Law Journal Vol. 2, No. 1 Spring 2010

Northeastern University
LAW JOURNAL
Vol. 2, No. 1 Spring 2010
Editors’ Introduction 1
Notes
Regaining the Wonderful Life of Homeownership Post-Foreclosure 5
Meg Rehrauer
Caveat Venditor: Predatory Purchasing in the

Post-Boom Residential Real Estate Market 41
Brian Parkinson
Articles
A Judicial Response to the Subprime Lending Crisis 67
Robert A. Kubica
Of Victims, Villains and Fairy Godmothers:

Regnant Tales of Predatory Lending 97
Carolyn Grose
Causes of the Subprime Foreclosure Crisis and the

Availability of Class Action Responses 137
Gary Klein & Shennan Kavanagh
Policy and Litigation Barriers to Fighting Predatory Lending 193

Deborah Goldstein & Matthew Brinegar
Defending Foreclosure Actions by Bringing in Third Parties 221

Michelle Weinberg
© 2010 Northeastern University Law Journal

Northeastern University
LAW JOURNAL
EDITOR-IN-CHIEF
Laura Fauber ’10
Christine McCleney ’10
MANAGING EDITOR ARTICLES EDITOR

Adrian Bispham ’10 Sarah Mitchell-Weed ’10
Ira Gant ’10 Alexandra Geiger ’10
PUBLICATION EDITOR SYMPOSIUM EDITOR
Erin Kalwaic ’10 Deidre Delay ’10
Justin Mikowski ’10 Katie Hawkins ’10
FACULTY ADVISORS
Professor Michael Meltsner
Professor David Phillips
Professor Sonia Rolland
All works are copyright by their authors.

JOURNAL STAFF
2009/2010 Senior Staff
Kasey Baker ‘10 Vanessa Madge ‘10

Spencer Baldwin ‘10 Kevin Mulligan ‘10
Tayo Belle ‘10 Lindsey Palardy ‘10
Brett Gallagher ‘10 Tom Spera ‘10
Jeff Harris ‘10 Jacob Taylor ‘10
2009/2010 Staff
Amerin Aborjaily ‘11 Vincent Enriquez ‘11 Jay Patel ‘11
Erin Albright ‘10 Hailey Ferber ‘11 Karishma Patel ‘10
Andrew Angely ‘11 Yana Garcia ‘11 Purvi Patel ‘10
Laila Atta ‘11 Sheila Giovannini ‘11 Nathaniel Paty ‘11
Mireille Azzi ‘11 Rachael Gramet ‘11 Abigail Putnam ‘10
Jordan Barringer ‘11 Michael Greenside ‘10 Jill Piccione ‘11
Robert Barry ‘11 Jasper Groner ‘11 Harsha Pulluru ‘10
Ryan Barry ‘11 Elisar Hares ‘11 Todd Roazen ‘10
Noah Becker ‘11 Laura Healey ‘11 Matt Rodgers ‘11
Robert Bench ‘10 Brian Hilburn ‘11 Rob Reutzel ‘11
Genia Blaser ‘11 James Hodge ‘11 Nancy Ryan ‘11
Adam Blechman ‘11 Hajra Khan ‘11 Laura Sannicandro ‘11
Alexis Bowie ‘11 Dan Klein ‘11 Adrian Santiago ‘11
Jeannie Bowker ‘11 Erin Kravitz ‘11 Sam Sawan ‘11
Meghann Burke ‘10 Asya Lakov ‘11 Matthew Schulz ‘11
Naureen Charania ‘11 Anthony Leone ‘11 Mike Serra ‘11
Seth Cohen ‘10 Lily Lockhart ‘11 Brandon Simpson ‘10
Jake Conte ‘11 Veronica Louie ‘11 Rupangini Singh ‘10
Austin Dana ‘11 Richard Louis ‘11 Alexis Smith ‘10
Liz Dedrick ‘11 Meghan MacKenzie ‘11 Chethan Srinivasa ‘11
Cleo Deschamps ‘11 Lorena Marez ‘11 Jane Sugarman ‘11
Elizabeth DiMarco ‘11 Liz McEvoy ‘11 Matt Thomson ‘11
Kristin Doeberl ‘11 Ryan Menard ‘11 Erica Virtue ‘11
Deirdre Donahue ‘11 Kate Millerick ‘11 Quentin Weld ‘11
Zoe Dowd ‘11 Paola Moll ‘11 Ryan White ‘10
An Duong ‘11 Graham Mowday ‘10 Chris Whitten ‘11
Natane Eaddy ‘11 Jonathan Nichols ‘11 Kaylin Whittingham ‘10
Alexandra Easley ‘11 Annie O’Connell ‘11 Nathan Wong ‘11
Seth Eckstein ‘11 Leigh O’Neil ‘11 Paige Young ‘10
Jason Elliott ‘11 Nick Ordway ‘10
The financial crisis that began in August 2007 has been the
most severe of the post-World War II era and, very possibly
– once one takes into account the global scope of the crisis,
its broad effects on a range of markets and institutions, and
the number of systemically critical financial institutions that
failed or came close to failure – the worst in modern history.
Although forceful responses by policymakers around the world
avoided an utter collapse of the global financial system in the
fall of 2008, the crisis was nevertheless sufficiently intense to
spark a deep global recession from which we are only now
beginning to recover.
Ben S. Bernanke
Address to the Annual Meeting of the American Economic
Association
January 3, 2010
The Northeastern University Law Journal is devoted to intellectual

rigor and to enriching legal discourse. The Journal is unique, however, in
that each issue is dedicated to a single topic and features articles regarding
representation, advocacy, and legal strategy, as well as legal theory and
analysis. Written by both academics and practicing attorneys, our articles
meld legal theory with legal practice while addressing societal challenges
and discussing progressive issues in the law. Northeastern University
School of Law is often referred to as the nation’s premier public interest
law school and the Journal shares the school’s focus on social justice,
public service, and the practice of law in the public interest.
This year we present a volume of the Journal focused on advocacy
amidst the fallout of the subprime mortgage foreclosure crisis. When we
selected this topic in late 2008, the United States was in one the deepest
financial crises in its history. The mortgage foreclosure rate had increased
more than eighty percent in one year, causing almost one million families
to lose their homes.1 The fallout was not isolated to the United States
1 Stephanie Armour, 2008 Foreclosure Filings Set Record, USA Today, Feb. 3,
2009, http://www.usatoday.com/money/economy/housing/2009-01-14-
foreclosure-record-filings_N.htm at 1, (citing RealtyTrac, 2008 Year-End
Foreclosure Market Report (2009), http://www. realtytrac.com/
ContentManagement/RealtyTracLibrary.aspx?channelid=8&ItemID=5814).
2 NORTHEASTERN UNIVERSITY LAW JOURNAL Vol. 2, No. 1
residential mortgage lending market. What followed was the collapse of

the global financial market that affected not only the residents on Main
Street, but also crushed large established investment banks on Wall Street.
The price gains in the United States housing market that eventually
led to the subprime mortgage foreclosure crisis began over a decade ago.
After years of slow growth, United States house prices rose more rapidly
in the late 1990s.2 The most accelerated price gains were in the mid
2000s, when the annual rate of house price appreciation was between
fifteen and seventeen percent.3 As the price of housing increased, a greater
percentage of mortgage applications involved adjustable-rate mortgage
products.4 The widespread issuance of variable-rate mortgages coupled
with the belief by many borrowers and lenders that the price of real estate
could only go up led to the demise of the housing market. The availability
of these alternative mortgage products and the mistaken beliefs that the
real estate markets would continue to soar is likely a key explanation of
the housing bubble explosion that led to the current fallout.5 In addition
to the alternative mortgage products, some believe that the deterioration
in mortgage underwriting standards, which was exacerbated by practices
such as the use of zero-money-down and no-documentation loans, led to
the fallout.6 What remains of the United States housing market in the
aftermath of the fallout is a very different landscape than what it has been
over the past decade.
As the economy begins to stabilize, lawyers and the court system
must take leading roles to ensure that the mistakes of the past decade are
not repeated. As a journal of legal practice, the Northeastern University
Law Journal provided a forum for attorneys who are charting their course
in the aftermath of the subprime mortgage foreclosure crisis to discuss the
challenges they face.
We were honored to host a symposium in the spring of 2009 at
which legal practitioners from across the nation came together to share ideas
2 Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System,

Address at the Annual Meeting of the American Economic Association:
Monetary Policy and the Housing Bubble 12 (Jan. 3, 2010).
3 Id.
4 Id. at 14.
5 Id. at 16.
6 Stan Liebowitz, New Evidence on the Foreclosure Crisis, Wall St. J., July 3,
2009, at A13.
about the legal policies and practices that would best facilitate a successful
emergence from the subprime mortgage foreclosure crisis. Following the
symposium, we selected submissions for this issue of the Journal from
Deborah Goldstein and Matthew Brinegar, Carolyn Grose, Gary Klein
and Shennan Kavanagh, Robert Kubica, and Michelle Weinberg, as well
as student comments from Meg Rehrauer and Brian Parkinson. Although
the subprime mortgage foreclosure crisis is subsiding, it is our belief that
the articles in this issue will have profound and lasting value for both
practitioners and policy makers. The articles focus on a wide range of
topics from policy and litigation barriers to fighting predatory lending to
defending foreclosure actions by bringing third party claims.
Deborah Goldstein and Matthew Brinegar address the policy
choices, laws, and judicial opinions that led to the subprime mortgage
foreclosure crisis. The authors’ analysis of the Holder in Due Course
doctrine, the preemption of state anti-predatory lending statutes, the
Truth in Lending Act, and mortgage underwriting standards offer ideas
for reform that could help strengthen the mortgage market and keep
many borrowers in their homes. Carolyn Grose’s article offers practice
tips for attorneys working with clients affected by predatory lending and
encourages lawyers to work collectively with their clients to construct
client narratives in which the client is recognized as more than a victim.
This piece urges lawyers to seek a deeper understanding of their clients’
stories, with a goal toward creating new narratives that address their
clients’ needs and concerns.
Gary Klein and Shennan Kavanagh analyze the history and
causes of the subprime mortgage foreclosure crisis and focus on class
action litigation as a valuable mechanism for remedying the foreclosure
crisis. Robert Kubica’s piece focuses on the judicial response to the
subprime lending crisis by showing how the Commonwealth v. Fremont
Investment & Loan7 decision in Massachusetts provides a framework for
individuals examining mortgage loans to determine which loans qualify
for restructuring. Michelle Weinberg’s article offers a wealth of practical
information for attorneys defending foreclosure, as well as innovative
ideas for clients’ potential third party claims.
We believe that each article in this edition of the Journal offers
unique insight into the subprime mortgage foreclosure crisis that can be
7 897 N.E.2d 548 (Mass. 2008).

used to guide the continued legislative response to the subprime fallout

and the representation of residents in the shadow of foreclosure, as well
as assist in preventing a similar catastrophe from occurring in the future.
We are proud of our articles, our authors, and our staff. We would
like to extend thanks to previous editorial boards of the Northeastern
University Law Journal, our faculty advisors Professors Michael Meltsner,
David Phillips, and Sonia Rolland, the Northeastern University School
of Law administration, faculty and staff, our symposium participants,
and our keynote speaker, Stuart Rossman of the National Consumer Law
Center.
Northeastern University Law Journal

Editorial Board
January 2010
REGAINING THE WONDERFUL LIFE OF

HOMEOWNERSHIP POST-FORECLOSURE
DEFENDING HOMEOWNERS FROM EVICTION AFTER

FORECLOSURE BY ATTACKING THE OWNERSHIP RIGHTS
OF THE FORECLOSING ENTITY
Meg Rehrauer*
“But he did help a few people get out of your slums,

Mr. Potter. And what’s wrong with that? Why... Here,
you’re all businessmen here. Doesn’t it make them better
citizens? Doesn’t it make them better customers? You...
you said... What’d you say just a minute ago?... They had
to wait and save their money before they even ought to
think of a decent home. Wait! Wait for what? Until their
children grow up and leave them? Until they’re so old
and broken-down that they... Do you know how long it
takes a working man to save five thousand dollars? Just
remember this, Mr. Potter, that this rabble you’re talking
about... they do most of the working and paying and
living and dying in this community. Well, is it too much
to have them work and pay and live and die in a couple
of decent rooms and a bath? Anyway, my father didn’t
think so. People were human beings to him, but to you,
a warped, frustrated old man, they’re cattle.”
Jimmy Stewart as George Bailey, It’s a Wonderful Life

(Liberty Films (II) 1946)
I. Overview
In It’s a Wonderful Life, George Bailey, a local businessman and

* J.D. Candidate, 2010, Northeastern University School of Law. Ms. Rehrauer
can be reached via email: rehrauer.m@neu.edu. Ms. Rehrauer would like to
thank Nadine Cohen and Eloise Lawrence of Greater Boston Legal Services for
their mentorship and continued commitment to helping distressed homeowners
in Massachusetts.
hero, supported the community by offering townsfolk affordable loans

from his Bedford Building and Loan. As Steven M. Cohen, the Counselor
and Chief of Staff at the Office of the New York State Attorney General,
explains:
There’s that great scene where there’s the run on the
bank…and the Jimmy Stewart character explains, “Your
money isn’t with me. It’s not here behind the counter.
It’s in Harvey’s home. That’s where your money is. And
Harvey’s money is in Gretchen’s home.” That model
ceased to exist. I don’t know when it ceased to exist, but
at some point it did.2
As Mr. Cohen aptly described, the originating lender, or originator,

in the modern mortgage business will likely not hold mortgages for the
life of the loan. Today, originators commonly sell mortgages, especially
at-risk mortgages, to other institutions as part of a securitization process.3
When securitized, the individual mortgages are pooled together and
offered as an investment security.4 Mortgage companies benefit from
recouping their investments and eliminating the risk of non-payment,
while investors benefit from the mortgage companies’ reduced transaction
costs due to economies of scale and reduced initial capital requirements.5
To illustrate, Investor Ian has $5,000 that he wants to invest in residential
mortgages. Ian does not have enough capital to offer a full mortgage
directly to Borrower Betty, and it will likely be cost prohibitive for Betty
to seek many smaller loans. Therefore, Betty seeks out Originator Owen,
a lender who will loan Betty all of the necessary funds, and Betty enter
into a mortgage transaction with Owen. Owen, however, does not want
to wait to recoup his investment and also does not want to bear the risk of
Betty’s non-payment. Therefore, after the transaction with Betty closes,
2 Steven M. Cohen, Counselor and Chief of Staff at the Office of the New York
State Attorney General, Panel Discussion: The Subprime Mortgage Meltdown
and the Global Financial Crisis, Address Before The Eighth Annual Albert A.
Destefano Lecture on Corporate, Securities, and Financial Law (Apr. 15, 2008),
in 14 Fordham J. Corp. & Fin. L. 1, 20 (2008).
3 See Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev.
2185, 2186-87 (2007).
4 Id. at 2188.
5 Id.
Owen assigns Betty’s loan to Securitizer Steve who will issue mortgage-
backed securities. Ian can purchase these securities, satisfying his desire
to participate in residential mortgages, and Owen can eliminate his risk
of loss, while recouping his investment quickly. With this mutually
beneficial relationship in place, many originators became “assignment
production companies.”6 Accordingly, in many foreclosure cases, the
foreclosing entity is not the originator.
In Massachusetts, the originator or subsequent mortgagee
may rightfully assign a mortgage to a third party without informing
the borrower.7, 8 In many situations, the borrower continues to make
payments to the same servicing lender, or servicer, and thus remains
blissfully unaware of the transfer of ownership.9 Therefore, the borrower
is often surprised by foreclosure notices from an unknown lender or a
party called Mortgage Electronic Registration Systems (“MERS”). Over
half of residential mortgages in the United States, list MERS as nominee
and mortgagee of record.10 When MERS is listed as the nominee on the
mortgage, MERS can continue to act as mortgagee of record through
subsequent assignments.11 Although the lender was fully aware of
the involvement of MERS, the borrower often is unaware of MERS’s
involvement in the mortgage until she defaults or the lender is moving
for foreclosure because the language designating MERS as nominee is
usually buried in legalese. Due to a lack of familiarity with MERS or an
assignee, a notice from unknown party can surprise the borrower. This
surprise, coupled with the emotional distress from foreclosure and the
prospect of homelessness, leads to confusion regarding the next step.12
6 Id.
7 See In re Hayes, 393 B.R. 259, 267 (Bankr. D. Mass. 2008).
8 The Helping Families Save Their Home Act of 2009 called for the amendment
of the Truth in Lending Act so that homeowners must be notified of a change
in mortgage ownership within 30 days of the transfer. See Helping Families
Save Their Homes Act, Pub. L. No. 111-22, 132 Stat. 1632 (2009) (codified at
15 U.S.C.S. § 1641(g)(1) (2009)). Therefore, this issue may be mitigated in
the future, but remains problematic for many current clients.
9 See In re Schwartz, 366 B.R. 265, 266 (Bankr. D. Mass. 2007).
10 See Peterson, supra note 3, at 2212.
11 MERS, About Us, http://www.mersinc.org/about/index.aspx (last visited Sept.
29, 2009).
12 See generally Robert J. Shiller, The Scars of Losing a Home, N.Y. Times, May 18,
2008, available at http://www.nytimes.com/2008/05/18/business/18view
Confusion can lead to inaction or ineffective action, which ultimately

leads to foreclosure, as Massachusetts does not require a judicial process
for mortgage foreclosure.
The process of foreclosure in Massachusetts, as opposed to a
judicial process, formally begins with a ninety day notice to cure letter
that describes the nature of the default and the date by which the default
should be cured.13 This notice to cure letter may come from the servicer,
an originator or assignee mortgagee, or MERS. In order to cure the
default, the borrower usually must pay the unpaid principal and interest,
a per-diem interest charge, and applicable late fees.14 The borrower does
not need to pay the accelerated balance on the mortgage, fees relating to
the exercise of a right to cure or attorney fees.15 Despite the limitations
on what the mortgagee can require in order for the borrower to cure
the default, the borrower may not have sufficient funds to cure several
months of mortgage payments, along with applicable late fees and
interest. Assuming an inability to cure the default, the foreclosure process
continues.
After the ninety day notice to cure has expired, the lender must
give twenty-one days notice before foreclosure.16 The foreclosing entity
must publish this foreclosure notice in the local newspapers once per week
after giving the twenty-one days notice, resulting in three publications.17
After these publications, the foreclosing entity has the authority to act
under a power of sale and can sell the mortgaged property at a public
auction held on or near the premises.18, 19 Any person who purchases the
property, including a foreclosing entity that sells the property to itself, can
move to evict the former homeowner from the newly acquired property.
When receiving the multiple notices from an unknown lender or
html.
13 See Mass. Gen. Laws ch. 244, § 35A(a) (Supp. 2009).
14 Id. § 35A(d).
15 See id. § 35A(d).
16 Id. § 17B.
17 Id. § 14.
18 See id.
19 The process described in this comment is foreclosure by sale and entry. In
Massachusetts, there are three foreclosure processes allowed by statute: sale,
entry, or action. See Francis J. Nolan, Massachusetts Foreclosures
§ 3.1.1 (MCLE 2003). Foreclosure by sale and entry is the most common form
of foreclosure in Massachusetts, and foreclosure by action is rarely used. See id.
MERS, the borrower is often unsure of what she should do next: Who
should I negotiate with? What do I do without being able to afford a
lawyer? How can I come up with enough money to cure a default? While
the borrower contemplates these questions, the lender may foreclose on the
property and move to evict the former homeowner. Since Massachusetts
is a non-judicial foreclosure state, the borrower will not necessarily have
her day in court to defend against the foreclosure.20, 21
In some cases it can take several years to complete the foreclosure
process, from the first ninety day notice to the foreclosure sale.22 From the
borrower’s perspective, the lender’s threats of foreclosure loom harmlessly
on the horizon until the borrower is served an eviction notice. When
the foreclosure process lags for months, the homeowners may begin to
believe that someone or something has intervened, that the lender forgot
about the foreclosure, or that the lender has decided to give them a break.
Unfortunately, the lender will eventually foreclose on the mortgage and
move for eviction.
At this point, the homeowners may seek legal counsel, at a
time generally considered too late. It is not, however, too late for some
homeowners, because a process that is confusing and complicated for
borrowers is equally complicated for lenders. When challenged, some
lenders have been unable to show an unblemished ownership interest.23
Without an unblemished ownership interest in the mortgage prior
to foreclosure, the foreclosing entity may not have a clear title to the
underlying property.24 Therefore, when a homeowner faces eviction after
20 See ch. 244, § 1.

