Cnty. of Cook v. HSBC N. Am. Holdings Inc.

136 F.Supp.3d 952

County of Cook, Plaintiff,

v.HSBC North America Holdings Inc.; HSBC Finance Corporation; HSBC Mortgage Corporation (USA); HSB Mortgage Services Inc.; HSBC USA Inc.; HSBC Bank USA; National Association; Beneficial Company LLC ; Decision One Mortgage Company, LLC; HFC Company LLC, Defendants.

14-cv-2031

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

Signed September 30, 2015

David J. Worley, Darren Penn, James M. Evangelista, Jeffrey Harris, Harris Penn Lowry LLP, Atlanta, GA, Daniel A. Dailey, James D. Montgomery, Sr., Michelle M. Montgomery, John K. Kennedy, James D. Montgomery & Associates, Ltd., Chicago, IL for Plaintiff.

Andrew L. Sandler, Ann D. Wiles, Brett J. Natarelli, Mark E. Rooney, Richard Eric Gottlieb, Valerie L. Hletko, Buckleysandler LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION AND ORDER

JOHN Z. LEE, United States District Judge

Cook County has filed a claim under the Fair Housing Act ("FHA") 42 U.S.C. §§ 3601 –19, against Defendants HSBC North America Holdings, Inc., and its various subsidiaries and affiliates. The County alleges that Defendants discriminatorily targeted minority homeowners in Cook County for predatory subprime mortgage loans, which resulted in thousands of housing foreclosures. According to the County, these foreclosures in turn caused a decline in tax revenue, an erosion of the County's tax base, harm to the County's ability to provide services to its residents, and general urban blight. Defendants move to dismiss the County's Amended Complaint, arguing that it lacks constitutional and statutory standing to maintain this claim. Defendants also contend that the FHA claim is barred by the statute of limitations and, alternatively, fails to state a claim. For the following reasons, Defendants' motion to dismiss is denied.

I. Factual Background¹

Cook County brings claims of intentional discrimination, disparate impact, and disparate treatment under the Fair Housing Act ("FHA") against Defendants. The gist of the County's claim is that Defendants targeted minority borrowers for their subprime mortgage products, designed those loans to fail, and, consequently, caused thousands of foreclosures in Cook County resulting in widespread economic and noneconomic harm. In so doing, at least according to the County, Defendants engaged in discriminatory lending practices and implemented facially-neutral practices that had a racial disparate impact. The County's Amended Complaint contains a slew of allegations describing the subprime mortgage lending crisis in general and Defendants' lending practices in particular. The Court will attempt to summarize them below.

Predatory lending was rampant in the subprime mortgage industry between 2003 and 2007. See generally Am. Compl. ¶¶ 8–9, 47–58. During this time, African-American and Latino borrowers were more likely to pay higher prices for mortgage loans than Caucasian borrowers. See id. ¶ 50. Data collected pursuant to the Home Mortgage Disclosure Act ("HMDA") and analyzed by the Federal Reserve confirms this disparity. See id. ¶ 51.

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. ¶ 52. 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. ¶¶ 53–54. 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. ¶ 55.

Cook County alleges that Defendants intentionally targeted and marketed to borrowers in predominantly minority areas in the County in order to grow their subprime mortgage lending business. See id. ¶¶ 41–46. Defendants used sophisticated algorithmic modeling to target minority borrowers as well as software programs to process credit bureau information in an effort to identify consumers best suited to receive and respond to subprime mortgage marketing materials. See id. ¶¶ 76, 78, 80–87. The targeting marketing strategy undergirded a general strategy of "upselling" to minority borrowers. See id. ¶ 79.

When selling these loan products to minority borrowers, Defendants engaged in discretionary pricing practices that resulted in higher costs of borrowing for minority borrowers. See id. ¶¶ 100–105. In fact, even after controlling for credit risk, minority borrowers were substantially more likely to pay higher charges on the loan products Defendants offered as compared to similarly situated nonminority borrowers. See id. ¶¶ 109, 112–13. Furthermore, Defendants incentivized their employees to override or circumvent underwriting criteria to steer otherwise qualified minority borrowers to higher cost loans than those provided to similarly situated nonmiority borrowers and to approve otherwise unqualified minority borrowers for high cost loans. See id. ¶ 131.

In addition, the County alleges that, even after the financial crisis, Defendants continued to engage in these practices by continuing to impose and enforce the discriminatory pricing terms and servicing the predatory loans in a discriminatory manner for financial gain. See generally id. ¶¶ 259–281. These ongoing predatory and discriminatory mortgage lending and servicing practices effectively diluted or, in some cases, eliminated the equity the borrowers had in their homes, thereby placing them in greater risk of delinquency, default and eventual foreclosure. See id. ¶¶ 282, 284–85.

The large volume of defaults in the affected communities lowered home values, decreased county tax revenues, and resulted in vacant or abandoned properties that forced the County to provide additional services in these communities at increased costs. See id. ¶ 285. In fact, based upon academic literature, the County estimates that each foreclosure resulted in up to $34,000 in community wide damages. See id. ¶ 307.

II. Legal Standards

A. Rule 12(b)(1) and Subject Matter Jurisdiction

A motion to dismiss pursuant to Rule 12(b)(1) tests the jurisdictional sufficiency of the complaint. "When ruling on a motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), the district court must accept as true all well-pleaded factual allegations, and draw reasonable inferences in favor of the plaintiff." Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir.1995). But "[t]he district court may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists." Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191 (7th Cir.1993) (quoting Grafon Corp. v. Hausermann, 602 F.2d 781, 783 (7th Cir.1979) ). "[I]f the complaint is formally sufficient but the contention is that there is in fact no subject matter jurisdiction, the movant may use affidavits and other material to support the motion." United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir.2003), overruled on other grounds by Minn–Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir.2012). "The burden of proof on a 12(b)(1) issue is on the party asserting jurisdiction." Id.

B. Rule 12(b)(6) and Failure to State a Claim

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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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, 127 S.Ct. 1955. 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, 129 S.Ct. 1937.

III. Analysis

A. Article III Standing

Defendants first argue, under Rule 12(b)(1), that the Court lacks subject matter jurisdiction over the County's FHA claim because the County does not possess Article III standing to pursue it. Article III standing requires that the County plead: "(i) an injury in fact, which is an invasion of a legally protected interest that is concrete and particularized and, thus, actual or imminent, not conjectural or hypothetical; (ii) a causal relation between the injury and the challenged conduct, such that the injury can be fairly traced to the challenged action of the defendant; and (iii) a likelihood that the injury will be redressed by a favorable decision." Wis. Right to Life, Inc. v. Schober, 366 F.3d 485, 489 (7th Cir.2004) (quotations omitted); see also Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). At the pleadings stage, "[a] plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and likely to be redressed by the requested relief." Hein v. Freedom from Religion Found., Inc., 551 U.S. 587, 598, 127 S.Ct. 2553, 168 L.Ed.2d 424 (2007) ; see also Warth v. Seldin, 422 U.S. 490, 508, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975) (a plaintiff "must allege specific, concrete facts demonstrating that the challenged practices harm him, and that he personally would benefit in a tangible way from the court's intervention.").

"The party invoking federal jurisdiction bears the burden of establishing these elements." Lujan, 504 U.S. at 561, 112 S.Ct. 2130. But "[a] motion to dismiss for lack of standing should not be granted unless there are no set of facts consistent with the complaint's allegations that could...