Jan 29, 2010 - the evolution of the mass torts approach in addressing wide-spread harm ... âmass tort actionsâ and what such a determination would mean.
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TAINTED LOANS: THE VALUE OF A MASS TORTS APPROACH IN SUBPRIME MORTGAGE LITIGATION Raymond H. Brescia* [I]n my conversations with Sambol he calls the 100% sub prime seconds . . . the “milk” of the business. Frankly, I consider that product line to be the poison of ours. 1
A poison has entered the financial bloodstream. We have responded by seeking to prop up the purveyors of the poison so that they do not lose their investment in it. We have allowed those who sold the poisonous product to walk away from the fallout, after reaping large profits for years. The purchasers of the product are left to languish, with its side effects draining their resources and spirits, displacing them and ruining their future economic prospects. Typically, the sale and distribution of such a product would have meant litigation, large jury awards, massive settlements compensating victims, and, yes, financial ruin, but not for the purchasers of the product. Instead, its creators, manufacturers, and distributors would answer for their actions. In the world of the home lending market, however, we have sided with the investors and the snake oil salesmen. We have chosen to shield the lenders, many of whom have simply walked away from their businesses after swimming in cascading profits. We have allowed the product to run its course, unchecked, and asked its victims to suffer the consequences. Failure to foresee, check, or correct for this scourge has come from every corner: our institutions—public and private; our * Assistant Professor, Albany Law School; J.D., Yale Law School (1992); formerly the Associate Director of the Urban Justice Center in New York City, a Skadden Fellow at The Legal Aid Society of New York, law clerk to the Honorable Constance Baker Motley, and staff attorney at New Haven Legal Assistance Association. I would like to thank Elizabeth Chamblee Burch, Timothy D. Lytton and Elizabeth Renuart, who gave insightful and constructive comments on earlier drafts, as well as the participants in the Albany Law School Faculty Workshop Series from whom I received valuable feedback. I must also acknowledge the contributions to this piece by my research assistants, Joseph Barlette, Mary Holst, Matthew LaRoche, Robert Magee, Meredith Perry, Guinevere Seaward, Ashley Smith, Irina Yegutkin, and my legal assistant, Fredd Brewer. Judith Resnik provided helpful suggestions while I was first attempting to conceptualize the piece, for which I am grateful. 1. U.S. Sec. & Exch. Comm’n, Excerpts of E-Mails From Angelo Mozilo, http://www.sec.gov/news/press/2009/2009-129-email.htm (last visited Jun. 9, 2009). David Sambol was the former Chief Operating Officer and one-time Acting Chief Executive Officer of Countrywide Financial Corporation. See Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Former Countrywide Executives With Fraud (Jun. 4, 2009), available at http://www.sec.gov/news/press/2009/2009-129.htm.
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Electronic copy available at: http://ssrn.com/abstract=1420792
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leaders—regulators, legislators, and lords of finance. The only institution that stands relatively untainted by the crisis is the courts. And the courts may end up being the field on which the most pitched and most decisive battles are fought. Indeed, despite the failure, to date, of litigation and the courts to play significant or meaningful roles in resolving the financial crisis, litigation arising out of the crisis is beginning to emerge in the courts. Litigants have commenced suits alleging discrimination in the proliferation of subprime mortgage products, securities litigation, and suits for breach of state unfair trade practices laws and common law fraud principles. Individual borrowers, municipalities, large hedge funds, sovereign wealth funds, and state attorneys general are actual and potential litigants. The damages sought in these actions could reach well into the trillions of dollars. Defendants in this litigation, including investment and commercial banks and subprime lenders, already facing existential crises from within due to the weakness of their ledgers, now face attacks from without, and some will break from this pressure. Courts may soon be inundated with these cases and will need effective tools for handling them. With some exceptions, the litigation presently underway is an incoherent collection of random cases. If we view the subprime mortgage crisis and the financial crisis that has followed as the result of the proliferation of toxic products, however, a mass torts approach to the subprime mortgage disaster would seem inevitable. It would help to bring order to the litigation chaos and promote improved policy responses to the present economic crisis. To date, however, we have not viewed the subprime crisis, and now the financial crisis, through this frame. Would a mass torts approach—one that uses aggregative techniques to coordinate and consolidate these actions, makes liability assessments, and evaluates and resolves damages claims in a coordinated fashion—help to bring order to this litigation in an efficient and effective way, root out the full extent of illegal conduct that has distorted market functions, prevent needless foreclosures and bankruptcies, and correct the injustices suffered by countless borrowers saddled with illegal loans? Would it ultimately reduce the cost of any federal assistance to homeowners, by eliminating the tainted loans and reducing the number of borrowers that ultimately need to be rescued? This Article attempts to answer these questions and to assess the extent to which affirmative litigation may complement and improve legal responses to the financial crisis. The present crisis is marked by several distinct features: millions of homeowners in default and millions more facing the possibility of
Electronic copy available at: http://ssrn.com/abstract=1420792
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falling behind on their mortgages and facing foreclosure, hundreds of insolvent mortgage lenders, banks on the brink of extinction, and investors holding devalued investments. Affirmative litigation is just one of several potential legal responses. While this Article attempts to assess the extent to which coordinated and comprehensive affirmative litigation can accomplish positive outcomes, it also measures the relative superiority of such a response to other potential legal responses. In Part I, I provide a brief overview of the subprime mortgage meltdown, outlining some of the areas in which the various players in the subprime process may have engaged in what may ultimately prove to be actionable conduct. This Part also includes my attempt to identify goals for legal responses to the subprime mortgage crisis. In Part II, I lay out a definition of the legal phenomenon known as mass torts, and discuss the evolution of the mass torts approach in addressing wide-spread harm through litigation. I also provide an overview of different types of litigation that have arisen or may arise in the aftermath of the subprime mortgage crisis. In Part III, I assess whether the features of the subprime litigation described in Part II would qualify such litigation as “mass tort actions” and what such a determination would mean. Finally, in Part IV, I test whether a mass torts approach as a legal response to the subprime mortgage crisis is superior to other potential legal responses, including individual litigation, personal bankruptcy, regulation, voluntary efforts, and social insurance. I. OVERVIEW: THE POTENTIAL GOALS FOR LEGAL INTERVENTIONS RESPONDING TO THE SUBPRIME MORTGAGE CRISIS A. How Did We Get Here? While I do not wish to engage in a full dress recounting of the events that led to the present financial crisis, a very brief overview is helpful in setting the stage for the analysis that follows. 2 The seeds of the present 2. For background on and overview of the subprime mortgage crisis, see, generally, EDWARD M. GRAMLICH, SUBPRIME MORTGAGES: AMERICA’S LATEST BOOM AND BUST 9–35 (2007) (providing analysis of trends in homeownership from the 1940s to the 2000s); JOHN BELLAMY FOSTER & FRED MAGDOFF, THE GREAT FINANCIAL CRISIS: CAUSES AND CONSEQUENCES (2009); DANIEL GROSS, DUMB MONEY: HOW OUR GREATEST FINANCIAL MINDS BANKRUPTED THE NATION (2009); RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF ’08 AND THE DESCENT INTO DEPRESSION (2009); ROBERT J. SHILLER, THE SUBPRIME SOLUTION: HOW TODAY’S GLOBAL FINANCIAL CRISIS HAPPENED, AND WHAT TO DO ABOUT IT 29–38, 87–113 (2008) (attributing the subprime mortgage crisis to irrational expansion of housing values); MARK ZANDI, FINANCIAL SHOCK: A 360º LOOK AT THE SUBPRIME MORTGAGE IMPLOSION, AND HOW TO AVOID THE NEXT FINANCIAL CRISIS (2009) (reviewing origins of the financial crisis); Raymond H. Brescia, Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response, 56 CLEV. ST. L. REV. 271 (2008) (attributing rise of subprime
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financial crisis were sown in the 1980s and 1990s, mostly through deregulation and non-regulation. 3 During this time, deregulation through federal preemption of state caps on interest rates and the introduction of laws permitting adjustable rate mortgages created the legal infrastructure that made subprime mortgage products possible. 4 Innovations in mortgage underwriting automated the process for determining prospective borrowers’ creditworthiness. 5 Innovations in mortgage finance converted future income streams from borrowers’ long-term mortgage commitments into liquid assets for mortgage lenders. 6 These innovations in mortgage finance, when coupled with the fees that mortgage lending could generate for mortgage brokers who had limited contact with a borrower after the consummation of a loan and mortgage lenders that sold their mortgages to investors through innovative finance schemes, prompted these brokers and lenders to pursue prospective borrowers aggressively and promote the generation of loan volume over loan viability. 7 Brokers and loan originators mortgage products to deregulation and conduct of brokers and lenders to breakdown in the traditional borrower-lender relationship); Possible Responses to Rising Mortgage Foreclosures: Hearing Before the H. Comm. on Fin. Servs., 110th Cong. 19–21 (2007) [hereinafter Possible Responses] (statement of Sheila C. Bair, Chairman, Fed. Deposit Ins. Corp.) (assessing trends in securitization of subprime mortgage debt within the past ten years); Mortgage Market Turmoil: Causes and Consequences: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 110th Cong. (2007) [hereinafter Mortgage Market Turmoil] (testimony of Roger T. Cole, Dir., Div. of Banking Supervision and Regulation) (discussing the impact of subprime lending); Allan N. Krinsman, Subprime Mortgage Meltdown: How Did It Happen and How Will It End?, 13 J. STRUCTURED FIN. 13 (2007) (providing overview of the origins of the subprime mortgage market); Souphala Chomsisengphet & Anthony Pennington-Cross, The Evolution of the Subprime Mortgage Market, 88 FED. RES. BANK OF ST. LOUIS REV. 31 (2006) (same). 3. See Todd J. Zywicki & Joseph D. Adamson, The Law and Economics of Subprime Lending, 80 U. COLO. L. REV. 1, 5–7 (2009); Sally Pittman, Comment, ARMs, But No Legs to Stand On: “Subprime” Solutions Plague the Subprime Mortgage Crisis, 40 TEX. TECH L. REV. 1089, 1093–94 (2008); PATRICIA A. MCCOY & ELIZABETH RENUART, The Legal Infrastructure of Subprime and Nontraditional Home Mortgages, in BORROWING TO LIVE: CONSUMER AND MORTGAGE CREDIT REVISITED (Nicolas P. Retsinas & Eric S. Belsky eds., 2008). 4. A loan generally considered subprime typically has several distinct features when compared to a prime loan: higher upfront costs; a higher interest rate; and an adjustable interest rate that follows a brief period of a low, introductory rate. Chomsisengphet & Pennington-Cross, supra note 2, at 32. For a discussion of the removal of interest rate caps see Cathy Lesser Mansfield, The Road to Subprime “Hel” was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market, 51 S.C. L. REV. 473, 492 (2000); Eamonn K. Moran, Wall Street Meets Main Street: Understanding the Financial Crisis, 13 N.C. BANKING INST. 5, 21 (2009); Pittman, supra note 2, at 1093; Zywicki & Adamson, supra note 3, at 6. 5. Moran, supra note 4, at 21–22. 6. Id. at 32–33. 7. See Brescia, supra note 2, at 291–98; see also John Kiff & Paul Mills, Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets 7, 11 (Int’l Monetary Fund, Working Paper, No. 188, 2007); Krinsman, supra note 2, at 14; Subprime Mortgage Market Turmoil: Examining the Role of Securitization: Hearing Before the Subcomm. on Sec., Ins., and Invs. of
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possessed a wealth of information about the mortgage market, the products available within it, and the mortgage terms for which prospective borrowers might qualify. This asymmetry was often exploited by brokers and originators because they were able to shift otherwise prime borrowers into subprime loans, driven, at least in part, by the higher costs and fees they could collect by steering these borrowers in this way. 8 Investors seeking better returns on their investments were eager to buy into the U.S. housing market, 9 and the innovative financial products created in the halls of the investment banks made such investment possible. 10 Financial products such as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) permitted investors to invest in the housing market without having to get into the messy business of mortgage lending itself. 11 Credit ratings agencies, eager to benefit from the fees these financial products could generate for them, and concerned that their competitors would secure a larger share of the market, blessed these financial products regardless of their ultimate value or viability. 12 All of these forces worked together to create, and then further inflate, a speculative bubble in housing that grew to draw in the S. Comm. on Banking, Hous. and Urban Affairs, 110th Cong. (2007) [hereinafter Subprime Mortgage Market Turmoil] (testimony of Kurt Eggert, Professor of Law, Chapman Univ. School of Law); Subprime Mortgage Market Turmoil, supra (testimony of Christopher L. Peterson, Assoc. Professor of Law, Univ. of Fla.); ZANDI, supra note 2, at 95. 8. Krinsman, supra note 2, at 14. 9. ZANDI, supra note 2, at 79–81. 10. Moran, supra note 4, at 34–35. 11. See id. at 36–40. The securitization of subprime mortgages is at the heart of the crisis. This process converted future income streams for mortgage lenders into present assets, permitted investors to invest in the U.S. housing market, and shifted the risk of default from the lender who assessed the prospective borrower’s creditworthiness to the investors, who would not have an opportunity to do so, but would trust the ratings agencies’ analysis of the loans that backed the securities in which they were investing. Lenders made loans for the purposes of selling them on the secondary mortgage market, sometimes days or even hours after those loans were consummated. Bundles of loans were packaged and sold to a separate entity, often called a Special Purpose Vehicle (SPV). The transfer of these assets to the SPV would generate fees for the mortgage lender, and such entities made soaring profits on such transactions as investment banks and other entities that packaged these loans clamored for more and more of these deals. The SPV created would then issue securities that investors would purchase, with return on those investments derived from the future mortgage payments the borrowers were committed to paying. Classes of interests were created, and the “higher” or more secure classes could expect their payments made first, even if the mortgages were not all performing. In addition to converting future income streams into present, liquid assets for the lender, another goal of the securitization process was to spread the risk of default on the mortgages, so that even some non-performing loans could be absorbed without risk to the overall success of the investments. For an overview of the securitization process, see Brescia, supra note 2, at 290–91; ZANDI, supra note 2, 115–16. Apparently, the models on which these vehicles were built did not anticipate the downturn in the housing market, the inability of the borrowers to meet their obligations and staggering default rates on the underlying mortgages. 12. See GROSS, supra note 2, at 50; Moran, supra note 4, at 34.
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lenders, borrowers, and investors alike. Investors deep in subprime securities sought to hedge their bets and insure themselves against a downturn in the market, lining up to obtain another financial innovation—credit default swaps. 13 Totally unregulated, firms issuing these swaps saw an opportunity for easy money: insuring the U.S. housing market was like banking on the sun rising each day. 14 Soaring real estate values encouraged borrowers and investors alike to try to get in on the action, or double down on their present investments. Prospective homeowners rushed to enter the market, and homeowners sought to upgrade their accommodations or tap the growing equity in their homes to purchase consumer goods. Many borrowers agreed to mortgages with adjustable interest rates with low introductory rates, without an understanding of the impact the resetting of these interest rates would have on their monthly budgets. Brokers told borrowers not to worry about those resetting interest rates because rising home values would permit those borrowers to refinance their present mortgage before the change in interest rate produced an increase in monthly payments. 15 Investors, seeing the growing returns these investments could 13. For an overview of the credit default swap market and its demise, see Aaron Unterman, Innovative Destruction—Structured Finance and Credit Market Reform in the Bubble Era, 5 HASTINGS BUS. L.J. 53, 66–72 (2009). 14. In the waning days of the Clinton Administration, a bill that enjoyed strong bipartisan support ultimately was passed into law that prevented regulatory agencies from attempting to regulate credit default swaps and other types of commodities. This feat of “non-regulation” played no small role in the financial crisis. See Commodity Futures Modernization Act of 2000, 7 U.S.C. §§ 1–27f (2006). For an overview of the role of credit default swaps in increasing and encouraging risky investment practices, see POSNER, supra note 2, at 56–60. In 2002, in the wake of the Enron scandal, Frank Portnoy, in a moment of remarkable prescience not uncommon for him, testified before Congress as follows: Congress made the deregulated status of derivatives clear when it passed the Commodity Futures Modernization Act. As a result, the [Over the Counter] derivatives markets have become a ticking time bomb, which Congress thus far has chosen not to defuse. Enron and Derivatives: Hearing Before the S. Comm. on Gov. Affairs, 107th Cong. (2002) (testimony of Frank Partnoy), available at http://ssrn.com/abstract=302332. 15. See Moran, supra note 4, at 17. In addition, many brokers had conflicting loyalties with the borrowers on whose behalf they were supposedly working. An example of a practice within the mortgage industry that revealed the obvious conflicts of interest the drive to securitize created is the socalled “yield spread premium” (YSP). The YSP is a method used by the mortgage originators for compensating the mortgage broker for the loans he or she is able to secure for that originator. To determine the compensation paid to a broker if a YSP was used in a particular transaction, the originator would assess a prospective borrower’s creditworthiness and inform the broker of the interest rate the originator would be willing to offer to that borrower. If the broker could convince the borrower to accept a loan at a higher interest rate from the lender, he or she would be paid the difference between the rate the lender would offer the borrower and the rate of the loan ultimately accepted. Of course, the borrower would be unaware that the lender was willing to offer him or her a loan at a lower rate. See Howell E. Jackson & Laurie Burlingame, Kickbacks or Compensation: The Case of Yield Spread Premiums, 12 STAN J. L. BUS. & FIN. 289, 291–92 (2007).
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generate, clamored for more investment opportunities. Investment banks, seeing the soaring profits of subprime lenders and heeding the call of investors for more mortgage-backed securities, pushed lenders to generate more mortgages that could be packaged into securities and sold to eager investors. 16 As the pool of viable borrowers that could serve to quench the thirst for these investments began to dry up, underwriting standards loosened, documentation and other requirements were lifted, and marketing got more aggressive, luring in borrowers who were poor credit risks, who took on debt they could not bear, and whose mortgages were packaged into products that would turn toxic once those borrowers could not satisfy their obligations. 17 Once housing prices began to level off and then fall in 2006, and interest rate resets began to kick in, borrowers who believed they could tap into the rising equity in their homes and refinance their mortgages were unable to find lenders to refinance those mortgages where the value of the homes serving as collateral was less than the outstanding debt. 18 Defaults began to occur. How did the market attempt to deal with the risk of a housing downturn apart from the issuance of credit default swaps? One way was the bundling of mortgages into large pools through the MBS and CDO model, which would spread the risk of default. 19 But when default rates exceeded the economic forecasts predicted by the financial alchemists, the models were worthless. Furthermore, originators were expected to make warranties about the viability of the mortgages they were offering up for securitization, often with an added requirement that they would buy back such loans if they failed. But these protections turned out to be hollow when highly leveraged lenders had no capital reserves to satisfy their obligations under these instruments. When the mortgages they had originated went bust, the lenders were unable to make good on their promises to buy back the mortgages, and were often forced to seek bankruptcy protection because of these outstanding liabilities, leaving investment banks and investors saddled with these toxic mortgages. 20 With so much riding on the strength of both the housing market and the underlying mortgages, the toxins from those tainted loans entered the global financial bloodstream, setting off the current crisis. 16. See Moran, supra note 4 at 24–25 (discussing how banks instituted aggressive and eager lending practices). 17. See GROSS, supra note 2, at 37; Krinsman, supra note 2, at 15, 17; Moran, supra note 4, at 21–22. 18. Moran, supra note 4, at 30–31. 19. See id. at 33 (discussing how the securitization process “disperse[s] risk amongst a wide group of investors and decrease[s] risk exposures of financial institutions”). 20. Krinsman, supra note 2, at 16; Mortgage Market Turmoil, supra note 2, at 3 (testimony of Roger T. Cole, Dir., Div. of Banking Supervision and Regulation).
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Another prominent aspect of the subprime mortgage crisis is that many subprime mortgages are burdened by limits on the ability of mortgage servicers to modify the mortgages in their portfolio. Modification can offer a borrower the chance to rework long-term obligations under the loan and can include reductions in the interest rate owed on the loan, extension of the loan term to bring down monthly charges, deferral of payment obligations, and outright forgiveness of certain payments and penalties. 21 But Pooling and Servicing Agreements (PSAs) governing the creation of securitized mortgage investments generally limit the extent to which the servicers of the mortgages backing those investments can modify those loans, making sensible workouts difficult to accomplish, regardless of whether such modifications are in the best interests of all parties to the transaction. 22 B. Some Goals for Subprime Litigation The impacts of the subprime mortgage crisis, and the financial crisis that has followed, are deep and severe. The need for interventions in the housing market and financial system is desperate, with monumental 21. The Role of the Secondary Market in Subprime Mortgage Lending: Hearing Before the H. Subcomm. on Fin. Insts. and Consumer Credit of the Comm. on Fin. Servs. 110th Cong. 116 (2007) [hereinafter Role of the Secondary Market] (testimony of Warren Kornfeld, Managing Dir., Moody’s Investors Serv.). 22. Possible Responses, supra note 2, at 4 (statement of Sheila C. Bair, Chairman, Fed. Deposit Ins. Corp.); see also Kiff & Mills, supra note 7, at 13. The Congressional Oversight Panel has identified several ways that securitization agreements, often referred to as “Pooling and Servicing Agreements” (PSAs), limit the extent to which a servicer can modify a securitized mortgage. Such agreements can forbid loan modifications altogether, can limit the percentage of loans in a particular pool that can be modified, may permit modification of only one feature of a particular loan (such as the interest rate or monthly payments), may require consent of 100% of all investors to modify any loans, and can require servicers to buy back from the investors mortgages those servicers wish to modify. Due to these limitations, servicers are reluctant to pursue modifications for fear they will face litigation by investors for modifying loans in violation of PSA restrictions. In addition, the servicer compensation structure of such agreements may also discourage servicers from pursuing modifications, where, for example, modifications of particular loans result in the payment of lower mortgage premiums, which, in turn, reduce the payments the servicers receive for servicing such loans. See CONGRESSIONAL OVERSIGHT PANEL, MARCH OVERSIGHT REPORT, FORECLOSURE CRISIS: WORKING TOWARDS A SOLUTION 42–47 (2009), available at http://cop.senate.gov/documents/cop-030609-report.pdf [hereinafter COP MARCH ’09 REPORT] (outlining barriers to loan modifications). Recent preliminary research into the explicit terms of these agreements does show that modifications are often possible by the express terms of those agreements, however. This research reveals the following: less than 10% of PSAs contain outright bans on loan modifications; 64% of PSAs require “reasonably foreseeable default” before “material” modification; for these 64% of loans requiring reasonably foreseeable default, some require that any loan modification must be carried out in the interests of the investors or the trust, and/or that the servicer treat these loans as it would loans in its own portfolio; some restrict modifications up to 5% of the loan pool. See John P. Hunt, What Do Subprime Securitization Contracts Actually Say About Loan Modification? Preliminary Results and Implications (Mar. 25, 2009) (Berkeley Ctr. For Law, Bus. and the Econ.), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1369286.
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interventions, costing trillions of dollars, already underway. Yet litigation is just one potential response and the ends that it could serve are many. Too many people face foreclosure, locked in mortgages they can ill afford, with homeowners making choices between paying the lender, putting food on the table, seeking medical attention, and investing in education. Some of these mortgages are the product of illicit conduct, from discrimination, fraud, or both. Yet for too many borrowers facing default, they will never know they might have valid defenses to the foreclosures filed against them. Theoretically, in such foreclosure actions, borrowers could raise the issue of misconduct in the marketing or consummation of the underlying mortgage, if they were aware of such conduct and were able to secure an attorney to defend against the action. When foreclosures arise as a result of payment delinquency, such foreclosures impact not just the family whose home is in jeopardy, but they drive down neighboring property values, weaken local tax bases, and drive up the municipal costs of monitoring vacant properties. 23 Facing falling property values, too many homeowners, as well as banks holding foreclosed properties, are placing homes on the market and this glut of properties further depresses home values, creating a vicious cycle. Lower property values force families whose homes are worth less than their outstanding mortgage debt to place their homes on the market for sale; as more properties hit the market, the greater the downward pressure on values. 24 Depressed home values and mortgage defaults have, in turn, impacted the value of the subprime securities backed by these mortgages considerably. Lenders that invested in these mortgages have seen the value of their investments plummet, making it difficult to secure capital to engage in lending themselves. As a result, lending has slowed considerably, even for borrowers with good credit scores, solid credit histories, and savings that can serve as down payments. 25 Paradoxically, at a time of lower home values, when first-time home buyers and other families who might have been waiting for the opportune moment to sell their homes and upgrade or downsize, borrowing has become more expensive and more difficult. Unwilling to invest in the present 23. PEW CHARITABLE TRUSTS, DEFAULTING ON THE DREAM: STATES RESPOND TO AMERICA’S FORECLOSURE CRISIS (2008), available at http://www.pewtrusts.org/uploadedFiles/ (describing impact of foreclosures on municipalities). wwwpewtrustsorg/Reports/Subprime_mortgages/ defaulting_on_the_dream.pdf. 24. See ZANDI, supra note 2, at 171–72. 25. See Stephen Gandel, Lenders Look Beyond Credit Scores to Gauge Who’s a Risk, TIME, Jan. 9, 2009, available at http://www.time.com/time/business/article/0,8599,1870450,00.html (describing increase in restrictions on lending and strengthening of underwriting criteria).
