SUPREME COURT: Cities May Sue for Effects of Predatory Lending

Predatory LoansOn May 1, 2017, the U.S. Supreme Court interpreted the Fair Housing Act (FHA) in a way that could send shock waves through the lending industry and open the door for law suits not only by cities but also homeowners associations, business owners, and others. The City of Miami, Florida, sued Bank of America and Wells Fargo Bank, claiming that the banks engaged in predatory lending practices that resulted in a higher rate of foreclosures in African American and Latino communities than in similarly situated white communities. Miami claimed that the banks’ practices lowered values of foreclosed properties as well as entire neighborhoods, resulting in the loss of property tax revenue to the City while increasing the demand for municipal services in the form of police, fire, building and code enforcement services and other blight remedies. In Bank of America Corp. v. City of Miami, the nation’s high court considered first whether the City had the constitutional right—also called standing—to assert the claims under the FHA and second whether the damages claimed were the type that the FHA was designed to address.

The case came to the Court at a relatively early stage in the litigation process. The District Court had dismissed the case after the banks had challenged whether the City’s complaint stated a claim on which the Court could grant relief. The banks challenged the complaint on three grounds, namely that the City lacked legal standing under FHA to pursue the claims, that the damages the City claimed were not the type that the Court could award because they were not legally caused by an FHA violation, and the claims were barred by passage of time under the FHA’s two-year statute of limitations. Some of the claims arose as early as 2004, indicating that the practices arose from the times of easy-credit before the crash of 2008. Although the District Court did allow the City to refile the case with an amended complaint, the District Court held that the amended complaint solved only the statute of limitations problem but not the others and dismissed the case for good. The City appealed, and the Eleventh Circuit Court of Appeals reversed. The Appeals Court held that not only did the City have standing to assert the FHA claims, but that the damages claimed were not so legally tenuous as not to be recoverable under the FHA because such damages were the foreseeable result of predatory lending. The Supreme Court granted the banks’ request to review the case.

The High Court reviewed the claimed predatory lending practices allegedly employed in minority communities that were not used with similarly situated non-minority borrowers. These included excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinance opportunities, large prepayment penalties, and—when default was imminent—unjustified refusals to refinance or modify the loans. The Court determined that given the Congressional intent of the FHA, standing should be determined to be very broad under the Act, and it held that Miami had standing to bring the claims. The Court stopped short, however, of deciding whether the City could recover the damages claimed, however. Instead, the Court noted that whether the alleged harm was foreseeable was simply not enough to allow the damages to be awarded. Instead, the Court said that the claimed damages must have a sufficiently close connection to the type of actions the FHA prohibits in order to have been the legal result of the claimed violations. Because the Appeals Court had not addressed this issue, the Supreme Court sent the case back to that court with instructions to consider the issue and make a decision. It is curious that the decision was 5-3, with Justices Thomas, Alito and Kennedy dissenting and Justice Gorsuch not participating in the decision. The Court’s decision not to rule on the damages question seems to be a compromise in order to get a majority decision. In other words, had the Court ruled on the damages question, it might have lost a concurring justice’s vote, and the decision of the Eleventh Circuit would have stood for lack of a majority to reverse it. Instead, the Court made a binding decision, although it was not a complete determination of the issues before it.
This case is noteworthy for its implications. If, for example, the Eleventh Circuit decides that the City’s damages claims are recoverable under the FHA, then other organizations such as homeowners associations or neighborhood community organizations could claim that predatory lending practices had adversely impacted the value of units in the community and sue for damages. Depending on the breadth of the ruling, one could see a grocery store or other business owner that had located within a particular community claim that its business failed because of a bank’s predatory lending practices shrinking the size or changing the demographics of the community. Certainly, the case is not over, but it does bear watching.