United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
of Cook, Illinois, alleges in this suit that Wells Fargo
& Co. and related entities (collectively, “Wells
Fargo”) issued predatory subprime mortgage loans to
Cook County residents that over the years went into default
and drove the mortgaged properties into foreclosure.
According to the County, because the scheme was and remains
concentrated in heavily minority neighborhoods, Wells Fargo
has violated Title VIII of the Civil Rights Act of 1968, 42
U.S.C. § 3601 et seq., more commonly known as
the Fair Housing Act (“FHA”). The court dismissed
the original complaint on the ground that the County, on the
facts alleged, did not fall within the FHA's zone of
interests and thus was not an “aggrieved person”
entitled to sue under the Act. Docs. 59-60 (reported at 115
F.Supp.3d 909 (N.D. Ill. 2015)).
County filed an amended complaint, Doc. 65, and Wells Fargo
again moved to dismiss, Doc. 70. While that motion was
pending, the Supreme Court granted certiorari to review
City of Miami v. Wells Fargo & Co., 801 F.3d
1258 (11th Cir. 2015), and City of Miami v. Bank of
America Corp., 800 F.3d 1262 (11th Cir. 2015), suits
very similar to this one. In light of the grant, this court
stayed this case pending the Supreme Court's decision.
Doc. 96. The Supreme Court ultimately held that the City of
Miami's “financial injuries” from the
defendant banks' alleged predatory lending
practices-practices and injuries closely resembling those
alleged here by Cook County-“fall within the zone of
interests that the FHA protects.” Bank of Am. Corp.
v. City of Miami, 137 S.Ct. 1296, 1304 (2017). The Court
nevertheless remanded the case for consideration of whether
the City had adequately alleged proximate cause, holding that
the “Eleventh Circuit erred in holding that
foreseeability is sufficient to establish proximate cause
under the FHA.” Id. at 1306.
light of City of Miami-in particular, its discussion
of proximate cause-this court offered and the County took the
opportunity to file a second amended complaint. Docs.
103-104, 106. Wells Fargo now moves under Civil Rule 12(b)(6)
to dismiss that complaint. Doc. 108. The motion is granted in
part and denied in part.
resolving a Rule 12(b)(6) motion, the court assumes the truth
of the operative complaint's well-pleaded factual
allegations, though not its legal conclusions. See Zahn
v. N. Am. Power & Gas, LLC, 815 F.3d 1082, 1087 (7th
Cir. 2016). The court must also consider “documents
attached to the complaint, documents that are critical to the
complaint and referred to in it, and information that is
subject to proper judicial notice, ” along with
additional facts set forth in Cook County's brief
opposing dismissal, so long as those additional facts
“are consistent with the pleadings.” Phillips
v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1019-20
(7th Cir. 2013). The facts are set forth as favorably to the
County as those materials allow. See Pierce v. Zoetis,
Inc., 818 F.3d 274, 277 (7th Cir. 2016). In setting
forth those facts at the pleading stage, the court does not
vouch for their accuracy. See Jay E. Hayden Found. v.
First Neighbor Bank, N.A., 610 F.3d 382, 384 (7th Cir.
Fargo is a large residential mortgage originator and
servicer. Doc. 106 at ¶ 26. Beginning in the late 1990s,
in an effort to increase profits, Wells Fargo (and Wachovia,
which Wells Fargo acquired in 2008, id. at ¶
30) developed a practice known as “equity
stripping.” Id. at ¶¶ 3-7, 77, 92,
105-106, 275. Wells Fargo pooled and securitized the loans it
originated while retaining fee-generating mortgage servicing
rights, and it maximized its fees by imposing onerous loan
terms without regard to borrowers' ability to repay the
loans. Id. at ¶¶ 79-80, 89, 97, 103, 105,
109, 111, 274. From 2010 to 2013, for instance, Wells Fargo
earned over $2.6 billion in late charges and ancillary fees.
Id. at ¶ 121. Wells Fargo's
equity-stripping practice continues through the present day
in the form of nonprime lending, mortgage servicing, and loan
default and foreclosure-related activities. Id. at
¶¶ 93, 120, 272, 276, 292, 385.
stripping begins with the origination of “high cost,
” “subprime, ” or other
“nonprime” mortgages, which permits Wells Fargo
to charge substantially higher origination fees and then
substantially higher service fees over the life of the loan.
Id. at ¶¶ 86, 92, 102, 104. Those
mortgages often allow the borrower to pay only the monthly
interest accruing on the loan or to make only minimum
payments. Id. at ¶ 126. Equity stripping
continues through loan servicing, as Wells Fargo receives
income from both prepayment fees and late payment fees.
Id. at ¶¶ 7, 91-92, 102. Equity stripping
culminates in default and foreclosure, as borrowers pay
additional fees and ultimately see their equity eliminated.
Id. at ¶¶ 7, 9, 91-92, 102.