21 The entity must comply with the Service Members Civil Relief Act and file a
complaint in land court to ensure that the borrower is not on active military
duty. See Francis J. Nolan, Massachusetts Foreclosures § 3.2 (MCLE
2003). This does not operate as a full hearing. Rather, it merely provides notice
to those on active military duty that a foreclosure is imminent. Id.
22 See generally Peter S. Goodman, Homeowner and Investors May Lose, but the
Bank Wins, N.Y. Times, July 30, 2009, at A1, available at http://www.nytimes.
com/2009/07/30/business/30serviceside.html?ref=business.
23 See generally In re Hayes, 393 B.R. 259 (D. Mass. 2008); see also In re Schwartz,
366 B.R. 265, 269 (D. Mass. 2007).
24 See generally U.S. Bank National Assoc. v. Ibanez, Nos. 08 MISC 384283, 08
MISC 386755, 2009 WL 3297551 (Mass. Land Ct. Oct. 14, 2009) (refusing
to “remove a cloud from the title” pursuant to Mass. Gen. Laws ch. 240, § 6
on several homes purchased after foreclosure due to defects in assignment of
foreclosure, it is important to ensure that the foreclosing entity properly

owned the mortgage prior to foreclosure. If the entity does not own the
mortgage prior to foreclosure, the homeowner may be able to overturn
the foreclosure and ultimately remain in her home.
What colloquially is thought of as a mortgage is comprised of two
separate legal documents – the note and the mortgage. The note evidences
the debt agreed upon determined from the mortgage transaction. This
note grants the mortgagee the right to collect payment. The note is a
negotiable instrument that is typically not recorded on the registry of
deeds. On the other hand, the mortgage evidences the security interest
arising from the mortgage transaction. This mortgage typically grants the
mortgagee the right to foreclose and must be recorded with the registry
of deeds. Therefore, the right to foreclose arises from the contractual
language in the mortgage.25 Despite the fact that the mortgage grants the
right to foreclose, the entity must own both the mortgage and the note
in order to do so.26 Therefore, an assignee must have a valid assignment
of mortgage with an indorsement of note in order to assert an ownership
interest and have the authority to foreclose.27 In Massachusetts, the
distinction between the mortgage and the note is important because
requirements for assigning the mortgage are dictated by property law
principles, while the requirements for transferring the note are dictated
by Uniform Commercial Code (“UCC”) principles.28
Accordingly the originator must fulfill certain requirements
in order to properly assign the mortgage and indorse the note. First,
the Statute of Frauds dictates that contracts relating to land, including
mortgage).
25 See Ibanez, 2009 WL 3297551 at *10.
26 See Kluge v. Fugazy, 536 N.Y.S.2d 92, 93 (N.Y. App. Div. 1988) (finding that
“absent transfer of the debt, the assignment of the mortgage is a nullity”); see
also Robert L. Marzelli & Elizabeth S. Marzelli, Massachusetts Real
Estate 2d § 5.1 (Lexis 2003) (stating that “[p]rior to instituting foreclosure
proceedings it is wise to examine the note and the mortgage”).
27 See In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008) (citing In re
Schwartz, 366 B.R. 265, 270 (Bankr. D. Mass. 2007)), aff’d in part and vacated
in part, 406 B.R. 434 (D. Mass. 2009); see also Ibanez, 2009 WL 3297551 at
*11.
28 See generally Ibanez, 2009 WL 3297551 (refusing to recognize an assignment
“in blank” as a valid assignment, despite the fact that an indorsement in blank
is a valid method to transfer a note).
assignments of mortgage, must be in writing.29 Moreover, when challenged,

the foreclosing entity must produce a properly indorsed note to assert
ownership of the mortgage.30 In practice, however, the foreclosing entity
may not be able to produce sufficient evidence of its ownership of the
mortgage.31 Thus, an effective consumer law practitioner should carefully
evaluate the documentation produced by the lender to determine if the
lender fulfilled the requirements for a valid transfer of ownership.
Finally, consumer law practitioners may challenge the foreclosing
entities’ ownership at any stage of the foreclosure, but in post-foreclosure
pre-eviction cases, it is often attractive to challenge ownership in order
to invalidate the prior foreclosure. This strategy is attractive in post-
foreclosure cases because it is likely too late to raise other objections that
could be properly raised during the foreclosure proceedings. It may seem
nonsensical to invalidate a foreclosure when the borrower was verifiably
in default and the lender may simply initiate new proceedings, taking
more care to closely follow the law and foreclose on the mortgage.32
Invalidating the foreclosure, however, may be the first step to attacking
the mortgage terms for violations of state consumer protection, Truth
in Lending Act violations, or discriminatory lending.33 A successful
invalidation of foreclosure may also open negotiations with the lender,
or give the borrower more time to find another living accommodation.
This comment has three parts. Part I briefly describes the elements
of effective assignments of mortgages and indorsements of notes. Part II
illustrates the challenges that can be raised based on ineffective assignments
of mortgage or indorsement of notes by highlighting objections to MERS
as assignor. Part III details theories designed to challenge entities who
wrongfully assert ownership in a post-foreclosure, pre-eviction case.
29 See Mass. Gen. Laws ch. 259, § 1 (2004); see also Adams v. Parker, 78 Mass.
(12 Gray) 53 (1858).
30 See Kluge, 536 N.Y.S.2d at 93.
31 See, e.g., In re Schwartz, 366 B.R. 265 (Bankr. D. Mass. 2007); In re Hayes, 393
B.R. 259 (Bankr. D. Mass. 2008); In re Maisel, 378 B.R. 19 (Bankr. D. Mass.
2007).
32 But see Ibanez 2009 WL 3297551 at *12 (“The issues … are not merely
problems with paperwork or a matter of dotting i’s and crossing t’s. Instead
they lie at the heart of the protections given to homeowners and borrowers by
the Massachusetts legislature.”).
33 See Sandler v. Silk, 198 N.E. 749, 751-52 (Mass. 1935).
I. Legal Requirements for Assignments of Mortgages

and Indorsement of Notes
Massachusetts imposes two different sets of requirements

on mortgagees when transferring a mortgage interest – one for the
assignment of the mortgage and another for the indorsement of the
note. The mortgagee must follow the basic common law principles of
contracts when assigning the mortgage. Meanwhile, the mortgagee must
follow the indorsement rules imposed by the UCC in order to transfer
the note. These requirements apply to all mortgages related to land
located in Massachusetts. In addition to state law requirements, other
requirements may arise when the mortgage is purportedly assigned to
a Real Estate Mortgage Investment Conduit (“REMIC”) trust as a part
of the securitization process. If a foreclosing entity is a REMIC trust,
then the assignment of mortgage must comply with the REMIC rules,
promulgated by the IRS, and the rules proscribed in the Pooling and
Servicing Agreement (“PSA”), which serves as the governing agreement
for the trust.

A. Requirements under Massachusetts Law
The mortgage and note are governed by different bodies of

Massachusetts law. Property and common law contract principles govern
any transaction to assign the mortgage. Accordingly, the assignment
must contain the traditional elements of a contract: offer, acceptance,
and consideration. Moreover, since assignments of mortgage constitute
contracts concerning land, the Statute of Frauds applies.34 On the other
hand, the UCC governs the note, as it is a negotiable instrument.35
Because Massachusetts is a non-judicial foreclosure state, the foreclosing
entity must show that it is the holder of the mortgage and the note only
after the foreclosing entity’s authority has been challenged.36 Therefore,
34 See Mass. Gen. Laws ch. 259, § 1 (2004).

35 See ch. 106, § 3-104(e); see also id. § 9-109(b).
36 In re Nosek, 386 B.R. 374, 382 (D. Mass. 2008) (“It is the creditor’s responsibility
to keep a borrower and the Court informed as to who owns the note and
mortgage and is servicing the loan, not the borrower’s or the Court’s
responsibility to ferret out the truth.”), aff’d in part and vacated in part, 406
B.R. 434 (D. Mass. 2009). This is in contrast to New York, which is a judicial
many homeowners facing foreclosure may allow the unknown entity

to foreclose, thinking that it must have the proper authority, just as the
homeowners trusted brokers and real estate agents who assured them that
the mortgage was affordable and appropriate. The lender, however, must
comply with Massachusetts law when transferring a mortgage interest.
1. Property Principles and the Statute of Frauds Relevant to

Assignments of Mortgage
An assignment of mortgage is a contract between the current

mortgagee and a third party assignee. The third party becomes the assignee
mortgagee, assuming the right to payment, the right to foreclose, and any
other right granted to the mortgagee under the original mortgage.37, 38 In
order for an assignment to be effective, there must be an offer, acceptance,
and consideration. Under chapter 259, section one of the Massachusetts
General Laws, an assignment of mortgage must be “in writing and signed
by the party to be charged therewith, or by some person thereunto by him
lawfully authorized.”39 The required writing must contain the essential
terms of the agreement, which sometimes includes the price.40 The
statute does not define what terms must be included; but in one case,
the court found that a contract for the sale of land satisfied the Statute
of Frauds, as a matter of law when it included “the names and signatures
of the parties, a sufficient description of the property, the price, and the
time when it is to be performed.”41 This written assignment does not
need to be recorded with the Registry of Deeds, but the foreclosing entity
must publicize an assignment of mortgage with the foreclosure notice to
show its ownership interest, if the entity acquired its interest through an
foreclosure state and foreclosing entities must prove their ownership interest
prior to foreclosure. See generally LaSalle Bank Nat’l Ass’n v. Lamy,
No. 030049/2005, 2006 WL 2251721, at *1 (N.Y. Sup. Ct. Aug. 7, 2006).
37 See Ibanez, 2009 WL 3297551 at *10 (finding that in order to have authority
to foreclose, one must have an assignment of mortgage).
38 The mortgagee has the right to receive payment when it holds the note, as
discussed above.
39 ch. 259, § 1.
40 Des Brisay v. Foss, 162 N.E. 4, 6 (Mass. 1928); but see Bogigian v. Booklovers
Library, 79 N.E. 769, 769 (Mass. 1907) (finding that consideration does not
necessarily mean price).
41 Pearlstein v. Novitch, 131 N.E. 853, 854 (Mass. 1921).
assignment.42 Moreover, the assignment of mortgage must be produced

by the foreclosing entity when ownership is challenged.43
In addition to the writing requirement, the contract must be “signed
by the party to be charged therewith, or by some person thereunto by him
lawfully authorized.”44 Because mortgagees are generally corporations,
the assignments must be signed by an authorized person within the
corporation.45 As lenders cope with increased numbers of foreclosures
around the country, lenders have heavily relied on servicers and local
foreclosure counsel to execute documents in order to foreclose. These
third parties assert authorization to execute assignments of mortgage by
the foreclosing entities.
This raises the question: can a third party sign on behalf of another
corporation in order to assign a mortgage? In In re Hayes, Argent Mortgage
Company, LLC, granted a limited power of attorney to Citi Residential
Lending, Inc.46 The court found that this limited power of attorney did
not authorize Citi Residential Lending to assign this mortgage because
the power of attorney limited actions to those explicitly listed.47 The
court did not address whether a third party agent could ever have this
authority. However, even if a corporation can grant authority to a third
party agent, it may create a conflict of interest for foreclosure counsel to
execute documents identifying itself as an employee of its own client.48
Thus, the question remains unanswered.
A final element relating to the assignment of mortgages is the timing
of the assignment. The foreclosing entity may produce an assignment
signed after the initiation of foreclosure proceedings, but purporting to
have retroactive effect.49 A Massachusetts Land Court recently rejected
an ownership claim based on a retroactive assignment.50 In U.S. Bank
42 See ch. 244, § 14.
43 See In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass. 2007).
44 ch. 259, § 1.
45 See Morrison v. Tremont Trust, 147 N.E. 870, 871 (Mass. 1925) (“A corporation
can act only by agents duly authorized.”).
46 In re Hayes, 393 B.R. 259, 264 (Bankr. D. Mass. 2008).
47 Id. at 268.
48 See Model Rules of Prof ’l Conduct R. 1.17 cmt. 1, 9, 10 (2002); see also
Model Rules of Prof ’l Conduct R. 1.8 cmt. 3 (2002).
49 See generally U.S. Bank National Assoc. v. Ibanez, Nos. 08 MISC 384283, 08
MISC 386755, 2009 WL 3297551 (Mass. Land Ct. Oct. 14, 2009).
50 See id. at *3.
Nat’l Assoc. v. Ibanez, the court refused to clear a cloud on the title of
several properties purchased after foreclosures because the lenders failed to
produce valid assignments of mortgage prior to foreclosure. 51 As a result
of Ibanez, at least one practitioner believes that thousands of foreclosures
in Massachusetts may be invalid and that insurance companies will be
very wary to give title insurance on foreclosed property.52 Accordingly,
the Ibanez decision will likely be appealed to the Supreme Judicial Court
of Massachusetts.53 At the date of publication of this comment, however,
Ibanez supports the idea that courts should not recognize retroactive
assignments as valid.
In Ibanez, several lenders brought an action to clear a cloud on
title pursuant to chapter 240, section six of the Massachusetts General
Laws, after purchasing several properties at a foreclosure auction, where
they also acted as foreclosing entities.54 In each foreclosure, the lender
could not produce assignments that were dated prior to the foreclosure
sales.55 The lenders argued that because they had “assignments in blank”
and properly indorsed notes, they had the right to foreclose despite the
defect.56 The court found that the assignments in blank did not meet the
statutory requirements for an assignment for failure to name an assignee
as required.57 Further, the court rejected the assignments, holding
“retroactive assignments, long after notice and sale have taken place, do
not cure the statutory defects.”58
To further support the argument that retroactive assignments
should not be valid, a New York court held that a retroactive assignment
cannot grant an ownership interest to the foreclosing entity.59 In
51 Id. at *11-12.
52 See Richard D. Vetstein, Esq., Massachusetts Land Court Reaffirms Controversial
Ibanez Ruling Invalidating Thousands of Foreclosures, The Massachusetts Real
Estate Blog, Oct. 14, 2009, available at http://www.massrealestatelawblog.
com/massachusetts-land-court-reaffirms-controversial-ibanez-ruling-
invalidating-thousands-of-foreclosures/.
53 Id.
54 Id. at *1.
55 Id. at *3.
56 Id. at *8.
57 Id. at *5.
58 Id. at *4.
59 See Countrywide Home Loans, Inc. v. Taylor, 843 N.Y.S.2d 495 (N.Y. Sup. Ct.
2007).
Countrywide Home Loans, Inc. v. Taylor, MERS executed an assignment

of mortgage as nominee for the lender.60 The assignment was signed one
month after the assignee filed a foreclosure complaint.61 The purported
assignment stated that the assignment “shall be deemed effective August
1, 2006.”62 The Taylor Court found that “[s]uch attempt at retroactivity,
however, is insufficient to establish Countrywide’s ownership interest at
the time the action was commenced.”63 Several Massachusetts District
Court cases also require the lender to produce an assignment signed prior
to asserting an ownership interest.64 In conjunction with Taylor, these
cases strongly suggest that backdated assignments will not withstand a
legal challenge, nor support a defense of valid assignment.65
Accordingly, practitioners should ensure that any assignment
of mortgage produced by the foreclosing entity meets the common law
elements of a contract. Moreover, an appropriate party should have
authorized the assignment of mortgage. It is also important to examine
the purported assignment to ascertain whether the parties are attempting
to create a retroactive assignment. Since the foreclosing entity must own
both the mortgage and the note, it is equally important to examine the
validity of a transferred note.

2. The UCC Relevant to Notes
While property and common law contract principles govern the

mortgage, the UCC negotiable instrument principles govern the note.66
Additionally, it is essential that the note is transferred along with the
mortgage in order to transfer the entire mortgage interest.67 The note
does not have to be recorded in the registry of deeds and may be sold to
any third party as a negotiable instrument. Article 3 of the UCC provides
60 Id. at 497.
61 Id.
62 Id.
63 Id.
64 See In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass. 2007); see also in re
Hayes, 393 B.R. 259, 268 (Bankr. D. Mass. 2008).
65 See Taylor, 843 N.Y.S.2d at 495; See also In re Schwartz, 366 B.R. at 269; In re
Hayes, 393 B.R. at 268.
66 See Mass. Gen. Laws ch. 106, § 3-104 (1999).
67 See Kluge v. Fugazy, 536 N.Y.S.2d 92, 93 (N.Y. App. Div. 1988).
the indorsement rules for the note.68 It is also generally accepted that the
mortgage follows the note.69 Therefore, if a note is properly transferred to
the foreclosing entity without a valid assignment of mortgage, a court may
create an equitable assignment of mortgage.70 As a result, determining that
the note has been validly indorsed to an assignee mortgagee may establish
that the mortgage interest was transferred properly. Thus, examining the
note to see if the parties fulfilled the indorsement requirements may be
essential to a claim that the foreclosing entity did not have an ownership
interest prior to the foreclosure.
Unlike the assignment of mortgage, which should be publicized
in the foreclosure notice, it is essential for the practitioner to request the
properly indorsed note in order to examine the note and to challenge
the foreclosing entity’s ownership. A note can be properly indorsed
two different ways. First, a note is properly transferred if it is indorsed
specifically to the party claiming an ownership interest.71 Second, a note
can have a blank indorsement, and thus becomes payable to the bearer.72
If the note is payable to the bearer, the party with physical possession
alone can assert ownership.73 Therefore, ascertaining who has physical
possession of the note may be essential to determining who has ownership
of the note.
Because it is generally accepted that the mortgage follows the note,
a foreclosing entity which produces a properly indorsed note, without
producing a lawful assignment, may succeed in asserting an ownership
claim. This success arises from the fact that a court may employ the
doctrine of equitable assignment by implying a proper assignment of
mortgage, circumventing the requirements of the Statute of Frauds.
In Massachusetts, courts have employed an equitable assignment of
68 See ch. 106, § 3-205.
69 See Watson v. Wyman, 36 N.E. 692 (Mass. 1894).
70 See Commonwealth v. Reading Savings Bank, 137 Mass. 431, 443 (1884) (“If,
by the defective execution of the assignment, the intention is not completely
carried out, a court of equity should correct it.”); but see U.S. Bank National
Assoc. v. Ibanez, Nos. 08 MISC 384283, 08 MISC 386755, 2009 WL
3297551, at *11 (Mass. Land Ct. Oct. 14, 2009) (“But even a valid transfer of
the note does not automatically transfer the mortgage.”).
71 See ch. 106, § 3-204.
72 See id. § 3-205 (b); see also In re Samuels, No. 06-11656-FJB, 2009 Bankr.
LEXIS 1954, at *28 (E.D. Mass. July 6, 2009).
73 See ch. 106, § 3-205(b).
mortgage when the note is properly transferred, but the assignment of

mortgage was defective.74 The purported assignor, however, must make
some attempt to assign the mortgage, as the courts will not automatically
create an equitable assignment with the mere transfer of the note.75
Therefore, without a properly indorsed note and purported, yet imperfect,
assignment of mortgage, it is unlikely that an equitable assignment of
mortgage defense will prevail.
Given that banks frequently assigned mortgages in the past few
years, a court may be willing to reduce the requirements for an equitable
assignment, akin to the court’s practical decision in Beal Bank SSB v.
Eurich.76 The Eurich court was willing to slightly lessen the restrictions
for the business records exception to hearsay, recognizing that banks
frequently assign mortgages.77 In Eurich, Beal Bank wanted to admit
another bank’s computer printouts under the business records exception
to hearsay, without satisfying the personal knowledge requirement of the
hearsay exception.78 In determining that the printouts were admissible
as business records, the Eurich court recognized that mortgages are
commonly and frequently assigned several times.79 The court also noted,
that the debtor did not provide any evidence or calculation that the
records were inaccurate and, thus, the court presumed the records were
more likely to be accurate.80 For these reasons, the court concluded that
the trial court did not abuse its discretion by admitting the printouts.81
Unlike the Eurich court’s disregard of the personal knowledge
requirement, it would not be fair, nor in the public’s interest, to disregard
the Statute of Frauds and to grant equitable assignments of mortgage
74 See Reading Savings Bank, 137 Mass. at 443.

75 See Barnes v. Boardman, 21 N.E. 308, 309 (Mass. 1889) (“The general rule is
familiar that an assignment or transfer of a mortgage debt carries with it an
equitable right to an assignment of the mortgage”); see also Wolcott v.
Winchester, 81 Mass. (15 Gray) 461, 464 (1860) (“Our doctrine has not gone
to the extent that the mere purchase of the debt drew with it the mortgage
security, so far as to vest the legal interest in the purchaser so that he might
enforce the same by a suit in his own name.”).
76 See 831 N.E.2d 909, 914 (Mass. 2005).
77 Id.
78 Id. at 910-11.
79 Id. at 914.
80 Id. at 914 n.4.
81 Id. at 914.
to banks. This disregard would not be fair because the banks profited
from their lax protocol and ignored their due diligence requirements
when granting these often predatory or unaffordable loans to borrowers.
Moreover, the banks, who profited from the original transactions, are
now seeking to foreclose on people’s homes, arguably those people’s most
precious asset, because these very transactions are no longer profitable to
the banks. Furthermore, at least one federal judge has frequently held
banks to the usual standard, not granting any leeway for the increased
volume of foreclosures. In In re Maisel, Judge Rosenthal commented
that “[u]nfortunately, concomitant with the increase in foreclosures is an
increase in lenders who, in their rush to foreclose, haphazardly fail to
comply with even the most basic legal requirements of the bankruptcy
system.”82 In Maisel, the purported mortgagee produced an assignment
of mortgage dated four days after the mortgagee filed a Motion for Relief
from Stay.83 Judge Rosenthal referred to the purported assignee as an
“unrelated third party that had no interest in the mortgage or note until
after the Motion for Relief was filed and, therefore, Movant did not have
standing to seek relief from stay.”84 Likewise in In re Schwartz, Judge
Rosenthal would not give weight to an assignment that had not been
signed until after the foreclosure sale.85 Judge Rosenthal concluded that
“HomEq and Deutsche were careless in their documentation, a problem
that falls squarely upon them.”86 With Judge Rosenthal’s condemnation
of sloppy lenders and a clear public policy argument, it is unlikely that a
court will lightly employ the equitable assignment doctrine. Moreover,
in Ibanez, Judge Long refused to grant an equitable assignment, rejecting
the argument that the law should change to “reflect ‘industry standards
and practice.’”87 Judge Long based his refusal on the lenders failure to
follow the statutes and their own standards, echoing Judge Rosenthal’s
sentiments when he stated that “the responsibility for the consequences
is theirs.”88 Therefore, challenging the foreclosing entity’s ownership
82 In re Maisel, 378 B.R. 19, 20-21 (Bankr. D. Mass. 2007).

83 Id. at 20.
84 Id. at 22.
85 In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass. 2007).
86 Id.
87 U.S. Bank National Assoc. v. Ibanez, Nos. 08 MISC 384283, 08 MISC
386755, 2009 WL 3297551, at *10 (Mass. Land Ct. Oct. 14, 2009).
88 Id.
based on defects in the indorsement of note and assignment of mortgage

may be a successful means to protect the homeowner’s interest.

B. Special Requirements for Assignments of Mortgage and Transfers of

Note to REMIC Trusts
Many mortgages have been assigned to REMIC trusts as a part

of the securitization process.89 The Internal Revenue Service (“IRS”)
created REMICs to enable the bundling of residential mortgages into
segregated asset pools, so that individuals could invest in these asset-
backed securities, which were thought to be stable investments. REMICs
are tax “pass-through” entities, meaning that the REMICs themselves
are not taxed on income, rather only the investors are taxed on income
received.90 This tax incentive further promoted investment in mortgage
backed securities. Moreover, many investors believed that pooling
mortgages reduced the overall risk of default because the individual risk of
default could be spread across the trust and any individual default would
represent a miniscule loss to the investors. As a result, many residential
mortgages were assigned, or purported to be assigned into REMIC trusts
that continue to play a prominent role in foreclosure cases.
1. Requirements Imposed by the Internal Revenue Code
Due to the favorable tax treatment, the IRS imposes strict

rules upon REMICs, as codified in the Internal Revenue Code, section
860A-G.91 As a general rule, a qualified mortgage must be an obligation
principally secured by an interest in real property and purchased by the
89 When a mortgage is owned by a REMIC trust, the trust may be more unwilling
to modify the loan because of negative implications in the tax code and possible
litigation with shareholders. This additional issue does not relate to assignments
but may be a concern when negotiating with a REMIC trust.
90 This is in contrast to “double taxation” which occurs when the entity is taxed on
income and the investor is also taxed on its share of income.
91 REMICs are a type of Real Estate Investment Trust (“REIT”) and the REMIC
rules sometimes adopt the REIT definitions. For example, the REMIC rules
adopt the REIT definition of “foreclosure property” found in 26 C.F.R.
§ 1.856-6 (2009).
REMIC within three months of the startup date.92 If the mortgage is

contributed to the REMIC after the three month window, it may be
contributed properly if it is a “qualified replacement mortgage.”93 A
qualified replacement mortgage is an obligation that would have been
qualified if transferred in the proper time, but is received outside the three
month window in exchange for a defective obligation.94 The REMIC can
only engage in qualified replacement mortgage transactions for up to two
years following the startup date.95
A mortgage may also be properly contributed to the trust after the
three-month window if the mortgage qualifies as “foreclosure property,”
a permitted investment for REMICs.96 Foreclosure property is property
acquired at a foreclosure sale or by agreement after there has been a
default.97 The mortgage is not eligible for foreclosure property treatment
if the trustee knew or had reason to know that default would occur.98
This information is termed “improper knowledge.”99 If the REMIC
trust cannot show either that the purchase of the mortgage was part of
the qualified replacement mortgage, or that the mortgage qualifies as
foreclosure property, the trust violated the REMIC rules by executing
a prohibited transaction. The IRS imposes a 100% tax on net income
derived from prohibited transactions.100
If a mortgage is transferred to the trust as part of a prohibited
transaction, a private right of action does not arise automatically under
the REMIC rules.101 Additionally, solely violating the REMIC rules does
not show a defect in ownership of the mortgage.102 The violation may,
however, increase the bargaining power of the borrower or may augment an
argument that the REMIC trust is not the proper owner of the mortgage,
92 I.R.C. § 860G(a)(3)(A)(i)-(ii) (2006).
93 See I.R.C. § 860G(a)(4)(A)-(B) (2006).
94 Id.
95 See 26 U.S.C. § 860G(a)(4)(B)(ii) (2006).
96 Id. § 860G(a)(5)(C).
97 26 C.F.R. § 1.856-6 (b) (2009).
98 Id. § 1.856-6 (b)(3).
99 Id.
100 26 U.S.C. § 860F(a)(1).
101 See generally id. at § 860A-G.
102 See In re Samuels, No. 06-11656-FJB, 2009 Bankr. LEXIS 1954, at *33-34
(E.D. Mass. July 6, 2009) (finding that an unfavorable tax consequence has no
effect on the validity of an assignment).
if it is one of several defects. Thus, it is advantageous to evaluate whether

there has been a violation of the REMIC rules if the assignee is a REMIC
Trust. Moreover, determining whether there has been a REMIC rule
violation is easily ascertained by public records. Pooling and Servicing
Agreements (“PSAs”) of any REMIC trust are available on the U.S.
Securities and Exchange Commission’s website and will list the startup
date of the particular trust.103 With the startup date, a practitioner can
determine the three month window for proper contribution, as well as
the two year period when mortgages may be contributed as qualified
replacement mortgages. Finally, the date of the purported assignment
can indicate whether the trust had “improper knowledge” with regard to
the mortgage as to whether it could be properly attributed as foreclosure
property. Because the possible violation is determined through scanning
the public records and may increase the strength of an argument that an
assignee does not own the mortgage, it is wise to evaluate whether there
have been violations of the REMIC rules.

