Lending

Supreme Court rules cities can sue banks for predatory lending

Hands partial victory to Miami in suits against Bank of America, Wells Fargo

Scales of justice with gavel

The Supreme Court handed down a landmark ruling, stating cities can sue banks for discriminatory mortgage lending practices, but cautioned that the burden of proof could be difficult to achieve.

In a 5-3 ruling released Monday, the Supreme Court ruled cities hold the right to sue banks over the banks’ lending practices, if an alleged violation of the Fair Housing Act is claimed.

The ruling stems from a lawsuit brought by city of Miami, which sued Bank of America, Wells Fargo, and Citigroup in 2013, stating that the banks engaged in predatory lending to minority borrowers in the city.

In its original lawsuit, Miami accused the lenders of "reverse redlining," which led to a large number of foreclosures, lower property tax collections, and increased cost to the city to deal with the resulting property value loss and blight.

Per the Supreme Court’s decision, Miami claimed:

The City’s complaints charge that the Banks intentionally targeted predatory practices at African-American and Latino neighborhoods and residents, lending to minority borrowers on worse terms than equally creditworthy nonminority borrowers and inducing defaults by failing to extend refinancing and loan modifications to minority borrowers on fair terms. The City alleges that the Banks’ discriminatory conduct led to a disproportionate number of foreclosures and vacancies in majority minority neighborhoods, which impaired the City’s effort to assure racial integration, diminished the City’s property-tax revenue, and increased demand for police, fire, and other municipal services. The District Court dismissed the complaints on the grounds that (1) the harms alleged fell outside the zone of interests the FHA protects and (2) the complaints failed to show a sufficient causal connection between the City’s injuries and the Banks’ discriminatory conduct.

U.S. District Judge William Dimitrouleas initially dismissed the lawsuits in July 2014, ruling that the city lacked standing to sue, and that the alleged harm was too remote from the banks’ conduct.

Then, the city appealed the Dimitrouleas’s ruling to a higher court. And in September 2015, the 11th U.S. Circuit Court of Appeals reversed the lower court’s dismissal of the city's claims under the federal Fair Housing Act.

Bank of America and Wells Fargo then appealed the Court of Appeals decision to the Supreme Court, while Citigroup elected not to appeal.

And in June of last year, the Supreme Court agreed to hear the case, stating that it will not rule on the merits of the city’s lawsuits, but rather whether Miami is allowed to bring the lawsuits in the first place.

The Supreme Court’s ruling combined Miami’s lawsuits against Bank of America and Wells Fargo into one decision, and handed the city a partial victory on whether it could sue the banks, but established a standard that could be difficult to prove.

The majority decision, authored by Justice Stephen Breyer, states the following (emphasis added by HousingWire):

We hold that the City’s claimed injuries fall within the zone of interests that the FHA arguably protects. Hence, the City is an “aggrieved person” able to bring suit under the statute. We also hold that, to establish proximate cause under the FHA, a plaintiff must do more than show that its injuries foreseeably flowed from the alleged statutory violation.

The remaining question is one of causation: Did the Banks’ allegedly discriminatory lending practices proximately cause the City to lose property-tax revenue and spend more on municipal services? The Eleventh Circuit concluded that the answer is “yes” because the City plausibly alleged that its financial injuries were foreseeable results of the Banks’ misconduct. We conclude that foreseeability alone is not sufficient to establish proximate cause under the FHA, and therefore vacate the judgment below.

We conclude that the Eleventh Circuit erred in holding that foreseeability is sufficient to establish proximate cause under the FHA. As we have explained, proximate cause “generally bars suits for alleged harm that is ‘too remote’ from the defendant’s unlawful conduct.” Lexmark, supra, at ___ (slip op., at 14). In the context of the FHA, foreseeability alone does not ensure the close connection that proximate cause requires. The housing market is interconnected with economic and social life. A violation of the FHA may, therefore, “‘be expected to cause ripples of harm to flow’” far beyond the defendant’s misconduct. Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U. S. 519, 534 (1983). Nothing in the statute suggests that Congress intended to provide a remedy wherever those ripples travel. And entertaining suits to recover damages for any foreseeable result of an FHA violation would risk “massive and complex damages litigation.” Id., at 545.

Rather, proximate cause under the FHA requires “some direct relation between the injury asserted and the injurious conduct alleged.”

Chief Justice John Roberts, along with Justices Elena Kagan, Ruth Bader Ginsburg, and Sonia Sotomayor, joined Breyer in the ruling.

Justices Anthony Kennedy, Samuel Alito, and Clarence Thomas dissented.

Thomas, in the dissenting opinion, wrote: The Court today holds that Congress intended to remedy those kinds of injuries when it enacted the FHA, but leaves open the question whether Miami sufficiently alleged that the discriminatory lending practices caused its injuries. For the reasons explained below, I would hold that Miami’s injuries fall outside the FHA’s zone of interests. I would also hold that, in any event, Miami’s alleged injuries are too remote to satisfy the FHA’s proximate cause requirement.

In a statement provided to HousingWire, Bank of America spokesperson Lawrence Grayson said that the bank will continue to defend itself against the city’s claims.

“Bank of America is committed to the goals and intent of the Fair Housing Act,” Grayson said. “We believe these claims are without merit, and we will continue to defend our interests in this matter.”

In a separate statement, Wells Fargo stated that the standard established by the court required to prove that a bank is responsible for the effects of its lending practices will be difficult to achieve.

“The Supreme Court has brought us one step closer to ending the litigation brought by the city of Miami and other municipalities under the Fair Housing Act,” a Wells Fargo spokesperson said in a statement.

“We believe that under the stringent standards articulated by the Supreme Court, it will be very difficult for Miami or any other municipality to show the required connection between the claimed damages and unsubstantiated allegations about our lending practices, which do not reflect how we operate in the communities we serve,” the spokesperson continued. “We intend to continue to focus on helping customers succeed financially and expanding homeownership in Florida and across the United States.”

To read the court’s decision in full, click here.

[Update: This article is upated with statements from Bank of America and Wells Fargo.]

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