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> | Class Action Lawsuits to Enjoin Foreclosure: The Fremont Case (rewrite)
Excessive Foreclosures and the Massachusetts Model
The Problem
The recent financial crisis has exposed a serious problem: foreclosures without adequate legal advising. When borrowers are unable to keep up with payments, banks foreclose on the houses right away. Often, these are firms which have engaged in a pattern of predatory lending that helped create the problem. Foreclosures soared 79% in 2007, last year 2.8 million homes received foreclosure notices.
The Fremont Injunction
In Massachusetts, the Attorney General won an injunction in 2008 to block foreclosures by Fremont Mortgage Group, a mortgage lending firm based in California that held approximately 3,000 loans in Massachusetts. This action, Commonwealth v. Fremont, was brought under the Massachusetts Predatory Loan Practices Act and the state's general consumer protection statute. The injunction requires Fremont, or any company that purchased a loan from Fremont, to submit these loans for review to the Attorney General's office before foreclosure .
Results
Judicial bypass was only be granted on a case by case basis, and the cost to Fremont to have an individual case reviewed was so great that one practical effect of the lawsuit was a de facto moratorium on foreclosures.
The benefit from a preliminary injunction to a homeowner is twofold: first, even if the suit is ultimately defeated and the foreclosures recommenced, the owner will have bought time to find a job, secure new living accommodations, or blunt the effect of such a massive life change on his family. Second, it puts pressure on the lender to settle and renegotiate the terms of the lease, as long as the money gained from renegotiating is greater than the sale of the house minus the cost of fighting the suit. Although Fremont is now defunct, other lenders would face a public relations nightmare if they persisted with foreclosures.
Replicability
Investors and mortgage lenders in the Commonwealth and all over the country are bracing for more lawsuits, afraid that other state governments may try to follow the Massachusetts precedent. In the case of New York, which saw over 57,000 foreclosure filings in 2007 the Attorney General has not yet sued, despite the provision of New York Banking Law 6-l that allows the Attorney General to enforce the provisions of the section.
To bring one of these suits, a plaintiff would need an applicable consumer protection statute and a lawyer willing to take the case. Although the Massachusetts Predatory Loan Practices Act allows courts to reform or rescind mortgage contracts that violate the terms of the act, other states have similar statutes that provide for causes of action and equitable relief against predatory lenders. New York Banking Law 6-l(9), for example, provides for injunctive relief the court deems appropriate. The Massachusetts Act also invalidates loan provisions that force borrowers to litigate in inconvenient districts, and applies regardless when lenders attempts to chop up or transfer the mortgages to avoid lawsuits. Banking Law 6-l section 2(g) invalidates clauses that force borrowers to submit to oppressive mandatory arbitration, and section 3 applies the Act to lenders who try to avoid the act by splitting up the home loans.
The Limits of Attorneys General
In Fremont, the Attorney General's Consumer Protection Office acted on behalf of the Commonwealth of Massachusetts and the homeowners who had been subject to predatory lending practices. However, Attorneys General will likely not be able to provide all the services required in this field. Logistical concerns alone sometimes preclude them from doing so.
However, there are also potential political barriers. Mortgage companies and other lenders generally have a great deal of influence on state government and spend freely during election campaigns. There may also be a political backlash by state residents who do not wish to see their state intervening to bail out people they perceive to have made bad decisions. Mass action by state Attorney's General, such as an action against Ameriquest that netted over a $300 million settlement, looks good in the news. Spread the money out over the affected borrowers, though, and there is very little to go around. Enjoining foreclosures, however, either directly or indirectly through an expensive review process, would shake the foundations of the credit industry, something the states may not be willing to do.
The Role of Private Practitioners
Private practitioners can offer their services to individual clients, but class action lawsuits have also sprung up. The private Ameriquest litigation private Ameriquest litigation, not to be confused with the larger action undertaken by state Attorney Generals, resulted in a large payout to the attorneys- but little on a per plaintiff basis and no injunctive relief. However, if private attorneys don't think they have a chance at winning, or think that the expected payout on the lawsuits doesn't justify the time or expense, they will not want to take on the lenders or might settle too quickly, recovering damages but not the injunction that will keep the homeowners and their families in their homes.
As for the Fremont borrowers, there was a settlement in 2009. The terms of the settlement preserved the permanent injunction at the terms set in 2008 and awarded the state 10 million (or about $4500 per borrower). While the actual benefit to the homeowners may well turn out to be much higher than that, a fee of $1500, which a lawyer taking the usual 1/3 contingency fee would get litigating an individual case, might be too small for a solo practitioner going up against a well funded lender (Fremont was represented by Skadden Arps). This might be an area where public interest organizations, working with unemployed or deferred graduates, or law clinics need to step in and expand their operations. | | | Class Action Lawsuits to Enjoin Foreclosure: An Argument for Clinical Involvement (original)
I. Excessive Foreclosures and the Massachusetts Model | | | Starting "in media res" with a description of the Massachusetts injunction has a certain zip to it, but I think starting out with a description of the broader problem may help orient a reader who is not familiar with litigation in this area.
