Cities and counties that have experienced increased foreclosure and vacancy rates in the aftermath of the housing market crash of 2007-2008, perhaps emboldened by recent court decisions, have recently filed several new “predatory lending” cases under the federal Fair Housing Act (“FHA”) against financial institutions. In the last six months, for example, Los Angeles, Miami, Providence, and Cook County, Illinois, have filed lawsuits under the FHA against a variety of mortgage lenders to attempt to recover lost property tax revenues and other damages.
The cases allege either traditional redlining (excluding minority areas from lending activity) or "reverse redlining" (targeting minority for subprime, Alt-A, and other high-cost loans). As is the rage these days, the plaintiffs use the doctrine of "disparate impact" to undergird their claims of violation of the Fair Housing Act. The authors allege that decisions of federal district courts that refuse to dismiss the lawsuits, as well as the settlement of the Mt. Holly case before the Supreme Court could hear oral arguments (much less decide it), have emboldened cities and counties to pursue these claims. Of specific import are recent decisions of a federal district court in lawsuits filed by the City Los Angeles against Wells Fargo and Citigroup, in which the judge held that the Sixth, Ninth, and Tenth Circuit Courts of Appeal have all determined that "disparate impact" under the FHA is a viable theory. As K&L Gates also discussed not long ago, the Fifth Circuit recently applied HUD's "disparate impact rule" in a fair lending case.
The settlement of the Mt. Holly case is cited by both firms as a setback for lenders and an encouragement for municipalities that want to blame mortgage lenders for their broken neighborhoods. That's not because the theory of "disparate impact" in fair lending cases is likely to be upheld, ultimately, when the US Supreme Court finally gets a chance to decide the issue (and there are powerful arguments against the application Of the theory to the FHA), but because of the obvious problem we've repeatedly noted: these cases, being based on sophisticated statistical analyses that require high-priced consultants and attorneys, are expensive for the defendants. We'd love to see them slug it out to the bitter end and to never settle, because, as King & Spalding concludes, settling questionable claims only encouirages more questionable claims. However, the best business decision for a specific insitution may very well be to pay off the plaintiffs and put the matter behind them. At least, until the next busted pesthole of a city decides to blame decades of mismangement, high taxes, and anti-business laws and regulations manned by sometimes-corrupt bureaucrats, entirely on lenders who are not themselves pristine.
On a positive note, the more the City of Los Angeles sues businesses, the more California-based businesses become Texas-based businesses.