Banking Law
Boston Lawyer’s Suit Over Unaffordable Loans Could Be a Model
Posted Aug 5, 2009 7:25 AM CST
By Debra Cassens Weiss
A Boston lawyer’s suit targeting two large mortgage companies accused of making unaffordable loans could spur similar suits throughout the country.
Gary Klein, of the law firm Roddy, Klein and Ryan, filed suit against Bank of America Home Mortgage and Wells Fargo Home Mortgage in federal court in June and July, the Boston Globe reports. He claims the lenders’ “payment option” mortgages grew larger over time, and the companies knew or should have known that borrowers wouldn’t be able to afford them. He is seeking class-action status.
Suffolk University law professor Kathleen Engel told the Globe that other lawyers will be watching the litigation. “If this case goes forward, it will be a model throughout the country,’’ she said.
The suits are based on a 2008 decision by the state’s highest court that upheld the state attorney general's arguments that lenders violated state law by making loans that were almost certain to lead to foreclosure. Engel told the newspaper that the case was the first in the country to hold lenders accountable for mortgage terms that are legal on their face, but unfair in practice. The decision “should put lenders on edge,’’ Engel said.
Bank of America said Klein's suit is without merit, while Wells Fargo declined comment.
- How B of A’s GC Got Fired: Leave Now, and Leave Your BlackBerry Behind
- Schools Ranked by 'Super Lawyers' Produced
- Law Firm Price Wars Break Out as Some Try ‘Loss Leader’ Bids for Work
- Five Questions for Law Firms Abandoning Lockstep Compensation
- Judge Jails 2 Attorneys for Contempt in 4 Days
- Reed Smith Will Ask Nonequity Partners to Pony Up Possibly 15% of Pay
- Court Deputy Ordered to Apologize or Face Jail After Taking Lawyer's Paperwork
- Skadden Jumps on the Bonus Bandwagon
- ABA Executive Director Resigns
- Nasty Attitude to Co-Worker, Naughty Word in E-Mail Cost 2 Their Jobs
Should Supreme Court Justices Be Able to Review News Accounts Before Publication?
Comments
B. McLeod
Aug 5, 2009 7:59 AM CST
It seems questionable whether the case will really have great impact in other states. The limited amount of information in the article suggests that the key issues will be: 1) whether the state law vindicated by the Attorney General in 2008 affords a private right of action; and, 2) if so, whether the necessary elements are met as to each loan.
One interesting facet is that the “payment option” feature is extremely common, if not universal, for credit card debt. Given that these mortgages (even if full recourse mortgages) can be rendered non-recourse via bankruptcy, aren’t these loans just larger versions of huge credit card balances? Also, will any borrower who has been playing this game with credit cards since coming of age be able to say with a straight face that he or she somehow did not understand the “payment option” feature? I predict that these cases will have a tough, uphill contest, even in Massachusetts, and that nationwide, the theory will have little impact.
Flag this comment
abe
Aug 5, 2009 8:05 AM CST
speaking of making unaffordable loans, how about all the student loans made to students at low ranked law schools who will most likely not be able to afford the payment schedule?
Flag this comment
B. McLeod
Aug 5, 2009 9:39 AM CST
Good point, abe. I predict that those loans are going to have to be repaid, because (unlike personal liability for mortgage deficiencies) most will not be dischargeable in bankruptcy.
Flag this comment
tim
Aug 5, 2009 9:59 AM CST
I saw we sue the lawyers for bring these frivilous suits. It is not a lender’s duty to make sure you can repay the loan. If they want to do a stupid loan to a deabbeat collectible so be it.
but then again i agree if we are going to sue, we should sue every law school and medical school in the country for pushing students to take out loans they can’t repay either.
glad to see america has no personable responisbility anymore
the obama circle of courruption and socalisim has come full circle
Flag this comment
mac
Aug 5, 2009 10:14 AM CST
Perhaps it is not illegal to give the loans, but there is probably fraud involved somewhere in the sale of the loans because rational people do not take out loans that they know they cannot repay. I’m willing to bet that the lenders either failed to properly disclose the terms of the loans (which state law mandates) or promised that the loans could either be repaid or refinanced. If the banks failed their disclosure duties, the borrowers should be able to bring a suit.
Flag this comment
Mit
Aug 5, 2009 10:41 AM CST
Tim, I think you should sue whoever taught you how to spell. Good luck on the SSAT this fall!
Flag this comment
tim
Aug 5, 2009 11:45 AM CST
The terms of the loan are all there. They are just to stupid to read it. Why do deadbeats always try to get out of their obligations.
I say we go back to making everyone pay 20% down - no exceptions and only giving loans to people who have perfect credit.
Why take the risk a trial lawyer will sue you because deadbeat will not pay his obligations under the loan. It’s not worthy loaning money to the poor and middle class anymore.
Let Obama give them free money.
Flag this comment
Judge Roy Bean
Aug 6, 2009 6:44 AM CST
Wow, tim. Widespread ignorance is bliss, which is distressing considering an assumption that many who would comment here are attorneys.
Loan origination became little more than a giant sausage machine; whether or not the borrower could make the payments was irrelevant for some highly-opportunistic lenders. All they wanted was a signature on a loan that was then bundled and sold through securitization into a trust. The originator carried no risk and it simply became too tempting for some to not take advantage of the situation. Considering how their compensation plans were structured and the enormous amounts of money being floated around with bonuses for top producers there is no way executives of these companies shouldn’t be held responsible.
Frankly, if housing prices hadn’t collapsed and turned so many loans upside down, Washington would still be encouraging the lending industry (through Freddie and Fannie) into cranking the sausage machine as fast as it could; foreclosure is an industry unto itself and a foreclosure is someone’s new loan opportunity.
Flag this comment
B. McLeod
Aug 6, 2009 7:43 AM CST
Actually, # 8, the originators did carry a risk. As they ultimately came to discover, it was the risk that investors would stop buying the bundled subprimes, causing the sausage machine to block up. Suddenly, there they were, with reams of bad loans they had to hold and service themselves. Except, of course, for the ones who managed to sell their whole operation to Wachovia before the shoe dropped.
Flag this comment
David Langford
Aug 11, 2009 12:43 PM CST
I agree with number 9. There were so many Banks, Mortgage Brokers (working for Banks) and Mortgage Companies (also working for Banks) to churn as many loans as possible.
Most all of the closing I performed over an 8 year period came with an “Assignment” agreement and notification. Thus, notifying the purchaser/refinancer that the loan would be assigned to the Bank. Why? Because the Banks would then bundle the loans and sell to the investment community. So, I guess the Banks should not be held accountable, when in fact they were paying the Brokers, Mortgage Companies, etc… a nice percentage payment for each loan assigned to it. That may be the reason the Tarp funds were necessary to bail out the banks. So, I guess it is reasonable for the government to bail out the Banks, but not help the person sucked into the loan, that the Bank purchased from its many sources. GIVE ME A BREAK.
Flag this comment
Add a Comment
We welcome your comments, but please adhere to our comment policy.
Commenting has expired on this post.