In a sense, you have a good big picture down already: you have identified a significant problem, an approach to solving it, and a way to generalize that solution. I think your efforts would be strengthened however, by adding some more precision to your statements about these elements and adding some more evidence to support your analysis. | |
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< | Class Action Lawsuits to Enjoin Foreclosure: The Fremont Case
Excessive Foreclosures and the Massachusetts Model
The Problem
The recent financial crisis has exposed a serious problem: foreclosures without adequate legal advising. When borrowers are unable to keep up with payments, banks foreclose on the houses right away. Often, these are firms which have engaged in a pattern of predatory lending that helped create the problem. Foreclosures soared 79% in 2007, last year 3 million homes received foreclosure notices. The economic and social upheaval caused by the housing crisis will have enormous effects on American society for years to come.
The Fremont Injunction
In Massachusetts, the Attorney General won an injunction in 2008 to block foreclosures by Fremont Mortgage Group, a mortgage lending firm based in California that held approximately 3,000 loans in Massachusetts. This action, Commonwealth v. Fremont, was brought under the Massachusetts Predatory Loan Practices Act and the state’s general consumer protection statute. The injunction requires Fremont, or any company that purchased a loan from Fremont, to submit these loans for review to the Attorney General's office before foreclosure.
Results
Judicial bypass will only be granted on a case by case basis, and the cost to Fremont to have an individual case reviewed is so great that one practical effect of the law is a de facto moratorium on foreclosures. For the foreseeable future, 2200 families remain in their homes and have a powerful bargaining chip through which to renegotiate the terms of the mortgage.
The benefit from a preliminary injunction to a homeowner is twofold: first, even if the suit is ultimately defeated and the foreclosure recommenced, the owner will have bought time to find a job, secure new living accommodations, or simply blunt the effect of such a massive life change on his family. Second, it puts pressure on the lender to settle and renegotiate the terms of the lease, as long as the money gained from renegotiating is greater than the sale of the house minus the cost of fighting the suit. Fremont also faces a public relations nightmare if they persist in foreclosing, and a powerful incentive to settle on terms favorable to the homeowners.
Replicability
Investors and mortgage lenders in the Commonwealth and all over the country are bracing for more lawsuits, afraid that other state governments may try to follow the Massachusetts precedent. In the case of New York, which saw over 57,000 foreclosure filings in 2007 the Attorney General has not yet sued, despite the provision of New York Banking Law 6-l that allows the Attorney General to enforce the provisions of the section.
To bring one of these suits, a plaintiff would need an applicable consumer protection statute and a lawyer willing to take the case. Although the Massachusetts Predatory Loan Practices Act allows courts to reform or rescind mortgage contracts that violate the terms of the act, other states have similar statutes that provide for causes of action and equitable relief against predatory lenders. New York Banking Law 6-l(9), for example, provides for injunctive relief the court deems appropriate. The Massachusetts Act also invalidates loan provisions that force borrowers to litigate in inconvenient districts, and applies regardless when lenders attempts to chop up or transfer the mortgages to avoid lawsuits. Banking Law 6-l section 2(g) invalidates clauses that force borrowers to submit to oppressive mandatory arbitration, and section 3 applies the Act to lenders who try to avoid the act by splitting up the home loans.
The Limits of Attorneys General
In Fremont, the Attorney General's Consumer Protection Office acted on behalf of the Commonwealth of Massachusetts and the homeowners who had been subject to predatory lending practices. However, Attorneys General will likely not be able to provide all the services required in this field. Logistical concerns alone sometimes preclude them from doing so.
However, there are also potential political barriers. Mortgage companies and other lenders generally have a great deal of influence on state government and spend freely during Attorney General election campaigns. There may also be a political backlash by state residents who do not wish to see their state intervening to "bailout" people they perceive to be undeserving. Mass action by state Attorney's General, such as an action against Ameriquest that netted over a $300 million settlement, looks good in the news. Spread the money out over the affected borrowers, though, and there is very little to go around. Enjoining foreclosures, however, either directly or indirectly through an expensive review process, would shake the foundations of the credit industry, something the states may not be willing to do.
The Role of Private Practitioners
Private practitioners can offer their services to individual clients, but class action lawsuits have also sprung up. The private Ameriquest litigation, not to be confused with the larger action undertaken by state Attorney Generals for deceptive lending practices, resulted in a large payout to the attorneys- but little on a per plaintiff basis and no injunctive relief. The NAACP filed a class action lawsuit on behalf of African American borrowers, claiming discrimination. They will probably be less motivated by the financial aspects of the suit, but a discrimination claim won't affect non-black borrowers.
However, if private attorneys don’t think they have a chance at winning, or think that the expected payout on the lawsuits doesn’t justify the time or expense, they will not want to take on the lenders or might settle too quickly, recovering damages but not the injunction that will keep the homeowners and their families in their homes.
As for the Fremont borrowers, there was a settlement in 2009. The terms of the settlement held the permanent injunction at the terms set in 2008 and awarded the state 10 million (or about $4500 per borrower). While the cumulative benefit to the homeowners may well turn out to be many times that number, a fee of $1500 might be too small for a solo practitioner going up against a well funded lender (Fremont was represented by Skadden Arps). Foreclosures rates are expected to continue to remain high through 2010 and there is still time for states or private lawyers to get involved on behalf of borrowers.
-- JonathanWaisnor - 19 Jun 2010
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