2. Requirements Imposed by Pooling and Servicing
Agreements
In addition to following the REMIC rules, any securitized trusts

must comply with the procedures outlined in its Pooling and Servicing
Agreement (“PSA”). The PSA describes how the trust will operate, setting
the ground rules for the trust so that the trust can induce investment
from third parties. The trust must also follow the protocol detailed in
the PSA so that the individual mortgages are bankruptcy remote from
the originating lender. Each trust has a unique PSA that describes how
mortgages must be transferred to the trust corpus. The PSA will, at the
bare minimum, require that mortgages flow first from the Depositor, to
the trust corpus. Other PSAs employ more parties, such as requiring the
transfer from a Depositor, to a Sponsor, to the trust corpus. If the trust
fails to meet its own standards when acquiring a mortgage, it may not
be able to successfully claim an ownership interest in the mortgage.104
103 See U.S. Securities and Exchange Comm’n., EDGAR Search Page, http://sec.
gov/edgar/searchedgar/companysearch.html (last visited Jan. 7, 2010).
104 See In re Hayes, 393 B.R. 259, 268 (Bankr. D. Mass. 2008) (“Deutsche Bank
failed to adequately trace the loan from the original holder, Argent Mortgage
Company, LLC, to it [under the rules described in the PSA].”); but see In re
But even with these detailed protocols, some assignments of mortgage

purport to assign the mortgage from the originator directly to a trust.
These assignments blatantly defy the terms of the PSAs, in what has
been termed an “A to D” transfer because it skips the necessary steps
(theoretically speaking “B” and “C”) proscribed in the PSA.
Courts have given mixed weight to the “A to D” theory. In In re
Hayes, the court found that the failure of the lender to trace its ownership
in the path proscribed in the PSA undermined the lender’s purported
ownership interest.105 The Confirmatory Assignment produced by the
lender was signed seven months after the lender claimed an ownership
interest.106 Moreover, the lender failed to produce any evidence that the
mortgage had been included in the trust corpus at the time the trust
initially claimed an ownership interest.107 Finally, the court found the
lender’s claim suspect because the originating lender was not a party listed
in the PSA.108 In In re Samuels, however, the court found that physical
possession of the note, coupled with a Confirmatory Assignment that
transferred the mortgage directly from the originator to the trust corpus
conveyed a valid ownership interest.109 In addition to the assignment, the
mortgage had been listed in a closing schedule of the PSA.110 Moreover,
the foreclosing entity had continuously held the mortgage and note in
its collateral files, until providing the documents to the servicer in order
to foreclose.111 It seems that a court may be more likely to ignore the
“A to D” problem if the lender can show that the trust had a long-term
ownership interest, rather than a short-term interest ostensibly made in
order to foreclose.
This may not, however, be the rule in Massachusetts. In Ibanez,
like in In re Samuels, the lenders could show that the mortgages in question
Samuels, 2009 Bankr. LEXIS 1954 at *33-34 (“Even if this direct [confirmatory]
assignment were somehow violative of the PSA, giving rise to unfavorable tax,
regulatory, contractual, and tort consequences, neither the PSA nor those
consequences would render the assignment itself invalid.”).
105 In re Hayes, 393 B.R. at 268.
106 Id.
107 Id.
108 Id.
109 See In re Samuels, No. 06-11656-FJB, 2009 Bankr. LEXIS 1954, at *33-34
(Bankr. D. Mass. July 6, 2009).
110 Id. at 23-24.
111 Id. at 24.
were included in the prospectus information given to investors.112 Also like

the lender in In re Samuels, the lenders in Ibanez had held the assignment
of mortgages and notes in a collateral file.113 Though not framed as
an “A to D” problem, the Ibanez court rejected the lenders assignment
because the mortgages had been assigned “in blank” which was not a
valid recordable form.114 The Ibanez court held that the assignments in
blank were not recordable assignments as required by the PSAs and thus
were ineffective.115 This failure to follow the lender’s own requirements,
coupled with an invalid retroactive assignment, led the Ibanez court to
decide that the mortgages had never been assigned to the foreclosing
entity.116
As illustrated by recent developments, Massachusetts courts
have not given consistent weight to the A to D problem. These recent
conflicting cases will likely be appealed at a later date. Until then, it
would be wise for a practitioner to bring claims based on a failure to
transfer the mortgage according to the method proscribed in the PSA.
C. Summary of Requirements for Assignment of Mortgage and

Indorsement of Notes
Ultimately, it is the lender’s burden to show that it holds the

mortgage and note through an assignment and indorsement, respectively.
Careful consumer practitioners, however, will examine both the
assignment of mortgage and the indorsement of note to ensure that
both documents comply with Massachusetts law. Additionally, there are
certain other requirements for assignees that are REMIC trusts. Even if
the documents appear to properly transfer ownership, the transfer will be
invalidated if the assignor party was not duly authorized. This final issue
is common in cases where the borrower challenges an assignment made
by MERS as nominee for the mortgagee.

II. Illustrating the Importance of Examining the Assignment of
112 See U.S. Bank National Assoc. v. Ibanez, Nos. 08 MISC 384283, 08 MISC
386755, 2009 WL 3297551, at *7 (Mass. Land Ct. Oct. 14, 2009).
113 Id. at *6.
114 Id. at *5.
115 Id. at *8.
116 Id. at *10.
Mortgage and Indorsement of Note: MERS As Assignor
All mortgages must have two parties – the mortgagor and the
mortgagee. In over fifty percent of mortgages in the United States,
MERS is a third party on the mortgage, as nominee and mortgagee of
record.117 Generally, the mortgage will explicitly give MERS, as nominee
for the mortgagee lender, the power to foreclose on the property upon
default and to act when necessary on the lender’s behalf. The formulaic
MERS mortgage does not, however, explicitly grant the right to assign
the mortgage on behalf of the lender. The absence of the right to assign
may indicate that the parties did not intend to give MERS this right.
Additionally, MERS itself claims that it has no real ownership interest in
mortgages. 118 Therefore, MERS lacks the authority to assign mortgages
or transfer notes.
Moreover, MERS can only assign the rights that it has and no
more.119 When MERS is a party to a mortgage, it has only nominee
rights. Black’s Law Dictionary defines a nominee as either a “person
designated to act in place of another, usu[ally] in a very limited way,”
or a “party who holds bare legal title for the benefit of others or who
receives and distributes funds for the benefit of others.”120 Therefore,
MERS, as nominee, may act on behalf of the true mortgage holder for
the limited purposes listed in the mortgage – the right to foreclose, the
right to release and cancel the mortgage, and the right to take any action
required by the lender – and no more. Hence, a challenge based on
MERS as assignor rests on the fact that MERS was not duly authorized as
required by Massachusetts law.
Building on this logic, a New York court held that MERS did not
have the authority to assign mortgages.121, 122 In LaSalle Bank Nat’l Ass’n
117 Peterson, supra note 3, at 2211.
118 See Mortgage Elec. Registration Sys., Inc. v. Neb. Dep’t. of Banking and Fin.,
704 N.W.2d 784, 787 (Neb. 2005).
119 See Dolben v. Kauffman, 170 N.E. 400, 400-01 (Mass. 1930) (explaining that
a plaintiff’s rights are not greater than those of his assignor).
120 Black’s Law Dictionary 1149 (9th ed. 2009).
121 See , No. 030049/2005, 2006 WL 2251721, slip op. at *2 (N.Y. Sup. Ct. Aug.
7, 2006).
122 Unlike Massachusetts, New York is a judicial foreclosure state. See Bergman on
New York Mortgage Foreclosures § 2.01 (MB 2009). Therefore, the plaintiff in
Lamy is the lender wishing to foreclose and it must prove its ownership to the
v. Lamy, the plaintiff proffered an assignment of mortgage that alleged

to show its ownership interest.123 According to this assignment, the
purported assignor was MERS.124 The Lamy court held that MERS, as
nominee, does not have the authority to assign mortgages because it does
not have the requisite ownership interest.125
In In re Huggins, the court considered the Lamy holding while
interpreting Massachusetts’ law.126 The Huggins court distinguished
MERS’ ability to foreclose from its ability to assign because the mortgage
explicitly granted MERS the authority to foreclose.127 Explaining the
distinction, the Huggins court found that:
Lamy thus rests on a defect in the title of the assignee,
arising from an inability of MERS, as nominee, to transfer
the rights of the owner of the mortgage, not on a defect
in the standing of MERS as nominee to foreclose on
behalf of a valid holder of the mortgage note.128
Therefore, the Huggins court did not accept nor reject the Lamy
court’s holding that MERS as nominee cannot assign the mortgage.
Consequently, whether MERS has the ability to assign mortgages based
on its nominee rights has yet to be determined in Massachusetts.
Assuming arguendo that MERS has the authority to assign
mortgages, it clearly has no authority to transfer the note because it has
no ownership interest in the underlying note.129 In Saxon Mortgage Servs.
Inc. v. Hillery, MERS as nominee for New Century purportedly assigned
court. LaSalle Bank Nat’l Ass’n, 2006 WL 2251721, at *1. Because borrowers
in Massachusetts must challenge the lender’s ownership claim before a court
can determine the validity of such a claim, New York has a more in-depth body
of case law in this area. See generally id.; see also Kluge v. Fugazy, 536 N.Y.S.2d
92, 93 (N.Y. App. Div. 1988).
123 LaSalle Bank Nat’l Ass’n, 2006 WL 2251721, at *1.
124 Id.
125 Id. at *2.
126 See In re Huggins, 357 B.R. 180, 184-85 (Bankr. D. Mass. 2006).
127 Id. at 183.
128 Id. at 184.
129 See Saxon Mortgage Servs., Inc. v. Hillery, No. C-08-4357 EMC, 2008 U.S.
Dist. LEXIS 100056, at *16 (N.D. Cal. Dec. 9, 2008) (finding no evidence
that MERS held the promissory note).
the mortgage and note to Consumer.130 There was no evidence that New
Century assigned the note to MERS, nor evidence that it granted MERS
as nominee the authority to transfer the note.131 The court found that
even if MERS had the authority to assign the mortgage, it never had the
authority to transfer the note, and thus, Consumer could not show a valid
ownership interest.132
Because MERS likely does not have the authority to assign
mortgages, and does not have the authority to transfer notes, a court is
unlikely to find that MERS effectuated a valid transfer of ownership. This
lack of authority to assign goes to the fundamental basis of the purported
assignee’s ownership interest. Therefore, it may be fruitful to challenge
any ownership claim that arises from a transfer from MERS due to an
invalid assignment of mortgage and indorsment of note.
III. Legal Theories That Can Be Utilized to Challenge

the Foreclosing Entity’s Ownership Interest
In order to foreclose upon the mortgage, the foreclosing entity

must have legal title to the mortgage and the note.133 If the foreclosing
entity is not the originator or servicer and the homeowner challenges the
entity’s ownership, the foreclosing entity must produce a valid assignment
of mortgage and properly indorsed note to show that it has the requisite
ownership interest.134 The foreclosing entity must also be able to show
that it received its interest from a party legally entitled to transfer
ownership. Furthermore, the foreclosing entity must have acquired its
interest in the mortgage prior to the foreclosure sale.135 If the foreclosing
entity fails to produce unblemished documentation of ownership, a court
130 Id. at *3.
131 Id.
132 Id. at *16.
133 See generally Adams v. Parker, 78 Mass. (12 Gray) 53 (1858) (establishing that
a plaintiff must prove legal title in real estate in order to maintain an action to
foreclose a mortgage).
134 See In re Maisel, 378 B.R. 19, 22 (Bankr. D. Mass. 2007) (“It is the [lender’s]
burden to bring information regarding the relationship between the parties to
the Court.”).
135 See In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass. 2007) (“Acquiring the
mortgage after the entry and foreclosure sale does not satisfy the Massachusetts
statute.”).
may invalidate the foreclosure.136 This section will detail the different
theories that may be utilized to challenge the foreclosing entity’s claim,
or to challenge the foreclosure itself, in order to defend the homeowner’s
interest in a post-foreclosure, pre-eviction case.
A. The Foreclosing Entity is Not a Real Party in Interest, Nor Does it

Have Standing
Massachusetts courts require that every claim “be prosecuted by a

real party in interest.”137 A real party in interest is the “party who, by the
substantive law, has the right sought to be enforced.”138 In a foreclosure
related action, a real party in interest must show an ownership interest
in the mortgage, which can be demonstrated by holding the note and
mortgage, or being the servicer for the holder of the note and mortgage.139
If an assignment of mortgage fails, the purported assignee by definition
cannot hold the note and mortgage. Without such an ownership interest,
the purported assignee cannot be the real party in interest.140
Challenging the foreclosing entity’s real party in interest status
arises where the foreclosing entity is attempting to evict the former
homeowner in housing court. When an entity acts to evict the former
owner after a foreclosure, the party must be a real party in interest in
the housing court.141 Accordingly, a homeowner facing post-foreclosure
eviction may be able to file a motion to dismiss for failure to be a real
party in interest. Unfortunately, the case will not be dismissed until a
136 See In re Maisel, 378 B.R. 19,22 (Bankr. D. Mass. 2007)(“It is the [lender’s]
burden to bring information regarding the relationship between the parties to
the Court.”).
137 Mass. R. Civ. P. 17(a).
138 McWhirter v. Otis Elevator Co., 40 F. Supp. 11, 14 (W.D.S.C. 1941).
139 See In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008); see also In re
Huggins, 357 B.R. 180, 183 (Bankr. D. Mass. 2006) (portraying a real party in
interest as the entity which has a property or ownership interest).
140 See Kenrich Corp. v. Miller, 256 F. Supp. 15, 17-18 (E.D. Pa. 1966) (“Under
Pennsylvania law, the attempted assignment from Kenrich to Jerome Kline is
void as champertous and against public policy, and vested no rights in Kline
sufficient to maintain this cause of action.”), aff’d, 377 F.2d 312 (3rd Cir.
1967).
141 See Mass. R. Civ. P. 17(a).
“reasonable time has been allowed after objection for ratification.”142

Therefore, challenging the foreclosing entity on the basis that it is not the
real party in interest will only delay the proceedings.
In federal court, the foreclosing entity must be the real party
in interest and have standing.143 Foreclosure cases in federal court are
frequently litigated as a part of the borrower’s bankruptcy proceedings,
and the foreclosing entity must show that it is the holder of the note and
mortgage in order to establish that it has standing to seek a relief from
automatic stay in order to foreclose.144, 145 Additionally, homeowners
may file for bankruptcy after foreclosure to prevent eviction.146 When
in federal court, the borrower can attack standing at any time, including
post-foreclosure.147 Attacking the foreclosing entity’s standing would not
invalidate the foreclosure per se, but would extinguish the party’s right to
enforce its claim in court. Again, this action may serve to increase the
borrower’s bargaining power or open meaningful negotiations between
the parties.
In contrast to the effects of an attack on real party in interest
status or standing, where the homeowner is challenging the foreclosing
entity’s right to prosecute a claim, the following theories aim to invalidate
the foreclosure itself.

B. Because the Entity Foreclosed on the Property without a Valid
Ownership Interest, the Court Should Void the Foreclosure Sale
Often the homeowner in a post-foreclosure, pre-eviction case
142 Id.
143 See In re Hayes, 393 B.R. 259, 266 (Bankr. D. Mass. 2008) (citing Shamus
Holdings, LLC v. LBM Financial, LLC (In re Shamus Holdings, LLC), Case
No. 08-1030-JNF, Adv. P. No. 08-1030, 2008 WL 3191315, at *6 (Bankr. D.
Mass. Aug. 6, 2008)).
144 See e.g., In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008); In re Huggins,
357 B.R. 180, 183 (Bankr. D. Mass. 2006).
145 A servicer may also have standing in federal court. See In re Hayes, 393 B.R. at
267 (“Courts have held that mortgage servicers are parties in interest with
standing by virtue of their pecuniary interest in collecting payments under the
terms of the notes and mortgages they service.”).
146 See generally In re Schwartz, 366 B.R. 265, 266 (Bankr. D. Mass. 2007)
147 See In re Hayes, 393 B.R. at 266.
wishes to invalidate the foreclosure.148 Because an earlier action brought

to invalidate the mortgage will not preclude a prospective action to set
aside the mortgage, the borrower need not raise both claims in the same
action.149 When invalidating a foreclosure sale, a court may void the
foreclosure sale or declare it voidable.150 “Errors that go to the legal basis
of power of sale make the sale totally void. Errors that involve mere
irregularities in the exercise of the power of sale are only voidable.”151 A
void sale creates a nullity.152 In other words, “[i]t is as if no such sale had
been made.”153 On the other hand, a voidable sale enables “the mortgagor,
or perhaps the purchaser, to avoid it, and still be effectual if all the parties
interested desire to have it stand.”154 Based on a theory of laches, however,
a mortgagor may be barred from voiding a “voidable” sale if he does not
act with reasonable promptness.155
Where the foreclosing entity produces an invalid assignment of
mortgage, or does not hold the note, the fact that the entity cannot show
an ownership interest in the mortgage likely relates to the legal basis of
the power of sale.156 In that instance, the mortgagor will ask the court to
declare the foreclosure sale void and unenforceable. To illustrate defects
that relate to the power of sale, a foreclosing entity must produce notices
under chapter 244, section fourteen of the Massachusetts General Laws
148 See, e.g,. Sandler v. Silk, 198 N.E. 749, 751 (Mass. 1935) (affirming that the
mortgagee failed to comply with duty of good faith and reasonable diligence in
foreclosing the mortgage); In re Schwartz, 366 B.R. 265, 269 (Bankr. D. Mass.
2007) (concluding that the foreclosure sale was improper because the foreclosing
entity failed to produce a valid assignment proving ownership of the note);
Kattar v. Demoulas, 739 N.E.2d 246, 257 (Mass. 2000) (upholding a jury
verdict that mortgagee violated the foreclosure statute by foreclosing out of
retribution for mortgagors’ refusal to testify).
149 See Sandler, 198 N.E. at 751-752.
150 See Stewart v. Bass River Savings Bank, 336 N.E.2d 921, 924-25 (Mass. 1975).
151 Id.
152 See id; see also Chace v. Morse, 76 N.E. 142, 144 (Mass. 1905) (“[W]here a
certain notice is prescribed, a sale without any notice, or upon a notice,
lacking the essential requirements of the written power, would be void as a
proceeding for foreclosure.”).
153 Bottomly v. Kabachnick, 434 N.E.2d 667, 669-70 (Mass. 1982).
154 Chace, 76 N.E. at 144.
155 See id.
156 See In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008), aff’d in part and
vacated in part, 406 B.R. 434 (D. Mass. 2009);
that identify the holder of the mortgage. 157 Furthermore, the foreclosing
entity must publicize the valid assignment under which it derives its
ownership interest with the foreclosure notice.158 If the foreclosing entity
does not properly own the mortgage, it will fail to identify the proper
mortgagee in the notices and publicize a valid assignment. This failure
will result in an invalid execution of the power of sale for failure to name
the holder of the mortgage and publicize a valid assignment.159 Because
a properly executed notice of sale under chapter 244, section fourteen
of the Massachusetts General Laws is a condition precedent to a valid
foreclosure, a violation of chapter 244 of the Massachusetts General Laws
will make the foreclosure sale void as a matter of law.160
C. Because the Entity Foreclosed on the Property without a Valid

Ownership Interest, It Violated Its Duty of Good Faith and
Reasonable Diligence under Chapter 93A of the Massachusetts
General Laws
Under chapter 93A, sections two subsection (a) and nine of the
Massachusetts General Laws, mortgagees must act in good faith and with
reasonable diligence when foreclosing on a mortgage.161 In addition
to creating a duty for tort actions, chapter 93A of the Massachusetts
General Laws makes violating this duty alone an unfair and deceptive
act.162 Moreover, if a lender violates its duty of good faith and reasonable
diligence, the foreclosure will be declared void.163 In Williams v. Resolution
GGF OY, the court sought to determine whether the mortgagee acted
in good faith during foreclosure by applying the factors found in PMP
Assocs., Inc. v. Globe Newspaper Co.164 Those factors are: “(1) whether the
practice…is within at least the penumbra of some common-law, statutory,
or other established concept of unfairness; (2) whether it is immoral,
157 See Bottomly, 434 N.E.2d at 669-70.

158 See Mass. Gen. Laws ch. 244, § 14 (2004).
159 See Bottomly, 434 N.E.2d at 669-70.
160 See id.
161 See Williams v. Resolution GGF OY, 630 N.E.2d 581, 582 (Mass. 1994).
162 See id. at 584.
163 Nat’l Loan Investors v. LaPointe (In re LaPointe), 253 B.R. 496, 501 (B.A.P. 1st
Cir. 2000).
164 Williams, 630 N.E.2d at 583-84.
unethical, oppressive, or unscrupulous; (3) whether it causes substantial

injury to consumers.”165 In PMP Assocs., Inc., the court determined
that courts should weigh the factors but not apply a strict calculation.166
Additionally, when the mortgagee acting pursuant to a power of sale is
also the purchaser, “he will be held to the strictest good faith and utmost
diligence for the protection of the rights of his principal.”167
A court will examine whether a mortgagee violated its duty of good
faith and reasonable diligence based on the individual facts. Generally, if
the mortgagee follows the required notices in chapter 244, sections eleven
through seventeen of the Massachusetts General Laws, the mortgagee will
satisfy its duty unless “the mortgagee’s conduct manifested fraud, bad faith,
or the absence of reasonable diligence in the foreclosure sale process.”168
Arguably, foreclosing upon a mortgage without establishing a clear
ownership interest, as legal literature on foreclosure urges practitioners to
do, may show a lack of reasonable diligence.169 Moreover, a court is more
likely to invalidate a foreclosure if the “bad faith or failure of diligence
has been of an active and conspicuous character.”170 Showing that the
foreclosing entity violated the duty of good faith and reasonable diligence
may effectively invalidate a foreclosure, or may be an element in another
tort cause of action.

