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From Banking and Finance Law Daily, June 11, 2014

Los Angeles can sue mortgage lenders over effects of alleged discrimination

By Richard A. Roth, J.D.

The City of Los Angeles has standing under Article III of the U.S. Constitution to sue mortgage lenders that allegedly engaged in discriminatory lending that resulted in blighted neighborhoods and lower property tax revenues, a federal district court has decided. Noting that this is one of at least four comparable suits the city has filed, the judge decided that the complaint against Citigroup Inc. and its subsidiaries described an injury in fact that was caused by the statutory violations (City of Los Angeles v. Citigroup Inc., June 9, 2014, Wright, U.S. District Judge).

Los Angeles claimed that Citigroup’s mortgage lending practices violated the Fair Housing Act in two ways. First, the companies engaged in redlining—denying credit to particular neighborhoods based on race. Second, they engaged in reverse redlining—making large numbers of exploitative loans in minority neighborhoods.

A statistical analysis included in the city’s complaint alleged that between 2004 and 2011 an African-American borrower was more than twice as likely as a comparable white borrower to be given a predatory loan. The city claimed it already had identified 1,200 discriminatory loans that have gone into foreclosure, which reduced the city’s tax base and damaged the affected neighborhoods.

Standing requirements. The existence of standing to sue is a necessary part of federal court jurisdiction. If a plaintiff does not have standing to sue, the constitutional requirement of a case or controversy is not satisfied, the judge said. For Los Angeles to have standing to Citigroup, the city had to describe three factors: that it suffered an injury in fact, that the injury had been caused by Citigroup’s actions, and that the court had the ability to impose a remedy for that injury. Citigroup disputed the presence of the first two factors.

Injury in fact. An injury in fact must be an injury that is both “concrete and particularized” and “actual or imminent,” the judge said. Citigroup argued that Los Angeles’s injury was neither specifically described nor concrete.

However, Supreme Court precedent makes clear that a decline in property values does injure a municipality by reducing the city’s tax base and thus its ability to pay for necessary municipal services, the judge pointed out.

This was not the right point in the litigation for Citigroup to dispute Los Angeles’s facts, the judge added. Arguments over whether property tax revenue actually had declined or over the effects of the recession on the city’s budget should be raised at a later time when the facts of the case, rather than the sufficiency of the city’s complaint, would be considered.

Causation. Citigroup also argued that Los Angeles had not described a chain of causation between the challenged lending practices and the city’s injury. The city had ignored that many discretionary decisions by third parties were involved and that these decisions broke the chain of causation, Citigroup claimed.

The judge disagreed. What Citigroup considered to be independent decisions by third parties instead could have been results of the challenged lending practices, he said. Los Angeles’s complaint described a regression analysis, based on public data, showing that African-American borrowers were more likely than white borrowers to be given predatory loans and that these discriminatory loans were more likely to go into default and be foreclosed on. The complaint also described how foreclosures would harm property values so that the tax base was reduced, and also how the demand on city services was increased.

Those claims were adequate to describe standing and survive a motion to dismiss, the judge said. The city was not, at this point in the case, required to prove the chain of causation by dispelling every alternative explanation for how its injury could have been caused.

Statute of limitations. The FHA includes a two-year statute of limitations, and Los Angeles filed its suit in 2013 while claiming that the challenged lending began in 2002, if not earlier. According to Citigroup, only loans made in the two years preceding the complaint could be considered, which excluded many of the specific loans described by the city.

Los Angeles, however, was claiming to have been injured by “an unbroken eight year pattern and practice” of discriminatory lending. As a result, the judge said the relevant time limit was not two years from the date of each specific loan; rather, it was two years from when the last loan that was part of the pattern was extended. Under this “continuing violation doctrine,” the suit was timely.

The case is No. 2:13-cv-9009-ODW (RZx).

Attorneys: Clifton W. Albright (Albright Yee and Schmit LLP), Elaine T. Byszewski (Hagens Berman Sobol Shapiro LLP), and Howard S. Liberson (Trial and Appellate Resources PC) for City of Los Angeles. Bronwyn F. Pollock (Mayer Brown LLP) for CitiGroup Inc., Citibank NA, CitiMortgage Inc., Citicorp Trust Bank FSB, and Citi Holdings Inc.

Companies: Citibank, N.A.; Citicorp Trust Bank, FSB; Citigroup Inc.; Citi Holdings, Inc.; CitiMortgage, Inc.

MainStory: TopStory CaliforniaNews CommunityDevelopment ConsumerCredit EnforcementActions EqualCreditOpportunity Loans Mortgages

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