to Fear,
AM. MED. NEWS, Sept. 15, 2008.
207
208
See Centers for Disease Control and Prevention, What Would Happen
If We Stopped Vaccinations?, http://www.cdc.gov/vaccines/vac-gen/
4/26/2010 10:03 PM
531
before the polio vaccine was available, 13,000 to 20,000 cases
of paralytic polio were reported annually in the United States
leaving children “in braces, crutches, wheelchairs, and iron
lungs.”209 In the years before the Hib meningitis vaccine was
available, the disease killed 600 children per year and left many
survivors with deafness, seizures, or mental retardation.210
Diphtheria was a major cause of illness and death for children in
the U.S. before a diphtheria vaccine was created.211 In addition,
from 1964 through 1965, before the rubella immunization was
routinely used, an epidemic of rubella resulted in an estimated
20,000 infants born with congenital rubella syndrome, of which
11,600 were deaf, 3,580 were blind and 1,800 were mentally
retarded.212
Unlike these diseases, HPV-induced cervical cancer is a slow
process that generally takes many years, and, therefore, does not
affect children.213 Further, most of the time, HPV goes away on
its own,214 and “few women who have HPV get cervical
cancer.”215 Thus, many of the reasons that justified mandating
previous vaccinations do not exist with respect to the HPV
vaccination.216
whatifstop.htm (last visited Sept. 25, 2009).
209
Id.
210
Id.
211
Id.
212
Id.
213
See Centers for Disease Control and Prevention, Common Questions
About HPV and Cancer, http://www.cdc.gov/STD/HPV/common-questions.
htm (last visited Sept. 25, 2009) [hereinafter CDC, Common Questions].
214
215
CDC, Common Questions, supra note 213. “Studies suggest that
whether a woman develops cervical cancer depends on a variety of factors
acting together with high-risk HPVs. The factors that may increase the risk of
cervical cancer in women with HPV infection include smoking and having
many children.” NCI, HPV and Cancer, supra note 54.
216
See GOSTIN, supra note 6, at 380.
4/26/2010 10:03 PM
532
6. Mandating the HPV Vaccine
Is Inconsistent with Jacobson
Unlike previously mandated vaccinations, requiring the HPV
vaccination would not fit within the principles articulated in
Jacobson.217 First, since HPV is passed on through sexual
contact,218 it cannot be transmitted in a classroom setting from
student to student.219 Therefore, unlike the smallpox vaccine in
Jacobson, the HPV vaccine is not “necessary for the public
health or the public safety.”220 The decision to mandate
vaccination in Jacobson occurred “in the midst of a smallpox
epidemic when there was no other less coercive means available
to staunch the outbreak. . . . vaccination was a medical
necessity to combat the disease.”221 Conversely, mandating the
HPV vaccination is not a public health necessity because
individuals can protect themselves through disease screening,
safe sex and abstinence.222
Although like HPV, hepatitis B is passed on through sexual
contact, and tetanus cannot be transmitted in a classroom setting,
these diseases differ from HPV in that they still fall within the
“public health necessity” category.223 For example, although
hepatitis B may be transmitted sexually, it may also be
communicated in other manners.224 Hepatitis B is spread when
blood, semen, or other body fluid infected with the hepatitis B
virus enters the body of a person who is not infected.225 People
can become infected with the virus while sharing needles,
217
See supra Part II.A.1.
219
Id.
220
See Jacobson v. Massachusetts, 197 U.S. 11 (1905).
221
Note, Toward a Twenty-First-Century, 121 HARV. L. REV. 1820,
1820 (2008).
222
Id.
223
See Jacobson, 127 U.S. at 28.
224
Centers for Disease Control and Prevention, Hepatitis B FAQs for the
Public, http://www.cdc.gov/hepatitis/B/bFAQ.htm (last visited Sept. 25,
2009).
225
Id.
218
4/26/2010 10:03 PM
533
syringes, or other drug-injection equipment, sharing items such
as razors or toothbrushes with an infected person, or by direct
contact with the blood or open sores of an infected person.226 In
2002, an Arkansas district court upheld the decision by the
Arkansas legislature that required all children entering daycare,
elementary and middle schools to receive the hepatitis B
vaccine.227 While comparing the situation to Jacobson, the court
stated:
Hepatitis B may not be airborne like smallpox; however,
this is not the only factor by which a disease could be
judged dangerous. Hepatitis B is spread by bodily fluids;
the virus is ‘fairly [hearty] and can survive on surfaces,
door knobs, et cetera, for up to a month.’ . . .
