In an action by Cook County, Illinois against various lenders for alleged increased expenses supposedly arising from heightened default rates, in which the County asserted that the lenders engaged in an “integrated equity-stripping scheme,” the U.S. Court of Appeals for the Seventh Circuit recently affirmed a summary judgment ruling in favor of the defendant banks.
In so ruling, the Seventh Circuit largely relied on Bank of America Corp. v. Miami, 581 U.S. 189 (2017), in which the Supreme Court of the United States held that the federal Fair Housing Act “provides relief only for injury proximately caused by a statutory violation,” and that “foreseeability alone is not sufficient to establish proximate cause under the FHA.”
A copy of the opinion in County of Cook v. Bank of America Corporation is available at: Link to Opinion.
In this suit filed under the federal Fair Housing Act, 42 U.S.C. 3601–19, Cook County, Illinois claimed that the defendant banks made credit too readily available to some borrowers, who defaulted, and then foreclosed on the loans in a way that injured the County. Specifically, the County alleged the banks targeted potential minority borrowers for: unchecked or improper credit approval decisions, which allowed them to receive loans they could not afford; discretionary application of surcharge of additional points, fees, and other credit and servicing costs above otherwise objective risk-based financing rates; higher cost loan products; and undisclosed inflation of appraisal values to support inflated loan amounts. When many of the borrowers could not repay, the County asserted it had to deal with vacant properties and lost tax revenue and transfer fees.
The trial court granted summary judgment to the defendants, relying in large part on Bank of America Corp. v. Miami, wherein the Supreme Court of the United States held that the FHA provides relief only for injuries proximately caused by a statutory violation and that “foreseeability alone is not sufficient to establish proximate cause under the FHA.” Id. at 201. The County timely appealed.
Quoting Miami, the Seventh Circuit began its analysis by stating that proximate cause under the FHA requires “some direct relation between the injury asserted and the injurious conduct alleged.” Id. at 203. “The general tendency” in these cases, “in regard to damages at least, is not to go beyond the first step.” Id.
Therefore, the Seventh Circuit observed that the County sought a remedy for effects that extended way beyond “the first step.” The directly injured parties were the borrowers, who lost both housing and money. The banks were secondary losers because they did not collect the interest payments that the borrowers promised to make and often did not recover the principal of the loans in foreclosure sales. In the Court’s view, the County was at best a tertiary loser, its injury derived from the injuries to the borrowers and banks.
The County argued on appeal that the remedy need not stop with “the first step,” because the banks engaged in an “integrated equity-stripping scheme.”
However, the Seventh Circuit noted that the summary judgment record showed instead that individual banks developed their own programs, at different times, for their own reasons. In fact, the County’s expert conceded that an “integrated equity-stripping scheme” would not have made economic sense for the banks, which would have been among the major losers from the inability to recoup their investments.
Accordingly, the Seventh Circuit affirmed the trial court’s summary judgment in favor of the banks.
In a concurring opinion, Circuit Judge Kenneth F. Ripple affirmed the trial court’s decision on evidentiary grounds.
Judge Ripple first concluded that the trial court correctly applied the Daubert analysis and did not abuse its discretion in excluding the County’s expert testimony because the subject methodology not only was “untested and unheard-of by others in [the experts’] field” but also was “substantively unsound” and “unreliable.” Thus, without the expert testimony, the County had no basis for its two disparate-impact claims.
This just left the County’s disparate-treatment claim based on the alleged existence of an integrated scheme to strip equity from minority borrowers. Judge Ripple agreed with the majority’s assessment that the summary judgment record did not show that the banks engaged in a coordinated scheme to target minority borrowers for loans that they could not afford in order to provoke defaults and foreclosures. Indeed, the County’s expert admitted that such a scheme would “not make economic sense.”
For the above evidentiary reasons, Judge Ripple determined that the County’s claims failed and remarked that resolving the case on evidentiary issues would allow further percolation on the important, and yet undecided, question of the nature of the proximate cause analysis under the FHA.