Can a City Sue the Banks for Screwing Homeowners?

The prosperity of households and cities are integrally linked – when one community member suffers, very often the wider social fabric bears at least some of the burden. During the financial crisis of 2007 and 2008, this relationship between the wealth of homeowners and the wealth of cities was demonstrated on an unprecedented scale.

After the financial crisis, parts of Miami experienced widespread foreclosures, vacant homes, and increased crime. This blight, at least in part, were exacerbated by unfair or deceptive lending practices by banks and mortgage brokers. As homeowners struggled to pay for their homes, their properties ended up in foreclosure. In turn, property values were devastated and household wealth decimated.

A primary source of tax revenue for most municipalities is property tax, which is levied as a percentage of property value. With property values significantly diminished, municipal tax revenue for Miami dwindled.

The Case in Question

This week, in the case of Bank of America Corp. v. City of Miami, the United States Supreme Court held that Miami could sue two banks, Bank of America and Wells Fargo, under the Fair Housing Act (FHA) of 1968 for intentionally and disproportionately issuing risky mortgages on unfavorable terms to minority borrowers.

The FHA prohibits, among other things, racial discrimination in connection with real estate transactions. Miami argued that these two banks intentionally targeted African-American and Latino neighborhoods with predatory loans and that, in violation of FHA, these banks lent money to the minority borrowers on worse terms than equally creditworthy non-minority borrowers. The city said that the discriminatory lending practices led to segregation and foreclosures, which hurt its property tax revenue and required it to provide additional municipal services.

The court held that the city is an “aggrieved person” authorized to bring suit under the FHA. Writing for a majority, Justice Stephen Breyer explained:

The housing market is interconnected with economic and social life. A violation of the FHA may, therefore, be expected to cause ripples of harm to flow far beyond the defendant’s misconduct.

This is a big win for the city because, most often, the aggrieved person is the person discriminated against. However, justice Breyer went on to say, “nothing in the statute suggests that Congress intended to provide a remedy wherever those ripples travel.”

The court suggested that the city must show a direct connection between the injury and the banks’ violation to sue under the FHA.