City of Memphis And v. Bank
| Decision Date | 04 May 2011 |
| Parties | CITY OF MEMPHIS and SHELBY COUNTY, Plaintiffs, v. WELLS FARGO BANK, N.A., WE LL S FARGO FINANCIAL TENNESSEE, INC., and WELLS FARGO FINANCIAL TENNESSEE 1, LLC, Defendants. |
| Court | U.S. District Court — Western District of Tennessee |
Before the Court is Defendants Wells Fargo Bank, N.A.; Wells Fargo Financial Tennessee, Inc.; and Wells Fargo Financial Tennessee 1, LLC's (collectively "Defendants" or "Wells Fargo") Motion to Dismiss the First Amended Complaint (D.E. # 38) filed on June 7, 2010. Plaintiffs City of Memphis and Shelby County have a filed a response in opposition. The Court heard oral arguments on Defendants' Motion on April 1, 2011. For the reasons set forth below, Defendants' Motion is DENIED.
Plaintiffs allege that Wells Fargo engaged in discriminatory lending practices in Memphis and Shelby County in violation of the Fair Housing Act ("FHA") and the Tennessee Consumer Protection Act ("TCPA"). Generally, the pleadings assert that Wells Fargo targeted African-American mortgage borrowers from 2000 to 2009 by steering those borrowers into loans they could not afford. The result was what Plaintiffs describe as a "disproportionately high number" of foreclosures in predominantly African-American neighborhoods in Memphis and Shelby County.
The Amended Complaint makes a series of statistical allegations about the overall foreclosure profile of Memphis and Shelby County, including the following:
• Wells Fargo made only 15% of its home loans in African-American neighborhoods, that is, neighborhoods with an African-American population of more than 80%. (Am. Compl. ¶ 4.) Eighteen percent (18%) of Wells Fargo loans in African-American neighborhoods for this period resulted in foreclosure. (Id. ¶¶ 5, 60.) However, 41% of Wells Fargo loans resulting in foreclosures occurred in African-American neighborhoods. (Id. ¶ 4.)
• In contrast, Wells Fargo made 59.5% of its loans in predominantly white neighborhoods, specifically, neighborhoods with an African-American population of less than 20%. (Id.) Only 3% of loans made in predominantly white neighborhoods resulted in foreclosure. (Id. ¶¶ 5, 60.) Overall, 23.6% of Wells Fargo loans resulting in foreclosures occurred in predominantly white neighborhoods. (Id. ¶ 4.)
• From 2005 to 2008, 54.2% of Wells Fargo foreclosures occurred in predominantly African-America census tracts in the City of Memphis and 46.8% in African-American census tracts in Shelby County. (Id. ¶ 57.)1
• For the same period, only 12.5% of Wells Fargo foreclosures occurred in predominantly white census tracts in the City and 20.1% in white census tracts in Shelby County. (Id.)2
• From 2004 to 2008, Wells Fargo made "high-cost loans" (loans with an interest rate that was at least 3% above a "federally-established benchmark") to 63% of its African-American borrowers in the City but only to 26% of its white borrowers in the City. (Id. ¶ 120.) In Shelby County, Wells Fargo made these high-cost loans to 51% of its African-American borrowers but to only 17% of its white borrowers. (Id.)
• Wells Fargo priced its basis points by increasing the rate 50 points for loans of $75,000 or less while decreasing the rate by 12.5 basis points for loans of $150,000 to $400,000 and decreasing by 25 points loans larger than $400,000. (Id. ¶ 124.) From 2004 to 2008, loans of less than $75,000 on properties in the City were three times more likely to be found in predominantly African-American census tracks. (Id. ¶ 126.)
• The average time to foreclosure for borrowers in African-American neighborhoods was 2.20 years in the City and 2.26 years in the County. For borrowers in white neighborhoods, the time was 2.79 years in the City, or 27% longer than in African-American neighborhoods. In the County the time is 2.76 years or 22% longer. (Id. ¶ 136.)3
In addition to statistics about foreclosures locally, the Amended Complaint details the national subprime lending crisis, the mortgage industry's departure from traditional primelending, the origins of the crisis from the mid-1990s, and its disproportionate impact on African-American neighborhoods. (Id. ¶¶ 29-48.) Plaintiffs contend that Wells Fargo engaged in a specific practice known as "reverse redlining." This is the practice of targeting residents in certain geographic areas for credit on unfair terms due to the racial or ethnic composition of the area in violation of the Fair Housing Act. (Id. ¶ 36.) Plaintiffs further allege that reverse redlining was a significant problem in Memphis and Shelby County. (Id. ¶¶ 49-54.) The Amended Complaint describes Wells Fargo as "a major contributor to the foreclosure crisis" in the Memphis area. (Id. ¶¶ 55-60.)