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mortgage market for fear of a further spiral down in prices, concerned about the value of the asset-backed securities they still hold in their own balance sheets, and strapped for cash themselves, banks have pulled back on the reins, unsure of the road ahead and lacking confidence in their ability to realize a reasonable rate of return from mortgage lending in the face of extreme volatility in that market. The modification of illegal and unwise loans would seem to be in the best interests of every sector—borrowers, lenders, and investors.26 When the value of the asset underlying the mortgage depreciates considerably through the foreclosure process, maintaining borrowers in their homes is often the best response because it not only reduces the human suffering associated with foreclosure, but, on strict economic terms, preserves the value of the home and protects the value of the loan secured by that home. Yet successful and broad voluntary loan modification efforts have proven elusive to date. Servicers, bound by the terms of PSAs, are reluctant to engage in sweeping loan modifications, given that the incentive structures in place under these PSAs and the business plans driving these entities often discourage meaningful renegotiations of the terms of the underlying mortgages. 27 Given this complex web of powerful forces, legal interventions would be directed toward the following: reducing the number of foreclosures; correcting for past illegality in the mortgage market to root out and remedy the harmful consequences of such conduct; uncovering and spreading information about the presence of such illegality in the market; promoting the modification of outstanding mortgage loans; applying pressure on banks and other institutions to strengthen and expand voluntary efforts to overcome past abuses in the market; preserving home values to the greatest extent possible; and improving oversight and regulation of this market. Legal and policy interventions that might address these many problems could include: litigation, from representation of individual borrowers in foreclosure or bankruptcy proceedings to affirmative class actions or other collective actions on behalf of borrowers or investors in subprime securities; regulatory and legal reforms that seek to shore up the legal infrastructure behind mortgage lending generally; and social insurance that would seek to mitigate the most serious impacts of the subprime mortgage crisis. The expensive and expansive bank interventions that have been attempted over the last year qualify as 26. See COP MARCH ’09 REPORT, supra note 22, at 6. (“When compared with the costs of foreclosure, the cost of loan workouts can often provide a more efficient, economically rational outcome for both the borrower and the lender, generally making foreclosure a lose-lose situation.”). 27. See infra Part IV.D.
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social insurance, though publicly, and not privately, funded. Apart from these legal and regulatory options, voluntary efforts on the part of banks and other institutions holding mortgages could lead to successful modifications of loans on terms that protect the borrowers as well as the value of the assets backing such loans. Each of these interventions is likely necessary to address the myriad problems present in the current financial crisis. How might litigation respond to some of the problems plaguing the home mortgage market? First, litigation could help to stem the tide of foreclosures by challenging the validity of the mortgages underlying those foreclosures. In carrying out such an effort, attorneys and potential litigants would assess the legitimacy of particular mortgages and explore legal attacks on their validity. This is already underway in affirmative, class action litigation as well as suits by state attorneys general using various theories, from violation of state consumer protection laws to federal antidiscrimination provisions. Litigation is also being used in individual foreclosure proceedings, by borrowers raising defenses and affirmative counterclaims in those proceedings. Second, litigation could expose critical information about the legitimacy of mortgage lending practices, which, in turn, could lead to more litigation and more informed policy, regulatory, and statutory reform. Disclosure through the discovery process of evidence of discrimination or other illegal conduct could be shared between plaintiffs’ attorneys, paving the way for new theories of recovery. The class certification process would uncover the names of potential class members, who, in turn, would receive notice of pending litigation and the theories behind it, broadening awareness about and expanding participation in the litigation. Such information would also make its way into the media, highlighting abusive lending practices and raising awareness about such practices. This would likely encourage potential borrower-victims to come forward and seek an assessment of the viability of any claims they might have against lenders or other actors in the mortgage process. It would also help sway public opinion to make it more favorable to borrowers in distress by creating a greater understanding of the processes at work that led to the current crisis. Third, litigation may permit borrowers to exert pressure on lenders and mortgage servicers to modify the underlying mortgages. Such modifications could change the terms of these mortgages, making them more fair and more closely aligned with a particular borrower’s ability to pay and the present value of the home serving as collateral. Fourth, litigation in the subprime context could, collectively, help to preserve home values generally because it would likely reduce the
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number of homes going into foreclosure and hitting the market for resale, as well as reduce the pressure on borrowers to sell their homes under the weight of oppressive mortgage terms. Reducing the supply of housing stock on the market would necessarily place less downward pressure on prices. By doing so, while home prices might not fully stabilize as a result of the effects of litigation, they would, at worst, decline less rapidly, simply through the laws of supply and demand. Fifth, litigation could place the courts in the position of assisting policy makers in developing sensible policies to help stabilize housing markets and presenting potential frameworks for the future regulation of financial markets. In this context, litigation could assist regulatory and policymaking efforts by uncovering information about fraudulent or discriminatory lending practices, applying pressure on banks and bank regulators to address issues that might otherwise go unnoticed, and attempting to craft and experiment with potential remedies that can root out illegal conduct and preserve stability in the mortgage market. In these ways, litigation and judicial intervention in the market can complement the policymaking functions of regulators and legislators as such actors contemplate and explore ways to create a new regulatory framework for financial markets. There are also potential harmful side effects of subprime litigation. The most obvious is that many financial institutions may be pushed to the brink of insolvency, or over its edge, resulting in the loss of value to investors in these institutions, and the loss of the jobs of the people employed by them. Worse still, for those institutions that are insured depository institutions, insolvency would externalize the harm of the litigation and place it squarely on the federal government, and, by extension, American taxpayers. Litigation could also lead to frivolous lawsuits that might shield borrowers from honoring their contractual responsibilities under their mortgages. In this way, litigation could create moral hazard by creating incentives for borrowers to disregard their mortgage obligations and make baseless settlement demands. Given this set of potential benefits and harmful side effects from litigation in the subprime lending context, I turn now to the modern mass torts phenomenon and a review of current litigation related to subprime lending already underway to determine the extent to which a mass torts approach to subprime litigation might serve the beneficial ends identified yet minimize the potential harms from it.
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II. MASS TORTS AND SUBPRIME LITIGATION A. What is a Mass Tort and What is the “Mass Torts Approach”? What is a mass tort? As distinct from individual tort cases (e.g., the typical pedestrian-hit-by-car case or slip-and-fall action), a mass tort action involves injuries inflicted on a wide range of people, often from a particular product, practice, or action. They can include “collective personal injury actions, mass financial injuries, products liability, and pharmaceutical liability cases.” 28 They are typically “pursued in a collective fashion—that is, as groups of cases rather than individually.” 29 Mass tort claims are typically aggregated: multiple cases are harnessed and handled by a single judge, or a small number of judges, who issue rulings or promote settlements that will affect all parties involved in the lawsuit. Aggregation of claims has made the cost of bringing such litigation far less expensive for plaintiffs; makes them easier for judges to handle more efficiently; and can make the job of defending against these cases harder because they increase the likelihood that such cases will be brought, and brought by more people. Aggregation also offers the opportunity for peace because all claims against a defendant can be resolved through a single process. 30 Deborah Hensler has identified some of the key features of mass torts that set them apart from other types of civil litigation. According to her definition, mass torts share some of the following features: numerosity, commonality, interdependence of case values, controversy over causation, emotional or political heat, and higher than average claim rate. 31 I shall return shortly to these features as they might apply to 28. Robin J. Effron, Disaster-Specific Mechanisms for Consolidation, 82 TUL. L. REV. 2423, 2424 n.3 (2008). 29. Deborah R. Hensler, The Role of Multi-Districting in Mass Tort Litigation: An Empirical Investigation, 31 SETON HALL L. REV. 883, 887–88 (2001). 30. For the benefits of aggregation, see infra text accompanying notes 36–45. 31. Hensler defines mass torts as follows: Mass torts involve a common set of injuries that occurred in the same or similar circumstances—for example, a hotel fire, a building collapse, or widespread product use—and that are allegedly linked to the actions of a single or small number of defendants. Plaintiffs and defendants are represented by a small number of law firms (relative to the magnitude of the litigation), and a single or small number of judges frequently manage the litigation because of aggregative procedures such as multidistricting and class action certification. Because of this high degree of commonality, the outcome of any one case within the litigation—regardless of whether it has been formally grouped with other such cases—is highly influential on the outcome of other cases. A single large plaintiff award for compensatory or punitive damages will increase the value not only of other pending cases asserting the same facts and legal doctrine but also of similar claims that may be filed in
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litigation in the wake of the present financial crisis. 32 The more important hallmarks of the mass torts approach are class action treatment; multi-district litigation procedures; 33 aggregating techniques utilized to adjudicate questions of liability, causation and damages, as well as to establish mechanisms for compensating plaintiffs through settlement; 34 and collaboration among plaintiffs’ and defense counsel handling similar cases to share information about claim values, relevant evidence, discovery strategy, litigation strategy, expert witnesses, and to spread and share the costs of litigation. 35 Many of these aspects of the mass tort approach are present in mass torts litigation because significant economies of scale can be achieved through their use, making the litigation easier to prosecute for plaintiffs and their counsel, arguably beneficial for defendants and their counsel, and ultimately more efficient for courts. 36 These benefits are best the future. A key doctrinal decision in a single case—for example, on the availability of market share liability—may presage the success or failure of massive litigation against particular defendants. In addition to numerosity, commonality, and interdependence of case values, many mass personal injury torts share three other features: controversy over scientific evidence of causation, emotional or political heat, and higher than average potential for claiming by allegedly injured parties. Deborah R. Hensler, A Glass Half Full, a Glass Half Empty: The Use of Alternative Dispute Resolution in Mass Personal Injury Litigation, 73 TEX. L. REV. 1587, 1596 (1995) (footnotes omitted). Similarly, Richard Nagareda has articulated a “working definition” of mass torts as follows: “[M]ass torts” involve allegations of tortious misconduct affecting large numbers of broadly dispersed persons. The persons, in turn, complain of injuries that may remain latent for years or even decades but, when they do emerge, present a limited set of factual variations. RICHARD A. NAGAREDA, MASS TORTS IN A WORLD OF SETTLEMENT viii (2007). 32. See infra Part III.A 33. For an overview of the use of multi-district litigation procedures, see L. Elizabeth Chamblee, Unsettling Efficiency: When Non-Class Aggregation of Mass Torts Creates Second-Class Settlements, 65 LA. L. REV. 157, 190–97 (2004); Hensler, supra note 29, at 893–95. 34. Aggregation can be accomplished by the creation of a class action, with common factual or liability disputes handled on a class-wide basis, or through other types of techniques, such as statistical sampling to reach determinations on these disputes. See, e.g., Hilao v. Estate of Marcos, 103 F.3d 767 (9th Cir. 1996). For a review of statistical sampling techniques, see Robert G. Bone, Statistical Adjudication: Rights, Justice, and Utility in a World of Process Scarcity, 46 VAND. L. REV. 561 (1993); Michael J. Saks & Peter David Blanck, Justice Improved: The Unrecognized Benefits of Aggregation and Sampling in the Trial of Mass Torts, 44 STAN. L. REV. 815 (1992). See also Alexandra D. Lahav, Bellwether Trials, 76 GEO. WASH. L. REV. 576, 589–634 (2008) (providing arguments for and against the use of bellwether trials as an aggregative technique). For an overview of the use of F.R.C.P. consolidation mechanisms, see Chamblee, supra note 33, at 187–90. 35. For an overview of aggregative techniques, see Saks & Blanck, supra note 34, at 817. See also Judith Resnik, From “Cases” to “Litigation”, 54 LAW & CONTEMP. PROBS. 5, 25–40 (1991) (providing overview of formal and informal aggregative techniques). 36. For the benefits of aggregation in mass torts cases generally, see Deborah R. Hensler, Resolving Mass Toxic Torts: Myths and Realities 1989 U. ILL. L. REV. 89 (1989) (providing overview of
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realized after cases reach “maturity”: that is, “where there has been full and complete discovery, multiple jury verdicts, and a persistent vitality in the plaintiffs’ contentions.” 37 At this stage, “little or no new evidence will be developed, significant appellate review of any novel legal issues has been concluded, and at least one full cycle of trial strategies has been exhausted.” 38 By coordinating the claims of many individuals against a single defendant or a small number of defendants, plaintiffs and their counsel can spread the high cost of litigating complex and difficult cases over many clients and can invest greater resources into prosecuting the claims of many victims out of the belief that such an investment will garner a larger judgment or settlement amount in the aggregate. 39 When litigating on behalf of a single plaintiff or a small number of plaintiffs, the advantages of aggregated solutions in mass tort cases). See also Edward H. Cooper, Aggregation and Settlement of Mass Torts, 148 U. PA. L. REV. 1943, 1949 (2000) (outlining benefits of aggregation); David Rosenberg, Class Actions for Mass Torts: Doing Individual Justice by Collective Means, 62 IND. L.J. 561, 581–82 (1987) (same); David Rosenberg, The Casual Connection in Mass Exposure Cases: A “Public Law” Vision of the Tort System, 97 HARV. L. REV. 849 (1984) (same); Saks & Blanck, supra note 34 (same); Georgene M. Vairo, Georgine, The Dalkon Shield Claimants Trust, and the Rhetoric of Mass Torts Claims Resolution, 31 LOY. L.A. L. REV. 79, 95–110 (1997) (same); Jack B. Weinstein, The Role of Judges in a Government of, by, and for the People: Notes for the Fifty-Eighth Cardozo Lecture, 30 CARDOZO L. REV. 1, 172–78 (2008) (same). For an argument that claim aggregation improves efficiency and consistency of outcomes, see Edward F. Sherman, Introduction to the Symposium: Complex Litigation: Plagued By Concerns Over Federalism, Jurisdiction and Fairness, 37 AKRON L. REV. 589, 591 (2004). For an argument that mandatory aggregation tends to maximize these benefits, see David Rosenberg, Mandatory-Litigation Class Action: The Only Option for Mass Torts Cases, 115 HARV. L. REV. 831, 840 (2002) (“Only mandatory-litigation class action enables the aggregation and averaging of claims that maximizes benefits from scale economies . . . and from redistribution of claimrelated wealth to achieve optimal deterrence and insurance from mass tort liability.”); David Rosenberg, Mass Torts Class Actions: What Defendants Have and Plaintiffs Don’t, 37 HARV. J. ON LEGIS. 393 (2000) (noting economies of scale of class actions). Such economies of scale are not limited to class action litigation, however. See Byron G. Stier, Resolving the Class Action Crisis: Mass Tort Litigation as Network, 2005 UTAH L. REV. 863 (2005) (describing economies of scale obtained through litigation networks of lawyers in mass torts cases even outside the class action context). 37. Francis E. McGovern, Resolving Mature Mass Tort Litigation, 69 B.U. L. REV. 659, 659 (1989). 38. Id. For a discussion of the importance of maturity in the life cycle of a mass tort for making the most effective use of aggregative procedures, see REPORT OF THE ADVISORY COMMITTEE ON CIVIL RULES AND THE WORKING GROUP ON MASS TORTS TO THE CHIEF JUSTICE OF THE UNITED STATES AND TO THE JUDICIAL CONFERENCE OF THE UNITED STATES 22–25 (1999) [hereinafter REPORT OF THE ADVISORY COMMITTEE]; Peter H. Schuck, Mass Torts: An Institutional Evolutionist Perspective, 80 CORNELL L. REV. 941, 949 (1995). For an argument that maturity is not required for the use of collective procedures, see David Rosenberg, Comment, Of End Games and Openings in Mass Tort Cases: Lessons from a Special Master, 69 B.U. L. REV. 695, 707–11 (1989). As Peter Schuck has pointed out, the maturation period can be a period of great creativity and experimentation. Schuck, supra, at 976. 39. For a description of the economies of scale that plaintiffs’ counsel can generate through handling a high volume of similar or aggregated cases, see Byron G. Stier, Resolving the Class Action Crisis: Mass Tort Litigation as Network, 2005 UTAH L. REV. 863, 896–906 (2005).
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the high cost of proving causation for a particular injury in an area where science is evolving or of establishing a particular defendant’s liability for that injury where fault might be difficult to trace can be prohibitive and result in many such claims never seeing the light of day. By bringing actions on behalf of a large number of claimants, however, plaintiffs’ counsel can invest the funds necessary to establish the elements of their clients’ claims with the hope that, at the end of the day, the greater net monetary award will likely more than compensate plaintiffs’ counsel for the expenses necessary to obtain such relief. When representing large groups of claimants, plaintiffs’ counsel also wield significantly greater leverage over defendants than any lawyer representing a single plaintiff. The threat of massive damages awards on behalf of thousands of victims, lengthy trials, embarrassing revelations, runaway juries, and the prospect of an opponent with an appetite for and sufficient resources to carry out sustained combat all create what some have called “[h]ydraulic” pressure on defendants to settle cases quickly, on terms less favorable than they might obtain dealing with certain disputes claimant-by-claimant. 40 In fact, when dealing with early claimants in cases filed individually, quiet settlements, even on terms that are generous (but with strict confidentiality provisions), can eliminate the threat that such cases will raise awareness in a particular community about the viability of similar claims. 41 Such settlements can, in turn, reduce the threat of copycat litigation, and lower net payouts made by defendants. By contrast, high-profile, large-scale, and very public litigation, in which plaintiffs’ counsel advertise for and recruit clients, increases the claim rate in the mass torts setting. 42 Aggregation of claims and the use of aggregating methodologies can also help defendants. 43 Handling multiple claims in a single matter can reduce transactions costs and can lower the risk of conflicting decisions that make claim valuation difficult. Successful motions to dismiss in aggregated cases can dispose of thousands of cases with a single motion. 44 Global settlements that bind present and potential future
40. Charles Silver, “We’re Scared to Death”: Class Certification and Blackmail, 78 N.Y.U. L. REV. 1357, 1358 (2003) (quoting Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 164 (3d Cir. 2001)). 41. For a discussion of the factors that lead to confidential settlements, see Jack B. Weinstein, Secrecy in Civil Trials: Some Tentative Views, 9 J.L. & POL’Y 53, 56–57 (2000) (noting that secrecy is often “the price of settlement”). 42. See Deborah R. Hensler and Mark A. Peterson, Understanding Mass Personal Injury Litigation: A Socio-Legal Analysis, 59 BROOK. L. REV. 961 (1993). 43. For the benefits of aggregation of claims for defendants, see DEBORAH R. HENSLER ET AL., CLASS ACTION DILEMMAS: PURSUING PUBLIC GOALS FOR PRIVATE GAIN 102 (2000). 44. Some research also suggests that the likelihood of jury verdicts for defendants increases as
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claimants can give defendants peace, and give them and their shareholders a clear picture of their ultimate legal exposure for the conduct underlying a particular action. 45 As in the asbestos and tobacco litigation, defense counsel pool resources and strive to present a common and united defense against the attacks lodged against them from many different quarters. 46 Courts too can benefit from aggregating techniques, which can help to resolve large numbers of cases on their dockets through sweeping dispositions affecting such cases, or through wide-ranging settlements. 47 Unfortunately, the very success of these techniques has probably made the mass torts model more attractive to plaintiffs’ counsel, driving up the number of mass torts cases ultimately filed. 48 Critics of the mass torts approach are legion, however. According to these critics, no one is spared the harms and distortions of mass torts litigation: not plaintiffs, defendants, the courts, nor the general public. 49 the claims of more severely injured plaintiffs are aggregated with plaintiffs suffering only modest injuries. See Irwin A. Horowitz & Kenneth S. Bordens, The Effects of Outlier Presence, Plaintiff Population Size, and Aggregation of Plaintiffs on Simulated Civil Jury Decisions, 12 LAW & HUM. BEHAV. 209, 225 (1988) (noting that having a plaintiff with severe injuries in a consolidated action resulted in more verdicts for the defendants). 45. John Coffee, a vocal critic of mass tort class actions, concedes that there are benefits to claims aggregation: (1) it economizes on transaction costs or permits greater financial or other resources to be assembled to counteract the typically greater resources of the defendants, (2) it threatens risk averse defendants with greater liability and so deters them from going to trial, and (3) it avoids a ‘race to judgment’ among competing plaintiffs who fear either the impact of precedents in other related cases or that defendants' assets may be insufficient to fund the aggregate recoveries. John C. Coffee, Jr., The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. CHI. L. REV. 877, 904 (1987). 46. In many mass torts cases, both plaintiffs’ and defendants’ counsel are able to pool resources and benefit from economies of scale in supporting their respective positions in litigation. See generally Stier, supra note 36, at 892–912 (2005) (describing benefits to counsel of pooling resources in the prosecution or defense of mass torts cases). 47. Rosenberg, Mandatory-Litigation Class Action, supra note 36, at 848 (noting additional benefit of class action treatment is that it motivates courts, as well as the parties, to invest resources in the litigation “so as to achieve optimal deterrence and insurance”); see also Saks & Blanck, supra note 34, at 815 (“Aggregation adds an important layer of process which, when done well, can produce more precise and reliable outcomes.”). 48. See Hensler, supra note 29, at 891; see also Resnik, supra note 35, at 60 (noting that aggregation of cases is “law generative”: making more work for judges which means they pursue alternatives to adjudication). 49. See, e.g., JACK B. WEINSTEIN, INDIVIDUAL JUSTICE IN MASS TORT LITIGATION: THE EFFECT OF CLASS ACTIONS, CONSOLIDATIONS, AND OTHER MULTIPARTY DEVICES 63 (1995) (“When an attorney undertakes what is in essence a public litigation, he or she must be prepared for financial destruction as well as glory. The issues transcend traditional one client-one attorney relationships and conflicts. They involve whole communities.”); HENRY S. COHN & DAVID BOLLIER, THE GREAT HARTFORD CIRCUS FIRE: CREATIVE SETTLEMENT OF MASS DISASTERS (1991) (discussing various
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For plaintiffs (and potential plaintiffs), it is argued that the mass torts approach leads to the development of litigation strategies and even binding settlements with little input from those plaintiffs and potential plaintiffs. Aggregative methods may not only deny plaintiffs due process, but also threaten to deny those parties their day in court. 50 The mass torts approach can pit the interest of class counsel—driven by a desire to reach settlements early in the litigation process and garner large contingency fees with little expenditure of resources—against claimants and potential claimants seeking larger net awards. 51 The sheer number of plaintiffs in many mass torts cases also makes it difficult for attorneys to communicate effectively with all of their clients, makes decisionmaking difficult, and sometimes creates conflicts within subclasses of plaintiffs. 52 These tensions usually arise when class criticisms of mass tort claims, particularly the ethical restraints on judges); Francis E. McGovern, Toward a Cooperative Strategy for Federal and State Judges in Mass Tort Litigation, 148 U. PA. L. REV. 1867, 1873 (2000) (criticizing the mass torts process and the manner in which settlements are reached). 50. Chamblee, supra note 33, at 170–77 (describing potential for collusion in settlement of mass torts claims); see also Judith Resnik, Dennis E. Curtis & Deborah R. Hensler, Individuals Within the Aggregate: Relationships, Representation, and Fees, 71 N.Y.U. L. REV. 296 (1996) (outlining concerns about individual autonomy and access to justice in aggregate litigation and suggesting ways in which rules of ethics and procedure can strike balance between these and other competing principles); Paul D. Rheingold, Ethical Constraints on Aggregated Settlements of Mass-Tort Cases, 31 LOY. L.A. L. REV. 395 (1998) (suggesting reforms to improve ethical conduct in the settlement of aggregate claims). 51. Many critics argue that plaintiffs’ counsel are more interested in maximizing their own fees than securing the best deal possible for all of their clients. See, e.g., Barbara J. Rothstein, Francis E. McGovern & Sarah Jael Dion, A Model Mass Tort: The PPA Experience, 54 DRAKE L. REV. 621, 623 (2006) (discussing plaintiffs’ counsel preference for quantity of claims rather than quality of claims due to their interest in collecting more sizeable attorney fees). 52. Frank M. McClellan, The Vioxx Litigation: A Critical Look at Trial Tactics, the Tort System, and the Roles of Lawyers in Mass Tort Litigation, 57 DEPAUL L. REV. 509 (2008). For a discussion of the ethical tensions in mass torts cases and class actions, see, e.g., Jack B. Weinstein, Ethical Dilemmas in Mass Tort Litigation, 88 NW. U. L. REV. 469, 494 (1994); Georgene M. Vairo, The Dalkon Shield Claimants Trust: Paradigm Lost (or Found)?, 61 FORDHAM L. REV. 617, 619 n.9 (1992); Hensler, supra note 36, at 96; Michael D. Ricciuti, Equity and Accountability in the Reform of Settlement Procedures in Mass Tort Cases: The Ethical Duty to Consult, 1 GEO J. LEGAL ETHICS 817, 842 (1988); John J. Donohue, III, The Effects of Fee Shifting on the Settlement Rate: Theoretical Observations on Costs, Conflicts, and Contingency Fees, 54 LAW & CONTEMP. PROBS. 195, 211 (1991). Over the last decade, the Supreme Court has addressed the issue of aggregate settlements in mass torts class actions, and, in both situations, found those settlements wanting. In Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Court invalidated a proposed class action settlement that attempted to settle both present and future claims against twenty asbestos manufacturers for the failure on the part of the settlement to meet the strict requirements of Rule 23 of the Federal Rules of Civil Procedure. Specifically, the Court concluded that based on the large number of questions presented by several categories of class members, as well as to specific individuals within each specific category, it is not possible to meet the predominance standard of Rule 23(b)(3). Id. at 624. Furthermore, the Court found that the requirements of Rule 24(a)(4) were not met because there were several conflicts of interest between the named parties and those they sought to represent. Id. at 625. For instance, the Court noted that there was a great disparity in the awards between currently injured and “exposure-only” plaintiffs.
