United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Z. LEE UNITED STATES DISTRICT JUDGE.
County of Cook (“the County”) has filed claims
under the Fair Housing Act (“FHA”), 42 U.S.C.
§§ 3601-19, against Defendant HSBC North America
Holdings, Inc., and its various subsidiaries and affiliates
(together, “HSBC”). The County claims that HSBC
discriminatorily targeted minority homeowners in Cook County
with high-priced predatory subprime mortgage loans and has
serviced and foreclosed on those loans in a discriminatory
manner. According to the County, these business practices
harmed the County by imposing on it out-of-pocket costs for
governmental eviction and foreclosure processes, as well as
for various social services for evicted homeowners. The
County also alleges it lost out on property tax income from
foreclosed, abandoned, and vacant properties, as well as
neighboring properties, and income from property recording
taxes, intangible taxes, and transfer fees. The County also
asserts that HSBC's practices injured the fabric of its
communities and caused general urban blight.
moves to dismiss the County's Second Amended Complaint
(“Complaint”). For the following reasons,
HSBC's motion to dismiss is granted in part and denied in
in 2003, HSBC engaged in a rampant predatory-lending business
program in the subprime mortgage market, which targeted
African-American and Latino borrowers in Cook County,
Illinois. See generally 2d Am. Compl.; id.
¶¶ 1- 13, 50-58. This program-which the County
describes as “equity stripping, ” because it
effectively diluted or eliminated the equity that borrowers
had in their homes-comprised numerous components.
HSBC intentionally targeted and marketed predatory loan
offerings to borrowers in predominantly minority areas.
See Id. ¶¶ 53, 73, 77-79, 84-105. HSBC
used sophisticated algorithmic modeling to target minority
borrowers, as well as software programs to process credit
bureau information, in an effort to identify consumers likely
to respond to subprime mortgage marketing materials. See
Id. ¶¶ 84-94. HSBC perceived minority
borrowers as being particularly susceptible to its predatory
offerings, because such borrowers traditionally lacked access
to low cost credit, and because borrowers whose first
language was not English had more difficulty evaluating the
terms, conditions, and risks of the loan agreements.
Id. ¶¶ 85, 87-88.
addition to originating these subprime loans, HSBC also
purchased them from other subprime lenders. Id.
¶¶ 150-184, 198-99. Because the Home Mortgage
Disclosure Act (“HMDA”) did not require HSBC to
report the ethnicity of borrowers for loans that it purchased
from third parties, it reported race or ethnicity on only 141
of the 19, 384 mortgage loans it purchased for properties in
Cook County between 2004 and 2007, obscuring the racial
impact of its practices. Id. Along similar lines,
the County also alleges that HSBC used the Mortgage
Electronic Registration System, Inc., (“MERS”) to
hide its predatory practices.
HSBC successfully generated leads, it charged minority
borrowers higher prices-even after controlling for variables
such as credit risk-for mortgage loans, as compared to
similarly situated nonminority borrowers. See Id.
¶¶ 9, 14, 83, 104-22, 136-49. HSBC accomplished
this by, among other things, incentivizing its employees to
ignore or circumvent conventional underwriting criteria to
“steer” minority borrowers to riskier and higher
cost loan products, which often had higher default rates.
Id. ¶¶ 129-49.
collected pursuant to the HMDA and analyzed by the Federal
Reserve confirms these pricing disparities. See Id.
¶¶ 56-66. The Federal Reserve analysis shows that,
on average, African-American borrowers were 3.1 times more
likely than nonminority borrowers to receive a higher-rate
home loan; Latino borrowers were 1.9 times more likely.
See Id. ¶ 61. Other statistics show similar
patterns: African-Americans were 37.5 percent more likely to
receive a higher-priced conventional home-purchase loan and
28.3 percent more likely to receive a higher-priced refinance
loan. See Id. ¶¶ 62-63. A U.S. Department
of Housing and Urban Development study found that, in
neighborhoods where at least 80% of the population was
African-American, borrowers were 2.2 times more likely to
refinance with a subprime lender. See Id. ¶ 64.
Additionally, HSBC's own publicly reported HMDA data
evidences similar disparities. Id. ¶¶ 67,
Discriminatory Foreclosure-Related Activities
HSBC often sold the mortgage notes to third parties, it
retained the right to service and foreclose on the subprime
loans it originated and purchased. Id. ¶ 283.
For loans that it serviced but did not own, HSBC had an
incentive to foreclose, rather than offer loss mitigation
options (such as loan modifications), because HSBC earned
fees for doing so without having to bear the investment risk.
Id. ¶¶ 283-88.
foreclosed on minority homeowners at a higher rate than
similarly situated nonminority homeowners. Id.
¶¶ 262-305. For example, based on publicly
available data, during a period of twelve years prior to the
County's filing of the Complaint, HSBC was 2.3 times more
likely to foreclose on a home in a neighborhood with 31-50%
minority homeowners, as compared to a neighborhood with 30%
or fewer minority homeowners. Id. ¶ 275. As the
concentration of minority homeowners increased to 50-70%,
HSBC was 3.8 times more likely to foreclose. Id. The
rate of foreclosures rose as the rate of minority home
ownership in a neighborhood rose. Id.
engaged in several business practices that contributed to
these results. For example, HSBC failed to adequately provide
loss mitigation options to minority homeowners, as compared
to similarly situated nonminority homeowners. Id.
