Emerging Common Law Theories of Imputed Liability for Predatory Lending
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While assignee liability and the holder in due course doctrine has tended to dominate both the academic discussion of and the state legislative agenda regarding secondary mortgage market liability, it is by no means the only body of law potentially relevant to the subject. Indeed, a relatively overlooked group of common law doctrines may in the long run hold more promise in creating a secondary market incentive to police predation by loan brokers, originators, and servicers.
In reading predatory lending cases, it becomes clear that the judiciary is uncomfortable apportioning liability for predatory lending exclusively through the addlepated federal and state patchwork of assignee liability statutes. Indeed consumers and some courts have groped for common law doctrines that might provide some remedy for the concerted wrongdoing of secondary market financiers of predatory lending. It is currently unclear whether these cases promise to congeal into a more unified and systemic response to securitization of predatory loans. However, at least three possible theories have emerged which have the potential to re-apportion liability for predatory lending amongst parties to a home mortgage securitization structure: aiding and abetting liability, civil co-conspirator liability, and joint venture liability.
I have researched these common law theories, focusing on the extent to which courts have and may continue to deploy them in predatory mortgage lending disputes.
1. Aiding and Abetting
It is a long standing common law principle that a business or individual can be held liable for aiding and abetting the wrongful acts of another. The Restatement of Torts (Second) suggests that, “for harm resulting to a third person from the tortious conduct of another, a person is liable if he … (b) knows that the other’s conduct constitutes a breach of a duty and gives substantial assistance or encouragement to the other so to conduct himself.” The alleged aider-abetter itself need not owe a duty of care to the victim. n368 And most courts agree that the alleged aider-abetter need not reap a personal financial benefit from the wrongful conduct to be held liable. But many courts consider financial gain by the alleged aider-abetter as evidence of knowledge of and/or assistance to the tortious behavior. Moreover, the alleged aider and abetter need not even posses a wrongful intent, provided that she knows the conduct in question is tortious. Courts are also amenable to use of the common law doctrine of aider-abetter liability to enforce statutes which do not by their own terms define or contemplate liability for aiding and abetting. While most aider-abetter liability cases involve allegations of fraud, some courts have been receptive to applying aider-abetter liability to unfair and deceptive trade practice claims as well.
A small, but growing line of cases apply aider-abetter liability to a variety of different parties involved in predatory lending. For example, in a payday lending case, the New York Attorney General’s office successfully argued that a bank criminally facilitated evasion of the state’s usury law by allowing a non-bank agent to originate, service, and retain an ownership interest in payday loans. A federal district court in New York denied a motion to dismiss an aider-abetter liability claim against a mortgage closing attorney, who allegedly claimed to represent the borrowers when in fact he did not. A Pennsylvania case held that a real estate appraiser was potentially liable for predatory lending related claims because she acted in concert with other defendants. And an Illinois federal district court case refused to dismiss a common law fraud claim against an assignee of a predatory mortgage based on the allegation that the assignee “knew of the fraud, but nonetheless funded the loan.”
In the context of securitization of mortgage loans, the most emblematic recent aider-abetter liability case involves Lehman Brothers and First Alliance Mortgage Company. In In re First Alliance Mortgage Co., the Central District of California held that Lehman Brothers could be held liable for aiding and abetting fraudulent lending by First Alliance. Throughout the mid-to-late 1990s, a parade of state attorneys general, private consumers, and public interest organizations accused First Alliance of targeting senior citizens with misleading and fraudulent home refinance loans. Discovery revealed that Lehman Brothers was fully aware of these allegations. Nevertheless, Lehman Brothers extended First Alliance a large secured warehouse line of credit to initially fund predatory loans. After originating the mortgage loans, First Alliance then used Lehman Brothers’ services to securitize the loans for resale to investors on Wall Street. First Alliance used the proceeds of loans sold into securitization pools to pay down its line of credit, cover overhead costs, and initially reap handsome profits. First Alliance also retained the servicing rights to the loans, which gave the company the opportunity to make additional profits from servicing compensation paid by the trust, as well as other servicing related revenue, such as that gathered from late fees and refinancing delinquent loans. But, when predatory lending litigation brought by state attorneys general and the FTC (along with exposes in the Wall Street Journal and on national television) began to make First Alliance’s prospects look dim, First Alliance filed for bankruptcy. But before petitioning the bankruptcy courts for protection, First Alliance drew down 77 million dollars on its warehouse line of credit with Lehman Brothers. In bankruptcy proceedings, the bankruptcy trustee argued that because Lehman aided and abetted First Alliance’s fraudulent lending, Lehman’s security interest on the warehouse credit line should be equitably subordinated to other creditors, including First Alliance’s predatory lending victims. Ultimately the district court concluded that Lehman Brothers’ security interest would not be subordinated since the 77 million dollars Lehman had already coughed up had enriched the bankrupt company’s estate. But, before doing so, the court made clear that Lehman had aided and abetted fraud against the First Alliance’s customers. Given this finding, For their part, consumers involved in the class action have still not been compensated for fraudulent loans, many of which led to the loss of a family home. Lehman, which was a secured creditor, had its bankruptcy claim paid in full.
