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County of Cook v. Wells Fargo & Co.

United States District Court, N.D. Illinois, Eastern Division

March 26, 2018



          Gary Feinerman, Judge

          County 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)).

         Cook 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.

         In 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.


         In 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. 2010).

         Wells 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.

         Equity 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.

         Wells 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.

         As part 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 ¶ 246.

         Wells 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.

         To 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.

         Discrimination 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.

         In sum, 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.

         Wells 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.

         Wells 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 ¶¶ 381-82.

         Those 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.


         The 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.

         I. Proximate Cause

         To 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.

         “‘Proximate-cause 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 ...

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