On Friday, May 30, 2014, asserting that “[i]t is axiomatic that banks should not make discriminatory loans”, the City of Los Angeles filed a two-count complaint against JPMorgan Chase & Co. in Federal Court for the Central District of California. Count one of the complaint is brought under the Federal Fair Housing Act, 42 U.S.C. §§ 3601, et seq., while count two is styled as “Common Law Claim For Restitution Based On California Law.”
In the complaint, the City of Los Angeles alleges, among other things, that:
- JPMorgan intentionally targeted residents of predominantly African-American and Latino neighborhoods in Los Angeles for different treatment than residents of predominantly white neighborhoods in Los Angeles with respect to mortgage lending.
- JPMorgan intentionally targeted residents of African-American and Latino neighborhoods for high-cost loans, without regard to their individual credit qualifications and without regard to whether they would have qualified for more advantageous loans.
- JPMorgan intentionally targeted residents of these neighborhoods for increased interest rates, points and fees, as well as for other disadvantageous loan terms.
- JPMorgan intentionally targeted residents of these neighborhoods for unfair and deceptive lending practices in connection with its marketing and underwriting of mortgage loans.
“Robo-signing,” the term coined to refer to bank officials who quickly approved mortgage foreclosure documents without actual knowledge of the validity of the grounds for foreclosure, has been spurring lawsuits and making headlines since as far back as 2010. It was in the news again with the recent settlement by Wells Fargo of another robo-signing lawsuit. In this lawsuit, brought by shareholders against Wells Fargo’s board of directors, the plaintiffs alleged that robo-signing at Wells Fargo was a breach by the individual defendants of their fiduciary duty of loyalty owed to Wells Fargo and its stockholders.
The $67 million settlement requires Wells Fargo to provide down payment assistance to affected home buyers, and counseling support for its customers that are having difficulty making mortgage payments. It also requires Wells Fargo to integrate its operations of residential mortgage servicing in order to ensure consistent management of business.
A former goliath of the non-prime lending market, Aurora Loan Services, LLC (“ALS”), recently resolved a class-action lawsuit alleging that it fraudulently induced distressed California borrowers to enter into purported “workout” agreements to extract unearned payments. ALS was one of many servicing affiliates of big banks that created, and profited off of, various reduced documentation programs, which correspondent lenders originating and funding residential home loans sold to Aurora Bank FSB were required to follow. A subsidiary of Aurora Bank FSB, and affiliate of Lehman Brothers Holdings, Inc., ALS left the mortgage servicing business in the aftermath of the financial crisis of 2007-2008, selling the majority of its remaining servicing rights to Nationstar Mortgage LLC in 2012.
The class-action lawsuit against ALS was pending before Judge Saundra Brown Armstrong of the United States District Court for the Northern District of California. The Amended Complaint contains accusations that ALS took advantage of homeowners who fell behind on their mortgage payments, drawing them into deceptive contracts that required borrowers to make monthly payments in exchange for delaying impending foreclosures. The agreements promised an opportunity for borrowers to obtain mortgage modifications, but ALS allegedly failed to follow through. The lawsuit was consolidated with two other cases and survived various dispositive motions brought by ALS.
Early last week, recently-appointed director of the Federal Housing Finance Agency (FHFA) Melvin L. Watt, announced plans to keep GSEs Fannie Mae and Freddie Mac going strong. This new strategy is in stark contrast to the express goals of his predecessor Edward J. DeMarco, White House officials and other proposed legislation, such as the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, that was aimed at dismantling the GSEs and shifting mortgage-lending risks back to the private sector. In his first speech as leader of the FHFA, Watt presented FHFA’s Strategic Plan for 2014, in which he stressed the Agency’s plan “to manage the present status of Fannie Mae and Freddie Mac” and maintain the dominance of those companies in the mortgage-lending market.
Last week, the Federal Housing Finance Agency (FHFA) put Freddie and Fannie to the test, and the results were grim. Dodd-Frank mandated “stress tests,” designed to evaluate a financial institution’s ability to withstand an economic downturn, revealed that in a severe recession Fannie and Freddie could require bailouts of as much as $190 billion, a staggering figure considering the $187.5 billion these agencies received in the wake of the last housing crisis.
As dictated by the terms of their previous bailouts, Fannie and Freddie’s excess profits (which were at record highs last year) above minimum net worth thresholds are remitted to the U.S. Treasury. The GSEs’ resulting lack of capital explains their poor performance under pressure.
