In the fall of 2010, in one of the largest scandals to ever hit the American court system, information gathered from lawsuits across the country revealed that tens of thousands of foreclosure filings were likely fraudulent -- if not outright criminal. These revelations sparked a nation-wide investigation by all 50 state attorneys general to assess not only the extent of the scandal and its potential impacts but also potential legal and policy responses to such behavior. That investigation is nearing its close. The state attorneys general will have to consider what steps to take in light of this scandal. Some of the weapons in the law enforcement arsenal are consumer protection laws. Once we know all that there is to know about the scandal, the state attorneys general should wield consumer protection laws to not only rein in that scandal, but also make progress on resolving the entire foreclosure crisis. This can be accomplished by using consumer protection lawsuits to apply pressure on banks to engage in mortgage principal reductions. The robo-sign scandal gives them an opening, and the leverage, to do so.
One of the important consumer protection statutes at the disposal of the state attorneys general includes each state's Unfair and Deceptive Acts and Practices (UDAP) laws. All fifty states and the District of Columbia have some statutory ban on unfair and/or deceptive practices in trade or commerce. Many of these UDAP laws were adopted in the 1970s and early 1980s as states sought new tools to protect consumers from abusive business practices. These laws are modeled on the Federal Trade Commission Act (FTCA), which Congress passed in 1914 and makes unlawful "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." One of the limitations of the FTCA is that it is typically only enforced by the U.S. Federal Trade Commission. Unlike the FTCA, however, many state UDAP statutes grant both consumers and state attorneys general the standing to bring actions alleging UDAP violations.
UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover all practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to stop abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. They have also been used to combat abusive foreclosure practices, as more fully described in this briefing paper on the subject. Once a violation of a UDAP law is found, state law enforcement officials can seek civil penalties, actual and punitive damages, and injunctions against offending parties.
In its November 2010 report, the TARP Congressional Oversight Panel described the range of practices revealed in the so-called "robo-sign scandal." The false affidavits, reckless claims and improper notarizations all violate the essence of most state UDAP laws; accordingly, the remedies available under such laws may be wielded by state attorneys general to halt abusive foreclosure practices throughout the nation. In addition, the actual damages to borrowers wrongfully foreclosed upon would seem quite substantial, especially if they lost equity in their home or were rendered homeless as a result of a faulty foreclosure.
Given the high stakes at risk when deceptive practices are utilized in the foreclosure process, the prospect of substantial civil penalties and punitive damages, as well as injunctions preventing foreclosures from going ahead when tainted by robo-sign practices, is considerable. At the end of the day, however, the prospect of a resolution to such claims that minimizes the threat of stiff penalties or sweeping injunctions barring foreclosures from taking place should be enough to get lenders and servicers to the negotiating table to bring about solutions to the robo-sign scandal that are more acceptable to borrowers, lenders, servicers and investors alike.
The best solution to the foreclosure crisis is mortgage principal reduction: i.e., bringing outstanding debt in line with home values. This both reduces the monthly payments borrowers must make and strengthens incentives to continue to make those payments by restoring the prospect of borrower equity in the home. The threat of significant penalties and injunctions through state UDAP laws for the abuses evident in the robo-sign scandal may be just the type of leverage needed to convince interested parties that such principal reductions are a more palatable resolution to UDAP enforcement actions than allowing such cases to drag out in the courts, where litigants may obtain more costly awards and more burdensome injunctions.
Such principal write-downs would not be unprecedented in the UDAP enforcement context. In litigation filed by Massachusetts Attorney General Martha Coakley against Fremont Bank, and in the lawsuit Bank of America settled by paying $8.4 billion to resolve claims of predatory lending by its subsidiary, Countrywide, those banks faced UDAP and other claims, and ultimately resolved those cases in ways that promoted sustainable mortgage relief, including principal reductions.
Getting banks to the settlement table through the pursuit of UDAP actions for robo-sign abuses could be a primary goal of UDAP actions in the wake of the robo-sign scandal. Should lenders and servicers wish to defend those actions on the merits, and risk judicial intervention that might translate into tens of thousands of dollars in penalties and punitive damages in each case, such would be their right. At the same time, a sensible response to such actions by the institutions caught up in the robo-sign scandal would be to consider more robust foreclosure mitigation strategies, including meaningful principal write-downs. State attorneys general should not hesitate to pursue UDAP remedies for robo-sign abuses. At the same time, they should be willing to discuss resolution of UDAP cases in ways that can promote mortgage principal reductions for those borrowers who might benefit from such relief.