By Nicole D. Prysby, J.D.
Cook County should be allowed to pursue its claims against Wells Fargo under the Fair Housing Act for the costs incurred by the county from increased foreclosures, held the U.S. District Court for the Northern District of Illinois. The county alleged that the bank engaged in a practice of targeting minorities for subprime mortgages and failed to process loan modification requests from minorities on the same basis as for non-minority homeowners. This practice led to increased direct costs incurred by the county related to foreclosures and evictions. Because the bank targeted minority neighborhoods, the county alleged that the practice violated the FHA. The court found that the county had sufficiently alleged that its injury was proximately caused by Wells Fargo’s actions, because the bank determined the number of homes that would end up in default or foreclosure through the discretion it exercised regarding whether to grant loan modifications or begin foreclosure proceedings (Cook County, Illinois v. Wells Fargo & Co., March 26, 2018, Feinerman, G.).
Background. Cook County filed suit against Wells Fargo alleging that the bank issued predatory subprime mortgage loans to Cook County residents that went into default and drove the mortgaged properties into foreclosure. Wells Fargo engaged in a practice known as "equity stripping" in which the bank would steer prime-eligible minority borrowers into nonprime loans, encouraging them to limit documentation, take out larger loans than needed, and avoid down payments. This practice resulted in higher mortgage payments and fees than for prime mortgages. The bank also failed to process mortgage modification requests from minority borrowers and charged fees in foreclosure for services it did not provide.
The county argued the practice violated the FHA because the scheme was concentrated in heavily minority neighborhoods, and that the county had suffered resulting harm in the nature of direct costs for evictions and foreclosures. The case was temporarily stayed while the U.S. Supreme Court decided a similar issue in Bank of Am. Corp. v. City of Miami (see Banking and Finance Law Daily, May 1, 2017). Following the City of Miami decision, in which the Court held that predatory lending practices fell within the zone of interests protected by the FHA, but raised issues regarding proximate cause, Wells Fargo moved to dismiss Cook County’s complaint.
Proximate cause. The court noted that based on the City of Miami decision, it is clear that the alleged conduct fell within the zone of interest protected by the FHA, but that the county must also allege proximate cause. Wells Fargo asserted that any harm to Cook County was too attenuated to be considered as proximately caused by its policy, because other factors could have contributed to the harm—for example, declines in property values not attributable to Wells Fargo’s conduct. But the court found that certain costs specified by Cook County were sufficiently direct to satisfy the proximate cause inquiry: those costs incurred in the process of administering and processing foreclosures, such as posing notices, serving summons, evicting borrowers, and the use of the court system to process foreclosure suits. Because Wells Fargo exercised discretion over whether to grant loan modifications and whether to foreclose on borrowers, the bank determined the number of homes that would end up in default or foreclosure. Although the injury to the county ran through a separate injury to county residents who had their property foreclosed, the intervening link did not break proximate cause, because the increase in the number of foreclosures and court cases was "surely attributable" to the increased volume of foreclosures. Although at the level of the individual borrower, there might be uncertainty as to whether an intervening factor caused the foreclosure, that issue did not defeat proximate cause at this stage, because such a problem could be solved, for example, with aggregate-level data from Wells Fargo and statistical analysis.
To the extent that Cook County alleged other harms, such as lost property tax revenue, increased demand for county services, and diminished racial balance and stability, the court found that those harms were too speculative to make a proximate cause showing. For example, it would be difficult to establish what percentage of an increase in demand for county homelessness-related counseling services or an increase crime was due to Wells Fargo’s practices.
Other grounds for dismissal. Wells Fargo argued several other grounds for dismissal, all of which were rejected by the court. First, the bank argued that the county failed to state a disparate impact claim, but the court found that the county had met that hurdle, as it had sufficiently alleged a statistical disparity between the baseline number of minority homeowners and the percentage of subprime mortgages Wells Fargo issued to minority borrowers. The county also identified a specific policy—Wells Fargo’s equity stripping—to which the alleged statistical disparity could be attributed.
The bank also argued that the action was filed outside the FHA’s two year statute of limitations, but the court found that the county had clearly alleged that the practices continued to the present day, in that Wells Fargo was still making decisions about loan modifications and foreclosures and that the county alleged that some of the discriminatory loans were issued less than two years prior to the filing of the lawsuit.
Finally, Wells Fargo argued that the county’s claims were precluded, as they could have been brought in an earlier lawsuit by the Attorney General of Illinois. But the court found no preclusion, because the Attorney General’s action represented the interests of borrowers, not the county’s interests in damages related to foreclosures, and was brought under different statutes. The mere fact that Cook County is s subdivision of the state was insufficient to create privity between the two entities.
The case is No. 1:14-cv-09548.
Attorneys: David J. Worley (Evangelista Worley, LLC) for County of Cook. Sheldon Toby Zenner (Katten Muchin Rosenman LLP) for Wells Fargo & Co., Wells Fargo Financial, Inc., Wells Fargo Bank, N.A. and Wells Fargo Corps.
Companies: County of Cook; Wells Fargo & Co.; Wells Fargo Financial, Inc.; Wells Fargo Bank, N.A.; Wells Fargo Corps.
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