D. Because the Entity Foreclosed on the Property without a Valid
Ownership Interest, the Foreclosure Sale Constituted an Unfair and
Deceptive Act under Chapter 93A of the Massachusetts General
Laws
In addition to imposing a duty of good faith and reasonable

diligence on mortgagees during foreclosure, chapter 93A of the
Massachusetts General Laws provides civil relief and equitable remedies
165 PMP Assocs., Inc. v. Globe Newspaper Co., 321 N.E.2d 915, 917 (Mass.
1975).
166 See id.
167 Williams, 630 N.E.2d at 584 quoting Union Market Nat’l Bank of Watertown
v. Derderian, 62 N.E.2d 661, 663 (Mass. 1945).
168 Pemstein v. Stimpson, 630 N.E.2d 608, 611 (Mass. App. Ct. 1994).
169 See Bruce E. Falby & E. Randolph Tucker, Massachusetts Real Estate
Liens § 2.3.1 (MCLE 2007).
170 Pemstein, 630 N.E.2d at 611.
for consumers against unfair and deceptive business practices. Unfair

and deceptive practices are not defined in the statute. But rather, “[u]
nfairness under G.L. c. 93A is determined from all the circumstances.”171
Furthermore, to evaluate whether a practice is unfair, the court will look
to the equities between the parties.172 Additionally, “unfairness is to
be measured…by analyzing the effect of the conduct on the public.”173
Moreover, “[a] practice may be deceptive if it reasonably could be found
to have caused the plaintiff to act differently than he otherwise would
have acted.”174
In Kattar v. Demoulas et al., the plaintiff, Kevin Kattar (“Kattar”),
challenged the foreclosure of his golf course under chapter 93A of the
Massachusetts General Laws.175 Kattar admitted that he was in violation
of the mortgage terms for failure to pay taxes, but claimed that he had
arranged with the bank to sell a portion of the property to a third party
and pay the debt owed to the bank in full after that transaction.176 Kattar
argued that the lender foreclosed on the mortgage because he refused
to falsely testify in another matter in support of the defendant, Arthur
Demoulas (“Demoulas”).177 The lender and Demoulas argued that Kattar
violated the mortgage terms and, therefore, the lender had the authority
to foreclose on the property, regardless of any motive.178
The Supreme Judicial Court affirmed the lower court’s decision,
finding that the foreclosure was conducted in bad faith to the detriment
of the borrower.179 The court found that “[e]ven if the defendants had
the right to foreclose, as the judge found, it was clearly unfair within the
meaning of c. 93A, to use that right for a reason so obviously against
171 Duclersaint v. Fed. Nat’l Mortgage Ass’n., 696 N.E.2d 536, 540 (Mass. 1998).
172 See Swanson v. Bankers Life Co., 450 N.E.2d 577, 580 (Mass. 1983) (“[w]hat
a defendant knew or should have known may be relevant in determining
unfairness…a plaintiff’s conduct, his knowledge, and what he reasonably
should have known may be factors in determining whether an act or practice is
unfair.”).
173 Schubach v. Houshold Fin. Corp., 376 N.E.2d 140, 142 (Mass. 1978).
174 Duclersaint, 696 N.E.2d at 540.
175 Kattar v. Demoulas, 739 N.E.2d 246, 252 (Mass. 2000).
176 See id.
177 See id. at 253.
178 See id. at 256.
179 Id. at 257.
public policy.”180 The court did not find, however, that Kattar was
entitled to a reconveyance of property.181 Although the court held that
chapter 93A of the Massachusetts General Laws could provide equitable
relief, the circumstances did not require a reconveyance.182 The court
based this decision on the fact that the bank had the right to foreclose,
that the property was held for investment, and that Kattar was in the
process of negotiating a sale to a third party when the lender foreclosed.183
Accordingly, the Court imposed actual damages for the violation of
chapter 93A of the Massachusetts General Laws.184
Based on the reasoning in Kattar, foreclosing on a residential
mortgage without proper ownership interest may be an unfair and
deceptive act under chapter 93A of the Massachusetts General Laws
because it violates public policy and may cause the borrower to act
differently than she would otherwise. Validating foreclosures brought
by improper parties violates public policy for several reasons.185 If the
foreclosing entity can foreclose without proper authority, that foreclosure
nullifies the rights and remedies of the actual mortgage and note holder.186
Moreover, allowing entities to foreclose on property without valid
written assignments violates the Statute of Frauds, further undermining
the public policy of maintaining real property rights through accurate
recordkeeping.187 Furthermore, if mortgage ownership is unknown, it
undermines the ability to buy and sell real property further contributing
to depressed home values and a stagnant economy.188
180 Id.
181 Kattar v. Demoulas, 739 N.E.2d 246, 259 (Mass. 2000).
182 Id.
183 Id. at 260.
184 Id.
185 Additionally, the effect of the conduct on the public may be a factor in
determining whether an act is unfair, in addition to a separate public policy
argument. See Schubach v. Houshold Fin. Corp., 376 N.E. 2d 140, 142 (Mass.
1978).
186 See Brown v. General Trading Co., 310 Mass. 263, 266 (1941).
187 See Mass. Gen. Laws ch. 259, § 1 (2004); but see Mechanics Nat’l Bank of
Worcester v. Killeen, 384 N.E.2d 1231, 1237 (Mass. 1979) (finding that “not
every unlawful act is automatically an unfair (or deceptive) one under G.L. c.
93A”).
188 See U.S. Bank National Assoc. v. Ibanez, Nos. 08 MISC 384283, 08 MISC
386755, 2009 WL 3297551, *4 n.21 (Mass. Land Ct. Oct. 14, 2009) (“It is
surely a fair inference that this would make potential bidders even more
In addition to the public policy arguments, in some instances the

foreclosing entity may have acted deceptively. If a purported mortgagee
reasonably caused the mortgagor to act differently, the mortgagee’s action
may have been deceptive.189 In the example of residential mortgages,
the borrower may be attempting to negotiate with the wrong party, if
the borrower does not know the true owner of the mortgage. In that
instance, the borrower suffers a real injury by losing the opportunity to
negotiate with the appropriate party to avoid foreclosure.
In addition to showing an unfair and deceptive act, the
homeowner must show injury in order to recover under chapter 93A of
the Massachusetts General Laws.190 In Iannacchino v. Ford Motor Co.,
the Court examined the injury requirement under chapter 93A, section
nine of the Massachusetts General Laws.191 The Iannacchino plaintiffs
purchased cars from Ford that had defective door handles, which the
plaintiffs alleged did not stay latched during certain accidents.192 The
plaintiffs alleged that Ford knew about the defect and failed to recall the
door handles.193 Ford argued that none of the plaintiffs had suffered an
injury because they had not been involved in accidents.194 The court
found that the plaintiffs alleged a cognizable injury because they paid
for vehicles that met federal safety guidelines, and received ones that did
not.195
In contrast, the court in Levin v. Reliance Co-operative Bank found
that a borrower could not show an injury after a foreclosure.196 In Levin,
the bank promised the homeowners that it would give adequate notice
unwilling to bid (or sharply discount their bids) without the plaintiffs’ ability to
show that they were valid “holders of the mortgage” and thus were able to
convey title at the time of the sale.”).
189 See Duclersaint v. Fed. Nat’l Mortgage Ass’n., 696 N.E.2d 536, 540 (Mass.
1998).
190 See Iannacchino v. Ford Motor Co., 888 N.E.2d 879, 885 (Mass. 2008); see also
Mass. Gen. Laws ch. 93A § 9 (2006).
191 See Iannacchino, 888 N.E.2d at 885.
192 Id. at 883.
193 Id. at 882.
194 Id. at 885.
195 Id. at 886-87 (“Such an overpayment would represent an economic loss –
measurable by the cost to bring the vehicles into compliance – for which the
plaintiffs could seek redress under G. L. c. 93A, § 9.”).
196 Levin v. Reliance Coop. Bank, 16 N.E.2d 88, 89 (Mass. 1938).
before a foreclosure sale.197, 198 The bank, however, failed to notify the
homeowners before the sale.199 The Levin court agreed that the bank had
acted in bad faith to the detriment of the mortgagor, but found that the
homeowners had not shown that they suffered an injury because they
could not show that they would have been the highest bidder at the sale,
nor that the house was sold at a price lower than market value.200
Using reasoning similar to Ford in Iannacchino and the bank
in Levin, a foreclosing entity may argue that even if it acted unfairly
or deceptively when foreclosing without valid ownership, the borrower
did not suffer an injury because she defaulted on the mortgage and the
mortgage would have been foreclosed on by the proper mortgagee. To
support this argument, the lender must show that the proper mortgagee
would have foreclosed if faced with the same situation. The lender may
have difficulty proving that any other lender would have foreclosed on
the mortgagor’s property in the current environment where servicers are
regularly engaging in voluntary modification agreements and informal
forbearances.201 On February 18, 2009, President Obama unveiled his
Stability and Affordability for Homeowners Plan, a program designed
to help between three and four million at-risk homeowners through
loan modifications.202 The plan also provides refinancing options for
homeowners with a mortgage through Freddie Mac or Fannie Mae,
affecting an estimated fifty percent of all homes in the United States.203
This seventy-five billion dollar plan gives financial incentives to lenders
and servicers to encourage negotiations and avoid foreclosure.204 Although
197 Id.
198 Levin predates statutory notice requirements.
199 Levin, 16 N.E.2d at 89.
200 Id.
201 See generally Alan White, Deleveraging the American Homeowner: The Failure of
2008 Voluntary Mortgage Contract Modifications, 42 Conn. L. Rev. (forthcoming
2009).
202 Posting of Macon Phillips to The Briefing Room Blog, http://www.whitehouse.
gov/blog/09/02/18/Help-for-homeowners/ (Feb. 18, 2009, 9:36 EST).
203 John Leland, Unlucky or Unwise, Some Homeowners Left Out, N.Y. Times, Mar
4, 2009, at A20, available at http://www.nytimes.com/2009/03/05/
us/05mortgage.html?ref=business.
204 Id.; but see Peter S. Goodman, Lucrative Fees May Deter Efforts to Alter Loans,
N.Y. Times, July 29, 2009, at A1, available at http://www.nytimes.
com/2009/07/30/business/30services.html?pagewanted=1.
this plan does not guarantee or force modification, the existence of this
plan may help show that the proper mortgagee may not have foreclosed
on the mortgage.
Ultimately, if the borrower can show that the lender engaged in an
unfair and deceptive practice and that the borrower suffered an injury, the
borrower may be able to invalidate the foreclosure. Furthermore, under
the equitable powers of chapter 93A of the Massachusetts General Laws,
the homeowner can receive a reconveyance of the property.205 Despite
the Kattar court’s unwillingness to reconvey property after finding that
a foreclosure violated chapter 93A of the Massachusetts General Laws,
in the case of a personal residence, there is a stronger argument for a
court to order a reconveyance of the property to the borrower because
a residence is the most important asset that majority of people own and
in a large amount cases there is a broad inequity between the parties.
Therefore, claiming that the foreclosing entity violated chapter 93A of the
Massachusetts General Laws when foreclosing on the mortgage without
proper ownership of the mortgage may be a very attractive option for
homeowners facing eviction.
E. Because the Entity Foreclosed on the Property without a Valid

Ownership Interest, It May Be Liable for the Tort of Wrongful
Foreclosure
Courts have recognized that the tort of wrongful foreclosure can

arise from a mortgagee’s conduct in foreclosure. “[A]n action of tort
will lie where the foreclosure was based upon an actual default but was
conducted negligently or in bad faith to the detriment of the mortgagor
or [those holding junior encumbrances or liens].”206 Although an action
for wrongful foreclosure is similar to an action under chapter 93 A of the
Massachusetts General Laws, an action in tort may be easier to prove, as
one does not need to show an unfair or deceptive act.207 Like all torts,
wrongful foreclosure requires showing duty, breach, causation, and injury.
While breach, causation, and injury are dictated by individual facts,
205 See Mass. Gen. Laws ch. 93A, § 11 (2006).
206 Levin v. Reliance Coop. Bank, 16 N.E.2d 88, 89 (Mass. 1938).
207 See Mechanics Nat’l Bank of Worcester v. Killeen, 384 N.E.2d 1231, 1237
(Mass. 1979) (finding that unlawful conduct does not automatically qualify as
unfair and deceptive).
chapter 93A, sections two subsection (a) and nine of the Massachusetts
General Laws create a duty for all mortgagees to act in good faith and
with reasonable diligence when foreclosing on a borrower’s mortgage.208
Like an action under chapter 93A of the Massachusetts General Laws, the
borrower must show an injury. Also, like a claim under chapter 93A of
the Massachusetts General Laws, the borrower may be able to show that
the proper mortgagee would not have foreclosed and, thus, the foreclosure
was an injury.
IV. Conclusion
The party with an ownership interest – the party that holds both
the mortgage and the note – is the only party that has the authority to
foreclose on its own behalf.209 For this reason, it is essential for practitioners
to furrow through the documents provided by the foreclosing entity and
raise challenges where the entity did not follow the black letter law.
In efforts to speed the vast number of defaulting borrowers through
the foreclosure process, entities have engaged in haphazard assignments,
treating mortgages like stocks. Despite the rampant securitization of
mortgages over the last several years, the fact remains that mortgages are
interests in real property. Therefore, the Statute of Frauds dictates that
assignments of mortgage must be in writing and signed by an authorized
agent. The UCC sets forth the rules for indorsing a note. Foreclosing
entities must follow the basic principles of real property and contracts.
When a foreclosing entity is a REMIC trust, the trust must comply with
the REMIC rules promulgated by the IRS and comport with the chain of
title set forth in the trust’s own PSA.210
Luckily, there are several causes of action that practitioners may
rely on to challenge a foreclosing entity’s ownership interest, and some
courts have expressed favorable attitudes toward borrowers. As the
recession continues, Americans grow even more nostalgic for the times
when George Bailey ran the banks – when people were treated as ‘human
beings,’ not ’cattle,’ or, put another way, when mortgages were treated
208 See Williams v. Resolution GGF OY, 630 N.E.2d 581, 583-84 (Mass. 1994).
209 Additionally, the servicer, acting on behalf of the party that holds the mortgage
and note, has the authority to foreclose on the lender’s behalf. See In re Huggins,
357 B.R. 180, 183 (Bankr. D. Mass. 2006).
210 See In re Hayes, 393 B.R. 259, 268 (Bankr. D. Mass. 2008).
as real property interests, not securities. And while a mortgage may be

viewed only as an asset that serves to back a security to an investor, the
homeowner continues to view a mortgage as a gateway to homeownership.
For the homeowner facing foreclosure, this gateway should not be lightly
closed by any passerby.
Caveat Venditor: Predatory Purchasing in the Post-Boom 41
Residential Real Estate Market
CAVEAT VENDITOR:
PREDATORY PURCHASING IN THE POST-BOOM
RESIDENTIAL REAL ESTATE MARKET
Brian Parkinson*
I. Overview
Prior to the collapse of the residential real estate market,

many of the mortgage industry’s now-discredited lending practices
received the blessing of both Democratic and Republican presidential
administrations.1 This approval arose from the widespread belief that
increasing homeownership by any means necessary was the best way to
promote community economic development.2 However, in failing to
police the origination of residential mortgages, the government undercut
access to homeownership’s most important economic benefit, i.e., an
appreciating asset that provides (1) shelter from the risk of financial
catastrophe and (2) leverage to pay for personal and family advancement.3
Even if the promise of homeownership still exists, the economic
recession threatens to erode its benefits. Unemployment leads to the loss
of household income and, hence, difficulty making monthly mortgage
payments, which in turn increases the risks of foreclosure.4 In addition,
* J.D. Candidate, 2010, University of Baltimore School of Law; M.A. Political
Economy, Claremont Graduate University; B.A., St. John’s College. Mr.
Parkinson would like to thank Professor Michele Gilligan and Robert Strupp,
Esq. for their comments on early drafts of this article, as well as Professor
Audrey McFarlane for encouraging him to explore the predatory lending
literature in his research. Mr. Parkinson would also like to thank his wife, Ana,
for her unconditional support. Mr. Parkinson can be reached via email: brian.
parkinson@ubalt.edu.
1 Jo Becker, Sheryl Gay Stolberg & Stephen Labaton, White House Philosophy
Stoked Mortgage Bonfire, N.Y. Times, Dec. 20, 2008, at A1.
2 Id.
3 Id. (noting, for example, that homeownership could help a family obtain a
home equity loan to pay for a child’s college education).
4 Bottom Fishing, Economist, June 6, 2009, at 73 (“Job losses stand in the way
of housing recovery in America . . . Deprived of regular income, many
homeowners are falling behind with their mortgage payments. A record 9.1
percent of borrowers had missed at least one payment by the first quarter of this
year.”); see also Press Release, Sheila C. Bair, Federal Deposit Insurance
banks have tightened lending standards on both residential real estate

loans and home equity lines of credit, rendering it difficult to obtain
a mortgage.5 Thus, as long as the recession continues, the national
residential real estate market will likely be a buyer’s market where sellers
are increasingly pressured to sell their houses, either to avoid high monthly
mortgage payments or to access home equity.
This shift in favor of home buyers offers significant benefits to
the economy. A steep slide in house prices will make homeownership
a possibility for more Americans, rewarding those who made prudent
financial decisions during the housing boom.6 Yet, this drop in prices
could mask attempts by unscrupulous buyers to take advantage of the
burgeoning number of motivated sellers in ways that pose risks both
for individual homeowners and for the stability of residential real estate
markets. A real estate flipping strategy taught by a Baltimore-based school
for creative real estate investment, Investors United School of Real Estate
(“Investors United”), exemplifies the dangers that home sellers face in a
buyer’s market.
Investors United has developed a flagship strategy for becoming
wealthy in any real estate market.7 The school calls this strategy “Control
& Roll.” By engaging in Control & Roll real estate transactions, students
make substantial profits by negotiating sales with homeowners who are in
economic crisis. Although Investors United has taught Control & Roll
for many years, the recent dramatic increase in motivated home sellers has
given the students more opportunities to employ this strategy.
This article argues that real estate investors who practice Control
& Roll employ tactics that closely resemble those of predatory lenders
who engaged in “equity stripping” during the housing boom. Control
Corporation, FDIC Encourages Loss-Share Partners to Provide Forbearance to
Unemployed Borrowers (Sept. 11, 2009), available at http://www.fdic.gov/
news/news/press/2009/pr09167.html (“With more Americans suffering
through unemployment or cuts in their paychecks, we believe it is crucial to
offer a helping hand to avoid unnecessary and costly foreclosures.”).
5 Board of Governors of the Federal Reserve System, July 2009 Senior Loan
Officer Opinion Survey on Bank Lending Practices 4 (Aug. 17, 2009), available at
http://www.federalreserve.gov/boarddocs/snloansurvey/200908/fullreport.pdf.
6 See, e.g., Damien Cave, As the Foreclosed Move out, First-Time Buyers Are Moving
in, N.Y. Times, Apr. 3, 2009, at A1.
7 See, e.g., Investors United Online Courses, http://www.investorsunited.com/
courses/locating-wholesale-real-estate.php (last visited Nov. 24, 2009).
& Roll therefore poses threats both to individual homeowners and to

regional residential real estate markets that are analogous to those that
predatory lending created during the boom. The tactics are so similar that
it seems appropriate to classify Control & Roll as a strategy for “predatory
purchasing.”
Section II reviews the definition and dangers of predatory
lending. Section III explains Investors United’s strategy of controlling
and rolling (i.e., “flipping”) real estate. Section IV critiques Control &
Roll by applying lessons learned from the predatory lending literature.
Finally, Section V concludes by offering policy recommendations to curb
the worst excesses of this ascendant strategy for capturing home equity.
II. Predatory Activity during the Housing Boom

(Predatory Lending)
A. Defining Predatory Lending
Predatory lending was a hallmark of the housing boom.8 The risks

of default and foreclosure that it created lay at the root of the subsequent
collapse of the financial markets.9 Mortgage brokers who employed
these tactics convinced vulnerable homeowners to forfeit home equity
by assuming unaffordable mortgages with terms that only benefited the
lenders.10
In combating predatory lending, a key challenge for analysts was
to create an operational definition of predatory lending.11 A seminal
study by law professors Kathleen Engel and Patricia McCoy, both
nationally recognized experts in financial regulation, presented perhaps
8 See, e.g., Peter S. Goodman & Gretchen Morgenson, Saying Yes, WaMu Built
Empire on Shaky Loans, N.Y. Times, Dec. 27, 2008, at A1. Although this article
refers to predatory lending as having occurred in the past, there is substantial
evidence that such practices continue in modified forms. See, e.g., Lorraine
Mirabella, Mortgage Fraud Up in State, Nation, Balt. Sun, Mar. 17, 2009, at
A1.
9 Goodman & Morgenson, supra note 8.
10 See Elizabeth Renuart, An Overview of the Predatory Mortgage Lending Process,
15 Housing Pol’y Debate 467, 485–86 (2004), available at http://content.
knowledgeplex.org/kp2/cache/documents/58727.pdf.
11 Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and
Economics of Predatory Lending, 80 Tex. L. Rev. 1255, 1259–60 (2002).
the best framework for understanding these harmful practices.12 Instead

of creating a “statutory definition,” Engel and McCoy offered “five
categories of problems that are associated with predatory lending.”13
Predatory lending practices could be identified if a practice partook of
one or more of these categories, which included: (1) “loans structured to
result in seriously disproportionate net harm to borrowers;” (2) “[forms]
of lack of transparency in loans that are not actionable as fraud;” and (3)
“loans that require borrowers to waive meaningful redress.”14
1. “Loans Structured to Result in Seriously

Disproportionate Net Harm to Borrowers”
Loan terms that fell into this category of predatory lending

frequently involved “asset-based lending,” where a mortgage broker
structured a loan based on the amount of equity that the prospective
borrower had in her house and without regard to the borrower’s ability
to repay the loan.15 The goal was to capture the equity in the house by
tacking on fees when the borrower defaulted and needed to refinance
the loan.16 These loan agreements set the borrower up to fail, ultimately
depriving her of a home through foreclosure.17
2. “[Forms] of Lack of Transparency in Loans That Are Not

Actionable As Fraud”
Predatory loans that fell into this category contained “misleading

omissions” that were nonetheless legal.18 In particular, predatory brokers
12 Id. at 1260–61.
13 Id.
14 Id. The other two categories are (4) loans involving fraud or deceptive practices
(i.e., “violations of existing laws, such as state fraud statutes, state consumer-
protection laws, state fiduciary duties, and federal disclosure statutes such as the
Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act
(RESPA)”) and (5) “harmful rent seeking,” (i.e., “when subprime lenders use[d]
their market power to charge rates and fees that exceed[ed] the rates and fees
they would obtain in a competitive market . . . .”). Id. at 1266–67.
15 Id. at 1262.
16 Id.
17 See id.
18 Id. at 1268.
would “layer” the various fees and points that they would charge borrowers
in order to make it difficult for them to rationally choose the least expensive
loan package.19 Thus, the disclosures regarding the loan terms would be
virtually “incomprehensible.”20 In addition, the borrowers themselves
were “disconnected from the credit economy and therefore unlikely or
unable to engage in comparison shopping.”21
A recent lawsuit brought by the city of Baltimore against Wells
Fargo highlights the pervasiveness of this kind of predatory practice
during the boom.22 For example, a former subprime loan officer for
Wells Fargo submitted an affidavit in which she outlined how she and
coworkers would convince borrowers who could have qualified for prime
loans to instead choose ones that were subprime.23 Another former loan
officer explained how the bank specifically targeted prospective borrowers
who were African American for subprime loans.24
3. “Loans That Require Borrowers to Waive Meaningful

Redress”
These loan agreements would include non-negotiable, mandatory-

arbitration clauses, clauses that would prohibit “borrowers from joining
plaintiff class actions against lenders,” and clauses in which the borrower
agreed to pay the lender’s attorney’s fees.25 Such loan terms shielded
predatory lenders from accountability via private lawsuits.26
B. The Harm Caused by Predatory Lending to Individual

Homeowners
Predatory lending practices during the housing boom isolated the

borrower from impartial expert advice, as well as from better offers from
19 Id. at 1270.
20 Id.
21 Id. at 1281.
22 Trisha Bishop, Ex-Employees Claim Racism in Wells Fargo Subprime Loan Push¸
Balt. Sun, June 4, 2009, at 1A.
23 Id.
24 Id.
25 Engel & McCoy, supra note 11, at 1270.
26 Id.
other lenders.27 Predatory lenders used this isolation as leverage to “strip”

the equity from the home through repeated refinancing, often resulting
in foreclosure.28 These practices resulted in the loss of homeowner equity
and even foreclosure.29 Elizabeth Renuart, who worked as a staff attorney
for the National Consumer Law Center, identified several key moments
during the origination of a predatory loan where this isolation was
especially evident.30
1. The Loan Agreement
The first moment of isolation occurred at closing or settlement

where the borrower actually signed the paperwork for the loan.31
Borrowers in most states did not hire legal counsel to represent them.32
This increased the likelihood that they would overlook any unfavorable
terms that were hidden in the agreement.33
2. Post-loan Agreement Solicitations
After the loan agreement had been signed, predatory lenders did
not end their efforts but simply entered into a “new phase” in which the
broker would offer to refinance the loan.34 The new loan agreement would
discard some of the unfavorable terms that the same broker had inserted
in the original agreement.35 This refinancing triggered prepayment
penalties36 and, presumably, also required the homeowner to pay the
broker a new set of fees for the new transaction. In more egregious cases,
the broker structured the loan so that the borrower would be unable to
afford the monthly payments; the lender would simply wait until the
borrower defaulted in order to begin another cycle of refinancing.37
27 See Renuart, supra note 10, at 483–84.
28 Id. at 485.
29 Id.
30 Id. at 483–84.
31 Id. at 483.
32 Id.
33 Id.
34 Id.
35 Id. at 483–84.
36 Id. at 484.
37 Id. at 485–86.
C. Predatory Lending Created Systemic Risk within the Residential

Real Estate Market

It is virtually undisputed that unscrupulous lending practices,
both legal and illegal, contributed greatly to the housing bubble.38
Borrowers were practically bound to default, especially once loans with
adjustable interest rates reset to dramatically higher levels.39 Furthermore,
ownership of these loans was sold through mortgage-backed securities to
investors around the world, many of whom were unaware of the high
risks of these investments.40 The ensuing collapse of the financial markets
is well known.
Beyond the financial markets, predatory lending and defaulting
borrowers imposed significant costs on the community in which the
mortgaged properties were located. As Engel and McCoy noted,
“[unaffordable subprime loans] impose heavy external costs on society
because they can result in homelessness, dependence on the state, and
neighborhood decline due to abandoned properties.”41
III. The Potential for Predatory Activity during

the Recession (Predatory Purchasing)
Even in these times of economic recession and falling home

values, a sizable majority of homeowners still have equity in their homes.
In fact, as of the third quarter of 2009, only an estimated twenty-one
percent of single family homes in the United States had mortgages with
negative equity.42 Hence, predatory real estate schemes to capture home
equity can still harm distressed homeowners and destabilize regional real
estate markets.
Close examination of a popular real estate flipping strategy taught
by the Baltimore-based real estate investment school, Investors United,
illustrates the dangers of predatory real estate transactions that can occur
38 See Goodman & Morgenson, supra note 8.

