The City of Miami recently brought an action against multiple lenders claiming their practices were discriminatory and in violation of the Fair Housing Act. On June 28, the U.S. Supreme Court granted Wells Fargo's petition for a writ of certiorari in Wells Fargo & Co. and Wells Fargo Bank, N.A. v. The City of Miami as well as Bank of America's petition for a writ of certiorari in Bank of America Corp., et al. v. City of Miami and consolidated the two cases. A final decision on the case will most likely define the reach of the Fair Housing Act.
The City of Miami alleges that the banks' conduct violated the Fair Housing Act in two ways. First, that it intentionally discriminated against minority borrowers and second, that its conduct had a disparate impact, resulting in an unbalanced number of foreclosures on minority-owned properties. This allegedly caused financial harm that included an increase in municipal costs and a decrease in tax revenue. The City of Miami sought an injunction, barring the lenders from engaging in similar conduct and punitive damages, as well as attorney's fees. The banks moved to dismiss, most notably stating the city lacked statutory standing to sue under the FHA as the claim fell outside the act's "zone of interest." The city failed to plead that the banks' actions were the immediate cause of the alleged damages. The motion was granted by the district court. The city then moved in the district court for reconsideration and for leave to file an amended complaint, which the district court denied. The city chose to appeal.
Upon review the appellate court held that the banks' "discriminatory lending practices caused minority-owned properties to fall into foreclosure," which in turn caused the avalanche of revenue loss to the city and tacked on the cost of fighting blight resulting from the foreclosed-upon properties. "We have little difficulty in finding," the appellate court ruled, "that the City has said enough to allege an injury in fact for constitutional standing purposes."
The court did not stop there, holding that the term "aggrieved person" in the FHA can encompass Miami's allegations in this case. It went on to note the proximate cause argument "is 'perfectly plausible' and that an extensive pattern of discriminatory lending led to substantially more defaults on [their] predatory loans, leading to a higher rate of foreclosure on minority-owned property, thereby reducing the City's tax base."
If the 11th Circuit U.S. Court of Appeals' opinion is upheld, there will be a very real cost associated with the resulting wider scope of the FHA. A lender would have to price in the risk that those not directly involved with the lending transaction can now bring a suit under the FHA. Lenders and servicers would see an uptick in inquiries from state attorneys general offices and regulators, such as the Consumer Finance Protection Bureau, when community groups and municipalities complain about blight. It is easy to see what a slippery slope would be created — if the City of Miami was able to bring an FHA claim for lost wages, why not a public school district or a condo association?
Another risk is raised in Bank of America's petition. Miami, it argues, experienced a drop in property tax revenue during the financial crisis, and seeks to shift responsibility for its recovery to Bank of America and other financial and lending institutions, despite the city not being a victim of lending discrimination. Noting a pattern, the bank states, "Other cities and counties are doing the same thing in other cases like this one. These suits were the brainchild not of the local governments themselves, but a group of plaintiffs' lawyers that have brought nearly-identical suits on behalf of municipalities across the country." Therefore, if these cases are successful and the decision of the 11th Circuit's is upheld, mortgage lenders should expect a wave of similar suits to follow.
Craig Nazzaro is of counsel at Baker Donelson and is a member of the Consumer Finance Litigation and Compliance Group.