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County of Cook v. HSBC North America Holdings, Inc.

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

May 30, 2018

COUNTY OF COOK, Plaintiff,



         Plaintiff 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.

         HSBC 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 part.

         Factual Background[1]

         Beginning 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.

         A. Discriminatory Marketing

         First, 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.

         In 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.[2]

         B. Discriminatory Pricing

         After 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.

         Data 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, 142-49.

         C. Discriminatory Foreclosure-Related Activities

         While 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.[3]

         HSBC 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.

         HSBC 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.

         D. Ongoing Practices

         Although 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.

         E. The County's Alleged Injuries

         As a 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.

         Additionally, 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.

         Finally, 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.

         F. The County's Claims

         In 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.

         HSBC 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.

         Legal Standards

         To 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.

         Moreover, 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 (2017).


         I. Proximate Cause

         A. City of Miami and Directness Principles

         HSBC's 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 (2017).

         There, 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 1301-02.

         Noting 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.

         The 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 ...

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