Magazine article American Banker

Two Court Decisions, One Big Blow for Cities' Lawsuits against Megabanks

Magazine article American Banker

Two Court Decisions, One Big Blow for Cities' Lawsuits against Megabanks

Article excerpt

Byline: Laura Alix

Two recent court decisions may be complicating cities' efforts to sue banks for predatory lending.

While the courts have affirmed banks' right to file such suits, they are also holding them to a higher standard in proving that banks knowingly steered minority borrowers into high-cost home loans.

In a decision handed down May 1, the Supreme Court sided with a lower court in ruling that the city of Miami could sue Bank of America and Wells Fargo under the Fair Housing Act. The banks had argued that individuals could sue under that law, but cities could not.

The decision was generally seen as bolstering cities' claims against big banks and, indeed, just two weeks later the city of Philadelphia filed a predatory lending suit against Wells Fargo.

Yet the Supreme Court ruling was seen by some as a victory for banks, since it also states that cities would have to show a much closer relationship between lending policies they claim are harmful and the actual harm done to the community.

Plaintiffs were dealt an even bigger blow on May 26 when the Ninth Circuit Court of Appeals handed down a ruling in the City of Los Angeles' case against Wells Fargo and Bank of America. In affirming a lower court's opinion siding with the banks, the federal appeals court ruled that the city failed to show a robust link between the banks' lending practices and damage to minority communities.

Taken together, the two rulings could make it more difficult for municipalities to prevail in lawsuits in which they allege that banks knowingly pushed high-cost, high-risk loans on minority borrowers, a practice sometimes referred to as reverse redlining.

"From a big-picture perspective, it's very hard for cities or municipalities to handle that burden when it shifts to them, showing that causality between the policy or procedure at the bank and any disparate impact they're alleging," said Craig Nazzaro, an attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz. "If it's not on the bank itself, it becomes a very difficult task for the plaintiff to overcome."

For a policy or practice to have a disparate impact, it must affect members of a protected class more than others, even though it's neutral on its face, as opposed to disparate treatment, in which the discrimination is intentional.

In its complaint, the city of Los Angeles said that three particular policies had had a disparate impact on the city's minority borrowers: a compensation scheme that rewarded loan officers for higher-dollar loans; marketing targeting low-income and minority borrowers; and a failure to adequately monitor loans for disparities.

A lower court found the city's argument lacking, particularly when it was limited to the two-year statute of limitations imposed by the Fair Housing Act. Ultimately, the Ninth Circuit agreed: that the city did not establish the "robust causality" it needed to make its case.

That need for robust causality has its origins in a 2015 case, Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which the Supreme Court ruled that disparate impact claims are allowed under the Fair Housing Act. The court also said that plaintiffs must show a robust causal link between the policy and the disparate impact; evidence of racial disparity is not enough on its own.

Adding to cities' challenges, the latest Supreme Court ruling says that cities will have to prove a much tighter connection, or proximate cause, between those lending policies they cite as harmful and the losses they've suffered in declining property values, lost tax revenue and increased spending on emergency services. …

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