The housing collapse of 2008 nearly broke the city of Miami. Now, its leaders have embarked on a novel and aggressive legal strategy to recoup losses from the big banks they say created the crisis with discriminatory and predatory lending practices.
It is a high-stakes effort that is being encouraged by many cities, and the banks Tuesday will ask the Supreme Court to stop it before it takes root.
Miami sued Bank of America, Wells Fargo and Citigroup under the 1968 Fair Housing Act, which bars discrimination in the sale, rental and financing of housing. The law states its purpose as providing for fair housing "throughout the United States."
The city says that it can prove the lending institutions discriminated against Latino and African American residents by directing them into risky high-interest loans. The resulting defaults destabilized Miami's poorest neighborhoods, and the resulting loss of tax revenue sent the city to the brink of bankruptcy, they say.
"It took us three years to really start recovering," said Miami City Commissioner Francis Suarez. "We decided unanimously as a commission that we wanted to hold the banks responsible for their lending practices, which we learned were discriminatory in nature."
Banks have been sued by individuals and taken to task by the federal government for lending practices, but these new cases are the first in which cities are the plaintiffs and are demanding that banks be held accountable for harming their communities.
The banks counter that Congress never intended the Fair Housing Act to be used as the basis for such suits.
"Municipal suits like this one were unheard of until recently, when enterprising contingency-fee counsel began pushing them," Bank of America told the court in its brief.
The banks warn of a "trickle-down" approach that would let anyone affected by a neighborhood in decline — from the next-door neighbor to the corner dry cleaner — to sue under the act.
There is little debate about the theory that foreclosure leads to vacancy, then blight and lower property values for the neighborhood and city. But the banks say economic and social conditions can have as much to do with that as the original loan.
The city says that it can prove — if it gets the chance — that discriminatory lending practices caused its problems, not the general economic downturn.
Using regression analysis, it alleges in court documents that African American and Latino borrowers were far more likely to receive unfavorable loan terms than similarly qualified whites. And when the borrowers got into trouble, they were less likely to be offered affordable refinancing packages.
"Clearly, higher rates were causing a much higher rate of default," Suarez said. "We think the banks were doing it knowingly, and as a part of the pattern and practice of their business model."
No one challenges the dire circumstances in which Miami found itself after the crash. It was the epicenter of the foreclosure problem. Suarez said that when he took office in 2009 the city had just $13 million in reserves, and if it had done nothing to curtail spending, its deficit would have reached $115 million.
Like most cities, its revenues are tied to property values, and real estate normally is relatively stable. "This was a precipitous drop," Suarez said, and the city invoked an emergency law to slash the salaries of municipal workers and impose a hiring freeze.
Localities as diverse as Los Angeles, Atlanta, Washington, D.C., and suburban Montgomery County, Md., are supporting Miami's suit.
But just because there is a problem, it does not mean that Congress provided a solution in the Fair Housing Act, say the banks and interest groups that support them.
The purpose of the law "is to protect minorities from housing discrimination, and to secure for all Americans the benefits of living in an integrated society," the U.S. Chamber of Commerce said in a friend-of-the-court brief. "No one would suggest that when Congress acted to secure fair housing in 1968, it also was concerned with protecting the tax bases and budgets of cities and towns."
Moreover, the likely result of a win by the cities would be that banks would cut back on loans in low-income neighborhoods, the Chamber says.
To go forward with the suit, Miami has to convince the Supreme Court of two things: that the act's language permitting an "aggrieved person" to sue includes municipalities, and that the alleged discriminatory practices by banks were the proximate cause of its decrease in property-tax revenue and increase in services because of property foreclosures.
While the banks argue that recent Supreme Court decisions in other civil rights cases have narrowed the definition of an "aggrieved person," cities argue that they have a role at the heart of the Fair Housing Act.
Because it is difficult for those who have received the loans to sue, the coalition of cities supporting Miami told the court, it is up to municipalities to "seek relief from the entities whose discriminatory practices have perpetuated the cycle of segregation and urban decay."
Even with a right to sue, the banks and their supporters say the cities cannot draw a line connecting the loans with the problems for which they seek redress. There are too many other factors, they say.
But Henry Hunnefeld, Miami’s senior assistant city attorney, said it is possible to separate out the losses attributable to discriminatory loans.
"All the city's asking for is to be put back in the same place it would have been if we didn't have discriminatory loans that resulted in foreclosures, which had all sorts of ramifications on the city," Hunnefeld said. "That's a question of proof at trial."