Banking and Finance Law Daily Oakland plausibly alleged Wells Fargo’s discriminatory lending practices reduced city property tax revenue
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Thursday, August 27, 2020

Oakland plausibly alleged Wells Fargo’s discriminatory lending practices reduced city property tax revenue

By Nicole D. Prysby, J.D.

The City of Oakland adequately alleged that predatory loans to Black and Latino residents, in violation of the Fair Housing Act, caused widespread foreclosures that reduced the City’s property-tax revenues.

The City of Oakland plausibly alleged that its decrease in property-tax revenues has some direct and continuous relation to Wells Fargo’s discriminatory lending practices, held the Ninth Circuit Court of Appeals. Oakland alleged that Wells Fargo & Company and Wells Fargo Bank, N.A., engaged in discriminatory lending practices by issuing predatory loans to Black and Latino residents, in violation of the Fair Housing Act (FHA), and that the predatory loans caused widespread foreclosures that reduced the City’s property-tax revenues and increased its municipal expenses. The Ninth Circuit held that the FHA’s proximate cause requirement is sufficiently broad to encompass Oakland’s alleged aggregate, citywide injuries. Through statistical regression analyses, Oakland plausibly alleged that the predatory loans injured the City because the foreclosures caused a respective drop in property values and, in turn. reduced property-tax revenues. However, the court held that the City failed to plausibly allege that its increased municipal expenses were proximately caused by Wells Fargo’s discriminatory lending practices (City of Oakland v. Wells Fargo & Company, Aug. 26, 2020, Murguia, M.).

The City of Oakland alleged that Wells Fargo engaged in discriminatory lending practices by issuing predatory loans to Black and Latino residents, in violation of the FHA. Oakland alleged that the predatory loans caused widespread foreclosures that reduced the City’s property-tax revenues and increased its municipal expenses. The district court denied Wells Fargo’s motion to dismiss as to claims for lost property-tax revenues and claims for injunctive relief, and granted Wells Fargo’s motion to dismiss as to claims for increased municipal expenses. Wells Fargo appealed the partial denial of its motion to dismiss.

Appellate review. The court first held that the FHA’s proximate cause requirement is sufficiently broad to encompass Oakland’s alleged aggregate, citywide injuries. The text and legislative history of the FHA reveal that Congress intended the statute to provide redress for a multitude of injuries that result from housing discrimination. And at least some of Oakland’s aggregate, city-wide injuries are administratively feasible and convenient under the FHA. Relying on its proposed statistical regression analysis, Oakland plausibly alleged that it can precisely calculate the exact loss in property values attributable to foreclosures caused by Wells Fargo’s predatory loans, isolated from any losses attributable to non-Wells Fargo foreclosures or other independent causes. There is no risk of duplicative recoveries in this case because individual borrowers cannot recover for Oakland’s aggregate, city-wide injuries like reduced property-tax revenues.

The court went on to hold that Oakland sufficiently pleaded that its reduced property-tax revenues, but not its increased municipal expenses, were proximately caused by Wells Fargo’s discriminatory lending practices. Through statistical regression analyses, Oakland plausibly alleged that the predatory loans injured the City because the foreclosures caused a respective drop in property values and, in turn, reduced property-tax revenues. Oakland’s analyses isolated the lost property value attributable to Wells Fargo’s foreclosures, as opposed to other potential causes. The court rejected Wells Fargo’s argument that to satisfy the proximate cause requirement, the City had to allege an injury that is the immediate result of a statutory violation; the City sufficiently demonstrated proximate cause through regression analysis that established some direct relation and continuity between its reduced property-tax revenues and Wells Fargo’s predatory loans. Although individual borrowers may have suffered more direct harm, individual borrowers often lack the financial incentive to pursue a lawsuit. Additionally, cities and local governments are uniquely well-suited to bring aggregate lawsuits under the FHA to deter banks from engaging in widespread, large-scale discriminatory lending practices because they have tools that allow them to detect illegal practices and patterns on a large, systematic scale.

The court also rejected several challenges Wells Fargo made to the City’s regression analysis. For example, the City was not required to include variables such as job loss in its regression analysis, because they are not correlated with the likelihood that a person will receive a predatory loan. With respect to increased municipal expenses, the City failed to plausibly allege a direct relation to Wells Fargo’s discriminatory lending practices. The entire increase in Oakland’s municipal expenses over the relevant time period cannot be attributed to Wells Fargo’s alleged predatory lending practices, and Oakland did not account for other independent variables that might have contributed to, or even caused, the spike in expenses.

Finally, the court held that the FHA’s proximate cause requirement applies to claims for injunctive or declaratory relief.

The case is No. 19-15169.

Attorneys: Maria Bee, Office of the City Attorney, for City of Oakland. Manuel Francisco Cachan (Proskauer Rose LLP) for Wells Fargo & Co. and Wells Fargo Bank, N.A.

Companies: Wells Fargo & Co.; Wells Fargo Bank, N.A.

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