Immunization of school children against Hepatitis B has a
real and substantial relation to the protection of the public
health and the public safety. The Court therefore finds
that requiring schoolchildren to be immunized against
Hepatitis B is a reasonable exercise of the State’s police
power and is constitutionally permissible.228
Further, although tetanus is not contagious, it is not
necessarily preventable. “[G]iven [children’s] propensity to both
play in the dirt and get scratches,”229 tetanus may easily be
obtained in a school setting. Unlike many parents’ reaction to
the HPV vaccine, parents are “very accepting of the Tetanus
vaccine,”230 both because the disease is not necessarily always
preventable and “because of the clear and obvious danger that
their child may step barefooted on a nail or do some other
dangerous activity.”231 HPV, on the other hand, is preventable—
232
by refraining from sexual activity.
Second, mandating the HPV vaccination does not fit within
226
227
228
229
230
231
232
Id.
Boone v. Boozman, 217 F. Supp. 2d 938, 954 (E.D. Ark. 2002).
Id.
Coletti, supra note 150, at 1368.
Id.
4/26/2010 10:03 PM
534
the Jacobson principle that there must be a “reasonable
relationship between the public health intervention and the
achievement of a legitimate public health objective.”233
Previously mandated vaccinations meet the “reasonable
relationship” requirement because school-aged children are most
at risk of contracting infectious diseases while in school.234
Moreover, “[a]ll children who attend school are equally at risk
of both transmitting and contracting the diseases.”235 On the
other hand, since HPV is sexually transmitted, exposure to the
disease is not directly related to attending school.236 In addition,
not all children are at equal risk of getting HPV since “[t]hose
who abstain from sexual conduct are not at risk for transmitting
or contracting HPV.”237 Further, arguably it is not “reasonable”
to mandate the HPV vaccine at this point given the limited
amount of testing.238
Third, requiring the HPV vaccine for adolescent females
could be considered “disproportionate to the expected benefit.”239
This is not only due to the relatively low incidence of cervical
cancer in the United States compared with the rest of the
world,240 but also because the HPV vaccine only protects against
four of the strains of HPV.241 Further, since the “overall
prevalence of HPV types associated with cervical cancer is
relatively low (3.4%),”242 mandating the vaccine for all girls
may be viewed as “disproportionate.”243
233
235
Id.
236
Id.
237
Id.
238
See supra Part III.B.4.
239
240
See National Cervical Cancer Coalition, http://www.nccc-online.org/
241
242
Lawrence O. Gostin & Catherine D. DeAngelis, Mandatory HPV
Vaccination: Public Health vs. Private Wealth, 297 JAMA 1921, 1921
(2007).
243
See GOSTIN, supra note 6, at 127.
234
4/26/2010 10:03 PM
535
Finally, mandating the HPV vaccine may not withstand a
fairness analysis under the Equal Protection Clause since it is
currently only administered to females.244 Under the heightened
scrutiny that is required for laws making sex-based distinctions,
the state would have to “justify its decision to burden females
with the risks of vaccination, and not males, even though males
also contribute to HPV transmission.”245 In October 2009, the
Food and Drug Administration approved the use of Gardasil in
boys and men ages nine to twenty-six to protect them from
genital warts; however, the ACIP did not encourage “its routine
use in boys, as it has recommended for girls.”246 The group
“questioned whether vaccinating boys was a cost-effective way
to protect their future sexual partners against cervical and other
types of cancer caused by . . . HPV.”247
C. The Possible Effects of Mandatory HPV Vaccination Laws
Many parents and guardians are currently choosing to take
advantage of exemptions to prevent their child from receiving
certain vaccinations.248 Due to the availability of exemptions,
“nearly one-half of 1% of kids enrolled in school are
unvaccinated under a medical waiver; 2% to 3% have a
nonmedical one, and the numbers appear to be rising.”249
Additionally, in an effort to avoid potential conflicts,250 some
244
See GARDASIL PACKAGE INSERT, supra note 68.
246
Natasha Singer, Vaccine Against Virus in Girls May Be Given to
Boys, N.Y. TIMES, Oct. 22, 2009, at A25.
