2. “City Governments and Predatory Lending Revisited” by Jonathan L. Entin

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January 22nd, 2014

Seven years ago, Shadya Yazback and I published an article in this journal about the legal options available to cities seeking to combat the harms arising from predatory lending.[1]  The editors have invited me to participate in an online debate with my friend and former colleague Kathleen Engel, who has done path-breaking work on predatory lending.[2]  I am honored to have the opportunity to continue the conversation, but I hope that the editors will not be overly disappointed that this exchange will not be much of a debate. Professor Engel and I are in basic agreement about the harms caused by predatory lending and in seeking mechanisms that can alleviate those harms.  Our differences ultimately relate to matters of emphasis and perhaps to our degree of optimism that the legal system can afford meaningful relief in the foreseeable future.

I.  Standing and Preemption

Ms. Yazback and I focused on two major issues: standing and preemption.  With respect to standing, we noted that cities might try to invoke the doctrine of parens patriae to sue on behalf of their residents, but we ultimately concluded that such suits probably would fail.  Although the Supreme Court has not addressed the issue, the Court has declined to treat cities as sovereigns or quasi-sovereigns in other contexts.[3]  Nevertheless, we doubted that parens patriae standing for cities would become a flashpoint of litigation.  The lower federal courts consistently have rejected parens patriae actions brought by municipalities on behalf of their residents, a point on which Professor Engel, Yazback, and I agree.[4]  The situation in state courts is less consistent, but Yazback and I were not optimistic about parens patriae claims by cities.  Courts in only one state, New York, have held that municipalities may sue as parens patriae on behalf of their residents, and the court in one of the two cases that reached that conclusion about municipal standing rejected the claim on the merits.[5]  Professor Engel has been more optimistic about the prospects for parens patriae claims than we are,[6] but the resolution of that issue will not determine whether cities can obtain redress for the harms caused by predatory lending.  Yazback and I agree with Professor Engel that cities can, in at least some circumstances, establish standing to sue for harm to the community itself.[7]

Beyond litigation, cities also have sought to regulate predatory lending directly.  Those efforts have foundered on the preemption doctrine.  Yazback and I focused mainly on preemption of local regulations by state law.  Courts in New York, California, and Ohio have held that state regulations preempt local initiatives despite what often appear to be expansive protections of municipal home rule in state constitutions.[8]

We also noted the possibility that federal law might preempt state measures in this area.  We cited expansive interpretations by the Office of the Comptroller of the Currency and the Office of Thrift Supervision and pointed to lower court rulings that federal regulations prevented state authorities from enforcing fair housing laws against national banks.[9]  Since publication of our article, the Supreme Court has weighed in on that subject.  In Cuomo v. Clearing House Association,[10] the Court held that the National Banking Act precludes states from seeking to inspect the books and records of national banks as part of the states’ ordinary oversight of corporations but that states could enforce their laws against national banks through ordinary litigation.[11]  That 2009 case did not address predatory lending, but rather an effort to assess national banks’ compliance with a state fair-lending law.[12]  Nevertheless, Cuomo suggests that neither states nor cities may exercise administrative oversight over national banks that might have engaged in predatory lending; any legal claims they might assert against such institutions must be pursued through ordinary litigation with all the limitations of civil discovery.[13]

Whatever impediments Cuomo might impose on state and local regulation of national banks may have been mitigated the following year by provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.[14]  Although Dodd-Frank empowers the new Bureau of Consumer Financial Protection to protect borrowers against unfair or unscrupulous lending practices,[15] it also specifically authorizes states to provide stronger consumer protections than the new federal law affords.[16]

Moreover, Dodd-Frank contains a much stricter test for federal preemption of state laws than federal bank agencies had been using.  This stricter test provides for federal preemption only if state laws have a discriminatory effect on national banks and requires that preemption determinations be made on a case-by-case basis rather than generically.[17]  All preemption determinations must be supported by “substantial evidence, made on the record of the proceeding” in which a particular state law is evaluated.[18]  The statute explicitly rejects the notion of field preemption that federal bank regulators previously invoked, specifying that federal law “does not occupy the field in any area of State law.”[19]  The new law also explicitly reaffirms Cuomo’s finding that state authorities may pursue ordinary litigation against national banks and federal thrifts but that they may not engage in administrative oversight of those financial institutions.[20]

It remains to be seen how Dodd-Frank’s preemption provisions will affect state and local predatory lending initiatives.  To date, no court has ruled on that question.  Nevertheless, those provisions do suggest that municipal efforts to address predatory lending might stand on a stronger foundation than they did before Dodd-Frank became effective.

