Part 2: The fallout of the Bank of America vs. City of Miami decision

Check out part one of this blog series here, which includes an overview of the case.

Potential future implications of the decision

With its decision on May 1, 2017,  the U.S. Supreme Court essentially strengthened the Fair Housing Act by broadening the definition of the “aggrieved party,” however the court declined to issue a ruling on causation and whether the predatory lending of the banks was sufficiently related to the cause of the financial injury claimed by the City of Miami. Several potential implications await the lending industry pending decisions on these issues that the Supreme Court sent back to the District Court for rehearing.

Primarily, the Supreme Court decision opens the door for cities across the country to sue lending companies for diminished property tax revenue and increased municipal expenses associated with foreclosures on properties within their minority communities due to predatory lending practices. As a result, mortgage lenders could be held liable as the direct cause for such financial burdens to government municipalities.

Since 2014, large mortgage lenders like Bank of America and Wells Fargo have seen decreased annual profit due to the increased legal costs associated with mortgage litigation. However, the Supreme Court’s recent admittance of suits brought against banks by large municipalities has increased that burden.

With increased litigation costs from suits brought by municipalities, it is also likely that banks will alter their budget to allow for an increase in litigation and settlement costs in the coming years. For instance, due to their increased vulnerability to lawsuits in March 2015, Wells Fargo increased its litigation budget from $1.1 billion in December 2014 to $1.2 billion in March 2015. Bank of America could take similar action in increasing its litigation budget to account for increased litigation

Large lending banks may be able to handle this increase in litigation fees, but smaller banks will likely struggle under the burden of this additional cost. It is possible that some smaller banks may even be forced to shut their doors or at least, discontinue their residential lending programs.

While legally banks cannot redline minority areas within the institution’s market, the pending cases may make mortgage lenders wary of lending to minority individuals living in certain cities or neighborhoods out of fear of litigation. Due to fear of future litigation by government municipalities, the outcome of this case could result in fewer mortgages dispersed by large lenders like Bank of America and Wells Fargo and overall decreased profit for these banking giants.

How could this decision affect consumers?

The outcome of this decision could directly affect prospective borrowers. If large lenders are less likely to disperse residential loans for fear of litigation, particularly in similar minority neighborhoods located in or near large cities across the United States, then this decision could have a severe implication on fair lending. Consumers who seek loans in specific neighborhoods may not have as many options if lenders scale back due to a fear of litigation.

Ultimately, therefore, if these consumers are unable to obtain a residential mortgage from a large lender, like Bank of America or Wells Fargo, they will likely resort to other means to obtain a loan. This may include seeking a mortgage from other sources, as lenders who only offer loans with interest rates that are higher than the market rates.

In addition to more limited options for consumers, there could be additional fallout from this decision. To offset the costs associated with increased litigation, customers could experience an increase in fees due to the fact that lenders will need to offset the cost of an increased litigation risk. This is not mere speculation; big banks have reacted this way in the past when confronted with a potential increase in litigation costs.

For example, there has been speculation that during the first quarter of FY2014 Citigroup increased its mortgage origination hurdles to compensate for the reduced quarterly profit due to litigation costs that apparently increased by 33% from the prior year, to about $945 million. If this practice by Citigroup is any indication as to how other banks try to compensate for increased litigation costs, Bank of America v. City of Miami threatens to increase banking fees for consumers and increase the hurdles set in place to qualify for a residential loan.

The Supreme Court’s recent decision in Bank of America v. City of Miami allows cities to sue lending institutions for lending practices that affect the city’s financial burdens, including unfair or discriminatory residential loan lending practices against minority populations within the city’s limits. If this decision is upheld in similar upcoming cases, including City of Philadelphia v. Wells Fargo, this will significantly hinder access to residential loans as large banks will be apprehensive to offer mortgages from fear of facing similar large, time-consuming, and expensive lawsuits from large cities.

Moreover, if the Supreme Court’s decision in this regard is upheld, bank fees will also likely increase to offset the potential increase in litigation costs that could result from suits between municipalities and large banks. Therefore, the results of upcoming decisions could have far-reaching effects on lending practices, mortgage terms, banking fees, financial liabilities, and party standing in court.