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From PLI’s Course Handbook

13th Annual Consumer Financial Services Litigation Institute

#14257

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5

the foreclosure crisis: can impact

litigation provide a response

Stuart T. Rossman

National Consumer Law Center

The Foreclosure Crisis: Can Impact Litigation Provide a Response

Stuart T. Rossman

Director of Litigation

National Consumer Law Center

Boston, MA

January, 2008

We are in the midst of a mortgage catastrophe. The Mortgage Bankers Association recently reported that of the 44 million active mortgages throughout the country, approximately 342,000 entered into foreclosure during the third quarter of 2007, the highest rate of foreclosures in more than 35 years. Overall, nearly 450,000 properties were in some stage of foreclosure during the third quarter of 2007, up 30% from the second quarter.

Nationally, the foreclosure crisis is worsening rapidly and is expected to deteriorate further. The number of foreclosure filings nearly doubled for the third quarter of 2006 to the third quarter of 2007. One out of every seventeen mortgage holders is no longer able to make payments on time, the highest rate in over twenty years. Approximately 150,000 adjustable rate loans are resetting to higher interest rates every month. In 2008, $362 billion in subprime loans will reset to higher rates. Treasury Secretary Paulson has claimed that 1.8 million subprime mortgages are scheduled to reset to higher rates over the next two years. The Joint Economic Committee of Congress predicts that from 2007 to 2009 there could be nearly 2 million foreclosures nationwide on homes purchased with subprime loans alone.

There is no simple solution to this unprecedented set of circumstances. Congress, the administration, state and local governments all have attempted to respond through myriad proposals, programs and agreements. Similarly, to an extent the mortgage lending industry itself has cooperated with efforts to stem the rising tide that threatens to engulf their very businesses. Most of the answers being provided, however, only have a future perspective and seek to prevent some of the elements and situations that led to, permitted and enabled the current crisis. For current homeowners the response has been of limited value--in part because of the sheer numbers involved and in part because the present solutions often have been restricted to a small sector of the affected community--those homeowners who have not yet fallen behind in their payments or defaulted on their loans.

Community development groups and other grass roots public interest organizations have done yeoman’s work in impossible settings to provide practical relief to individual homeowners, whether before or after default, through repayment plans, refinancing and loan renegotiations. Nonetheless, the foreclosures keep increasing in the face of overwhelming demands and insufficient resources.

Litigation also has played a role in this battle. Private and legal services attorneys have represented individual homeowners attempting to save their homes in court, sometimes by raising affirmative defenses and counterclaims, when allowed, in judicial foreclosure proceedings. In those states that provide for non-judicial foreclosures, affirmative cases can sometimes be brought to assert claims and defenses in an attempt to enjoin the foreclosure. There never will be enough lawyers available, however, to insure that more than a small minority of, let alone every, homeowner will be entitled to legal representation in their individual foreclosure cases.

Rather than proceed on a person by person basis, therefore, some attorneys for homeowners have been exploring innovative litigation strategies for cases that might have a broader impact on the current foreclosure crisis. Their efforts have been supplemented by state and municipal cases brought by governmental authorities on behalf of the citizens facing foreclosures in their jurisdictions. These cases may have an important role to play in providing meaningful, timely relief for large numbers of homeowners who are in default or on the verge of going into default. They also may be the basis for effective moratoria on on-going foreclosure proceedings. Set forth below are some of the recent developments in this area:

I. Challenges to Standing by the Foreclosing Bank Trust

A Federal District Court in Ohio has dismissed 14 home foreclosure actions based on lack of standing by the foreclosing bank trust. The Federal Court's dismissal of these foreclosure cases is significant because the Court found that the trust lacked standing to pursue the foreclosures in light of the fact that it could not demonstrate its ownership of the mortgages at issue, a problem that exceedingly is common in foreclosure cases throughout the country.

In In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio 10/31/07), Judge Christopher A. Boyko demanded that the foreclosing plaintiff, Deutsche Bank National Trust Company, produce copies of the Assignment of the Note and Mortgage in each of the 14 cases Deutsche Bank filed showing that it was the owner of the mortgage loans at the time the cases were filed. Instead, Deutsche Bank produced Assignments stating a present intent to convey all rights. The Court found that this belied Deutsche Bank's assertion that it owned these mortgages, and concluded that Deutsche Bank therefore lacked standing to foreclose.