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counsel represents a group of plaintiffs that have been injured, or are presently experiencing injuries from a particular product or practice, as well as all members of a class of unknown future victims. For the purposes of subsequent discussions of this constellation of issues affecting plaintiffs’ counsel, I will join others in referring to this problem as the “futures” problem. Critics also raise concerns about the impact of the mass torts approach on the defense side. Defendants are forced to face the prospect of massive, firm-killing judgments in cases that find themselves before juries sympathetic to the plight of representative plaintiffs. Such defendants are blackmailed into settlement on the slimmest of allegations, supported only by “junk science.” 53 According to the critics, a major problem in mass tort cases has been the use of experts testifying to causation based on highly questionable or incomplete data and analysis. 54 The public pressure that comes from the combination of See id. at 626. As a result, the settling parties achieved global compromise with “no structural assurance of fair and adequate representation for the diverse groups and individuals affected.” Id. at 627. Similarly, in Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), a case in which the parties attempted to settle a so-called “limited fund” class action under F.R.C.P. 23(b)(1)(B), the Court found that the proposed settlement agreement did not meet the essential requirements of such a limited fund action. Specifically, the Court found several flaws in the agreement including (1) a failure to demonstrate that the fund was actually limited except by the agreement of the parties, and (2) the agreement showed exclusions from the class and allocations of assets at odds with the concept of limited fund treatment and the structural protections of Rule 23(a) as described in the Amchem case. Id. at 848. First, because all assets were not yet liquidated the Court was concerned that the defendants had not established the upper limits of the fund with sufficient specificity to comply with Rule 23(b). Id. at 850. Second, the Court was concerned with equity among the members of the class. Id. at 854. Two issues were important for the Court in this respect: the inclusiveness of the class and the fairness of distributions to those within it. Id. As to the inclusiveness of the class, the Court found that the mandatory settlement class surely could not qualify when in the very negotiations aimed at the class settlement, class counsel agreed to exclude what could have turned out to be more than one third of all claimants. Id. at 854. The Court also found that the agreement did not provide fairness to the class members because it did not have sufficient procedural mechanisms to properly award damages to dissimilarly situated class members. Id. at 855. In fact, the Court noted that many of the conflicts of interests that were present in the Amchem case were also present in the proposed Ortiz class settlement. Id. at 856–57. For a discussion of the impact of Amchem and Ortiz on mass torts litigation generally, see Patrick M. Hanlon & Anne Smetak, Asbestos Changes, 62 N.Y.U. ANN. SURV. AM. L. 525 (2007); see also Deborah R. Hensler, Has the Fat Lady Sung? The Future of Mass Toxic Torts, 26 REV. LITIG. 883, 922 (2007) (arguing that, as of 2007, mass torts practice “remains vibrant” after Amchem and Ortiz decisions). For a discussion of ways to compensate present and future claimants equitably in the context of mass torts settlements, see Deborah R. Hensler, Bringing Shutts Into the Future: Rethinking Protection of Future Claimants in Mass Tort Class Action, 74 UMKC L. REV. 585 (2006). 53. PETER W. HUBER, GALILEO’S REVENGE: JUNK SCIENCE IN THE COURTROOM 2–3 (1991) (coining term “junk science” for what is perceived as the use of questionable scientific evidence in litigation). 54. David Bernstein, Out of the Fryeing Pan and into the Fire: The Expert Witness Problem in Toxic Tort Litigation, 10 REV. LITIG. 117, 120 (1990) (noting a witness broker’s policy that “[i]f the first doctor we refer doesn’t agree with your legal theory, we will provide you with the name of a second prospective expert.”); David E. Bernstein, Getting to Causation in Toxic Tort Cases, 74 BROOK. L. REV.
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questionable proof, bad press, and the threat of a plaintiff-friendly jury system forces corporations to settle claims for exorbitant sums despite their relative weakness or lack of merit. For subsequent discussions, I will call this set of issues the “undue pressure” problem. With respect to the judiciary, critics argue that courts are overburdened by the influx of mass torts and are forced to cut procedural corners out of a desperate need to clear their dockets. It is argued that some judges arrogate to themselves suspect powers and exert undue pressure on parties to convince them to settle, regardless of the relative merits of the claims. Some have complained that mass tort cases often create a situation that fosters “managerial” judging that results in forced settlements. 55 The numbers of litigants and claims in mass tort cases and their complexity has led judges to control the litigation and become heavily invested in promoting settlement. 56 The ability of judges to encourage settlement can create a risk that judges will attempt to manage a case with a heavy hand. 57 For instance, judges have a wide variety of methods to encourage settlement, including refusing to rule on dispositive motions, putting pressure on defendants to deal with an overwhelming number of pending cases, ordering broad discovery into the defendants’ corporate activities, and authorizing a large number of depositions. 58 Some have even argued that managerial judges have bent substantive rules and gone too far to encourage settlement at the expense of litigants’ rights. 59 For subsequent discussions, I will refer to this critique of the mass torts approach as the “managerial judges” problem. Critics complain that the public at large suffers as the costs associated with paying out large judgments are ultimately passed on to the consumer in terms of higher prices for goods by companies that find
51, 61–69 (2008) (arguing that plaintiffs in mass torts cases have attempted to evade traditional standards of proof on issues of causation). 55. See RONALD J. BACIGAL, THE LIMITS OF LITIGATION: THE DALKON SHIELD CONTROVERSY (1990); Judith Resnik, Managerial Judges, 96 HARV. L. REV. 374 (1982); Peter H. Schuck, The Role of Judges in Settling Complex Cases: The Agent Orange Example, 53 U. CHI. L. REV. 337 (1986). 56. See, e.g., PETER H. SCHUCK, AGENT ORANGE ON TRIAL: MASS TOXIC DISASTERS IN THE COURTS 163 (1987) (“A well-meaning but overzealous judge may occasionally go too far and ‘coerce’ settlement, and [Judge] Weinstein himself has been accused of this.”). 57. See id. 58. Mark Herrmann, From Saccharin to Breast Implants: Mass Torts, Then and Now, 26 LITIG. 50, 54 (1999) 59. Roger H. Trangsrud, Mass Trials in Mass Tort Cases: A Dissent, 1989 U. ILL. L. REV. 69, 85 (1989) (arguing that on the eve of a mass torts trial Judge Judge Weinstein: “(1) warned counsel for plaintiffs that they might be held personally responsible by their clients for rejecting the proposed $180 million settlement; (2) led the parties to settle on that figure rather than a higher one because of his opinion that similar suits should not be encouraged in the future; and (3) misled the plaintiffs into believing that a higher figure was impossible because of the attitude of the defendants.”).
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themselves on the short end of massive settlements. 60 Individual parties to other litigation before courts grappling with mass tort litigation find their access to the courts impaired by the time commitment required of judges handling such unwieldy and consuming litigation. Another concern for the public regarding mass torts is the economic impact on third parties from such litigation. 61 For instance, settlements against the asbestos industry demonstrated that mass torts claims can bankrupt even large companies. 62 Over the past four decades, “[w]orkers claiming injuries due to exposure to asbestos have sued more than a thousand corporations, in a wide range of industries.” 63 In fact, hundreds of thousands of asbestos claims have been brought against individual corporations. 64 These claims resulted in more than $20 billion in settlements and more than forty corporations have gone bankrupt. 65 As a result, the public suffers: stockholders lose their capital, workers lose jobs, and state and local governments lose tax revenues. 66 According to some, another negative impact on the public from mass tort cases stems from the typical settlement agreements that are reached by the parties. 67 Most mass tort cases often terminate in some form of confidentiality agreement. 68 Typically, these agreements prevent disclosure of information relating to a defendant’s negligent or otherwise wrongful conduct and the amount of the settlement or terms of payment. Still, the societal interest in knowing what went wrong and why is great. Documents protected by settlement agreements often contain valuable information concerning product defects and other public hazards. 69 Preventing disclosure of these documents can protect those who engage in misconduct, conceal the cause of injury from other victims, or even render future victims vulnerable. 70 For subsequent discussions, I will refer to these issues as the “public cost” critique of the 60. See Weinstein, supra note 52, at 494. 61. Richard C. Ausness, Cigarette Company Liability: Preemption, Public Policy, and Alternative Compensation Systems, 39 SYRACUSE L. REV. 897, 955 (1988). 62. See Deborah R. Hensler, As Time Goes By: Asbestos Litigation After Amchem and Ortiz, 80 TEX L. REV. 1899 (2002). 63. Id. 64. Id. 65. Id. 66. Ausness, supra note 61, at 956. 67. See generally Owen M. Fiss, Against Settlement, 93 YALE L.J. 1073, 1085–87 (1984) (arguing that settling cases, while promoting peace between the parties, does not necessarily foster justice since the parties may agree to terms acceptable to them, but not beneficial to society). 68. Weinstein, supra note 52, at 510. 69. See id. at 511–12. 70. Id.
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mass torts approach. These pages could not possibly answer all of these critiques, but I will return to them, directly and indirectly, throughout the remainder of this paper, in an attempt to assess whether they are relevant to, and might counsel against, the use of the mass torts approach in the context of litigation spawned by the subprime mortgage crisis. Because, to paraphrase Alexis de Tocqueville, all financial conflicts in the United States eventually end up in the courts, 71 a wave of such litigation is coming, and effective responses to this phenomenon are necessary to meet the needs of the litigants, the courts, and the public at large. How these cases are handled, and their outcomes, will have broad and lasting effects. As the nation braces for a wave of foreclosures— nearly 3 million anticipated by the end of 2010—state court systems are struggling to develop mechanisms for coping with the steep growth in their dockets caused by the rise in foreclosure actions. 72 Plaintiffs’ lawyers are lining up to enlist the holders of subprime securities, seeking to bring fraud actions against the issuers of those securities and the ratings agencies that blessed them. Civil rights attorneys are investigating racially tinged lending patterns in the subprime mortgage market to generate interest in and recruit plaintiffs for suits under the fair lending laws that challenge discriminatory lending practices. Federal and state officials have commenced criminal investigations and filed criminal charges against mortgage brokers, officials from subprime lending entities, and mortgage scam artists from across the country. 73 How should the courts deal with this litigation explosion? The
71. ALEXIS DE TOCQUEVILLE, DEMOCRACY IN AMERICA 257 (Harvey C. Mansfield & Delba Winthrop eds. and trans., 2000) (“There is almost no political question in the United States that is not resolved sooner or later into a judicial question.”). 72. For a discussion of methods that courts could utilize to handle this influx of foreclosure actions, see Raymond H. Brescia, Beyond Balls and Strikes: Towards a Problem-Solving Ethic in Foreclosure Proceedings, 59 CASE W. RES. L. REV. 305 (2009). 73. See, e.g., Kevin Johnson, Mortgage fraud probe snares 406 suspects, USA TODAY, June 20, 2008, at B2, available at http://www.usatoday.com/money/economy/housing/2008-06-19-mortgagefraud-arrests_N.htm (over 400 people charged with fraud-related charges as a result of “Operation Malicious Mortgage”); Gretchen Morgenson, S.E.C. Accuses Countrywide’s Ex-Chief of Fraud, N.Y. TIMES, June 5, 2009, at A1 (describing case against Mr. Mozilo including e-mails from Mr. Mozilo stating that certain Countrywide products were “toxic” and “poison”); Henri E. Cauvin, Major Mortgage Fraud is Alleged, WASH. POST, Apr. 28, 2009, at B1, available at http://www.washingtonpost.com/ wp-dyn/content/article/2009/04/27/AR2009042702342.html (describing a mortgage scam that netted in excess of $70 million). See also John S. Pistole. Deputy Director, Federal Bureau of Investigation, Statement Before the House Committee on the Judiciary (April 1, 2009), available at http://www.fbi.gov/congress/congress09/pistole040109.htm (describing Federal Bureau of Investigation’s efforts to combat mortgage and other financial frauds); Lisa Madigan, Illinois Attorney General, Testimony to House Committee on Financial Services (March 20, 2009) (discussing actions taken by state attorneys general to protect consumers and pursue those perpetrating frauds).
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arguments presented in the following section stress the need for judges and litigants to take a mass torts approach to the financial crisis, one that would bring together a range of parties who might have a stake in the resolution of subprime disputes: homeowners, subprime lenders, brokers, governmental bodies, investment houses, and investors. Mortgage products would be assessed for their legality to determine to what extent the products were marketed in a deceptive fashion or sold on discriminatory bases or terms. Where mortgage products were themselves illegal, they should be rescinded and reformed consistent with sound lending products and on fair terms to the borrowers. As politicians and policy makers debate ways to encourage banks to agree to modify outstanding mortgages to keep borrowers in their homes, judicial intervention could help to cut the Gordian Knot of securitized mortgages, a shadow banking system, securities holders’ self-interest, and depressed home values. We should not throw good money after bad mortgages, however. Where those mortgages are tainted by illegal terms or deceptive marketing, they should be fixed, and any renegotiation of them undertaken based on fair and legal terms, not on terms that are illegal. In the following section, I outline a series of areas in which subprime litigation has already ensued, and then assess whether the “mass tort” label applies to the subprime litigation phenomenon. B. Subprime Litigation: An Overview Litigation that has arisen in the wake of the subprime mortgage crisis comes in many forms. In this section, I provide an overview of four types of subprime mortgage litigation: actions based on state law claims; actions based on federal anti-discrimination provisions; actions based on the Truth in Lending Act; and lawsuits filed by municipalities for lender misconduct that has caused harm within those plaintiffs’ city limits. In addition, I review some securities litigation that seeks to prevent mortgage modifications. 1. State Law Claims Against Subprime Lenders A host of actions have been filed by state attorneys general against different subprime lenders for violations of laws related to mortgage and credit transactions and under general unfair business practices statutes. In a series of these cases, separate actions were filed against Countrywide Financial Corporation and several other Countrywide affiliates by eleven state attorneys general on behalf of their constituent
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states’ populations 74 alleging a wide range of state law claims. 75 For example, the suit brought by Attorney General Jerry Brown of California on behalf of that state alleged violations of state laws banning deceptive advertising and unfair competition. It was alleged that Countrywide steered homeowners into mass-produced, risky loans for the sole purpose of reselling those mortgages on the secondary market. 76 The suit claimed that Countrywide used deceptive practices such as low “teaser” rates to entice thousands of borrowers into adjustable-rate loans without properly informing them that payments would balloon in later months. 77 A similar suit was filed by Florida’s Attorney General, Bill McCollum, seeking injunctive relief and damages on the grounds that 74. The states include Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas, and Washington. 75. See Complaint for Restitution, Injunctive Relief, Other Equitable Relief, and Civil Penalties, California v. Countrywide Fin. Corp., LC081846, (Cal. Super. Ct. filed June 24, 2008), available at http://ag.ca.gov/cms_attachments/press/pdfs/n1582_draft_cwide_complaint2.pdf (alleging, under California law, violations for deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market); Complaint, Connecticut v. Countrywide Fin. Corp., No. 1207, (Conn. Super. Ct. filed Aug. 5, 2008), available at http://www.ct.gov/ag/lib/ag/consumers/countrywidelawsuit.pdf (alleging a violation of the Connecticut Unfair Trade Practices Act and violations of state laws prohibiting unfair or deceptive acts or practices; seeking civil penalties); Complaint for Injunctive and Other Relief, Illinois v. Countrywide Fin. Corp., 08CH22994 (Cook County Cir. Ct. filed June 25, 2008), available at http://www.ag.state.il.us/pressroom/2008_06/countrywide_complaint.pdf (alleging that Countrywide violated Illinois law by engaging in unfair and/or deceptive practices); Final Judgment and Consent Decree, Indiana v. Countrywide Fin. Corp., Cause No. 76C01-0808-PL-652 (Steuben County Cir. Ct. filed Apr. 23, 2009), available at http://atgindsha01.atg.in.gov/cpd/docs/enforcement/GregZoeller624334-1.pdf (discussing violations of Indiana state law through the alleged engagement in deceptive and misleading practices that led to borrowers obtaining potentially risky and costly loans, ordering Countrywide to end listed deceptive practices, void the prepayment penalties on Countrywide originated loans, and void any portion of the Countrywide originated loans resulting from deceptive acts); Complaint for Injunctive Relief, Damages, and Other Statutory Relief, Office of the Att’y Gen., Dep’t of Legal Affairs, Florida v. Countrywide Fin. Corp., Case No.: 08 30105 03 (Fla. Cir. Ct. filed June 30, 2008), available at http://myfloridalegal.com/webfiles.nsf/WF/MRAY7G5G7L/$file/CountrywideComplaint.pdf (alleging a violation of Florida’s Deceptive and Unfair Trade Practices Act); Consent Judgment and Injunction, Ohio, ex. rel. Att’y Gen. Nancy H. Rogers v. Countrywide Fin. Corp., CV 08 680445 (C.P. Cuyahoga County filed Dec. 29, 2008), available at http://www.opif.ag.state.oh.us/opifimages/PIF2745.pdf (alleging violations of Ohio’s consumer protection laws); Plaintiff’s Original Petition, Texas v. Countrywide Fin. Corp., Cause No. 2009 – 717 (Dist. Ct. El Paso County filed Feb. 11, 2009), available at http://www.oag.state.tx.us/newspubs/releases/2009/021109countrywide_pop.pdf (alleging, under Texas law that Countrywide’s actions are in violation of the Texas Deceptive Trade Practices Act); see also In re Countrywide Fin. Corp. Sec. Litig., No. CV-07-05295-MRP, 2009 WL 943271 (C.D. Cal. Apr. 6, 2009). 76. See Complaint for Restitution, Injunctive Relief, Other Equitable Relief, and Civil Penalties, supra note 75. 77. Id. See also CAL. BUS. & PROF. CODE §§ 17203, 17535 &17536 (West 2008). Among other relief, the suit seeks civil fines for violations of Business and Professions Code Section 17535, as well as an injunction against Countrywide from making untrue or misleading statements in violation of Business and Professions Code Section 17500, including untrue or misleading statements.
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Countrywide failed to use due diligence in its mortgage practices when it accepted applications that were patently fraudulent and reflected no ability on the part of the borrowers to make the required payments. 78 It is alleged that these practices placed borrowers into mortgages they could not afford or saddled them with terms regarding interest rates and penalties that were misleading. 79 Ohio’s Attorney General, Nancy Rogers, brought suit against Countrywide seeking injunctive and declaratory relief, borrower restitution, and civil penalties for alleged violations of Ohio’s consumer protection laws. 80 The suit also sought damages for the losses incurred by the state of Ohio, such as the increased costs to police and fire services, demolition costs, and damages to local property values that resulted from the foreclosure of Countrywide’s mortgages in the state. 81 While these and other actions were pending against Countrywide, the company was purchased by Bank of America. 82 The lawsuits were ultimately settled in October 2008 in the most comprehensive, sweeping, and expensive settlement to date in a predatory lending dispute.83 Through the settlement, Bank of America has agreed to offer $8.4 78. See Complaint for Injunctive Relief, Damages, and Other Statutory Relief, supra note 75. 79. The suit alleged a violation of Florida’s Deceptive and Unfair Trade Practices Act. See FLA. STAT. § 501.201–.213 (2007). The claims allege that Countrywide engaged in predatory lending practices by telling customers interest rates were fixed when they were adjustable and misrepresenting the length of teaser rates and long-term higher rates, thus allowing brokers who knew Countrywide would write these mortgages to target the most financially unsophisticated segment of the population. Additionally, Countrywide hid any potentially negative effects of “teaser” loans, including rising rates, prepayment penalties and negative amortization, which borrowers would inevitably face if they were making minimum payments or trying to refinance. Countrywide offered reduced or no documentation loan programs to increase its loan sales. Countrywide also allegedly paid greater compensation to brokers for loans with higher interest rates and prepayment penalties because it could sell those loans for higher prices on the secondary market. Further, the company’s deceptive marketing practices were supposedly designed to sell costly loans while hiding or misrepresenting the terms and dangers. 80. See Consent Judgment and Injunction, supra note 75. 81. See Ohio Consumer Sales Practices Act, OHIO REV. CODE ANN. § 1345.01–1345.13 (West 2008). 82. Stipulated Judgment and Injunction, California v. Countrywide Fin. Corp., LC081846, (Cal. Super. Ct. filed Oct. 20, 2008), available at http://ag.ca.gov/cms_attachments /press/pdfs/n1618_cw_judgment.pdf. 83. Andrew Harris, Countrywide Settles Fraud Cases for $8.4 Billion, BLOOMBERG, Oct. 6, 2008, available at http://www.bloomberg.com/apps/ news?pid=20601087&sid=aWdK8sUC0Lf0&refer=home. This settlement dwarfed an earlier settlement with other subprime lenders. See Press Release, Iowa Office of the Attorney General, States Settle With Household Finance: Up to $484 Million for Consumers (Oct. 11, 2002), available at http://www.iowa.gov/government/ag/protecting_consumers/2002_news/10_11_2002.html. Similarly, in 2006, forty-nine states and the District of Columbia settled an action against the large subprime lender Ameriquest Mortgage Company. That settlement resulted in Ameriquest setting aside $295 million as restitution to borrowers and another $30 million to the states for consumer education, investigation and enforcement. See Largest Subprime Lender Agrees to $325 Million Settlement, 24 NCLC REPORTS 13 (Jan./Feb. 2006).
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billion in direct loan relief to an estimated 400,000 borrowers nationwide. 84 One of the goals of the agreement is to modify mortgages to give borrowers more favorable and affordable terms. The bank will also provide financial assistance to families so that they can relocate if they do not appear able to afford a loan even on more favorable terms. The agreement also requires borrowers assisted through the modification or relocation program to sign a general release, relieving Bank of America and Countrywide from any liability for illegality in the terms of the original mortgages written by Countrywide. 85 Another case offers a glimpse into the subprime mortgage crisis in a nutshell, and offers a road map for similar litigation in the future. In Commonwealth v. Fremont Investment & Loan, 86 the Supreme Judicial Court of Massachusetts affirmed the trial court’s grant of an injunction against a subprime lender for violations of that state’s general unfair business practices law. The action began in 2007, when the Federal Deposit Insurance Corporation, concerned with the lending practices of California-based Fremont General Corporation and its subsidiary, Fremont Investment and Loan (collectively Fremont), entered into a consent agreement with Fremont. In this agreement, the bank agreed to cease making loans with certain subprime features, including loans in which the borrower’s ability to repay the loan was based on the introductory teaser rate, and not the prospective adjustable rate. 87 Following that consent decree, the Attorney General of Massachusetts entered into a separate agreement with Fremont through which Fremont agreed to give notice to the Attorney General’s office of any pending foreclosures so that office could review such actions for any signs of fraud in the underlying mortgages and could attempt to resolve the foreclosure in a way that protected the borrower. 88 If a dispute over a particular mortgage could not be resolved, the Attorney General could seek to enjoin any foreclosure of a mortgage it deemed tainted by fraud or other illegal practices. 89 The agreement also provided that it could be terminated unilaterally by either party, and Fremont did just that when the Attorney General’s office refused to consent to the foreclosure of
84. Id. 85. See Stipulated Judgment and Injunction, supra note 82. 86. 897 N.E.2d 548 (Mass. 2008). 87. Id. at 553. 88. Id. 89. Commonwealth v. Fremont Inv. & Loan, 07-4373-BLS1, 2008 Mass. Super. LEXIS 46, **4– 5 (Mass. Sup. Ct. Feb. 25, 2008).
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many of Fremont’s delinquent mortgages. 90 Once the agreement was terminated, the Attorney General sought to enjoin Fremont from foreclosing on any of its delinquent mortgages, for Fremont’s alleged violation of Massachusetts’s general unfair trade practices law. 91 That statute makes unlawful any “unfair or deceptive acts or practices in the conduct of any trade or commerce.” 92 Although Massachusetts had recently passed an anti-predatory lending law that covered certain “highcost” loans, 93 the loans in question in the Fremont litigation failed to meet the high-cost threshold provided under that law, and thus it was inapplicable in this litigation. Fremont was accused, among other things, of luring borrowers into adjustable rate mortgage loans without taking into account those borrowers’ ability to repay the loans based on an assessment of the borrowers’ incomes in relation to what their payments might be once their interest rates reset. Fremont had also offered borrowers essentially 100%-financing options, with the expectation that those borrowers could simply refinance their loans (and pay a significant prepayment penalty) once the initial teaser period expired. Initially, the trial court issued an injunction that prevented Fremont from foreclosing on any residential properties within the state without providing the office of the state’s Attorney General notice of the foreclosure and affording that office an opportunity to raise an objection to the foreclosure on the ground the underlying loan was “presumptively unfair.” 94 Once the Attorney General raised such an objection, the order stated, the bank and the Attorney General were to attempt to resolve their differences, which, it was assumed, would involve the lender
90. Id. at **6–7. 91. MASS. GEN. LAWS ch. 93A (2008). 92. Id. § 2. 93. See Predatory Home Loan Practices Act, MASS. GEN. LAWS ch. 183C (2008). This Act defined high cost loans as a loan securing the borrower’s principal dwelling and that, for a first lien mortgage, exceeds by more than eight percentage points the yield on Treasury securities with a comparable maturity, or features points and fees that are the greater of 5% of the loan or $400. Id. § 2. 94. The trial court found that a loan was presumptively unfair if it possessed four characteristics: 1. The loan is an ARM with an introductory period of three years or less; 2. The loan has an introductory or “teaser” rate for the initial period that is at least 3% lower than the fully indexed rate; 3. The borrower has a debt-to-income ratio that would have exceeded 50% if the lender’s underwriters had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully indexed rate; and 4. The loan-to-value ratio is 100% or the loan carries a substantial prepayment penalty or a prepayment penalty that extends beyond the introductory period. Commonwealth v. Fremont Inv. & Loan, 07-4373-BLS1, 2008 Mass. Super. LEXIS 46, **35–36 (Mass. Sup. Ct. Feb. 25, 2008).
