Local Mortgage Lawsuits Could Pile Up For Banks

The U.S. housing market is showing signs of a sustained recovery, but the hangover from the financial crisis continues for the nation’s biggest banks in the form of lawsuits alleging discrimination both before and after real estate downturn.

Those suits, which range from allegations of predatory lending to higher-cost loans or rejected refinancing applications, are starting to show signs of expansion, geographically and in scope. And the continued litigation and the financial costs associated with settlements may keep private investors at bay at a time when many lawmakers in Washington are calling for the federal government to play a less-prominent role in mortgage financing.

Los Angeles and Miami are the latest cities to seek damages for lost tax revenue and the increased cost of municipal services needed to maintain neighborhoods with high concentrations of foreclosed properties. The lawsuits are in addition to those alleging predatory lending practices at Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

The lawsuits aren’t limited to cities in the so-called sand states – Arizona, California, Florida and Nevada – that were some of the hardest hit by the foreclosure crisis. In May, Providence sued the U.S. unit of Madrid-based Banco Santander SA, formerly known as Sovereign Bank, for allegedly halting lending to minority neighborhoods after the housing decline began.

For the banks, which have denied the claims, the allegations follow the 2012 National Mortgage Settlement between the country’s five largest mortgage servicers and 49 state attorneys general. That agreement was spurred by systemic robo-signing of foreclosure documents, and it was designed to provide as much as $25 billion in relief to certain homeowners as well as states and the federal government.

In addition, the Justice Department is seeking settlements with banks similar to the $13 billion agreement it reached last year with JPMorgan Chase & Co. regarding the firm’s involvement in mortgage securities sales.

But state and federal settlements haven’t stopped cities from moving forward.

“The bad loans were unevenly distributed, the foreclosures were unevenly distributed and the foreclosure relief has been unevenly distributed,” said Kevin Stein, associate director of the California Reinvestment Coalition, which consists of more than 300 nonprofit and state agencies that advocate for equality in banking and financial services.

“The relief that’s been provided [as a result of the National Mortgage Settlement] has not been adequate and has not reached the hardest hit communities,” he said in a June 25 phone interview.

The resulting proliferation of lawsuits at the municipal level underscores the different jurisdictional authorities extended to cities, states and the federal government.

“Municipalities were in impossible positions,” Kathleen C. Engel, a professor of law at Suffolk University in Boston, wrote in the Fordham Law Journal earlier this year. “They were powerless to prevent abusive lending. Only state and federal legislatures and regulators had the authority to restrict unfair loan products; yet the cities bore the burden of unaffordable loans in the form of abandoned property, displaced families, increased demands for police and fire protection, and declining tax revenues.”

Much of the data used by cities looking to build cases against mortgage lenders involving discriminatory lending come by way of the Home Mortgage Disclosure Act of 1975, which requires most mortgage providers to report detailed lending data, such as an applicant’s race, on an annual basis. In the Los Angeles suit against Citigroup, U.S. District Judge Otis Wright II cited the city’s collection of publicly available figures as one reason for allowing the case to move forward.

“To bring a discrimination suit you need to gather the data to bring that suit, and it takes a while to gather that info,” said Jack Konyk, executive director of government affairs at Weiner Brodsky Kider PC, a Washington-based law firm whose clients include mortgage banking companies and financial institutions.

The problem for cities that suspect discriminatory lending practices is that there’s a significant lag between, say, denial of service and public disclosure of the data.

A Federal Reserve analysis of the most recent HMDA figures found that in 2012 conventional home loan denial rates were 32 percent for African-Americans and 21 percent for Latinos, compared with 12 percent for whites. The 2013 batch of data is expected later this year.

While more data could lead to more cities filing suit, some fair-lending advocates say more detailed information is needed from banks to determine patterns of discrimination.

“It’s not always easy to bring a case if all you have is HMDA data,” said Stein of the California Reinvestment Coalition. “We’ve been looking at HMDA data for years now, and there are always disparities.”

Relying on years-old data is also problematic because many banks tightened lending standards for all applicants in the wake of the 18-month recession that ended in June 2009. That also means that any potential impact these lawsuits could have on overall mortgage practices might not be known for a few more years.

The rulemaking responsibilities for HMDA are now in the hands of the Consumer Finance Protection Bureau, which is in the process of considering changes to reporting practices.

While no major U.S. cities have announced plans to file similar lawsuits alleging discriminatory lending practices, developments in pending cases could play a determining role.

“If you see a couple of these cases where the judge adjudicates in favor of the city and finds the bank guilty, that’ll spur more interest,” Konyk said in an interview. “Right now the settlements are a little less seductive.”

Some fair-housing advocates see potential for more cities to join related civil rights lawsuits, ones that allege lenders maintain and market foreclosed properties in white neighborhoods better than they do in African-American and Latino communities, resulting in blighted neighborhoods.

“I think that because Miami and Los Angeles are moving forward it will give courage to other cities to take some action,” said Shanna L. Smith, president and chief executive officer of the National Fair Housing Alliance. “Our taxpayer dollars should not go into rehabbing these neighborhoods. The banks caused these problems and they should be responsible for repairing them.”