Specifically, the Court held:

In each of the above-captioned Complaints, the named Plaintiff alleges it is the holder and owner of the Note and Mortgage. However, the attached Note and Mortgage identify the mortgagee and promisee as the original lending institution- one other than the named Plaintiff. Further, the Preliminary Judicial Report attached as an exhibit to the Complaint makes no reference to the named Plaintiff in the recorded chain of title/interest. The Court's Amended General Order No.2006-16 requires Plaintiff to submit an affidavit along with the Complaint, which identifies Plaintiff either as the original mortgage holder, or as an assignee, trustee or successor-in-interest. Once again, the affidavits submitted in all these cases recite the averment that Plaintiff is the owner of the Note and Mortgage, without any mention of an assignment or trust or successor interest. Consequently, the very filings and submissions of the Plaintiff create a conflict. In every instance, then, Plaintiff has not satisfied its burden of demonstrating standing at the time of the filing of the Complaint.

Understandably, the Court requested clarification by requiring each Plaintiff to submit a copy of the Assignment of the Note and Mortgage, executed as of the date of the Foreclosure Complaint. In the above-captioned cases, none of the Assignments show the named Plaintiff to be the owner of the rights, title and interest under the Mortgage at issue as of the date of the Foreclosure Complaint. The Assignments, in every instance, express a present intent to convey all rights, title and interest in the Mortgage and the accompanying Note to the Plaintiff named in the caption of the Foreclosure Complaint upon receipt of sufficient consideration on the date the Assignment was signed and notarized. Further, the Assignment documents are all prepared by counsel for the named Plaintiffs. These proffered documents belie Plaintiffs' assertion they own the Note and Mortgage by means of a purchase which pre-dated the Complaint by days, months or years.

Id. at *1-*2

The Court went on to note that:

[it] is obligated to carefully scrutinize all filings and pleadings in foreclosure actions, since the unique nature of real property requires contracts and transactions concerning real property to be in writing. R.C. § 1335.04. Ohio law holds that when a mortgage is assigned, moreover, the assignment is subject to the recording requirements of R.C. § 5301.25. Creager v. Anderson (1934), 16 Ohio Law Abs. 400 (interpreting the former statute, G.C. § 8543). “Thus, with regards to real property, before an entity assigned an interest in that property would be entitled to receive a distribution from the sale of the property, their interest therein must have been recorded in accordance with Ohio law.” In re Ochmanek, 266 B.R. 114, 120 (Bkrtcy.N.D.Ohio 2000) (citing Pinney v. Merchants' National Bank of Defiance, 71 Ohio St. 173, 177, 72 N.E. 884 (1904).

Id. at *2

The Court acknowledged:

...the right of banks, holding valid mortgages, to receive timely payments. And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes-seeking foreclosure on the property securing the notes. Yet, this Court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary mortgage market, nor monetary or economic considerations of the parties, nor the convenience of the litigants supersede those obligations.

Id.

As a result, the Court ruled that it could not be “forgiving in this regard.” Rather, admonishing the mortgage industry and sending a stern warning, the Court concluded:

[T]he financial institutions or successors/assignees rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. The financial institutions know the law charges the one with title (still the homeowner) with maintaining the property.

There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution's favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit-to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. Counsel for the institutions are not without legal argument to support their position, but their arguments fall woefully short of justifying their premature filings, and utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate.

The Court will illustrate in simple terms its decision: “Fluidity of the market”-“X” dollars, “contractual arrangements between institutions and counsel”-“X” dollars, “purchasing mortgages in bulk and securitizing”-“X” dollars, “rush to file, slow to record after judgment”-“X” dollars, “the jurisdictional integrity of United States District Court”-“Priceless.”