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refinancing the loan or agreeing to some other concessions with respect to the loan. If the differences could not be resolved, then permission to foreclose had to be obtained from the trial court. 95 In December 2008, the Supreme Court of Massachusetts upheld the trial court’s issuance of the preliminary injunction, effectively barring Fremont from foreclosing on mortgages with predatory features without court consent. The state’s high court, when reviewing the bank’s practices, expressed its disapproval of Fremont’s approach: [L]oans were made in the understanding that they would have to be refinanced before the end of the introductory period. Fremont suggested in oral argument that the loans were underwritten in the expectation, reasonable at the time, that housing prices would improve during the introductory loan term, and thus could be refinanced before the higher payments began. However, it was unreasonable, and unfair to the borrower, for Fremont to structure its loans on such unsupportable optimism. 96
It is likely that the practices that were at the heart of the Fremont litigation were widespread during the subprime mortgage frenzy. And many states have versions of Massachusetts’s unfair trade practices law. 97 Given these facts, this litigation may well serve as an example of the type of litigation that could help to halt the spread of foreclosures by intercepting predatory loans before they lead to displacement of borrowers saddled with onerous mortgage terms. Section 4 of the Massachusetts unfair trade practices law provides that the Attorney General of the state may bring an injunction for violation of that law, 98 but Section 11 of that same law states that an injunction may be sought by any person who “suffers any loss of money or property” for another
95. By the terms of the injunction, before commencing any foreclosure in the Commonwealth of Massachusetts Fremont must first give notice to the state Attorney General of its intent to foreclose and must inform the office whether the underlying mortgage involved in that foreclosure possesses the features that would render it “presumptively unfair.” Id. at *47. The Attorney General’s office can object to the foreclosure on the grounds that the loan is presumptively unfair and that a foreclosure of such mortgage would be objectionable. Id. at *48. The parties then have fifteen days to work out their differences with respect to the mortgage, or Fremont can seek the court’s permission to go ahead with the foreclosure despite the Attorney General’s objections. Id. at *49. The court then must assess “whether Fremont has taken reasonable steps to ‘work out’ the loan and avoid foreclosure, and whether there is any fair or reasonable alternative to foreclosure.” The terms of the injunction expressly reserve the right of the court to appoint a special master if the number of disputed foreclosures “grows too large.” Id. 96. Fremont, 897 N.E.2d at 558. 97. See LexisNexis 50 State Comparative Legislation and Regulations, Deceptive Trade Practices, (2008), http://www.lexisnexis.com. 98. MASS. GEN. LAWS ch. 93A, § 4.
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party’s violation of the law. 99 As state attorneys general and private litigants and their attorneys consider litigation that might follow the Fremont approach, they will want to assess the scope of different states’ unfair trade practices laws and review the remedies available. 100 The Countrywide and Fremont litigation are striking examples of the power of litigation to prevent foreclosures of subprime loans and promote sensible modifications of onerous loan terms. Civil rights statutes are also proving a fertile field for litigation in the wake of the subprime mortgage crisis. 2. Civil Rights Actions There is a growing awareness that a disproportionate share of subprime loans, particularly those in the latter years of the subprime mortgage market’s heyday, were marketed and sold to AfricanAmerican and Latino borrowers. Standing alone, this might be cause for celebration because of the resulting expansion in the homeownership rate in communities of color, which had been depressed for so long due to overt and covert racism. But when viewed in light of the fact that many of these borrowers received loan terms that were more onerous than white borrowers of similar credit risk, we see that the underlying mortgages were often priced more expensively based on the race of the borrower, and not just perceived credit risk. 101 In addition to the features of the subprime mortgage crisis described above, 102 another significant phenomenon of the crisis is the extent to 99. Id. at § 11. 100. For a review of different states’ unfair and deceptive acts and practices laws, see CAROLYN L. CARTER, CONSUMER PROTECTION IN THE STATES (2009), available at http://www.consumerlaw.org/issues/udap/content/UDAP_Report_Feb09.pdf. 101. These actions typically raise claims under the Fair Housing Act (FHA), and/or the Equal Credit Opportunity Act (ECOA). The FHA makes it unlawful “to discriminate against any person in making available [any real estate related transaction], or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” 42 U.S.C. § 3605(a) (2006). It is also unlawful “[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin.” 42 U.S.C. § 3604(b). The ECOA forbids discrimination: against any applicant, with respect to any aspect of a credit transaction— (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter. 15 U.S.C. § 1691(a) (2006). 102. See supra Part I.A.
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which many abuses in the subprime mortgage market were carried out disproportionately in communities of color, partly because a disproportionate share of subprime lending took place in those communities. While significant gains were made in homeownership rates in such communities in the earlier part of this decade, much of this expansion was fueled by subprime loans. 103 Indeed, in 2005 alone, while only 20% of all mortgages issued in that year were subprime, more than half of the mortgages made to African-American families and 40% of mortgages made to Latino families were subprime in nature. 104 The history of lending discrimination in these communities meant there was pent up demand for home loans, fewer traditional lending options, 105 and fewer channels that could offer sensible, informed counseling and advice. 106 One study from the early days of the subprime mortgage market’s expansion showed that, in 1998, 39% of residents of upper income African-American neighborhoods used subprime products to refinance their existing mortgages compared to just 6% of residents of upper income white neighborhoods. In even starker contrast, residents of lowincome white neighborhoods refinanced their homes with subprime products only 18% of the time. Thus, in 1998, upper-income residents of African-American neighborhoods were twice as likely as residents of 103. See Kiff & Mills, supra note 7, at 4 n.4. For an overview of some of the reasons that certain minority groups pay more for subprime loans, see Alan M. White, Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing, 60 S.C. L. REV. 677 (2009). 104. Robert B. Avery et al., Higher-Priced Home Lending and the 2005 HMDA Data, FED. RES. BULL. A123, A125, A159–60 (2006), available at http://www.federalreserve.gov /pubs/bulletin/2006/hmda/bull06hmda.pdf. 105. For a history of discrimination in the home mortgage market in particular and the housing market in general, see DAN IMMERGLUCK, CREDIT TO THE COMMUNITY: COMMUNITY REINVESTMENT AND FAIR LENDING POLICY IN THE UNITED STATES 87–108 (2004); see also Adam Gordon, The Creation of Homeownership: How New Deal Changes in Banking Regulation Simultaneously Made Homeownership Accessible to Whites and Out of Reach for Blacks, 115 YALE L. J. 186, 209–11 (2005) (discussing how the regulatory system denied most African-Americans the opportunity to buy homes). 106. See U.S. DEP’T OF HOUS. & URB. DEV. & U.S. DEP’T OF TREASURY, CURBING PREDATORY HOME MORTGAGE LENDING: A JOINT REPORT 17 (2000), available at www.huduser.org/publications/pdf/treasrpt.pdf [hereinafter HUD-TREASURY REPORT] (noting reasons predatory lenders can flourish in communities of color); Kathleen C. Engel & Patricia A. McCoy, The CRA Implications of Predatory Lending, 29 FORDHAM URB. L.J. 1571, 1583–84 (2002) (arguing that predatory lenders flourish in markets underserved by traditional lenders); see also Michael S. Barr, Credit Where It Counts: The Community Reinvestment Act and Its Critics, 80 N.Y.U. L. REV. 513, 534– 40 (2005) (providing overview of economic reasons for failure of the mortgage market to serve certain communities). See generally ALVARO CORTES ET AL., U.S. DEP’T OF HOUS. & URB. DEV., EFFORTS TO IMPROVE HOMEOWNERSHIP OPPORTUNITIES FOR HISPANICS: CASE STUDIES OF THREE MARKET AREAS (2006), available at http://www.huduser.org/Publications/PDF/hisp_homeown2.pdf (studying practices of Latino communities in three urban settings and finding that the lack of information about the mortgage process was the most significant barrier to homeownership and access to home mortgage financing).
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low-income white neighborhoods to utilize subprime refinance products. 107 More recent lending data, from 2006, revealed similar discrepancies in subprime lending based on race. 108 For example, roughly 54% of home purchase loans made to African-Americans in that year had subprime features, compared to only 18% of the loans made to nonHispanic whites. 109 Even controlling for some borrower and lender characteristics, 30% of loans made to African-American borrowers still had subprime features, compared to 18% for whites. Thus, AfricanAmerican borrowers of similar economic profile to their white counterparts still took out subprime loans at nearly twice the rate as whites. Similarly, controlling for those same features, Latino borrowers took out subprime loans 24% of the time, a nearly 50% higher subprime rate as compared to whites. 110 Controlling for many borrowers and lender characteristics in terms of refinance originations, subprime refinance loans were extended to blacks 33% of the time and to nonHispanic whites 26% of the time, an unexplained difference of 7.3%, 111 and Latinos received subprime refinance loans 29.7% of the time.112 Even within subprime lending itself there are racial and ethnic disparities in pricing and subprime terms. The Center for Responsible Lending studied Housing Mortgage Disclosure Act (HMDA) data from 2004 related to subprime lending during that year. Controlling for borrower variables, it found that African-Americans and Latinos were 107. HUD-TREASURY REPORT, supra note 106, at 48. More recent research on lending patterns found similar results and concluded that these patterns were likely the result of steering. See CALIFORNIA REINVESTMENT COALITION ET AL., PAYING MORE FOR THE AMERICAN DREAM: THE SUBPRIME SHAKEOUT AND ITS IMPACT ON LOWER-INCOME AND MINORITY COMMUNITIES 4–5 (2008), available at http://www.woodstockinst.org/publications/download/paying-more-for-the-americandream-%11-the-subprime-shakeout-and-its-impact-on-lower%11income-and-minority-communities (analyzing activity of subprime lenders in seven metropolitan areas and finding that over 40% of the loans by these entities were in predominantly minority neighborhoods while only 10% of their loans were in predominantly white neighborhoods, “suggest[ing] that these neighborhoods were targeted by high-risk lenders”). A preliminary investigation showed that at least some subprime borrowers were otherwise qualified for prime loans, but ultimately agreed to enter into subprime loans. Mike Hudson & E. Scott Reckard, More Homeowners with Good Credit Getting Stuck with Higher-Rate Loans, L.A. TIMES, Oct. 24, 2005, at A1 (finding 20% of subprime borrowers would have qualified for prime loans). 108. See Robert B. Avery et al., The 2006 HMDA Data, 93 FED. RES. BULL. A73, A95 (2007), available at http://www.federalreserve.gov/pubs/bulletin/2007/pdf/hmda06final.pdf. 109. Id. 110. Id. at A96. 111. Id. 112. Id. Other studies confirm a disproportionate share of subprime loans going to minority borrowers, even controlling for creditworthiness and other factors. See, e.g., Paul S. Calem, et al., The Neighborhood Distribution of Subprime Mortgage Lending, J. REAL ESTATE FIN. & ECON. 393 (2004),; Paul S. Calem et al., Neighborhood Patterns of Subprime Lending: Evidence from Disparate Cities, 15 HOUS. POL’Y DEBATE 603 (2004).
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more likely to have higher priced subprime loans and features such as prepayment penalties than similarly situated white borrowers. 113 The researchers found “Latinos and African-Americans were 28 percent and 37 percent more likely, respectively, to receive a higher-rate subprime loan than whites.” 114 With fixed-rate home purchase loans with prepayment penalties, African-Americans were 31% more likely than whites to have higher interest rates on their loans, and 34% more likely to have higher interest rates in their refinance loans. 115 For Latinos, the figures are even more striking: for fixed-rate home purchase loans with a prepayment penalty, Latino borrowers were 45% more likely to receive a loan with a higher interest rate than white borrowers; with fixed-rate loans without a prepayment penalty, Latino borrowers were 142% more likely to have a higher interest rate than similarly situated white borrowers. 116 Finally, the 2007 HMDA data actually shows these discrepancies improved slightly in that year, most likely as a result of the collapse of more than 100 subprime mortgage lenders during that year. 117 Indeed, 169 institutions that reported loans under HMDA in 2006 ceased operations in 2007, and the data on the lending patterns of these institutions in terms of their lending to different races is striking. These failed institutions originated subprime loans to blacks 74% of the time and to Latinos 63% of the time, compared to the industry average of 50% and 37%, respectively, for all lenders. 118 Plaintiffs in a number of settings have commenced class action lawsuits to raise allegations of discrimination in subprime mortgage lending. The first decision to be generated from this recent wave of cases 119 was the decision denying the defendants’ motion to dismiss in 113. See DEBBIE GRUENSTEIN BOCIAN ET AL., UNFAIR LENDING: THE EFFECT OF RACE AND ETHNICITY ON THE PRICE OF SUBPRIME MORTGAGES (2006), available at http://www.responsiblelending.org/mortgage-lending/research-analysis/rr011-Unfair_Lending-0506.pdf 114. Id. at 10. 115. Id. at 3–4. 116. Id. at 4. 117. See Robert Avery et al., The 2007 HMDA Data, FED. RES. BULL. A107, A108–A109 (2008). 118. Id. at A126 tbl.12. 119. Prior to this recent wave of cases, and since 2000, a handful of cases have arisen in which plaintiffs raised arguments that a particular mortgage lender’s practices violated either the FHA, the ECOA or both. These cases were filed before the large spike in lending that grew out of the subprime mortgage market in the mid-2000s, and will not be discussed at length here. Although the general allegation that the defendant-lenders in those cases engaged in discriminatory lending practices is similar to the allegations raised in the discretionary pricing cases discussed here, few were brought as class actions and many of the allegations raised in the complaints in those actions pre-dated the explosive growth in subprime lending that took place in communities of color earlier in this decade. See, e.g., Honorable v. Easy Life Real Estate Sys., 100 F. Supp. 2d 885, 887 (N.D. Ill. 2000); Matthews v. New Century Mortgage Corp. 185 F. Supp. 2d 874 (S.D. Ohio 2002). For an overview of these
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the case of Ramirez v. Greenpoint Mortgage Funding, Inc. 120 Plaintiffs in this class action allege that Greenpoint had both objective as well as subjective criteria for determining the pricing of its loans.121 The subjective criteria granted bank loan officers the ability to increase the interest rate and fees on loans, regardless of the perceived credit risk of the borrower. The plaintiffs in Ramirez allege that increased pricing based on subjective criteria was more likely to occur in loans made to borrowers of color as opposed to white borrowers, a practice they allege violates both the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). 122 Due to the prevalence of increased pricing based on these subjective factors in loans Greenpoint made to borrowers of color as compared to white borrowers, the trial court denied the defendants’ motion to dismiss, finding that the plaintiffs had established that the bank’s actions had a disparate impact on minority borrowers sufficient to establish the plaintiffs’ prima facie case of discrimination. 123 earlier cases, see Raymond H. Brescia, Subprime Communities: Reverse Redlining, the Fair Housing Act and Emerging Issues in Litigation Regarding the Subprime Mortgage Crisis, 2 ALB. GOV’T L. REV. 164, 187–89 (2009). The cases listed here are a representative sample. For a more comprehensive list of cases alleging the extension of credit on discriminatory terms in the subprime mortgage market, see NATIONAL CONSUMER LAW CENTER, CREDIT DISCRIMINATION 169 n.17 (5th ed. 2009) 120. 633 F. Supp. 2d 922 (N.D. Cal. 2008). 121. The claims in Ramirez and other cases reviewed here in which plaintiffs have raised claims challenging subjective mortgage pricing echo those raised in challenges in the employment context in which subjective employment practices have a disparate and discriminatory impact. For example, in Watson v. Forth Worth Bank & Trust, 487 U.S. 977 (1988), the Court found: [D]isparate impact analysis is in principle no less applicable to subjective employment criteria than to objective or standardized tests. In either case, a facially neutral practice, adopted without discriminatory intent, may have effects that are indistinguishable from intentionally discriminatory practices. Id. at 990. For an overview of Supreme Court and lower court jurisprudence regarding discretionary and subjective employment practices that have a discriminatory disparate impact, see Susan Sturm, Second Generation Employment Discrimination: A Structural Approach, 101 COLUM. L. REV. 458, 486–90 (2001). 122. Ramirez, 633 F. Supp. 2d at 924–25. 123. Id. at 928–29. One issue that has arisen in several of the cases discussed herein is whether disparate impact analysis is available under the FHA. Defendants have argued that the Supreme Court’s decision in Smith v. City of Jackson, 544 U.S. 228 (2005), construing the Age Discrimination in Employment Act (ADEA), suggests that such analysis is unavailable to the FHA plaintiff. There, the Court construed the ADEA’s language regarding disparate impact as narrower than the language in Title VII which provides for claims based on proof of disparate impact of a challenged employment practice. Id. at 240. Defendants point out that no explicit provision for disparate impact analysis is found in the FHA and thus the Court’s decision in Smith dictates that disparate impact analysis should not be available to the FHA plaintiff. Ramirez, 633 F. Supp. 2d at 926–27. Despite the holding in Smith with respect to the ADEA, circuit courts from across the country have continued to consider claims using disparate impact analysis under the FHA. See, e.g., Budnick v. Town of Carefree, 518 F.3d 1109, 1113– 14 (9th Cir. 2008); Affordable Hous. Dev. Corp. v. City of Fresno, 433 F.3d 1182, 1195 (9th Cir. 2006). For a discussion of the viability of disparate impact claims under the FHA and ECOA, see Michael Aleo
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In Miller v. Countrywide Bank, N.A., 124 the plaintiffs in a national class action alleged that Countrywide Bank and its subsidiaries engaged in discriminatory pricing of loans through subjective pricing mechanisms. The district court there also denied the defendants’ motion to dismiss, where the plaintiffs had shown African-American borrowers were three times more likely to receive high-priced home purchase loans and twice as likely to receive high-priced refinance loans than similarly situated whites. 125 Although the court recognized the defense that the plaintiffs, at the motion to dismiss stage, had failed to show that the disparity was caused by any discriminatory policy carried out by the defendants, it left such issues to “later stages in the proceedings.” 126 Most recently, in Taylor v. Accredited Home Lenders, Inc., 127 plaintiffs raised allegations of disparate discretionary pricing by defendants. The plaintiffs in Taylor have cited to national reports about discriminatory lending practices and local lending data which included such data from the defendants. 128 Ruling on the defendants’ motion to dismiss, the court found that, based on this data, the plaintiffs had raised allegations sufficient to establish a disparate impact on borrowers of color from the defendants’ practices. 129 A similar case, filed by the National Association for the Advancement of Colored People (NAACP) in 2007 against a wide range of subprime lenders and their parent companies, raised allegations of racial steering of African-American borrowers into higher cost, subprime, and predatory loans. The action was filed by the NAACP “in its individual capacity, in its representative capacity, and as a class action,” 130 alleging violations of the FHA, ECOA, and the Civil Rights Act, citing the & Pablo Svirsky, Foreclosure Fallout: The Banking Industry’s Attack on Disparate Impact Race Discrimination Claims Under the Fair Housing Act and the Equal Credit Opportunity Act, 18 B.U. PUB. INT. L.J. 1 (2008). 124. 571 F. Supp. 2d 251 (D. Mass. 2008). 125. Id. at 253. The plaintiffs in Ramirez easily meet statistical thresholds courts have found will establish an actionable disparate impact. Courts have utilized different standards to measure statistical significance. The test applied under the Supreme Court’s decision in Castaneda v. Partida found that a discrepancy of “two or three standard deviations” would constitute a statistically significant difference sufficient to establish an actionable disparate impact. Castaneda v. Partida, 430 U.S. 482, 496 n.17 (1977). Others utilize the “four-fifths” or “80% rule,” whereby courts will find a statistically significant discrepancy where a test might disqualify members of a protected class, with similar qualifications to members of a non-protected class, at a rate greater than 20% of the time. For a description of the 80% rule, see Elaine W. Shoben, Disparate Impact Theory in Employment Discrimination: What’s Griggs Still Good For? What Not?, 42 BRANDEIS L.J. 597, 604 n.54 (2004). 126. Miller, 571 F. Supp. 2d at 259. 127. Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062 (S.D. Cal. 2008). 128. Id. at 1068–69. 129. Id. 130. NAACP v. Ameriquest Mortgage Co., 635 F. Supp. 2d 1096, 1099 (C.D. Cal. 2009).
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existence of “numerous empirical studies that all confirm that AfricanAmericans are substantially more likely to receive higher-rate residential mortgage loans than” similarly qualified white borrowers.131 The NAACP alleges that it has also suffered injuries at the hand of the defendants because their “discriminatory mortgage lending policies and practices tend to frustrate the association’s mission, reduce contributions and divert its resources, including through investigation, advocacy and counseling, and litigation costs.” 132 Defendants moved to dismiss the plaintiff’s claims on several grounds, including that the plaintiff had failed to establish it had associational standing under Havens Realty Corp. v. Coleman, 133 and did not have representational standing under Hunt v. Washington State Apple Advertising Commission. 134 They also argued that the complaint failed to plead with specificity allegations sufficient to establish the right to the relief sought under the pleading requirements articulated by the Supreme Court in Bell Atlantic Corp. v. Twombly; 135 and that the plaintiff’s disparate impact theories under the FHA, ECOA, and Civil Rights Act were unavailable. In January 2009, the trial court denied the motion in its entirety. It held that the NAACP had satisfied the court that its allegations were sufficient to establish the group’s standing to sue, both in its associational and representational capacities. 136 It held further that the allegations concerning the disparate treatment of African-American borrowers in the subprime mortgage market, based on reports (some of which are cited above) that reveal that African-Americans were far more likely that white borrowers to be steered toward subprime loans even when they qualified for prime loans, set forth the plaintiff’s right to relief with sufficient specificity to satisfy the requirements of Twombly. 137 Finally, the court ruled that the NAACP could present its prima facie case of discriminatory treatment under the FHA, ECOA, and Civil Rights Act through evidence of a disparate impact on AfricanAmericans from the defendants’ policies. 138 While the NAACP has settled its claims with several of the defendants, including WMC Mortgage, LLC, and JP Morgan Chase & Co. (and affiliates), and at
131. 132. 133. 134. 135. 136. 137. 138.
Id. Id. 455 U.S. 363 (1982). 432 U.S. 333 (1977). 550 U.S. 554 (2007). See NAACP, 635 F. Supp. 2d at 1104–05. Id. Id.
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least one defendant, Accredited Home Lenders, Inc. has filed for bankruptcy, the matter is proceeding against the other defendants and is presently in the discovery phase. 3. Truth in Lending Litigation Similar to the class actions filed under fair lending laws, several class actions have been filed under the federal Truth in Lending Act (TILA), 139 that seek to exercise the right of rescission under that statute for loans made in violation of its terms. Courts have been unreceptive to attempts to certify class actions in such cases, however, and recent decisions out of U.S. circuit courts have reaffirmed judicial reluctance to treat TILA rescission claims in the class action context. TILA was enacted by Congress in 1968 to “avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” 140 In furtherance of these goals, TILA requires lenders to make certain disclosures about the terms of any credit transaction, and offers borrowers the right to rescind such credit transaction within three days of its consummation, or within three days of learning from the lender of the right to rescind, whichever is later. 141 If, however, the right to rescind is never disclosed to the borrower, the rescission period extends to three years from the consummation of the transaction. 142 Recent decisions of the Seventh and First Circuit Courts of Appeals have held that TILA rescission claims should not receive class action treatment. Most recently, in Andrews v. Chevy Chase Bank, 143 the Seventh Circuit found that class actions are not available to resolve TILA claims, citing the individual nature of the rescission claim and the nature of the resolution of such a claim that varies according to the facts of each underlying transaction. The court also interpreted a cap on damages in another provision of TILA as a sign that Congress intended that provision to be amenable to class action treatment, 144 and Congress’s failure to discuss class action features in the context of the rescission remedy meant that Congress did not intend for rescission to be available in class actions. 145 The Andrews court had relied on the 139. 140. 141. 142. 143. 144. 145.
15 U.S.C. §§ 1601–1667f (2006). Id. § 1601(a). See id. § 1635(a). See 12 C.F.R. § 226.15(a)(3) (2009). 545 F.3d 570 (7th Cir. 2008). Id. at 575 (citing 15 U.S.C. § 1640(a)(2)(B)). Id. at 575–76.
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First Circuit’s 2007 precedent in McKenna v. First Horizon Home Loan Corp., 146 which had reached a similar conclusion about Congress’s intent with respect to the availability of TILA rescission in a class action. Both circuits relied on a Fifth Circuit precedent from 1980, in which the court there found as follows: “[Rescission] is a right which the creditor has with each individual obligor. Thus the notion of a class action in this sort of context would contradict what would seem to be the Congressional intent about the nature of this action.” 147 I will return to this issue shortly. 4. Municipal Lawsuits Several cities have initiated litigation against lenders for the harm caused by the proliferation of subprime products within their borders. To date, these suits have taken three different approaches. First, the mayor and city council of Baltimore, Maryland, have commenced litigation against Wells Fargo for alleged violations of the FHA in the marketing and sale of subprime loans to primarily African-American and Latino communities within Baltimore city limits. 148 Second, the City of Cleveland, Ohio, has commenced a broad-side attack against a series of banks under a public nuisance theory, alleging that these banks promoted the spread of subprime products in communities in Cleveland with the knowledge that such loans were doomed to fail and likely to bring about tangible harm in those communities. In a sweeping decision, Federal District Court Judge Lioi of the Northern District of Ohio recently dismissed this action on the ground that state law forbids municipalities within Ohio from regulating mortgages, and the municipality’s commencement of the litigation itself fell within the prohibitions of the statute. 149 Third, cities such as Buffalo, New 146. 475 F.3d 418 (1st Cir. 2007). 147. James v. Home Constr. Co. of Mobile, 621 F.2d 727, 731 (5th Cir. 1980) (citation omitted). 148. For an overview of the Baltimore litigation, see Brescia, supra note 119, at 175–79. 149. See City of Cleveland v. Ameriquest Mortgage Sec., Inc., 621 F. Supp. 2d 513, 518–20 (N.D. Ohio 2009) (granting dismissal of complaint). The Ohio law in question, Ohio Revised Code § 1.63, provides: The state solely shall regulate the business of originating, granting, servicing, and collecting loans and other forms of credit in the state and the manner in which any such business is conducted, and this regulation shall be in lieu of all other regulation of such activities by any municipal corporation or other political subdivision. Any ordinance, resolution, regulation, or other action by a municipal corporation or other political subdivision to regulate, directly or indirectly, the origination, granting, servicing, or collection of loans or other forms of credit constitutes a conflict with the Revised Code. . . is preempted. OHIO REV. CODE. ANN. § 1.63 (West 2009).
