Loan Mod Racketeering?

James Cagney in "Public Enemy"

James Cagney and Mae Clarke in “Public Enemy”

Bloomberg BNA Banking quoted me in BofA Must Face RICO Claims on Loan Modifications (behind paywall). It opens,

Bank of America must face claims that it and another company violated federal anti-racketeering laws by denying loan modifications to eligible borrowers, a federal appeals court said Aug. 15 ( George v. Urban Settlement Svcs., 10th Cir., No. 14-cv-01427, 8/15/16 ).

The ruling by the U.S. Court of Appeals for the Tenth Circuit reinstates purported class claims by Richard George and other borrowers that Bank of America and Urban Settlement Services (“Urban”), a settlement company, feigned compliance with guidelines under the Home Affordable Modification program (HAMP) while modifying as few loans as possible.

A district court dismissed the claims, saying the plaintiffs failed to sufficiently allege the existence of an association-in-fact enterprise under the Racketeer Influenced and Corrupt Organizations Act (RICO), but the Tenth Circuit reversed, saying they made a “facially plausible” claim.

The ruling sends the case back to the district court to consider that and other allegations.

Case Moves Forward

The decision is the latest in connection with HAMP, a 2009 Treasury Department effort aimed at stabilizing the housing market that was closely related to disbursement of government funds to banks under the Troubled Asset Relief Program. Bank of America received $45 billion in TARP funds.

The plaintiffs are represented by Steve Berman, Ari Y. Brown, Kevin K. Green, and Tyler S. Weaver in the Seattle and San Diego offices of Hagens Berman Sobol Shapiro.

“We are more than pleased the court has ruled our complaint has sufficiently alleged that Bank of America’s massive HAMP mortgage-modification program was in fact a RICO enterprise,” Berman, the firm’s managing partner, said in an Aug. 15 statement. “For years, we have tirelessly fought this major Wall Street kingpin to right the wrongs it committed against hundreds of thousands of homeowners and taxpayers who footed the $45 billion government bailout BoA took in, only to have it used to propagate a scheme to squeeze every dollar from BoA customers and wrongfully foreclose thousands of homes in the process.”

Bank of America spokesman Rick Simon said the bank denies the claims, which he said paint a false picture of the bank’s practices and its employees.

“In fact, Bank of America has been an industry leader in HAMP and other beneficial mortgage modifications,” Simon told Bloomberg BNA in an Aug. 15 e-mail. “We are reviewing the Circuit court’s decision and considering our options.”

The lawsuit, which involved loans originally held by Countrywide Home Loans, said Bank of America and Urban were part of a fraudulent scheme to keep borrowers from acquiring permanent HAMP loan modifications, allegedly because defaulted loans were more profitable.

They said Urban functioned as a “black hole” for HAMP-related documents submitted by borrowers, ensuring that trial modifications would not be made permanent.

Tenth Circuit Reverses

In its September 2014 ruling, the district court said the plaintiffs failed to allege, as required by RICO, that Bank of America was distinct from the alleged racketeering enterprise.

The Tenth Circuit reversed in a decision by Judge Nancy Moritz, who wrote for a three-judge panel. The plaintiffs, she said, “don’t contend that either a parent corporation or its subsidiary corporation is the enterprise. Rather, they assert that BOA and Urban—two separate legal entities— joined together, along with several other entities, to form and conduct the affairs of the BOA-Urban association-in-fact enterprise.”

According to the plaintiffs, she said, Bank of America and Urban “performed distinct roles within the enterprise while acting in concert with other entities to further the enterprise’s common goal of wrongfully denying HAMP applications.”

That is enough to “plausibly allege” that Bank of America meets the “enterprise” requirement, she said.

Crisis Cases Continue

Brooklyn Law School Professor David Reiss said the decision shows that financial crisis-era litigation is not over. “This case is an example of litigation that arises from the supposed fixes for the crisis—fixes that were often implemented poorly, as can be seen from a variety of cases and regulatory actions,” Reiss told Bloomberg BNA in an Aug. 15 e-mail.

The lawsuit alleged in part that documents submitted by borrowers were intentionally “scattered” across various computer databases and systems, allegedly with the goal of creating the appearance that borrowers had not completed the paperwork required to convert their trial plans into permanent modifications.

Reiss called it significant that the court accepted, for purposes of a motion to dismiss, the plaintiffs’ theory that the alleged “black hole” treatment of documents could rise to the level of a RICO violation.

“While courts have held against defendants in individual cases with similar facts, the possibility that they could hold against lenders and servicers in a class action raises the stakes quite a bit for defendants,” Reiss said.

What To Do With MERS?

Albert_V_Bryan_Federal_District_Courthouse_-_Alexandria_Va

Bloomberg BNA quoted me in More Policy Queries As MERS Racks Up Court Wins (behind a paywall). The article further discusses the case I had blogged about earlier this week.  It reads, in part,

Mortgage Electronic Registration Systems, Inc. (MERS), the keeper of a major piece of the U.S. housing market’s infrastructure, has beaten back the latest court challenge to its national tracking system, even as criticism of the company keeps coming (Montgomery County v. MERSCORP, Inc., 2015 BL 247363, 3d Cir., No. 14-cv-04315, 8/3/15). In an Aug. 3 decision, the U.S. Court of Appeals for the Third Circuit reversed a lower court ruling in favor of Nancy J. Becker, the recorder of deeds for Montgomery County, Pa., whose lawsuit claimed MERS illegally sidestepped millions of dollars in recording fees.

*     *     *

MERS has faced an array of critics, including those who say its tracking system is cloaked in secrecy. MERS disagrees, and provides a web portal for homeowners seeking information.

A host of friend-of-the-court briefs filed in the Third Circuit blasted the company, including one filed in March by law school professors who said the MERS system “has introduced unprecedented opacity and incompleteness to the record of interests in real estate.”

One of those, Brooklyn Law School Professor David Reiss, Aug. 6 raised the question whether MERS, though not a servicer, might be the subject of increased oversight.

“The problems consumers faced during the foreclosure crisis were compounded by MERS,” Reiss told Bloomberg BNA. “Those issues have not been resolved by the MERS litigation, and it would be interesting to see if the Consumer Financial Protection Bureau will seek to regulate MERS as an important player in the servicing industry. It would also be interesting to see whether state regulators will pick the ball in this area by further regulating MERS to increase transparency and procedural fairness for homeowners,” he said.