Id. at *3

II. Right to Rescission Classes in Truth in Lending Actions

Over 25 years ago, the Fifth Circuit Court of Appeals in James v. Home Construction. Co., 621 F.2d 727, 731 (5th Cir. 1980) refused to certify a class seeking rescission under the Truth in Lending Act (“TILA”) because the statutory scheme gave the creditor certain rights before a rescission claim might be brought before a court. See also, Jefferson v. Sec. Pac. Fin. Servs., Inc., 161 F.R.D. 63 (N.D. Ill. 1995) (agreeing with rationale of James, and concluding that actions seeking rescission under TILA § 1635 should not be certified); and Nelson v. Unified Credit Plan, Inc., 77 F.R.D. 54, 58 (E.D. La. 1978) (having “found no evidence of congressional intent that class treatment is appropriate in actions seeking rescission in the Truth-in-Lending context,” casting doubt on the “propriety of ever pursuing rescission under” TILA).

The James Court found that the right of rescission was a purely personal remedy under TILA, exemplified as a unique transaction between each individual lender and borrower that differs each time the right is exercised. Therefore, the Court concluded, the remedy did not present the commonality, superiority and manageability features necessary to support a class certification under the federal rules. Furthermore, the Court noted that without a cap on the rescission payments the creditor could be exposed to annihilating damages and insolvency if class rescissions were allowed. Finally, the Court found comfort in the fact that the availability of monetary recoveries and attorneys fees in individual rescission cases still would be available in individual enforcement actions under TILA.

Some contemporary cases subsequently held, however, that a rescission class could be certified, specifically when the relief sought was merely a declaration of the class members’ rights to individually pursue a rescission of their own transaction. See, e.g., Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980) (class certified under TILA with option to rescind offered in settlement of common claim); Williams v. Empire Funding Corp., 183 F.R.D. 428 (E.D. Pa. 1998) (same), later opinion, 109 F. Supp. 2d 352 (E.D. Pa. 2000); In re Consol. Non-Filing Ins. Fee Litig., 195 F.R.D. 684, 692 (M.D. Ala. 2000) (same); Hickey v. Great W. Mortgage Corp., 158 F.R.D. 603 (N.D. Ill. 1994) (permitting certification of a 23(b)(3) class seeking, inter alia, “a declaration that the class has a continuing right to rescind its transactions,” having concluded that Nelson and its progeny were inapposite when the plaintiff had not rescinded his contract).

The issue recently has been framed. In McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir., 2007) the First Circuit Court of Appeals followed James, supra, and held that , as a matter of law, class certification is not available for rescission claims, direct or declaratory, under TILA and parallel state law because Congress did not intend rescission suits to receive class action treatment.

On the other hand, in Andrews v. Chevy Chase Bank, FSB, 474 F.Supp. 2d 1006 (E.D. WI, 2007)(pending appeal) class certification was found to be appropriate for a declaration of the availability of rescission rights that class members may exercise in light of a finding of a TILA violation. The Andrews Court relied upon the fact that although Congress had amended TILA to cap damages claims against creditors it did not, at the same time, limit or ban rescission classes. As a result, the Court concluded, it should not infer a Congressional intent in the face of a vacuum. The Court noted that, unlike the circumstances raised in James, the personal aspects of rescission only arise when the right is exercised. Therefore, merely declaring whether a consumer had a right of rescission was a “common issue” of fact that could be decided on a class wide basis.

The Andrews decision currently is pending appeal in the 7th Circuit Court of Appeals. A determination of whether rights of rescission class actions are available to consumer advocates will have significant impact upon their ability to effectively utilize the most significant remedy available under TILA in order to enforce a fundamental consumer protection statute.

III. Sub-prime Mortgage Lending Discrimination Cases

Not surprisingly, there is a glaring race component that unfortunately is manifest in the midst of the mortgage foreclosure disaster. United for a Fair Economy reports that the subprime mortgage crisis will cause African Americans to experience wealth losses of between $71 billion and $122 billion over its duration and that the racial bias of subprime mortgage lenders accounts for a 40% difference in losses between whites and people of color.

On July 11, 2007, The National Association for the Advancement of Colored People (“NAACP”) filed a so-called “reverse redlining” class action compliant alleging violation of the Fair Housing Act, 42 U.S.C. §§ 3601, et seq (“FHA”); the Equal Credit Opportunity Act, 15 U.S.C. §§ 1691 et seq (“ECOA”); and racial discrimination under the Civil Rights Act, 42 U.S.C.§§ 1981 and 1982 against 12 banks and lending institutions. NAACP v. Ameriquest Mortgage Company et al, C.A. 07-0794, United States District Court for the Central District of California.

