ATLANTA -- Three counties in Georgia have filed a lawsuit
claiming that British bank HSBC cost them hundreds of millions of
dollars in expenses and damage to their tax bases by aggressively
signing minorities to housing loans that were likely to fail.
The
Georgia counties' failure or success with the relatively novel strategy
could help determine whether other local governments try to hold big
banks accountable for losses in tax revenue based on what they claim are
discriminatory or predatory lending practices.
Similar lawsuits resulted in settlements this year worth millions of dollars for communities in Maryland and Tennessee.
Fulton,
DeKalb and Cobb counties say in their lawsuit, filed in October, that
the housing foreclosure crisis was the "foreseeable and inevitable
result" of big banks, such as HSBC and its U.S. subsidiaries,
aggressively pushing loans that were destined to fail. The counties say
the crisis has caused them tremendous damage.
The lawsuit says
predatory lending practices include: targeting vulnerable borrowers for
mortgage loans with unfavorable terms; directing credit-worthy borrowers
to more costly loans; putting unreasonable terms, excessive fees or
pre-payment penalties into mortgage loans; basing loan values on
inflated or fraudulent appraisals; and refinancing a loan without
benefit to the borrower.
The counties are asking the court to
order the bank to stop its behavior and to take steps to prevent similar
predatory lending in the future. They are also seeking financial
compensation for the damages they've suffered and punitive damages to
punish the bank for its "willful, wanton and reckless conduct." The
counties say the financial injury they've suffered is in the hundreds of
millions of dollars.
Andrew Sandler, a lawyer for HSBC and its
subsidiaries, said he couldn't comment on the case. A federal judge has
given the bank until Jan. 25 to respond to the counties' complaint.
"It's
not only the personal damage that was done to people in our
communities," said DeKalb County Commissioner Jeff Rader. "That has a
ripple effect on our tax digest and the demand for public services in
these areas."
The city of Atlanta straddles Fulton and DeKalb counties; Cobb County is northwest of the city.
The
lawsuit says the banks violated the Fair Housing Act, which provides
protections against housing or renting policies or practices, including
lending, that discriminate on the basis race, color, national origin,
religion, sex, family status or handicap.
The counties say their
tax digests - which represent the value of all property subject to tax -
have declined from a high point in 2009.
Fulton's tax digest has
dropped about 12%, from $32.7 billion to $28.7 billion; DeKalb's has
dropped about 20%, from $22 billion to $17.5 billion; and Cobb's has
dropped about 15%, from $25.5 billion to $21.3 billion, the lawsuit
says. That reduces their ability to provide critical services in their
communities, the counties say.
In addition to decreased tax
income, vacant or abandoned homes that are in or near foreclosure create
additional costs for the counties, the lawsuit says.
Their
housing code and legal departments have to investigate and respond to
code violations, including having to board up, tear down or make
structural repairs to unsafe homes. They have to deal with public health
concerns, such as pest infestations, ruptured water pipes, accumulated
garbage and unkempt yards. And fire and police departments have to
respond to health and safety threats.
Lawyers for the counties
declined interviews on the case, but one of them, Jeffrey Harris, said
in an e-mailed statement that they are continuing to investigate other
banks and could file additional complaints.
Similar suits were
filed against Wells Fargo by the city of Memphis and surrounding Shelby
County in Tennessee in 2009 and by the city of Baltimore in 2008. Those
suits were settled earlier this year.
Both settlements included $3
million to the local governments for economic development or housing
programs and $4.5 million in down payment assistance to homeowners, as
well as a lending goal of $425 million for residents over the subsequent
five years, according to media accounts.
As in those cases, the
lawsuit filed by the Georgia counties says the bank, in this case HSBC,
targeted communities with high percentages of Fair Housing Act-protected
minority residents, particularly blacks and Hispanics.
"Communities
with high concentrations of such potential borrowers, and the potential
borrowers themselves, were targeted because of the traditional lack of
access to competitive credit choices in these communities and the
resulting willingness of FHA protected minority borrowers to accept
credit on uncompetitive rates," the lawsuit says.
The lawsuit says minority borrowers were disproportionately targeted with high-cost loans between 2004 and 2007.
Before
the beginning of the subprime lending boom in 2003, annual foreclosure
rates in metro Atlanta less than 1%, but U.S. Department of Housing and
Urban Development data show the estimated foreclosure rates for each of
the three counties now average more than 9% and are as high as 18% in
communities with the highest percentages of minority borrowers, the
lawsuit says.
It is the alleged targeting of minority communities
that entitles the counties to seek action against HSBC for loss of tax
income and other expenses, the lawsuit says.
"If you can show that
you yourself have suffered harm by an illegal act under the Fair
Housing Act, even if you are not the target, even if you are not the
intended victim, you can still sue to stop the behavior and to recover
any damages that you can prove you suffered because of the violation of
the Fair Housing Act," said Steve Dane, a lawyer whose firm was involved
in the Memphis and Baltimore lawsuits.
The costs incurred by
counties because of high rates of foreclosure are reflected in court
records and related fees for each home, and police and fire departments
can calculate the costs of responding to a given address, Dane said. He
said it takes a lot of time and effort to gather the necessary records
to prove the harm.
Another discouraging factor could be a lack of
political will, said Lisa Rice, vice president of the National Fair
Housing Alliance.
"Politicians may not want to go up against the
banks," she said, adding that there will likely be other local
governments that give this a try but she doubts the number will be high.
But
Jaime Dodge, an assistant law professor at the University of Georgia,
says she thinks more cases are likely, at least in the short term as
municipal governments continue to feel the squeeze of a tight economy
and seek ways to refill their coffers.
They may try to test
federal courts in different parts of the country, she said. Successes in
multiple jurisdictions could lead to more attempts, but if courts start
knocking the suits down that would likely discourage them, she said.
Associated Press