[Note: Check here for part two of this blog, which includes the potential future implications of the decision and how this decision could impact consumers.]

On May 1, 2017, the United States Supreme Court issued a decision that will likely have a profound impact on the residential mortgage industry. When presented with the issues noted in Bank of America vs. city of Miami on appeal, the Supreme Court decided that municipalities have the standing to bring a legal action against residential mortgage lenders for any financial burden, such as municipality fees, as a result of discriminatory mortgage lending practices.

Following the ruling issued by the Supreme Court in the Miami case, the City of Philadelphia was quick to seize these newly affirmed rights given to municipalities and on May 15, 2017, proceeded to file suit against Wells Fargo for alleged discriminatory residential mortgage lending practices. Pending further court decisions, by the United States Court of Appeals for the Eleventh Circuit and the United States Court of Appeals for the Ninth Circuit respectively, on both Bank of America vs. city of Miami and City of Philadelphia vs. Wells Fargo on this matter, it is likely that similar lawsuits will be filed by large municipalities alleging discriminatory practices in the future.

The outcome of the City of Philadelphia case and other possible lawsuits on both large and small mortgage lenders could likely negatively affect consumers because lenders will have to pass on the cost of such risk of potential lawsuits to their customers.

An overview of Bank of America v. City of Miami

In this particular case, the city of Miami brought suit on Dec. 20, 2013 in the District Court for the Southern District of Florida alleging that Bank of America and Wells Fargo violated the federal Fair Housing Act (FHA) by intentionally implementing unfair lending practices to target Latino and African-American homeowners in Miami.

It was alleged that the banks offered worse loan terms to minority borrowers than similarly-situated white borrowers. These unfair lending practices resulted in increased municipal costs for the city of Miami. In March 2014, the District Court ruled in favor of Bank of America and Wells Fargo granting the lenders’ Motion to Dismiss. The city of Miami appealed the ruling to the Eleventh Circuit Court of Appeals who, on Sept. 1, 2015, reversed the findings in favor of the city of Miami.

In March 2016, following the Eleventh Circuit’s ruling, the lenders collectively filed a writ of certiorari requesting the case to be heard before the U.S. Supreme Court. The case was argued at the U.S. Supreme Court in November 2016 and an opinion was issued on May 1, 2017.

The court found that that FHA does not impose a different burden on municipalities seeking to bring a suit claiming FHA violations and therefore, the city of Miami should be considered an “aggrieved party,” or an individual who has been injured, and is allowed to bring suit under the FHA.  Moreover, the Supreme Court found that the conduct of the banks financially harmed the city of Miami by diminishing its tax base and increasing its costs. The court then vacated the prior judgment of the Eleventh Circuit Court of Appeals on the issue of whether the targeted unfair lending of the banks was sufficiently related to the city of Miami’s alleged financial injury and sent the case back to the District Court for the Southern District of Florida for further deliberation.

Other present litigation

On May 15, 2017, just two weeks following the release of the Supreme Court decision, another lawsuit against Wells Fargo concerning this same subject matter was filed by the city of Philadelphia. The suit was brought by many of the same lawyers who represented the city of Miami in its suit against Bank of America and Wells Fargo, including Robert Peck of the Center for Constitutional Litigation PC.

In its complaint, the city of Philadelphia claimed that Wells Fargo violated the Fair Housing Act by practicing unfair predatory lending. Like the city of Miami, the city of Philadelphia alleges in its complaint that the purported lending discrimination by Wells Fargo produced many defaults by minority borrowers in the city, which resulted in diminished property tax revenue and increased municipal-costs.

The complaint seeks an unspecified amount in damages and an injunction against Wells Fargo related to discriminatory mortgage lending. If the city of Philadelphia is successful in its lawsuit, it is very likely that this outcome could further increase the number of lawsuits brought by cities against mortgage lenders in the future.

As of the date of publication, the case has not yet been added to the Court Proceedings Schedule for the U.S. District Court for the Eastern District of Pennsylvania. Notwithstanding these suits, there is other litigation which appears to have resulted in court decisions that are more favorable to the lenders. 

While the outcome of these suits against Wells Fargo and Bank of America are still pending, a very similar lawsuit brought against Wells Fargo by the city of Los Angeles in December 2014 was decided in Wells Fargo’s favor. In July 2015, the District Court for the Central District of California ruled that the city did not prove that the bank’s lending policies led to higher cost loans for minority borrowers. Subsequently, in May 2017, the Court of Appeals for the Ninth Circuit ruled that the decision of the lower court was appropriate because the city of Los Angeles could not show discriminatory lending during the time period in question.

While the City of Los Angeles attorney, Mike Feuer, recommended appealing the decision, Wells Fargo agreed to settlement in an attempt to avoid the further litigation costs associated with such a high profile case.

Thus the lawsuit was settled on Sept. 8, 2016 when Wells Fargo agreed to provide restitution to affected minority victims in Los Angeles and pay the City of Los Angeles $50 million in civil penalties.

Check here for part two of this blog, which includes the potential future implications of the decision and how this decision could impact consumers.