II.  Can the Tort System Offer an Answer?

Even if cities can surmount standing and other procedural and jurisdictional obstacles, the question remains whether litigation represents a promising avenue for redress against predatory lenders.  Professor Engel invokes the public-wrong theory of torts, arguing that the political process and the regulatory system have failed and that the tort system can and should provide an alternative remedy.[21]  Even if we accept this view of the tort system, the examples that Professor Engel invokes should give us pause.  She analogizes predatory lenders to tobacco companies and firearms manufacturers that “used their money and lobbying power to escape or limit government regulation and corporate responsibility.”[22]  It is not at all clear that the tort system has vindicated the public interest in either of those situations, nor do recent developments in predatory-lending litigation provide as much reason for optimism as she suggests.

Consider first the litigation about firearms.  Professor Engel notes that cities asserting tort claims against gun manufacturers survived motions to dismiss.[23]  In fact, state and lower federal courts took divergent approaches to dismissal motions in municipal firearms lawsuits.[24]  Even in cases where local governments defeated motions to dismiss, courts ultimately rejected their claims on the merits.[25]  In the end, Congress passed legislation preempting such lawsuits.[26]  Efforts to circumvent this federal preemption of municipal lawsuits have failed.[27]

The tobacco story is more complicated.  All fifty states and the District of Columbia sued the principal tobacco manufacturers and entered into a master settlement agreement under which the tobacco companies would pay the plaintiff governments a total of nearly $250 billion over a 25-year period as compensation for their tobacco-related costs.[28]  The agreement did not require that the settlement money be used exclusively for smoking prevention and treatment, and the states have used only about 3 percent of their tobacco revenues for such purposes.[29]  In recent years, many jurisdictions have reduced their spending on smoking-related programs in both relative and absolute terms, resulting in the gutting or elimination of many effective anti-smoking initiatives.[30]  At best, therefore, the tobacco litigation came to an imperfect and far less than ideal conclusion.[31]

Professor Engel’s thoughtful and thorough account of municipal predatory-lending lawsuits is notable for what it omits: no city has yet prevailed in any of those cases.  Birmingham[32] and Cleveland[33] had their cases dismissed.  Although Memphis and Baltimore survived motions to dismiss for lack of standing, neither city obtained a final judgment in its favor.  Memphis did, as Professor Engel notes, obtain a substantial financial settlement, but that settlement did not require the lending institutions to acknowledge any wrongdoing.[34]  Baltimore’s claims were resolved as part of a consent order in a separate lawsuit brought by the federal government, and that consent order expressly disclaimed any determination of liability.[35]  Finally, she cites situations in Massachusetts and Nevada that resulted in financial payments in connection with subprime lending activities, but those cases were brought by state attorneys general, not cities, and the payments resulted from settlements, not court rulings, so the lenders were never found liable for their activities.[36]

In short, the record to date suggests that cities have had and will continue to have difficulty in winning predatory-lending suits.  Perhaps Baltimore’s lawsuit served as a catalyst for federal action, but it is entirely possible that the Department of Justice under a Republican administration would not have sued.[37]  Meanwhile, state officials might have some leverage, but thus far few state agencies have filed suit and those cases have not resulted in findings of liability despite some well-publicized settlements.  Even if some cities eventually prevail in court, it will take years to obtain the legal vindication that they seek.


It is difficult to disagree with a friend and former colleague who has done so much significant work on a problem that has corroded the bonds of community in our nation.  I wish that I could share Professor Engel’s optimism that the tort system holds promise for vindicating the cities that have suffered so much from unscrupulous predatory lenders.  We agree that those who have perpetrated these wrongs should be held accountable.  The record so far suggests that cities by themselves face an uphill battle.  State and federal authorities have more leverage, if only they would use it.