The law suit alleges that the defendant mortgage lenders have engaged in institutionalized, systematic racism by targeting African-American homeowners for subprime mortgage loans at rate that is disproportionate to the number of Caucasian borrowers with the same qualifications receiving such loans. Specifically, the NAACP asserts that the subprime industry has attempted to maximize its profits by directing or “steering” African American borrowers with relatively good credit to subprime mortgages. The causes of action included claims, in the alternative, for both intentional discrimination by the subprime mortgagees and a discriminatory impact created by the policies developed and employed by the subprime mortgagees to steer African American borrowers to their subprime loans.

The NAACP suit shortly was followed by a series of national and statewide class action cases filed by African American and Hispanic consumers against individual subprime lenders across the country. Many of these cases pursued different strategies than the NAACP case. Although they also were brought predominantly under the FHA and the ECOA, they did not assert claims for intentional discrimination. Rather, their focuses are on the disparate impacts of the alleged “Discretionary Pricing Policies” of those subprime companies which authorized their loan officers, brokers and correspondent lenders to include subjective, discretionary charges and interest rate mark-ups in the finance charges of home mortgage loans they originated. These charges and mark-ups allegedly are totally unrelated to a borrower’s objective credit characteristics and result in purely subjective charges that affect the rate otherwise available to borrowers.

The “Discretionary Pricing Policies” cases stem from the practice of subprime lenders determining a risk-based financing rate or “Par Rate” for each loan applicant. The “Par Rate” is based upon objective risk-related variables such as the individual’s credit bureau histories, payment amounts, debt ratio, bankruptcies, automobile repossessions, charge offs, prior foreclosures, payment histories, credit score, debt to income ratios, loan to value ratios and other risk-related attributes and variables.

After arriving at a risk-based rate, certain subprime lenders authorize their loan officers, brokers or correspondent lenders to mark up the objective “Par Rate” to an amount limited only by the “caps” established by the lender’s policies. This markup (sometimes called a “Yield Spread Premium” or “YSP”) is not based on a credit applicant’s score or any other risk-related assessment. On the contrary, the mark-up is subjectively set pursuant to, and within the limits of, policies specifically delineated by the subprime lender.

The plaintiffs in these cases allege that the Discretionary Pricing Policies of the subprime lenders, although facially neutral, have a disproportionately adverse effect on African Americans compared to similarly situated Whites in that the African Americans pay disparately more discretionary charges (both in frequency and amount) than similarly situated Whites. They further allege that the subprime lenders know, or should have known, that their credit pricing systems cause African Americans to pay more for mortgage financing than the amounts paid by White customers with identical or effectively identical credit scores.

IV. Municipal Suits

On Tuesday, January 8, 2008, a lawsuit was filed under the Fair Housing Act on behalf of the City of Baltimore. In Mayor and City Council of Baltimore v. Wells Fargo Bank, N.A. et al., pending in the U.S. District Court for the District of Maryland, Civil Action No. 08-cv-062, the City of Baltimore alleges that Wells Fargo Bank

intentionally targeted Baltimore's minority communities for predatory loans with

discriminatory and unfair terms. The City claims that Wells Fargo's discriminatory lending practices have resulted in extraordinarily high rates of foreclosure in Baltimore's

minority neighborhoods - foreclosures that ultimately cost the City millions of

dollars in lost tax revenues, added fire and police costs, court administrative

costs, and social programs needed to maintain stable and healthy neighborhoods.

The City of Baltimore Complaint asserts that Wells Fargo’s disproportionately high foreclosure rate in Baltimore’s African-American neighborhoods is the result of reverse redlining:

Wells Fargo has been, and continues to be, engaged in a pattern or practice of unfair, deceptive and discriminatory lending activity in Baltimore’s minority neighborhoods that have the effect and purpose of placing inexperienced and underserved borrowers in loans they cannot afford. These practices maximize short-term profit to Wells Fargo without regard to the borrower’s best interest, the borrower’s ability to repay, or the financial health of underserved minority neighborhoods. Wells Fargo’s lending practices, targeted in this manner at Baltimore’s underserved and vulnerable minority neighborhoods, have resulted in the disproportionately high rate of foreclosure in Baltimore’s African-American communities, caused substantial and irreparable damage to these neighborhoods, and caused direct and continuing financial harm to the City of Baltimore.

