A sign of the times.

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Miami Tries to Hold Banks Accountable for Bad Loans

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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It’s hard to imagine much work getting done in most offices on Tuesday -- except at the U.S. Supreme Court, which will hear cases, pretending to be blithely oblivious to the history being made in voting booths across the country.

As it turns out, one of those cases is actually pretty important. It concerns whether the city of Miami can bring claims against Wells Fargo and Bank of America for racially discriminatory predatory lending under the Fair Housing Act -- or whether the law only allows suits by individuals directly affected by discrimination. The justices may split, 4-4. And the issue is exactly the kind that will be affected by the election results.

The case is really two consolidated cases, Wells Fargo & Co. v. City of Miami and Bank of America Corp. v. City of Miami. Both arose from the city’s allegation, detailed in the opinions for the U.S. Court of Appeals for the 11th Circuit, that for a decade the banks systematically targeted blacks and Latinos in Miami for “high-cost loans … subprime loans, interest-only loans, balloon payment loans, loans with prepayment penalties, negative amortization loans, no documentation loans, and adjustable rate mortgages with teaser rates.”

In essence, the Miami suits are follow-ons to the subprime mortgage crisis: creative legal attempts to hold banks accountable for predatory lending. The catch is that the Fair Housing Act is about racial discrimination, not unconscionable lending behavior per se.

The city had to cross two legal hurdles to bring the suits: It had to allege that the banks engaged in race discrimination through their predatory lending. And it had to allege that the banks proximately caused injury to the city.

The key to both was regression analysis. The city examined lending data and alleged that the predatory loans were correlated with race, and that the loans were correlated with default. It then asserted that the default rate led to foreclosures in the city that lowered property values and the city’s tax base, costing it money. Thus, Miami argued that the banks’ discriminatory practices caused the harm as required by the Fair Housing Act.

These allegations haven’t yet been fully explored in court. A federal district court threw the case out, reasoning that the city wasn’t within the “zone of interests” of the housing act because the alleged injuries were economic, not racial, and because the judge thought the city hadn’t proved that the banks harmed it.

The 11th Circuit, however, reinstated the suits. It held that the alleged chain of causation was “perfectly plausible.” Equally important, the appeals court said that the city could count as an “aggrieved person” who is allowed to sue under the housing act.

The court’s basis was a set of three Supreme Court statements from the 1970s and early 1980s. One, from 1972, said the Fair Housing Act is “broad and inclusive” and reaches “as broadly as is permitted by Article III of the Constitution.” In non-technical terms, that means courts should hear any case under the act that the Constitution allows the courts to hear. The Constitution requires a plaintiff to have suffered a concrete, real injury -- and monetary harm usually counts.

In another case, this one from 1979, the village of Bellwood, Illinois, sued two Realtors for racial steering, and the Supreme Court let the suit go forward. In the third, from 1982, the court repeated that the housing act reached as far as Article III allows.

The fact that the Supreme Court agreed to hear the case strongly suggests that at least four justices want to disallow the Miami suits. The banks’ strongest argument rests on a 2011 Supreme Court case that involved not the Fair Housing Act, but Title VII, the more general civil-rights statute that is a cousin to the act.

In that decision, Thompson v. North American Stainless LP, the court interpreted the words “aggrieved person” to exclude a plaintiff “whose interests are unrelated to the statutory prohibitions” in the law.

The 2011 case specifically backed away from the broad 1972 case on which the 11th Circuit had relied. The issue was whether a man could sue for retaliation as an aggrieved person under Title VII on the theory that he was fired in retaliation for a sex harassment claim brought by his fiancee. Justice Antonin Scalia, who wrote the opinion, said he couldn’t. Otherwise, he wrote, “a shareholder would be able to sue a company for firing a valuable employee for racially discriminatory reasons, so long as he could show that the value of his stock decreased as a consequence.”

Scalia’s hypothetical sounds pretty close to Miami’s argument. If a third-party shareholder can’t sue for damage caused to him by discrimination to an employee, why should a city be able to sue for damage caused to it by discrimination against residents? 

The 2011 opinion was unanimous, so maybe the court’s liberals intend to go along with a rollback of Fair Housing Act precedent. But I think the 2011 case needs to be understood in the framework of Scalia’s outsize influence in statutory interpretation cases -- and the fact that he often had five votes in such cases.

A liberal-majority Supreme Court would likely be much more unwilling to restrict civil-rights laws that were understood 40 years ago to be expansive and inclusive. The Fair Housing Act case might not make national headlines. But it’s worth watching closely, as a bellwether of where the court may go in the near future -- depending, of course, on what happens Tuesday.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Feldman at nfeldman7@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net