Miami Commissioner Francis Suarez stands near a demolished vacant property in the Allapattah neighborhood of Miami. The U.S. Supreme Court is hearing Miami’s case to sue banks that the city accuses of predatory lending. (Angel Valentin/for The Washington Post)

The housing collapse of 2008 nearly broke the city of Miami. Now, its leaders have embarked on a novel and aggressive legal strategy to recoup losses from the big banks they say created the crisis with discriminatory and predatory lending practices.

It is a high-stakes effort that is being encouraged by many cities, and the banks Tuesday will ask the Supreme Court to stop it before it takes root.

Miami sued Bank of America, Wells Fargo and Citigroup under the 1968 Fair Housing Act, which bars discrimination in the sale, rental and financing of housing. The law states its purpose as providing for fair housing “throughout the United States.”

The city says that it can prove the lending institutions discriminated against Hispanic and African American residents by directing them into high-interest, risky loans. The resulting defaults destabilized Miami’s poorest neighborhoods, and the resulting loss of tax revenue sent the city to the brink of bankruptcy, they say.

In Miami’s Liberty City neighborhood, another vacant property is torn down. (Angel Valentin/For The Washington Post)

“It took us three years to really start recovering,” said Miami Commissioner Francis Suarez. “We decided unanimously as a commission that we wanted to hold the banks responsible for their lending practices, which we learned were discriminatory in nature.”

Banks have been sued by individuals and taken to task by the federal government for lending practices, but these new cases are the first in which cities are the plaintiffs and are demanding that banks be held accountable for harming their communities.

The banks counter that there is a reason such Fair Housing Act suits are novel: Congress never intended for the law to be used for such purposes.

“Municipal suits like this one were unheard of until recently, when enterprising contingency-fee counsel began pushing them,” Bank of America told the court in its brief.

The banks warn of a “trickle-down” approach that would let anyone affected by a neighborhood in decline — from the next-door neighbor to the corner dry cleaner — to sue under the act.

There is little debate about the theory that foreclosure leads to vacancy, then blight and lower property values for the neighborhood and city. But the banks say economic and social conditions can have as much to do with that as the original loan.

The city says that it can prove — if it gets the chance — that discriminatory lending practices caused its problems, not the general economic downturn.

Using regression analysis, it alleges in court documents that African American and Hispanic borrowers were far more likely to receive unfavorable loans than similarly situated whites. And when borrowers got into trouble, they were less likely to be offered affordable refinancing packages.

“Clearly, higher rates were causing a much higher rate of default,” Suarez said. “We think the banks were doing it knowingly, and as a part of the pattern and practice of their business model.”

No one challenges the dire circumstances in which Miami found itself after the crash. It was the epicenter of the foreclosure problem. Suarez said that when he took office in 2009 the city had just $13 million in reserves, and if it had done nothing to curtail spending, its deficit would have reached $115 million.

Like most cities, its revenue is derived from property values, and real estate normally is relatively stable. “This was a precipitous drop,” Suarez said, and the city invoked an emergency law to slash the salaries of municipal workers and impose a hiring freeze.

“I had firefighters who from one day to the next, they’d get a 20- to 40-percent decrease in pay,” Miami Fire Chief Maurice Kemp said in an interview. “The effect was quite dramatic, as you might expect, on morale.”

Police Chief Rodolfo Llanes said his force at one point was down about 160 officers, more than 10 percent of the workforce. And the demands on both fire and police were increasing, the chiefs said.

“Abandoned property breeds crime and also disorder,” Llanes said. “You can imagine living on a block where there is an abandoned house and you go to work every day and you come home to this place that is unsecured and taken over by drug dealers or vagrants or folks using it as a dope house.

“It degrades the entire neighborhood because it draws in a criminal element that will break into cars or break into houses to feed their habit.”

The fire department had increased calls because of the neighborhood blight, the chiefs said. The city incurred additional costs boarding up vacant properties — in some cases demolishing them. At trial, the city says, it could document millions of dollars in lost revenue and increased costs.

Localities as diverse as Los Angeles, Atlanta, the District and Montgomery County, Md., are supporting Miami’s suit.

But just because there is a problem, it does not mean that Congress provided a solution in the Fair Housing Act, say the banks and the interest groups that support them.

The purpose of the law “is to protect minorities from housing discrimination, and to secure for all Americans the benefits of living in an integrated society,” the U.S. Chamber of Commerce said in a friend-of-the-court brief. “No one would suggest that when Congress acted to secure fair housing in 1968, it also was concerned with protecting the tax bases and budgets of cities and towns.”

Moreover, the likely result of a win by the cities would be that banks would cut back on loans in low-income neighborhoods, the Chamber says.

To go forward with the suit, Miami has to convince the Supreme Court of two things: that the act’s language permitting an “aggrieved person” to sue includes municipalities and that the alleged discriminatory practices by banks were the proximate cause of its decrease in property-tax revenue and increase in services because of property foreclosures.

While the banks argue that recent Supreme Court decisions in other civil rights cases have narrowed the definition of an “aggrieved person,” cities argue that they have a role at the heart of the Fair Housing Act. Because it is difficult for those who got the loans to sue, the coalition of cities supporting Miami told the court, it is up to municipalities to “seek relief from the entities whose discriminatory practices have perpetuated the cycle of segregation and urban decay.”

Even with a right to sue, the banks and their supporters say the cities cannot draw a line connecting the loans with the problems for which they seek redress. There are too many factors, they say.

But Miami Senior Assistant City Attorney Henry J. Hunnefeld said the city can separate out the losses it thinks are attributable to discriminatory loans.

“All the city’s asking for is to be put back in the same place it would have been if we didn’t have discriminatory loans that resulted in foreclosures, which had all sorts of ramifications on the city,” Hunnefeld said. “That’s a question of proof at trial.”