Complaint ¶¶ 4 and 5.

Baltimore alleges that the foreclosures and consequent vacancies harm neighborhoods by reducing the property values of nearby homes. This, in turn, reduces the City’s revenue form property taxes. It also claims it makes it harder for the City to borrow funds because the value of the property tax base is used to qualify for loans. Complaint ¶ 19.

The foreclosures related to Wells Fargo’s alleged discriminatory reverse redlining practices allegedly have caused, and continue to cause, multiple other types of injuries to Baltimore, including:

a. An increase in the number of abandoned and vacant homes;

b. An increase in criminal and gang activity as abandoned and vacant homes become centers for squatting, drug use, drug distribution, prostitution and other unlawful activities;

c. Increased expenditures for police and fire protection;

d. Increased expenditures to acquire and rehabilitate vacant properties; and

e. Additional expenditures for administrative, legal and social services.

Complaint ¶ 66.

Following almost immediately on the heels of the City of Baltimore case, the City of Cleveland initiated a suit on January 11, 2008, against 21 major investment banks alleging that they enabled the subprime lending and foreclosure crises in the City. The case, City of Cleveland v. Deutsche Bank Trust Company, et al., filed in Cuyahoga County Common Pleas Court, CV-08-646970, contends that the defendants made mortgages available to people who had “no realistic means of keeping up with their loan payments.” The resulting widespread defaults and thousands of foreclosures, it is alleged, depleted the City’s tax base and left entire neighborhoods in ruins. The City therefore charges the firms with creating a public nuisance. The claims asserted seek to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

Significantly, the City of Cleveland targets its claims not only at the subprime lenders themselves, but also at the financial firms that provided them with access to the funds to fuel the subprime loan crisis:

Responsibility for Cleveland’s plight rests principally with sub-prime’s so-called “securitizers”-investment banking firms from Wall Street and elsewhere that actually provided the cash used to make loans, regardless of the lender or broker nominally involved in the transactions. The “securitizers” accomplished this largely by buying the sub-prime loans with proceeds received from the sale of mortgages from earlier deals. Through this cycle, Wall Street financed the sub- prime boom that took place in Cleveland and across the country. Investment bankers bought sub-prime mortgages for use as collateral in the sale of mortgage- backed securities. This form of investment became the darling of Wall Street, given the substantial returns that purchases were supposed to receive (in keeping with the substantial interest that sub-prime borrowers were supposed to pay on the mortgages that backed the securities). “Securitizers,” typically paid themselves astronomical fees in putting together new offerings of mortgage-backed securities. Their appetite for mortgage-backed securities became so voracious that “securitizers” explicitly countenanced loans made to borrowers either on financially irrational terms or without any information to corroborate the borrowers’ wherewithal to pay-anything to keep new mortgages coming for the creation of still more mortgage-backed securities.

Complaint ¶ ¶ 6-8.

In particular, the City of Cleveland argues that rather than dealing in “conforming mortgages that meet certain restricted “borrower quality characteristics and loan-to-value ratios,” “securitizers” focused their investments on spurring the unprecedented surge in sub-prime lending:

In contrast, Wall Street has relied upon sub-prime mortgages to fund their mortgage-backed offerings. These securities offer investors higher rates of return than those backed by “conforming mortgages,” since they involve higher rates of interest. They also involve higher degrees of risk, since sub-prime borrowers (with their relatively poor credit) by definition default with greater frequency than recipients of loans at prime rate. Wall Street’s involvement in the sub-prime market encompassed more than just the purchase and pooling of mortgages to back new securities offerings. The investment bankers also provided lenders with lines of credit and other means of financing required to accommodate the dramatic increase in the number of mortgages they were procuring....Wall Street necessarily held significant influence over sub-prime lenders, given its concurrent positions as financier, underwriter, and investor in the sub-prime market. The firms used their preeminent status to set the standard that lenders applied to determine who did (almost everyone) and did not (almost no one) qualify for sub- prime financing.

Complaint ¶ ¶ 36-38, 42.