Fargo's equity-stripping practice targeted minority
borrowers in Cook County. Id. at ¶¶ 4, 6,
54, 80-81, 166, 187-188, 229, 293-300, 311. Publicly
available loan origination data indicates that the percentage
of high-cost and other nonprime loans issued by Wells Fargo
in Cook County to minority borrowers well exceeded the
County's percentage of minority home owners-typically by
a factor of two to three. Id. at ¶¶
297-309. Because minority borrowers “provided the
quickest and easiest path … for [Wells Fargo] to
originate as many loans as possible as rapidly as possible to
borrowers most likely to accept … less favorable
terms, ” id. at ¶ 164, Wells Fargo
subjected minority borrowers to equity stripping to a greater
extent than it did nonminority borrowers with similar credit
histories, id. at ¶¶ 80, 154. Minority
borrowers were particularly susceptible to Wells Fargo's
predatory practices because they were more likely than
nonminority borrowers to lack access to low-cost credit,
relationships with banks and other traditional depository
institutions, and adequate comparative financial information.
Id. at ¶ 162.
of its equity-stripping practice, Wells Fargo granted
employees discretion to steer prime-eligible minority
borrowers into nonprime loans. Id. at ¶¶
5, 81, 150, 183-186, 197-199, 212, 227, 229, 231, 243-244,
435. Wells Fargo employees encouraged minority borrowers
otherwise eligible for prime loans to limit the documentation
they provided concerning their income and assets, to take out
larger loans than they needed, and to avoid making down
payments. Id. at ¶¶ 246-248. This resulted
in minority borrowers paying “materially higher costs,
discretionary fees, [and] materially higher monthly mortgage
payments … than similarly situated non-minority
borrowers.” Id. at ¶ 266. Wells Fargo
employees also failed to advise prime-eligible minority
borrowers of their prime-eligible status. Id. at
Fargo compensated employees with bonuses and commissions for
offering minority borrowers higher than published loan rates
and for approving them for loans for which they were not
qualified based on their employment, income, or credit
history. Id. at ¶¶ 5, 150, 183, 197-199,
205, 227, 229, 243-244. Wells Fargo reserved the right to
discipline employees who failed to issue a certain quantity
of nonprime loans. Id. at ¶ 184. In addition,
Wells Fargo incorporated unfavorable terms, excessive fees,
and prepayment penalties into mortgage loans to minority
borrowers; based loans to minority borrowers on inflated or
fraudulent appraisals; encouraged minority borrowers to
inflate their stated income; fraudulently entered income data
into the company's underwriting software; repeatedly
refinanced loans to minority borrowers; and included loan
terms and conditions that made it difficult for minority
borrowers to reduce their debt. Id. at ¶¶
152, 255-256, 259-260.
further its equity-stripping practice, Wells Fargo maintained
a “Diverse Segments” unit, whose responsibility
was to increase the number of loans made to minority
borrowers. Id. at ¶¶ 167-182. The unit had
access to a wealth of relevant demographic data and typically
worked closely with realtors and community organizations to
target potential customers. Id. at ¶¶
162-182, 187. The data enabled Wells Fargo to customize its
marketing materials to African-Americans. Id. at
¶ 188. Wells Fargo paid bonuses to employees in the
Diverse Segments unit based on the number of loans they made
to minority borrowers. Id. at ¶ 183.
in administering Wells Fargo's equity-stripping practice
continued into the loan-servicing process, including its
evaluation and processing of loan modification requests and
its handling of defaulted loans through default work-outs and
foreclosure proceedings. Id. at ¶¶
272-273, 295. Wells Fargo retained the discretion to modify
loans in default and to foreclose on properties with
defaulted mortgages and, pursuant to that discretion,
“routinely charged marked-up fees to minority
borrowers, including in connection with repayment plans,
reinstatements, payoffs, bankruptcy plans, and
foreclosures.” Id. at ¶ 273. Wells Fargo
also discriminated against minority borrowers by failing to
process requests for loan modifications; failing to notify
borrowers of the documentation required to process such
requests and of the reasons for denying them; wrongfully
denying modification applications; failing to process
borrower delinquencies or defaults, including failing to
apply payments or maintain accurate account information;
providing false information to borrowers during the loan
modification process; and charging improper fees for
default-related loan servicing and foreclosure. Id.
at ¶¶ 276, 279-280. Upon foreclosure, Wells Fargo
charged additional fees for post-foreclosure services,
including inspection and maintenance of the property, whether
or not it actually rendered those services. Id. at
¶ 393. Wells Fargo continues to the present day to
discriminate against minorities in determining whether to
make mortgage modifications and in the foreclosure process.
Id. at ¶¶ 390-391, 439, 444-449, 462.
minority borrowers paid more for loans, were
disproportionately subjected to prepayment penalties and
other fees, and experienced default, vacancy, and foreclosure
at higher rates than comparable nonminority borrowers.
Id. at ¶¶ 80, 88, 234, 266-267. In 2007,
for instance, Wells Fargo charged African-American borrowers
approximately $2, 000 and Hispanic borrowers approximately
$1, 200 more in fees than similarly situated white borrowers.
