After losing billions in property tax revenue during the foreclosure crisis, local governments notched a win earlier this year, when the U.S. Supreme Court affirmed the City of Miami’s right to sue Bank of America and Wells Fargo under the 1968 Fair Housing Act (FHA).
However, the decision is not a total win. The court also found that, to establish proximate cause under the FHA, the city must allege more than mere foreseeability of harm from the alleged discriminatory practices, and the court remanded the case for further proceedings on that question.
Predatory lending practices, or “redlining,” have a long history and are back in the regulatory spotlight. In the 1930s, the Home Owners’ Loan Corp. “graded” neighborhoods into four categories, based in large part on the neighborhoods’ racial makeup. Neighborhoods with large numbers of minority occupants were marked in red – hence redlined – and considered high-risk for mortgage lenders. In redlined neighborhoods, many lenders either refused to lend to that area entirely or imposed substantially different loan terms. Although the passage of the Civil Rights Act in 1968 theoretically outlawed redlining, the practice persisted in many areas of the country.
Redlining allegations had taken a backseat to other forms of discrimination allegations until the Consumer Financial Protection Bureau (CFPB) brought redlining back to the forefront. Since 2015, the CFPB has identified redlining as one of its focuses for fair lending compliance and enforcement.
One way that the CFPB is able to increase its focus on redlining allegations is through the use of data collected from banks pursuant to the Home Mortgage Disclosure Act (HMDA). The CFPB uses demographic data regarding a census metropolitan statistical area and HMDA data to compare lenders against their “peers.” Importantly, the data is public information available to potential litigants such as the City of Miami.
Cities follow the CFPB’s lead
Miami is just one of a number of cities that in the last four years have brought claims against lenders under the FHA. The cities are seeking compensation for allegedly disproportionate losses in tax revenues and simultaneous increases in demand for, and costs of, police, fire and other municipal services in majority-minority neighborhoods hard hit by the foreclosure crisis.
Los Angeles; Oakland, Calif; and Providence, R.I., had also sued lenders, claiming that banks intentionally targeted African-American and Latino neighborhoods with riskier loans than those offered to non-minority borrowers and then induced defaults by failing to extend refinancing and loan modifications on fair terms to those borrowers, which led to a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods.
According to Miami’s complaint, Wells Fargo’s and Bank of America’s loans in majority-minority neighborhoods were nearly six times as likely to result in a foreclosure as loans in majority white neighborhoods. An amicus brief filed in the case by the Miami Fraternal Order of the Police (FOP) listed multiple examples of terrible conditions in semi-abandoned neighborhoods that put an unusual strain on city resources. Foreclosed homes were used to hide dead bodies and to advertise child sex trafficking, and a toddler drowned in a pool at a neighbor’s abandoned house. According to FOP, untended pools in foreclosed homes also became breeding grounds for swarms of mosquitoes and “created the epicenter for America’s first Zika outbreak.”
The cities are using the FHA as a vehicle for seeking reparations against big banks because it prohibits racial discrimination in connection with real estate transactions and permits any “aggrieved person” to file a civil action. In Miami’s case, the lenders argued that the city had no standing because the FHA should apply to individuals, not governments.
The banks sought dismissal of the lawsuit and contended first that the city does not fall within the FHA’s “zone of interest”: aggrieved persons Congress intended to protect when it passed the law. Second, the banks argued that the harm the city allegedly suffered was not sufficiently related to FHA violations, and thus, the bank could not be liable for the city’s losses for a lack of proximate cause.
The district court found in favor of the banks, dismissing the lawsuit on a motion to dismiss. On appeal, the court of appeals reversed and found the city could proceed with its lawsuit.
The Supreme Court, by a 5-3 vote, rejected the banks’ first argument and held that the city is an “aggrieved person” authorized to bring suit under the FHA. The majority, which included Justices Roberts, Ginsburg, Sotomayor, Kagan and Breyer, explained that the FHA’s definition of an “aggrieved person” reflects the intent to confer standing broadly, so long as the alleged injury is “arguably” within the “zone of interest.”
However, the court disagreed with the court of appeals on the causation question. In reversing dismissal to permit the city’s lawsuit to proceed, the U.S. Court of Appeals for the Eleventh Circuit determined that while there are “several links in the causal chain” between the alleged lending practices and the alleged losses, the city sufficiently alleged causation because the effects of the practices were foreseeable. The Supreme Court rejected foreseeability as too low of a bar for sustaining the tort-like FHA claims and explained that parties seeking redress for FHA violations must sufficiently allege a direct connection between the violation and their alleged injury.
The court remanded the case, with instructions for the lower courts to “define, in the first instance, the contours of the proximate caused under the FHA and decide how that standard applies to city’s claims.”
What’s to come?
The high burden of proof cities must present to show financial harm resulting from predatory lending practices is not likely to prevent future lawsuits, as litigation costs and publicity surrounding such lawsuits may motivate lenders to strike quick settlements with local authorities.
For example, the City of Providence filed a complaint against the Santander Bank N.A. in May 2014 alleging that the bank engaged in redlining practices in violation of the FHA and the Equal Credit Opportunity Act (ECOA). The bank settled the lawsuit by November of the same year by offering to provide $1.3 million in grants to three Providence nonprofit organizations, including Rhode Island Local Initiatives Support Corp., AS220 and the Providence Community Library.
Additionally, potential litigants are soon going to have access to new information that may be used as a foundation for redlining allegations. Beginning in 2018, lenders will be required to provide substantially more information under HMDA regarding loan applications and completions. With more data come more ways to compare lenders with their peers and the potential for new redlining allegations.
Nevertheless, localities weighing whether to bring their own actions against lenders should consider Los Angeles’ experience with claims it asserted against the Bank of America and Countrywide, similar to claims in Miami.
Los Angeles relied on statistical analysis to show that minority borrowers in neighborhoods were two to three times more likely to receive high-cost FHA/Veterans Affairs loans than were similarly situated white borrowers. But the District Court for the Central District of California awarded summary judgment to the banks based on its findings that Los Angeles failed to demonstrate a “robust” connection between the banks’ “facially neutral” bank policies that incentivized sales of such high-cost loans and the statistical racial disparity in the number of those loans the banks issued. The Ninth Circuit Court of Appeals recently affirmed the summary judgment grant.
The daunting task of establishing causation in redlining/predatory lending lawsuits by localities may be one of the reasons that, following the Miami decision, the anticipated flood of similar lawsuits has yet to materialize. To date, only the City of Philadelphia has taken a shot at making its own case against Wells Fargo. Similar to Miami’s complaint, Philadelphia filed a complaint in the District Court for the Eastern District of Pennsylvania alleging that Wells Fargo pushed minorities into riskier loans with higher rates, even in cases in which the borrowers had credit profiles that would have qualified them for lower-rate loans. Philadelphia seeks monetary damages against Wells Fargo based on its loss of property tax revenue and compensation for non-economic injuries associated with foreclosures, such as interference with the city’s ability to achieve its goals for non-discriminatory housing practices.
It remains to be seen how Miami and Philadelphia will approach the burden of demonstrating the causal connection between the alleged bank policies and the damages they seek. Los Angeles’ experience should serve as a cautionary tale for both.
Natalia Steele is a partner in the Cleveland office of Vorys, Sater, Seymour and Pease LLP and a member of the litigation group, where her practice is focused on complex civil business litigation, including in the areas of consumer lending and lender liability. Heather Lutz’s litigation practice in the Cleveland office of Vorys, Sater, Seymour and Pease includes business and employment litigation, with a focus on cases involving lender liability.