In a recent case, Bank of America v. Miami, the U.S. Supreme Court decided that cities can sue banks over Fair Housing Act (FHA) violations if they target minorities for risky, costly mortgages and the city suffered harm by these actions. Read on to learn more about this case, as well as the types of mortgage discrimination are prohibited under the FHA, how to spots the signs of lending discrimination, and what to do if you are experiencing it.
The federal Fair Housing Act (FHA) makes it illegal to discriminate in residential real estate transactions. The law covers loans made to buy, construct, improve, repair, or maintain your home, or if you use your home is as security (collateral) for the loan.
The FHA prohibits lending discrimination based on race, color, national origin, religion, sex, disability, or familial status (42 U.S.C. § 3605). This means a lender cannot consider these factors when determining whether to:
Learn more about the FHA and other laws that protect people from credit discrimination in Nolo’s article Laws That Prohibit Credit Discrimination.
In the case of Bank of America v. Miami, the City of Miami filed a lawsuit against Wells Fargo and Bank of America claiming a violation of the FHA. The causes of action in the complaint alleged that these banks had engaged in racially discriminatory lending practices by intentionally targeting African-American and Latino neighborhoods and residents for particular types of predatory loans. Specifically, the predatory loans offered by the banks had very high-interest rates, unjustified fees, teaser interest rates (and overstated refinancing opportunities), and significant prepayment penalties.
The suit stated that Wells Fargo and Bank of America made these risky, costly mortgages to minority customers, but did not offer them to similarly situated white, non-Latino customers. The suit also asserted that the banks’ discriminatory mortgage lending practices led to a disproportionate number of mortgage defaults by minority borrowers in certain neighborhoods. Then, after the borrowers fell behind on mortgage payments, the banks refused to provide refinancing or modifications to make the loans more affordable.
The City of Miami further alleged that the banks’ discriminatory practices:
The banks’ primary defense was that the City of Miami lacked standing to file this type of case. (Standing is the right to file a lawsuit or make a particular legal claim. Only a person or entity that has suffered actual injury has standing to sue in court.)
Under the FHA, only someone who has been injured by a discriminatory practice can sue those who have violated the statute. Wells Fargo and Bank of America argued that the city of Miami was not injured and that the suit was really about public rights, not an individual injury to a particular plaintiff (Miami).
The banks also argued that the connection between the FHA violations and the harm the city claimed to have suffered were too far apart to entitle Miami to win the suit. That is, the banks argued there was no “proximate” cause. (Proximate cause is defined as the immediate reason that something happened that caused harm to another person.)
Ultimately, the court determined that Miami had been injured by the banks’ discriminatory practices and, therefore, it was allowed to file suit under the FHA.
In its decision, the U.S. Supreme Court acknowledged that the banks’ discriminatory lending practices led to widespread foreclosures and vacancies in the city’s minority communities. This forced Miami to spend more on municipal services. For instance, additional police, fire, and building and code enforcement services were needed to remedy the blight and unsafe conditions that the foreclosures and vacancies generated. Also, the decreased value of the foreclosed homes and surrounding neighborhoods led to lower property taxes, which reduced the city’s revenue.
However, this wasn’t a straightforward win for the City of Miami. The Court concluded that, even though the bank’s practices injured Miami, there must be a direct connection between the violation and the injury for the city to recover monetary damages. The Court sent the case back to the lower court to determine whether there was a sufficient link between the banks’ lending practices and the city’s economic injuries to hold the banks responsible.
Because the case was sent back to the lower court to look at the issue of causation, some cities might decide it isn’t worth the effort to start a court battle over mortgage discrimination if there's no guarantee that the bank will have to pay restitution.
Even though some cities may be reluctant to sue banks under the FHA, if you encounter mortgage discrimination, you might want to file a suit against a lender.
Lending discrimination isn’t always apparent. Some subtle signs that you might be experiencing mortgage discrimination are:
If a bank offers you a mortgage loan or other form of credit with terms that are worse than you expected and you suspect it could be due to discrimination, you should ask the creditor the following questions:
If you think you’re experiencing mortgage discrimination, you may want to speak with a lawyer experienced with the FHA. You can also file a complaint with the Consumer Financial Protection Bureau at www.consumerfinance.gov or the U.S. Department of Housing and Urban Development (HUD) at www.hud.gov/complaints.