Another broken city, buried under a mountain of economic malaise caused by its own mismanagement, is attempting to blame its woes on a big bank, and, in the process, squeeze some money out of it.
The city of Providence, R.I., is suing Santander Bank in federal court claiming the bank has refused to make prime home loans in minority neighborhoods.
The city is claiming that Santander, a Spanish banking giant with U.S. headquarters in Boston, deliberately cut back on lending to qualified homebuyers in minority neighborhoods in recent years while increasing mortgage lending in predominantly white areas.
Providence alleges that Santander has followed a pattern of discrimination across its New England footprint. The lending declines, the city says, are not the result of economic conditions. While Santander mortgage originations in minority neighborhoods fell, other banks, including Citizens Bank, made home loans in much greater numbers in the same areas.
Such practices, dubbed 'redlining' over allegations that some lenders used red highlighters on maps to outline off-limits neighborhoods, violates the federal Fair Housing Act as well as the Equal Credit Opportunity Act. Providence is demanding a jury trial and is seeking an injunction against Santander as well as unspecified compensatory and punitive damages.
“We categorically reject this accusation and will vigorously defend ourselves against the legal action," Santander said in a statement. "However, we are willing to work with the City of Providence to allay its concerns."
In other words, "we we'll pay blackmail, as long as it's not exorbitant."
This suit is based on the same "disparate impact" theory that the Department of Justice, HUD, and various municipal nirvanas like Cleveland and Baltimore have been using to offer misdirection to the fact that, as I once put it so amiably, "[c]rime, poverty, high taxes, a business-unfriendly environment, a lack of cohesive vision for the future and the will to implement that vision even if it existed, all might have had something to do with" each city's current woes. The fact that the municipalities are being kicked out of court on the issue of causation doesn't deter them. After all, it's the taxpayer picking up the tab.
In a recent article in the American Banker (paid subscription required), lawyers Valerie Hletko and Ann Wiles discuss the potential impact on disparate impact lawsuits filed by municipalities, of the US Supreme Court's decision Lexmark International v. Static Control Components, which doesn't address disparate impact but, nevertheless, throws a giant monkey wrench into the gears of this litigation juggernaut. According to Hletko and Wiles, "the court held that, in order to have standing to sue under a federal statute, a plaintiff must fall within the statute's 'zone of interest' and also show 'proximate cause.' In other words, a plaintiff's injury must flow directly from a violation of the statute, and the plaintiff must be the party Congress wanted to protect in enacting the statute."
The Supreme Court said in Lexmark that the Lanham Act's stated purpose of preventing injury to a commercial interest in reputation or sales requires "no guesswork." Nor does the FHA's. The FHA's statement of purpose is "to provide, within constitutional limitations, for fair housing throughout the United States." It protects integrated housing patterns and persons discriminated against in housing transactions on the basis of race, color, national origin, religion, sex, familial status and disability. It does not protect the tax receipts of municipalities.
Justice Antonin Scalia's 9-0 opinion acknowledged that the Supreme Court's earlier standing discussions now look "misleading" in light of Lexmark. While Lexmark has yet to be applied to the FHA, this higher standard is likely to eviscerate standing for a range of theories of liability. While banks will have to wait for another disparate impact case to make it to the Supreme Court for a ruling on whether disparate impact claims are viable under the FHA at all, they may now avoid FHA disparate impact claims brought by plaintiffs alleging daisy-chain standing well outside the statute's zone of interest.
I don't know whether Santander is going to roll over and play dead or come out swinging. If it takes off the gloves, one of the first punches thrown has got to be based on the Lexmark decision.