Can cities sue banks for predatory lending?

By S.M. | NEW YORK

THE recession of 2008 wreaked havoc on minority communities in America’s cities. Using an innovative legal strategy, one particularly hard-hit city, Miami, is trying to recoup some of its losses from banks that contributed to the crisis. Miami claims it is due compensation from Bank of America and Wells Fargo under the Fair Housing Act (FHA), a law Congress passed in 1968 that bars sellers, banks and landlords from discriminating against buyers and tenants on the basis of their race. These banks, the city charges, spent a decade gracing whites with low-cost loans while targeting blacks and Latinos for their riskiest, most expensive mortgages. The ill-advised loans spurred a vicious cycle of missed payments, foreclosures, plummeting property values and urban blight that put a significant dent into Miami’s finances. The 11th Circuit Court of Appeals ruled last year that Miami may go forward with its quest to collect damages for its reduced tax base and higher demand for municipal services; the FHA, the court held, “encompasses the city’s claim”.

On November 8th, the Supreme Court heard arguments about whether that was the correct call. Three justices—Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor—made it rather clear during the election-day hearing that they agree with the 11th circuit. Ms Kagan told Neal Katyal, the lawyer for the banks, that the FHA is “a very peculiar and distinctive kind of anti-discrimination statute”. Congress did not limit the reach of the law to individual claims of discrimination, she said; lawmakers also sought to make the law a bulwark against “community harms”. Given this legislative purpose, Ms Kagan argued, it’s quite fitting that “cities are standing up and saying” that when banks engage in “reverse redlining...a community is becoming blighted.” Is there, she asked rhetorically, any entity “better than the city to recognise that interest and to assert it?”