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SCOTUS Rules That Cities Have Standing to Sue Banks for Predatory Lending Under the Fair Housing Act

The Fair Housing Act received renewed attention this week, as the United States Supreme Court issued a mixed opinion regarding a city’s ability to sue banks under the statute. The Supreme Court’s opinion will undoubtedly impact the scope of liability that banks may assume, potentially making way for new Fair Housing Act lawsuits filed by cities in the future.

The Fair Housing Act prohibits, among other things, racial discrimination in connection with real-estate transactions, and permits any “aggrieved person” to file a civil damages action for a violation of the Act. In Bank of America Corp. et al v. City of Miami, Florida, the City of Miami filed suit against Bank of America and Wells Fargo in the aftermath of the subprime mortgage crisis.

Specifically, the city alleged under the Fair Housing Act that the banks had intentionally targeted predatory practices at African-American and Latino neighborhoods and residents, lent to minority borrowers on worse terms than equally creditworthy nonminority borrowers, and induced defaults by failing to extend refinancing and loan modifications to minority borrowers on fair terms. As a result, the city alleged that it had suffered serious damages, including a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods, which impaired the city’s effort to assure racial integration, the diminishment of the city’s property tax value, and increased demand for police, fire, and other municipal services.

In response, the banks argued that that the city’s complaint failed to set forth a cause of action because: (1) the city was not an “aggrieved person” within the “zone of interest” that the Fair Housing Act seeks to protect; and (2) the complaint failed to draw a direct, or proximate, causal connection between the violation claimed and the harm allegedly suffered. The district court, agreeing with the banks, dismissed the complaint. On appeal, the Eleventh Circuit reversed, holding that: (1) the city was an “aggrieved person” under the statute; and (2) proximate cause existed because the financial injuries were foreseeable results of the banks’ misconduct.

This week, the Supreme Court delivered a mixed opinion, both expanding and constricting potential liability of banks under the Fair Housing Act. Specifically, the Court expanded the reach of the Act by affirming the Eleventh Circuit’s opinion that cities are among the “aggrieved persons” under the Act because the city’s claims of financial injury are, at the least, “arguably within the zone of interests” the Act protects.

On the other hand, the Court rejected the notion that proximate cause is based solely on foreseeability, recognizing that entertaining suits to recover damages for any foreseeable result of the Act’s violation would risk “massive and complex damages litigation” which may cause “ripples of harm to follow far beyond the defendant’s misconduct.” Accordingly, the Court vacated and remanded the Eleventh Circuit’s ruling, leaving it to the lower court to define the specific contours of proximate cause under the Act and decide how the standard applied to the city’s claims for lost property-tax revenue and increased municipal expenses.

The Supreme Court’s ruling this week expands the scope of liability that banks may assume under the Fair Housing Act. Although the damages standard has yet to be determined, banks should nevertheless review past activity and determine its impact on cities to determine risk. In addition, banks should ensure that current practices comply with the Act’s mandates in order to avoid potential litigation now allowed under the Fair Housing Act.



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