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

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, firm foreclose the houses right away. Often, these are firms which have engaged in a pattern of predatory lending that helped create the problem.

A few good statistics would be helpful here to quickly paint a picture. How many foreclosures nationally, how often are the firms foreclosing the same ones that did predatory lending, etc.

The Fremont Injunction

In Massachusetts, the Attorney General won an injunction in 2008 to block such foreclosures by Fremont Mortgage Group, a mortgage lending firm based in California that held approximately 3,000 loans in the Commonwealth of 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 that keeps 2200 people in their homes for the foreseeable future or allows them to renegotiate the terms of their mortgages on very favorable terms.

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 new 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.

Some data about the benefits would be helpful here. Without that data, in current form (especially the second paragraph), it has the feel of a discussion of the theoretical benefits the injunction could bring rather than empirical observation of results obtained.

As of Spring 2010 (or as recent as possible), are those 2200 people still in their homes? What is the year and source of the 2200 figure?

II. 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. 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 is particularly plaintiff-friendly, other states have similar statutes that provide for causes of action and equitable relief against predatory lenders.

Why is the MA law particularly plaintiff friendly? What other states have similar statutes and in what ways are they different?

How do we know mortgage lenders are afraid? Is there really a significant probability that other AGs will do this? Have they? Fremont was in 2008. What has happened since, both in MA and elsewhere?

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 the all of legal services required in this field. Logistical concerns alone 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.

Providing some evidence would be helpful here.

The Role of Private Practitioners

Lawsuits such as Fremont have sometimes been brought by private practitioners, usually representing a single client. Class action lawsuits have also appeared in different jurisdictions- with these suits, it is possible to completely stop a company from foreclosing on any household that purchased a toxic loan.

However, if 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.

I think an assessment of the role of private practitioners is an important part of the argument you want to make, but I think you need more backing it up and you need to get more precise.

This section could use some evidence. Especially: "usually representing a single client," "have also appeared in different jurisdictions" "it is possible" "if attorneys don't think" "they will not want to take on the lenders or might settle too quickly."

III. The Role of Law Students: A Clinic at Columbia?

Perhaps a clinic, or a temporary project closely resembling a clinic, could be introduced here at Columbia. A coalition of faculty-run, student staffed law clinics or externships, pro bono consumer protection attorneys, and unemployed recent graduates could band together to bring these lawsuits on behalf of affected homeowners. Clinics at law schools in every state could work together and with law firms to represent clients in class action suits against lenders to keep many thousands of people at a time from foreclosure. Indeed, Harvard Law already offers a Predatory Lending clinic that works with private practitioners to represent homeowners.

You might want to do some digging and assess what, if anything, the HLS clinic has achieved in terms of preventing foreclosures, and how the clinic is funded.

You may want to engage with the issue that existing faculty here at CLS don't have any incentive to do this, and CLS doesn't have much money to hire any additional staff. Unemployed recent graduates still need to be paid by someone - although deferred associates may have a stipend, and many in that category are still looking for work. The problem would be the cost of supervision. How do we finance that? Also, law firms may decided to defer less people in coming cycles (paying people to do nothing for them is not desirable for them).

From a perusal of their website, it appears that Harvard's program is part of a legal services center sponsored by Wilmer Hale. Perhaps law firm sponsorship could provide funding here as well?

Pro bono work of alumni or other lawyers could be a source of work. But it wouldn't necessarily be sustainable or reliable, and may not be much available given the recession.

But the core idea of a clinic implies current CLS students doing work on this cases, and that can't be done without supervision, which must be funded.

Supply of Talent

Spots in Columbia's clinical program are in high demand, reflecting a desire of students for more hands-on legal education. The law school should expand its clinical program, including unemployed or deferred recent graduates into the mix, and the current state of the legal job market may force them to do this. Clients are becoming aware of a new balance of power in the legal services market, and they no longer want to pay for inexperienced associates, a problem for firms who are used to training their associates during the first few years on the job.

Skills Training

If firms value graduates with better legal writing, research, and judgment than they are getting now, and students demand more clinical experience, the law school will have no choice but to offer these programs. When that happens, law students across the country could play a significant role in repeating the success of the Fremont lawsuit.

"law students across the country could play a significant role in repeating the success of the Fremont lawsuit"

I think this statement could use some more evidence. In the section on the role of law students, you argue that students want to do clinical work, and that CLS should provide them more clinical opportunities. In sections above, you argue that people being foreclosed need good lawyers. I think there are further analytical steps between those two propositions that need to be filled in.

The logistical barriers to setting up a new clinical program are significant. Providing reliable legal advice to people who will depend on it is a formidable undertaking, and the law school doesn't seem to have much in the ways of resources to provide supervision, space, or funding for such a project.

Also, there hasn't been much evidence introduced for the proposition that the Fremont case is replicable in other states (or evidence about the precise results of the Fremont case itself in MA). Adding some of that in would help.

"If firms value graduates with better legal writing, research, and judgment than they are getting now, and students demand more clinical experience, the law school will have no choice but to offer these programs."

I'm not sure this sentence does much analytically. I think it basically says: if firms demand more clinical training and students demand more clinical training, then the law school will eventually offer more clinical training. I'm not sure there is anyone who would dispute this.

It might be interesting to engage with why firms haven't been demanding more clinical training in the past. Also, are they demanding it more now? I am not sure. Why haven't students demanded it more in the past? Are they now?

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General Comments

Links

One thing that I think would be generally helpful would be to make more use of linking; the original didn't have any links. The purpose is not necessarily to cite sources for the sake of citing sources, but to connect the reader to other resources that might interest her. The web, and wikis in particular, are media that are designed to facilitate these kinds of links.

I've added some links to some of the legal materials you mention. But, it might be helpful to add in links to some of the sources that you used for other points.

Precision and Use of Evidence

My edits have primarily focused on clarity and structure. I have tried to help articulate what I took to be your core points. I don't have a particularly strong knowledge of this topic, so I'm not in a great position to evaluate the particular merits of your analysis and proposal.

However, I think the piece would be strengthened by more use of evidence and more precise statements rather than generalization. For me to research these issues and fill in the piece with cites would I think exceed the scope of the editorial role. However, I've marked areas where you may wish you to add supporting evidence of some sort (and ideally links).

The Big Picture

Another area where there is room for improvement is giving more of a big picture sense of the problem and potential solutions. A reader learns that there is some sort of foreclosure problem in MA, and that MA has a law that could help, and then there's a discussion of how Columbia could add a new clinic, since there's a high demand here for clinical training. I think the dots could use some more connection.

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.