A second possible avenue of asserting liability for concerted wrongdoing in predatory lending securitization is civil co-conspirator liability. Generally a civil conspiracy is defined as “a malicious combination of two or more persons to injure another in person or property, in a way not competent for one alone, resulting in actual damages.” A conspiracy requires demonstration of an underlying unlawful act upon which the claim is based, as well as some form of combination or agreement between the co-conspirators.
It is well settled that where a conspiracy exits, liability for actions by one co-conspirator taken in furtherance of the conspiracy can be attributed to every co-conspirator, making each equally liable for the others’ acts. Courts treat parties to a civil conspiracy as joint tortfeasors with joint and several liability for all damages “ensuing or naturally flowing” from the act. Moreover, courts hold co-conspirators liable irrespective of whether they are the direct actor, and irrespective of the degree of involvement. n389 Courts distinguish co-conspirator liability from aider-abetter liability because, unlike a co-conspirator, an aider-abetter does not adopt as her own the wrongful act of the primary violator through concerted action or agreement.
Co-conspirator liability seems to have some promise in attributing wrongful actions of front-line players to behind the scenes financiers in securitization. In Williams v. Aetna Finance Company the Supreme Court of Ohio found a mortgage lender liable for fraud committed by a door-to-door salesman. The mortgage lender had an agreement to give the salesman a commission for loans he facilitated with the lender. The “pitchman” targeted neighborhoods with senior citizens who owned their homes free and clear, convincing them to borrow money for home repairs. The lender was liable for the pitchman’s behavior because it gave “access to loan money that was necessary to further his fraudulent actions against customers… .”
Other decisions have denied dismissal of civil co-conspirator liability claims for a range of mortgage lending industry participants, including brokers, home sellers, lenders, appraisers, and attorneys. In Herrod v. First Republic Mortgage, the Supreme Court of Appeals of West Virginia rejected the notion that the mere fact of securitization changes the application of co-conspirator liability rules, explaining that:
“[a] securitization model – a system wherein parties that provide the money for loans and drive the entire origination process from afar and behind the scenes – does nothing to abolish the basic right of a borrower to assert a defense to the enforcement of a fraudulent loan, regardless of whether it was induced by another party involved in the origination of the loan transaction, be it a broker, appraiser, closing agent, or another.”
While none of these cases involved extending liability to a seller, underwriter, or trustee in a securitization deal, the notion of a “pitchman” and a “financier” seems plausibly applicable to a lender and a seller or underwriter respectively. Although a pooling and servicing agreement will never explicitly say that an investment bank agrees to a deal despite an originator, broker, or servicer’s modus operandi of violating predatory lending laws, agreement can be shown through circumstantial evidence such as the financial incentives, available information, and tacit understanding amongst the parties.
3. Joint Venture
A final common law doctrine which may hold promise in creating greater accountability for structured financing of predatory lending is joint venture liability. A joint venture is an association of two or more persons designed to carry out a single business enterprise for profit, for which purpose they combine their property, money, effects, skill, and knowledge. Joint ventures arise out of contractual relationships, be they oral, written, express, or implied. While the precise formulation of elements varies, generally to form a joint venture:
 two or more persons must enter into a specific agreement to carry on an enterprise for profit;  their agreement must evidence their intent to be joint venturers;  each must make a contribution of property, financing, skill, knowledge, or effort;  each must have some degree of joint control over the venture; and  there must be a provision for the sharing of both profits and losses.
