Wells Fargo Faces Suit from City of Philadelphia Over Predatory Lending

July 30, 2017 by Amy E. Martinez, Esq.

The United States Supreme Court recently ruled that cities with residents who were victims of discriminatory lending practices are able to sue banks over their actions. The SCOTUS issued its decision after the city of Miami sued Bank of America, Citigroup, and Wells Fargo for alleged discriminatory conduct against borrowers. The city claimed the banks’ actions led to a disproportionate number of foreclosures and vacancies which impaired the City’s effort to assure racial integration, diminished the city’s property-tax revenue, and increased demand for police, fire, and other municipal services.

Now, two weeks after the Supreme Court’s decision, the city of Philadelphia is also suing Wells Fargo for allegedly discriminating against minority borrowers. The ruling in the Miami case granted cities the right to sue banks under the Fair Housing Act of 1968; however, the ruling is narrow and the city will have to prove the lender caused direct harm to the city and not just the borrowers.

In Miami, the court held

“…that the City’s claimed injuries fall within the zone of interests that the FHA arguably protects. Hence, the City is an ‘aggrieved person’ able to bring suit under the statute. We also hold that, to establish proximate cause under the FHA, a plaintiff must do more than show that its injuries foreseeably flowed from the alleged statutory violation.”

Attorneys for Philadelphia, many who also represented the city of Miami, allege that for well over a decade, Wells Fargo engaged in the practice of steering African-American and Latino borrowers towards high-cost or high-risk loans. The city alleges that in many cases those borrowers had credit that would have allowed them to obtain loans with better interest rates and terms.

The suit also claims that the bank lured African-American and Latino borrowers with incentives, wherein Wells Fargo would pay the borrower’s closing costs and in turn, charged them higher interest rates, resulting in much higher profits for the bank with no additional benefit for the borrower.

According to the complaint, many of the borrowers were then rejected when they attempted to obtain more advantageous loans, resulting in an unusually high rate of foreclosures in predominately minority neighborhoods such as Olney, Northwest Philly, and Southwest Philly, which were 4.7 percent higher than that of white neighborhoods. This pattern, according to the city, harmed Philadelphia financially when property tax revenues were greatly reduced.

In a response to the accusation, Wells Fargo spokesman, Tom Goyder, stated, “The city’s unsubstantiated accusations against Wells Fargo do not reflect how we operate. Wells Fargo has been a part of the Philadelphia community for more than 140 years and we will vigorously defend our record as a fair and responsible lender.”

The city claims Wells Fargo has a history of “red-lining” and other practices that reflect a “total breakdown of appropriate internal controls.” Philadelphia’s complaint seeks “equitable relief”, that includes an injunction requiring Wells Fargo to stop engaging in discriminatory lending practices. It seeks monetary damages based on the City’s loss of property tax revenue both from unpaid taxes on abandoned properties, as well as the tax reduction resulting from decreased values in neighborhoods with a high number of foreclosures.

The city is also planning to seek compensation for non-economic injuries associated with foreclosures, such as interference with the City’s ability to achieve its goals for non-discriminatory housing practices.

A Wells Fargo spokesman claims the recent ruling in Miami means that, “for Fair Housing Act claims, financial institutions cannot be held responsible for harm they didn’t cause. These types of cases have been pending in other states and have been rejected by all courts who have addressed the merits of the claims.”

However; in its recent decision, the Supreme Court states,

“Rather, proximate cause under the FHA requires ‘some direct relation between the injury asserted and the injurious conduct alleged.’ Holmes v. Securities Investors Protection Corporation, 503 U.S. 258, 268 (1992).

In its ruling, the Supreme Court was able to find a direct correlation between the conduct of the bank and the injury to the city of Miami. For the city of Philadelphia to prevail, it too must prove a “direct” link between the alleged misconduct and the asserted injuries.