KAREN CALDICOTT
Homeowners facing foreclosure who have been the victims of fraud have little hope of obtaining justice or financial restitution. That was the message of Lionel Ouellette, executive director of the New York City-based advocacy group Changer. He was speaking to a grim-faced group of about thirty Hispanic and African-American homeowners at a community center in the Brooklyn neighborhood of East New York last winter.
Nobody at the meeting had the resources to hire a lawyer for complex legal cases, said Ouellette, a 35-year-old former schoolteacher who became a housing counselor after falling victim to a scam that involved predatory loans and concealed damage in a house he purchased in 2001.
Ouellette pointed out that even if you are fortunate enough to find a legal services attorney to take your case for free, you will most likely spend years in litigation against a major bank that has the resources to hire top law firms. No, legal action is generally not an option, he counseled, pacing back and forth in front of a blackboard. It’s best to get on with your life–try to work out a loan modification with the bank or negotiate a short sale that will allow you to cut your losses and get out of a rotten deal.
“We are very honest with people about what their options are,” Ouellette said in a recent interview. “This is your chance of getting a modification, and this is what the possibilities are of somebody litigating your case–and 99 percent of the time, no one is going to be able to litigate it.”
The abysmal situation that Ouellette described last winter should improve somewhat as a result of a 2010 appropriations bill the Senate passed on December 13. Legislators increased funding for the federally chartered Legal Services Corporation from its 2009 level of $390 million to $420 million and, more important, removed a restriction on LSC lawyers that had barred them from seeking attorneys’ fees when they win cases. Now that this prohibition has been repealed, LSC lawyers should be able to greatly expand their efforts to represent distressed homeowners. In so doing, they undoubtedly will call greater attention to a major aspect of the foreclosure crisis, which has not received enough attention in policy debates.
Certainly many homeowners knowingly took out loans they could not afford, and others either committed fraud or were complicit in fraudulent schemes. However, vast numbers facing foreclosure were victims of complex predatory lending scams and deceptive sales practices that violate a number of federal and state laws. Mortgage brokers frequently forged borrowers’ loan documents without their knowledge and inveigled them into taking out loans they could not afford and should not have been eligible for. Another common scam involved banks, sellers and appraisers conspiring to inflate the appraisal of a house so that a buyer could be conned into buying it for much more than it was worth. And in some cases, mortgage brokers who did not clearly explain to borrowers the terms of “high cost” mortgages (loans padded with fees above an established threshold) were violating the federal Truth in Lending Act.
Many victims have legal claims that entitle them to receive damages from lenders, which could include attorneys’ fees, court costs and having a mortgage voided. Other victims have legal defenses under existing anti-predatory lending laws, which could be used as leverage to obtain an affordable loan modification. Even when foreclosure cannot be averted, raising claims under existing laws could buy time to enable homeowners to find another place to live.
Unfortunately, the legal remedies under existing anti-predatory lending laws are often not strong enough to save defrauded homeowners from losing their homes. In many cases the amount of money that homeowners owe on their mortgage outweighs whatever damages they may be entitled to. In others, the statutes of limitations may have run out by the time the violation is detected.
According to a recent report from the Brennan Center for Justice at New York University Law School, “Foreclosures: A Crisis in Legal Representation,” the crisis is exacerbating an already existing crisis in legal representation that is disproportionately hitting the poor. Low-income people ought to be able to find help through the Legal Services Corporation, which has 137 federally funded programs and 918 offices spread throughout the country. The LSC’s mission is to serve the growing number of Americans who live below 125 percent of the poverty line (an income of $27,563 for a family of four). Currently, approximately 54 million people fall into that bracket.
But the increasing number of low-income homeowners seeking help is swamping the LSC, which has been plagued by severe funding shortages since 1996, when, seeking to fulfill the agenda of Newt Gingrich’s Contract With America, Congress slashed almost a third of the corporation’s budget and imposed restrictions that severely curtailed its operations. A year later LSC was serving 1 million fewer people.
Under the restrictions dating from the Gingrich-era assault–which, with the exception of the recently overturned ban on collecting statutory attorneys’ fees, have been reapproved in every subsequent appropriations cycle of Congress–LSC lawyers are prohibited from engaging in many basic legal activities that are open to all other lawyers, such as lobbying for legislative changes before government officials and filing class-action lawsuits. There is even a poison pill that prohibits LSC offices receiving federal funds from using money they raise elsewhere to engage in any of the prohibited activities or services [see Peter Edelman, “…And a Law for Poor People,” August 3/10, 2009].
Currently the LSC is able to serve less than half of the low-income people who contact its member programs seeking help. Of those it is able to help, most get only general legal advice, not full representation. And for the handful of predatory lending cases an LSC attorney is able to litigate at any one time, “winning” generally means years in court followed by a sealed out-of-court settlement, which simply becomes a cost of doing business for major financial institutions.
“Of the number of clients we intake, we are probably able to accept a third of them. Not all of the ones we reject have strong legal claims, but most of the loans we see are subprime loans with abusive terms,” says Meghan Faux, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services. “There are a lot of homeowners we cannot represent who have valid claims against their originating lender.”