Where a joint venture does exist, courts generally rely on partnership law in judging the rights of the parties. Thus, courts hold joint venturers may be jointly and severally liable for debts of the venture including those incurred from tortious conduct. In general, a co-venturer is not liable for the willfully unlawful acts of another. But, where the unlawful act was within the actual or apparent scope of the joint venture, or where the co-venturer gave express or implied consent to the act, or even where the co-venturer failed to protect the victim from the act, he or she can be liable for the primary wrongdoer’s behavior.
As with aider-abetter and co-conspirator liability, a growing line of cases find co-venturer liability with respect to predatory lending allegations. For example, in George v. Capital South Mortgage Investments, the Kansas Supreme Court considered a large punitive damage award against a mortgage lender and an assignee. The case involved a defunct mortgage brokerage called Creative Capital Investment Bankers. The consumer-plaintiffs in the case hired Creative to assist them in obtaining a loan to purchase a home from a relative for $ 40,000. After swamping the family with a parade of silly and unnecessary documents, the mortgage broker obtained a signature on a loan contract with a principle of $ 60,000. The broker then instructed a closing agent to distribute less than the agreed purchase price for the home to the seller. The lender, who was apparently aware of the unusual terms, assigned the loan to a private individual at closing and gave the closing agent instructions to not inform the borrowers of the assignment. When the family learned that they had borrowed $ 20,000 that they never wanted nor received, they sued. Creative Capital did not appear at trial and the court gave the family a default judgment, which in all likelihood was uncollectible. Of greater import was the family’s claim that the lender and the broker were engaged in a joint venture to profit from the broker’s fraud and usury. At trial the jury agreed. On appeal, the Kansas Supreme Court found sufficient evidence to sustain the co-venturer verdict against the lender and assignee. The lender argued that it was a distinct corporation, located in a different state, and did not share office space, administrative services, or telephone lines. Looking past these arguments, the court pointed to frequent contact between the lender and the broker, as well as the lender’s insolvency in structuring the loan immediately preceding closing. The court sustained the jury verdict against the assignee by pointing to the undisclosed assignment at closing as evidence that the assignee was a participant in the joint venture. Moreover, the court pointed out that the fact that the assignee received much of the financial benefit from the unlawful charges suggested that the assignee had agreed to the joint venture.
While the George case did not involve securitization, there does not appear to be a principled reason why joint venture rules would be inapplicable to structured finance. In securitization deals, the pooling and servicing agreement is an explicit agreement to carry on an enterprise for profit by the different businesses involved in the conduit, including mortgage brokers, lenders, MERS, servicers, sellers, underwriters, trustees, and trusts, or an SPV taking a different legal form. Each of these parties fulfill a specific function within a structured finance deal and all have control over their own particular role. At least some of the parties in some cases agree to share in the losses and profits of the venture. For example, mortgage lenders frequently agree to repurchase non-performing loans from the trust.
Mortgage brokers are only paid if any given loan closes and conforms to the underwriting standards of the loan pool. Servicers agree that their fees are contingent on performance aspects of the loan, such as whether borrowers pay on time. Sellers and underwriters agree to accept the price they can receive from selling securities, which is in turn dependent on the reputation and behavior of the originators, brokers, and servicers. Trustees agree to share in profits and losses, since they accept compensation out of the proceeds of consumers’ monthly payments. And certainly a trust (or other type of SPV) itself agrees to share in profits and losses, given that trust income is completely dependent on performance of the loans it houses.