Based on these allegations and statistics, the Amended Complaint alleges that the high number of foreclosures in Memphis-Shelby County resulted from Wells Fargo (a) employing predatory practices and pricing in African-American neighborhoods and customers; (b) failing to underwrite African-American borrowers properly; and (c) putting these borrowers into loans they could not afford. (Id. ¶¶ 7, 66.) According to the Amended Complaint, Wells Fargo "generally fostered a discriminatory culture" among its lending agents. Wells Fargo gave its employees broad discretion about steering customers to products more profitable for Wells Fargo. For example, loan officers instructed borrowers not to submit documentation about income or put any money down, factors which would push their loans into the subprime category and result in higher interest rates and fees. At the same time, loan officers failed to offer prime mortgages where borrowers could qualify for those products. (Id. ¶¶ 8, 123.) Some Wells Fargo employees referred to loans of this type as "ghetto loans." Wells Fargo had software that was designed "to filter loans to make sure that applicants were offered the best loans for which they qualified, but the filters were regularly evaded and did not work." (¶ 98.)
Additionally, the Amended Complaint alleges that loan officers pushed other loan products which made home borrowers even more vulnerable to foreclosure. By failing to properly underwrite adjustable rate mortgages ("ARMs" or "2/28 and 3/27 loans") (Id. ¶ 131.) Wells Fargo also ¶sed higher interest rate caps in African-American neighborhoods (15.19%) than in white neighborhoods (13.9%). (Id. ¶¶ 133,134.) The Amended Complaint states that another Wells Fargo practice was to offer debt consolidation into one mortgage (credit cards, student loans, car loans, purchase money loans). (Id. ¶ 84.) Wells Fargo offered refinancing of existing mortgages "into new high-cost subprime loans." (Id. ¶ 85.) The Amended Complaint alleges that loans like these "could be identified by reviewing Wells Fargo's loan files for loans in Memphis and Shelby County." (Id. ¶ 110.)
Plaintiffs allege that Wells Fargo's violations of the Fair Housing Act have resulted in harm to the City of Memphis and Shelby County. Homes where the borrowers faced foreclosure tended to become vacant. (Id. ¶ 12.) When homes became vacant, local government incurred a series of expenses for police calls, fire calls, and boarding-up and cleaning properties. The Amended Complaint alleges that these costs "can also be distinguished from harm attributable to non-Wells Fargo foreclosures or other causes." (Id.) Another cost to Plaintiffs were the "significant declines" in property values and the reduction in property tax revenue collections that followed. (Id. ¶ 13.) Plaintiffs contend that these losses can be calculated precisely and distinguished from losses caused by other factors, using a method known as "hedonic regression." (Id. ¶¶ 200-203.)
The Amended Complaint then lists 50 different addresses where Plaintiffs had to provide additional government services following foreclosures. (Id. ¶¶ 139-212.) All of these addresses were foreclosures related to loans originated by Wells Fargo and nearly all of them became vacant at some point after the foreclosure. (Id. ¶ 146.) In many cases, local government had to make repairs to the properties to correct housing code violations. (Id. ¶ 143.) Plaintiffs allege that they have suffered injuries even where a foreclosure did not lead to a vacancy.
Wells Fargo's Motion to Dismiss (D.E. # 37) presents three arguments in favor of dismissal. First, Wells Fargo contends that Plaintiffs have failed to plead that they have suffered an injury-in-fact that is fairly traceable to any illegal act committed by Wells Fargo. As a result, Plaintiffs have not alleged sufficient facts to establish their standing to assert the claims at bar. Second, Plaintiffs' FHA disparate impact claims must be dismissed because they have failed to make plausible factual allegations to support the claims. Finally, Wells Fargo argues that based on the Supreme Court's reasoning in Smith v. City of Jackson, 544 U.S. 228 (2005), disparate impact claims are no longer cognizable under the FHA.
In their response brief, Plaintiffs have argued that the Amended Complaint plausibly alleges a traceable injury to Plaintiffs. Wells Fargo's predatory lending in African-American neighborhoods caused increases in "notices of foreclosure and completed foreclosures." In turn, these "foreclosures plausibly caused properties to become vacant." The 50 particular foreclosures and vacancies listed in the Amended Complaint injured Plaintiffs financially causing the City and County to devote additional municipal services at those addresses and driving down property values. Plaintiffs contend that these allegations both establish their standing and state a claim for violations of the FHA under a...
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