Supreme Court says cities can sue banks over predatory loans

WASHINGTON — The Supreme Court ruled Monday that cities can sue banks for discriminatory mortgage lending practices, but they must prove that predatory loans led to damages such as lost tax revenue and higher spending on municipal services.

The decision was a partial victory both for Miami, which sought standing to sue banks under the Fair Housing Act, and for Bank of America and Wells Fargo, which argued that the city's damages were too many steps removed from the original loans. The dispute now returns to lower courts for further action.

The 5-3 ruling was written by Justice Stephen Breyer and backed by the court's liberal justices and Chief Justice John Roberts. Three justices — Clarence Thomas, Anthony Kennedy and Samuel Alito — argued that the city had no right to sue under the landmark 1968 civil rights law in the first place. Newly confirmed Justice Neil Gorsuch did not take part in the decision.

"The city's claimed injuries fall within the zone of interests that the FHA arguably protects," Breyer wrote. "Hence, the city is an 'aggrieved person' able to bring suit under the statute."

But he warned: "The housing market is interconnected with economic and social life" that can cause "ripples of harm to flow" far beyond the banks' actions. "Nothing in the statute suggests that Congress intended to provide a remedy wherever those ripples travel."

Thomas, in dissent, said the city's injuries fall outside the housing law's zone of interests and are too disconnected from the bank's actions. "The court of appeals will not need to look far to discern other, independent events that might well have caused the injuries Miami alleges in these cases," he said.

The city claimed that banks purposely approved more expensive and riskier loans to minority borrowers than they qualified for, which counteracted its effort to integrate minority neighborhoods. Lawsuits in Baltimore and Memphis resulted in settlements between banks and those cities. Others, including Los Angeles, have made similar allegations.

The decision was hailed by liberal interest groups who said it grants broad access to the courts to challenge discriminatory practices.

“Our nation is still wrestling with the collateral consequences of the foreclosure crisis," Kristen Clarke, president of the Lawyers' Committee for Civil Rights Under Law. "Today’s Supreme Court decision reinforces the critical role that states and cities must play in holding banks and other actors accountable for actions that continue to harm communities, particularly minority communities that have borne the brunt of the crisis."

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During oral arguments on Election Day last year, the court's more liberal justices had argued that the landmark civil rights law was intended to help not just individual victims of discrimination, such as home buyers and renters, but communities as well.

"Here the cities are standing up and saying, 'every time you do this redlining and this reverse redlining, essentially a community is becoming blighted.' And who better than the city to recognize that interest and to assert it?" Justice Elena Kagan said at the time.

But Neal Katyal, the lawyer representing the banks, said the city could prove only "sixth-step liability" from a process that allegedly begins with discriminatory loans and leads progressively to defaults, foreclosures, increased vacancies, lost property taxes, reduced property taxes and urban blight. If it can sue based on that scenario, he warned, 19,300 cities in the United States could file similar complaints.

And some justices who signed on to Breyer's ruling had expressed doubt during oral argument that the city's losses were a direct result of the banks' lending practices — something the city now will have to prove in lower courts to win its case and collect damages.

"Your injuries are derivative of the injury to the homeowners who had the subprime mortgages and who suffered the foreclosure and so on," Roberts said during oral argument. "You don't start with you."