Leverage: State Enforcement Actions in the Wake of the Robo-Sign Scandal
Raymond H. Brescia
Albany Law School
December 17, 2010
Albany Law School Research Paper No. 38
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. One of the tools at the state attorneys general’s disposal that might rein in this behavior includes each state’s Unfair and Deceptive Acts and Practices (UDAP) laws. Such laws typically prohibit “unfair” and “deceptive” practices and often give consumers, as well as state attorneys general, the ability to bring affirmative litigation to rein in practices that violate their terms. UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to rein in abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. This paper explores the availability of UDAP laws and the remedies they provide to rein in the range of practices revealed in the so-called “robo-sign scandal.” It concludes that such practices – 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. Such remedies include civil penalties, actual and punitive damages, attorney’s fees and injunctions. What’s more, UDAP actions in light of robo-sign abuses could help chart a path towards a more robust mortgage modification regime, one that would result in principal reduction, which is the clearest path out of the current crisis.
The robo-sign scandal has exposed deep flaws in the practices of many mortgage lenders and mortgage servicers. These flaws expose those entities to liability under many states’ consumer protection laws, notably the collection of state statutes considered UDAP laws. These UDAP laws are broad in their reach and offer litigants pursuing claims under them a range of remedies, from damages to injunctions. The threat of litigation from lawsuits under these statutes is real, and the pressure to settle such actions in the wake of admissions of abusive foreclosure practices will be strong. State attorneys general pursuing such claims, and wielding such threats, can work with lenders and servicers to come to sensible solutions that not only root out abusive practices, but help reform the mortgage market. There is no better place to start in this road to reform than working with lenders to write down and forgive mortgage principal, to help align borrower debt with the assets that secure that debt. Short of such settlements, financial institutions face the prospect of stiff penalties, multiple damage claims and injunctions preventing them from bringing tainted foreclosure actions. Aligning borrower debt to home values will help re-align and balance incentives, reducing the risk of foreclosure for hundreds of thousands of borrowers. Such a re-alignment will also help stabilize the mortgage market by reducing the number of mortgages in the foreclosure pipeline and slowing the flow of properties entering the mortgage market at reduced, post-foreclosure prices. Once supply slows, demand will rise, as will prices. The state attorneys general have an opportunity, through strategic use of their UDAP enforcement powers, to pursue claims that foreclosure practices ran roughshod over consumer protection laws and the laws that govern those foreclosures. This opportunity can give rise to critical advances in stabilizing home prices and the mortgage market, and reduce volatility in those prices and markets. State law enforcement officials should not hesitate to pursue these claims and utilize all tools at their disposal to move from scandal to settlement, and uncertainty to resolution.
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