Who Can Go After Banks for the Foreclosure Crisis?

Cities are arguing that they, too, were damaged by risky loans, and that they should be able to take the lenders to court to regain their losses.

J Pat Carter / AP

In the wake of the housing crisis, surprisingly few people or institutions have been held accountable for the risky lending practices that nearly wrecked the U.S. economy.  That’s partly because the people who were most damaged by the foreclosure crisis—the people who lost their homes—don’t have the resources to bring lawsuits.

But the families who lost their homes weren’t the only ones hurt by the foreclosure crisis. So there’s an argument to be made that they shouldn’t be the only ones who can go after the lenders. Cities, for example, lost tax revenue when homes sat vacant, and saw property values within their boundaries decrease when vacant and boarded-up homes sat empty. Cities had to pay for police and fire protection to keep those homes from being vandalized and to respond to reported break-ins and criminal activity at the houses.

So should cities be able to sue the banks, too?

That’s the question making its way through courts across the country after municipalities including Los Angeles, Miami, Oakland, and Providence all filed lawsuits against lenders under the Fair Housing Act. The lawsuits, which the banks are fighting to have dismissed, argue that the lending practices of these banks harmed the cities too. When lenders targeted minorities for risky loans, knowing that the borrowers would likely lose their homes, they knowingly deprived cities of tax revenue while making them shoulder the expenses of blocks of foreclosures, the lawsuits allege. Oakland, for instance, argues in its complaint against Wells Fargo that the city “has suffered economic injury based upon reduced property tax revenues resulting from (a) the decreased value of the vacant properties themselves, and (b) the decreased value of properties surrounding the vacant properties.” Last month a judge declined to dismiss the suit.

In these cases, the municipalities have accused lenders, including Wells Fargo, JP Morgan, and Bank of America, of “redlining,” or the practice of denying credit to people in particular neighborhoods because of their race, and “reverse redlining,” or the practice of flooding a minority neighborhood with exploitative loan products. These practices, they say, violate parts of the Fair Housing Act.

Those violations themselves could be very costly to the banks, but the much, much bigger question at stake is whether the cities even have standing to bring the cases. If they do, that will be a nightmare for banks, which could face lawsuits from every corner of the country if indeed the city’s can bring such cases. Much to the horror of the lenders, the Eleventh Circuit Court of Appeals ruled in September that Miami did indeed have standing to bring its case against Wells Fargo, Bank of America, and Citigroup. (A similar suits by Miami against JP Morgan Chase has been dismissed, though the city is appealing.)

“[The Eleventh Circuit] completely accepted our theory of the case,”  Robert S. Peck, a lawyer for the cities and the president of the Center for Constitutional Litigation, told me.

The Eleventh Circuit sent the cases back to the lower court, which dismissed the cases on other grounds. On Friday, the cities filed an amended complaint, and both sides are waiting for a judge to now decide the statute of limitations on the banks’ practices.

But on the question of standing, the banks appealed the Eleventh Circuit’s decision to the Supreme Court, which could choose to consider the banks’ petition to dismiss the case on standing grounds.

We do not believe that the Fair Housing Act was intended to allow for the claims that the city of Miami has made in this case, and are asking the Court to provide a definitive ruling on that matter,” Tom Goyda, a Wells Fargo spokesman, wrote to me in an email.

The Fair Housing Act, a section of the Civil Rights Act of 1968, prohibits housing discrimination on the basis of race, color, religion, sex, or national origin, and introduced enforcement mechanisms for people to bring suits if they experienced discrimination from landlords or lenders. It prohibits intentional discrimination, and also discrimination that may not be intentional but that has a “disparate impact” on certain populations of minorities. One part of the law allows an “aggrieved person”—someone who has been injured by a discriminatory housing practice, or who “believes that such person will be inured by a discriminatory housing practice that is about to occur”—can bring a suit under the act.

The lenders say that allowing cities to sue is far too wide an interpretation of the Fair Housing Act. They also argue, in their motions to dismiss the lawsuits, that they issued high-interest loans to help minority borrowers who might not otherwise be able to buy homes.

“The claims in the lawsuits really don’t reflect how we approach our lending business and our commitment to the communities in which we do business,” Goyda told me.

In the petition now before the Supreme Court, the U.S. Chamber of Commerce filed an amicus brief siding with the banks, arguing that the municipalities were not discriminated against and that their injuries are not related to whether the lenders discriminated on the base of race.

“By extending Fair Housing Act remedies to municipalities that have allegedly suffered remote and conjectural economic harms—such as a diminution of their tax base—the Eleventh Circuit has exposed lending institutions to virtually boundless liability,” the Chamber’s brief says.

Peck disagrees. “It was foreseeable that the city would get injured by this and as a result, they plainly have standing,” Peck told me. “They're suing for lost property taxes, and the costs of remediating neighborhoods as the result of foreclosures because of lending policies that predictably resulted in foreclosure.”

The Supreme Court has shown that it is open to interpreting the Fair Housing Act relatively broadly. In its Inclusive Communities decision last year, it upheld the disparate-impact standard and said that suits under it could be brought under the Fair Housing Act, which meant that people did not have to prove discrimination was intentional, just that it occurred, to bring a case.

But, if the Court finds that the cities do not have standing, the question will remain: Who can hold lenders accountable for their practices during the mid 2000s? So far, doing so has been difficult. Most of the civil lawsuits have been brought by investors who bought the bad home loans, not by the people who actually lost their homes or were targeted with predatory loans, according to Stuart Rossman, the Director of Litigation at the National Consumer Law Center.

That’s because it’s hard, as an individual, to bring lawsuits against banks with deep pockets and lots of experience litigating. Most people wouldn’t recoup enough from a lawsuit to make it worthwhile. And filing a lawsuit against the banks only became more difficult after a 2011 Supreme Court decision that set a higher standard for who could form a class to bring class-action lawsuits. The National Consumer Law Center had 11 lawsuits against subprime lenders under the Fair Housing Act, and “the entire group cratered” after that decision, known as the Dukes decision, came down, Rossman said.

If municipalities aren’t allowed to bring these suits under the Fair Housing Act, it will fall to the Justice Department and the Justice Department alone to try and bring suits against the banks, according to Rossman. The Civil Rights Division of the Justice Department has already brought some lawsuits, but just a few, and civil rights advocates say the ensuing settlements haven’t gone far enough in holding the banks accountable. The cities are trying to pick up some of the slack. But whether they’ll be able to do so is up to the courts.