Much of what Los Angeles City Atty. Mike Feuer alleges in his lawsuits against four big banks for their mortgage and foreclosure practices isn't debatable.
In his latest lawsuit filed May 30 against JP Morgan Chase, Feuer alleges that mortgage lenders swarmed into low-income minority neighborhoods with easy but deceptive offers of credit to people ill-equipped to handle the economic burden. Federal regulators and financial analysts recognized long ago that predatory practices, such as steering some borrowers into loans with high costs and stiff terms even though they qualified for better loans, thrived in the sub-prime mortgage market.
"From 2002 to 2005, credit flooded into low credit-score ZIP Codes," economists Atif Mian of Princeton and Amir Sufi of the University of Chicago write in their recently published book, "House of Debt." In those neighborhoods, they observe, "mortgages originated for home purchase grew 30 percent per year, compared to only 11 percent in high credit-score areas."
It's not news that lenders imposed abusive foreclosure practices and terms that cost borrowers their homes and blighted their neighborhoods; in 2012, all four of the banks named by Feuer settled charges from 49 states and the federal government over precisely those practices for $25 billion.
Feuer's lawsuits are an effort new to Los Angeles to bring such discriminatory practices to an end and extract compensation for their effect on the entire city.
They may also herald a newly aggressive era for the city attorney's office, which under Feuer's recent predecessors has honored its claim to be the "people's lawyer" more through rhetoric than reality.
"The paradigm in many public law offices is to be principally defensive," Feuer told me last week. "But we can be so much more than that." Since taking office in July, Feuer has developed a vision of the city attorney as an uber-regulatory agency, riding herd on practices that harm the quality of life but aren't being addressed by oversight agencies treating their industries with kid gloves.
Consider his crackdown on "patient dumping," in which hospitals get rid of mentally disabled patients by depositing them on skid row. Feuer has extracted $750,000 in penalties, including grants to homeless service agencies, from two hospitals. And he is pressing all area hospitals to follow a common protocol governing the treatment and discharge of homeless patients.
"We ought to not only be reactive, but to look for ways to keep a problem from happening," he says.
The bank lawsuits sound the same theme. Feuer's feel for the impact of mortgage and foreclosure abuse reflects his background in public interest law, which included service as executive director of Bet Tzedek Legal Services, the Los Angeles public interest firm that assists the elderly, disabled and other disadvantaged clients.
He says his goal in filing the lawsuits against the banks — JPMorgan, Bank of America, Citigroup and Wells Fargo — was not so much to land them in court as to bring them to the table. Before filing, he sent the complaints to the banks, hoping to settle amicably.
"Obviously, that didn't happen," he says.
After the JPMorgan lawsuit was filed, the bank stated it was "disappointed the L.A. City Attorney is pursuing an adversarial approach to address city finances impacted by the recent economic downturn." That's a bit of a dodge: Feuer's allegation is that city finances were affected directly by the bank's behavior; as for the "recent economic downturn," that resulted in part from the practices of JPMorgan and its Wall Street brethren. If you need to refresh your memory, read the report of the Financial Crisis Inquiry Commission chaired by former California Treasurer Phil Angelides.
The banks targeted by Feuer in the first lawsuits, filed in December, deny that they acted unfairly or were responsible for the dire harvest. (JPMorgan hasn't yet filed its formal response.) "Remarkably," BofA asserted in its own defense, Feuer's lawsuit "does not even mention the recent deep recession, drop in housing prices and high unemployment rates." BofA adds, "hundreds of other lenders made hundreds of thousands of other loans to city residents at the same time."
Boiled down, the city charges that the banks' predatory lending and discriminatory foreclosure practices caused a decline of nearly $79 billion in city property values. That in turn could lead to a loss of about $481 million in property tax revenue. (The estimates come from a September 2011 report by the Alliance of Californians for Community Empowerment and the California Reinvestment Coalition.)
After the collapse, Feuer alleges in the JPMorgan lawsuit, the bank shortchanged borrowers of resources to avoid foreclosures, including by "declining to offer refinancings or loan modifications to minority customers on fair terms."
As a result, the lawsuit states, an African American borrower in L.A. was nearly twice as likely to receive a predatory loan than a white borrower with the same financial profile. Foreclosures on black-owned homes moved faster than those owned by white borrowers
In short, the banks have engaged in what Feuer alleges was a one-two punch of redlining and reverse-redlining. They've instituted foreclosures hyper-aggressively (that's the "redlining") in the same neighborhoods in which they sold abusive mortgages (reverse redlining).
Other public officials have employed litigation as a regulatory device with uneven success. One problem is that powerful interests, when poked with the stick of a municipal lawsuit, sometimes can get higher government entities to snarl back on their behalf. That's what happened when gun manufacturers were sued by cities such as Chicago and New Orleans over the tide of firearms violence within their borders. An acquiescent Congress enacted the Protection of Lawful Commerce in Arms Act of 2005, which barred negligence lawsuits against gun makers and dealers for crimes committed with their products.
On the other hand, in 1998, the tobacco industry yielded to lawsuits filed by dozens of states and the federal government — citing the health-related costs of cigarette smoking — by agreeing to payments totaling more than $200 billion over 25 years and to an end to youth-oriented advertising and marketing, among other provisions.
Mortgage settlements have been a mixed bag. In 2012, Wells Fargo, Bank of America, Citi, JPMorgan and Ally Financial (formerly GMAC) settled complaints by the federal government and 49 states about their fraudulent foreclosure practices. The offenses included "robo-signing" documents, lying in court about mortgage claims, maintaining inaccurate records and keeping borrowers in the dark about foreclosure plans. The settlement was billed as a $25-billion deal, but in reality the banks were on the hook for only $5 billion in cash.
As we observed at the time, this was a tiny fraction of the cost to individuals and communities. The financial analyst and blogger Yves Smith put the figures in stark perspective: "We've now set a price for forgeries and fabricating documents," she wrote. "It's $2000 per loan." She called that, accurately, the equivalent of a "rounding error" to the banks.
That same year, Wells Fargo settled lawsuits by government entities that more closely resemble the Los Angeles cases. The bank committed to spending $175 million, mostly in Baltimore, to settle allegations by the city and the federal government that it had systematically engaged in discriminatory lending. And it pledged $432.5 million to settle a lawsuit by the city of Memphis, Tenn., over similar practices. In both cases, the bank denied the allegations.
Feuer's strategy survived a major test just last month, when Los Angeles Federal Judge Otis Wright rejected Wells Fargo's motion to dismiss Feuer's lawsuit against it on procedural grounds. A similar fate plainly awaits similar efforts by the other banks in Wright's courtroom.
Feuer is seeking monetary damages from the banks, as well as injunctions to prevent continued mortgage discrimination.
"We are seeking to have existing rules enforced," he says. "There should be enough rules in place to govern behavior so that one doesn't encounter the same problem in the future."
That's the signal he's sending to the banks. His message to the public is slightly different.
"There's a tremendous lack of faith today in every public institution," he says. "It's up to us to show our constituents that there's tremendous potential in these offices to change the world."