         *  Associate Dean for Academic Affairs (School of Law), David L. Brennan Professor of Law, and Professor of Political Science, Case Western Reserve University.

         Φ Suggested citation: Jonathan L. Entin, City Governments and Predatory Lending Revisited, 40 Fordham Urb. L.J. City Square 108 (2014), http://urbanlawjournal.com/city-governments-and-predatory-lending-revisited/.

        [1].     Jonathan L. Entin & Shadya Y. Yazback, City Governments and Predatory Lending, 34 Fordham Urb. L.J. 757 (2007).

        [2].     See, e.g., Kathleen C. Engel & Patricia A. McCoy, The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps (2011); Kathleen C. Engel, Do Cities Have Standing? Redressing the Externalities of Predatory Lending, 38 Conn. L. Rev. 355 (2006); Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending, 80 Tex. L. Rev. 1255 (2002).

        [3].     Entin & Yazback, supra note 1, at 763–64.

        [4].     Id. at 764; Engel, supra note 2, at 365.

        [5].     Entin & Yazback, supra note 1, at 765.

        [6].     Engel, supra note 2, at 366–67; see also Kathleen C. Engel, The State of Play in City Claims Against Financial Firms, 40 Fordham Urb. L.J. City Square 82, 88-89 (2013), http://urbanlawjournal.com/state-of-play-in-city-claims/ (noting that “the pleading and decisions [that we discuss] do not specify whether the cities asserted standing based on their proprietary interests or as parens patriae”).

        [7].     Entin & Yazback, supra note 1, at 769–70; Engel, supra note 2, at 374–77.

        [8].     Entin & Yazback, supra note 1, at 771–75, 779.

        [9].     Id. at 781. Professor Engel criticizes these expansive interpretations of federal law by these two agencies. See Engel, supra note 6, at 92.

      [10].     557 U.S. 519 (2009).

      [11].     Id. at 536.

      [12].     Id. at 522-23.

      [13].     Cf. id. at 531 (noting the distinction between the exercise of visitorial powers and the pursuit of litigation).  Professor Engel also notes the implications of heightened pleading standards on the survival of a motion to dismiss. See Engel, supra note 6, at 90.

      [14].     Pub. L. No. 111–203, 124 Stat. 1376 (2010) (codified in scattered sections of 7, 12, 15 & 22 U.S.C. (Supp. IV 2010)).

      [15].     12 U.S.C. § 5511 (Supp. IV 2010).

      [16].     12 U.S.C. § 5551(a)(2). (Supp. IV 2010).

      [17].     12 U.S.C. §§ 25b(b)(1), (3), 1465(a) (Supp. IV 2010).

      [18].     12 U.S.C. § 25b(c) (Supp. IV 2010); see also 12 U.S.C. § 1465(a) (Supp. IV 2010) (applying the same standard to application of state laws to federal savings associations).

      [19].     12 U.S.C. §§ 25b(b)(4), 1465(b) (Supp. IV 2010).

      [20].     12 U.S.C. §§ 25b(i)(1), 1465(c) (Supp. IV 2010).

      [21].     Engel, supra note 6, at 92.

      [22].      Id.

      [23].     Id. at 90 (citing City of Cincinnati v. Beretta U.S.A. Corp., 768 N.E.2d 1136, 1148–49 (Ohio 2002)).

      [24].     See City of Gary v. Smith & Wesson Corp., 801 N.E.2d 1222, 1232 n.8 (Ind. 2003) (collecting cases).

      [25].     See District of Columbia v. Beretta U.S.A. Corp., 872 A.2d 633 (D.C. 2005); City of Chicago v. Beretta U.S.A. Corp., 821 N.E.2d 1099 (Ill. 2004).

      [26].     Protection of Lawful Commerce in Arms Act, Pub. L. No. 109–02, 119 Stat. 2095 (2005) (codified at 15 U.S.C. §§ 7901–7903 (2006)).

      [27].     See City of New York v. Beretta U.S.A. Corp., 524 F.3d 384 (2d Cir. 2008); District of Columbia v. Beretta U.S.A. Corp., 940 A.2d 163, 172 (D.C. 2008).