The City asserts that the “securitizers” are liable to the municipality for public nuisance for their respective roles in “proliferating toxic sub-prime mortgages within its borders, under circumstances that made the resulting spike in foreclosures a foreseeable and inevitable result.” The municipality claims that, just as the “securitizers” could have and should have foreseen the mass foreclosures they were causing in Cleveland, they could have and should have anticipated the damages the City would suffer as a result of their actions, including the cost of monitoring, maintaining and demolishing foreclosed properties, and decreased tax revenues resulting from the depreciated value of the affected homes and all surrounding real estate. Complaint ¶ ¶ 62-65.

V. Ameriquest Litigation

In In Re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, No. 1715, is a multidistrict litigation case (MDL”) pending before Judge Aspen in the United States District Court for the Northern District of Illinois. The MDL against Ameriquest and its related entities involves three tracks: (a) Consolidated Class Claims of Borrower Plaintiffs; (b) Consolidated Class Claims of Non-Borrower Plaintiffs; and (c) Individual Claims of approximately 800 borrowers.

Two of the key claims of the borrower-plaintiffs, both class and most individual plaintiffs as well, are that Ameriquest violated TILA in failing to provide borrowers with complete and accurate Notice of Right to Cancel forms, and in failing to use Notice of Right to Cancel forms designed for refinancing by the same lender where appropriate. Other non-statutory claims include that it misrepresented loan terms, engaged in bait and switch tactics, employed a confusing and unfair variable interest rate structure, imposed duplicative and excessive costs and closing fees, and improperly serviced borrowers' loans.

The non-borrower plaintiffs assert that Ameriquest violated the Fair Credit Reporting Act (“FCRA”) by accessing their credit reports and either not giving them a firm offer of credit or failing to provide a notice of adverse action where required.

In the past year, three Motions to Dismiss filed by Ameriquest in the MDL have been denied. The most important of these asserted that a TILA rescission class could not be certified, citing the holding to that effect in McKenna v. First Horizon Home Loan Corp., 474 F.3d 418 (1st Cir., 2007)[See discussion, supra, in Section II above]. Judge Aspen declined to follow McKenna, finding more persuasive the analysis in Andrews v. Chevy Chase Bank, FSB, 474 F. Supp. 2d 1006 (E.D. WI, 2007) and the other district court decisions cited therein. He held that a declaration of a right to rescind would not violate the TILA damages cap or any other provision of the Act.

Another Ameriquest Motion to Dismiss argued that plaintiffs’ TILA damages claims that are predicated on Ameriquest’s failure to rescind when requested to do so were time-barred by TILA’s one year statute of limitations. The Motion contended that the statute began to run when the loan transaction was consummated, but the Court found that it did not begin to run until the failure to rescind occurred. At the same time, Judge Aspen also denied Ameriquest’s request to dismiss plaintiffs’ punitive damages claims. Ameriquest had argued that TILA didn’t permit these, but the Court found they were actually based on state law, not TILA.

A third Ameriquest Motion to Dismiss sought dismissal of the non-borrower Consolidated Complaint on the ground that the Fair and Accurate Transactions Act (“FACTA”) eliminated certain private causes of action under the FCRA. Judge Aspen overruled this motion, holding that these provisions of FACTA were not to be applied retroactively to plaintiffs’ claims that arose before its effective date, December 1, 2004.

Although unable to get class claims against it dismissed during 2007, Ameriquest did reduce the class size by several hundreds of thousands of borrowers. These borrowers accepted payments from a $295 million restitution fund Ameriquest had paid to the Attorneys General of 49 States in 2006.[1] Nevertheless, class counsel has estimated in a Court filing that more than 350,000 borrowers remain in the putative class.[2]

During 2007, Ameriquest and Argent also added approximately 300 third-party defendants, seeking indemnification and contribution. The third-party defendants fall into two categories: (1) mortgage brokers who, for example, allegedly misled Ameriquest or Argent about information regarding the borrower; and (2) title companies, individual attorneys involved in closing the loans, and title underwriters. As to the latter, Ameriquest claims that if any of the borrowers received inaccurate, incomplete, or misleading Notice of Right to Cancel forms, or an incorrect number of forms, this was entirely attributable to the third-party Title Defendants. According to Ameriquest and Argent, the latter were hired by them to close the loans and were contractually obligated to accurately and completely complete the Notice of Right to Cancel Forms and to provide the underlying plaintiffs with the correct number of those completed forms.