247
Id. Although males cannot contract cervical cancer, they can become
infected with HPV and transmit the virus to others. Centers for Disease
Control and Prevention, HPV and Men Fact Sheet, http://www.cdc.gov/
STD/HPV/STDFact-HPV-and-men.htm (last visited Sept. 25, 2009). Most
men who get HPV do not develop any symptoms; however, it can cause
health problems, such as genital warts, anal or penile cancer. Id.
248
See Park, supra note 139.
249
Id.
250
Health officials are beginning “to take a harder line with parents who
submit vaccine exemptions for nonmedical reasons.” Id. In November 2007,
245
536
4/26/2010 10:03 PM
parents are choosing to “homeschool their kids so they won’t be
forced to vaccinate them” with certain vaccines, such as the
MMR vaccine.251
If states follow Virginia’s or D.C.’s lead and mandate the
HPV vaccine for girls entering the sixth grade, it is likely that
even more parents will opt out of the HPV vaccine for their
children.252 Parents and guardians will object to the HPV vaccine
for all of the same reasons that they object to vaccines in
general, such as concerns regarding autism and the mandatory
nature of the shots.253 However, due to the nature of HPV and
the HPV vaccine, the vaccine presents additional worries.254
Since the HPV vaccine is not a public health necessity in the
same way that other mandated vaccines are,255 “[i]t is this
qualitative difference between the HPV vaccine and more
traditional vaccines that resonated with the public and with state
lawmakers in seeking broad exemptions to mandatory
vaccination.”256
Virginia’s statute allows parents to choose not to have their
daughter vaccinated as long as they review “materials describing
the link between the human papillomavirus and cervical cancer
approved for such use by the Board.”257 This makes it relatively
258
simple for parents to opt out of vaccinating their child.
officials in Maryland “threatened to take parents to court for truancy
violations if their kids did not get all their shots.” Id. On Long Island,
parents are called in for “‘sincerity’ interviews with school officials . . . to
determine how genuinely the vaccines conflict with religious convictions.” Id.
251
Id.
252
See supra text accompanying note 41. There is also a risk of “parental
rejection of the vaccine because it is perceived as coercive.” Javitt et al.,
supra note 42, at 390.
253
254
See supra Part III.B.
255
Note, Toward a Twenty-First-Century, supra note 221, at 1838.
256
Id. at 1839.
257
VA. CODE ANN. § 32.1–46(D)(3) (West 2008).
258
The Virginia statute also allows for medical exemptions if
[t]he parent or guardian presents a statement from a physician
licensed to practice medicine in Virginia, or a licensed nurse
practitioner, that states that the physical condition of the child is such
4/26/2010 10:03 PM
537
Although the statute differentiates the HPV vaccine by stating
that it “is not communicable in a school setting,”259 the ease in
which a parent can exercise this opt out right could encourage
parents to then seek exemptions to other previously mandated
vaccines which protect against diseases that are communicable in
a school setting.
The HPV vaccine is dissimilar to previously mandated
vaccines,260 which is why it is expected to draw additional
scrutiny by parents.261 Further, the ability to opt out of the HPV
vaccine is not masked. In fact, the District of Columbia’s
legislation specifically calls for the advertisement of the opt-out
provision of the HPV vaccination: all “communications from the
Department of Health on the HPV vaccination program” must
“prominently feature information pertaining to the ability of
parents or guardians to opt out of the program.”262 Thus, many
parents will likely exercise their right to opt-out of the HPV
vaccination for their daughters.263
The broad opt-out provision for the HPV vaccine may bring
some parents and guardians, who otherwise might not have, to
look into the availability of vaccine exemptions in their state for
other vaccines. Although parents would likely use the
philosophical exemption if it is available in their state, “more
and more parents today are claiming religious exemptions
regardless of whether the religion they belong to explicitly
prohibits it.”264 Further, in states without philosophical
that the administration of one or more of the required immunizing
agents would be detrimental to the health of the child
and for religious exemptions if “[t]he parent or guardian of the child objects
thereto on the grounds that the administration of immunizing agents conflicts
with his religious tenets or practices.” Id. at § 32.1–46(D)(1)–(2).
259
Id. at § 32.1–46(D)(3).
260
See supra Part III.B.1.
261
See Gardner, supra note 39; see also Marsa, supra note 38.
262
D.C. CODE § 7–1651.04 (2008).
