Tag Archives: remand

Banks v. Cities

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The Supreme Court issued a decision in Bank of America Corp. v. Miami, 581 U.S. __ (2017). The decision was a mixed result for the parties.  On the one hand, the Court ruled that a municipality could sue financial institutions for violations of the Fair Housing Act arising from predatory lending. Miami alleged that the banks’ predatory lending led to a disproportionate increase in foreclosures and vacancies which decreased property tax revenues and increased the demand for municipal services. On the other hand, the Court held that Miami had not shown that the banks’ actions were directly related to injuries asserted by Miami. As a result, the Court remanded the case to the Eleventh Circuit to determine whether that in fact was the case. This case could have big consequences for how lenders and others and other big players in the housing industry develop their business plans.

For the purposes of this post, I want to focus on the banks’ activities of the banks that Miami alleged they engaged in during the early 2000s. It is important to remember the kinds of problems that communities faced before the financial crisis and before the Dodd-Frank Act authorized the creation of the Consumer Financial Protection Bureau. As President Trump and Chairman Hensarling (R-TX) of the House Financial Services Committee continue their assault on consumer protection regulation, we should understand the Wild West environment that preceded our current regulatory environment. Miami’s complaints charge that

the Banks discriminatorily imposed more onerous, and indeed “predatory,” conditions on loans made to minority borrowers than to similarly situated nonminority borrowers. Those “predatory” practices included, among others, excessively high interest rates, unjustified fees, teaser low-rate loans that overstated refinancing opportunities, large prepayment penalties, and—when default loomed—unjustified refusals to refinance or modify the loans. Due to the discriminatory nature of the Banks’ practices, default and foreclosure rates among minority borrowers were higher than among otherwise similar white borrowers and were concentrated in minority neighborhoods. Higher foreclosure rates lowered property values and diminished property-tax revenue. Higher foreclosure rates—especially when accompanied by vacancies—also increased demand for municipal services, such as police, fire, and building and code enforcement services, all needed “to remedy blight and unsafe and dangerous conditions” that the foreclosures and vacancies generate. The complaints describe statistical analyses that trace the City’s financial losses to the Banks’ discriminatory practices. (3-4, citations omitted)

Excessively high interest rates, unjustified fees, teaser interest rates and large prepayment penalties were all hallmarks of the subprime mortgage market in the early 2000s. The Supreme Court has ruled that such activities may arise to violations of the Fair Housing Act when they are targeted at minority communities.

Dodd-Frank has barred many such loan terms from a large swath of the mortgage market through its Qualified Mortgage and Ability-to-Repay rules. Trump and Hensarling want to bring those loan terms back to the mortgage market in the name of lifting regulatory burdens from financial institutions.

What’s worse, the  burden of regulation on the banks or the burden of predatory lending on the borrowers? I’d go with the latter.

S&P Must Face The Orchestra on Rating Failure

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After many state Attorneys General brought suit against S&P over the objectivity of their ratings, S&P sought to consolidate the cases in federal court. Judge Furman (SDNY) has issued an Opinion and Order in In Re:  Standard & Poor’s Rating Agency Litigation, 1:13-md-02446 (June 3, 2014) that remanded the cases back to state courts because “they arise solely under state law, not federal law.” (3) Explaining the issue in a bit greater depth, the Court stated,

there is no dispute that the States’ Complaints exclusively assert state-law causes of action — for fraud, deceptive business practices, violations of state consumer-protection statutes, and the like.The crux of those claims is that S&P made false representations, in its Code of  Conduct and otherwise, and that those representations harmed the citizens of the relevant State. (20, citation omitted)

The Court notes that in “the final analysis, the States assert in these cases that S&P failed to adhere to its own promises, not that S&P violated” federal law. (28) The Court concludes that it does not reach this result “lightly:”

Putting aside the natural “tempt[ation] to find federal jurisdiction every time a multi-billion dollar case with national  implications arrives at the doorstep of a federal court,” the federal courts undoubtedly have advantages over their state counterparts when it comes to managing a set of substantial cases filed in jurisdictions throughout the country. Through the MDL process, federal cases can be consolidated for pretrial purposes or more, promoting efficiency and minimizing the risks of inconsistent rulings and unnecessary duplication of efforts. (51, citation omitted)

S&P knew that it would have to face the music regarding the allegations that its ratings were flawed. But it hoped that it could face a soloist, one federal judge. That way, it could keep its litigation costs down, engage in one set of settlement talks and get an up or down result on its liability. The remand means that S&P will face many, many judges, a veritable judicial orchestra. In addition to all of the other problems this entails, it is also almost certain that S&P will face inconsistent verdicts if these cases were to go to trial. This is a significant tactical setback for S&P. From a policy perspective though, the remand means that we should get a better understanding of the issuer-pays model of rating agencies.