As part of the fallout of the economic recession that this country continues to face, local municipalities across the United States have taken action to assess the damage caused to their communities and to develop new strategies for dealing with those damages. One strategy that municipalities have implemented included suing major mortgage lenders for so-called predatory lending practices that led consumer borrowers to default on their mortgage loans. The subsequent foreclosures that followed the consumers’ default led, the allegations go, to vacant and blighted properties in the municipalities, causing the municipalities to expend scarce resources to clean up the lenders’ mess. Now, it seems that, although courts appear sympathetic to the lenders, municipalities may continue to press these lawsuits as a way to attempt to extract some pound of flesh from the lenders. In the most recent skirmish on this front, Wells Fargo Bank N.A. emerged victorious against the City of Baltimore.
In January 2008, Baltimore City filed a lawsuit against Wells, a national bank, and Wells Fargo Financial Leasing Inc., in federal court, claiming that the Wells entities engaged in reverse redlining that led to high foreclosure rates in the city. The complaint, filed in the U.S. District Court for the District of Maryland in Baltimore, noted that since 2000, lenders have foreclosed on more than 33,000 homes in the City, resulting in lost revenue in property taxes. In its lawsuit, the City claimed that the Wells entities violated the federal Fair Housing Act of 1968 by targeting areas predominantly comprised of African-Americans to market deceptive, predatory, and unfair lending practices, including the imposition of significant prepayment penalties and excessive points and fees. The City alleged that the result of such targeting placed inexperienced and underserved borrowers in loans they cannot afford. Specifically, the City claims that Wells failed to “prudently underwrite” hybrid adjustable rate mortgages, such as 2/28s and 3/27s, and loans where consumers refinanced into loans that stripped the equity out of their homes. With regard to the ARM loans, the city claimed that Wells did not adequately consider borrowers’ abilities to repay the loans, especially after the teaser rate expired and the interest rate increased, and that the caps on the ARMs were higher for loans made to minority borrowers.
The City alleged that Wells’ underwriting decisions resulted in foreclosure nearly four times as often in African-American neighborhoods as in predominantly white neighborhoods. The complaint relied, in part, on a 2004 report issued by the Center for Responsible Lending entitled A Review of Wells Fargo’s Subprime Lending, and also cited data provided by Wells under the Home Mortgage Disclosure Act that allegedly indicated that, in 2005 and 2006, a Wells refinance loan to an African-American borrower was 2.5 times more likely to be “high cost” than a refinance loan made to a white borrower. The City sought a declaration that Wells’ conduct violated the Fair Housing Act, an injunction against future conduct, and both compensatory and punitive damages.
Last summer, the federal court denied Wells’ motion to dismiss the lawsuit. Based on affidavits of two former Wells employees, the federal district court found that the City provided “sufficient proof to proceed with its claim for disparate treatment discrimination under the Fair Housing Act.” The court added that the City was entitled to discovery on its disparate impact theory of liability. However, some two years after the initial filing of the lawsuit, the federal court dismissed the City’s lawsuit. The federal district court concluded that the City’s allegation of a causal connection between Wells’ alleged practices and the damages the City claimed from vacant properties was not “plausible.” The court also noted that although the City estimated the number of vacant homes to be as high as 30,000, the City only identified 401 properties as properties financed by a Wells loan that subsequently went into foreclosure. Of those properties, only 80 remain vacant. The court therefore concluded that Wells was only responsible for “a negligible portion of the City’s vacant housing stock” and granted Well Fargo’s motion to dismiss. Undeterred, published newspaper reports indicate that Baltimore City intends to refile its lawsuit, making its allegations more narrowly tailored to reach only those “damages” allegedly attributable to Wells’ alleged practices.
Baltimore is not the only municipality to take a national lender to task for vacant and blighted properties. Also in January 2008, the City of Cleveland, Ohio, filed suit in the Cuyahoga County Common Pleas Court against 21 banks, including Wells, Deutsche Bank, Goldman Sachs, and Merrill Lynch, for their alleged role in the subprime mortgage crisis. That lawsuit claimed that these investment banks bought and sold high-interest mortgage loans in the secondary market, knowing that they were defective products likely to harm the mortgage market. In doing so, the City of Cleveland asserted the banks contributed to the subprime meltdown and created a public nuisance by increasing defaults, decreasing the city’s tax revenue, and devastating many parts of the city. Cleveland sought to recover compensatory damages stemming from lost tax revenue and costs incurred to demolish and secure abandoned homes. Unlike Baltimore, the Cleveland lawsuit did not accuse the lenders of violating the Fair Housing Act by targeting areas predominantly comprised of African-Americans to market predatory mortgage loans. In May 2009, a federal court in Cleveland dismissed that city’s lawsuit, ruling that Ohio state law preempted the city’s public nuisance complaint and that state law does not allow municipalities to regulate lending.
Similarly, in November 2008, attorneys representing the City of Birmingham, Alabama, filed suit against several mortgage lenders, alleging that they violated the federal Fair Housing Act by engaging in predatory lending. Like the Baltimore lawsuit, the Birmingham lawsuit alleged that Wells, Regions Bank, Countrywide Financial Corporation, and Agent Mortgage Company, among others, engaged in “reverse redlining and other illegal acts or omissions in violation of the Fair Housing Act” in the extension of subprime mortgage loans to minority borrowers. However, according to an account in The Birmingham News, Birmingham Mayor Larry Langford said he opposed the lawsuit and would seek to withdraw it. “As economic conditions have changed, we’ve made the determination that we’d rather not file this action right now because these lenders have started to work with homeowners, and we want to give them the opportunity to do that,” Langford’s special counsel, Julie Elmer, told The Birmingham News. The Birmingham News also reported that Deborah Vance-Bowie, the mayor’s chief of staff, said an attorney who filed the lawsuit was told in writing not to file a lawsuit without a directive from the city. In July 2008, the Birmingham City Council approved a resolution to permit the filing of the lawsuit for “unfair, deceptive and discriminatory lending activities in the City’s neighborhoods.” After much political wrangling—and movement of the case from state to federal court, and back to state court—the court dismissed the lawsuit.
Despite the failure of the municipalities to secure a win against mortgage lenders based on the alleged harm caused to the municipalities’ housing stock by predatory lending practices, both state and local governments continue to press on. Last July, Illinois Attorney General Lisa Madigan filed a lawsuit in Cook County Circuit Court against Wells, claiming that Wells illegally discriminated against African- American and Latino homeowners by selling them high-cost subprime mortgage loans, while white borrowers with similar incomes received lower-cost loans. And in January 2010, the City of Memphis, Tennessee, took Wells to task again for allegedly originating more high-cost and subprime mortgages from 2000 to 2008 in the region’s minority-dominated neighborhoods, while originating lower-cost and prime loans in the area’s predominately white neighborhoods. Although Wells originated a greater number of loans in the white neighborhoods, the City of Memphis claimed the rate of foreclosures in minority neighborhoods was eight times greater than the rate of foreclosures in white communities. Like Baltimore and Birmingham before it, the City of Memphis also seeks damages under the Fair Housing Act. We will keep readers of Basis Points informed about the continued progress – or lack thereof – of these lawsuits as they wind their way through the court system.
Cathy Brennan is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.