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Forget the "Foreclosure Investigator"--File a Lawsuit!

posted by Katie Porter

Elizabeth Warren's recent post asked "What Can a City Do?" about subprime lending. The post prompted many thoughtful comments, both on Credit Slips and on the Calculated Risk blog. While readers were discussing the merits of various ideas, including a city-appointed "Foreclosure Investigator," the city of Baltimore took a much more aggressive tact--it sued Wells Fargo on January 8th. Calling the city a "second victim" after the homeowners, Baltimore filed suit in U.S. District Court alleging that Wells Fargo engaged in predatory and discrimatory subprime mortgage lending. Wells Fargo denies the allegations, which focus on purported steering of black homeowners into high cost loans. The Associated Press reports that "two-thirds of Wells Fargo's foreclosures occurred in neighborhoods that are more than 60 percent black." The city attorneys apparently analyzed foreclosure data, finding that while most lenders had higher foreclosure rates in majority-black communities, that according to the AP, "Wells Fargo stood out having the most glarity racial disparity."

I believe this is the first lawsuit filed by a city as plaintiff to grow out of the current subprime loan crisis, and it seems sure to be controversial. Past Credit Slips guestblogger and law professor, Kathleen Engel, has an article on SSRN for free download entitled "Do Cities Have Standing? Redressing the Externalities of Predatory Lending?" that addresses many of issues that the Baltimore v. Wells Fargo suit will raise.

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The Complaint filed in federal court in Baltimore vs. Wells Fargo Bank has been posted on the web site of the plaintiff's firm: www.relmanlaw.com. It includes color maps of foreclosure filing and mortgage loans in Baltimore and a well-researched factual exposition drawing on HMDA data and other sources, certainly more than Rule 8 requires.

Cleveland has taken a similar approach:

http://blog.cleveland.com/metro/2008/01/cleveland_sues_21_investment_b.html

Cleveland sues 21 banks over subprime mess

Posted by Henry J. Gomez and Thomas Ott January 11, 2008 05:01AM

Cleveland Mayor Frank Jackson took aim at Wall Street on Thursday with a lawsuit against 21 major investment banks that he said have enabled the subprime lending and foreclosure crisis here.

The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.

Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.

Each of these lawsuits presents unique challenges. Cleveland's lawsuit is sure to give rise to standing and causation issues like we have seen in the gun, lead paint and tobacco litigation.

The Baltimore lawsuit highlights the difficulties inherent in proving lending discrimination claims based on price. Individuals and entities-- other than states and the federal government-- typically only have access to HMDA data when they file complaints. Because these data omit key variables like credit scores and nuanced pricing information, defendants can assert that lending discrimination claims based on HMDA data are insufficient to state claims for relief. Yet, the only way plaintiffs can obtain meaningful data is by filing a lawsuit and engaging in discovery. For these reasons, HMDA data fields need to be expanded to make it easier for the public to detect potentially discriminatory actions by lenders.

States and the federal government can obtain detailed loan-level data in furtherance of investigations of lenders and, thus, have the potential to acquire valuable information on pricing and creditworthiness. They should use their investigatory authority to request pricing data from "suspect" lenders and pursue claims where appropriate.

Although Baltimore and Cleveland have significant hurdles ahead of them, these cities should be lauded for trying to hold responsible the entities that contributed to the subprime pollution in their communities.

"...these cities should be lauded for trying to hold responsible the entities that contributed to the subprime pollution in their communities."

Subprime pollution? Isn't that the same as "increased mortgage-financed homeownership by less affluent members of society?" (After all, that's what "subprime" actually means-- lending to people who exhibit fewer indicia of creditworthiness, like, you know, steady income, down-payment from savings, track record of paying back other loans...)

The "heads I win, tails you lose" attitude on display here is maddening. Politicians like those who run Baltimore have campaigned against banks for years, accusing them of "redlining" and refusing to lend to minority borrowers. Enforcement action under the Community Reinvestment Act and regulations of all the Federal alphabet agencies has diverted billions into the pockets of "advocates," and politicians and lawyers and consultants and risky borrowers with the right skin color (at the expense of higher interest rates for legitimate borrowers).

Now the chickens come home to roost, the loans which banks were forced-- at C.R.A. gunpoint-- to make to borrowers with poor credit, against collateral with little value, are going into default, and it's time to sue the banks for "polluting" communities with those loans?

How can it be unlawful both to (a) refuse loans to risky borrowers, and to (b) make loans to risky borrowers? Which of those is wrong, huh?

I have a simpler explanation. Whenever politicians can blame "out of town banks" for any economic problem, they do so, whether it's true or not.

It is nice some states take action. Illinois does not,when it comes to Wells Fargo. My ex took out a 39K home equity line of credit 5 months after our divorce is finalized! He has now
put my house into Forclosure since 03-07 as he used the property as collateral. Illinois and Attorneys do nothing. Minors and ex wifes lose out. He has not made a payment, Yet behind in support by 8K and walking free and driving Good Illinois LAWS!!!!

Its time all 12 Federal reserve banks be sued at once, as they control the money, and allowed this money to the banks,to make these fool loans, and all 12 federal Reserve Banks are private Corporations, Be brought suit in a class action. The Fed has never been audited, even though the congress asked that it be a number of repeated times, this also goes for the FOMC! Which meet daily.

Unfortunately, banks at one time had stricter lending standards. These standards, due to socio-economic conditions, excluded more minorities from loans. So the Congress had to investigate and find out why.
Instead of dealing with the reasons for the socio-economic problems, they simply relaxed the standards. And to put the nail in the coffin, forced lenders to follow the relaxed rules:
"No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."
"Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt." (Liebowitz, 2008)
Hence we end up with "alternative" loan options, aka subprime mortgages. This let loose a large amount of free money to people that had obvious difficulties with their finances. Somewhat akin to inviting an alcoholic to guard your liquor store at night.

http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm

I am looking for an attorney to take on Wells Fargo, please contact me asap

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