Banks May Pay for Ravaging Minority Neighborhoods

      The nation's big banks got by mostly scot-free for the harm they did to the nation's economy and in particular the housing market leading up to the Great Recession of 2007-08. But the Supreme Court cleared the way last week [May 1] for the nation's cities to hold the banks at least somewhat accountable for the particular harm they did to minority homebuyers and the boarded-up minority neighborhoods left behind after waves of foreclosures.
      The Supreme Court's decision in Bank of America v. Miami clears the way for the city of Miami to use the Fair Housing Act to try to recover damages from BofA and Wells Fargo for financial losses the city blames on the banks' policies of targeting predatory mortgage loans to African American and Latino customers. The city's complaint, yet to be tested at trial, includes statistics and whistle-blower affidavits substantiating the banks' practices of steering minority homebuyers to mortgages with less favorable terms than those offered to white customers.
      The banks made money on the loans and then ended up with the houses by foreclosing on the properties when the would-be homeowners, predictably, defaulted on the lender-friendly mortgages. Miami was one of several big cities that claimed that boarded-up minority neighborhoods cost them property tax revenue and added to the cost of providing law enforcement and other municipal services. Two cities have won seven-figure settlements in such cases, but Miami's prospects in an eventual trial are uncertain.
      The racial discrimination was both more subtle and more pervasive than was practiced in the bad old days. Back before the Fair Housing Act was enacted in 1968 and still afterward, real estate agents helped create and maintain residential segregation in cities and suburbs alike simply by steering black clients away from white neighborhoods.
      The Fair Housing Act had been on the books for only a decade when the Supreme Court first confronted the question whether a city could use the law to sue real estate agents for financial losses attributable to residential segregation. The court answered in the affirmative in Gladstone, Realtors v. Village of Bellwood (1979) by broadly construing the statutory terms allowing any "aggrieved person" to sue for damages if "injured by a discriminatory housing practice."
      Bellwood, a tiny village in the Chicago suburbs, joined individual plaintiffs in suing two real estate firms that housing "testers" had shown to have been practicing racial steering. The court's 7-2 decision went so far as to allow suits by the individual testers even though they were gathering evidence and not actually looking for apartments. In its complaint, Bellwood claimed that the practices were lowering property values and robbing the village of racial balance and stability.
      Writing for the majority, Justice Lewis F. Powell Jr. accepted the village's standing to sue the two firms for damages. "A significant reduction in property values directly injures a municipality by diminishing its tax base, thus threatening its ability to bear the costs of local government and provide services," Powell wrote. "Other harms flowing from the realities of a racially segregated community are not unlikely," he added.
      In the new case, Justice Stephen G. Breyer led a 5-3 majority in relying on the Bellwood decision to uphold Miami's effort to sue the two banks. Miami's claimed injuries, he wrote, "arguably fall within the FHA's zone of interests, as we have previously interpreted that statute." Breyer's opinion was joined by Chief Justice John G. Roberts, who assigned the opinion to Breyer as the senior justice in the majority, and Breyer's three liberal colleagues: Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan. Justice Clarence Thomas, joined by Justices Anthony M. Kennedy and Samuel A. Alito Jr., dissented on the point.
      The justices were unanimous, however, in tightening somewhat the burden of proof that Miami will have to meet to prevail at trial. Breyer said that the Eleventh U.S. Circuit Court of Appeals had been too lax in allowing Miami to recover for any "foreseeable" losses. Instead, Breyer said, the city would have to show "some direct relation" between the banks' practices and the claimed losses. In his dissenting opinion, Thomas said that Miami's allegations were "extremely attenuated" and predicted that the city could not meet the "rigorous" standard laid out in Breyer's opinion.
      The banks both issued statements vowing to defend the suits and predicting eventual vindication. For his part, civil rights lawyer Robert Peck, who argued Miami's case at the Supreme Court, said he was confident that Miami could meet the causation standard. Peck will be arguing an appeal by the city of Los Angeles later this month seeking to reinstate a similar suit ordered dismissed by a district court judge.
      Erwin Chemerinsky, a leading liberal academic and dean of the University of California-Irvine School of Law, called the ruling "an important victory for civil rights." It is a measure of the court's retreat on racial justice that the justices reaffirmed a 7-2 decision only by a narrower 5-3 vote and only with an 8-0 burden of proof ruling casting some doubt on the city's eventual claims. But Amanda Kellar, general counsel for the International Municipal Lawyers Association, predicted cities would succeed in making banks pay. "There's plenty of evidence," Kellar said, "that discriminatory lending practices not only caused devastating losses to individuals but also had concrete effects on municipalities."