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Mortgage Lender Wins Two Significant FHA ‘Disparate Impact’ Victories

Model CityA large mortgage lender recently prevailed against both the City of Los Angeles and the County of Cook, Illinois, in lawsuits alleging “disparate impact” discrimination in violation of Title VIII of the Civil Rights Act of 1968, 42 U.S.C. § 3601 et seq., more commonly known as the federal Fair Housing Act (FHA).

As you may recall, the City of Los Angeles alleged that Wells Fargo & Co. and Wells Fargo Bank, N.A. “engaged in a continuous pattern and practice of mortgage discrimination in Los Angeles since at least 2004 by imposing different terms or conditions on a discriminatory and legally prohibited basis.”

According to the City of Los Angeles, the alleged pattern and practice of lending discrimination “consist[ed] of traditional redlining and reverse redlining, both of which have been deemed to violate the [FHA] by federal courts throughout the country.”

The City alleged that “Wells Fargo engaged in reverse redlining, and continues to engage in such conduct, by extending mortgage credit on predatory terms to minority borrowers in minority neighborhoods in Los Angeles on the basis of the race and ethnicity of its residents,” and that “Wells Fargo’s redlining and reverse redlining allegedly resulted in both intentional discrimination and disparate impact discrimination.”

The City of Los Angeles identified eight types of allegedly “predatory” home loans that Wells Fargo supposedly extended to minority borrowers: “(1) high-cost loans (defined by the City as loans with an interest rate three percentage points or more above the federally established benchmark); (2) subprime loans; (3) interest-only loans; (4) balloon payment loans; (5) loans with prepayment penalties; (6) negative-amortization loans; (7) no-documentation loans; and (8) adjustable rate mortgage loans with ‘teaser’ rates.” The City also took issue with Wells Fargo’s ”United States Federal Housing Authority” loans – i.e., FHA loans — which the City alleged also included “higher risk features such as higher fees and higher interest rates.”

The U.S. District Court for the Central District of California rejected the City’s allegations, granting Wells Fargo’s motion for summary judgment. A copy of the opinion is available at: Link to Opinion.

The Court in the City of Los Angeles action noted that the statute of limitations for FHA claims is two years, but the discriminatory conduct alleged by the City of Los Angeles reached back nearly a decade. The Court held:

In order for the City to sue Wells Fargo for all discriminatory conduct in the last ten years, the City must prove that the continuing violations doctrine applies. The doctrine allows conduct that occurred outside the limitations period into the suit on the condition that the City proves there is a continuous unlawful practice that continued into the limitations period. The City must prove that Wells Fargo violated the Act within the limitations period. … Stated differently, the core issue for this phase of the litigation is whether Wells Fargo violated the Act during the limitations period triggering the continuing violations doctrine.

The Court held that, in order for liability to exist for a disparate impact claim, “there is simply no question that the statistical disparity must be ‘sufficiently substantial’ or ‘significant.’” The Court also held that “the Supreme Court’s recent guidance in Inclusive Communities precludes the City’s statistical disparity evidence from creating a genuine dispute regarding a prima facie case,” as the “Court must examine the City’s prima facie evidence ‘with care.’”

The Court held that the City of Los Angeles failed to “provide evidence of a significantly disproportionate effect on minorities, and comparing thousandths of a percentage fails to meet the minimum threshold of Inclusive Communities.”

The Court also held that, under Inclusive Communities, the “[t]he City was required to point to a Wells Fargo policy or policies that caused the disparity,” and that “[t]he City’s entire disparate impact claim must ‘solely’ seek to remove a policy that is “artificial, arbitrary, and [an] unnecessary barrier[].”

The Court ruled that “the City fails to actually identify any policy that created an artificial, arbitrary, or unnecessary barrier. Instead, the City argues that a lack of a policy [of risk management and monitoring] produced the disparate impact. There is no authority that suggests that disparate impact claims are designed to impose new policies on private actors. … Without identifying an actual policy that creates a barrier, the City cannot base its disparate impact claim on Wells Fargo’s practice of issuing high-cost loans.”

