Supreme Court Rules Cities Can Sue Banks for Predatory Lending

Symbol of law and justice in the empty courtroom, law and justice concept.

In a decision that could have an enormous impact on massive real estate litigation claims for years to come, the Supreme Court of the United States recently ruled that the city of Miami could move forward with bringing claims against Bank of America and Wells Fargo for allegedly violating the federal Fair Housing Act (FHA) through predatory lending practices aimed at minority communities. Although the court also ruled that the evidentiary standard that the city must show in linking its alleged damages to the banks’ conduct is higher than that stated by the 11th circuit, the fact that the court rejected the banks’ arguments that municipalities were not proper plaintiffs under the FHA clears the way for more cities to bring suit against large banks for lending practices. According to the Washington Post, Oakland and Los Angeles have already brought similar suits to recover damages from large Wall Street banks.

Miami’s Claims Against the Banks

In its lawsuit, the city of Miami argued that the banks violated the Fair Housing Act, which prohibits discrimination in real estate transactions, by using predatory lending practices to intentionally issue riskier mortgages to homeowners in Latino and African-american neighborhoods than their counterparts in majority-white neighborhoods. The city argued that, as a result of these predatory lending practices, more foreclosures occurred in these neighborhoods and that Miami was injured in the following ways:

  • An adverse impact on the racial composition of the city
  • An impairment of the city’s ability to assure racial integration and desegregation
  • A frustration of the city’s “longstanding and active interest in promoting fair housing and securing the benefits of an integrated community”
  • A drop in property taxes paid to the city
  • An increase in demand for services (fire, police, building and code, etc.) to remedy blight and related issues that foreclosures cause

Traditionally, individuals who have been discriminated in real estate transactions have brought claims under the FHA, thus having a city present a claim under the FHA presented a novel question to the Supreme Court regarding standing. Contrary to the banks’ arguments, the Supreme Court ruled that the city could indeed bring a claim because Miami’s “claimed injuries fall within the zone of interests that the FHA arguably protects.”

Direct Causation Under the FHA Must Be Shown

Although Miami and cities like it can proceed with claims under the FHA, the challenge left by the Supreme Court’s decision is in being able to show sufficient evidence at the outset that there is a direct causal link between the banks’ actions and the damages being argued, i.e. that the predatory lending caused a demonstrable drop in property taxes.

The 11th Circuit Court of Appeals had ruled that Miami need only show that the types of damages it is alleging be “foreseeable” results of the banks’ actions. The Supreme Court unanimously rejected that standard, holding that the proper legal causation standard under the FHA requires “some direct relation between the injury asserted and the injurious conduct alleged.”

While the court declined to further specify the parameters of this standard, it is clear that it does require some level of direct evidence of causation, not just foreseeability. We will learn more about how this evidentiary standard plays out at the trial level as the Miami case returns to the trial and similar cases around the country proceed.

Work With an Experienced Los Angeles Real Estate Attorney

At Wagenseller Law Firm in downtown Los Angeles, our attorneys have extensive experience in resolving all types of real estate litigation matters. Contact the Wagenseller Law Firm today to schedule a consultation to discuss your matter.