VI. Countrywide Fair Lending Settlement

On December 5, 2006, Attorney General Eliot Spitzer of New York announced a groundbreaking fair lending agreement with Countrywide Home Loans, Inc., one of the largest residential mortgage lenders in the country. (Portions of this summary are taken from the press release issued by the New York Attorney General’s Office on that date.)[3]

Under the terms of the settlement agreement, Countrywide substantially will enhance its fair lending monitoring activities; compensate minority borrowers who were improperly given certain costly loans; and institute a $3 million consumer education program to assist consumers in making informed choices about mortgage loan products.

The Attorney General’s office initiated its inquiry last year after its review of the new federal Home Mortgage Disclosure Act ("HMDA") data allegedly showed that Countrywide’s black and Latino customers were more likely than its white customers to receive high-priced loans in New York in 2004. Expert statistical analyses were commissioned to determine whether these pricing differences could be explained by legitimate factors, such as borrower credit scores or outstanding debts. The Attorney General concluded that, although such factors accounted for much of the disparity, on average black and Latino borrowers still paid more than whites for their mortgage loans, especially for loans generated by mortgage brokers.

Specifically, the agreement requires:

• Expanded monitoring of pricing-related discretionary decisions – such as the decision to relax underwriting requirements, the choice of loan products or features to present to customers, and the imposition of discretionary charges – to ensure that minority borrowers are treated fairly.

• Increased monitoring of broker pricing decisions, particularly the amount of broker compensation sought for loans, and stringent remedial measures against brokers who unjustifiably charge minorities higher prices.

• Compensation for black and Latino retail customers who improperly received subprime or "Alt-A" loans in 2004.

• Implementation of a $3 million consumer education program consisting of statewide seminars and individualized counseling. The seminars will target minority consumers and will educate participants about the advantages, disadvantages and relative costs of different mortgage products and product features; discretionary fees and the fact that such charges are negotiable; the role of mortgage brokers and how they are compensated; and the importance of shopping around when seeking a mortgage. The seminars will be conducted in English and Spanish by an independent entity and will not involve the sale or promotion of any Countrywide products.

• Improved disclosure about the advantages, disadvantages, and relative costs of different mortgage products and features.

• Extensive and updated fair lending training for loan officers.

• Detailed reporting to the Attorney General’s office to ensure compliance with the agreement and track Countrywide’s progress in meeting its fair lending goals.

• Payment of $200,000 to the State for the cost of the investigation.

This agreement marks the first settlement of a regulatory inquiry arising out of the new April, 2005, HMDA disclosures which required lenders to disclose the race and ethnicity of consumers who received high-cost loans. Initially, the New York Attorney General’s Office sought to investigate federally regulated banks doing business in the state. However, both the banks and the Office of the Comptroller of the Currency successfully brought legal actions to stop the investigation, claiming federal preemption in separate federal district court proceedings and affirmed by the Second Circuit Court of Appeals, The Clearing House Association, L.L.C. v. Cuomo, F.3d , 2007 WL 4233358 C.A. 2 (N.Y.), December 4, 2007.

However, the existing rulings did not affect the New York Attorney General Office’s ability to investigate non-federal banks. While Countrywide does hold a federal bank charter, its mortgage affiliate is not within the bank and does not qualify for preemption. The New York Attorney General’s Office ultimately may, or may not, be entitled to expand its investigations and enforcement of civil rights and consumer protections against national banks, subject to the outcome of the pending appeals. The question remains, however, whether the Countrywide settlement has established what amounts to a national industry best practices standard.

-----------------------

[1] See, e.g.,

[2] Those who accepted the Attorneys General settlement and executed releases in return for modest compensation are not barred from asserting “any claim or defense that [they] have with respect to [their] loan with an Ameriquest party in response to a judicial or threatened non-judicial foreclosure, including those [claims and defenses] related to the lending practices listed in the release." Foreclosures brought by assignees of Ameriquest should also be covered by the foreclosure exception to the release where the claim or defense raised by the borrower in the foreclosure is based on a "loan with an Ameriquest party."

[3] A complete copy of the Countrywide Fair Lending Settlement Agreement is posted at

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