39 Id.
40 See, e.g., Gretchen Morgenson, How the Thundering Herd Faltered and Fell, N.Y.
Times, Nov. 9, 2008, at BU1.
42 Zillow.com, Zillow MediaRoom—Real Estate Market Reports, http://zillow.
mediaroom.com/index.php?s=169 (last visited Dec. 11, 2009).
even during an economic downturn. As the recession continues, the ranks

of homeowners who are motivated to sell in order to meet other financial
obligations will swell. It is precisely these “motivated” homeowners that
Investors United students are trained to target.
A. Investors United
Investors United bills itself as the first brick-and-mortar school

in the country that is devoted to creative real estate investment.43 Since
opening its doors in 1998, the school has garnered extraordinary public
exposure. In 2004 and 2005, Investors United received commendations
from a number of prominent public officials including then-Governor
Robert Ehrlich, then-mayor Martin O’Malley, and two members of
the House of Delegates, Joseph C. Boteler, III and John W.E. Cluster,
Jr.44 The school has advertised regularly through virtually every major
media outlet in Baltimore, including the local affiliates of all three major
television broadcast networks.45 Perhaps most strikingly, the United States
Small Business Administration selected Investors United’s President, Ian
Parrish, as the 2005 Mid-Atlantic Young Entrepreneur of the Year.46
Investors United claims to have graduated thousands of
students.47 This claim has credibility given the anecdotal evidence
provided in newspaper articles.48 The students come from every walk
of life and include lawyers, engineers, successful small business owners,
43 Investors United, Contact Us: Ian Charles Parrish, http://www.investorsunited.
com/ianparrish.shtml (last visited Nov. 23, 2009) (providing the President of
Investors United’s biography).
44 About Investors United: Newsroom Archive, http://www.investorsunited.com/
news_archive1.shtml (last visited Nov. 23, 2009).
45 About Investors United, http://www.investorsunited.com/about.shtml (last
visited Oct. 17, 2009) (providing a list of advertising outlets at the bottom of
the page).
46 Staci Wolfson, Bounding up the Career Ladder, Balt. Messenger, July 14,
2005, available at http://www.explorebaltimorecounty.com/business/6014915/
bounding-up-career-ladder.
47 Education in Real Estate Investing, Investors United School of Real Estate,
http://www.investorsunited.com/about.shtml (last visited Dec. 11, 2009).
48 See, e.g., Jamie Smith-Hopkins, Bargain Hunters Buy up Houses, Slumping
Market Has Opened Door for Real Estate Investors, Balt. Sun, Sept. 9, 2007, at
1A (describing a visit to an Investors United free introductory seminar that was
attended by forty people).
stockbrokers, and members of every branch of the military.49 A recent

article in Maryland’s major law and business newspaper reported on the
success of one recent immigrant who had graduated from the school.50
Investors United appears to have ambitious plans for expansion,
as evidenced by the fact that the school has invested at least $180,000 to
develop an online version of their curriculum to reach students “nationally
or internationally.”51 This effort has included the creation of an online
research database for real estate investors nationwide.52 The instructors
at Investors United also appear to have serious and substantial expertise
in real estate investment. Their ranks include an instructor from the
Johns Hopkins University Graduate School of Real Estate and a former
prosecutor for the city of Baltimore, as well as several other attorneys and
certified public accountants.53
Investors United’s CEO, Charles Parrish, explains the school’s
flagship strategy, Control & Roll, in numerous podcasts. Mr. Parrish
offers high praise for Control & Roll: “[t]he absolute highest and best
form of leverage ever in the real estate business according to my opinion is
never owning the property, [but instead] controlling the property and . . .
[flipping it] before you even have to go to settlement.”54 Control & Roll
requires that students first find homeowners who are in economic crisis
and thus looking to sell their homes quickly.55 Students then use various
negotiation and contract engineering tactics to isolate the seller from
other prospective buyers.56 This isolation gives the students transactional
leverage so that they can compel the seller to lower the property’s sale
49 Kate Milani, Leaving the Office to Hit the Pavement, Balt. Bus. J., Mar. 26,
2004, available at http://www.bizjournals.com/baltimore/stories/2004/03/29/
smallb1.html.
50 Robbie Whelan, Immigrant From Bulgaria Finds His Niche in Baltimore Real
Estate, The Daily Record, Sept. 29, 2008, at 1A.
51 Id.
52 Real Fast Data, http://www.realfastdata.com (last visited Dec. 10, 2009).
53 Investors United, About Us: Award-Winning Faculty, http://www.
investorsunited.com/faculty.shtml (last visited Dec. 11, 2009).
54 Podcast: Charles Parrish, CEO, Investors United, 5 Contract Clauses Every
Real Estate Investor Should Know, http://www.investorsunited.com/rss/index.
xml.
55 See infra Part IV.B.
56 See infra Part IV.B–C.
price dramatically from that which was initially negotiated.57 In effect,

students profit by compelling the motivated seller to forego a sizable share
of the equity that may still exist in the property and then passing the
“savings” on to other investors who ultimately purchase the property.58
B. Control & Roll Step #1: Preliminary Negotiations
1. Find a Property Owner in Crisis
The Investors United student first finds a homeowner who is in

financial crisis.59 Ian Parrish, the President of Investors United, advises
Control & Roll practitioners to “go underground to find motivated
owners: tax sale, pre-foreclosures, absentee owners, direct mail, expired
listings, or the lis pendens list at the courthouse. Contact owners
potentially distressed by violations, non-paying tenants, vacancies,
or even condemnation notices.”60 Charles Parrish, also encourages
students to think of motivation more broadly, such as a seller’s pending
incarceration, job loss, divorce, or gambling debts to a loan shark.61 To
find homeowners with these hidden sources of motivation can require
the use of a technique called “farming,” whereby students get to know a
particular neighborhood so well that they become experts in the value of
the properties and, presumably, the circumstances of those who live in
them.62
A sense of contempt for the seller permeates and even inspires
Control & Roll. Charles Parrish frequently refers to the seller as the
student’s “negotiation nemesis,” e.g., “the most important part to your
negotiation nemesis is their needs. Find their needs and negotiate from
57 See infra Part IV.D.

58 See infra Part IV.E.
59 Podcast: Charles Parrish, CEO, Investors United, Negotiating for Fun and
Profit I (2007), http://www.investorsunited.com/radioshows/No65_2007-
11-05_Parrish.mp3.
60 Ian Parrish, Control & Roll: Wholesaling Real Estate for Profit (2003) (on file
with author).
61 Parrish, supra note 59.
62 Podcast: Charles Parrish, CEO, Investors United, 15 Questions You Should
Ask Your Real Estate Attorney (2007), http://www.investorsunited.com/
radioshows/No61_2007-10-01_Garcia.mp3.
that point downward to satisfy your primary decision.”63 Mr. Parrish

frames these tactics by comparing them to the classic Dale Carnegie
exhortation to create “win-win” solutions.64 In the Investors United’s
version, however, the student negotiates to win first and then, if there is
anything left over, the student may let the seller win as well.65 According
to Mr. Parrish, the seller’s “win” could simply be that the student is buying
the property in the first place or that the student is giving the seller some
money to buy a car so that he can leave town.66 In other words, the
student’s goal should be to give minimal compensation to the seller in
exchange for the property.
2. Determine the Amount of Equity That the Seller Has in

the Property
Once the student has located a seller who is in some sort of crisis
and has an understanding of the seller’s predicament, the next critical
step is for the student to determine how much equity the seller has in the
property, i.e., the difference between the property’s market price and the
amount that the seller owes on that property.67 As Charles Parrish states:
“[you] are negotiating for equity. If you don’t know the equity in the
property then you’re negotiating blindly ...this is why it is important ... to
know exactly what their mortgage balance is.”68
For example, suppose that the student knows that the seller
absolutely needs to make $10,000 on the sale. If the student then
determines that the seller’s mortgage balance is $100,000, the student
can guess that the seller might accept a price as low as $110,000 for the
property, assuming that she is sufficiently motivated to sell.

64 Podcast: Charles Parrish, CEO, Investors United, Negotiating for Fun and
Profit IV (2007), http://www.investorsunited.com/radioshows/No70_2007-
12-10_Parrish.mp3.
65 Id.
66 Id.
67 For example, if a property is likely to have a market value of $200,000 and the
owner owes only $150,000 for the mortgage and other outstanding liens on
that property, then the owner has around $50,000 of equity in that property.
68 Parrish, supra note 64 (emphasis added).
C. Control & Roll Step #2: Engineer the Purchase Contract
Once the student has negotiated the seller’s price down by as

much as possible, a purchase agreement is drafted and signed.69 In order
to profit from this transaction, it is critical that the student insert key
“magic” clauses into the purchase contract.70 These clauses enable the
student to isolate the seller from other prospective buyers. They also
give the student substantial leverage to convince the seller to lower the
sale price below that which was originally agreed upon in the purchase
contract.71
Contract clauses embody the heart and soul of Control & Roll.
“You don’t need to explain everything [to the seller] because . . . a well-
written contract of sale is a work of art. It’s a well-painted Rembrandt.”72
The ability to include “magic” clauses is absolutely critical to making a
profit through Control & Roll.73 As Charles Parrish states, “it breaks
my heart to sign a [standard] contract.”74 His main complaint about the
standard real estate contract seems to be that it protects all parties, not
just the student.75
To avoid having to sign a standard contract, Investors United
students are advised to tack their clauses onto the end of a standard
contract as an addendum.76 The terms of the addendum are written
such that they legally supersede those of the standard contract.77 Perhaps
tellingly, Charles Parrish states that he tries to avoid using addenda
because he does not want to combine the clauses on one “billboard:”
“I want my clauses right where I want my clauses [i.e., not to be on
one page].”78 In this way, a central tactic of Control & Roll relies on
maintaining the homeowner’s ignorance of her rights and duties under
the creatively engineered purchase contract.
Investors United’s podcasts discuss a wide variety of contract
69 See Id.
70 Id.
71 See infra Part IV.D.
73 Id.
75 See Id.
76 See Parrish, supra note 64. See also Parrish, supra note 54.
clauses.79 Overall, these clauses are intended to accomplish two goals.

First, they give the student leverage to pressure the seller to lower her
asking price during “second stage negotiations,” as discussed infra.
Second, the student sells (or “assigns”) the contract at an auction at a
discounted price, which arises as a result of the student compelling the
seller to relinquish her home equity.80
D. Control & Roll Step #3: After the Seller Has Signed the Purchase
Contract, Use “Second Stage” Negotiations to Drive the Price Down
Further
Normally, one would expect the signing of a purchase contract to

be the end of negotiations over a property’s price, but for the Investors
United student it is only the beginning. In fact, a crucial step in the
student’s capturing of windfall profits is engaging in “second stage”
negotiations to lower the sale price after the seller has signed the purchase
contract.
Second stage negotiations generally occur after the purchase
contract has been signed, at which point the student has eliminated the
threat of competition from other prospective buyers.81 These tactics
involve the use of contract clauses in the signed purchase agreement to
convince a now-isolated seller to lower her price closer to her absolute
bottom line:
Often times, you may have to . . . offer a higher price than
you’re willing to pay subject to a contingency . . . [in order
to] control the real estate so that you can move into second
stage negotiations [or] there’s somebody at the front door
willing to pay what the seller wants or you’re not willing
to [go into] competition with the new buyer. So sometimes
we will offer more than we expect to get knowing that we can
move into the very creative . . . second stage negotiations
[where] you can renegotiate after a contingency failure
(emphasis added).82
79 See Appendix, infra, for a discussion of additional clauses.

80 See infra Part IV.E for a discussion of the contract marketing clauses.
81 See Parrish, supra note 64.
82 Id.
A well-engineered contract will thus permit the student to block

competition. One proffered way to use a contingency clause in second
stage negotiations is as follows:
Mr. Jones, I’m sorry. I have done my due diligence and
based on the final inspection we discovered that there’s
asbestos on the furnace, there’s lead paint in the windows
. . . and that it looks like the roof is a little thin. Based on
that we just need to renegotiate the price.83
1. Clauses in the Purchase Contract That Give the

Student Leverage during Second Stage Negotiations
The “delay of settlement” clause stipulates that settlement will not

occur for up to 120 banking days, or about six months.84 In addition, the
student also seeks to acquire for himself the option to postpone settlement
for an additional thirty banking day study period.85 Delay of settlement
clauses are referred to as “controlling” clauses – presumably because if the
student is able to delay settlement, and hence delay payment to the seller,
he gains leverage over the seller, especially if the seller must sell quickly.86
To this end, Mr. Parrish also urges students never to permit a “time is of
the essence” clause in the contract since its absence gives the buyer more
leeway to delay settlement.87
Charles Parrish has expressed particular enthusiasm for
contingency clauses, which transform an agreement that otherwise would
be binding on the student into a mere option that the student may choose
to exercise at his discretion: “[a]ny contract that you have that has a period
of time in it [or] that has a contingency, even ever so soft, is in fact an
option.”88
Beyond delay and contingency clauses, Investors United students
83 Id.
84 See Parrish, supra note 60 (“Ideally, you should have enough time to market and
sell the property twice, so you are protected if your first buyer defaults. If you
are unable to delay closing for 120 banking days . . . you can settle for 60 to 90
banking days which is usually plenty of time.”).
86 Id.
88 Id.
are also taught to include in their purchase contracts liquidated damages

and exculpatory clauses. A liquidated damages clause ensures that if the
student breaches the purchase contract, the only money that the student
forfeits is the initial deposit that the investor gave the seller at the time
of contracting, which may be as little as $100.89 Also, to this end, an
exculpatory clause can relieve the student “from liability resulting from a
negligent or wrongful act.”90
E. Control & Roll Step #4: “Roll” the Purchase Contract for Profit
In order to make a profit in a Control & Roll transaction, the

student must “roll” the property by assigning (i.e., selling) the purchase
contract to someone who agrees to take the student’s place at the
settlement table and actually buy the property.91 Students succeed in
rolling property by following a corollary to the Control & Roll strategy,
“Buy Low, Sell Low and Do It Often.”92
For example, if a house is worth $200,000, but the owner has a
mortgage for only $175,000, then the owner has $25,000 of equity in
the house. If the owner signs a purchase contract in which he has agreed
to sell the house for $180,000, then the student has preserved access to
$20,000 of equity in that property. The student could then assign the
contract to an investor for $5,000. This means that the investor, after
agreeing to give the student that $5,000 portion of the home equity, still
stands to acquire a property for $15,000 below market value.
1. Clauses That Enable the Student to Flip the Property
A “right to market” clause is very important because it allows

the student to market the contract for profit.93 A “right of entry” clause
enables the student to show the property at his convenience.94 In addition,
students may even insert a right of possession clause which conveys all of
the benefits of ownership to the investor: “With possession, you can
89 Id.
90 Id. See Black’s Law Dictionary 608 (8th ed. 2005).
93 Id.
94 Id.
change the locks, paint, rent the property or even ‘have a circus on the
front lawn.’”95
Selling purchase contracts is not an easy endeavor because few
lenders will finance the purchase of a contract rather than the property
itself. Students therefore need to find buyers who are willing to pay cash
for the contracts. There are two major ways that students can find such
all-cash buyers. One is through an auction house, where the contract is
sold to the highest bidder. The other is through individually negotiated
deals with a particular investor who agrees to pay the student a finder’s fee
in exchange for the ability to purchase the property at the bargain rate.
Investors United has created forums to facilitate both of these methods
for selling purchase contracts.
Many, if not most, Control & Roll transactions seem to lead
to one place: Auction Brokers, LLC, an auction house that adjoins and
is operated in coordination with Investors United.96 Through Auction
Brokers, Investors United has created a clearing-house for Control &
Roll transactions, having completed over 644 of them in 2006 alone.97
Auction Brokers presents an attractive place for Investors United students
to conduct business and permits them to become Auction Associates
after six months of membership with the school.98 Students may also
partner with Auction Associates on deals as soon as they become enrolled
in Investors United.99
A second likely forum for assigning purchase contracts is the
Maryland Real Estate Exchange (the “Exchange”), a network of real
estate investors coordinated by Investors United.100 Every month, the
Exchange holds meetings and hosts guest speakers on a variety of real
estate investment issues.101 Considering that a key objective of the
Exchange is to facilitate deals between members, it is an ideal venue for
rolling purchase contracts from a novice student to a wealthy investor or
95 Id.
96 See Charles Parrish – Auction Brokers, LLC, http://www.auctionbrokers.net/
aboutus/president.asp (last visited Dec. 12, 2009).
98 Id.
99 See, e.g., Milani, supra note 49.
100 Maryland Real Estate Exchange, http://www.mdrealestateclub.com/ (last
visited on Mar. 6, 2009).
101 Id.
group of investors.102

IV. Control & Roll as Predatory Purchasing
A. A New Face for Predatory Real Estate Transactions
Investors United’s strategy of flipping real estate is predatory in

the same sense as the predatory lending tactics described by Engel and
McCoy.103 Just as predatory lending involves “loans structured to result
in seriously disproportionate net harm to borrowers,” Investors United
students are taught to structure the purchase contract to isolate the seller
in order to capture the seller’s home equity.104 Above all else, it is this
deliberate isolation that makes the strategy of Control & Roll predatory
towards unsuspecting and vulnerable homeowners. In addition, just
as predatory lending exhibits “[forms] of lack of transparency that are
not actionable as fraud,” Investors United students are taught either to
attach any misleading clauses as an addendum or to disperse these clauses
strategically throughout the contract to avoid detection.105 Finally, in the
same way that predatory lending involved loans that “require[d] borrowers
to waive meaningful redress,” Investors United teaches its students to
strategically insert liquidated damages and exculpatory clauses.106
B. Systemic Risks Posed by Predatory Purchasing
Just like predatory lending, predatory purchasing may pose

serious systemic risks to the economy. For example, assume there are two
families that are equally motivated to sell their homes in order to address
a financial emergency (i.e., both of the families’ absolute bottom line is
to get $30,000 apiece in cash from the sale of their houses). The only
difference between the properties is that the family that owns House A
has $30,000 of equity (the “low-equity” homeowner) and the family that
owns House B has $100,000 of equity (the “high-equity” homeowner).
If the prospective buyer knows only the value of the house (i.e.,
102 Id.
103 See supra Part II.
104 See supra Part III.D.
105 See supra Part III.C.
106 See supra Part III.D.
its “retail price”), then both of the properties’ market clearing prices will
approximate the retail price of $200,000. The high-equity seller will be
the one to make the sale because he has a greater ability to lower his
asking price and still get the money he needs. Importantly, however, the
high-equity seller will not need to go as low as his absolute bottom line.
If, however, the buyer knows each motivated homeowner’s
economic needs and home equity position, then the high-equity
homeowner will still be the one to sell, but at a much lower price. This is
because the high-equity homeowner can lower the price by more than the
low-equity homeowner and still get the $30,000 that he requires, which
the buyer now has greater leverage to convince him to do.
Hence, when the price of a real estate sale is negotiated according
to the amount of equity that the seller has in the property, prices are not
set by the competitive value of the property, but rather by the high-equity
homeowner’s bottom line. Equity thereby is driven from the market and
prices fall precipitously. The more that buyers conduct such equity-based
negotiations among motivated homeowners, the more steeply prices will
drop and the less home equity that distressed sellers will retain as they
transition out of homeownership.
In sum, as the market for foreclosed homes clears and as
homeowners experience mounting financial distress, the critical factors
that determine the retail price will become the prevalence of buyers and
the tactics that they employ in their purchases. Insofar as buyers practice
predatory purchasing techniques, such as those taught at Investors
United, motivated homeowners risk losing far more equity than they
need to in order to resolve their financial crises. Moreover, housing prices
will continue to fall more precipitously than necessary to reach efficient,
market-clearing prices.
The Potential Impact of Equity-Based Purchasing

on the Price of Residential Real Estate
House A: “Low Equity” House B: “High Equity”

Money Needed: $30,000 Money Needed: $30,000
Retail Price: $200,000 Retail Price: $200,000
Mortgage: $170,000 Mortgage: $100,000
Home Equity: $30,000 Home Equity: $100,000
Retail Clearing Price:

$200,000 (Price floor low-equity owner’s bottom line)
Equity-Based Clearing Price:

$130,000 (Price floor high-equity owner’s bottom line)
V. Policy Recommendations
The collapse of the real estate market has prompted many calls
for regulatory reform, especially with regard to those segments of the
financial market that have not met basic transparency requirements. As
the apparent viability of real estate investment strategies such as Control
& Roll demonstrates, however, the real market for residential real estate
is itself susceptible to manipulation that deprives individual homeowners
of substantial equity while undermining the integrity of the market itself.

