Watch your backs and your wallets.
According to a recent study by Chicago-based Navigant Consulting, 278 subprime-related legal cases were filed in federal courts nationally last year. That’s almost half the 559 cases handled by the Federal Deposit Insurance Corp.’s Resolution Trust over multiple years as more than 1,000 savings and loan institutions failed between 1986 and 1995, Navigant found.
Massachusetts is named as one of the top 11 states in which privately filed litigation could occur in a separate, December 2007 report prepared by risk and reinsurance specialist Guy Carpenter & Co., a division of New York risk-management and insurance consulting firm Marsh & McClennan.
The Bay State, which ranked sixth-highest, shares space with Connecticut and Rhode Island as a “very high” risk state, according to the report, “What’s the State of Your State? E&O [Errors & Omissions] Risk Uneven Across the Country.”
In contrast, Maine and Vermont are two of the lowest-risk states.
Of the factors measured that influence litigation, Massachusetts ranked at or near the national average on its foreclosure rate and the number of Truth in Lending Act (TILA)-related lawsuits filed in the state between January 2005 and the third quarter of 2006, and above average in the number of banking-related lawsuits filed during the same time period. It also ranked above average for its subprime mortgage delinquency rate and the number of litigation attorneys per local mortgage professional.
“Truth in Lending filings in 2006 and 2007 in Massachusetts have increased dramatically to 25 and 30, respectively, from four filings in 2005,” noted Guy Carpenter Managing Director Julia Chu.
Additional TILA suits against mortgage brokers and banks could be in Massachusetts’ future, she said. For example, appraisers could be sued by banks or property owners for offering inflated property appraisals, and real estate brokers or agents could find themselves held “vicariously liable” for referring a broker or appraiser to a transaction.
However, Chu said, Massachusetts’ ranking was mostly driven by the state’s relatively high subprime loan delinquency rate – 17 percent, compared to 14.5 percent nationally – and its high ratio of litigation attorneys to mortgage professionals.
David Hadlock, general counsel to the Massachusetts Mortgage Association, a brokers’ group, said that finding doesn’t surprise him.
“There’s a pretty well-organized and sophisticated group of class-action attorneys in Massachusetts and Rhode Island who look for [consumer] claims” in the financial arena, he said.
“There is already a concern in Massachusetts that errors and omissions [malpractice] insurers are decreasing their offerings,” Hadlock said, adding that reports such as Guy Carpenter’s add fuel to the fire.
Hadlock said he guesses that about half the mortgage industry doesn’t carry malpractice insurance, which is not required under state law. For those who don’t carry insurance, however, the costs could be high if there’s a problem, he said.
Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, suggested that reports such as Guy Carpenter’s could increase local brokers’ and lenders’ difficulties in getting bond insurance, which is required for licensing.
Cuff said only in rare instances does he hear about lawsuits from MMBA members and those that do occur do not seem to share similar patterns.
The Navigant study divided subprime mortgage-related lawsuits filed in 2007 into three main categories: borrower class actions (43 percent), securities cases (22 percent) and commercial contract disputes (22 percent). Other cases were mostly bankruptcy and employment-related.
Conflicts and Desperation
Karen Tseng, a staff attorney with the predatory lending division of the WilmerHale Legal Services Center of Harvard Law School in Jamaica Plain, which has litigated cases on behalf of individual borrowers since 2004, said she’s seeing more of “the type of conflicts and desperation that give rise to more claims,” as well as indications that lenders are facing increasing litigation these days.
Defendants in the WilmerHale clinic’s cases are “invariably” large, out-of-state lenders such as IndyMac, Fremont, Countrywide, Option One, GMAC, Ameriquest and New Century, Tseng said.
“You don’t find local banks, which are subject to a different [stricter] set of regulations,” she said.
Cases are based on the federal Truth in Lending, Real Estate Settlement Procedures, and Fair Debt Collection Practices acts and their state counterparts, including Massachusetts’ consumer protection law, Chapter 93A. Cases also may be based on as “common law” areas including fraud, negligent misrepresentation and infliction of emotional distress, Tseng said.
Even if a lender has gone out of business, Tseng said, the new owner of outstanding loans can still be sued.
At Greater Boston Legal Services, whose Boston office covers much of eastern Massachusetts, senior attorney Nadine Cohen said there’s been an “enormous increase” in calls from homeowners facing foreclosure in recent months. Total numbers are in the hundreds, she said, and most callers have loans they wouldn’t have been able to afford even before a rate adjustment.
In some cases, figuring out the best legal approach for a case is difficult, Cohen said. But she thinks race discrimination can be a factor.
“People and communities of color were often targeted by some of the lenders for high-cost loans,” she said.
Cohen and others noted that Massachusetts, unlike 30 other states, does not allow judges to review foreclosures before they’re final. “If you go on some of the lenders’ Web sites, I think Massachusetts is considered one of the easier states to foreclose in,” she said.
Stuart Rossman, a litigator with the National Consumer Law Center’s Boston office, said the fact that judicial review is not allowed here made him wonder about the Bay State’s high-risk ranking.
When courts aren’t involved in foreclosure decisions, Rossman said, it cuts down on mortgage-related litigation. Last year, Massachusetts legislators considered but rejected adding judicial review to state law, although Rossman and Cohen said the proposal could resurface.
NCLC added to Massachusetts’ apparent rising tide of consumer lawsuits in mid-February, Rossman said, by filing two class-action suits against national lenders Long Beach Mortgage Co. (a subsidiary of Washington Mutual) and H&R Block (of which Option One Mortgage Co. is a subsidiary).
The lawsuits, filed in Massachusetts’ Federal District Court, allege under the federal Fair Housing Act and Equal Credit Opportunity Act that the lenders adopted policies that, “while they may appear neutral on their face, result in African American and Hispanic consumers paying more than white consumers for the same credit,” Rossman said.
While the Guy Carpenter report only dealt with private claims, Massachusetts Attorney General Martha Coakley has filed several mortgage-related civil lawsuits in the past year against national lender Fremont Investment and Loan, local attorneys, brokers and individuals operating so-called mortgage rescue schemes.
The state Division of Banks also recently stripped several mortgage brokers and lenders of their licenses, according to Michael Collora, an attorney with Boston law firm Dwyer & Collora, who said even more criminal cases are likely to follow.
