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Miami Lawsuit Against Mortgage Lenders Survives High- Court Review--Update

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05/01/2017 | 04:21pm EDT
By Brent Kendall and Jess Bravin 

WASHINGTON -- The Supreme Court handed a partial victory to the city of Miami Monday, ruling it was authorized to bring lawsuits alleging Bank of America Corp. and Wells Fargo & Co. engaged in financial-crisis-era discriminatory lending that led to urban blight and falling property values.

The court said in its 5-3 ruling, however, that Miami in future proceedings will have to establish that the banks caused direct harm to the city -- not attenuated, downstream effects -- a high standard that could prove challenging to meet.

The court's opinion, written by Justice Stephen Breyer, concluded that Miami had legal standing to bring the lawsuits under the Fair Housing Act, which bars discrimination in housing sales and rentals, as well as in related real-estate transactions.

The court rejected the banks' argument that the city wasn't an appropriate party to bring a claim under the law. Miami's alleged economic injuries "fall within the zone of interests that the FHA protects," Justice Breyer wrote.

Miami is one of several major cities that have brought similar claims against mortgage lenders.

The municipalities are suggesting a novel theory -- that discriminatory housing policies by banks can harm not only homeowners and potential buyers, but also cities themselves, given the high foreclosure rates, blight and urban decay that can follow. The court's ruling Monday found that this theory is legally plausible.

The Supreme Court ruling sends the case back to the 11th U.S. Circuit Court of Appeals in Atlanta to review whether the banks' alleged misconduct has a "direct relation" to the injuries the city alleges.

Miami City Attorney Victoria Méndez said she was "extremely pleased" with the ruling and looked forward to additional court proceedings. A Bank of America spokesman said the company "is committed to the goals and intent of the Fair Housing Act" but added, "We believe these claims are without merit and we will continue to defend our interests in this matter."

Wells Fargo said the Supreme Court announced stringent standards, and it "will be very difficult for Miami or any other municipality to show the required connection between the claimed damages and unsubstantiated allegations about our lending practices, which do not reflect how we operate in the communities we serve."

The ruling produced a rarely seen coalition at the court, with conservative Chief Justice John Roberts joining the court's four liberals to form a five-justice majority. That lineup has occurred only a handful of times in the chief's 12-year tenure, most notably in the court's 2012 ruling that saved President Barack Obama's health-care law.

Justice Clarence Thomas, joined by Justices Anthony Kennedy and Samuel Alito, dissented, concluding that the cities had no right to bring suit under the Fair Housing Act.

The case was argued before President Donald Trump appointee Justice Neil Gorsuch joined the court, so he didn't take part in the decision.

The lawsuits alleged that the banks' lending practices discriminated against minority borrowers, steering them toward loans with less-favorable terms and higher fees that were more likely to fail. When those loans led to foreclosures in large numbers, city neighborhoods suffered, causing diminishing tax revenues and others harms to Miami, the city alleged.

The banks denied the allegations and said the lawsuits were attempts by the city, working with private plaintiffs' lawyers, to boost its coffers.

Several local governments, including Cook County, Ill.; DeKalb County, Ga.; and Oakland, Calif., are pursuing similar claims against mortgage lenders. Other banks that have faced similar suits include Citigroup Inc. and J.P. Morgan Chase & Co.

Joel Liberson, a lawyer representing Miami and other municipalities in several cases, said Monday's decision "reaffirmed the important role of cities in combating housing discrimination within our communities."

The cases have produced mixed results so far. Later this month, the Ninth Circuit Court of Appeals is set to hear an appeal from Los Angeles, whose claims against the banks were dismissed in the district court.

In 2012, Wells Fargo paid more than $175 million to settle similar discrimination allegations brought by the Justice Department. As a part of that deal, in which the bank didn't admit wrongdoing, Wells Fargo settled parallel lawsuits filed by the state of Illinois and city of Baltimore. That followed a $335 million settlement over housing-discrimination claims against Countrywide Financial Corp. that the government reached with parent Bank of America in 2011.

In announcing the Wells Fargo settlement, the Justice Department said that beyond tens of thousands of individuals who allegedly received predatory loans because they were black or Hispanic, the alleged discrimination also damaged local communities.

As a result, officials said then, the settlement included funds directed to eight metropolitan areas "heavily impacted by Wells Fargo's discriminatory practices," including Baltimore; Chicago; Cleveland; New York; Philadelphia; Riverside, Calif.; the San Francisco Bay Area; and Washington, D.C.

The Supreme Court didn't consider whether Bank of America and Wells Fargo actually violated the fair housing law. Instead it only examined whether Miami should be allowed to proceed with its claims.

Write to Brent Kendall at brent.kendall@wsj.com and Jess Bravin at jess.bravin@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BANK OF AMERICA -0.60% 29.82 Delayed Quote.21.02%
FIRST FINANCIAL CORP -0.56% 44.03 Delayed Quote.9.66%
WELLS FARGO & COMPANY -0.04% 48.91 Delayed Quote.6.18%
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