In an economy that, for the foreseeable future, will cause the ranks of
motivated home sellers to swell, common sense protections should be put
in place to limit the impact of practices such as those taught by Investors
United.
A. Creating a Fiduciary Duty to the Seller
Absent blatant fraud, a homeowner’s only recourse if she finds

herself trapped in a predatory purchase contract may be to file a private
lawsuit. However, the accountability imposed by the threat of a lawsuit
is minimized by a variety of tactics including exculpatory and liquidated
damages clauses in the purchase agreement, an investor’s ability to conceal
assets through the use of corporations and limited liability companies,
and the lawsuit’s sheer expense.
Engel and McCoy confront similar issues in their recommendations
for regulating predatory lenders:
[T]he law does not afford adequate redress for predatory
lending. Contract law, disclosure, and consumer
counseling fail because they place the onus on highly
vulnerable victims to refrain from signing loans, rather
than on the lenders and brokers who perpetrate these
loans. Fraud laws and antidiscrimination laws are more
formidable, but their scope is too narrow and enforcement
is suboptimal.107
As an alternative to these traditional legal protections, Engel and McCoy

advocate for the imposition of a “duty of suitability” for subprime
mortgage lenders.108
Federal and state government agencies have applied the suitability
requirement widely to protect consumers in the securities and insurance
industries.109 Under this duty, brokers must take clients’ preferences and
individual risk thresholds into account when recommending securities.110
The suitability requirement protects consumers in situations where the
107 Engel & McCoy, supra note 11, at 1317–18.
108 Id.
109 Id. at 1321–23.
110 Id. at 1319.
other party in the transaction has greater knowledge of a complicated

product (e.g., life insurance and annuities).111 In the securities industry,
for example, a duty of suitability essentially requires that “a salesperson
‘should recommend only securities that are suitable to the needs of the
particular customer.’”112
Key to enforcement of the suitability requirement is a “multiple-
gatekeeper system” where the industry would incentivize self-regulation,
and both private individuals and the government could institute a cause
of action for breach of suitability.113 In terms of the subprime lending
industry, this right of private action would be rooted in prohibiting
lenders from making loans that they have determined a borrower could
not repay out of current income, “based on reasonable investigation and
the consideration of all material facts known to the brokers and lenders at
the inception of the loans.”114
Remedies for breach of suitability in subprime lending would
include damages or disgorgement, with interest and a right of redemption
if the property at issue had already been foreclosed.115 Breach of
suitability would also serve as an absolute defense to foreclosure and may
permit borrowers to rescind the loan.116 The court would have equitable
power “to reform loans to conform to the law and to strike down illegal
terms.”117 In addition to these protections, Engel and McCoy suggest
the possibility of awarding treble damages and attorney’s fees.118 A court
could also pierce the corporate veil under highly limited circumstances,
thereby reaching investors who had purchased the subprime loan from
the originator.119
Had these lending reforms been enacted, they could have had
a dramatic impact on predatory behavior, perhaps quelling some of the
fervor that drove the subprime mortgage market before its collapse.
While the predatory activities taught by Investors United have not yet
111 Id. at 1333–34.
112 Id. at 1318 (quoting Louis Loss & Joel Seligman, Fundamentals of
Securities Regulation 1010 (4th ed. 2001)).
113 Id. at 1337.
114 Id. at 1343.
115 Id. at 1352.
116 Id.
117 Id.
118 Id. at 1353.
119 Id. at 1353–54.
reached the level of predatory lending, they may become more pervasive.
In such a case, it would be prudent to consider similar reforms. Although
Investors United students present themselves as buyers or investors, they
are really just middlemen trying to sell a purchase contract for the seller’s
home at auction or through a similar forum. As such, they arguably
work as the sellers’ agents. Hence, a fiduciary duty to the seller would be
appropriate.
B. Creating the Right Kind of Transparency during the Executory

Period for the Purchase Contract
Beyond a fiduciary duty to the seller, policymakers should also

consider reforming the rules that govern transparency of the residential
real estate market.
1. Requiring the Recording of Residential Purchase

Contracts
The best way for regulators to track trends in investment strategies

is by reviewing real estate purchase contracts. The purchase contract is
the most critical document in a real estate transaction, outlining the tasks
that both buyer and seller must perform, the conditions under which
the sale can be postponed or terminated, and the method by which the
transaction will be financed.120 Recording requirements for these legal
instruments would help advocates and policymakers track these purchase
contracts and defend against the techniques that various investment
networks use.
2. Disclosure Requirements
The profitability of Control & Roll transactions depends in part

on the student having a more sophisticated understanding of contract law
than the seller. As such, standardization of purchase contracts, at least
with regard to suspect clauses such as liquidated damages or exculpatory
clauses, may help to reduce the attractiveness of their profligate use.
120 Alex M. Johnson, Jr., Understanding Modern Real Estate Transactions

42 (2d ed. 2007).
VI. Conclusion
There is now growing criticism of the old paradigm that

exalted homeownership as the primary means by which individuals
could build wealth and communities could anchor identity.121 Indeed,
homeownership is not for everyone, especially if one requires mobility
in order to find new economic opportunities. Many people who are
currently homeowners may therefore benefit from transitioning into the
rental market. Nonetheless, if a transition away from homeownership
occurs in the midst of this tough housing market, federal, state, and local
governments have a responsibility to ensure that the real estate transactions
run efficiently and that sellers are able to retain as much equity as possible
as they begin their lives anew. Close scrutiny of the latest strategies of real
estate speculators will help to maintain the efficiency of this transition
and therefore the integrity of the market for residential real estate.
121 Richard Florida, How the Crash Will Reshape America, The Atlantic, Mar. 6,
2009, at 44, available at http://www.theatlantic.com/doc/200903/meltdown-
geography.
Appendix
Additional Clauses Used by Investors United Students

in Purchase Contracts
None of the clauses that Investors United’s students use when

drafting a purchase contract are inherently wrong or even unethical,
with the possible exception of exculpatory clauses. Their unchecked use,
however, gives students substantial leverage without any countervailing
advantages for the homeowner. This fact is made clear in Charles Parrish’s
discussion of owner financing clauses.122
Mr. Parrish argues that the owner is the best bank in the world
because he usually will not demand points or ask for a credit report as
he “doesn’t have underwriters or appraisers breathing down [his] neck
making [him] jump through hoops.”123 In other words, no external checks
exist to ensure that the loan is provided in a responsible and prudent
manner. The owner financing provision opens the door for a variety of
other creative clauses:
• If the owner agrees to contribute financing, then the investor tries
to get the owner to give a principal only loan.124 If the owner asks
about interest, the investor just tells him “it’s in there” – advising
him to report whatever amount of interest that he wants to the
Internal Revenue Service since, as far as the investor is concerned,
it will all be principal.125
• Mr. Parrish also advises students to include a “first right of
refusal,” which means that the owner cannot sell the mortgage
without first giving the investor the opportunity to purchase the
mortgage.126 Thus, if someone offers the owner $80,000 for a
$100,000 mortgage, the owner cannot make that deal without
first giving the investor the option to buy the mortgage for the
discounted amount.
• A “discount clause” stating that “if this mortgage is paid off within
or before the maturity date, then [the investor] has a right to take
122 For a full discussion of the owner financing clauses, see Parrish, supra note 64.
124 For a full discussion of the owner financing clauses, see Parrish, supra note 64.
125 Id. See also Parrish, supra note 54.
X% discount on that mortgage.”127

• Another clause associated with owner financing is the “right of
substitution of collateral.”128 This clause enables the investor to
sell the property for which he obtained owner financing, but to
avoid having to pay off that mortgage by attaching or “walking”
the mortgage to another property of equal or greater value.129
• A final important clause to include with owner financing is an
exculpatory clause stating that the property stands as the sole
security for the debt.130
There is a disturbing circularity to these owner financing

provisions. They leave the seller with no recourse in the case of a buyer’s
default. If the buyer walks away from the deal, the seller, at best, ends up
in the same position in which he began because the only item of value
that secured this “loan” was the seller’s property itself.
127 Id.
128 Id.
129 Id.
130 Id.
A JUDICIAL RESPONSE TO THE SUBPRIME LENDING CRISIS
Robert A. Kubica*
I. Introduction
During 2008, the mortgage foreclosure rate in the United States

increased by 81%.1 The ripple effect from the subprime residential
mortgage crisis has been felt from the largest investment banks2 to the
streets of every city or town. The fallout, however, was not limited to
subprime residential mortgage providers and the individuals receiving
subprime mortgages to buy or refinance their homes. In the wake of this
crisis, the global economy has been reshaped leaving lawmakers and the
courts with the task of restoring the residential lending market. Action is
being taken at all levels and in some states – Massachusetts, for example –
the judicial system has intervened to protect borrowers from losing their
homes without a fair fight.
As foreclosure rates rise, the federal government and many states
have acted to reduce the potential consequences that could stem from
amplified foreclosure filings. Specifically, new legislation and recent
judicial decisions may ease the burden on individuals who entered into
subprime residential mortgages which were originated through predatory
*Mr. Kubica is an associate at Bingham McCutchen, LLP, where he practices in
the areas of commercial real estate and corporate law. The author gratefully
acknowledges the contributions of Jon Albano, Henry Healy and Richard
Toelke, and the Northeastern University Law Journal for the opportunity
afforded by the Shelter from the Storm Symposium. Thanks also to Hannah
Burrows for testing these theories in real time.
1 Les Christie, Foreclosures Up a Record 81% in 2008, CNNMoney, Jan. 15,
2009, http://money.cnn.com/2009/01/15/real_estate/millions_in_foreclosure/
index.htm at 2, (citing RealtyTrac, 2008 Year-End Foreclosure Market
Report (2009), http://www. realtytrac.com/ContentManagement/Realty
TracLibrary.aspx?channelid=8&ItemID=5814 (reporting that 861,664 families
lost their homes in 2008)).
2 On September 21, 2008, Goldman Sachs and Morgan Stanley requested to
change their entity structure from investment banks to bank holding companies
effectively ending the investment bank era on Wall Street for the time being.
See generally Andrew Ross Sokin & Vikas Bajaj, Shift for Goldman and Morgan
Marks the End of an Era, N.Y. Times, Sept. 22, 2008, at A1.
lending practices or were “doomed to foreclosure” because of the terms

of the loan documents.3 For example, the United States Congress passed
the Mortgage Forgiveness Debt Relief Act of 2007.4 The Act allows a
taxpayer to exclude from taxable income the income he or she is deemed
to have received from forgiveness of mortgage debt on a principal
residence resulting from a mortgage restructuring, as well as mortgage debt
forgiven in connection with a foreclosure.5 In the first quarter of 2009,
California had the third highest rate of foreclosures per total households.6
However the recently enacted California Foreclosure Prevention Act
gives borrowers additional time to work out loan modifications and
exempts mortgage loan servicers that have implemented a comprehensive
loan modification program.7 The California Foreclosure Prevention
Act requires an additional ninety day period beyond the period already
provided by California foreclosure law that will allow all parties to pursue
a loan modification.8
3 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 554 (Mass. 2008)
(noting that loans which contained certain characteristics were “‘doomed to
foreclosure’ unless the borrower could refinance the loan at or near the end of
the introductory rate period, and obtain in the process a new and low
introductory rate.” (omission without ellipsis in original) (quoting
Commonwealth v. Fremont Investment & Loan, 23 Mass. L. Rptr. 567, 571
(Mass. Super. Ct. 2008))).
4 I.R.C. § 108 (2006).
5 Id. § 2 (attempting to encourage lenders and borrowers to restructure loans
before foreclosure). The Mortgage Forgiveness Debt Relief Act also contains
the following restrictions: (a) the amount of forgiven debt is limited to up to $2
million or $1 million for a married person filing a separate return; (b) the tax
break only applied to mortgage debt discharged by a lender in 2007, 2008 and
2009; and (c) the loan must have been taken out to buy or build a primary
residence. Id.
6 Louis Aguilar, Michigan Foreclosure Rate is Nation’s Sixth Highest, The Detroit
News, Apr. 16, 2009, at 1. The states with the highest foreclosures per total
households in the first quarter of 2009 were the following: (1) Nevada; (2)
Arizona; (3) California; (4) Florida; (5) Illinois; and (6) Michigan. Press Release,
RealtyTrac, Foreclosure Activity Increases 9 Percent in First Quarter (Apr. 16,
2009), http://www.realtytrac.com/ContentManagement/PressRelease.aspx?
ItemID=6180.
7 Cal. Civil Code § 2923.5 (West 2009). The California Foreclosure Protection
Act went into effect on June 15, 2009.
8 Cal. Civil Code § 2923.52 (West 2009).
In Commonwealth v. Fremont Investment & Loan,9 the Massachusetts

Supreme Judicial Court barred a lender, Fremont Investment and Loan
(“Fremont”), from foreclosing on 2,500 subprime loans without first
obtaining a court order. In this December 2008 decision, the court
upheld a preliminary injunction against Fremont holding that certain
types of variable rate interest mortgage loans with “teaser” interest rates
are “presumptively” illegal under the Massachusetts Unfair and Deceptive
Practices Act.10 The preliminary injunction restricted Fremont’s ability
to foreclose on loans that contained a combination of the following four
characteristics:
• An adjustable rate mortgage with a “teaser” interest rate period
of three years or less;
• A teaser rate at least 3% lower than the fully indexed rate;11
• A debt-to-income ratio of more than 50% indexed over the
term of the loan; and
• A loan-to-value ratio of 100%, or a prepayment penalty that
is either “substantial”12 or extends beyond the introductory
rate period.13

As a practical matter, requiring a court order to foreclose on
certain types of loans should provide a lender with a powerful incentive to
modify or rewrite a loan before initiating foreclosure proceedings. While
it is too early to determine the implications of the Fremont decision,
the court has sent a clear message to subprime mortgage lenders. The
residential mortgage lending environment has changed and so too must
9 Fremont, 897 N.E.2d 548 (Mass. 2008).

10 Id. at 562. The court cited the Massachusetts Unfair and Deceptive Practices
Act. Mass. Gen. Laws ch. 93A (2006).
11 Id. at 553, n.11 (“The ‘fully indexed rate’ refers to the interest rate that represents
the London Interbank Offered Rate (LIBOR) rate at the time of the loan’s
inception plus the additional rate specified in the loan documents . . . .”).
12 Id. at 554. The judge defined a “substantial prepayment penalty” as a penalty
that was greater than the “conventional prepayment penalty” defined in section
2 of the Massachusetts Predatory Home Loan Practices Act. Mass. Gen. Laws
ch. 183C, § 2 (2008). For a further explanation of a “conventional prepayment
penalty,” see infra note 69 and accompanying text.
13 For an analysis of the four characteristics the Massachusetts Supreme Judicial
Court used in its analysis to restrict Fremont’s ability to foreclose, see infra notes
69-79 and accompanying text.
residential lending practices. Nevertheless, with 3.1 million foreclosure

filings in 2008, it remains clear that there is still a substantial amount of
work and policy change needed to clean up the mess left in the wake of
the subprime lending boom.14
The thesis of this paper is that the Fremont decision (and
subsequent settlement) provides a reasonable solution to the current rise
in foreclosures in Massachusetts. Part II reviews the many factors that
contributed to the subprime mortgage crisis and follows the Fremont
litigation over the three years leading up to the decision.15 Part III
analyzes the Fremont decision setting forth the Massachusetts Supreme
Judicial Court’s holding that certain residential mortgage loans are
“presumptively” illegal under the Massachusetts Unfair and Deceptive
Practices Act.16 Part IV evaluates the practical effects of the Fremont
decision and its potential to change the landscape of the future residential
mortgage model.17 Part V concludes that, although not ideal, judicial
proceedings, such as the Fremont decision, provide the best solution for
working through many of these subprime loans because the court can
determine the applicable “unfairness” standard to be applied.18
II. Subprime Lending: The Calm Before the Storm
A. A Brief Overview of Subprime Lending
The practice of subprime lending is not a concept that is new

to this decade. Subprime lending – providing high interest loans to
individuals who would be considered too risky for conventional loans19
14 Christie, supra note 1.
15 For a discussion on the factors that led to the Fremont decision, see infra notes
19-68 and accompanying text.
16 For an analysis of the Fremont decision and the factors that were addressed by
the court, see infra notes 69-104 and accompanying text.
17 For rationales on whether the Fremont decision will change the practice of
marketing and providing subprime residential mortgages, see infra notes 105-
126 and accompanying text.
18 For a summary of the potential role of the judicial system in the foreclosure
process, see infra Section V.
19 John Atlas and Peter Dreier, The Conservative Origins of the Sub-Prime Mortgage
Crisis, The American Prospect, Dec. 18, 2008, available at http://www.prospect.
org/cs/articles?article=the _conservative_origins_of_the_subprime_mortgage_
– can be traced back as far as lending in general. Nevertheless, the initial

groundwork of the current subprime lending market was laid in the early
1980s. In 1980, the federal government enacted new lending laws, which
allowed lenders to charge high interest rates and fees, as well as provide
loans with variable interest rates and balloon payments.20 Under the new
lending laws, lenders had a greater incentive to extend loans to borrowers
that would otherwise be denied credit. More importantly, these new laws
legalized the practice of charging high rates and fees to borrowers.21
Homeownership in the United States increased from 64% in 1994
to 69.2% in 2004.22 From 1997 to 2005, the value of residential real
property increased by 124%.23 Fueling this increase in property values
was the availability of credit to subprime mortgage borrowers. It was at
this time that a specialized type of mortgage lender emerged as a leading
player in the residential mortgage market. These lenders, which are not
regulated as traditional banks,24 marketed higher risk loan options, such
as adjustable rate mortgages, interest only mortgages, and “stated income”
loans.25 These lenders were able to produce a high volume of these types
of loans because the mortgages could be subsequently bundled and sold
crisis.
20 See generally Depository Institutions Deregulation and Monetary Control Act
of 1980, 12 U.S.C. §§3501-3509 (1982) (expired 1986); Alternative Mortgage
Transaction Parity Act of 1982, 12 U.S.C. § 3801-3805 (2006); 12 U.S.C.
§226 (2000).
21 Souphala Chomsisengphet & Anthony Pennington-Cross, The Evolution of the
Subprime Mortgage Market, 88 Fed. Res. Bank of St. Louis Rev., 31, 38
(2006), available at http://research.stlouisfed.org/publications/review/06/01/
ChomPennCross.pdf (explaining that the combination of the lending laws and
the Tax Reform Act allowed homeowners to access the value of their homes
through a cash-out refinancing when interest rates were low); see also generally
Richard Bitner, Confessions of a Subprime Lender: An Insider’s Tale of
Greed, Fraud, and Ignorance (2008).
22 Katalina M. Bianco, J.D., The Subprime Lending Crisis: Causes and Effects of the
Mortgage Meltdown, Fed. Banking L. Rep. (CCH), Mortgage Comp. Guide
and Bank Dig. (CCH), at 6 (2008), available at http://business.cch.com/
bankingfinance/focus/news/Subprime_WP_rev.pdf.
23 Id. (explaining the housing demand fueled the rise in housing prices and
consumer spending).
24 Id. at 7 (noting that traditional lenders held 60% of the mortgage market in the
mid-1970s as compared to today where such lenders hold about 10%).
25 Id. Stated income loans are also called “no doc” or “liar” loans.
as securities in the secondary market.26

The creation of a secondary market for subprime loans provided
subprime mortgage lenders with an incentive to generate subprime
loans in bulk, not loans that were necessarily going to be successful.27
Subprime mortgage lenders were rewarded for the number of mortgages
generated, not the number of “good” mortgages generated. This led to
lax lending standards.28 Profits were often based on the sheer volume of
mortgages the lender could originate. Some commentators have noted
that these mortgage lenders essentially became originating and servicing
businesses.29 In order to entice borrowers to accept a new loan or refinance
an existing loan, many mortgage lenders created products with special
rates, such as adjustable rate loans and interest only loans.30 An adjustable
rate mortgage loan is a loan that has an interest rate on the note that can
be adjusted periodically based on a published index.31 Adjustable rate
loans would contain low interest rates, many times as low as 4%, for
an introductory period (two to three years), after which the interest rate
increased significantly.
In 2007, global financial markets began to stumble. The housing
bubble was beginning to burst. There was a rapid decrease in home values,
which left many homeowners with mortgage debt higher than the value of
their homes.32 As housing prices began to fall, borrowers had less ability
26 See Posting of Abraham Park to Graziado Business Report Blog, Why Did
Subprime Loans Become Such a Big Deal, http://gbr.pepperdine.edu/blog/index.
php/2008/05/05/29 (May 5, 2008) (explaining that the government enabled
agencies like Ginnie Mae, Fannie Mae, and Freddie Mac to buy mortgages in
the secondary market which in turn provided the lenders with additional funds
to sell more loans).
27 It is important to note that there has been a secondary market for “conforming”
loans for fifty or more years. It is only in the past ten to fifteen years that a
secondary market has emerged for subprime loans.
28 Vikas Bajaj, Lax Lending Standards Led to IndyMac’s Downfall, N.Y. Times, July
29, 2008, at A1 (describing lending practices of IndyMac, a mortgage company
which was seized by the government on July 11, 2008). See also Park, supra
note 26.
29 Park, supra note 26.
30 An “interest only” loan is a loan in which the borrower is allowed to only pay
interest on the loan. The option to pay interest only generally lasts for a
specified period, usually 5 to 10 years.
31 John P. Wiedemer, Real Estate Finance 99-105 (8th ed. 2001)
32 Bianco, supra note 22 at 3.
to refinance their mortgage loans.33 This created a particular problem

with adjustable rate loans and interest only loans. As home values began
to drop, many borrowers were left with little chance to refinance because
the value of their home was no longer worth the value of the loan. Given
that many of these adjustable rate mortgages were originated between
2004 and 2006, the rate was primed to “adjust” at the impending end
of the introductory term.34 The Massachusetts Supreme Judicial Court
faced this particular situation in Fremont. While this article only provides
a very basic overview of the subprime lending environment over the past
several years, a broader outline of subprime lending and securitization is
better served by many of the scholarly publications that have originated
in the past years.35

