(The Center for Monetary and Financial Alternatives has recently launched a new program, in cooperation with our colleagues in Cato's Center for Constitutional Studies, aimed at influencing policy through the legal system. The program, led by Thaya Brook Knight, strategically files amicus briefs in cases throughout the federal courts. These briefs focus on instances of financial regulatory overreach that threaten to erode the free and efficient operation of financial markets as well as the public's fundamental rights. By targeting key cases, the program hopes to assist the judiciary in developing legal interpretations that promote our Center's goals of preserving economic liberty and protecting innovation in the financial sector.)
The City of Miami has come up with an ingenious plan: raise revenue without asking for a dime from taxpayers and make Wall Street banks pay for it, all under the auspices of fighting racial discrimination. Actually, it would be unfair to give Miami full credit for the idea: so far, it's only one of more than a dozen cities, counties, and school districts that have tried the same scheme.
The plan works by engaging the services of plaintiffs' counsel (who typically work on a contingency fee, requiring the city to pay nothing out of pocket) to sue mortgage lenders under the Fair Housing Act (FHA). The city claims that it has suffered from a diminished tax base, in addition to an increase in the need for its services, all thanks to lenders' alleged discriminatory practices.
While this is an interesting theory, it falls well outside the problems the FHA was designed to address. It seems the Supreme Court may also question whether the FHA permits this type of suit as it has granted certiorari in the case Bank of America v. City of Miami. On Monday, the Cato Institute filed a brief in support of Bank of America and its co-defendant, Wells Fargo.
The FHA is a provision of the 1968 Civil Rights Act, and was designed to address discrimination in access to housing. It creates a cause of action for "aggrieved persons" to sue when they believe they have been subject to discrimination. Generally, "aggrieved person" has been understood to mean a person who has actually suffered the effects of discrimination. For example, by being guided to certain neighborhoods based on racial make-up, or being denied the chance to rent a certain apartment because of race. It has even been found to mean people who have been denied the benefits of living in a racially integrated environment because of discrimination directed at prospective neighbors. But in each of these examples, the harm is clearly one that relates to the effects of discrimination in housing access.
Miami's argument, though, creates a much more attenuated relationship between the alleged discriminatory actions and the harm. Under Miami's theory, the term "aggrieved person" can be extended to include a city that has a reduced tax base due to increased foreclosures that may have been caused by certain actions by lenders (and not, the city seems to feel, by the historic 2008-2009 financial crisis that rocked the world, causing unprecedented foreclosures all over the U.S.) and their specific interactions with certain borrowers who then faced a number of varied financial and economic challenges, which led to high numbers of foreclosures, which coincided with other economic stresses on the city's budget. This long-winded chain of events extends beyond what the law typically recognizes as an actionable claim in any case, and certainly extends beyond the type of discriminatory harm the law was intended to address.
Aside from the problems that such an interpretive stretch creates with regard to the roles of the judiciary and legislature, Miami's interpretation also creates a deeply problematic relationship between the City and its citizens. In general, when a government wants more money to spend, it must go before its electorate and obtain the people's consent through increases in taxes. If instead a city can simply pursue a claim against several big banks, it can dispense with the people's consent and instead reach right for the cash.
The Court has indicated that its past statements suggesting a wide interpretation of the FHA may have been ill-advised. We hope that the Court affirmatively constrains the FHA to its proper application: helping those who have been the victims of discrimination. Not helping governments dip into deep pockets.