      [28].     James B. Carroll & David A. Moss, Council of State Governments, Tobacco Settlement and Declining State Revenues 2 (Mar. 2002); Rachel Kaufmann et al., State Tobacco Revenues Compared with Tobacco Control Appropriations—United States, 1998–2010, 61 Morbidity & Mortality Wkly. Rep. 370, 370 (2012).

      [29].     See Kaufmann et al., supra note 28, at 370, 372–73.

      [30].     See generally Campaign for Tobacco-Free Kids, A Broken Promise to Our Children: The 1998 State Tobacco Settlement 13 Years Later (2011); see also Kaufmann et al., supra note 28, at 372–72 (tbls. 1–2). As part of an economic stimulus package in 2008, Ohio eliminated the foundation that had been established to administer funds that the state was to receive as part of the master settlement agreement. A legal challenge to that move failed. See Bd. of Trs. of the Tobacco Use Prevention and Control Found. v. Boyce, 941 N.E.2d 745 (Ohio 2010).

      [31].     See Wendy E. Wagner, Rough Justice and the Attorney General Litigation, 33 Ga. L. Rev. 935, 970–73 (1999).

      [32].  City of Birmingham v. Citigroup, Inc., No. CV-09-BE-467-S, 2009 WL 8652915 (N.D. Ala. Aug. 19, 2009); see Engel, supra note 6, at 84.

      [33].  See Engel, supra note 6, at 85–87 (federal case), 87–88 (state case).

      [34].  See Engel, supra note 6, at 83; Ted Evanoff, Wells Fargo Goes from Foe to Partner in Memphis, Com. Appeal (June 3, 2012, 12:08 AM), http://www.commercialappeal.com/news/2012/jun/03/wells-fargo-goes-from-foe-to-partner (last visited Oct. 30, 2013).

      [35].  United States v. Wells Fargo Bank, NA, No. 1:12-cv-01150-JDB (D.D.C. July 12, 2012) (consent order), available at http://www.justice.gov/crt/about/hce/documents/wellsfargocd.pdf (“There has been no factual finding or adjudication with respect to any matters alleged by the United States.”).  On the relationship between Baltimore’s case and the federal suit, see generally Ylan Q. Mui, Wells Fargo, Justice Department Settle Discrimination Case for $175 Million, Wash. Post, July 12, 2012, available at http://www.washingtonpost.com/business/economy/wells-fargo-justice-department-settle-discrimination-case-for-175-million/2012/07/12/gJQAX66ZgW_story_1.html (last visited Oct. 30, 2013).

      [36].     See Engel, supra note 6, at 91. See, e.g., Assurance of Discontinuance ¶ 3, In re Morgan Stanley & Co., No. 10-2538 (Mass. Super. Ct. June 24, 2010) (“Morgan Stanley enters into this [Assurance of Discontinuance] for settlement purposes only and neither admits nor denies the [Attorney General’s] allegations.  This AOD is made without any trial or adjudication of any issue of fact or law.”); Assurance of Discontinuance ¶ 10, In re Barclays Bank PLC, No. 13-3202 (Mass. Super. Ct. Sept. 9, 2013) (“This AOD is made without any trial or adjudication or finding of any issue of fact or law, and is not a final order of any court. Barclays enter into this AOD for settlement purposes only and neither admits nor denies the [Attorney General’s] allegations.”); Assurance of Discontinuance ¶ 6, In re DB Structured Prods., Inc., No. A-13-690144-B (Nev. Dist. Ct. Oct. 14, 2013) (“DBSP enters into this Assurance solely to resolve the Nevada Attorney General’s investigation and neither admits nor denies any wrongdoing.”); Settlement Agreement, Mass. Att’y Gen. Martha Coakley ¶ E.1 (May 7, 2009), http://www.mass.gov/ago/docs/press/2009/2009-05-07-goldman-settlement.pdf (“Nothing contained herein shall be deemed to constitute an admission by Goldman Sachs of any wrongdoing in connection with any matter.”).

      [37].  But see United States v. City of Yonkers, 856 F.2d 444, 447–52 (2d Cir. 1988) (summarizing the procedural history of a complex racial discrimination case filed near the end of President Carter’s term and vigorously pursued by the Justice Department under President Reagan), rev’d in part sub nom. Spallone v. United States, 493 U.S. 265 (1990).