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York, 150 and Cincinnati, Ohio, 151 have attempted a somewhat different tack, arguing that the failure of certain banks to maintain their portfolio of vacant homes obtained by those banks through foreclosure violates local ordinances and creates a public nuisance. Because of the harm that has flowed from the proliferation of subprime products, local governments are straining under the weight of the fallout from the mortgage collapse; these suits allege that such harm was foreseeable on the part of the lenders and investment banks, and thus, their actions are subject to suit under various legal theories. As has become painfully obvious over the past several years, foreclosures reduce neighboring property values and reduce the tax base of local communities. Foreclosed homes become a magnet for crime and create a drag on police and fire services. These forces could ultimately result in a reduction in assets and local revenues in the hundreds of billions, if not the trillions, of dollars. 152 These actions are still in the early stages of litigation, 153 but they could yield critical information about the risks of which subprime lenders were aware when they marketed their loans to certain communities. 5. Investor Litigation A fifth potential avenue for litigation is in the area of investor lawsuits: suits by the holders of the securities against the investment banks that sold and packaged mortgage-backed securities and even the ratings agencies that reviewed and assessed those securities. There has been a slow growth of these actions, with the first wave stemming from Additional grounds for dismissal included that the action was barred by the economic loss rule, that the City’s allegations “fail[ed] to demonstrate an unreasonable interference with a public right” and the City was unable to demonstrate “that Defendants’ conduct was the proximate cause of its alleged damages.” City of Cleveland, 621 F. Supp. 2d at 536. Because this action was unique among the municipal litigation currently pending, it is unclear whether this decision, if not reversed on appeal, will have any impact on the other pending actions, though it will likely discourage other municipalities within Ohio from bringing actions based on similar allegations. 150. See Jason Szep, Cities grapple with surge in abandoned homes, REUTERS, Mar. 25, 2008, available at http://www.reuters.com/article/marketsNews/idUSN1162941020080325 (describing how Buffalo filed suit against lenders holding foreclosed properties for the costs of maintenance and/or demolition of such properties). 151. Dan Monk, City Sues Deutsche Bank, Wells Fargo, BUSINESS COURIER OF CINCINNATI, Dec. 24, 2008, available at http://www.bizjournals.com/cincinnati/stories/2008/12/22/daily45.html (describing Cincinnati action). 152. See Brescia, supra note 119, at 168–70 and sources cited therein. 153. For an overview of municipal litigation in the wake of the subprime mortgage crisis and a preliminary assessment of the viability of claims raised in such litigation, see Creola Johnson, Fight Blight: Cities Sue to Hold Lenders Responsible for the Rise in Foreclosures and Abandoned Properties, 2008 UTAH L. REV. 1169 (2008).
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the investment bank write-downs of mortgage-backed securities they issued. As of November 2008, one study showed more than 200 new investor actions arising out of the subprime mortgage meltdown and the financial crisis generally have been filed, 154 although some have already been dismissed. 155 While it is likely that there will be a large spike in securities litigation generally given the drastic reduction in value in the stock market, securities litigation with respect to alleged illegality in the mortgage-backed securities market is likely to crowd court dockets for the immediate future. A full analysis of this area of litigation is beyond the scope of this review, but one form of lawsuit in this area is worth mentioning here because it involves investors suing banks over loan modifications such banks undertake with delinquent borrowers. It is generally recognized that hundreds of thousands of mortgages have been modified or are in line to be modified to preserve the asset and keep the borrower in his or her home. Typically, no one wins in a foreclosure. Conflicting loyalties, however, create barriers to modification. The companies that now service the mortgages might have no incentive to pursue foreclosures because such proceedings are expensive and the servicer will not receive compensation for the costs of prosecuting them. Investors in subprime securities whose income might benefit from certain elements of the transaction—such as an income stream from prepayment penalties—see their interests destroyed if the underlying mortgage is modified. As a result, investors holding mortgage-backed securities worry that their investments in these securities, already reduced in value, will be rendered worthless if they depend on the income streams from loans that are ultimately modified. Such investors threaten to sue the banks and servicers who might enter into loan modification agreements without their consent, and such lawsuits could ultimately impair any rescue effort. To date, one such lawsuit has been filed. In Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial 154. Jennifer E. Bethel et al., Legal and Economic Issues in Litigation Arising from the 2007-2008 Credit Crisis 2–3 (Harvard Law and Economics Discussion Paper No. 612, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1096582. 155. See, e.g., In re 2007 Novastar Fin., Inc. Sec. Litig., No. 07-0139-CV-W-ODS, 2008 U.S. Dist. LEXIS 44166 (W.D. Mo. June 4, 2008) (granting defendant’s motion to dismiss securities fraud claim where plaintiff failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act), aff’d sub nom, Gilmore v. Novastar Fin., Inc. (In re 2007 Novastar Fin. Inc. Sec. Litig.), 579 F.3d 878 (8th Cir. 2009); Tripp v. IndyMac Bancorp, Inc., No. CV07-1635, 2007 U.S. Dist. LEXIS 95445 (C.D. Ca. Nov. 29, 2007) (dismissing a securities fraud claim for failure to meet the heightened pleading requirements of the PSLRA where plaintiff alleged that the defendant corporation maintained it was financially stable despite the economic downturn in the housing and mortgage markets).
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Corp., 156 the plaintiffs, two limited liability corporations that invested in subprime securities issued by Countrywide, have filed a declaratory judgment action as a class action 157 seeking to prevent Countrywide, acting through its parent company, Bank of America, from reducing the value of the securities those LLCs hold as a result of meeting the obligations of the $8.4 billion settlement with various attorneys general. 158 The crux of the complaint is that the modifications of the loans through the settlement will necessarily reduce the value of the securities linked to those mortgages. Plaintiffs allege as follows: Modifying a mortgage loan almost always means reducing or delaying payments due on that loan. Reducing or delaying those payments in turn entails a reduced or delayed flow of funds into the trusts to which those loans were sold in securitizations. A reduced or delayed flow of funds into those trusts reduces the value of the certificates that those trusts sold to investors. Plaintiffs believe and allege that, depending on the resolution of the questions on which they seek a declaratory judgment, the value of all certificates held by members of the plaintiff class will be affected by billions of dollars. 159
The plaintiffs seek a declaratory judgment that would force the bank to buy the mortgages back from the securities holders before they modify them, because, it is alleged, the agreements underlying those securities require the bank to do so before it modifies any loan. The complaint appears silent as to the purchase price at which those mortgages must be repurchased by the bank. It is too early to tell whether this lawsuit, or others like it in the future, will force banks to repurchase mortgages from the trusts they created when they securitized those mortgages. At a minimum, the threat of such lawsuits has necessarily scared banks and made them reluctant to modify loans for fear of investor lawsuits.
156. The case was originally filed in the New York Supreme Court but recently removed to federal district court under both diversity and federal question jurisdiction, and docketed under 2008 CV 11343 (S.D.N.Y) (RJH). It was subsequently remanded. Greenwich Fin. Servs. Distressed Mortgage Fund 3, LLC v. Countrywide Fin. Corp., No. 08 Civ. 11343(RJH), 2009 WL 2499149 (S.D.N.Y. Aug. 14, 2009). 157. The proposed class consists of “all persons or entities that own or hold certificates in one or more” of a list of hundreds of securitization transactions listed in the complaint, likely representing hundreds of thousands of mortgages. Complaint at ¶12, Greenwich Fin. Servs. Distressed Mortgage Fund 3, LLC v. Countrywide Fin. Corp., 650474/2008 (N.Y. Sup. Ct. filed Dec. 01, 2008). 158. See also Vikas Bajaj, Fund Investors Sue Countrywide Over Loan Modifications, N.Y. TIMES, Dec. 2, 2008, at B8; Posting of Steven M. Davidoff to DealBook, http://dealbook.blogs.nytimes.com/2008/12/09/behind-greenwichs-dispute-with-countrywide/ (Dec. 9, 2008, 13:56 EST). 159. Complaint, supra note 157, at ¶ 32.
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III. MASS TORTS AND SUBPRIME LITIGATION A. Subprime Litigation and the Mass Torts Paradigm Given these different types of litigation flowing out of the subprime mortgage crisis, do any of these cases fit within the mass torts paradigm? Returning to the working definition of mass torts utilized above, mass torts involve numerosity of plaintiffs, commonality among their claims, interdependence of their claim values, controversy over scientific evidence, emotional and political heat, and higher than average potential for claiming by allegedly injured parties. 160 The following is an analysis of the subprime litigation involving borrowers or public plaintiffs and the extent to which such litigation exhibits the characteristics of mass torts litigation. 161
160. Hensler, supra note 31, at 1596. 161. Although some of the state law claims in the municipal litigation and those cases brought by state attorneys general raise tort claims, not all claims of borrowers in the subprime context have their basis in tort. Nevertheless, discrimination claims in certain contexts have been characterized as having similar characteristics as mass torts cases generally. Geoffrey Hazard, discussing what he calls “institutional decree” litigation involving poverty and issues of discrimination, argues: [S]chool cases and other “institutional decree” litigation can be conceived as involving mass torts. Lack of equal opportunity for an effective education is certainly a personal injury in some sense of the term. So are suffering inhumane conditions in prisons and mental institutions, homelessness, inadequate medical care, and racial discrimination in public housing. These mass tort poverty-discrimination cases have arisen in virtually every large community in the United States and in many smaller ones. Their genesis has been over the same period as the asbestos claims and other mass personal injury torts. The litigation in the mass tort poverty-discrimination cases resembles the mass tort personal injury cases in yet other ways, including those discussed by Judge Weinstein: multiple party joinder of plaintiffs and respondents; use of the class suit device as the procedural structure; novel roles for counsel, court, parajudicial officers, experts, and community representatives; complex problems of causation and evidence, for example, differentiating the significance of race, class, and family structure on educational achievement and assessing the significance of “de facto” desegregation in the public schools; and problems of communication, community, participation, and individual dignity and autonomy. Geoffrey C. Hazard, Jr., Reflections on Judge Weinstein’s Ethical Dilemmas in Mass Tort Litigation, 88 NW. U. L. REV. 569, 573–74 (1994). Furthermore, mass financial harm cases are not recognized by some as traditional mass torts. See REPORT OF THE ADVISORY COMMITTEE, supra note 38, at 10–11. Some commentators have argued that they typically do not have the same scale of damages as more traditional mass torts cases. See Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REV. 1, 77–78 (2008). In the subprime context, because the potential for damages in these cases reaches into the hundreds of billions, if not trillions of dollars, the scale of financial harm that could arise in the context of subprime litigation is staggering, warranting its consideration for inclusion in the pantheon of mass torts. For a discussion of the commonality between mass financial harm cases and mass torts generally, see DEBORAH HENSLER, ET AL., supra note 43, at 51–62 (2000).
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1. Numerosity Subprime litigation, particularly the fair lending cases described above, necessarily includes numerous plaintiffs and a limited number of defendants. That some of the cases have been filed by state attorneys general, or by municipalities, does not undermine this finding. 162 Much of the litigation around tobacco products and against gun manufacturers has been brought by similar public entities. 163 Underlying those cases is the harm to individual victims, with those victims sometimes numbering in the millions. In the subprime context, hundreds of thousands of borrowers stand to benefit from the state attorneys general lawsuits against Countrywide that was settled by Bank of America, and, if the municipal lawsuits are ultimately settled as well, it is likely that remedial programs will be instituted to assist individual borrowers located within the jurisdictions covered by those actions. 164 2. Commonality Turning to the issue of commonality, whether subprime litigation will find commonality among claims and issues will turn on the nature of the practice challenged in any particular action. For the discrimination cases described above, where quantifiable differences can be found in the conduct of lenders, and where such conduct was undertaken against a particular class of borrowers across the board, there will be sufficient commonality of issues. 165 Similarly, where a lender may have used a particular practice against a particular class of borrowers, such as using a standard form notice of loan terms that was defective on its face, or advertised generally in a false or deceptive way, those exposed to such product or advertising would share common issues of fact for resolution. Where a particular practice brought about particular harms—higher interest rates or hidden charges—borrowers could bring claims against such lenders and such claims would share a core of commonality. 166 162. See supra Part II.B.1. 163. See infra Part III.B. 164. See supra notes 83–84 and accompanying text. 165. See supra Part II.B.2. 166. Commonality issues arise in several potential, not necessarily mutually exclusive settings: e.g., in federal courts through joinder of plaintiffs (through FRCP 20); class action treatment (through FRCP 23); consolidation (through FRCP 42); and multi-district litigation (through 28 U.S.C. §1407). Procedural rules of the state courts have similar mechanisms. See, e.g., Stephen B. Burbank, The Class Action Fairness Act of 2005 in Historical Context: A Preliminary View, 156 U. PA. L. REV. 1439, 1544 tbl. 1 (list of states that have adopted provision similar to FRCP 23 after its amendment in 1966) (2008). For a survey of state multi-district procedures, see Yvette Ostolaza & Michelle Hartmann, Overview of Multidistrict Litigation Rules at the State and Federal Level, 26 REV. LITIG. 47, 69-75 (2007). For a
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There are certainly cases where commonality is not present. One example would be where a particular mortgage broker may have engaged in illegal steering with respect to some borrowers of color, but not all. Where the particular oral communications used in each transaction are in question, it is hard to envision aggregative techniques helping except where a number of borrowers can show or allege that the same communications or tactics were used on them as standard practice. Even there, unless the broker was a prolific salesperson, it is unlikely the number of borrowers impacted by that single broker would meet the “numerosity” element described above. 3. Interdependence of Claim Values The next characteristic of mass torts is the interdependence of claim values within a set of claims. There are three basic categories of subprime borrower-claimants: those who have already lost their homes, those who are delinquent in their payments and at risk of foreclosure, and those who may be saddled with debt that is the product of illegal and actionable conduct but who are, at present, current on their mortgages. 167 Public plaintiffs often seek compensation for borrowers, or for the losses government entities face due to subprime practices. 168 For borrowers who have already lost their homes, the market has yet to mature for the losses associated with foreclosure. 169 Already ousted borrowers will face different harms, and, thus, different damages. Did foreclosed borrowers have another place to live upon eviction? Did they have to spend a premium on motels or other temporary housing? Did they have to spend time in shelters on the streets? Did they lose employment or were illnesses contracted or exacerbated due to the stress fuller discussion of commonality issues in mass torts litigation, see Hensler & Peterson, supra note 42, at 967–69. In addition, claim aggregation in mass torts litigation is common. Georgene M Vairo, Georgine, the Dalkon Sheild Claimants Trust, and the Rhetoric of Mass Torts Claims Resolution, 31 LOY. L. A. L. REV. 79, 95 (1997) (describing multi-district treatment of tens of thousands of asbestos cases as a “dramatic example” of aggregation). Deborah R. Hensler, A Glass Half Full, A Glass Half Empty: The Use of Alternative Dispute Resolution in Mass Personal Injury Litigation, 73 TEX. L. REV. 1587, 1609–12 (1995) [hereinafter Hensler, A Glass Half Full] (providing examples of aggregated mass tort suits). 167. As an example, several different types of claimants—based on the current status of their loan and whether they have already been foreclosed upon—are contemplated to benefit from the Bank of America/Countrywide settlement. See supra note 82. 168. See, e.g., Complaint, City of Buffalo v. ABN AMRO Mortgage Group Inc, at 92–93 (seeking damages for costs to municipality for maintenance of foreclosed properties). 169. The Countrywide/Bank of America settlement sets aside funds to assist borrowers who had already been foreclosed upon by the time the settlement was reached but does not set forth any mechanism for determining what type of compensation such borrowers should receive. See supra note 82, at 19–20.
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of foreclosure and dislocation or exposure to the elements due to homelessness? These claims will necessarily vary by individual, and, short of useful settlement “grids,” 170 and some method for monetizing these different harms, aggregation of damages assessments will prove difficult until some market for these harms is established. For borrowers still in their homes, however, the value of their claims might be relatively easy to establish. The greatest problem for subprime borrowers is the interest rate of their mortgage. 171 And for subprime borrowers improperly steered into subprime loans when lenders should have offered them prime loans, it should be relatively simple to identify the prime rate and terms at the time the loan was consummated. Once a prime loan rate is established, the borrower’s loan can be reset at that rate, and any payments made beyond what the loan rate would have been will reflect the borrower’s damages. When coupled with a rescission of the underlying loan, and reformation under the prime rate and on prime terms, the borrower’s past damages are determinable, and future damages are avoided. For municipal litigants seeking to recover damages for the impact of lender activity in their communities, this, too, is a market that has not yet matured. 172 One of the greatest sources of harm in the municipal litigation context is the overall drop in property values, with a concomitant loss in tax base revenue. 173 Teasing out the extent to which a particular lender may have contributed to this drop in tax revenues will be difficult. While studies exist on the impact of foreclosures on property values, litigants have yet to quantify the harms perpetrated on a particular community from a particular lender’s conduct. That is not to say it cannot be done, however. Moreover, municipalities should be able to quantify their costs due to maintenance or demolition of foreclosed homes, and any drop in tax revenue they have received from a particular property tied to a particular lender’s loans. 4. Controversy over Scientific Evidence It is unlikely that many questions about scientific evidence will arise in the context of subprime litigation. While some may look at questions
170. For a description of settlement grids, see NAGAREDA, supra note 31, at 60-65. 171. Many free websites make “mortgage calculators” readily available to consumers. See, e.g., www.mortgage-calc.com. Over the life of a loan, the total cost to the borrower for a loan of $250,000 loan at an 8% interest rate as opposed to one of 6% is roughly $120,000 higher, i.e., nearly 50% the original loan amount. 172. See supra note 153 and accompanying text. 173. See supra Part II.B.4.
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of behavioral economics to suggest ways to promote better mortgage products in the future, 174 disputes over hard science will not be in play in subprime litigation. 5. Emotional and Political Heat Fallout from the subprime mortgage market has generated a great deal of emotional and political heat. At present, the question of who is to blame for the subprime mortgage crisis is hotly debated. Did liberal politicians, who passed statutes such as the Community Reinvestment Act and promoted the activities of the government-sponsored entities, Fannie Mae and Freddie Mac, push responsible lenders to make risky loans to risky borrowers? 175 Did the George W. Bush Administration’s laissez-faire policy toward regulatory oversight encourage predatory lending practices? 176 Did Alan Greenspan’s policies at the Federal Reserve inflate the housing bubble, causing a frenzy of speculative conduct that ultimately led to rapid rise and then steeper decline in price values, precipitating the financial crisis? 177 Should taxpayers, who played by the rules and lived within their means, spend trillions to pump up irresponsible banks and delinquent borrowers? These are some of the burning emotional and political questions of the day, and subprime mortgage litigation may help yield some answers to them. 178 6. Higher-than-Average Potential for Claiming At present, the litigation pending in the subprime area is merely the tip of the proverbial iceberg. Hundreds of municipalities in California and Florida alone might find themselves pursuing claims similar to those raised by the cities of Baltimore, Cleveland, Buffalo, and
174. See, e.g., Michael S. Barr et al., Behaviorally Informed Home Mortgage Regulation, in BORROWING TO LIVE: CONSUMER AND MORTGAGE CREDIT REVISITED 170, (Nicolas P. Retsinas & Eric S. Belsky eds., 2008) (arguing for a default option of “plain vanilla” mortgages to ensure borrowers are steered towards simple, fixed-term loans where appropriate). 175. See Howard Husock, Housing Goals We Can’t Afford, N.Y. TIMES, Dec. 11, 2008, at A49. 176. See Jo Becker et al., White House Philosophy Stoked Mortgage Bonfire, N.Y. TIMES, Dec. 21, 2008, at A1. Of course, financial deregulation did not occur only under Republican presidents. The Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999) (codified in scattered sections of 12 and 15 U.S.C.), which took down the wall between commercial and investment banks, and the Commodity Futures Modernization Act of 2000, 7 U.S.C. §§ 1-27f (2006), were both passed and signed into law during the Clinton Administration. 177. See WILLIAM A. FLECKENSTEIN WITH FREDERICK SHEEHAN, GREENSPAN’S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE (2008). 178. See infra Part III.B.2.
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Cincinnati if those cities are ultimately successful in their cases. 179 Similarly, hundreds of thousands of borrowers, if not millions, could find themselves exploring potential avenues for litigation if they learn that the brokers they used or the lenders that wrote their mortgages may have engaged in illegal conduct in the subprime market. Borrowers could be alerted to the possibility of legal action by press attention to the pending actions, communications from investigators in the offices of state attorneys general or municipal attorneys, or word-of-mouth of neighbors and family members. Such information will likely lead many to pursue their own claims, or, more likely, join with others already pursuing similar claims. There is no question that we are witnessing the opening salvos in the litigation war that will likely ensue from the fallout of the collapse of the subprime mortgage market. And many combatants will likely join the fray if given the opportunity. Given that many features of subprime litigation appear to line up with the features typically present in mass torts cases, it is safe to conclude that subprime mortgage litigation may warrant the treatment given by litigants and the courts to mass torts. The next sections explore the potential implications of a mass torts approach to subprime mortgage litigation and then identifies some of the barriers the implementation of such an approach might face. B. The Value of a Mass Torts Approach to Subprime Litigation The critical questions are whether mass torts litigation techniques would help to further the goals of subprime mortgage litigation, and whether they would prove superior to other options. To review the goals of subprime mortgage litigation, I have identified five: correcting for past illegality in the mortgage market that will reduce the number of foreclosures moving forward; uncovering and spreading information about the presence of such illegality in the market; promoting the modification of outstanding mortgage loans through settlements as well as the application of pressure on banks and other institutions to expand voluntary efforts to overcome past abuses in the market; preserving home values; and complementing regulatory and policymaking efforts to improve oversight and regulation of financial markets. To gauge whether a mass torts approach to subprime litigation would be an effective tool to address some of these needs, it is helpful to look at other contexts in which litigation has impacted policymaking.
179. See supra Part II.B.4.
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My colleague, Timothy Lytton, has reviewed the success of litigation in both the firearms and clergy abuse scandals and identified critical results from litigation in these areas. He has also compared the relative success of lawsuits in both areas in influencing relevant policymaking. Lytton identifies the six distinct ways that litigation influences policymaking: (1) framing issues in terms of institutional failure and the need for institutional reform; (2) generating policy-relevant information; (3) placing issues on the agendas of policymaking institutions; (4) filling gaps in statutory or administrative regulatory schemes; (5) encouraging self-regulation; and (6) allowing for diverse regulatory approaches in different jurisdictions. 180
Lytton’s assessment of litigation in these two areas is that the clergy litigation had a greater deal of success in seeking compensation for victims, weeding out abusers among the clergy in the Catholic Church, and encouraging the church hierarchy to police its ranks. When measured by their relative success, clergy abuse litigation was far more successful in bringing about the outcomes desired than litigation against the firearms industry. Notably, the clergy litigation was successful in framing the issue as one of both personal and institutional failure. By generating information that was not otherwise available and raising the profile of the issue with policymakers, this litigation filled gaps in the regulatory scheme and achieved legislative changes in certain areas that helped to facilitate greater access to the courts for clergy victims, and encouraged the church hierarchy to investigate and respond to the allegations through internal efforts. Cross-jurisdictional conflicts did not arise as “[m]ore stringent laws or enforcement practices in one jurisdiction do not interfere with approaches in other jurisdictions that grant greater leeway to Church officials to resolve the problem internally.” 181 By contrast, firearms litigation has not, by itself, framed issues surrounding the danger of firearms in ways that had not already been utilized by earlier gun control advocates. Furthermore, such litigation might have strengthened the efforts of gun control opponents in obtaining statutory immunity from different types of lawsuits and sharpened these opponents’ rhetoric in debates concerning the meaning of the Second Amendment. 182 Firearms litigation did not reveal much in 180. Timothy D. Lytton, Using Tort Litigation to Enhance Regulatory Policy Making: Evaluating Climate-Change Litigation in Light of Lessons from Gun-Industry and Clergy-Sexual-Abuse Lawsuits, 86 TEX. L. REV. 1837, 1838 (2008). 181. Id. at 1862. 182. Id. at 1858–59.
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the way of “smoking gun” information about the firearms industry, and has led to greater competition between jurisdictions over the proper role of legislation and regulation in policing the firearms industry, sometimes resulting in the granting of immunity from suit and sometimes resulting in lax enforcement of laws already on the books. 183 Lytton further identifies four features of the clergy sexual abuse litigation that help “explain why it has had such a beneficial impact on policy making.” 184 First, it revealed an “especially scandalous narrative” that had “an especially high degree of cultural resonance.” 185 Second, the plaintiffs’ success in the clergy sexual abuse litigation “sparked national press coverage, encouraged additional victims to come forward, and in turn fueled more litigation.” 186 This attention made it more politically palatable for law enforcement officials to engage in aggressive investigation and prosecution of allegations of clergy sexual abuse. 187 Third, the failure on the part of victims to come forward prior to 1984, and the reluctance of the Church to recognize the problem within it before then (and long afterwards), built up pressure for litigation to have a “dramatic” impact on policymaking in this area.188 Fourth, instead of creating conflicts between regulatory bodies and jurisdictions, “[l]itigation enabled . . . other institutions to address the problem of clergy sexual abuse more effectively, and without it, it is highly unlikely that any of them would have had the will or the knowledge necessary to do so.” 189 Informed by this analysis, I next examine whether the mass torts approach can be utilized to further the goals of subprime litigation. 1. Reducing the Number of Foreclosures, Correcting for Past Illegality in the Market, and Promoting Mortgage Modifications The most important goal of subprime litigation is to reduce the number of foreclosures. Apart from voluntary modifications, described below, one of the best strategies for doing this is assessing whether the 183. Id. at 1859–61. 184. Id. at 1863. 185. Id. 186. Id. at 1864. Lytton asserts that lawyers become more experienced with the litigation and skilled in uncovering the facts necessary to establish their claims. Moreover, judges became more skeptical of church opposition to discovery. “Litigation thus produced more clients, better lawyering skills with which to pursue their claims, a growing supply of attorneys to bring the claims, and increasing sympathy among judges.” Id. 187. Id. 188. Id. at 1865. 189. Id.
