The State of Play in City Claims against Financial Firms

Abstract

In 2006, before the subprime mortgage crisis and the collapse of the financial markets, I wrote an article titled Do Cities Have Standing? Redressing the Externalities of Predatory Lending. In the article, I addressed the possibility that cities had standing to recover for the damage that predatory lenders were inflicting on their communities. At the time, exploitative lenders were putting unsophisticated borrowers in loans they could not afford, and many of those borrowers have since lost or will lose their homes.Municipalities were in impossible positions. They were powerless to prevent abusive lending. Only state and federal legislatures and regulators had the authority to restrict unfair loan products; yet the cities bore the burden of unaffordable loans in the form of abandoned property, displaced families, increased demands for police and fire protection, and declining tax revenues.The focus of my article was analyzing the availability of (1) parens patriae standing to cities and (2) city standing based on direct injuries in claims against lenders who engaged in predatory lending. In the course of the article, I also identified potential claims cities could bring and argued for broader municipal standing. Jonathan Entin and Shadya Yazback wrote an article in response to Do Cities Have Standing, in which they echoed my analysis of city standing as parens patriae and as claimants for injuries to their proprietary interests. They also explored the potential for claims under the Fair Housing Act and discussed the role that preemption has played in limiting cities’ ability to directly regulate lenders.Eight years later, we now know more about the role of lenders in exploiting borrowers. We also know more about the impact that exploitative and unfair lending has had on communities. And, most importantly for this essay, several cities have brought lawsuits that test some of the theories I put forth in my original article.