“Litigation Developments: Cities Use Novel Tactics in Actions Against Subprime Lenders”

In an effort to respond to their residents’ mortgage defaults, and the foreclosures that follow, some cities have turned to novel legal theories against banks and other participants in the subprime lending market.  One example is the lawsuit filed in state court on January 10, 2008 by the City of Cleveland against 21 large investment banks and mortgage lenders, claiming they exacerbated the subprime lending and foreclosure crisis in the city.  Cleveland alleges the companies created a public nuisance in its neighborhoods in violation of state law.  After the action was removed to federal court, Cleveland filed a motion to remand the case.  A hearing on the city’s motion to remand is scheduled for February 29, 2008.  In response to Cleveland’s lawsuit, two subsidiaries of Wells Fargo & Company, one of the named defendants, brought their own case in federal court, claiming that their ability to make mortgage loans is threatened by the city’s move, and seeking to block Cleveland’s case from proceeding.

The City of Baltimore is attempting a similar challenge to lenders’ practices, alleging that subprime lending harms minority communities.  According to Baltimore’s complaint, Wells Fargo Bank, N.A. and Wells Fargo Financial Leasing, Inc. intentionally sold high-cost, looser-standards subprime loans more to African-Americans than to Caucasians – a violation of federal law – by engaging in “reverse redlining,” defined in the complaint as “the targeting of an area for the marketing of deceptive, predatory or otherwise unfair lending practices because of the race or ethnicity of the area’s residents.”

Although Baltimore and Cleveland are the first cities to file such claims, others may soon follow with similar lawsuits.  It has been reported that the cities of Minneapolis and St. Paul, Minnesota, are closely following events in the Cleveland case to see if they wish to pursue similar liability theories.  This Stroock Subprime Task Force Special Bulletin examines the issues raised in the Cleveland and Baltimore actions, looks at other developing trends in litigation involving subprime lending, and discusses the practical impact of such litigation for participants in subprime lending markets.

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