In addition, the Court ruled that “the City is essentially advocating for racial quotas.” However, the Court noted, “[i]n Inclusive Communities, the Supreme Court specifically noted that disparate impact claims must not force private actors to ‘adopt racial quotas’” and that “such quotas ‘raise[] serious constitutional concerns.’”

In the words of the Court:

The City is arguing that the lack of an unconstitutional racial quota is the cause of the statistical discrepancy in this case. Wells Fargo cannot constitutionally issue high-cost loans based on a racial quota system, and its lack of such a policy does not create a prima facie case of disparate impact under the Act. Not only did the City fail to identify any policy that caused the negligible statistical disparities, it advocates for the implementation of ‘serious constitutional concerns.’

Accordingly, the Court held there is no genuine dispute of fact that Wells Fargo did not violate the FHA during the two-year limitations period, and without an FHA violation “continu[ing] into the limitations period,” the continuing violations doctrine does not apply. Wells Fargo was therefore entitled to summary judgment.

Similarly, the County of Cook, Illinois, alleged that various Wells Fargo affiliates extended “predatory subprime mortgage loans” that were concentrated in the County’s predominantly minority neighborhoods. Cook County alleged that this practice resulted in urban blight and a reduced property tax base, all in supposed violation of the FHA.

The Court noted that the “United States Department of Justice (“DOJ”) sued Wells Fargo over precisely these alleged practices under the FHA, as did the Attorney General of Illinois under parallel provisions of the Illinois Human Rights Act, 775 ILCS 5/1 et seq.,” and that “both cases were resolved in 2012 with consent decrees. See United States v. Wells Fargo Bank, NA, 891 F. Supp. 2d 143 (D.D.C. 2012); People of the State of Illinois v. Wells Fargo & Co., Final Judgment and Consent Order, No. 09 CH 26434 (Cir. Ct. of Cook County, July 12, 2012).

The Court further noted that “[i]ts residents already having been directly compensated for their injuries, Cook County filed this federal suit in November 2014 seeking compensation only for its own injuries as a corporate person.”

The U.S. District Court for the Northern District of Illinois granted Wells Fargo’s motion to dismiss on the ground that Cook County is not within the FHA’s “zone of interests.” A copy of the opinion is available at: Link to Opinion.

Among other things, Wells Fargo argued that Cook County does not have “statutory standing” because it is not an “aggrieved” person within the FHA’s meaning. See 42 U.S.C. § 3602(i)(1) (“‘Aggrieved person’ includes any person who … claims to have been injured by a discriminatory housing practice.”)

Although the Court agreed with the numerous other courts that have held that municipalities and counties have constitutional standing to sue under the FHA, the Court held that “statutory standing” is not coextensive with “constitutional standing,” citing the Supreme Court of the United States’ recent opinions in Thompson v. North American Stainless, LP, 562 U.S. 170 (2011), and Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014).

Examining the language of various section of the FHA, the Court concluded that Cook County’s alleged injuries —i.e., urban blight and a reduced property tax base — “while perhaps the consequences of reverse redlining or equity stripping writ large, do not bring it within [the FHA]’s zone of interests.” According to the Court, “Cook County’s alleged injuries … are purely derivative and not the type that the FHA was designed to protect. The county’s claims thus fall outside the zone of interests.”

Accordingly, the Court granted Wells Fargo’s motion to dismiss. However, the Court held that “[a]lthough the court doubts that Cook County could cure the zone-of-interests defect the dismissal is without prejudice, and the county is granted leave to file an amended complaint by August 14, 2015. … If Cook County does not replead by that date, thereby electing to stand on its complaint, the suit will be dismissed with prejudice.”

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Ralph Wutscher's practice focuses primarily on representing consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. He represents the lending and financial services industry as a litigator, and as regulatory compliance counsel. For more information, see