B. The Rise of Fremont
Fremont, a California industrial bank, originated 14,578 loans

to Massachusetts’s residents between January 2004 and March 2007.36
Roughly 50% to 60% of Fremont’s loans were considered subprime based
on the fact that 64% of Fremont’s loans were adjustable rate mortgage
loans and 38.4% were “stated income” loans.37 After originating
the loans, Fremont subsequently sold these loans into the secondary
market.38 As explained above, the secondary market for these residential
mortgages acted to bundle and sell these mortgage loans as securities with
the mortgage debt as collateral.39 Lenders, such as Fremont, could sell
these securities on the secondary market. Under the terms of sale, the
originating lender’s responsibility for problems with the loans was usually
33 Id. at 10.
34 Id. at 15.
35 Id. at 1; see also Chomsisengphet & Pennington-Cross, supra note 21, at 31;
Park, supra note 26.
36 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 551 (Mass. 2008).
37 Id. at 552 nn.6-7. The judge made this estimate based on the inference that all
of the stated income loans were subprime adjustable rate mortgage loans, and a
majority of the remaining adjustable rate mortgage loans were also subprime.
A “stated income loan” is a loan in which the borrower provides no
documentation of his or her income. Id. at n. 7.
38 Id. at 552.
39 For a more detailed description of the mortgage backed security market, see
generally Bianco, supra note 22.
very limited, giving these lenders the ability to replenish their funds in
order to originate and fund more mortgage loans. Moreover, Fremont
generally would not deal with the borrowers directly.40 Instead, mortgage
brokers would find the borrowers, assist the borrowers in selecting one of
Fremont’s mortgage products and submit the borrower’s loan application
and credit report to Fremont for approval by Fremont’s underwriting
department.41
Mortgage lenders who sold and securitized these loans had a strong
financial incentive to originate as many of these mortgages as possible.
This was called the “originate-to-distribute” model.42 By shifting the
risk of default of the mortgages to the secondary market, ensuring that
each borrower qualified to pay the loan became less important.43 As long
as housing prices continued to increase – as they had done for the past
twenty years between 1986 and 200644 – this business was profitable
for all parties involved. Moreover, the fees and returns for “risk-based”
loan products were better than “conforming”45 loans, rewarding all
stakeholders, including the originators, brokers, servicers, mortgage
bankers, investment firms, and investors. It was a successful strategy so
long as housing prices did not drop.
In order to generate additional residential mortgage borrowers,
Fremont created subprime loan products structured to attract low-income
40 Fremont, 897 N.E.2d at 552.
41 Id.
42 See Thomas Simpson, Massachusetts Supreme Court Puts the Brakes on Subprime
Foreclosures by Invoking the State’s Unfair and Deceptive Practices Law, Clarks’
Secured Transactions Monthly, Dec. 2008, at 2 (explaining the process of
selling mortgage loans to a third party that would package the loans into
“mortgage-backed” securities and other forms of collateralized debt obligations).
43 Fremont General Corp., Annual Report (Form 10-K) 6 (2006), available
at http://www.sec.gov/Archives/edgar/data/38984/0000950129-06-002726-
index.idea.htm (supporting comment that Fremont did not share in the risk of
loan default for the loans which they originated and distributed to the secondary
mortgage market).
44 Christie, supra note 1.
45 Wiedemer, supra note 31, at 44, 78-86 (explaining that a “conforming loan”
is a mortgage loan that conforms to the GSE guidelines for purchase by
government sponsored enterprise (GSE)). The Federal Home Loan Mortgage
Corporation (“FHLMC”) known as “Freddie Mac” is a GSE created in 1970 to
expand the secondary market for mortgages in the United States. GSEs are
only allowed to buy conforming loans.
borrowers.46 Fremont would offer adjustable rate mortgages, which

featured a fixed interest rate for the first two or three years, then, after
the introductory period, the interest rate would adjust every six months
to a substantially higher variable rate for the remainder of the loan.47 In
order to determine whether a borrower qualified for one of these loans,
Fremont would require that the borrower have a debt-to-income ratio
of 50% or less. A borrower’s debt-to-income ratio is the percentage of
a consumer’s monthly gross income that goes toward paying debts.48
Fremont, however, would calculate a borrower’s debt-to-income ratio on
the introductory “teaser rate” mortgage payments, as opposed to the “fully
indexed” interest rate of the loan resulting from the adjustment that takes
place at the end of the “teaser rate” period.49 When the loan rate jumped
to the fully indexed interest rate, the borrower’s debt-to-income ratio also
increased.50 As a final feature, Fremont would offer subprime mortgages
with no money down.51 Instead, Fremont financed the full value of the
property resulting in a typical “loan-to-value ratio” of 100% at the time
the mortgage was created.52
Borrowers were not always completely innocent parties in these
situations. Some borrowers understood that they were taking significant
risks that could have only been successful in a market with rising
housing prices and the ability to refinance as needed.53 Also, as reported
46 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 552 (Mass. 2008).
47 Id. at 553, n.10 (explaining that the variable rate would be based on the six
month London Interbank Offered Rate (“LIBOR”), a market interest rate, plus
a fixed margin to reflect the risk of the subprime loan). These adjustable rate
mortgages were generally for a period of thirty years. Id. at 552, n.10.
48 For example, if a borrower earned $2,000 per month and a mortgage payment
of $500, taxes of $300 and insurance expenses of $200, the borrower’s debt-to-
income ratio is 50%.
49 Fremont, 897 N.E.2d at 552. Using the example from note 51, when the
interest rate increased after the second or third year, so to would the borrower’s
monthly mortgage payment which would negatively affect the borrower’s debt-
to-income ratio.
50 Id.
51 Id.
52 Id. at 553. The loan-to-value ratio is calculated as a percentage of the first
mortgage lien over the total appraised value of the property. For example, if a
borrower receives $200,000 to purchase a house worth $250,000, the loan-to-
value ratio is $200,000/$250,000 or 80%.
53 Eric S. Rosengren, President & CEO, Fed. Res. Bank of Boston, Subprime
by BasePoint Analytics,54 as much as 70% of early payment defaults

resulted from borrower’s fraudulently misrepresenting information on
their loan applications.55 Nevertheless, in some cases subprime lenders
appear to have chosen to ignore or perhaps overlook obvious borrower
misrepresentations. Predatory lending appears to have been prevalent in
the refinancing market.56 A cash-out refinancing is the process of taking
out a new mortgage loan on the property in an amount that exceeds the
existing balance on the current mortgage loan in order to refinance the
original mortgage loan and receive additional cash.57 As a result, cash-
out refinancing became a viable mechanism for homeowners to access
cash based on the value of their homes. Slightly over 50% of subprime
loan originations were related to cash-out refinancing.58 This allowed
borrowers to access the value of their homes on the day of the refinancing.
This cash could, in turn, be used to pay for home restorations, a car,
a college education, and so on. All of these factors contributed to the
stress and unpredictability of the residential lending market, a market
that proved to be very unstable.
Unfortunately, instead of home values continuing to increase, the
housing bubble burst. The economy began to take a turn for the worse
and unemployment rates started to grow. As these events occurred many
borrowers, who had borrowed with the assumptions that housing values
would only rise and refinancing would be available before the end of the
Mortgage Problems: Research, Opportunities, and Policy Considerations (Dec.
3, 2007) (available at http://www.bos.frb.org/news/speeches/rosengren
/2007/120307.htm).
54 BasePointAnalytics.com, Company Overview, http://www.basepointanalytics.
com /companyoverview.shtml (last visited Aug. 4, 2009) (noting Base Point
Analytics is a provider of predictive analytic fraud and risk management
solutions for the global banking industries).
55 Bianco, supra note 22 at 10 (George Mason University economics professor
Tyler Cowen said: “There has been plenty of talk about predatory lending, but
predatory borrowing may have been a bigger problem.”).
56 What is Predatory Lending, MortgageNewsDaily.com, http://www.mortgage
newsdaily.com/mortgage_fraud/Predatory_Lending.asp (last visited Oct. 18,
2009) (examples of predatory lending in the refinancing market include using
inflated and incorrect valuations for the refinancing, charging excessive fees,
and providing unnecessary products or insurance).
57 Chomsisengphet & Pennington-Cross, supra note 21, at 38.
58 Id. (noting that cash-out refinancing was a much more attractive, and available,
option when there were low and declining interest rates).
two to three year introductory rate period, began to default. When the
Massachusetts Attorney General brought suit against Fremont in 2007,
the value of the securities tied to subprime loans had dropped significantly
and default was imminent for many borrowers.59
C. Warnings of Clouds in the Distance
Warnings of a possible price decline in the housing market were

first provided in the late 1990s; however, many subprime lenders did
not adjust their practices based on these warnings. Although many of
these subprime loans were in compliance with banking-specific laws
and regulations, state and federal regulatory guidance warned lenders
operating in the subprime lending market that their practices could be
considered unfair and deceptive.60 In January 2001, interagency federal
guidance published jointly by the Office of the Comptroller of Currency,
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation (“FDIC”), and the Office of Thrift Supervision
stated, “Loans to borrowers who do not demonstrate the capacity to repay
the loan, as structured, from sources other than the collateral pledged are
generally considered unsafe and unsound.”61
59 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 553 n.13 (Mass
2008). At the time the suit was initiated, Fremont indicated that it intended to
foreclose on at least 20% of its loans.
60 Thomas Curry, Comm’r. of Banks, Office of Consumer Affairs and Banking
Regulation, Div. of Banks, Subprime Lending (Dec. 10, 1997), http://www.
mass.gov/?pageID=ocaterminal&L=4&L0=Home&L1=Business&L2=Bankin
g+Industry+Services&L3=Industry+Letters&sid=Eoca&b=terminalcontent&f
=dob_subprime&csid=Eoca [hereinafter Subprime Lending] (explaining that
banks’ policies could be considered unfair and deceptive practices under Mass.
Gen. Laws. ch. 93A even though the loans are in compliance with banking laws
and regulations); see also generally, Interagency Memorandum from Office of
the Comptroller of the Currency, et. al., Interagency Guidance on High LTV
Residential Real Estate Lending, (Oct. 8, 1999); Memorandum from Richard
M. Riccobono, Deputy Dir., Office of Thrift Supervision, Dep’t of the Treasury,
to C.E.O.’s (Feb. 2, 2001), http://files.ots.treas.gov/ 25137.pdf [hereinafter
Riccobono]; Interagency Memorandum from Office of the Comptroller of the
Currency, et. al., Credit Risk Management Guidance For Home Equity
Lending (May 16, 2005) [hereinafter Credit Risk Management].
61 Riccobono, supra note 60, at 11 (stating that subprime lending, when executed
correctly, is a sound and profitable business, even though it is generally
Additionally, government agencies warned that subprime lenders

were basing loans on the “foreclosure value of the collateral, rather than
on the determination that the borrower has the capacity to make the
scheduled payments under the terms of the loan . . . .”62 Through 2006,
Fremont continued to offer adjustable rate mortgages with “teaser”
introductory interest rate periods.63 In early 2007, the FDIC brought
charges against Fremont for “unsafe and unsound” banking practices
related to its subprime lending business.64 These charges led Fremont
to enter into a consent agreement with the FDIC on March 7, 2007,
effectively providing that Fremont would “cease and desist” from
originating adjustable rate mortgage products that the FDIC had deemed
to be unsafe and unsound.65
Fremont’s next assault came from the Massachusetts Attorney
General. On July 10, 2007, Fremont entered into a letter agreement
with the Massachusetts Attorney General providing that Fremont would
give the Attorney General ninety days’ notice before foreclosing on any
Massachusetts residential mortgage loan.66 If the Attorney General
objected to the foreclosure, Fremont would agree to negotiate in good
faith to resolve the objection. In the event the parties did not resolve the
objection, the Attorney General would be provided an additional fifteen
days to decide whether to seek an injunction.67
In theory, the letter agreement provided the opportunity for
Fremont and the Attorney General to work out any potential issues
before a foreclosure or judicial proceeding requesting an injunction. In
practice, however, the agreement did not operate as either party expected.
The Attorney General objected to every proposed foreclosure of a home
associated with higher risk levels).
62 Office of the Comptroller of Currency, Advisory Letter, Guidelines for National
Banks to Guard Against Predatory and Abusive Lending Practices, AL 2003-2
at 2 (Feb. 21, 2003).
63 Fremont, 897 N.E.2d at 551-52.
64 Id. at 553.
65 Id. (noting that in entering into the consent agreement, Fremont did not admit
to any wrongdoing).
66 Simpson, supra at note 42, at 2 (providing background to Fremont’s dealings
with the FDIC and the Massachusetts Attorney General).
67 Fremont, 897 N.E.2d at 553 (acknowledging that the negotiation period would
provide sufficient time for Fremont and the Attorney General to possibly
modify the loan).
that was owner-occupied as it was her understanding that Fremont would

negotiate loan modifications and refinancing proposals for most of the
loans.68 Concluding that the two sides would not be able to negotiate
loan modifications, the Massachusetts Attorney General filed a motion for
preliminary injunction prohibiting Fremont from foreclosing on owner-
occupied properties without first obtaining court approval.69 Fremont
subsequently terminated the letter agreement in December 2007,
explaining that the Massachusetts Attorney General had “no intention
of engaging in a meaningful review process on a borrower-by-borrower
basis.”70
III. A Unique Approach: Subprime Lending and Unfair or

Deceptive Business Practices Law
A. Loans That Are “Doomed for Foreclosure”
Chapter 93A of the Massachusetts General Laws declares that,

“unfair methods of competition and unfair or deceptive acts or practices
in the conduct of any trade or commerce” are unlawful.71 The Attorney
General may bring an action in the name of the Commonwealth against
any person that he or she has reason to believe is using a method, act, or
practice that is unfair or deceptive provided the proceedings are in the
public interest.72 In Fremont, Massachusetts Attorney General, Martha
Coakley, sued Fremont in the name of the Commonwealth, claiming that
Fremont had “violated G. L. c. 93A in originating and servicing certain
‘subprime’ mortgage loans.”73
68 Simpson, supra at note 42, at 2 (explaining that the Massachusetts Attorney
General expected Fremont would deliver proposals with “significant concessions
for borrowers, only foreclosing on loans where there was no other option).
69 Fremont, 897 N.E.2d at 553. The Massachusetts Attorney General filed a
motion for injunctive relief on October 4, 2007.
70 Id. (noting in the same letter that Fremont stated that it would continue to seek
to avoid foreclosure and provide the Attorney General with loan files prior to
foreclosure).
71 Mass. Gen. Laws ch. 93A, § 2 (2006) (allowing the attorney general to “make
rules and regulations interpreting the provisions of subsection 2(a) of [Chapter
93A]”).
72 Id. § 4.
73 Fremont, 897 N.E.2d at 550-51 (outlining the purpose of the Attorney General’s
The trial judge determined that the Commonwealth was likely

to prevail on the merits of its claim and, therefore, granted a preliminary
injunction restricting Fremont’s ability to foreclose on loans with features
that were “presumptively unfair.” In it’s finding, the trial court determined
that loans were “presumptively unfair” if they contained (1) an adjustable
rate mortgage with a “teaser” interest rate period of three years or less; (2)
a teaser rate at least 3% lower than the fully indexed rate; (3) a debt-to-
income ratio of more than 50% indexed over the term of the loan; and
(4) a loan-to-value ratio of 100%, or a prepayment penalty that is either
“substantial”74 or extends beyond the introductory rate period.75 Provided
that the loan contained the four characteristics, the trial court determined
that in originating these residential mortgage loans, the borrower would
almost certainly not be able to make the mortgage payments, therefore
leading to a default under the loan and subsequent foreclosure.76
The trial court judge went on to explain that loans that contained
this package of four characteristics were “doomed to foreclosure.” The
court noted:
Given the fluctuations in the housing market and
the inherent uncertainties as to how that market will
fluctuate over time . . . it is unfair for a lender to issue a
home mortgage loan secured by the borrower’s principal
dwelling that the lender reasonably expects will fall into
default once the introductory period ends unless the fair
market value of the home has increased at the close of
the introductory period. To issue a home mortgage loan
whose success relies on the hope that the fair market
value of the home will increase during the introductory
period is as unfair as issuing a home mortgage loan whose
Chapter 93A claim).
74 Id. at 554. Under section 2 of the Massachusetts Predatory Home Loan
Practices Act, a “conventional prepayment penalty” is “any prepayment penalty
or fee that may be collected or charged in a home loan, and that is authorized
by law other than this chapter, provided the home loan (1) does not have an
annual percentage rate that exceeds the conventional mortgage rate by more
than 2 percentage points; and (2) does not permit any prepayment fees or
penalties that exceed 2 per cent of the amount prepaid.” Mass. Gen. Laws ch.
183C, § 2 (2008).
75 Id.
76 Id. at 550.
success depends on the hope that the borrower’s income

will increase during that same period.77
Fremont appealed, and the Massachusetts Supreme Judicial Court

granted the Commonwealth’s application for direct appellate review.78
The Massachusetts Supreme Judicial Court affirmed the lower court
ruling granting the preliminary injunction against Fremont, essentially
requiring the lender to obtain a court order to foreclose on any owner-
occupied property.79
It is notable that the injunction does not relieve borrowers
of the obligation to repay their loans.80 The injunctive order requires
Fremont to take the following steps before foreclosing on any property in
Massachusetts:
• Provide advance notice to the Attorney General of its intent
to foreclose on any of its home mortgage loans;
• As to loans that possess each of the four characteristics of
unfair loans described above and that are secured by the
borrower’s principal dwelling, Fremont is to work with the
Attorney General to resolve any differences regarding the
foreclosure, presumably through a restructure or work-out of
the loan; and
77 Id. (omission in original) (quoting Commonwealth v. Fremont Inv. & Loan, 23
Mass. L. Rptr. 567, 574 (Mass. Super. Ct. 2008)) (finding a preliminary
injunction would serve the public interest when taking into account the balance
of harms in granting such injunction).
78 Id. at 551. The Fremont decision notes that the Supreme Judicial Court
solicited amicus briefs shortly after granting direct appellate review and received
amicus briefs filed on behalf of Fremont by New England Legal Foundation
and Associated Industries of Massachusetts; the American Securitization Forum
and the Securities Industry and Financial Markets Association; and the
American Financial Services Association, the Consumer Mortgage Coalition,
the Housing Policy Council of the Financial Services Roundtable, and the
Mortgage Bankers Association; and on behalf of the Commonwealth by
WilmerHale Legal Services Center of Harvard Law School; and National
Consumer Law Center, Center for Responsible Lending, AARP, National
Association of Consumer Advocates, and National Association of Consumer
Bankruptcy Attorneys. Id. at n.4.
79 Id. at 562 (noting that the case is remanded to the Massachusetts Superior
Court for further proceedings).
80 Simpson, supra note 42, at 3.
• If the loan cannot be worked out, Fremont is required to

obtain approval for foreclosure from the court.81
B. Fremont’s Side of the Story
The Massachusetts Supreme Judicial Court rejected Fremont’s

two main arguments in concluding that the Attorney General was likely
to prevail on the merits of her Chapter 93A claim. First, the court
determined that Fremont’s loans were not exempt from Chapter 93A
because the loans were permitted under federal and Massachusetts laws at
the time the loans were originated.82 Fremont argued that retroactively
applying a new standard for whether a loan was “fair” at the time of its
origination would represent “bad policy” because it could potentially
cause lenders to be more hesitant to lend to subprime borrowers. This, in
turn, would hurt Massachusetts’s consumers because fewer lenders would
be willing to extend credit.83
Fremont argued that “the loans were underwritten in the
expectation, reasonable at the time, that housing prices would improve
during the introductory loan term, and thus could be refinanced before
the higher payments [began].”84 The court pointed out that Fremont
had been warned by the Massachusetts Division of Consumer Affairs and
Business Regulation that these loans were unfair to the borrower in that
they were structured on the basis of unsupportable optimism about future
economic conditions.85 In hindsight, it seems obvious that housing prices
81 Fremont, 897 N.E.2d at 555 (explaining that in no way did the injunction
relieve borrowers of their obligation ultimately to prove that a particular loan
was unfair and foreclosure should not be permitted).
82 Id. at 555-56 (arguing that, while the terms of its subprime loans may seem
arguably “unfair,” they did not violate the applicable mortgage lending industry
standards at the time they were originated).
83 Id. (summarizing Fremont’s argument regarding retroactively applying a new
definition for “fairness”).
84 Id. at 558 (summarizing Fremont’s argument that borrowers would be able to
refinance before the loan payments increased after the two to three year grace
period).
85 Subprime Lending, supra note 60 (“[M]ost subprime loans have been originated
during robust economic conditions and have not been tested by a downturn in
the economy. Management must ensure that the institution has adequate
financial operations strength to address these concerns effectively.”). See also
could not continue to rise indefinitely. If housing prices did not continue
to increase, many borrowers would not be able to refinance before the two
to three year introductory period concluded.
Similarly, in an amicus brief, the New England Legal Foundation
argued that retroactively applying the concepts of unfairness in consumer
protection was inconsistent with the fundamental common law
principle that conduct must be judged by the standards in place when
it occurred and would impermissibly deprive businesses of certainty and
predictability with respect to the conduct proscribed by Chapter 93A.86
Nevertheless, the court further noted that Fremont’s consent agreement
with the FDIC on March 7, 2007, which ordered Fremont to “cease
and desist” from making loans with the four troublesome characteristics,
supported the Massachusetts Attorney General’s argument that Fremont
violated established concepts of unfairness.87 Under Chapter 93A case
law, in order to overturn the trial court’s decision, Fremont was required
to demonstrate that the regulatory scheme at the time affirmatively
permitted the practice that was alleged to be unfair.88 However, Fremont
did not meet this burden as it was unable to prove that loans combining
these four features were affirmatively permitted at the time of their
origination.89
Second, the Supreme Judicial Court determined that the trial judge
properly applied the provisions of the Massachusetts Predatory Home
Loan Practices Act90 to the Fremont loans even though the loans are not
Credit Risk Management, supra note 60 (noting management for financial
institutions should “actively assess a portfolio’s vulnerability to changes in
consumers’ ability to pay and the potential for declines in home values”).
86 See Brief for Fremont Investment & Loan as Amici Curiae Supporting
Defendant, Commonwealth of Massachusetts. v. Fremont Inv. & Loan, 897
N.E.2d 548 (Mass. 2008).
87 Fremont, 897 N.E.2d at 559 (“[T]he fact that the FDIC ordered Fremont to
cease and desist from the use of almost precisely the loan features that are
included in the judge’s list of presumptively unfair characteristics indicates that
the FDIC considered that under established mortgage lending standards, the
marketing of loans with these features constitute unsafe and unsound banking
practice . . . .”).
88 Id. at 559-60 (detailing Chapter 93A case law on the issue of whether a Chapter
93A claim is barred because Fremont’s actions were permitted by law as it
existed at the time of origination).
89 Id. at 561.
90 Mass. Gen. Laws ch. 183C (2008).
subject to the Act. The Massachusetts Predatory Home Loan Practices

Act prohibits a lender from making a “high-cost” home mortgage loan
unless the lender reasonably believes the borrower will be able to make
the scheduled payment.91 The applicable section of the Act states that the
borrower is presumed to be able to repay the loan so long as his or her
debt-to-income ratio, calculated based on the fully indexed rate associated
with the adjustable rate mortgage loan does not exceed 50%.92 The court
agreed that Fremont’s mortgage loans were not high-cost mortgage loans
as governed by the Massachusetts Predatory Home Loan Practices Act.93
Nevertheless, the court determined that the conduct the Massachusetts
Predatory Home Loan Practices Act prohibits is similar to the unfairness
the judge found in Fremont’s lending practices.94 Therefore, even though
the plain language of the statute did not apply, the principles of fairness
expressed in the statute supported the court’s finding that the loans were
presumptively unfair and therefore illegal under Chapter 93A.95
Interestingly, although the court found that there was no
evidence that Fremont encouraged borrowers to misstate their income
to qualify for a loan, in October 2007, Morgan Stanley Mortgage
Capital Holdings LLC accused Fremont of breaching agreements over
residential mortgages.96 In the suit, Morgan Stanley claimed that some
of the Fremont loans misrepresented the income, assets, or employment
of the borrower in the loan documents. Morgan Stanley went on to note
91 Id. § 4; see also Fremont, 897 N.E.2d at 559.
92 For a further explanation of a debt-to-income ratio, see supra note 49 and
accompanying text.
93 Fremont, 897 N.E.2d at 560 (noting that Fremont’s loans did not qualify as
“high cost home mortgage loan” as defined by G.L. c. 183C, § 2, because a
“high cost home mortgage loan” is a loan securing the borrower’s principal
dwelling and that either exceeds by more than eight percentage points (for a
first mortgage) the yield on Treasury securities with a comparable maturity
period, or features total points and fees the greater of 5% of the total loan or
$400).
94 Id. The judge determined that Fremont should have recognized at the outset
the borrower was not likely to be able to repay the loan.
95 Simpson, supra note 42, at 4 (discussing that the banking industry will take
strong exception to the reasoning used by the court).
96 Christie Smythe, Bankrupt Lender Fremont Settles with Mass., Calif., Law360,
Apr. 21, 2009, http://bankruptcy.law360.com/articles/97719 (detailing that
Morgan Stanley Mortgage Capital Holdings LLC sued Fremont for $10
million).
that many of the loans were made without satisfying the requisite credit
score standards.97 It remains a point of contention whether Fremont, and
many subprime lenders in general, misrepresented vital loan information
of subprime borrowers in originating many of these loans.

