Home Lending Industry's "Waterfall Of Excuses" & "Abysmal Numbers Of Modifications" Force State AGs Closer To Filing Consumer Fraud Lawsuits

The New York Times reports:

• Newly empowered by the Supreme Court, the attorneys general of several states hit hard by the housing collapse are exploring consumer fraud suits against major mortgage lenders. Frustrated by the banks’ inability or unwillingness to stop an avalanche of foreclosures, the states are considering lawsuits over the creation and marketing of millions of bad loans as well as the dismal pace of mortgage modifications.

• Such cases would have been impossible until recently, because federal regulators had exclusive oversight of national banks. But a 5-to-4 Supreme Court decision in June allowed the states to exercise their own supervision, giving them significant leverage.(1)(2) “We tried to use the tool to be persuasive with the banks,” Arizona’s attorney general, Terry Goddard, said in an interview. “But their waterfall of excuses, the abysmal numbers of modifications, tells us persuasion is not working.” As a result, he said, “we’re moving much closer to litigation.”

• While statutes vary, those of every state prohibit fraud in consumer lending. The attorneys general are considering the theory that the banks essentially perpetrated a vast fraud on consumers by marketing exotic loans that would prove impossible to pay back.

For more, see States Are Pondering Fraud Suits Against Banks.

(1) According top the story, the states’ new power to sue banks arose from an effort in 2005 by Eliot Spitzer, then the New York attorney general, to discover whether several banks had violated the state’s fair-lending laws. The banks balked at surrendering any information. The Clearing House Association, a consortium of national banks, and the federal Office of the Comptroller of the Currency filed suit, asserting the states had no authority over national lenders. Mr. Spitzer’s successor, Andrew M. Cuomo, took up the battle. Lower courts agreed with the banks, but the Supreme Court, narrowly, did not. Already, the states’ victory in Cuomo v. Clearing House is beginning to affect the legal landscape. “The handcuffs are off,” said Ann Graham, a professor of banking law at Texas Tech University. “The states can pursue justice now.”

(2) For the U.S. Supreme Court's ruling, see Cuomo v. Clearing House Assn., L.L.C., 129 S. Ct. 2710; 174 L. Ed. 2d 464; 2009 U.S. LEXIS 4944 (June 29, 2009).