Id. at ¶ 230. Moreover, Wells Fargo “knew
… that the mortgage loan products they originated or
funded, securitized and serviced, contained predatory terms,
were underwritten in a predatory manner, and were targeted to
and/or disproportionately impacted FHA protected minority
borrowers.” Id. at ¶¶ 140, 151;
see also id. at ¶ 231.
Fargo's equity-stripping practice has disproportionately
and disparately impacted communities in Cook County with
relatively higher concentrations of minority homeowners.
Id. at ¶¶ 10, 285, 289, 319-320, 339-345,
381, 383, 385, 434, 437. Communities with higher rates of
minority homeownership have been and remain more likely than
areas with lower rates of minority homeownership to
experience foreclosure, and the foreclosure rate in different
neighborhoods increases as the percentage of minority
homeowners increases. Id. at ¶¶ 10,
340-344. From November 2012 to November 2014, almost 70
percent of Wells Fargo's foreclosures in Cook County were
in areas with more than 50 percent minority homeownership.
Id. at ¶¶ 342-343. From June 2015 to April
2017, that figure fell modestly to approximately 60 percent.
Id. at ¶ 344.
Fargo's equity-stripping practice has resulted in certain
discrete harms to Cook County. Id. at ¶¶
11, 269, 395. Among those harms are the direct costs to the
Cook County Sheriff's Office of posting eviction and
foreclosure notices; registering, inspecting, and securing
foreclosed or abandoned properties; serving foreclosure
summonses; and executing evictions. Id. at
¶¶ 11, 23, 395, 404, 420. The County's harms
also include the costs of administering an increased number
of foreclosure suits in the Circuit Court of Cook County.
Id. at ¶¶ 23, 395, 404. There were
approximately 131, 000 more foreclosure filings in Cook
County from 2006-2013 than over the prior eight-year period,
a 68 percent increase. Id. at ¶ 23. Additional
harms to the County include increased demand for other
services, including housing counseling; reduced property tax
revenue and property transfer and recording fees; and a broad
destabilization of minority communities that has deprived it
of its racial balance and stability through the
“segregative effects of the increased foreclosures and
vacant properties” created by equity stripping.
Id. at ¶¶ 11, 23, 376, 381, 386-388, 395,
406-409, 413, 420. Homeowners in majority-minority
communities are more likely than homeowners elsewhere in Cook
County to have negative equity. Id. at ¶¶
harms were foreseeable, insofar as Wells Fargo steered
borrowers toward loans that did not require verification of
basic underwriting data, including employment or income, and
thus that were “destined to fail.” Id.
at ¶¶ 52, 435. In particular, Wells Fargo knew that
borrowers targeted under the equity-stripping practice would
have difficulty repaying their loans and were, as a result,
at greater risk of foreclosure. Id. at ¶ 56.
operative complaint brings both disparate impact and
disparate treatment claims under the FHA. Id. at
¶¶ 433-465. Wells Fargo urges dismissal on several
grounds: (1) Cook County's injuries are too remote to
satisfy City of Miami's proximate cause
standard; (2) the County has failed to plausibly state an FHA
disparate impact claim; (3) the suit is barred by the
FHA's statute of limitations; and (4) the suit is barred
by claim preclusion.
proceed with an FHA claim, a plaintiff must fall within the
Act's zone of interests and also must allege proximate
cause. See City of Miami, 137 S.Ct. at 1302-06. As
noted, the Supreme Court in City of Miami held in
materially identical circumstances that a municipality
alleging that a bank violated the FHA by engaging in equity
stripping falls within the Act's zone of interests.
Id. at 1302-05. But City of Miami makes
clear that the zone-of-interest and proximate cause analyses
under the FHA are distinct. Id. at 1305-06. Thus,
the Court held that although Miami's “allege[d]
economic injuries … fall within the FHA's zone of
interests, ” the banks' “allegedly
discriminatory lending practices” did not necessarily
“proximately cause” its injuries. Ibid.
analysis is controlled by the nature of the statutory cause
of action. The question it presents is whether the harm
alleged has a sufficiently close connection to the conduct
the statute prohibits.'” Id. at 1305
(quoting Lexmark Int'l, Inc. v. Static Control
Components, Inc., 134 S.Ct. 1377, 1390 (2014)).
“In the context of the FHA, foreseeability alone does
not ensure the close connection that proximate cause
requires.” Id. at 1306. “Rather,
proximate cause under the FHA requires ‘some
direct relation between the injury asserted and the
injurious conduct alleged.'” Ibid.
(emphasis added) (quoting Holmes v. Sec. Investor Prot.
Corp., 503 U.S. 258, 268 (1992)). In applying the direct
relationship requirement to statutes like the FHA that have
“common-law foundations, … [t]he general
tendency … is not to go beyond the first step.”
Ibid. (citations and internal quotation marks
omitted). “What falls within that first step depends in
part on the nature of the statutory cause of action and an
assessment of what is administratively possible and
convenient.” Ibid. (citations and ...