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mortgages securing those homes for those homeowners were the products of illegal conduct. As described above, borrowers and state attorneys general are bringing actions based on federal antidiscrimination statutes, state common law, and state unfair trade practices statutes. These efforts have already produced the Bank of America settlement through which as many as four hundred thousand borrowers will receive modifications to their loans on terms that those borrowers can afford. A comprehensive review of the relative merits of the potential claims outlined above should be undertaken to determine whether any additional suits are viable. Where actionable industry- or communitywide practices can be identified, suits should pursue claims challenging such practices in a comprehensive fashion, using aggregative techniques in their pursuit, prosecution, and settlement. A sober assessment of market practices in all quarters—broker activity, lender misconduct, investment bank activities and ratings agency practices—should be undertaken in a comprehensive way, in an effort to identify conduct that might lead to broad-ranging litigation that, in turn, could prevent tainted loans from leading to foreclosures and bring about constructive modifications of such loans along terms that are fair and affordable. Comprehensive litigation that roots out illegal behavior and identifies tainted loans will force banks to modify the loans that were the product of such illegal behavior on terms that are fair, affordable, and legal. 190 Depending on the degree of actionable behavior in the market, removing the ability to foreclose on tainted loans will greatly reduce the number of foreclosures, identify and combat illegal behavior, and promote loan modifications. This is already happening in the Countrywide and Fremont litigation described above. Finally, reducing the number of foreclosures will necessarily drive down the ultimate cost of any federal interventions to assist borrowers in distress.
190. A critical issue is the ability of homeowners to defend themselves against a foreclosure action brought by the mortgagee. When the mortgagee is also a defendant in the homeowner’s affirmative case, there is a risk that the desire of individual homeowners to avoid foreclosure when they are also parties to large, sprawling affirmative cases will receive less attention than the pursuit of their affirmative claims, leaving them exposed to the loss of their home while they await the outcome of their affirmative case. See NATIONAL ASSOCIATION OF CONSUMER ADVOCATES, CLASS ACTION GUIDELINES 11-17 (rev. 2006) (outlining guidelines for attorneys when handling class action cases involving the mortgages of homeowners to guard against foreclosure during the pendency of an affirmative case), available at http://www.naca.net/_assets/media/revisedguidelines.pdf.
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2. Uncovering Information About Illegality in the Market As stated above, one of the key aspects of the clergy sexual abuse litigation was the ability of litigants to develop an “especially scandalous narrative” with “an especially high degree of cultural resonance.” 191 This narrative, in turn, led to press coverage and more litigation. 192 The fallout from the subprime mortgage crisis has yet to develop a narrative that identifies subprime borrowers as victims of “scandalous” behavior in a way that resonates in the broader culture. If the YouTube popularity of the rant of CNBC’s Rick Santelli about the Obama foreclosure rescue plan is any indicator of whether popular sentiment views borrowers as victims of predatory conduct or “losers,” 193 a lot of heavy lifting still must be done to shape public opinion about the causes of the subprime meltdown. The discovery process in subprime litigation could yield critical information in this area. In other settings in which internal memoranda and other information were revealed through discovery and exposed in the popular press, public opinion was swayed in favor of plaintiffs. This was especially true in the asbestos, tobacco, and clergy sex abuse litigation settings in which the defendants’ knowledge of harm long before the public was generally aware of danger was covered up and potential corrective steps were ignored, when they could have been taken earlier to prevent incalculable suffering. 194 191. Id. at 1863. 192. See id. at 1864. 193. See Video: Rick Santelli and the “Rant of the Year,” http://www.youtube.com/watch?v=bEZB4taSEoA (showing 1,062,034 views as of last visit on Jun. 9, 2009). 194. In the mass torts context, discovery has been critical in uncovering information central to plaintiffs’ claims. In the asbestos litigation, discovery revealed a conspiracy to hide information about product risk. David Rosenberg, The Dusting of America: A Story of Asbestos–Carnage, Cover-up, and Litigation, 99 HARV. L. REV. 1693, 1696–701 (1986) (reviewing PAUL BRODEUR, OUTRAGEOUS MISCONDUCT: THE ASBESTOS INDUSTRY ON TRIAL (1985)). For a discussion of the impact of discovery on cigarette litigation, see Brian H. Barr, Engle v. R.J. Reynolds: The Improper Assessment of Punitive Damages for an Entire Class of Injured Smokers, 28 FLA. ST. U. L. REV. 787, 798–99 (2001). For a discussion of the role of discovery in uncovering information that showed church officials were aware of abusive conduct yet took efforts to conceal it, see Lytton, supra note 180, at 1852–53. See also Michael D. Green, Negligence = Economic Efficiency: Doubts, 75 TEX. L. REV. 1605, 1640–41 (1997) (describing documents obtained through discovery in the Ford Pinto litigation that showed Ford was aware of product design defects and could have corrected them relatively inexpensively); Weinstein, supra note 52, at 512 (describing types of “smoking gun” evidence that can be obtained through discovery in mass torts cases). Timothy D. Lytton, Using Tort Litigation to Enhance Regulatory Policy Making: Evaluating Climate-Change Litigation in Light of Lessons from Gun-Industry and ClergySexual-Abuse Lawsuits, 86 TEX. L. REV. 1837, 1845 (2008) (“Litigation has also generated information relevant to regulating firearm design and gun-industry marketing practices. Discovery has uncovered that gun manufacturers are further along in developing safer gun designs than their public statements suggest.”) (citations omitted). See also Wendy Wagner, Stubborn Information Problems & the
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Will the discovery process in subprime litigation yield this kind of scandalous material? Will it show that brokers and originators were aware that they were using questionable tactics on unsuspecting borrowers, or that they were targeting certain communities for costlier loans based on the race of those communities? Only time (and discovery) will tell. Indeed, in the Baltimore litigation, affidavits of former banking officials have already been released by the plaintiffs that tend to show Wells Fargo targeted communities of color for certain types of loans. 195 Should broader discovery yield such information, and it is revealed that some of the most abusive loan terms were the product of intentional, predatory, and illegal conduct, it is likely to sway public sentiment in favor of aggressive interventions to assist borrowers in distress. 3. Promoting Voluntary Efforts to Overcome Past Abuses in the Market As described more fully below, 196 voluntary efforts to modify mortgages have not had a very successful track record. Modifications undertaken by banks on a voluntary basis have not resulted in major changes to the underlying mortgages, nor have they produced greater Regulatory Benefits of Gun Litigation, in SUING THE GUN INDUSTRY: A BATTLE AT THE CROSSROADS OF GUN CONTROL AND MASS TORTS 271 (Timothy D. Lytton ed., 2005). A recent New York Times editorial said it succinctly, when commenting on a release of documents in the Catholic church’s clergy abuse scandal: In the end it was not the power of repentance or compassion that compelled the Roman Catholic Diocese of Bridgeport, Conn., to release more than 12,000 pages of documents relating to lawsuits alleging decades of sexual abuse of children by its priests. It was a court order. A Bishop’s Words, N.Y. TIMES, Dec. 7, 2009, at A28, available at http://www.nytimes.com /2009/12/07/opinion/07mon2.html. 195. In July of 2009, the bank’s motion to dismiss was denied by the district court after affidavits from former Wells Fargo employees were produced by plaintiffs that alleged that bank officials would refer to African-Americans as “mud people” and subprime loans as “ghetto loans”. As a result, the court is allowing the plaintiffs in the action to proceed under both a disparate treatment as well as disparate impact theories of recovery under the FHA. Mayor of Baltimore v. Wells Fargo Bank NA, 631 F. Supp. 2d 701, 704 (D. Md 2009). See Michael Powell, Bank Accused of Pushing Mortgage TIMES, June 7, 2009, at A16, available at Deals on Blacks, N.Y. http://www.nytimes.com/2009/06/07/us/07baltimore.html?scp=1&sq=affidavits%20baltimore&st=cse. In a stunning turnaround, just six months after denial of the initial motion to dismiss, and after the case was transferred to a new trial judge, a new bank motion to dismiss was granted. In its decision on that motion, the new trial judge concluded that the plaintiffs had failed to show in their amended complaint that their allegations regarding their standing to sue were plausible, citing the Supreme Court’s decision in Ashcroft v. Iqbal, 129 S. Ct 1937 (2009). Mayor and City Council of Baltimore v. Wells Fargo, CV 08-0062, Slip Copy, 2010 WL 92545 (D.Md., 2010) (January 06, 2010). In the decision, the plaintiffs were invited to amend their complaint if they can satisfy the pleading requirements imposed by the trial judge. Id. at *4. 196. See infra Part IV.D.
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savings for borrowers or an assessment of the illegality of those loans. If litigation challenging the legality of subprime mortgages grows, if it leads to findings of liability and judgments against banks for such illegality, and if it generates the type of information that could help sway public opinion about lender misconduct during the subprime mortgage frenzy, pressure will grow on banks to undertake comprehensive and wholesale modifications of loans voluntarily and on more meaningful terms that are likely to lead to more successful outcomes. While voluntary efforts already underway have led to modifications, they have not generated the type of robust and comprehensive changes to the underlying loans that would be more consistent with both corrective justice and a need to reflect fairer loan terms. Voluntary efforts undertaken by banks to modify mortgages, when made under the threat of litigation, will likely result in changes to loan terms and reductions in principal balances, interest rates, and monthly payments. Such voluntary efforts would have greater viability than the current modifications being undertaken without the threat of litigation, where many of these new agreements have resulted in borrowers becoming delinquent once again. 197 Indeed, because of the litigation settled by Bank of America, nearly 100,000 loans modifications have been undertaken by that bank alone. 198 This is fifty times the number of permanent modifications that had been reached through the Treasury Department’s voluntary loan modification program through August 2009. 199 The use of aggregative methods 200 to identify borrowers who were the 197. See infra Part IV.D. 198. According to recently released public information concerning the progress of the settlement, as of the third quarter of calendar year 2009, there have been a total of 95,991 loan modifications under the settlement nationwide. See non-confidential section of Third Quarter 2009 Progress Report (on file with author). 199. As of September 1, 2009, according to the Congressional Oversight Panel, the Home Affordable Modification Program (HAMP) “had facilitated 1,711 permanent mortgage modifications, with another 362,348 additional borrowers in a three-month trial stage. [The Home Affordable Refinance Program] had closed 95,729 refinancings . . . .” CONGRESSIONAL OVERSIGHT PANEL, OCTOBER OVERSIGHT REPORT: AN ASSESSMENT OF FORECLOSURE MITIGATION EFFORTS AFTER SIX MONTHS 3 (Oct. 9, 2009), available at http://financialservices.house.gov/Key_Issues/ TARP_Oversight_and_Accountability_Reports/COP_Foreclosure_Mitigation_Rpt100909.pdf. This number has improved since September. Figures from the Treasury Department indicate that through November 2009, 31,382 permanent modifications have been secured through HAMP for all banks participating in the program. U.S. DEP’T OF THE TREASURY, MAKING HOMES AFFORDABLE PROGRAM: SERVICER PERFORMANCE REPORT THROUGH NOVEMBER 2009, 3 (2009), available at http://www.financialstability.gov/docs/MHA%20Public%20121009%20Final.pdf. This number, though an improvement, is still less than one-third the number of loan modifications secured with just one bank through the Countrywide/Bank of America settlement. 200. The technique of multi-district litigation often deployed in mass torts litigation has already been utilized in the mortgage setting. For example, the Miller action referenced above has been
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victims of predatory loan terms and to engage in wholesale modifications of those terms, as was done in the Bank of America settlement, will likely have the spillover effect of generating voluntary responses from banks. Seeking to avoid similar lawsuits, they will likely pursue similar approaches to modifications for many of their borrowers. In this way, the mass torts approach to subprime litigation will improve voluntary efforts directed at generating more comprehensive and effective loan modifications 4. Preserving Home Values and Complementing Regulatory Efforts Mass torts techniques will reduce the number of outstanding loans in delinquency as quickly and efficiently as possible. It is hard to imagine that the beneficiaries of the Countrywide and Fremont litigation described above could have prevented the foreclosures of their mortgages without those lawsuits. The use of such techniques in other cases will place the judicial system in a critical role that can help to complement future regulatory and policymaking efforts in the mortgage market, and in financial markets more generally. Courts can play a complementary role in fashioning sensible policies in areas where oversight and regulation are needed, but where regulators and legislators may not have the appetite for intervention, or where, as in the mortgage and financial markets, such actors have completely abdicated their responsibilities to provide meaningful oversight. 201 Courts in the subprime context can also experiment with remedies that can ameliorate the harsh consequences of illegal conduct. In the Fremont litigation
consolidated with several other nationwide class actions brought against Countrywide for treatment as multi-district litigation under 28 U.S.C. § 1407. In re Countrywide Fin. Corp. Mortg. Lending Practices Litig., 571 F. Supp. 2d 1366 (J.P.M.L. 2008). Similarly, mortgage discrimination claims against Wells Fargo have been consolidated through MDL as well. In re Wells Fargo Residential Mortg. Lending Discrimination Litig., 2009 WL 2473684 (N.D. Cal. 2009) (Order Denying Defendant’s Motion to Join Mortgage Brokers as Necessary Parties). While many subprime lawsuits are class actions, aggregation of claims without resort to Rule 23 is also entirely possible assuming the “common issues of law or fact” appear in the cases sought to be consolidated and aggregated. See Chamblee, supra note 33, at 187-90 (describing non-class aggregation methods). Such approaches would permit parties to avoid the apparent bar on rescission as a remedy under TILA, and would prevent the preclusive effects of class action judgments on absent class members in mandatory class actions. 201. In these ways, subprime litigation can “enhance[] the performance of other regulatory institutions” because it can “[u]ncover[] information, fram[e] issues, attract[] attention to them, shap[e] policy alternatives, and exert[] pressure on policymakers.” Timothy D. Lytton, Clergy Sexual Abuse Litigation: The Policymaking Role of Tort Law, 39 CONN. L. REV. 809, 880 (2007). For a discussion of the role of courts in the face of regulatory or legislative inaction, see, e.g., NEIL K. KOMESAR, IMPERFECT ALTERNATIVES: CHOOSING INSTITUTIONS IN LAW, ECONOMICS, AND PUBLIC POLICY 150 (1994); PETER H. SCHUCK, THE LIMITS OF LAW 350–63 (2000).
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discussed above, 202 the court, applying common law principles and deploying state statutory powers, reserved the right to enjoin a subprime lender from foreclosing on predatory loans. The success of this effort should be monitored to determine if a similar regulatory response—e.g., imposing a regulatory moratorium, either temporary or permanent, on the foreclosure of all loans deemed to be predatory to afford the parties the time necessary to work out sensible modifications of those loans— might serve useful ends if taken to scale. The success, and potential failure, of these and other efforts can inform regulator and legislator decision making when such actors consider rebuilding the legal infrastructure that is clearly necessary in these markets as we move into the future. C. Barriers to the Implementation of the Mass Torts Approach While a mass torts approach may be valuable in the context of the current crisis, such an approach would face procedural and doctrinal barriers and would require litigants and courts to address such barriers in creative ways. Such barriers include: problems of proof that may not lend themselves to aggregative methods; the likelihood of investor litigation seeking to halt loan modifications; the fact that the holder in due course doctrine may be invoked by the issuers and holders of subprime securities; whether rescission of the underlying mortgage is a potential remedy; the standing of municipalities to bring subprime litigation; the so-called futures problem; and the likelihood that many lenders and banks face insolvency in the face of large judgments and the fact that many originators are already bankrupt or near bankrupt. 1. Problems of Proof Where complaints in subprime litigation include allegations of wrongdoing by particular brokers or loan officers in the offices of particular loan originators that hinge on the oral communications made by such actors to particular borrowers, such claims will not necessarily be amenable to aggregative procedural mechanisms. To the extent that there are allegations of common representations, or written forms containing generic, template language that is itself illegal, courts can utilize discovery and fact-finding mechanisms en masse, and adjudicate matters efficiently and effectively. Otherwise, it is unlikely that aggregative procedures will be helpful in these contexts.
202. See supra notes 86–99 and accompanying text.
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Similarly, unless claims of borrowers already displaced through foreclosure can reach maturity, and the value of the claims of such borrowers determined through a series of trials on such issues or some other methodologies, the individualized nature of the harm will impede the use of aggregative methods to determine the value of the claims. The nature of these borrowers’ claims will necessarily be personal to them, and some will have suffered more as a result of foreclosure than others. Until the value of these claims can be properly assessed, litigants and the courts will be hard pressed to aggregate such claims for settlement or findings with respect to the value of their damages. 2. Investor Lawsuits to Prevent Modifications While hundreds of pending lawsuits take aim at allegedly illegal conduct that arose during the subprime mortgage market’s heyday, the sum of all of these lawsuits is far less than the whole. Such piecemeal litigation will likely burden banks and other lending institutions to the breaking point, if they are not already bankrupt (as many mortgage lenders already are). Moreover, lenders entering into settlements regarding the claims of borrowers could get whipsawed, facing not only liability for faulty loans but also litigation by securities holders for packaging those same loans into securities. The Congressional Oversight Panel has identified several ways that securitization agreements, often referred to as PSAs, limit the extent to which a servicer can modify a securitized mortgage. Such agreements can forbid loan modifications altogether, can limit the percentage of loans in a particular pool that can be modified, may permit modification of only one feature of a particular loan (such as the interest rate or monthly payments), may require consent of 100% of all investors to modify any loans, and can require servicers to buy back loans from investors before modification. Due to these limitations, servicers are reluctant to pursue modifications for fear they will face litigation by investors for modifying loans in violation of PSA restrictions. In addition, the servicer compensation structure of such agreements may also discourage servicers from pursuing modifications, where, for example, modifications of particular loans result in the payment of lower mortgage premiums, which, in turn, reduce the payments the servicers receive for servicing such loans. 203 Recent preliminary research does show that modifications are often
203. See COP MARCH 2009 REPORT, supra note 22, at 42–47 (outlining barriers to loan modifications).
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possible by the express terms of those agreements, however. 204 And Anna Gelpern and Adam J. Levitin have assessed ways to challenge what contractual rigidities exist in these PSAs that are hindering the wholesale modifications of the loans underlying them. 205 After a review of New Deal efforts to confront contract rigidities that presented barriers to economic stabilization efforts, including “gold clauses” in contracts that offered protections to investors against inflation that were written while the United States was still under the gold standard and utility holding company contracts that had anti-competitive effects, Gelpern and Levitin conclude that the doctrine that contracts can be deemed void for public policy might be a useful strategy for weakening the barriers the PSAs present to sensible mortgage modification programs. The void for public policy doctrine is a long-standing principle of contract law. 206 Even in the “Golden Age” of contract, the late nineteenth century, 207 the doctrine was robust, and contracts could be voided on several grounds, including a showing that a contract was usurious or interfered with the administration of justice. 208 For example, in Sprott v. United States, 209 the Supreme Court ruled against a resident of Mississippi who had sought compensation for cotton seized by Union troops during the Civil War and sold with the proceeds going into the federal coffers. Due to the Union naval blockade of the Confederate sea ports, the Confederacy was forced to sell cotton domestically to fund the rebellion. Sprott sued the federal government, alleging that the cotton was his when it was seized and that he had purchased it merely for profit and not with the intent to support the Confederate war effort. The Supreme Court rejected the validity and enforceability of Sprott’s contract with the Confederacy:
204. See Hunt, supra note 22. 205. Anna Gelpern & Adam J. Levitin, Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage-Backed Securities (Georgetown University Law Center, Business, Economic & Regulatory Policy Working Papers Series, Research Paper No. 1323546, 2009), available at http://ssrn.com/abstract=1323546. 206. See generally Mark Pettit, Jr., Freedom, Freedom of Contract, and “The Rise and Fall”, 79 B.U. L. REV. 263 (1999) (analysis of the loss of freedom and freedom to contract since the “Golden Age” of the late nineteenth century through analysis of several cases from the same era where contracts were voided as being against public policies). 207. Id. at 299–300. 208. See RESTATEMENT (FIRST) OF CONTRACTS ch. 18 (1932). Chapter 18, entitled “Illegal Bargains,” covers many, but not all, types of contracts that are unenforceable including those which are bargains in restraint of trade, contracts involving wagering, usury contracts, bargains to be performed on Sunday, bargains tending to obstruct the administration of justice, in violation of a public or private fiduciary duty, tending to defraud or injure third parties or prohibited by statute as well as some concerning familial relations. 209. 87 U.S. 459 (1874).
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The proposition that there is in many cases a public policy which forbids courts of justice to allow any validity to contracts because of their thendency [sic] to affect injuriously the highest public interests, and to undermine or destroy the safeguards of the social fabric, is too well settled to admit of dispute. 210
With the advent of the regulatory state, the importance of the void for public policy doctrine may have diminished significantly, given that legislatures and administrative agencies have charted the contours of acceptable conduct in many states, including in such areas as employer– employee relations and food and product safety. 211 Courts, too, have proven reluctant to wield the doctrine in the absence of clear directives from legislatures regarding the public policies against which contracts should be measured. 212 Congress has stepped into the fray with respect to modifications, and given courts the tools they need to insulate mortgage servicers from collateral attacks on their efforts to modify mortgages, by providing for servicer immunity from suit for entering into modifications that meet certain guidelines. 213 210. Id. at 463. 211. See Pettit, supra note 206, at 296. 212. Harry G. Prince, Public Policy Limitations on Cohabitation Agreements: Unruly Horse or Circus Pony?, 70 MINN. L. REV. 163, 171 (1985). 213. On May 20, 2009 Congress enacted the Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-22, 123 Stat. 1632. The relevant portions of Section 201, which is entitled “Servicer safe harbor for mortgage loan modifications” are: (a) IN GENERAL.--Notwithstanding any other provision of law, whenever a servicer of residential mortgages agrees to enter into a qualified loss mitigation plan with respect to 1 or more residential mortgages originated before the date of enactment of the Helping Families Save Their Homes Act of 2009, including mortgages held in a securitization or other investment vehicle— (1) to the extent that the servicer owes a duty to investors or other parties to maximize the net present value of such mortgages, the duty shall be construed to apply to all such investors and parties, and not to any individual party or group of parties; and (2) the servicer shall be deemed to have satisfied the duty set forth in paragraph (1) if, before December 31, 2012, the servicer implements a qualified loss mitigation plan that meets the following criteria: (A) Default on the payment of such mortgage has occurred, is imminent, or is reasonably foreseeable, as such terms are defined by guidelines issued by the Secretary of the Treasury or his designee under the Emergency Economic Stabilization Act of 2008. (B) The mortgagor occupies the property securing the mortgage as his or her principal residence. (C) The servicer reasonably determined, consistent with the guidelines issued by the Secretary of the Treasury or his designee, that the application of such qualified loss mitigation plan to a mortgage or class of mortgages will likely provide an anticipated recovery on the outstanding principal mortgage debt that will exceed the anticipated recovery through foreclosures.
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State legislatures could also strengthen servicers’ hands by creating legislation that would define, for the purposes of PSAs that are to be interpreted under a particular state’s law, the meanings of some of the restrictions on modifications found in those PSAs. For example, state legislatures could define such terms as “reasonable foreseeable default” to include situations in which the appraised value of a property exceeds the outstanding value of the home. A mass torts approach to servicer litigation could also be helpful to resolve all outstanding issues regarding the underlying loans and the PSAs that are bound to them. Using a mass torts approach would include bringing some order to the chaos by consolidating these actions in rational ways that will help to sort out the interests of all of the respective parties, and create efficient mechanisms for developing factual bases for the claims and evaluating claim values. Borrowers’ actions would be consolidated with the actions by securities holders against originators and the issuers of subprime securities. If the underlying mortgages are found to have been issued on illegal terms or in an illegal manner, they will need to be rescinded, but this would leave investors in subprime securities left with investments reduced in value greatly. To protect the investors to a certain extent, and insulate lenders and the issuers of securities from satellite litigation that might threaten to undermine settlements with borrowers, global settlement negotiations would take into account the nature of the claims of the borrowers as well as the securities holders. The most useful approach to settlement would involve a re-evaluation of the underlying loans, one that would reset mortgage interest rates, reduce outstanding principle, and correctly
(b) NO LIABILITY.--A servicer that is deemed to be acting in the best interests of all investors or other parties under this section shall not be liable to any party who is owed a duty under subsection (a)(1), and shall not be subject to any injunction, stay, or other equitable relief to such party, based solely upon the implementation by the servicer of a qualified loss mitigation plan. (c) STANDARD INDUSTRY PRACTICE.--The qualified loss mitigation plan guidelines issued by the Secretary of the Treasury under the Emergency Economic Stabilization Act of 2008 shall constitute standard industry practice for purposes of all Federal and State laws. (d) SCOPE OF SAFE HARBOR.--Any person, including a trustee, issuer, and loan originator, shall not be liable for monetary damages or be subject to an injunction, stay, or other equitable relief, based solely upon the cooperation of such person with a servicer when such cooperation is necessary for the servicer to implement a qualified loss mitigation plan that meets the requirements of subsection (a). Id. § 201; see also U.S. DEP’T OF TREASURY, HOME AFFORDABLE MODIFICATION PROGRAM GUIDELINES (2009), available at http://www.treas.gov/press/releases/reports/ modification_program_guidelines.pdf.