263
264
Coletti, supra note 150, at 1350. For example, in New Jersey, to file
for a religious exemption, a parent only needs to “write a letter stating how
the vaccines conflict with the family’s religious beliefs.” Jill P. Capuzzo,
538
4/26/2010 10:03 PM
exemptions, besides using religious or medical exemptions,
parents may also send their children to parochial or private
schools or home school their children, increasing alternatives for
parents seeking to avoid vaccinating their children.265 In sum,
introducing parents to the idea of opting out of the HPV
vaccination for their daughter may encourage these parents to
seek exemptions not only for the HPV vaccine, but for other
previously mandated vaccines that have proved to be
tremendously effective over the years. Once parents realize the
ease of which they can opt out of the HPV vaccine, they may
then seek to opt out of other vaccines by using exemptions. The
increased use of exemptions is already a cause for concern,
primarily due to recent measles and whooping cough
outbreaks,266 and any additional encouragement to opt out of
mandatory vaccines will only exacerbate the situation.
IV. CONCLUSION
From 2007 to 2008, the number of thirteen to seventeenyear-old girls who had received the first of three doses of the
HPV vaccine increased from 25 to 37 percent.267 This increase
occurred, despite the fact that most states have not instituted a
HPV vaccine requirement for school entry.268 Therefore, this
Some Parents Seek Options to Vaccine Orders, N.Y. TIMES, Dec. 23, 2007.
Verification by a member of the clergy is not required. Id. Further,
organizations exist to assist parents in their application. See id. For example,
Barbara Flynn, a mother of two, has a Web site, www.callingtheshots.info,
where she provides a sample three-page letter that parents can use when
drafting their own letter. Id.
265
Capuzzo, supra note 264.
266
See Bloomberg News, supra note 12.
267
David Olmos, Third of Teen Girls Get Cancer Vaccine, NEWSDAY,
Sept. 18, 2009, at A32. Rates of vaccination “varied widely among the
states, from 54.4 percent in New Hampshire to 15.8 percent in Mississippi.”
Id.
268
See NCSL, HPV Vaccine, supra note 35. The Virginia legislature
passed a school vaccine requirement in 2007, and considered a bill that would
delay that requirement, but the Senate Committee declined to take action on
the bill. Id. D.C.’s bill was enacted and the requirement started at the
4/26/2010 10:03 PM
539
trend supports the idea that mandatory HPV vaccination is an
unnecessary measure at this point—especially when there is an
increasing amount of vaccine skeptics.269 Even without a
mandatory requirement, an increasing number of females are
currently obtaining the HPV vaccination.270
Recently, concerns regarding a connection between autism
and vaccinations have fueled the battle over vaccines,271 and as a
result, parents are paying close attention to vaccine requirements
and their right to decide what is best for their child.272 Indeed,
the use of exemptions is increasing.273 Unfortunately, this
increase in the use of exemptions has already led to an
observable rise in vaccine-preventable disease,274 with major
275
outbreaks of measles and pertussis. For example, states “with
easily obtained exemptions had higher non-medical exemption
rates and increased incidence of pertussis.”276
As states continue to consider the contentious subject of
whether or not to require girls to be vaccinated against HPV, it
is imperative that the state legislatures consider not only the
effect of the mandate itself, but also the effect of any opt-out
provisions the legislature chooses to include. Including the HPV
vaccination on the list of mandated vaccines for school-entry
with broad opt-out provisions will only encourage the use of
exemptions, thereby undermining our nation’s public health. The
development of vaccines was one of the “great public health
achievements of the twentieth century,”277 resulting in a dramatic
decrease in common childhood illnesses that “once accounted for
beginning of the 2009 school year. Id.
269
Steinhauer & Harris, supra note 130.
270
See Olmos, supra note 267.
271
Park, supra note 139, at 36.
272
See Steinhauer & Harris, supra note 130 (explaining that there is “an
increasing number” of “vaccine skeptics” often due “to an unproven notion
that vaccines are linked to autism and other disorders”).
273
See id.
274
US Measles Increase Caused by Vacc Scare, supra note 25.
275
276
Id.
277
Id. at 376.
4/26/2010 10:03 PM
540
a substantial proportion of child morbidity.”278 Although the
approval of a vaccine against cancer-causing HPV strains is a
tremendous step forward in improving our nation’s health,
mandating its use will have an overall detrimental effect for it
and other vaccines. Until states figure out an alternative to
including broad opt-out provisions in their legislation, voluntary
HPV vaccination is the best alternative.
278
Id.

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