Can a city, or potentially other governmental entities, sue lenders over their discriminatory lending practices under the Fair Housing Act?  On May 1, 2017, the U.S. Supreme Court said “yes,” but with the following conditions:

  1. The city must be an “aggrieved person” within the meaning of the Fair Housing Act;
  2. The alleged harm must be within the range of injuries against which the Fair Housing Act protects; and
  3. The discriminatory lending practices must be the proximate (i.e., direct) cause of the injury to the city.

The City of Miami alleged that,

“. . . the Banks [i.e., Bank of America and Wells Fargo] intentionally targeted predatory practices at African-American and Latino neighborhoods and residents, lending to minority borrowers on worse terms than equally creditworthy nonminority borrowers and inducing defaults by failing to extend refinancing and loan modifications to minority borrowers on fair terms.  . . . and . . . that the Banks’ discriminatory conduct led to a disproportionate number of foreclosures and vacancies in majority-minority neighborhoods, which impaired the City’s effort to assure racial integration, diminished the City’s property-tax revenue, and increased demand for police, fire, and other municipal services.”

The Court agreed that these alleged harms were within the “zone of interests” the Act was intended to protect, but concluded that having a foreseeable injury of this type was not enough.  The City also had to show that banks’ lending practices were the direct cause (i.e., the proximate cause) of its injuries.  The Court said that the “proximate cause [required] under the FHA requires ‘some direct relation between the injury asserted and the injurious conduct alleged’”.  Therefore, the Court sent the case back to the 11th Circuit Court of Appeals for further consideration of whether the Banks’ lending practices were the direct cause of the City’s injuries.

The implication of this decision is significant, as it recognizes a new set of plaintiffs that can bring Fair Lending cases against lenders.  The remaining challenge for these plaintiffs is that they must demonstrate that a lender’s action was the proximate cause or direct connection between alleged discriminatory lending and harm to the public entity.  Previously, similar cases by municipalities had been dismissed at the district court level or the lenders had settled with the cities involved.  This case puts municipal plaintiffs on more solid ground to seek damages when lenders are responsible for the harm at issue.

From this decision, many questions might arise.  For example,

  • Do other lenders, such as non-depository mortgage lenders stand in a similar position vis-à-vis the Fair Housing Act, as commercial or savings banks, when they lend within municipal boundaries?
  • Do entities other than municipalities, such as states or community organizations, have standing to bring suit in Federal court for damages against banks whose lending patterns they do not like?
  • How do municipalities demonstrate the causal connection between their lending practices and injury to cities?
  • What is the defense for lenders that find themselves in a suit similar to the one facing Bank of America and Wells Fargo?
  • If a lender discriminates and a municipality can demonstrate a direct causal relationship between urban blight and that discrimination, can the municipality prevail in court?

These questions will doubtless be answered in the coming months and years.  A mindful lender, however, will want to develop and implement strategies to mitigate this emerging risk.