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appraise the value of the underlying home. Any securities holder would have the value of its interest in the securities backed by the mortgage on that home similarly devalued. Both the mortgage and the securities would be re-issued, reflecting the new valuation. If investors did not wish to resolve their outstanding claims against an originator or servicer, they could run the risk of having their PSAs rendered void for public policy grounds or take their chances with a bankruptcy filing by the defendant, in which investors could stand to lose much more. 3. Holder in Due Course Doctrine Some have raised concerns that the holder in due course doctrine may shield some purchasers of subprime loans from liability for the potentially nefarious actions of the brokers and lenders. The holder in due course defense protects certain buyers of commercial interests from claims against the seller of that interest of which the buyer is unaware. 214 Such a defense, if viable, might shield such buyers from claims of borrowers that the underlying mortgages were consummated under discriminatory or other illegal terms. Yet there are many exceptions to this defense, 215 several statutes such as TILA and HOEPA have exemptions from the doctrine, 216 and many have argued that this doctrine should be inapplicable in the context of subprime lending. 217 For example, investors in the mortgage securitization chain might attempt to claim protected status as holders, but many are not holders of
214. See, e.g., Vern Countryman, The Holder in Due Course and Other Anachronisms in Consumer Credit, 52 TEX. L. REV. 1, 2–3 (1973) (describing holder in due course doctrine); see also Kathleen C. Engel & Patricia A. McCoy, Predatory Lending: What Does Wall Street Have to Do With It?, 15 HOUSING POL’Y DEBATE 715, 724–26 (2004) (describing application of holder in due course doctrine in subprime securitization process), available at http://www.mi.vt.edu/data /files/hpd%2015%283%29/hpd%2015%283%29_article_engel.pdf; Cassandra Jones Havard, To Lend or Not to Lend: What the CRA Ought to Say About Sub-Prime and Predatory Lending, 7 FLA. COASTAL L. REV. 1, 16–18 (2005) (same). 215. See, e.g., Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 2185, 2235–38 (2007) (describing exceptions to holder in due course doctrine and successful attempts at enforcing such exceptions). 216. See Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039, 2052–54 (2007) (describing TILA and HOEPA exemptions). 217. See, e.g., Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 640 (2002) (arguing that the holder in due course is not necessary in residential mortgage loans); Siddhartha Venkatesan, Note, Abrogating the Holder in Due Course Doctrine in Subprime Mortgage Transactions to More Effectively Police Predatory Lending, 7 N.Y.U. J. LEGIS. & PUB. POL’Y 177 (2003) (advocating an affirmative cause of action against predatory loan assignees).
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the underlying mortgage; rather, they are investors in bonds backed by those securities. Furthermore, courts will have to make factual determinations as to whether present holders of the interest in the mortgage knew or had reason to know about whether borrowers have defenses to the mortgages based on their alleged underlying illegality. Because so many securitizing entities worked closely with originators, whether they had reason to know that some of the more exotic mortgages were being promoted and executed outside the bounds of the law and propriety is an issue courts and litigants will have to explore. Even a finding that particular downstream investors are shielded by the holder in due course status will not shield originating lenders, even if they no longer have an interest in the mortgage (although many of these lenders are now insolvent). If rescission of the mortgage is the relief that is ultimately granted, however, downstream investors might have to enforce any claims they have against the entity that securitized the mortgage, not the borrowers benefiting from the rescission. Finally, some lenders still have an interest in the underlying mortgage, even after securitization, and thus cannot be shielded from claims of the borrowers by any downstream transaction that might have occurred. 4. Rescission as a Remedy There are two outstanding questions with respect to the viability of claims for rescission of tainted loans. First, to what extent is this remedy available generally in actions alleging discrimination or mortgage fraud? Second, is such a remedy available in actions under TILA via class actions? Rescission of mortgages and other contracts is a long-standing common law remedy. 218 When litigants press common law fraud 218. See Household Fin. Corp. v. Artis (In re Artis), 27 B.R. 863, 866 (Bankr. E.D.N.Y. 1983) (“The right of recission whether based on statutory authority or common law is governed by equitable principles.”); Lee v. Thermal Eng’g Corp., 572 S.E.2d 298, 301 (S.C. Ct. App. 2002) (“[B]y the rules of the common law it is competent for the parties to a simple contract in writing before any breach of its provisions, either altogether to waive, dissolve, or abandon it, or vary or qualify its terms, and thus make a new one.”) (quoting Evatt v. Campbell, 106 S.E.2d 447, 450 (S.C. 1959)). Compare RESTATEMENT (SECOND) OF CONTRACTS §§ 162, 164 (1981) (stating that fraudulent or material misrepresentation renders a contract voidable), and RESTATEMENT (FIRST) OF RESTITUTION § 55 cmt. a (1937) (claiming an extremely broad application of restitution for benefits received through misrepresentation or fraud), and RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT § 54 & cmt. b (Tentative Draft No. 6, 2008) (noting that rescission is left to the discretion of the court and is governed by equitable principles), with NAT’L CONSUMER LAW CTR., TRUTH IN LENDING § 6.7.3.1, at 459 & n.831 (6th ed. 2007) (explaining the primary difference as being that under TILA the creditor who violated the law must act first), and Robert Murken, Can’t Get No Satisfaction? Revising How Courts Rescind Home Equity Loans Under The Truth In Lending Act, 77 TEMP L. REV. 457, 463 (2004) (providing a brief overview of how § 1635(b) of TILA modifies rescission under common law).
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claims, rescission has been a remedy long recognized in the common law of contracts. 219 Many statutory fraud provisions that subprime borrowers might deploy also give courts wide latitude to use traditional mechanisms to remedy fraudulent conduct. 220 Similarly, both the FHA and ECOA state explicitly that courts may deploy “any remedy” to combat violations of those laws. 221 This language has been interpreted broadly by the Supreme Court to grant the judiciary broad discretion to craft a range of remedies in the face of unlawful discrimination. 222 Because rescission is a long-standing common law remedy, it is unquestionable that rescission is a viable remedy available under the FHA and ECOA. But rescission, standing alone, may not be the most effective remedy available in the context of mitigating the harmful effects of subprime loans. Rescission of a loan means voiding that loan, which would necessarily entail not only relieving the borrower of any outstanding obligations under the loan, but also the borrower returning the outstanding principal of the loan: the original sum paid by the original lender less any payments made by the borrower towards principal. 223 Of course, short of selling the home and paying the lender what is owed from the proceeds of the sale, the borrower is unlikely to have cash on
219. Mor-Wood Contractors, Inc. v. Ottinger, 562 N.E.2d 1247, 1253 (Ill. App. Ct. 1990) (“[R]escission is also an equitable remedy which can be afforded to one party under a contract because of the other party’s fraud.”) (citing Douglass v. Wones, 458 N.E.2d 514, 523 (Ill. App. Ct. 1983)); Scott v. Commercial Servs. of Perry, Inc., 121 S.W.3d 26, 30 (Tex. App. 2003) (“[R]escission of a contract is available as an alternative to damages in cases in which one contracting party is induced to contract by the fraud of the other.”). 220. Mich. Prot. & Advocacy Serv., Inc. v. Babin, 18 F.3d 337, 344 (6th Cir. 1994) (asserting the congressional intent for the statute as having a broad reach); Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874, 885 (S.D. Ohio 2002) (stating that § 3604 of FHA should “be read liberally, so that its terms reach transactions that fall beyond the literal scope of selling or renting housing”). 221. Fair Housing Amendments Act of 1988, 42 U.S.C. § 3613(c)(1) (2006) (“[M]ay grant as relief, as the court deems appropriate, any . . . other order . . . or ordering such affirmative action as may be appropriate . . . .”); Equal Credit Opportunity Act, 15 U.S.C. § 1691e(c) (2006) (“[Courts] may grant such equitable and declaratory relief as is necessary to enforce the requirements imposed under this subchapter.”). 222. Hills v. Gautreaux, 425 U.S. 284, 297 (1976) (“[E]very effort should be made by a . . . court to employ [reasonable] methods ‘to achieve the greatest possible degree of (relief), taking into account the practicalities of the situation.’”) (quoting Davis v. Sch. Comm’rs of Mobile County, 402 U.S. 33, 37 (1971)); Swann v. Charlotte-Mecklenburg Bd. of Educ., 402 U.S. 1, 15 (1971) (“[T]he scope of a . . . court’s equitable powers to remedy past wrongs is broad, for breadth and flexibility are inherent in equitable remedies.”). 223. See generally Truth In Lending Act, 15 U.S.C. § 1635(b) (2006) (describing how rescission relieves the borrower of debt while also requiring the return of any property or money gained); NAT’L CONSUMER LAW CTR., supra note 218, § 6.6.3.2, at 445–46 (describing the borrower’s rescission benefits in more detail); id. § 6.6.4.2, at 447–48 (describing the borrower’s rescission obligations in more detail).
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hand to satisfy the outstanding debt. 224 In addition, because the steepest drop in property values likely occurred in those communities where fraud and other abuses were most rampant, the proceeds from such a sale would likely not satisfy any outstanding balance on the underlying mortgage. Given these factors, rescission, standing alone, is likely not a satisfying or fair remedy. Because of the inequities that would likely follow the use of traditional rescission in this context, a more robust approach to rescission is likely necessary, such as the one put in place in both the Countrywide and Fremont litigation described above. 225 In the consolidated litigation involving Countrywide, Bank of America agreed to rescind and then refinance hundreds of thousands of loans that appear to have predatory features. 226 Similarly, in Fremont, the trial court used the threat that it would enjoin the foreclosure of mortgages with predatory features to pressure the bank to agree to renegotiate, rescind, or refinance any outstanding mortgages with such features. 227 When a lender refinances a loan through such processes, it is typically a paper transaction, and no money need change hands. Instead, the terms of the relationship between the parties are reset. The decline in home values, as well as the fact that most borrowers saddled with predatory loan terms have paid interest rates in excess of a rate that would not have been charged in the absence of illegal conduct, are issues that courts should take into account when crafting remedies to overcome mortgage abuses. Such remedies might include reducing the outstanding principal of predatory loans in proportion to the overall decline in the value of the house. Furthermore, to the extent a borrower has made payments based on excessive interest rates, those payments should be taken into account to further reduce the outstanding principal on the underlying loan. The broad latitude given judges in the common law and discrimination contexts affords courts great flexibility in fashioning appropriate remedies to overcome abuses in the mortgage market and facilitate sensible modifications of loans on fair and equitable terms. It is hard to argue against robust judicial control over settlement negotiations, even so-called managerial judging, 228 when courts are given such broad latitude in the law to fashion appropriate remedies. 224. NAT’L CONSUMER LAW CTR., supra note 218, § 6.1, at 384 (discussing the reluctance of low-income borrowers to seek rescission due to a concern about tender costs). 225. See supra Part II.B.1. 226. See supra note 85 and accompanying text. 227. See supra notes 94–95 and accompany text. 228. See supra notes 55–59 and accompanying text.
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Turning to the second question, several federal appellate courts have ruled that rescission is not an available remedy to class action plaintiffs under TILA. 229 But other statutes, notably the FHA and ECOA, have broad grants of authority to courts to employ any effective remedy to combat illegal discrimination. 230 Even assuming for the sake of argument that TILA does not provide the remedy of rescission to class action plaintiffs, aggregated claims of individual plaintiffs could still proceed for rescission, and class actions under TILA could still be settled, affording plaintiffs the relief of rescission in an effort on the part of defendants to avoid damages awards that are still viable under TILA. 231 Furthermore, the common law claims that undergird many of the municipal and attorneys general cases afford courts the flexibility to craft remedies consistent with, or that approximate, rescission. 232 Mortgage rescission and reformation on fair terms is actually in the best interests of all of the parties and would help to bring about the stability
229. Andrews v. Chevy Chase Bank, 545 F.3d 570, 575 (7th Cir. 2008) (“TILA’s rescission remedy—by its terms an individualized, restorative rather than compensatory remedy—is just that, a purely individual remedy that may not be pursued on behalf of a class.” (emphasis omitted)); McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 423 (1st Cir. 2007); James v. Home Constr. Co. of Mobile, Inc., 621 F.2d 727, 730–31 (5th Cir. 1980). 230. The relevant portion of the Fair Housing Act, 42 U.S.C. § 3613 provides: (c) Relief which may be granted (1) In a civil action under subsection (a) of this section, if the court finds that a discriminatory housing practice has occurred or is about to occur, the court may award to the plaintiff actual and punitive damages, and subject to subsection (d) of this section, may grant as relief, as the court deems appropriate, any permanent or temporary injunction, temporary restraining order, or other order (including an order enjoining the defendant from engaging in such practice or ordering such affirmative action as may be appropriate). (2) In a civil action under subsection (a) of this section, the court, in its discretion, may allow the prevailing party, other than the United States, a reasonable attorney's fee and costs. The United States shall be liable for such fees and costs to the same extent as a private person. (d) Effect on certain sales, encumbrances, and rentals Relief granted under this section shall not affect any contract, sale, encumbrance, or lease consummated before the granting of such relief and involving a bona fide purchaser, encumbrancer, or tenant, without actual notice of the filing of a complaint with the Secretary or civil action under this subchapter. 42 U.S.C. § 3613(c)–(d) (2006). The relevant portion of ECOA provides that “upon application by an aggrieved applicant, the appropriate United States District Court or any other court of competent jurisdiction may grant such equitable and declaratory relief as is necessary to enforce the requirements imposed under this subchapter.” 15 U.S.C. § 1691e(c) (2006). 231. See Williams v. Empire Funding Corp., 183 F.R.D. 428, 435–36 (E.D. Pa. 1998) (asserting that TILA does not preclude the individual remedy of rescission to each class member under the mechanism of a class action). 232. See supra Part II.B.1 (common law claims) & II.B.4 (municipal litigation).
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in the housing market that is so desperately needed. 5. The Standing of Municipalities The Supreme Court and several lower courts have recognized a municipality’s cognizable interest under the FHA in challenging practices that reduce the local tax base. 233 Generally speaking, however, the strength of government claims of standing was solidified in the recent Supreme Court decision in Massachusetts v. EPA. 234 The State of Massachusetts and other plaintiffs filed suit against the U.S. Environmental Protection Agency (EPA) under the Clean Air Act for the EPA’s failure to promulgate regulations regarding greenhouse gas emissions from motor vehicles. The plaintiffs alleged that by failing to regulate these emissions the EPA contributed to global warming and endangered the Massachusetts coastline. The plaintiffs alleged that the coastline itself was owned in part by the Commonwealth. 235 Writing for the majority, Justice Stevens recognized the Congressional grant of authority to bring the type of suit in question, i.e., a challenge to a failure on the part of the EPA to issue regulations under the CAA. 236 The Court cited its prior decision in Lujan v Defenders of Wildlife, 237 for the elements of standing that a plaintiff must establish to satisfy the cases or controversies requirement of Article III: an actual or imminent injury that is traceable to the defendant and redressable by the court. The majority went on to recognize that the “injury in fact” element was met by the Commonwealth. Because it
233. See Gladstone Realtors v. Village of Bellwood, 441 U.S. 91 (1979) (recognizing municipality standing where racial steering in housing allegedly reduced property values and diminished the local tax base); Village of Bellwood v. Dwivedi, 895 F.2d 1521, 1525 (7th Cir. 1990) (recognizing municipality standing in a case of racial steering in light of “settled” nature of the issue as a result of Court’s ruling in Gladstone); Heights Cmty. Congress v. Hilltop Realty, Inc., 774 F.2d 135, 138–39 (6th Cir. 1985) (citing Gladstone and recognizing municipality standing in case alleging racial steering in housing that resulted in diminution in the tax base from such practice). For a contrary argument, see Jonathan L. Entin & Shadya Y. Yazback, City Governments and Predatory Lending, 34 FORDHAM URB. L.J. 757, 762–70 (2007) (arguing against municipality standing to pursue claims the lenders engaged in predatory lending against local residents). 234. 549 U.S. 497 (2007). 235. Under CAA, the EPA has authority to issue regulations concerning control of “air pollutants.” Id. at 506. The EPA had chosen not to issue rules with respect to these gases, and had failed to provide reasons for that decision, in the face of Massachusetts’s express request that the EPA generate such rules. See id. at 510, 533–34. In seeking compliance with the CAA’s terms, Massachusetts was seeking that the EPA make a determination that greenhouse gas emissions were, in fact, pollutants, and, assuming that the EPA found that they were, issue regulations pertaining to their emissions. See id. at 510. 236. Id. at 514–16 (citing 42 U.S.C. § 7607(b)(1)(2006)). 237. 504 U.S. 555 (1992).
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owned “a substantial portion of the state’s coastal property” it had “alleged a particularized injury in its capacity as a landowner.” 238 In terms of causation, the EPA argued that its failure to act to regulate greenhouse gas emissions contributed “insignificantly” to the harms the plaintiffs were alleging. 239 The Court found, however, that even “a small incremental step” to mitigate an injury is subject to judicial review. 240 With respect to redressability, the Court found the plaintiffs’ arguments had merit, noting that even a “reduction in domestic emissions [of greenhouse gases] would slow the pace of global emissions increases, no matter what happens elsewhere.” 241 Whatever the impact of the Massachusetts decision on standing law generally, 242 there is no doubt that governments have standing to bring suits alleging harms to their interests, either as property owners or in their representational capacity for their constituents. Municipalities seeking to claim damages from predatory loan products can no doubt argue that these products reduced property values to a degree sufficient enough to confer standing, especially where the municipality itself owns property impacted by foreclosures of subprime loans. 6. The Futures Problem In the wake of the Supreme Court’s decisions in Amchem and Ortiz, discussed above, 243 an acceptable approach to the problem of how to evaluate the damages of future claimants has proven somewhat elusive. In the subprime context, however, the futures “problem” 244 is, in fact, not a problem at all. In this context, the sooner someone is identified as being a likely victim of predatory conduct in the mortgage transaction, the lower the damages. If mortgages can be rescinded and reformed on terms that are fair, the future damages such claimants might have otherwise suffered evaporate. Effective aggregative techniques can be utilized to evaluate past harms along the lines that have been suggested
238. Massachusetts, 549 U.S. at 522. 239. Id. at 523. 240. Id. at 524. 241. Id. at 526. 242. For an assessment of the likely impact of the Court’s discussion of standing in Massachusetts v. EPA, see generally Jonathan H. Adler, God, Gaia, The Taxpayer, and the Lorax: Standing, Justiciability, and Separation of Powers after Massachusetts and Hein, 20 REGENT U. L. REV. 175 (2008); Robert V. Percival, Massachusetts v. EPA: Escaping the Common Law’s Growing Shadow, 2007 SUP. CT. REV. 111 (2007); Tyler Welti, Massachusetts v. EPA’s Regulatory Interest Theory: A Victory for the Climate, Not Public Law Plaintiffs, 94 VA. L. REV. 1751 (2008). 243. See supra note 52. 244. See supra notes 50–52 and accompanying text.
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here, i.e., rewrite old mortgages on fair terms and reduce principal owed by the amount of excess payments already made. With rescission and effective reformation of the underlying loans, the futures problem completely disappears because there are no future harms until borrowers make payments on loans that are illegal. Where they never make those payments, they have suffered no future harm. 245 7. Defendant Insolvency A significant barrier to compensation and meaningful resolution of some subprime mortgage litigation is the insolvency, or near insolvency, of many would-be defendants. First, nearly 170 subprime lenders left the field from 2006 to 2007. Recent reports indicate that as many as 345 “major U.S. lending operations” have “imploded” since 2006. 246 As described above, before they closed their doors, a highly disproportionate share of the subprime loans of the institutions identified by the Federal Reserve as having stopped lending in 2007 were made to African-Americans and Latinos, even higher than the already skewed percentages of the subprime market generally. Much of the worst abuses of the subprime market were likely carried out by these lenders directly, and now they have already dissolved, or have entered the bankruptcy process. Many other financial institutions that might have some legal liability for misconduct during the subprime market’s heyday are on the brink of insolvency and bankruptcy, and the pursuit of claims against them would be an existential threat. Even such institutions as Citigroup and Bank of America have sought and received substantial assistance from the federal government. A finding of liability in any subprime litigation could depress share prices even further and drive many institutions to the shelter of bankruptcy. As in other mass torts settings, claims against mass torts defendants could certainly be resolved in bankruptcy court, and the remnants of bank assets could be liquidated and the proceeds distributed to claimants, borrowers, and investors alike. 247 For subprime originators 245. Of course, the futures problem is only a problem in the class action context where members of the class will be prevented from re-litigating claims disposed of in the class action itself. Aggregation or consolidation short of class action treatment will not bar absent parties. See, e.g., Elinor P. Schroeder, Relitigation of Common Issues: The Failure of Nonparty Preclusion and an Alternative Proposal, 67 IOWA L. REV. 917, 919-21 (1982) (describing requirement of privity when seeking to apply preclusive effects of prior judgments). 246. IEHI, Inc., The Mortgage Lender Implode-O-Meter, http://ml-implode.com/index.html#lists (last visited July 1, 2009). 247. See Alan N. Resnick, Bankruptcy as a Vehicle for Resolving Enterprise-Threatening Mass
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already in bankruptcy, subprime plaintiffs should intervene in those proceedings and get in line for satisfaction of their claims. But for those still solvent institutions, it is likely that prosecuting claims against these entities to pursue the goal of compensation for claimants would likely work at cross purposes with the goal of restoring faith in the housing and mortgage markets. It would likely lead to a further reduction in confidence in financial markets, destroy any remaining value of share prices of these institutions and make credit even tighter. Larger, healthier banks are unlikely to purchase the assets and assume the liabilities of these institutions. There is clearly a “public cost” to pursuing subprime mortgage litigation using the mass torts approach 248 and banks might feel the “undue pressure” 249 from high-profile litigation that seeks to blame those institutions for the financial crisis. Because many subprime lenders have already entered bankruptcy proceedings and may have few assets to liquidate to compensate creditors, and litigation might threaten the health of presently viable institutions, federal funds might be needed to “backstop” the defendants in subprime litigation. A strategic use of federal funds could encourage settlements and fund sensible resolution of these actions, including providing insurance for mortgage refinance agreements carried out through such settlements. Therefore, federal funds should be strategically deployed to help grease the wheels of the settlements pursued in the array of cases that will ultimately make their way to the courts. One effective use of remaining federal bailout dollars would be to create a “Failed Institutions Fund,” which could work like the so-called Superfund program created under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). 250 Such a fund would help compensate investors for their losses in the mortgage-backed securities market and would help offset some of these losses so that the modifications that will result from the array of lawsuits described above will not fall disproportionately on innocent investors. Where there are solvent institutions responsible for illegal conduct, compensation for investors should come from such institutions. Where the entities Tort Liability, 148 U. PA. L. REV. 2045 (2000) (arguing that bankruptcy system is efficient and effective forum for the resolution of mass torts claims); Douglas G. Smith, Resolution of Mass Tort Claims in the Bankruptcy System, 41 U.C. DAVIS L. REV. 1613 (2008) (same). 248. See supra notes 60–70 and accompanying text. 249. See supra notes 53–54 and accompanying text. 250. 42 U.S.C. §§ 9601–9657 (2006). For an overview of CERCLA’s Superfund program, see JOHN A. HIRD, SUPERFUND: THE POLITICAL ECONOMY OF ENVIRONMENTAL RISK (1994); Kathleen Chandler Schmid, Note, The Depletion of the Superfund and Natural Resources Damages, 16 N.Y.U. ENV. L. J. 483 (2008).
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responsible for actionable legal conduct are no longer in existence, or have few assets that could be utilized to compensate investors, the Fund could be deployed to help encourage loan modifications. Like the approach with the 9/11 Victims Compensation Fund, 251 investors could seek some compensation from the Failed Institutions Fund, or pursue their claims against the failed institutions themselves. Let the investors choose which path to pursue. Such an approach would target the use of federal funds only where necessary, i.e., to preserve the viability of defendant-institutions where the cost of potential judgments against them would threaten their financial existence, or where there are few assets to satisfy any potential judgments or to finance sensible settlements. While such an effort would prove costly, it would necessarily reduce the cost of the more general borrower bailout plan currently underway. Indeed, the Obama Administration’s current plan is to use nearly $300 billion to encourage the refinancing of mortgages, regardless of the legality of the underlying mortgages. 252 Where some borrowers could void their illegal loans, there will be fewer loans to modify through the Obama Plan. Most mortgages could be classified into four categories: (1) those mortgages that were consummated legally, but require refinancing to keep the borrower in the home; (2) those mortgages that had illegal 251. For an overview of the 9/11 Victims Compensation Fund, see Mike Steenson & Joseph Michael Sayler, The Legacy of the 9/11 Fund and the Minnesota I-35W Bridge-Collapse Fund: Creating a Template for Compensating Victims of Future Mass-Tort Catastrophes, 35 WM. MITCHELL L. REV. 524, 530–60 (2009); see also Robin J. Effron, Event Jurisdiction and Protective Coordination: Lessons from the September 11th Litigation, 81 S. CAL. L. REV. 199 (2008) (providing an overview of the 9/11 Victims Compensation Fund and the litigation that arose around it). 252. The Department of Treasury announced on March 4, 2009 its guidelines for participation in the Home Affordable Modification Program (HAMP) which was implemented through the authority granted to the Secretary of the Treasury by the Troubled Assets Relief Program (TARP), which was in turn authorized by the Emergency Economic Stabilization Act of 2008, 12 U.S.C. § 5201–5261 (Supp. II 2008). See also U.S. DEP’T OF TREASURY, supra note 213 (HAMP Guidelines). The program is designed to set forth a standardized process for servicers to modify mortgages in foreclosure or in imminent danger of entering foreclosure with limited help available to those current on their mortgages. If the Net Present Value (NPV) of the expected cash flows from modified mortgage is greater than the NPV of the cash flows without modification, the borrower must be offered a Home Affordable Modification. The program provides incentives to both servicers and borrowers, in the form of cash payments to the servicers and principal reduction for the borrowers, for keeping current on the modified mortgage terms. The program also requires stringent verification of all information required of borrowers as well as reporting guidelines for those servicers participating in HAMP. Borrowers must meet rigid qualifications to participate in the program. Owners with mortgages on single family one- to four-unit, owner-occupied properties that are primary residences, as verified by tax returns and credit reports, with additional documentation such as utility bills, meet the eligibility requirement. The home may not be condemned, abandoned. or investor owned but those borrowers that are in bankruptcy are not per se ineligible for a loan modification. Those borrowers currently involved in litigation relating to the mortgage do not relinquish legal rights by participating in HAMP. There is also a maximum amount of principal which may be owed on the loan, which escalates as the number of units rises, to qualify.
