Cities Can Sue Banks for Predatory Lending, Rules U.S. Supreme Court

by | May 2, 2017

By Bob Egelko

The U.S. Supreme Court bolstered the nation's housing-discrimination laws Monday, allowing cities to sue banks for racially biased home-loan practices -- but only if they can show that those practices are causing financial harm to city governments.

With Chief Justice John Roberts joining more-liberal colleagues to cast the deciding vote, the court ruled 5-3 that local governments, and not merely individuals, can challenge so-called predatory lending that targets racial minorities. Newly appointed Justice Neil Gorsuch did not participate.

The ruling comes two years after the court departed from its generally conservative stance on civil rights in a 5-4 decision that allowed housing-discrimination suits based on sales, lending and zoning practices that disproportionately harm minorities, even if no intentional racism can be proven.

In Monday's case, the court refused to dismiss a suit by the city of Miami accusing Bank of America and Wells Fargo of targeting black and Latino borrowers with risky mortgages on less favorable terms than those offered to white customers -- among other things, higher interest rates and fees, large prepayment penalties, and refusals to refinance or modify loans to avoid defaults. The banks deny those allegations, which have not yet gone to trial.

The city said the banks' lending practices caused foreclosures and vacancies that have increased housing segregation, reduced property values and local tax revenue, and drained city coffers of funds to fight housing blight, crime and other dangers in the affected neighborhoods.

"The city's financial injuries fall within the zone of interests that the (Fair Housing Act) protects," Justice Stephen Breyer said in the majority opinion.

He noted that the court had ruled in 1972 that the law could be invoked not only by minorities who were denied housing, but also by white tenants who claimed discriminatory rental practices were depriving them of benefits from interracial relationships. A 1979 ruling allowed a village to sue over alleged discriminatory practices that affected its racial balance and tax revenue.

Cities and counties from around the nation, along with civil rights groups, had urged the court to allow municipal lawsuits.

In arguments on behalf of 26 local governments from multiple states, the city of San Francisco said Congress, in passing the law, "understood that the increased crime, poor public health and educational outcomes, and weakened employment prospects that plagued the inner city were part of a vicious cycle that housing discrimination spawned."

But the court stopped short of saying what a city must do to prove economic harm. A federal appeals court had ruled that Miami could argue that its financial losses were "foreseeable" results of discrimination by the banks. But Breyer said foreseeability wasn't enough to show a "direct relation" between the banks' alleged conduct and the city's losses.

He declined to specify a standard, saying lower courts should address the issue first. Justice Clarence Thomas, in a dissenting opinion arguing for dismissal of Miami's suit, predicted that no city would be able to show financial losses caused by discrimination in private housing loans.

The court's "conclusion is wrong, but at least it is narrow," said Thomas, joined by Justice Anthony Kennedy and Samuel Alito. If cities can sue for loss of property tax value, they argued, neighbors of spurned minority borrowers would also be able to sue for the decline in their own homes' value.

Thomas' argument was "typical sky-is-falling hyperbole," said attorney Deepak Gupta, who represented national organizations of cities, counties and local elected officials in the case.

The ruling is "a win for the Fair Housing Act," Gupta said, noting that local governments have more resources and can file more far-reaching suits than individual homeowners or renters. He said he was confident that cities could provide "rigorous statistical proof" connecting lending practices to financial losses, "on a block-by-block basis if necessary."

(c)2017 the San Francisco Chronicle