This past summer Faux won a sealed out-of-court settlement for a homeowner facing foreclosure after a major lawsuit that lasted nearly four years and included charges against Credit Suisse for aiding and abetting a fraudulent scheme. She says her office has won other settlements against large banks on behalf of individual homeowners. However, the LSC restrictions, especially the ones on class-action suits and attorneys’ fees, have hampered the ability of her office to win widespread relief for victims of predatory lending and mortgage-servicing abuses. “Without the threat of having to pay our attorneys’ fees, there is not a lot of incentive for the defendants to settle early or really settle, because their liability isn’t increasing,” she said in an interview conducted before the restriction on attorneys’ fees was overturned.
A legal services lawyer can generally provide full representation to about half a dozen homeowners a year and general legal advice to about ten times that number, says Michael Hickey, executive director of the Center for New York City Neighborhoods, a nonprofit founded by the City of New York and various local organizations to coordinate efforts dealing with the foreclosure crisis. “Full legal representation for everybody going through a foreclosure is almost impossible to provide,” he says. “Taking on a case means being on it for a year and a half to two years. They are extremely demanding, very expensive and the outcomes are limited because you are fighting for one homeowner. So instead, our strategy is oriented much more toward providing advice and counsel, particularly to people who are representing themselves in court.”
Although the foreclosure crisis is engulfing a sizable portion of the middle class, much of the illegal predatory lending activity has been concentrated in low-income communities, especially those of color. After decades of being denied credit, minority communities were flooded with credit on unfair terms in a well-documented practice known as reverse redlining. “Low- and moderate-income African-Americans were more than twice as likely to receive subprime loans as whites,” according to a study cited in the Brennan Center report, which goes on to note that “subprime borrowers of color will lose between $72 billion and $93 billion in equity as a result of home loans made during the past eight years.”
“In the subprime market, entire communities were targeted,” says Melanca Clark, counsel in the Justice Program at the Brennan Center and co-author of the center’s report, noting that the LSC restrictions have widened a justice gap that is having a profound effect on society. “The very fact that you are stripping tools from lawyers who could possibly defend [low-income communities of color] in those circumstances is devastating. It doesn’t just hurt those people; it has obviously hurt our economy and also the nature of our justice system.”
One might think distressed homeowners would be able to get help from the pro bono practices of large law firms, which have played a significant role in combating so many other injustices, ranging from civil rights abuses to the denial of habeas corpus at Guantánamo. Big firms that do business with banks and other lenders are particularly well equipped to help out distressed homeowners, because they employ lawyers with the financial services expertise that is necessary to handle a foreclosure case. But those firms have generally been reluctant to take on foreclosure-related pro bono work out of fear of jeopardizing existing and potential business relationships with the financial institutions. Over the past year the American Bar Association and the Federal Reserve Bank of New York have attempted to resolve these conflicts of interest; now financial institutions can issue special waivers that allow pro bono lawyers to help homeowners with foreclosure counseling and loan modifications.
However, thus far the waiver system has been an absolute failure in New York City, says Lynn Armentrout, director of the Lawyers’ Foreclosure Intervention Network, a program of the City Bar Justice Center, which matches pro bono lawyers with people facing foreclosure. “We don’t have any big-firm lawyers doing the work, precisely because of the conflicts issue,” says Armentrout. “The Fed has negotiated with the large financial institutions to waive conflicts of interest, but even though many large financial institutions did that, it hasn’t persuaded or allowed the big firms to get involved.”
On the legislative front the news is mixed. The removal of the LSC attorneys’ fees restrictions will certainly enable these nonprofit lawyers to help many more low-income Americans climb out of the legal black holes in which they have been living. However, the bill passed on December 13 leaves in place other Gingrich-era restrictions, which both the Obama administration and LSC advocates have been trying to overturn.
Advocates say that removing the other critical Gingrich-era restrictions would help an even greater number of homeowners and also provide Legal Services lawyers with better tools to combat predatory lenders, especially in cases where civil damages for individual violations are limited. “It is useful that lawyers representing homeowners, when lenders have violated consumer protection laws, will now be able to assert claims for fees,” says Rebekah Diller, a deputy director of the Brennan Center’s justice program. “An even greater deterrent would have been the ability to bring class-action lawsuits against predatory lending. So it’s progress, but it’s not as much progress as we hoped to achieve.”
LSC advocates are placing their hopes on a bill introduced last year by Representative Bobby Scott and thirteen other members of Congress to reauthorize the LSC, which Congress has not done since 1977. That bill, the Civil Access to Justice Act of 2009, would increase federal funding to $750 million and remove most of the restrictions that date from the Contract With America, such as the ones on class-action lawsuits and on Legal Services lawyers lobbying for legislative and regulatory changes.
Many people desperately need legal help. The foreclosure listing service RealtyTrac tallied 3.6 million foreclosure starts from January through November 2009, and the Center for Responsible Lending projects 9 million foreclosure starts over the next four years. Under the current state of affairs, millions of Americans–many of them the victims of fraud–may unnecessarily lose their homes because they cannot get access to a lawyer. Reauthorization of the Legal Services Corporation is long overdue.
Alex UlamAlex Ulam is a freelance journalist who writes frequently on finance and urban planning. See his work at AlexUlam.com.