Philadelphia Sues Wells Fargo For Alleged Fair Housing Act Violations

Posted by Patrick Barnard on May 15, 2017 No Comments

Earlier this month, the U.S. Supreme Court ruled that cities have the right to sue banks over discriminatory mortgage lending practices under the Fair Housing Act, provided that they can successfully prove that a lender’s actions led to economic losses through lower tax revenues and increased demand for city services.

The court also ruled that the losses must have already occurred – in others words, a complaint can’t be based on the potential for future losses. As such, cities have a pretty high bar in bringing such cases, in that they have to link foreclosures, vacant housing and blight directly to a lender’s violations of the Fair Housing Act.

Now it appears that the first court case related to the Supreme Court’s decision is about to commence, as the City of Philadelphia announced on Monday that it is suing Wells Fargo for alleged discriminatory lending practices against minority borrowers.

Philadelphia’s announcement specifically cites the recent Supreme Court decision, which stems from a lawsuit brought by the City of Miami against Bank of America, Citigroup and Wells Fargo in 2013.

In that case, the City of Miami sued the banks in federal court, arguing that they intentionally targeted minority borrowers with riskier loans and then caused a wave of defaults by failing to extend refinancing and loan modifications on fair terms. This led to increased foreclosures and abandoned properties that, in turn, diminished the city’s tax base and increased reliance on fire and police services.

More importantly, the City of Miami suit alleged that the banks were at fault for these foreclosures because they had steered minority borrowers into riskier loan products – including “lender credit” loans, in which a lender pays a borrower’s closing costs in exchange for receiving a loan with a higher interest rate. The city alleged that most of the minority borrowers who were steered into these loans did not realize at the time that the higher interest rate applied to the life of the loan. The city also alleged that the banks had engaged in discrimination because they had sold a disproportionately higher number of higher-cost and higher-risk loans to minorities than they had to non-minorities.

The banks fought Miami’s suit, arguing that the city does not fall within the Fair Housing Act’s “zone of interest” and “aggrieved persons” provisions. The banks also argued that the city could not definitively prove that its losses were related to the alleged Fair Housing Act violations. Initially, a U.S. District Court found in favor of the banks, dismissing the lawsuit. However, on appeal, the U.S. Court of Appeals reversed and found in favor of the city, and the lawsuit was allowed to proceed.

Earlier this month, the U.S. Supreme Court held that Miami is an “aggrieved person” in the case and authorized that it could bring suit under the Fair Housing Act.

On Monday, Philadelphia filed its complaint, which alleges that from 2004 through today, Wells Fargo violated the Fair Housing Act by “steering African-American and Latino borrowers towards high-cost or high-risk loans, even where those borrowers’ credit permitted them to obtain more advantageous loans.” The city further alleges that Wells Fargo was “aware and, in fact, incentivized the marketing of the high-cost or high-risk loans to minorities.”

The suit says that a recent analysis uncovered that 23.3% of loans Wells Fargo made to minorities in Philadelphia were higher-cost and higher-risk, while only 7.6% of loans made to white customers fell in that category.

“The practices of Wells Fargo disproportionately affected minority borrowers here in Philadelphia, and because many of these loans resulted in foreclosures, all neighborhoods throughout the city suffered the harm,” Philadelphia Mayor Jim Kenney says in a statement.

Wells Fargo says it intends to fight the charges.

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