Following this reasoning, at least one court has found a triable issue of fact on the question of whether a securitization pooling and servicing agreement created a joint venture with respect to predatory lending allegations. In Short v. Wells Fargo Michael Short alleged that employees of Delta Funding, a mortgage lending company, closed a mortgage loan on his home when they came to his house with a stack of documents for him to sign. Mr. Short alleged that Delta never provided him any copies of the loan documents, nor gave any explanation of them at the informal closing. Delta Funding sold Mr. Short’s loan along with many others into a trust pursuant to a pooling and servicing agreement with Wells Fargo, a national bank regulated by the Office of the Comptroller of the Currency, agreeing to act as trustee. Under the pooling and servicing agreement, Countrywide Home Loans, Inc. agreed to service the loans. Eventually Mr. Short alleged that Countrywide gave Mr. Short notice that he owed two payments on his loan in one month. After several unsuccessful (and no doubt frustrating) attempts to contact Countrywide’s customer service, Countrywide eventually informed Mr. Short that he also owed nearly a thousand dollars in attorneys’ fees and other penalties in addition to his regular payment, plus the still unexplained extra monthly payment – all immediately due by certified check. Mr. Short also alleged that Countrywide had charged him fees that were not authorized under West Virginia statutes. Eventually Mr. Short obtained counsel and sued. The federal district court reviewed the general principles of joint venture. Then, the court pointed out that the parties explicitly divided up the revenue from various fees in the pooling and servicing agreement. The court concluded that “taking the evidence in the light most favorable to the plaintiffs, it would not be unreasonable for a jury to conclude that Delta Funding, Countrywide and Wells Fargo entered into a joint venture.”
IV. The Consumer Protection Critique of Mortgage Securitization Law
A. Ambiguity: Consumer Protection Laws Presume an Antiquated Model of Finance
Perhaps the one uniform feature of predatory lending law is its failure to recognize and account for the complex financial innovations that have facilitated securitization structures. Most consumer protection statutes, including the TILA (1968), the FDCPA (1977), the ECOA (1974), the FHA (1968), and the FTC’s holder in due course notice rule (1975) all preceded widespread securitization of subprime mortgages by over a decade. While this time frame is not meaningful in itself, it hints at a fundamental structural problem in the law.
One would expect little controversy in a term as fundamental as “creditor.” But, the word suggests a unitary notion of a single individual or business that solicits, documents, and funds a loan. For example, under the TILA, a creditor is “the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness.” This definition is important since the private cause of action creating the possibility of liability under the act extends only to “any creditor who fails to comply” with the Act’s requirements. While this definition resonates with the notion of a lender as we commonly think of it, this notion is increasingly discordant with reality. In the vast majority of subprime home mortgage loans, most of the actual tasks associated with origination of the loan, including especially face-to-face communication with the borrower, are conducted by a mortgage loan broker.
Abuses by Mortgage Service Companies
Although predatory lending has received far more attention than abusive servicing, a significant percentage of consumer complaints over loans involve servicing, not origination. For example, the director of the Nevada Fair Housing Center testified that of the hundreds of complaints of predatory lending issues her office received in 2002, about 42 percent involved servicing once the loan was transferred
Abusive Mortgage Servicing Defined:
Abusive servicing occurs when a servicer, either through action or inaction, obtains or attempts to obtain unwarranted fees or other costs from borrowers, engages in unfair collection practices, or through its own improper behavior or inaction causes borrowers to be more likely to go into default or have their homes foreclosed. Abusive practices should be distinguished from appropriate actions that may harm borrowers, such as a servicer merely collecting appropriate late fees or foreclosing on borrowers who do not make their payments despite proper loss mitigation efforts. Servicing can be abusive either intentionally, when there is intent to obtain unwarranted fees, or negligently, when, for example, a servicer’s records are so disorganized that borrowers are regularly charged late fees even when mortgage payments were made on time.
Abusive servicing often happens to debtors who have filed a Chapter 13 Bankruptcy Plan and are in the process of making payments under the Plan. If you suspect that your mortgage servicer is abusing your relationship by charging unnecessary fees while you are paying off your Chapter 13 Plan, call us. We can help.
There is significant evidence that some Mortgage servicers have engaged in abusive behavior and that borrowers have frequently been the victims. Some servicers have engaged in practices that are not only detrimental to borrowers but also illegal Such abuse has been documented in court opinions and decisions, in the decisions and findings of ratings agencies, in litigation and settlements obtained by government agencies against prominent servicers, in congressional testimony, and in newspaper accounts of borrowers who claim to have been mistreated by servicers. The abusive servicing practices documented in these sources include improper foreclosure or attempted foreclosure, improper fees, improper forced-placed insurance, and improper use or oversight of escrow funds .
