Broken Homes
Baltimore has sued Wells Fargo for what it claims were predatory lending practices. Other cities hit hard by foreclosures are watching carefully.
The American Lawyer
By Francesca Heintz
November 01, 2009
Vacant, boarded-up houses line Winchester Street in Baltimore's Rosemont neighborhood. On a recent day in August, a black bandanna was tied to the front porch of one house, a sign that a gang had claimed the property after its owners left. A neighbor told a reporter that he had called the police to take down the bandanna--although he expected that it would go up again after they took it down.
The foreclosure crisis has left Baltimore with thousands of vacant homes. Estimates range from 16,000 to 30,000, most in minority neighborhoods. The city's attempts to maintain the properties as they fall into disrepair has not stopped squatters from moving in. And the diminishing tax base as property values plummet has strained an already cash-strapped city government.
To recover some of these losses,the city of Baltimore made an unusual move in January 2008. It sued Wells Fargo & Company.
The lawsuit, filed in federal district court in Baltimore, alleges that Wells Fargo, one of the largest mortgage lenders in the city, violated the Fair Housing Act by targeting minorities for predatory loans. The discriminatory practice, known as reverse redlining, allegedly steered minority borrowers into loans they couldn't afford, which the city says led to an increase in foreclosures. The city claims that a Wells Fargo loan in a predominantly African American neighborhood is three times more likely to result in foreclosure than a loan in a predominantly white neighborhood. "Even with automatic underwriting programs, lenders are not going to get it absolutely right," says George Nilson, a former DLA Piper partner who became Baltimore's city solicitor in 2007. "But they should get it just as right in African American communities as in Caucasian ones." Baltimore estimates damages, including property tax losses and increased police and fire calls, to be in the tens of millions of dollars.
Wells Fargo denies the allegations, and calls the city's damage assessment "conclusory and illogical." The lender is represented by Andrew Sandler of Washington, D.C.'s BuckleySandler, who declined to comment for this story.
Baltimore's counsel, John Relman of Washington, D.C.'s Relman & Dane, was pulled into the case by Nilson in early 2007. Relman knows the field well: While at the Washington Lawyers' Committee for Civil Rights and Urban Affairs in the late 1990s, he started a case against Capital City Mortgage Corporation that became a landmark. It was the first time that reverse redlining was found to violate the Fair Housing Act. Since then, a handful of reverse redlining cases are brought every year, according to Relman. But Baltimore's case is different. The city is the plaintiff, not the borrowers.
"This is not an approach designed to supplant direct action by borrowers, but simply another means of attacking an enormous problem," says Relman.
The reverse redlining argument has angered some defense lawyers, who say that Baltimore's attempts to paint Wells Fargo as discriminatory is little more than a public relations stunt. "It's hard to find cases that are more frivolous. After years and years of forcing banks to invest in inner cities and ignore underwriting standards to do so under the Community Reinvestment Act, to then turn around and say they are now guilty of the crime of targeting the very same people is preposterous," says Dykema Gossett partner Richard Gottlieb, who has defended banks in similar municipal litigation. "It's a classic damned if you do, damned if you don't."
Nilson and Relman say they've come to expect this argument from defense counsel. They counter that steering minorities into bad loans is still illegal. "Lenders were encouraged to go into minority communities by the federal government," says Nilson. "But nobody encouraged the lenders to screw and cheat them."
Borrowers and cities are not the only ones trying to force financial institutions to pay for their role in the subprime crisis. Banks, lenders, underwriters, and ratings agencies are facing actions by investors over alleged false statements, breach of duty, and failure to disclose the risks associated with subprime lending. The Securities and Exchange Commission and federal and state regulatory agencies have launched probes into subprime lending practices. A study released in March by Navigant Consulting, Inc., found that 576 subprime mortgage--related civil cases were filed in 2008 alone. "The litigation is going in every conceivable direction," says Relman. Most of these cases are still in the early stages, with the parties battling over motions to dismiss.
For cities grappling with the effects of the subprime crisis, Baltimore has become a leader. The city of Cleveland filed suit against 22 banks a few days after Baltimore, and the city of Birmingham filed its own suit against a handful of lenders in early 2008. While Birmingham's complaint also alleged reverse redlining, Cleveland claimed that the increase in foreclosures in the city had created a public nuisance. "There are different legal theories, but they are all tied to the basic allegation that these are loans that shouldn't have been made to inner city residents who are predominantly minorities," says Gottlieb, who represented IndyMac Bancorp, Inc., in the Cleveland case.
So far, these cases have had limited success. Cleveland's suit was dismissed in May, though the city has already filed an appeal with the U.S. Court of Appeals for the Sixth Circuit, and Birmingham's case was dismissed in August for lack of standing. (Birmingham has decided not to appeal.)
Even so, other municipalities continue to eye litigation as a potential option. Memphis and Shelby County, Tennessee, have passed resolutions to move forward with litigation, according to news reports and lawyers watching the case's progress. And Atlanta's acting city attorney, Roger Bhandari, says the city of Atlanta is also considering a lawsuit against predatory lenders.
Baltimore's case against Wells Fargo, meanwhile, has plowed ahead. Wells Fargo filed a motion to dismiss in March 2008. In June federal district court judge Benson Legg held a hearing in which Sandler--who has faced off against Relman a dozen times in housing discrimination cases--put forth a barrage of legal theories as to why the case lacked merit: first, that the city lacked standing to bring the case; second, that Baltimore could not prove that it suffered a distinct injury from Wells Fargo foreclosures; and finally, that Baltimore had failed to identify a single African American borrower who had been targeted with a subprime loan that eventually caused a foreclosure. Sandler called the case "a theory in search of a lawsuit."
Lawyers with experience in fair housing litigation believe that what convinced Judge Legg to allow the case to proceed--and what has given Baltimore a leg up on other cities--were two affidavits filed by former Wells Fargo loan officers. The affidavits say that Wells Fargo set up its commission system to make it more profitable for loan officers to refer customers for subprime loans even if they could have qualified for prime loans. The affadavits also contained details about how minorities were allegedly targeted. One tactic was to give presentations at black churches; another was to produce marketing materials aimed at African Americans and to use minority loan officers to sell subprime products. One of the loan officers said they used to joke that, by targeting minorities with predatory loans, they "were riding the stagecoach to hell." The other said in his affidavit that supervisors used racial slurs, referring to their African American customers as "mud people" and the loans they gave them as "ghetto loans." (Wells Fargo has said in statements to news outlets that these former loan officers are disgruntled employees pursuing their own litigation against the company.) On July 2 Judge Legg denied the lender's motion to dismiss.
Baltimore got its latest break in August. In a hearing to set discovery rules, U.S. district court judge J. Frederick Motz (who replaced Judge Legg in August for undisclosed reasons) agreed to allow the city access to electronic data for all Wells Fargo loans in Baltimore going back to 2000. The city can also begin to take depositions of Wells Fargo officials. "The loan files are going to be the big teller," says Nilson. "As long as we can establish that an FHA violation was a contributing cause to the foreclosure, then I'm confident we can recover damages."
Even if Baltimore does recover damages, a recent tour around the city's blighted neighborhoods suggests that it has some big hurdles ahead. "It looks like a bomb has gone off," says Relman. "We're going to be digging out from this mess long after the stock market has returned." And, for now, house after house on Winchester Street continues to stand empty.
Click here for the full Litigation 2009 report.
Photo by Jonathan Hanson / Baltimore solicitor George Nilson, standing; Baltimore counsel John Relman, sitting
