L.A.’s Discriminatory Lending Lawsuits Could Cost The Banks Billions

June 4th, 2014 by Trefis Team
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Accusations of discriminatory lending have become a prominent issue for the country’s largest banking groups of late, with the city of Los Angeles filing a lawsuit against JPMorgan Chase (NYSE:JPM) last week alleging that the bank handed out risky mortgages to minorities only to benefit from the ensuing foreclosure process. [1] The lawsuit follows similar ones by L.A. against Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) last December. [2] Considering the fact that a judge recently foiled Wells Fargo’s attempt to get the lawsuit dismissed, the alleged discriminatory lending practices could potentially cost the banks millions in settlements and fines in the near future. [3]

Each of these banks has doled out billions of dollars in settlements over the last couple of years to put a lid on several mortgage-related issues in the run-up to the economic downturn – including robo-signing and improper foreclosures. The allegations by Los Angeles of predatory lending practices for nearly a decade is likely to spawn similar lawsuits across the country in the coming months. A lawsuit by the city of Providence, Rhode Island, against Banco Santander last month alleged that the bank discriminated against minorities over the last few years by refusing them loans even when they were eligible. [4] Going by how things have played out in the past, federal regulators are likely to step in soon to see how much truth there is to these allegations of predatory and discriminatory lending by banks.

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Last December, the city of Los Angeles held Bank of America, Citigroup and Wells Fargo accountable for the wave of foreclosures it witnessed following the economic downturn of 2008. [2] Last week, it added JPMorgan to the list. In separate lawsuits, the city claimed that these banks had indulged in predatory lending since at least 2004, extending mortgages to minorities by “imposing different terms or conditions on a discriminatory and legally prohibited basis.” [1] The lawsuits claim that while minority communities were approached extensively by the banks with sub-prime mortgages prior to the downturn, the trend reversed soon afterwards, as they were either refused mortgages completely or were offered them at higher rates despite being eligible for normal rates.

While discriminatory lending by itself goes against the Fair Housing Act and the Equal Credit Opportunity Act, the city of Los Angeles is seeking damages from the banks for the lost property tax income from the foreclosed properties as well as the additional costs incurred by the local government for safety inspections, police and fire calls, trash removal and property maintenance – a total of around $1.7 billion. [1] While the legal liabilities for the banks in these lawsuits would likely be a fraction of this total if they settle or are found guilty, it seems to be a likely outcome given the fact that Los Angeles managed to secure a $10 million settlement with Deutsche Bank (NYSE:DB) over foreclosure-related costs last year. [5] Moreover, if other cities follow Los Angeles’ cue and come up with similar lawsuits of their own over subsequent months, the banks could be staring at much more costly settlements.

The impact of higher legal costs on JPMorgan can be understood by making changes to the chart below, which shows non-interest expenses for the bank’s mortgage division as a percentage of its revenues.

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Notes:
  1. L.A. sues JPMorgan Chase, alleges predatory home loans to minorities, Los Angeles Times, Jun 2 2014 [↩] [↩] [↩]
  2. LA sues Bank of America, alleges discriminatory mortgage lending, Reuters, Dec 7 2013 [↩] [↩]
  3. Judge denies Wells Fargo’s bid to dismiss L.A. predatory lending suit, Reuters, May 29 2014 [↩]
  4. Providence, R.I., Files Federal Lawsuit Against Banco Santander, The Wall Street Journal, May 29 2014 [↩]
  5. Wells Fargo Can’t Shake L.A. Lawsuit Over Predatory Loans, Bloomberg, May 29 2014 [↩]