¶ 292. HSBC also filed foreclosure lawsuits against
minority borrowers, without ensuring that the necessary
mortgage loan documents were properly endorsed or assigned
and in the possession of the appropriate party. Id.
HSBC stopped originating and purchasing subprime loans in
2007, the County claims that HSBC has continued to impose
discriminatory pricing terms and has serviced and foreclosed
on the predatory loans in a discriminatory manner. See
Id. ¶¶ 282-305. The County believes that this
is borne out by publicly available data regarding HSBC's
foreclosures in Cook County between March 2012 and March 2014
and, again, between June 2015 and April 2017, which shows
that HSBC initiated foreclosure proceedings at a higher rate
for minority borrowers. Id. ¶¶ 277-81.
The County's Alleged Injuries
result of HSBC's conduct, the County claims that it has
been harmed by having to incur additional costs related to
conducting judicial and non-judicial foreclosure-related
processes; serving eviction and foreclosure notices;
registering and monitoring foreclosed properties; inspecting,
securing, maintaining, and/or demolishing foreclosed
properties; and providing various types of social services to
evicted or foreclosed homeowners. Id. ¶¶
5, 33, 321, 348.
the County seeks as damages the loss of tax and other income
related to foreclosed, abandoned, and vacant properties (as
well as neighboring properties that declined in value) and
the resources that it had to provide to communities that
suffered from the resulting urban blight. Id. The
County believes that it will be able to prove these damages
at trial with statistical evidence and expert testimony.
Id. ¶ 349.
the County seeks damages for the recording fees, transfer
fees, and intangible tax income it lost when HSBC used MERS
to allegedly obscure its transactions from public recording
systems in an effort to hide its race-based activities.
Id. ¶¶ 5, 33, 321.
The County's Claims
Count I, the County claims that HSBC's predatory program
has disparately impacted minority borrowers in violation of
the FHA. Id. ¶¶ 350-73. In Count II, the
County alleges that the foreclosure component of HSBC's
program, standing alone, has disparately impacted minorities
in violation of the FHA. Id. ¶¶ 374-87. In
Count III, the County contends in the alternative that
HSBC's practices have constituted disparate treatment of
minority borrowers. Id. ¶¶ 388- 96.
has moved to dismiss all three counts. It argues that the
County has failed to adequately plead that HSBC's conduct
was the proximate cause of the County's injuries; state
disparate-treatment and disparate impact claims; file its
claims in a timely fashion; and adequately plead that various
HSBC subsidiaries and affiliates named as Defendants were
involved in the alleged conduct.
survive a motion to dismiss pursuant to Rule 12(b)(6), the
complaint must “state a claim to relief that is
plausible on its face.” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). The factual
allegations in the complaint must at least “raise a
right to relief above the speculative level.” Bell
Atl. Corp., 550 U.S. at 555. The Court must accept as
true all well-pleaded allegations in the complaint and draw
all possible inferences in the plaintiff's favor. See
Tamayo, 526 F.3d at 1081. Mere legal conclusions,
however, “are not entitled to the assumption of
truth.” Iqbal, 556 U.S. at 679.
the County must plausibly plead that its injuries were
proximately caused by a violation of the FHA. Bank of Am.
Corp. v. City of Miami, Fla., 137 S.Ct. 1296, 1306
City of Miami and Directness Principles
principal argument is that the County's claims should be
dismissed because the County's allegations are
insufficient to show that HSBC's challenged conduct was
the proximate cause of the County's injuries. Defs.'
Mem. Supp. at 4- 12. As both sides recognize, the controlling
case is the Supreme Court's recent decision in Bank
of Am. Corp. v. City of Miami, Fla., 137 S.Ct. 1296
the City of Miami alleged that Bank of America and Wells
Fargo intentionally issued risky mortgages on terms less
favorable to minority customers than similarly situated white
customers. Id. at 1301. Much like here, the city
alleged that these lending practices adversely impacted the
racial composition of the city; impaired its goals of
promoting racial integration and desegregation; frustrated
its interest in promoting fair housing; and
disproportionately caused foreclosures and vacancies in
minority communities. Id. The foreclosures, in turn,
decreased the property value of both the foreclosed homes and
other homes in Miami neighborhoods and, concomitantly,
reduced tax revenues and forced the city to spend more for
municipal services in blighted neighborhoods. Id. at
the “broad reach” of the term “aggrieved
person” as defined in the FHA, the Supreme Court
reaffirmed its prior holding that Congress intended “to
define standing [in the FHA] as broadly as is permitted by
Article III of the Constitution.” Id. at 1303
(citations and internal quotations omitted). From this, the
Supreme Court held that the financial injuries alleged by
Miami as a result of the banks' actions fell with
“the zone of interest that the FHA protects, ”
id. at 1304. As to the question of causation,
however, the Supreme Court took a more exacting approach.
Eleventh Circuit had held that Miami's allegations
satisfied the causation requirement, because the city had
“plausibly alleged that its financial injuries were
foreseeable results of the Banks' misconduct.”
Id. at 1305. The Supreme Court disagreed with this
broad foreseeability test, holding that “foreseeability
alone is not sufficient to establish proximate cause under
the FHA.” Id. This is because “[t]he
housing market is interconnected with economic and social
life.” Id. at 1306. Thus, the Supreme Court
observed, a FHA violation could “be expected to cause
ripples of harm to flow far beyond the defendant's