Holding Banks to Account for Foreclosure Crisis

      For all its legal firepower, the federal government has precious little to show for its efforts to hold the nation’s banks accountable for all the harm they did in causing the Great Recession of 2008-09. A few dozen executives from mid-level banks have gone to prison, yes, but the top-ranking executives from the “too big to fail” banks all escaped prosecution even as their companies agreed to pay billions in civil fines for improper foreclosure practices.
      Several of the nation’s big cities, however, have been trying to hold banks responsible for the harm inflicted in particular on African American and Latino neighborhoods with predatory lending targeted to minority home buyers. Now, the Supreme Court is set to decide whether cities have the legal standing needed to collect millions of dollars in damages from the banks for racial discrimination in violation of the federal Fair Housing Act.
      The justices’ questions during the hour-long arguments in Bank of America v. City of Miami on Tuesday [Nov. 8] seemed to indicate a ruling to green-light Miami’s suits against two of the nation’s biggest banks: Bank of America and Wells Fargo. Three Supreme Court decisions dating from the 1970s allow suits under the Fair Housing Act not only by would-be home buyers or renters but also by neighbors who are denied the benefits of interracial associations or by municipalities that are robbed of “racial balance and stability,” as the court put it in Gladstone, Realtors v. Village of Bellwood (1979).
      The court’s liberals seemed comfortable with applying those precedents to allow Miami to proceed with its suits despite concerns from two justices, Chief Justice John G. Roberts and Justice Anthony M. Kennedy, about how to limit the scope of the banks’ potential liability. The federal appeals court for Florida ruled in favor of the city’s suit, so the city would win even if the eight-justice Supreme Court were to split 4-4.
      The city of Miami, along with its neighboring municipalities in South Florida, was one of the epicenters of the foreclosure crisis that helped take the nation into recession. At the height of the crisis, South Florida had 172,894 homes in some stage of foreclosure in 2009. The worst of the crisis has passed, but South Florida was still ranked fifth highest in foreclosures last year among the nation’s metropolitan areas.
      Foreclosures need to be understood as more than personal setbacks for the forced-from-their-home homeowners. They are also disasters for neighborhoods left with the blight of empty, boarded-up houses and for municipalities deprived of property tax revenues and burdened with increased costs of law enforcement and social services.
      In its complaints against the banks, filed in December 2013, the city sought to show that the foreclosures resulted not from natural economic causes but from deliberate business strategies adopted by the banks. Backed up by affidavits from confidential bank employee witnesses, the city alleged that the banks targeted minority borrowers for discriminatory, high-cost loans that included terms likely to prove unaffordable. The banks then induced foreclosures by refusing to refinance the loans on fair and affordable terms.
      Loan officers got bonuses for writing loans that the city characterized in its complaints as “predatory.” Those loans included features such as interest rates at least three percentage points above the federal benchmark, interest-only loans, balloon loan payments, loans with prepayment penalties, and adjustable mortgages with “teaser rates” that increased by more than 6 percent over the life of the loan. The city alleged that minority borrowers were more likely to be offered these kinds of loans than white borrowers with equal creditworthiness: one-and-a-half times more likely for Bank of America, more than four times more likely for Wells Fargo. .
      The city used statistical studies to show that the results were just as could have been predicted: foreclosures by the taken-advantage-of minority borrowers. For Bank of America, nearly one-third of its loans to minority borrowers (32.8 percent) resulted in foreclosures but only 7.7 percent of its loans in predominantly white neighborhoods. For Wells Fargo, 24 percent of its loans to minority borrowers resulted in foreclosures, roughly 4 percent for white borrowers.
      The banks have yet to answer these allegations in detail because they have sought to dismiss the suits altogether as unwarranted extensions of the legal standing doctrines recognized in the Supreme Court precedents. The federal district court judge hearing the case agreed with the banks, but the Eleventh U.S. Circuit Court of Appeals reversed his decisions in emphatic, unanimous decisions in the two cases.
      At the Supreme Court, former acting solicitor general Neal Katyal represented the banks by warning against an “unlimited theory of liability” that would award compensation for harms “several steps removed” from the alleged discriminatory conduct. Representing the city, Robert Peck, president and founder of the private Center for Constitutional Litigation in Washington, forcefully countered that the banks’ policies had caused it to lose the “benefits . . . that come with an integrated community free from housing discrimination.”
      A legal ruling for the city would do no more than set the stage for a trial, where it would have to prove its allegations and connect its injuries to the banks’ policies. Millions of dollars from the banks would go only so far in undoing the damage the city has suffered, but it would be a significant victory for corporate accountability and racial justice.