Improper foreclosure or attempted foreclosure
Because servicers can exact fees associated with foreclosures, such as attorneys’ fees, some servicers have attempted to foreclose on property even when borrowers are current on their payments or without giving borrowers enough time to repay or otherwise working with them on a repayment plan Furthermore, a speedy foreclosure may save servicers the cost of attempting other techniques that might have prevented the foreclosure.
Some servicers have been so brazen that they have regularly claimed to the courts that borrowers were in default so as to justify foreclosure, even though the borrowers were current on their payments. Other courts have also decried the frequent use of false statements to obtain relief from stay in order to foreclose on borrowers’ homes. For example, in Hart v. GMAC Mortgage Corporation, et al., 246 B.R. 709 (2000), even though the borrower had made the payments required of him by a forbearance agreement he had entered into with the servicer (GMAC Mortgage Corporation), it created a “negative suspense account” for moneys it had paid out, improperly charged the borrower an additional monthly sum to repay the negative suspense account, charged him late fees for failing to make the entire payment demanded, and began foreclosure proceedings.
Claiming that borrowers are in default when they are actually current allows servicers to charge unwarranted fees, either late fees or fees related to default and foreclosure. Servicers receive as a conventional fee a percentage of the total value of the loans they service, typically 25 basis points for prime loans and 50 basis points for subprime loans In addition, contracts typically provide that the servicer, not the trustee or investors, has the right to keep any and all late fees or fees associated with defaults. Servicers charge late fees not only because they act as a prod to coax borrowers into making payments on time, but also because borrowers who fail to make payments impose additional costs on servicers, which must then engage in loss mitigation to induce payment.
Such fees are a crucial part of servicers’ income. For example, one servicer’s CEO reportedly stated that extra fees, such as late fees, appeared to be paying for all of the operating costs of the company’s entire servicing department, leaving the conventional servicing fee almost completely profit The pressure to collect such fees appears to be higher on subprime servicers than on prime servicers:
Because borrowers typically cannot prove the exact date a payment was received, servicers can charge late fees even when they receive the payment on time Improper late fees may also be based on the loss of borrowers’ payments by servicers, their inability to track those payments accurately, or their failure to post payments in a timely fashion. In Ronemus v. FTB Mortgage Services, 201 B.R. 458 (1996), under a Chapter 13 bankruptcy plan, the borrowers had made all of their payments on time except for two; they received permission to pay these two late and paid late fees for the privilege. However, the servicer, FTB Mortgage Services, misapplied their payments, then began placing their payments into a suspense account and collecting unauthorized late fees. The servicer ignored several letters from the borrowers’ attorney attempting to clear up the matter, sent regular demands for late fees, and began harassing the borrowers with collection efforts. When the borrowers sued, the servicer submitted to the court an artificially inflated accounting of how much the borrowers owed.
Some servicers have sent out late notices even when they have received timely payments and even before the end of a borrower’s grace period Worse yet, a servicer might pocket the payment, such as an extra payment of principal, and never credit it to the borrower Late fees on timely payments are a common problem when borrowers are making mortgage payments through a bankruptcy plan
Moreover, some servicers have also added false fees and charges not authorized by law or contract to their monthly payment demands, relying on borrowers’ ignorance of the exact amount owed. They can collect such fees or other unwarranted claims by submitting inaccurate payoff demands when a borrower refinances or sells the house). Or they can place the borrowers’ monthly payments in a suspense account and then charge late fees even though they received the payment Worse yet, some servicers pyramid their late fees, applying a portion of the current payment to a previous late fee and then charging an additional late fee even though the borrower has made a timely and full payment for the new month Pyramiding late fees allows servicers to charge late fees month after month even though the borrower made only one late payment
Servicers can turn their fees into a profit center by sending inaccurate monthly payment demands, demanding unearned fees or charges not owed, or imposing fees higher than the expenses for a panoply of actions For example, some servicers take advantage of borrowers’ ignorance by charging fees, such as prepayment penalties, where the note does not provide for them Servicers have sometimes imposed a uniform set of fees over an entire pool of loans, disregarding the fact that some of the loan documents did not provide for those particular fees. Or they charge more for attorneys’, property inspection, or appraisal fees than were actually incurred. Some servicers may add a fee by conducting unnecessary property inspections, having an agent drive by even when the borrower is not in default, or conducting multiple inspections during a single period of default to charge the resulting multiple fees
The complexity of the terms of many loans makes it difficult for borrowers to discover whether they are being overcharged Moreover, servicers can frustrate any attempts to sort out which fees are genuine.