As detailed in an August 2013 Salon article by David Dayen and a September 2013 Bloomberg Businessweek article by Karen Weise, West Palm Beach, Florida homeowner and attorney Lynn Szymoniak helped blow the whistle on widespread fraud in the mortgage industry. Over the past few years, Szymoniak has helped the U.S. government recover millions of dollars from major banks that engaged in fraudulent practices such as “robo-signing,” and also won $18 million for herself under the False Claims Act when the U.S. Justice Department intervened in her foreclosure-fraud lawsuit and negotiated a $95 million settlement with Bank of America and other lenders to resolve a false claims case.
But Szymoniak, who is still suing other lenders accusing them of the same fraudulent behavior, is so far on her own in that lawsuit as the U.S. Justice Department has not joined the case. As Jef Feeley and David McLaughlin reported in a recent Bloomberg Businessweek article, while the government can intervene in the case at any time with court permission, Szymoniak’s attorneys have said that so far the Justice Department isn’t interested in getting involved. The Justice Department has not explained why it has so far refused to intervene in the lawsuit, although professor Joan Krause of the University of North Carolina says in the recent Bloomberg Businessweek article that there could be a variety of reasons, including lack of resources, or a determination that the case against the remaining lenders is not particularly strong.
Following the financial crisis, the U.S. Securities and Exchange Commission has received sharp criticism from the public for its seemingly weak enforcement of Wall Street’s too big to fail banks. Surprisingly, this sentiment was recently echoed from within the SEC. James A. Kidney, a retiring SEC trial attorney, no longer muffled by his employment with the agency, blasted his supervisors during a retirement speech on March 27 for being too “tentative and fearful” in their enforcement of Wall Street banks and instead “picking on the little guys.” This is particularly troubling because we know from recent experience that megabanks are the biggest risk takers.
Kidney, who had been with the SEC since 1986, pursued securities fraud suits against Goldman Sachs & Co. during his tenure. According to unconfirmed reports from the New York Times’ DealBook, Kidney blamed the commission’s “revolving door” for the lack of meaningful actions against big banks for their behavior. “It is no surprise that we lose our best and brightest as they see no place to go in the agency and eventually decide they are just going to get their own ticket to a law firm or corporate job punched,” Kidney reportedly grieved. Despite higher-ups apparently believing in the SEC’s mission “to protect investors and to maintain fair, honest and efficient markets,” they fail to follow through.
Last week, Magistrate Judge David S. Cayer of the U.S. District Court for the Western District of North Carolina denied Bank of America’s motion to dismiss the Security and Exchange Commission’s claims against it in SEC v. Bank of America Corporation, et al. The SEC’s complaint is founded upon allegations that “[t]he Bank of America entities misrepresented and omitted certain material facts regarding an RMBS [issuance], backed by more than $855 million of residential mortgages, known as BOAMS 2008-A, that was offered and sold in 2008.” Continue Reading
Momentum in housing-finance reformation picked up speed last month as the House Financial Services Committee unveiled the proposed Housing Opportunities Move the Economy (HOME) Forward Act of 2014. The proposed HOME Forward Act was introduced by Rep. Maxine Waters, who stated that the Act provides “an opportunity to address some of the fundamental flaws of the current system, by ending the perverse incentives created by Fannie Mae and Freddie Mac’s ownership structure and providing an explicit government guarantee that is paid for by industry.”
The United States Court of Appeals for the Ninth Circuit (encompassing nine Western states and two Pacific islands) has held that for purposes of diversity jurisdiction a national bank is a citizen only of the state in which its main office is located, and not of every state where it does business, or even the state of its principal place of business. The 2-1 decision came in a case involving Wells Fargo, which the Ninth Circuit held was a citizen of South Dakota, the location of its “main office” (as set forth in its articles of association), not California, the location of its principal place of business.
As Circuit Judge M. Margaret McKeown wrote in the majority opinion, “[t]he relevant statute is ambiguous, the courts are split on the question, and the Supreme Court has not squarely decided the issue.” The statute at issue is 28 U.S.C. § 1348, which says banks are residents “of the states in which they are respectively located.” The Ninth Circuit noted that the statute contains “sparse text” and that the U.S. Supreme Court previously determined the word “located” to be contextually ambiguous.