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terms, and where defendant-institutions might be insolvent or near insolvent, such that they are unable to finance meaningful settlements; (3) those mortgages written by lenders already in bankruptcy proceedings, the remaining assets of which would not satisfy the cost of any settlement that might arise from those institutions’ misconduct; and (4) those mortgages that should be rescinded due to underlying illegality but where a defendant-institution liable for such illegality has funds sufficient to finance a meaningful settlement of the claims against it. Removing those loans in the fourth category will likely reduce the cost of the overall bailout. The creative use of federal funds in the second category of cases, perhaps through the use of low-interest loans to these near-insolvent institutions, would likely reduce the long-term costs associated with the modification program by leveraging the resources those institutions might have to fund those settlements and promising the repayment of federal funds those institutions might borrow. Where lenders are already in bankruptcy proceedings, such institutions’ assets should be liquidated and the financing raised through that process should be used, at least in part, to help fund aggregated settlements in cases filed against those institutions. Federal funds could be used to meet any shortfall, but at least the ultimate cost of rewriting the mortgages impacted by these institutions’ conduct would be reduced by the value of the assets that are to be liquidated through bankruptcy proceedings. IV. VALUE OF THE MASS TORTS APPROACH COMPARED TO ALTERNATIVES I turn now to whether the mass torts approach to subprime litigation would be superior to other potential legal responses: individualized litigation, regulation, voluntary efforts, and social insurance. A. Individualized Litigation In Ortiz v. Fibreboard Corp., the Supreme Court invalidated a settlement agreement in asbestos litigation because the majority was suspicious of the apparent lack of protection of the rights of members of the plaintiff class during the settlement process. 253 The Court praised the ideal of the individual litigant’s “day in court” in American culture. 254 Mass tort settlements, the Court cautioned, threaten this
253. 527 U.S. 819 (1999). 254. Id. at 846.
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ideal, and tend to endanger the interest of members of the class, particularly those interests of future claimants, whose claims may not be protected by class counsel anxious to reward the present members of the class. 255 But does such an ideal really make sense in the present context of subprime mortgage litigation? Would individual litigants really be able to pursue their claims as individuals and protect their interests adequately? Aggregative techniques in the subprime arena can move cases forward quickly, get relief to plaintiffs as soon as possible, and produce results in a timeframe that will preserve home values and prevent them from deteriorating further. These techniques also can raise awareness about the illegal conduct underlying many mortgage transactions in a way that would only arise with a market-wide view of such conduct, and make bringing such cases possible economically for plaintiffs’ counsel. Without a systemic response that takes into account conduct across the market broadly, individual litigants will languish unrepresented and uninformed about their potential claims. Without representation, 256 few borrowers, if any, will bring affirmative actions on their own to challenge the legality of their mortgages. If they are fortunate enough to live in a state that requires judicial action to carry out a foreclosure,257
255. Id. at 852-53. 256. Generally, an estimated 80% of the legal needs of the indigent are not met, while 40–60% of the legal needs of the middle class are unmet. See, e.g., LEGAL SERV. CORP., SERVING THE CIVIL LEGAL NEEDS OF LOW-INCOME AMERICANS (2000), available at http://permanent.access.gpo.gov/lps12495/ www.lsc.gov/foia/other/exsum.pdf (describing unmet legal needs of the poor); ALBERT H. CANTRIL, AMERICAN BAR ASSOCIATION, AGENDA FOR ACCESS: THE AMERICAN PEOPLE AND CIVIL JUSTICE (1996) (describing legal needs of moderate-income Americans); ROY W. REESE & CAROLYN A. ALDRED, LEGAL NEEDS AMONG LOW-INCOME AND MODERATE-INCOME HOUSEHOLDS: SUMMARY OF FINDINGS FOR THE COMPREHENSIVE LEGAL NEEDS STUDY 32 (1994). These studies likely underestimate the actual percentage of the legal needs of low- and moderate-income individuals that go unmet because such individuals often are not even aware that they have legal problems. Deborah Rhode, Access to Justice: Connecting Principles to Practice, 17 GEO. J. LEGAL ETHICS 369, 397–98 (2004); Deborah L. Rhode, Access to Justice, 69 FORDHAM L. REV. 1785, 1818 (2001). 257. Not all states require mortgage foreclosure through judicial process: Judicial foreclosure—a termination of the mortgagor’s interest in the property that in effect allows the mortgagee to seize and/or sell the property—is the “predominant,” though often not the exclusive, method of foreclosure in the United States. About 60 percent of states permit a “power of sale” foreclosure, through which a mortgagor grants to the mortgagee the right to terminate the interests of the mortgagor and foreclose on the mortgage through sale of the deed, typically by a sheriff or other public official. Even where power of sale foreclosures are permitted, there are certain situations where a mortgagee will elect to utilize the state’s judicial foreclosure apparatus, for example, where there are lien priority disputes. There are also times where the judicial foreclosure process is mandatory, as is the case in those jurisdictions that require judicial intervention when a mortgagee seeks a deficiency judgment in addition to the foreclosure judgment, or where the mortgage documents do not permit a power of sale foreclosure.
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they will be able to attempt to challenge their mortgage in the foreclosure action, if they are able to find a lawyer to represent them. 258 If they are not able to afford their mortgage payments, however, it is unlikely they will afford an attorney to defend them in the foreclosure proceeding. Even assuming individual litigants could find an attorney willing to accept a case on a contingency fee, and were able to challenge their mortgages in affirmative actions on an individual basis, are the courts really capable of handling hundreds of thousands of new, individual lawsuits? It is unsatisfactory to respond that few individual litigants will find their way to the courts, regardless of the merits of any potential claims. Where claims will never come to light, patterns of conduct never revealed, and harm never prevented, the individualized approach is not a real option. In the name of due process, we cannot cling to the ideal of individualized adversarial proceedings when hundreds of thousands, if not millions, of potential claimants will never get their day in court. 259 It is obvious that an aggregative approach to subprime mortgage litigation stands a much better chance of realizing the goals of the legal responses to the subprime mortgage crisis than an individualized approach ever could. B. Regulation In their recent work, Oren Bar-Gill and Elizabeth Warren argue that ex ante regulation with respect to credit products is superior to ex post judicial interventions because courts are not competent as institutions to handle disputes regarding credit transactions, 260 there are significant doctrinal limitations in the law applicable to such transactions, and Brescia, supra note 72, at 338 (footnotes omitted). 258. The absence of representation of borrowers in foreclosure proceedings is notable. See MELANCA CLARK WITH MAGGIE BARON, FORECLOSURES: A CRISIS IN LEGAL REPRESENTATION 2 (2009) (showing that 84% of borrowers in foreclosure proceedings in Queens County, NY went without representation; on Staten Island, NY, the figure reached 91%; in Nassau County it was 92%). 259. The majority opinions in Amchem Products v. Windsor and Ortiz v. Fibreboard Corp. have met strong criticism for their nostalgic view of individualized adjudication. See, e.g., Hensler, supra note 62, at 1923–24 (arguing majority opinions in Amchem and Ortiz actually puts interests of future claimants at risk); Samuel Issacharoff, “Shocked”: Mass Torts and Aggregate Asbestos Litigation After Amchem and Ortiz, 80 TEX. L. REV. 1925, 1930 (2002) (describing reality of asbestos litigation after Amchem and Ortiz as one in which “the economics of litigation and the sophistication of the bar in this area have combined to leave far behind such nostalgic renditions of an Aristotelian world of simple dispute resolution.”); Bruce Hay & David Rosenberg, “Sweetheart” and “Blackmail” Settlements in Class Actions: Reality and Remedy, 75 NOTRE DAME L. REV. 1377, 1380 n.8 (2000) (arguing majority opinion in Ortiz “establishes a conception of individualism that in operation will make all plaintiffs individually worse off”). 260. Bar-Gill & Warren, supra note 161, at 70–79.
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procedural barriers lead to judicial restraint in this area. 261 With respect to institutional competence, Bar-Gill and Warren argue that regulatory agencies have better access to relevant information in the credit context than courts faced with information on an individual, case-by-case and consumer-by-consumer basis, including information about the broader business practices of particular credit issuers as well the functioning of the broader market. They echo concerns of others who favor regulation to litigation in the context of consumer contracts generally.262 Bar-Gill and Warren also critique the legal doctrine of unconscionability. They argue that this doctrine is too narrow and is not crafted to address the many ways that potentially harmful credit transactions go awry. Furthermore, a more robust approach to unconscionability would require a “fact-intensive inquiry of market conditions and practices” and would likely result in an expansion of the doctrine generally into “markets that may not suffer from the same defects” as the consumer credit market. 263 Finally, Ben-Gill and Warren argue that significant procedural barriers prevent courts from serving as an effective check on abusive consumer practices. They argue that the “high-probability, lowmagnitude” nature of harms flowing from consumer transactions (i.e., that many consumers will suffer relatively low damages) means that few consumers will come forward to press their claims and it will be harder for them to obtain attorneys. 264 Admittedly, Ben-Gill and Warren’s arguments are prospective in nature; they argue that, from the outset, an ex ante regulatory regime is superior to one that uses judicial controls to monitor conduct after the fact. In the subprime context, we are faced with problems that have occurred in the past, even where they continue to cause problems into the future, as subprime borrowers continue to pay excessive rates and the prospect of more foreclosures extends beyond the horizon. Still, the arguably illegal conduct at issue in the subprime context did occur in the past, at a time when regulators failed to police potentially predatory conduct, and federal regulators even stepped in to preempt state regulators from doing the same. 265 Any new regulatory regime that Congress or state legislatures might put in place would be ill-equipped 261. Id. at 74–75. 262. See id, at 75 nn.246–247 (citing Richard Craswell, Howard Beales. Alan Schwartz, Louis L. Wilde, Richard Epstein and W. Kip Viscusi). 263. Id. at 76. 264. Id. at 77. 265. For an overview of federal regulators’ efforts to preempt state anti-predatory laws with respect to certain federally regulated lenders, see Raymond H. Brescia, Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, 59 S.C. L. REV. 617, 648–52 (2009).
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to engage in ex post facto controls on prior conduct. Thus, judicial responses are likely superior to regulatory controls of actions that took place in the past. Moreover, the mass torts approach is well-suited to the three gauges by which Ben-Gill and Warren measure the relative strengths of regulation and litigation: (1) the ability to develop information relevant to the regulatory issue, (2) the doctrinal limitations of judicial controls, and (3) the procedural barriers to such controls. The discovery process in the pending litigation will likely generate information related to discriminatory pricing and the extent to which borrowers of color were steered toward subprime loans when they qualified for prime mortgages, as well as evidence of other intentional acts on the part of lenders to carry out predatory conduct. It is unlikely that regulators could generate the same sort of information or would have the appetite or the budgets to pursue such information to the same extent, and with the same vigor, as plaintiffs’ counsel. Moreover, plaintiffs’ counsel would be in a strong position to make such information public, thereby alerting the general public to the information which, in turn, will both raise public awareness about the issue and likely encourage other potential plaintiffs to come forward. As to doctrinal limitations, the discussion in Part II.B, supra, attempts to identify the different areas in which subprime mortgage litigation is beginning to unfold. While it is too early to gauge the ultimate success of such efforts, it is clear that state common law theories, federal discrimination statutes, and other federal laws all offer some channels for measuring the legality of the conduct of actors in the mortgage transaction process. The doctrines underlying these claims certainly have their limits, but plaintiffs are not as constrained as Ben-Gill and Warren seem to suggest. Similarly, while there are barriers to the mass torts approach in subprime litigation, as described in Part III.C, supra, the main barrier identified by Ben-Gill and Warren is that the damages often recovered in consumer cases are so minimal many consumers will not pursue such claims. This does not seem to hold true in the subprime context. 266
266. In addition, the analysis on consumer credit regulation generally does not take into account the realities of the home mortgage context because of the resonance of homeownership in U.S. culture and the economic and social benefits derived from homeownership. On the benefits of homeownership, see Lee Ann Fennell, Homeownership 2.0, 102 NW. U.L. REV. 1047, 1058-59 (2008). Of course, these benefits have their dark side. For a review of what is called America’s “love affair with homeownership” and the potentially harmful consequences of the cultural and political support for homeownership, see Kristin David Adams, Homeownership: American Dream or Illusion of Empowerment, 60 S.C. L. REV. 573 (2009). See, also, ALYSSA KATZ, OUR LOT: HOW REAL ESTATE CAME TO OWN US (2009) (describing political support for expanding homeownership in the U.S., from the New Deal to the present).
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Moreover, the prospect of aggregated claims, with the potential for rescission of mortgages that could promise borrower savings of hundreds of thousands of dollars per mortgage, will likely encourage plaintiffs to come forward and plaintiffs’ lawyers to prosecute these cases. Accordingly, the mass torts approach as currently conceptualized would overcome the concerns about access to information, doctrinal limitations, and procedural barriers raised by Ben-Gill and Warren. C. Individual Bankruptcy The Obama Administration has rolled out a new foreclosure prevention policy with the goal of strengthening and expanding opportunities for loan modifications. 267 The original proposal called for Congress to amend the bankruptcy code to permit delinquent borrowers to have their loans modified through the bankruptcy process. 268 While this provision ultimately failed in the Senate, 269 it is not clear that such an alternative is preferable to a mass torts approach as a mechanism for bringing about the modification of millions of distressed mortgages. Bankruptcy is atomistic, as well as a cumbersome, time-consuming, and expensive process, even with an attorney. 270 Without an attorney, the process is daunting and extremely difficult to navigate. 271 Furthermore, filing for individual bankruptcy arguably has a worse effect on a debtor’s credit rating than a foreclosure action. 272 In addition, this 267. Sheryl Gay Stolberg and Edmund L. Andrews, $275 Billion Plan Seeks to Address Crisis in Housing, N.Y. TIMES, Feb. 19, 2009, at A1, available at http://www.nytimes.com /2009/02/19/business/19housing.html?ref=todayspaper. 268. Id. 269. Renae Merle, Senate Defeats Measure to Allow Bankruptcy Judges to Change Mortgage Terms, WASH. POST, Apr. 30, 2009, available at http://www.washingtonpost.com/wpdyn/content/article/2009/04/30/AR2009043000286.html (discussing rejection by U.S. Senate of bankruptcy “cramdown” provision). 270. Michelle J. White & Ning Zhu, Saving Your Home in Chapter 13 Bankruptcy 20 (Nat’l Bureau of Econ. Research, Working Paper No. 14179, 2008), available at http://www.econ.ucsd.edu/~miwhite/white-zhu-nber14179.pdf (estimating average cost to the debtor of $6,000 for filing Chapter 13 Bankruptcy, including cost of an attorney). See also, Gary Klein & Shenna Kavanagh, Causes of the Subprime Foreclosure Crisis and the Availability of Class Action Responses, Northeastern L. Rev. (forthcoming 2010), draft manuscript on file with author at 55-59 (offering reasons bankruptcy “is a not feasible option” for many homeowners facing foreclosure). 271. See U.S. Courts, Filing for Bankruptcy Without an Attorney, http://www.uscourts.gov/bankruptcycourts/prose.html (last visited Feb. 24, 2009). 272. Compare Posting of Justin Harelik, to http://www.bankrate.com/finance/debt/boosting-yourpost-bankruptcy-credit-score.aspx (Oct. 10, 2006) (explaining the effects of post-bankruptcy “ghost credit” which permanently mire the credit rating of someone who has filed for bankruptcy) with Beth Fitzgerald, Ask the Biz Brain, STAR-LEDGER (Newark, N.J.), Sept. 20. 2007, at 55 (noting that a borrower who has had a home foreclosed on in the past may have to pay a 33% higher rate on a
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process is seen by many as an absolute last resort, if an option at all. Whether it is for these or other reasons, “relatively few consumers pass through” the doors of the bankruptcy court. 273 From the banking industry’s perspective, permitting borrowers to seek modifications through the bankruptcy process would likely drive up the cost of home-loan borrowing. The industry argues that such a mechanism would make lenders even more reluctant to lend if they fear their contracts are essentially unenforceable if a borrower can seek modification through bankruptcy. 274 In contrast, the mass torts approach of identifying illegal mortgages and restructuring them through aggregative methods would not threaten the viability of mortgage lending, provided the determinations of illegality have legitimacy. Using aggregative methods, borrowers and their counsel could benefit from economies of scale and could utilize a broad range of theories to void the underlying contract, not just seek relief under it. D. Voluntary Modifications Many banks, encouraged by federal and state programs designed to promote loan modifications, have voluntarily entered into loan modification agreements with their borrowers. A series of federal initiatives have led the way in this regard. First, the HOPE NOW Alliance was created in October 2007 as a voluntary effort to improve contact between servicers and borrowers with the goal of increasing the number of loan modifications and avoiding foreclosures. 275 According to program estimates, more than one million foreclosures have been avoided due to the efforts of participants. 276 Second, the Housing and Economic Recovery Act of 2008 became law in July 2008, 277 and was subsequent mortgage). 273. Bar-Gill & Warren, supra note 161, at 78. 274. See MORTGAGE BANKERS ASS’N, CONGRESS SHOULD AVOID FURTHER DESTABILIZATION OF THE MORTGAGE LENDING MARKET THROUGH BANKRUPTCY CRAM DOWN (2009), available at http://www.mbaa.org/files/AU/IssueBriefs/CramDownIssueBrief.pdf; Editorial; Give Loan Modification a Try, WASH. POST, Jan. 11, 2009, available at 2009 WLNR 561003; Jonathan Peterson, Aid On Home Loans Sought, L.A. TIMES, Feb. 26, 2008, at 1; Dina ElBoghdady, Bills Offer Relief for Heavily Indebted Homeowners, WASH. POST, Nov. 20, 2007, available at 2007 WLNR 22974879. 275. See Press Release, U.S. Dep’t of Treasury, Statement by Secretary Henry M. Paulson, Jr. on Announcement of New Private Sector Alliance—HOPE NOW (Oct. 10, 2007), available at http://www.ustreas.gov/press/releases/hp599.htm. 276. See HOPE NOW, FACT SHEET: 2008 HOPE NOW FORECLOSURE PREVENTION EFFORTS (2008), available at https://www.hopenow.com/press_release/files/ HOPE%20NOW%20Fact%20sheet%202008-2009.pdf. 277. Pub. L. No. 110-289, 122 Stat. 2654 (2008).
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intended to offer relief to an estimated 400,000 borrowers in distress through the availability of up to $300 billion in loan guarantees to finance workable refinance arrangements. 278 Third, the federal takeover of Fannie Mae and Freddie Mac means the federal government can influence the handling of millions of mortgages those entities still own. 279 Finally, the Obama Administration’s new foreclosure prevention policy seeks to strengthen and expand opportunities for loan modifications. 280 But the success of these efforts, all voluntary, has been elusive. 281 In a speech given in December 2008, the Comptroller of the Currency, John C. Dugan, noted that many borrowers who had entered into voluntary loan modifications had already defaulted again on those modified loans. 282 Alan White’s review of loan modifications gives some reasons why these efforts have met with only partial success. His analysis reveals that many voluntary loan modifications executed to date do not actually result in a reduction of the monthly payments borrowers must pay moving forward. If borrowers were paying more than they could afford before the modifications, it is unlikely that modifications that do not bring down the monthly costs to the borrowers will permit those borrowers to stay current on their payments after modifications. 283 It is easy to conclude, then, that banks, left to their own devices, are
278. Id. § 1402; CONGRESSIONAL BUDGET OFFICE, COST ESTIMATE: FEDERAL HOUSING FINANCE REGULATORY REFORM ACT OF 2008 8 (2008), available at http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf. 279. See Vikas Bajaj, U.S. Holds the Whip Hand in Modifying Mortgages, N.Y. TIMES, Sept. 13, 2008, at C1. 280. See Stolberg & Andrews, supra note 267. 281. See supra notes 200-04 and accompanying text. 282. John C. Dugan, Comptroller of the Currency, Remarks Before the Office of Thrift Supervision’s 3rd Annual National Housing Forum (Dec., 2008) (noting that 6 months after loan modification, 58% of borrowers were more than 30 days past due on their mortgage payments), available at http://www.occ.treas.gov/ftp/release/2008-142a.pdf. Although Dugan did not have a definitive reason for the high re-default rate, he asked the following questions related to this phenomenon: The question is, why is the number of re-defaults so high? Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors? We don’t know the answers yet, but these are the types of questions that we have begun asking our servicers in detail. Id. 283. See Alan M. White, Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications, 41 CONN. L. REV. 1107 (2009).
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not engaging in the types of modifications that must take place in order to stabilize the housing and mortgage markets. Litigation that requires meaningful reductions in payments and balances owed stands the best chance of bringing about meaningful and effective modifications. Indeed, as noted earlier, the Bank of America settlement has proven much more successful in generating modifications than other efforts. As the previous discussion shows, such litigation must utilize the mass torts approach, and not leave individual borrowers to their own devices to attempt to exact concessions from lenders. E. Social Insurance Litigation and regulation are not the only means of achieving distributive justice, however. Under a social insurance model, a victim of accidental injury need not prove fault or causation to recover compensation so long as the claimant can establish injury. 284 In certain sectors, the U.S. system utilizes social insurance models, e.g., worker’s compensation systems, no-fault insurance plans, Medicare, and Social Security Disability Insurance. 285 Still, social insurance programs have been designed to meet particular needs and, therefore, do not represent the dominant force addressing injury or illness in the United States. 286 As a result, there is currently no uniform system for compensating victims and claimants must resort to both tort law and large programs of public and private insurance for assistance. 287 Commentators have argued that there are a variety of benefits to a comprehensive social insurance program in the United States, 288 including the following: the reduction in transactions costs associated 284. See John Fabian Witt, Toward a New History of American Accident Law: Classical Tort Law and the Cooperative Firstparty Insurance Movement, 114 HARV. L. REV. 690 (2001). On the benefits of social insurance, see Theodore R. Marmor & Jerry L. Mashaw, Understanding Social Insurance: Fairness, Affordability, and the “Modernization” of Social Security and Medicare, 15 ELDER L.J. 123, 126-28 (2007). For the difference between social insurance and social welfare programs, see Donald G. Gifford, The Death of Causation: Mass Products Torts’ Incomplete Incorporation of Social Welfare Principles, 41 WAKE FOREST L. REV. 943, 951 n.22 (2006). 285. Kenneth S. Abraham & Lance Liebman, Private Insurance, Social Insurance, and Tort Reform: Toward a New Vision of Compensation for Illness and Injury, 93 COLUMB. L. REV. 75, 82–83 (1993). 286. See id. 287. Id. at 75. 288. See, e.g., James C. Harris, Comment, Why the September 11th Victim Compensation Fund Proves the Case for a New Zealand-Style Comprehensive Social Insurance Plan in the United States, 100 NW. U. L. REV. 1367 (2006) (using success of September 11th Victim Compensation Fund to argue for the need for social insurance to replace tort system). For an overview of the benefits and shortcomings of a social insurance system, see Richard L. Abel, How the Plaintiffs’ Bar Bars Plaintiffs, 51 N. Y. L. SCH. L. REV. 345 (2007).
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with attorney’s fees that arise in the prosecution of and defense against claims; 289 the fact that a critical element of compensation is often the wealth of the victim, such that tortfeasors are punished less when they injure poorer victims with fewer resources to pursue their claims; 290 and that where one of a series of joint tortfeasors is insolvent, the remaining actors can be found 100% liable for their victim’s injuries. 291 Although many proposals for tort reform have centered around implementing a comprehensive social insurance model to replace the existing tort system, 292 these approaches do not consider the complexities arising from the overlap of market forces, tort law, existing social insurance programs, and government regulation. 293 Part of what would make implementation of a comprehensive social insurance program difficult to implement is that each of these systems currently operates independently. 294 As a result, some have argued for a system that has a mix of market incentives, tort liability, social insurance, and regulation. 295 Whether we like it or not, in the financial sector, we have essentially created a model of social insurance for financial institutions, one that is completely taxpayer funded, does not seem to concern itself with prior illegal conduct, and is terribly expensive. The superiority of a mass torts approach to a social insurance approach in this context is that the federal taxpayer bill for creating a safety net for borrowers may be a lot lower if bank conduct is assessed for illegality, mortgages are rewritten along lines that are affordable and legal, and bank assets are utilized, as appropriate, to fund these activities. An approach that seeks to identify the extent to which problem loans were the product of illegal conduct and modify them first on terms that are fair might just reduce the number of loans in the government cue, presently waiting for assistance. It could ultimately lower the cost of homeowner interventions significantly and insulate such modifications from investor lawsuits.
289. 290. 291. 292.
Harris, supra note 288, at 1386. See id. at 1401. See Abraham & Liebman, supra note 285, at 116. STEPHEN D. SUGARMAN, DOING AWAY WITH PERSONAL INJURY LAW: NEW COMPENSATION MECHANISMS FOR VICTIMS, CONSUMERS, AND BUSINESS 127–48 (1989) (arguing for replacing tort system with social insurance system and new regulatory scheme to prevent accidents). 293. See W. Kip Viscusi, Toward a Diminished Role for Tort Liability: Social Insurance, Government Regulation, and Contemporary Risks to Health and Safety, 6 YALE J. ON REG. 65 (1989). 294. Id. at 65. 295. See, e.g., id. at 65–67.
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V. CONCLUSION I have argued that a mass torts approach to the subprime mortgage meltdown and the ensuing financial crisis will help bring some order to the crisis, and enlist the courts in crafting meaningful and helpful solutions to it. In other settings in which a toxic product was released into the market, the courts have played a critical role in sorting out the harms and assigning liability for them. At times, the federal government has stepped into the breach to help minimize the extent to which the harm from toxic products or illegal practices might fall on innocent parties or where the cost of compensating for such products and practices might destroy businesses and the livelihood they provide to their employees. As the pages of this Article argue, a mass torts approach to the subprime mortgage crisis might help resolve harms, assign liability, and dispense compensation in a coherent, efficient, and meaningful way. As Linda Mullinex has noted generally about mass torts: “just as there is no paradigmatic mass tort litigation, there also is no paradigmatic method for resolving these cases.” 296 Through experimentation, successes and failures, fits and starts, these cases are going to have to work their way through the American legal system. It is my hope that, at the end of the day, we will be able to say that the whole of the subprime mortgage litigation will be greater than the sum of the parts.
296. Linda S. Mullenix, Resolving Aggregate Mass Tort Litigation: The New Private Law Dispute Resolution Paradigm, 33 VAL. U. L. REV. 413, 428 (1999).