Improperly forced-placed insurance
Mortgage holders are entitled under the terms of the loan to require borrowers to carry homeowners’ insurance naming the holder as the payee in case of loss and to force-place insurance by buying policies for borrowers who fail to do so and charging them for the premiums However, some servicers have force-placed insurance even in cases where the borrower already had it and even provided evidence of it to the servicer Worse yet, servicers have charged for force-placed insurance without even purchasing it. Premiums for force-placed insurance are often inflated in that they provide protection in excess of what the loan.
Escrow Account Mismanagement
One of the benefits of servicing mortgages is controlling escrow accounts to pay for insurance, taxes, and the like and, in most states, keeping any interest earned on these accounts Borrowers have complained that servicers have failed to make tax or insurance payments when they were due or at all. The treasurer of the country’s second largest county estimated that this failure to make timely payments cost borrowers late fees of at least $2 million in that county over a two-year span, causing some to lose their homes. If servicers fail to make insurance payments and a policy lapses, borrowers may face much higher insurance costs even if they purchase their own, non-force-placed policy. Worse yet, borrowers may find themselves unable to buy insurance at all if they cannot find a new insurer willing to write them a policy
You can make a claim for mortgage service abuse, and often the court will award actual and punitive damages. If you think you have been a victim of mortgage service abuse, contact us. We can help you make a claim.
Because brokers usually do not fund the loan, they are not the party to whom the loan is initially payable. The absurd result is that the federal statute which purports to promote useful and accurate disclosure of credit prices, does not govern the business or individual that actually speaks to a mortgage applicant. Rather, liability for the statute is confined to errors in the complex paperwork, which many consumers have difficulty reading, and which are typically ignored in hurried loan closings long after borrowers arrive at decision on which broker and/or lender to use. Arguably the credit advertising restrictions in Part C of the statute reach mortgage loan solicitations by mortgage brokers. But these provisions are quite limited in their substantive reach. For example, they never explicitly prohibit misleading advertising or even false descriptions of loans. And even if they did, the statute does not grant a private cause of action to sue for advertising violations anyway.
Here are some examples of what our offices do in fighting foreclosures. Many a client call me when its toooooo late however sometimes something can be done it would envolve an appeal and this application for a stay. Most likely you will have to pay the reasonable rental value till the case is decided. And … Yes we have had this motion granted. ex-parte-application-for-stay-of-judgment-or-unlawful-detainer3
When title to the property is still in dispute ie. the foreclosure was bad. They (the lender)did not comply with California civil code 2923.5 or 2923.6 or 2924. Or the didn’t possess the documents to foreclose ie. the original note. Or they did not possess a proper assignment 2932.5. at trial you will be ignored by the learned judge but if you file a Motion for Summary Judgmentevans sum ud
template notice of Motion for SJ
TEMPLATE Points and A for SJ Motion
templateDeclaration for SJ
TEMPLATEProposed Order on Motion for SJ
TEMPLATEStatement of Undisputed Facts
you can force the issue and if there is a case filed in the Unlimited jurisdiction Court the judge may be forced to consider title and or consolidate the case with the Unlimited Jurisdiction Case
2nd amended complaint (e) manuel
BAKER original complaint (b)
Countrywide Complaint Form
FRAUDULENT OMISSIONS FORM FINAL
California stop foreclosure and get your own shortsale COMPLAINT
And in some cases an injunction is in order
Foreclosure injunction TRO
and a Lis Pendence
Southern California (909)890-9192 in Northern California(925)957-9797