C. The Settlement: Commonwealth v. Fremont
The Massachusetts Attorney General and Fremont settled the

Chapter 93A suit on April 17, 2009. As part of the settlement, Fremont
agreed to pay as much as ten million dollars in damages.98 Additionally,
Fremont agreed to submit to a permanent injunction barring the lender
from foreclosing on Massachusetts properties without first notifying
the state Attorney General’s office.99 In order to initiate or advance a
foreclosure on a mortgage loan in Massachusetts that was deemed to be
“presumptively unfair” by the Supreme Judicial Court, Fremont must
give the Attorney General forty-five days advance written notice of
the proposed foreclosure.100 This notice must identify the reasons why
foreclosure is reasonable under the circumstances.101 In the fifteen days
following the notice, the Attorney General has the right to object to the
foreclosure. In the event the Attorney General objects, the Attorney
General and Fremont must reasonably attempt to resolve their differences
97 Id. (arguing that Fremont did not attempt to obtain the proper credit history
information for many borrowers).
98 Id. The article also notes that Fremont settled with the State of California
insurance commissioner over claims of improper insurance transactions.
Fremont agreed to pay the California insurance regulator $5 million in cash
and to provide $4.1 million from the proceeds of sales of certain company-
owned artwork. Id.
99 See id. Additionally, Fremont is barred from marketing or extending adjustable
rate mortgage products to subprime borrowers in an unsafe and unsound
manner.
100 Final Judgment by Consent, Commonwealth of Massachusetts v. Fremont Inv. &
Loan and Fremont General Corporation, Civil Action No. 07-4373-BLS1 (Mass.
Dist. Ct. June 9, 2009) (also providing that Fremont may not sell, transfer, or
assign any mortgage loan originated by Fremont that is secured by any
residential property in Massachusetts or the legal obligation to service any
mortgage loan originated by Fremont that is secured by any residential property
in Massachusetts, unless Fremont first gives the Attorney General notice of
such assignment at least five (5) days before such assignment). See id.
101 Id.
regarding the foreclosure. If the differences are not resolved, Fremont

may proceed with the foreclosure only with the prior approval of the
Massachusetts Superior Court.102
Nevertheless, the Fremont decision, arguably the first of its kind,
may be remembered more for the subsequent effect of the ruling as
opposed to the ruling itself. On May 7, 2009, the Commonwealth of
Massachusetts and Goldman Sachs & Company (“Goldman”)103 entered
into a settlement agreement regarding certain subprime mortgages
originated in Massachusetts.104 The Massachusetts Attorney General
commenced an investigation of Goldman’s practices of backing subprime
mortgage lenders. For instance, Security and Exchange Commission
filings show Fremont maintained a line of credit of at least $500 million
with Goldman. In connection with the settlement agreement, Goldman
agreed to resolve any potential claims stemming from the Massachusetts
Attorney General’s investigation by providing loan restructuring valued
at approximately fifty million dollars to Massachusetts subprime
borrowers.105 Additionally, Goldman agreed to pay the Commonwealth
of Massachusetts ten million dollars. Under the settlement agreement,
Goldman agreed to write-down principal to allow approximately 700
102 Id. (explaining it will be the Superior Court’s determination whether the loan
is (a) actually unfair and secured by the borrower’s primary residence that is
both inhabited and inhabitable, (b) whether Fremont has taken reasonable
steps to “work-out” the loan and avoid foreclosure, and (c) whether there is any
fair or reasonable alternative to foreclosure).
103 The settlement agreement covered Goldman Sachs and Company on behalf of
itself and its affiliates Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp.
104 Press Release, Office of the Attorney General of the Commonwealth of
Massachusetts (May 11, 2009) (on file with author). The agreement stated that
the Massachusetts Attorney General’s investigation concerned:
(1) Whether securitizers may have facilitated the origination of
“unfair loans” under Massachusetts law;
(2) Whether securitizers may failed to ascertain whether the
loans purchased from originators complied with the
originators’ stated underwriting guidelines;
(3) Whether securitizers may failed to take sufficient steps to
avoid placing problem loans in securitization pools; and
(4) Whether securitizers may have been aware of allegedly unfair
or problem loans.
105 Id.
Massachusetts homeowners to refinance or sell their homes.106

The Goldman settlement adds a new layer to this situation. While
the Massachusetts Supreme Judicial Court determined that Fremont
was at fault for originating loans that were “presumptively unfair,” the
Goldman settlement extends past the originators to the underwriters of
these subprime mortgage loans. Effectively, the Goldman settlement
has indicated that securitizers may be held accountable for purchasing
subprime loans from originators such as Fremont without ensuring that
the loans that they were buying for securitization were sound. Extending
accountability could very well lead to additional trouble for banks that
backed subprime mortgage lenders.
IV. The Practical Effects and Ramifications of Fremont
As a legal matter, the Fremont decision froze the foreclosure

proceedings for 2,500 Fremont originated loans in Massachusetts. As
a practical matter, Fremont could potentially reshape the foreclosure
process and open the door to additional unfair or deceptive business
practices actions brought against other subprime mortgage providers
in Massachusetts and in other states with similar legislation. In turn,
subprime mortgage lenders may have an added incentive to modify or
rewrite loans that contain the four troublesome characteristics because
of the potential that the loans will be frozen in the foreclosure process.107

A. The Issues Stemming from the Originate-to-Distribute Model
In order to create a solution for handling the fallout from the

subprime mortgage crisis, it is important to determine the relevant
parties. While Fremont originated nearly 15,000 mortgage loans in
Massachusetts between January 2004 and March 2007, the Chapter 93A
suit involved only 2,500 subprime loans that Fremont continued to own
106 Id. (noting that Goldman agreed to reduce principal of first mortgages by up to
25-35% and second mortgages by 50% or more).
107 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 552 (Mass. 2008)
(the “preliminary injunction granted . . . restricts, but does not remove,
Fremont’s ability to foreclose on loans with features that [are] ‘presumptively
unfair.’”).
or service.108 As of July 2007, Fremont owned and serviced approximately

290 loans in Massachusetts and serviced, but no longer owned, 2,200
other Massachusetts loans.109 Similar to other lenders that generated a
large number of subprime mortgage loans in the early-to-middle part of
the decade, Fremont no longer held or serviced many of the mortgages
that it originated.
A frequently suggested solution to an impending mortgage default
is to modify or rewrite the loan. In order to do this, the borrower must first
determine the current holder and servicer of the loan. The growth of the
subprime lending market was fueled by the availability of the secondary
market.110 Financial institutions and mortgage brokers, such as Fremont,
were less concerned with the financial condition of the borrower because
the risk of default was outsourced to the secondary market.111 After many
of these loans were generated and sold, the servicing of the mortgages were
assigned to servicing companies, which collected the mortgage payments.
Generally, the servicer is the primary contact for borrowers who are
behind in loan payments. Servicers, however, are bound by an agreement
with the trustee bank which sets forth the responsibilities of the servicer
and controls what a servicer can do to assist borrowers who are behind
in their payments. The agreements governing the servicer’s actions often
limit the servicer’s ability to modify existing loans in a mortgage pool.
Therefore, at the outset, it is often difficult for borrowers to find a party
with the authority to make substantive modifications to their mortgage.
Further, in Massachusetts, eight out of the ten largest subprime loan
originators are no longer lending.112 Fremont, for example, stopped
108 Id. (outlining the process for a subprime mortgage loan after Fremont originated
the loan).
109 Id. at 552 n.6.
110 Park, supra note 26 (noting that the size of the mortgage market became bigger
than the size of the mortgage originations).
111 Simpson, supra note 42, at 2.
112 Rosengren, supra note 53. Mr. Rosengren provides the following statistics:
lending in the subprime market when federal regulators contended that

the company did not adequately ensure that borrowers would be able
to repay their loans.113 Fremont then attempted to “rebrand” itself as a
commercial real estate lender in late 2007. Nevertheless, Fremont’s past
caught up with the company and it subsequently filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code on June 18, 2008.
Therefore, the initial hurdle to a loan work-out is to find the loan
holder and the servicer. Once an individual finds the servicer, the next
obstacle is determining whether the servicer has the authority to negotiate
substantive loan terms with the borrower. Even if the borrower finds the
servicer, there is the chance, as in the Fremont case, that the loan holder has
gone bankrupt and any legal work-out will be subject to the bankruptcy
proceedings. In sum, attempting to obtain a loan modification could
potentially bring about more questions than solutions. The answer to
these troubled loans may rest in court proceedings and new legislation.
B. Potential Outcomes for Court Ordered Work-Outs
Before the Fremont case settled, there was speculation as to the

potential damages should Fremont be unsuccessful in its defense.114
Mortgage Provider # of Loans % of Subprime Mortgages Status
Option One Mtg. Corp. 11,243 18.6% Operating
New Century Financial Corp. 5,951 9.9% Shutdown
Fremont Investment and Loan 5,550 9.2% Shutdown
Argent Mtg. Co. 3,599 6.0% Shutdown
Summit Mtg. Co. 3,067 5.1% Shutdown
Mortgage Lender Net 2,798 4.6% Shutdown
Long Beach Mtg. Co. 2,520 4.2% Shutdown
WMC Mtg. Corp. 2,316 3.8% Shutdown
Accredited Home Lenders 2,174 3.6% Shutdown
First Franklin Financial 1,896 3.1% Operating
Note: Mr. Rosengren used this list to show the top ten subprime lenders in
terms of number of purchase mortgage originations in Massachusetts
from 1993 to 2007.
113 Smythe, supra, note 96.

114 Simpson, supra note 42, at 4 (outlining the four possibilities discussed in this
section).
While the issue of damages proved to be irrelevant to Fremont itself, it

remains very relevant in terms of the other mortgage lenders who could
be susceptible to a Chapter 93A claim in Massachusetts. Chapter 93A
allows the Attorney General to “restore to any person that has suffered
any ascertainable loss . . . any moneys or property, real or personal, that
may have been acquired by means of such method, act, or practice.”115
The Attorney General may have a number of potential remedies for
subprime mortgage loans that the court has determined to be “unfair and
deceptive.”
1. Rescission of the Unfair Loan
Rescission is a remedy that eliminates the existing loan and restores

the parties to their positions prior to entering into the contract.116 Where
a subprime loan is involved, restoring the parties to their prior positions
would seem unlikely given that Fremont did not alleviate the borrowers’
requirement to pay the loan.117 Moreover, as a matter of policy, allowing
borrowers to rescind mortgage loans years after the loan has been in place
would provide even more uncertainty in the residential lending market.
There are current laws that allow for rescission in the context of residential
mortgage loans; however, these laws provide for only a three-day grace
period after a loan has been supplied in order to shield borrowers from
unscrupulous lenders.118
2. Refunding Principal, Interest and Fees Paid by Borrower
The legal concept of restitution governs circumstances where the

115 Mass. Gen. Laws ch. 93A, § 4 (2006) (noting that any person that the court
finds has employed a method, act, or practice which he knew or should have
known to be in violation of Chapter 93A could be required to pay the
Commonwealth a civil penalty).
116 Geoffrey Samuel, Law of Obligations and Legal Remedies 150 (2d ed.
2001).
117 Fremont, 897 N.E.2d at 555 (Mass. 2008).
118 Truth in Lending Act, 15 U.S.C. § 1641(a)-(b) (2006). Provided the borrower
provides notice to the lender within three days after the loan is put into effect,
the Truth in Lending Act requires a lender to give up, within twenty days, its
claim to the borrower’s property as collateral and to refund any fees paid by
borrower.
borrower receives a refund of principal, interest, and fees. Restitution

serves to compensate the borrower for a sum of money paid related to
the illegal act. Where a subprime mortgage loan is involved, if the court
were to award restitution damages, the borrower would be reimbursed
for the loan and all expenses related to the loan. The mortgage would be
terminated and the borrower would no longer own the home. Essentially
this would work to put the borrower and lender back in the place they
were before the loan was originated.
Applying a pure restitution concept to this situation could have
numerous drawbacks. First, similar to a foreclosure, it would take the
homeowner out of his or her home. Second, although the borrower
may be able to account for the amount paid to the mortgage broker
and servicer, the fees and expenses would have been spread among
many different companies. A court or similar authority would need
to determine exactly which party would be liable for the amount of
fees and expenses. Finally, it would be time inefficient and potentially
counterproductive to reimburse the borrower for all principal, interest,
and fees paid in connection with the loan. Alternatively, some states are
taking a “restitution-like” approach, which acts to provide an incentive
for loan restructuring.
The Texas Attorney General, Greg Abbott, initiated a $7.46
million restitution program against Countrywide Financial Corp.
(“Countrywide”) that would make money available for eligible
Countrywide residential mortgage customers in Texas.119 Similar to
Fremont, the State of Texas brought an action against Countrywide
alleging that it “encouraged homeowners to accept loans [that] they could
not afford, failed to fully disclose risky loan terms to borrowers, and wrote
loans for unqualified borrowers in an effort to increase market share.”120
Under the settlement agreement with Countrywide, eligible homeowners
could modify the terms of their loans to make monthly mortgage
payments more affordable. The potential modifications included interest
rate freezes, interest rate reductions, loan term extensions, conversions
119 exas Launches Restitution Program for Countrywide Customers, Consumer

Affairs, Feb. 13, 2009, http://www.consumeraffairs.com/news04/2009/02/
tx_countrywide_settlement.html [hereinafter Texas Restitution] (outlining
Texas program for loan work-outs).
120 Id. (detailing the terms of the State of Texas’ law suit against Countrywide).
from variable to fixed rate loans, and principal reductions.121 The financial
support for such modifications would be funded out of the restitution
program.
3. Freezing Foreclosure and Allowing the Homeowner to

Stay in the Home
Many large banks in the United States voluntarily instituted

foreclosure freezes in late 2008 and early 2009. In February 2009,
J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp.
committed to weeks-long foreclosure moratoriums in anticipation of the
government’s financial stability plan.122 Those moratoriums have started
to come to an end as J.P. Morgan Chase & Co., Wells Fargo & Co.,
and Fannie Mae and Freddie Mac have all noted that they are increasing
foreclosure activity as of April 15, 2009.123 These companies are now
determining which troubled borrowers are candidates for government
assistance and initiating the foreclosure process for those troubled
borrowers not eligible for assistance. Freezing foreclosures is a temporary
fix that does not solve the ultimate substantive problem: the loan will
either need to be worked out or rewritten. As evidenced by Fremont,
courts are also entering the picture by instituting foreclosure freezes;124
however, unless there is a comprehensive plan developed to aid borrowers
who are dodging the foreclosure process due to a current freeze, it is only
a matter of time before a solution is determined or the foreclosure begins.
4. Requiring Loan Work-outs with Substantial

Modifications to the Mortgage Terms
Perhaps the most compelling solution would be legislatively
121 Id. (stating that eligible borrowers would not be charged late fees, loan
modification fees, foreclosure fees, or pre-payment penalties).
122 Meena Thiruvengadam, Banks Agree to Foreclosure Moratorium, Wall St, J.,
Feb. 14, 2009, at A1.
123 Ruth Simon, Banks Ramp Up Foreclosure, Wall St. J., Apr. 16, 2009, at A1
(acknowledging that these companies have lifted internal moratoriums which
temporarily halted foreclosures).
124 Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548, 550-51 (Mass.
2008).
mandated or court ordered loan work-outs. As evidenced by the

program instituted in Texas,125 individual borrowers who qualify could
receive interest rate freezes, interest rate reductions, loan term extensions,
conversions from variable to fixed rate loans, and principal reductions.
The first issue that could arise with requiring individual loan work-outs is
the substantial amount of time that it would take to work out these loans
and the financial impact of these modified loans. A court cannot work
through each subprime mortgage loan individually. Instead, court ordered
initiatives similar to what has occurred in Texas and in the Fremont ruling
in Massachusetts could be an effective conduit to working out troubled
mortgage loans.
Legislatively mandated residential loan work-outs could be
problematic outside of the bankruptcy context based on historic case
law.126 In Louisville Joint Stock Land Bank v. Radford, the Court ruled
that “the Fifth Amendment commands that, however great the nation’s
need, private property shall not be thus taken even for a wholly public use
without just compensation.”127 Legislatively mandated loan work-outs
could be considered a “taking” of the lenders property. In Radford, the
Court determined that if taking property of individual lenders in order
to relieve the necessities of individual borrowers is in the public interest,
action must be taken through a proceeding by eminent domain.128
Work-outs mandated as the result of a judicial proceeding where
there has been a finding of lender wrongdoing may provide a remedy.
Due to the finding of lender wrongdoing the constitutional issues are
avoided. The Fremont settlement, if executed effectively, would allow
the Massachusetts Attorney General to review the foreclosure before the
homeowner is forced to leave his or her home. Provided the Attorney
General determines that the loan was “presumptively unfair,” the
Attorney General could force the lender to negotiate new terms with
the homeowner. In this scenario, the homeowner could keep his or her
home. The loan would continue, as modified, allowing the lender to
125 Texas Restitution, supra note 119.

126 See generally Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935);
cf. Wright v. Vinton Branch of Mountain Trust Bank of Roanoke, VA., et. al.,
300 U.S. 440 (1937).
127 Id. at 601-02.
128 Id. at 602 (explaining that through taxation, the burden of the relief being
provided in the public interest would be borne on the public).
realize some sort of value for a loan that seemed destined for foreclosure.
The lender would bear the financial impact in the form of writing down
principal or lowering interest rates. However, in the wake of the Goldman
settlement, it is apparent that money is being made available to finance
these concessions. In effect, the payments from Fremont and Goldman,
while arguably a minimal amount when measured against the current rise
in foreclosures, will begin to correct the problems of the housing market
that has been ravaged by the very mortgage products Fremont created.
It is important to note the negative aspects of this solution. First,
it will take a substantial amount of time to implement many of these loan
work-outs. In order to fairly determine which loans should be modified,
the Massachusetts Attorney General will need to review each individual
loan. Second, the money that the Attorney General has secured from
Fremont and Goldman will not be enough to help all affected borrowers.
Furthermore, the Attorney General’s office will have to determine the
parties who are entitled to the settlement amounts on a case-by-case basis.
Finally, foreclosures are not going to stop. Every loan that is in default will
not be worked out. Families will still lose their homes. The troubling aspect
of many of these loans is the fact that the variety of terms allows courts
wide latitude when determining whether the loan was “presumptively
unfair.” Courts will face situations in which the homeowner has a loan
containing three of the four troublesome characteristics and must decide
if this is sufficient for the loan to be deemed unfair. The Fremont ruling
and subsequent settlement does not provide a perfect solution.
V. The End of the Beginning
As the dust settles and the economy begins to stabilize, governments

– on the local, state, and federal level – and courts must take leading roles
working through the fallout from the boom in subprime lending in the
early part of the decade. Judicial proceedings, such as Fremont, provide
the best solution for working through many of these loans because the
court can determine the applicable “unfairness” standard to be applied.
As evidenced by the Goldman settlement, the Massachusetts Attorney
General is not finished investigating the practices of subprime lenders as
well as banks that supported subprime lenders.
The Fremont decision supplies the Attorney General with a

structure for reviewing home loans that are part of a foreclosure proceeding.
Although reviewing each mortgage loan on a case-by-case basis may be
costly and time intensive, this review may be the only fair method in
determining which individuals should qualify for a loan work-out and
which foreclosures should proceed as planned. Other methods, such as
foreclosure freezes and loan refunds, while beneficial for borrowers, would
not effectively pinpoint the individuals who were wronged by these unfair
and deceptive lending practices.
The landscape of the mortgage lending market is ever changing.
The fallout has affected many lives and businesses. The wave from the
housing bubble has come to an end and it is now time to repair the damage.
Ideally, the subprime lending crash will compel borrowers to refrain
from over-leveraging and lenders to take more care when determining
borrowers’ financial stability. The Fremont decision will provide individuals
working through these mortgage loans with a framework for determining
which loans qualify for restructuring. Additionally, it may also prompt
lenders and borrowers to begin restructuring negotiations before the
foreclosure process is implemented, reducing stress on the court and the
Massachusetts Attorney General’s Office. While time will only tell the
effect of the Fremont decision, the Commonwealth is arguably moving in
the right direction.
Of Victims, Villains and Fairy Godmothers: 97
Regnant Tales of Predatory Lending
OF VICTIMS, VILLAINS AND FAIRY GODMOTHERS:

REGNANT TALES OF PREDATORY LENDING
Carolyn Grose*
Abstract
The subprime mortgage crisis has exposed a system of predatory
and irresponsible lending on a scale we are only beginning to comprehend.
Those initially harmed in this crisis – the canaries in the coal mine – were
largely low-income people of color. As the crisis has unfolded, the potential
solutions available to such borrowers seem to privilege one kind of legal story
over all others: the story of the poor person as a victim in need of rescuing.
In order to win, therefore, lawyers who represent these clients often fall
back on a default narrative about their clients as unwitting or irresponsible
victims in high-stakes, crisis-driven stories that take place in the winner-
take-all context of litigation. These narratives begin at the moment of crisis
and not at any time before. In addition, these narratives do not take the
long view of this crisis or its effects. As such, these stories reinforce the status
quo by focusing attention on the victims’ bad choices and unscrupulous
lenders, cabining the particular crisis as an unfortunate confluence of events
rather than a part of the larger picture of a system that reinforces poverty.
But it does not have to be that way. Looking through the lens of
narrative theory, my paper constructs counter-stories about those who
find themselves faced with home foreclosure: stories that envision the
individual clients’ broader context and their agency within that context;
stories that imagine the clients’ ability to look and plan ahead. I perform
this analysis by suggesting that these situations present lawyers with the
opportunity to tell many different – competing, alternative, serial – but
equally “good” stories. The choices about which of those stories to tell
* Associate Professor of Law, William Mitchell College of Law. Thanks to the
following colleagues for reviewing and critiquing drafts of this piece: Jane
Aiken, Peggy Cooper Davis, Greg Duhl, Steve Ellman and the New York Law
School Clinical Legal Theory Workshop, Randy Hertz and the Clinical Law
Review Writing Workshop, Margaret Johnson, Ann Juergens, Minna Kotkin,
Robert MacCrate, Binny Miller, Sarah Paoletti, Spencer Rand, David Reiss,
and Denise Roy. Thanks also to my research assistants, Victoria Gardner and
Sarah Weiss, and to William Mitchell College of Law for its support – financial
and otherwise – of this endeavor.
and how to tell them are complex and nuanced and depend on multiple
variables that need to be weighed by both the lawyer and the client.
The piece concludes by suggesting that a lawyering theory that is open
to this multiplicity of stories – and does not privilege one among them –
contributes to constructing lawyering models that empower all kinds of client
narratives. This approach thus allows those who would otherwise assume
victim roles in adversarial narratives to contribute in constructing narratives
that do not necessarily involve them having to be rescued. Moreover, it helps
lawyers recognize their power and responsibility to construct these stories
collaboratively with their clients, and thus to move the law in a direction that
recognizes the clients as something other than victims.
I. Introduction
The mortgage crisis has made sad stories of dispossession

ubiquitous. Some of those faced with the loss of their homes have found
lawyers to help them negotiate imminent foreclosures. These cases turn
on a complex morass of laws dealing with lending practices. Perhaps as
important, these cases also depend on the stories the lawyers tell about
their clients. Some stories are more likely to get the attention of the
public and lenders and result in settlements that may favor the borrower
and save their homes. In the long run, these stories may fail to address
the larger story that the mortgage crisis has revealed, which, left untold,
promises to create even greater harm for the poor and dispossessed. This
article discusses the power of narrative in predatory lending cases and the
larger consequences of the stories lawyers tell in those cases.
Over the past two years, we have learned more than we thought
we would ever need to know about subprime lending,2 securitization,
ballooning interest rates, and bundling loans.3 Those of us who have
listened to National Public Radio and read the newspaper can speak
with some authority about the demise of mortgage-backed securities
and foreclosure rates.4 We also know the difference between a legitimate
subprime loan gone bad and a predatory loan.5 Thus, I begin with a
1 See Stacy-Marie Ismael & Saskia Scholtes, US Subprime Losses Set To Mount,
Fin. Times, Sept. 26, 2007, at 5; Larry Peterson, The Subprime/Securitization
Market Panic2: A Guide for the Perplexed, Dollars and Sense, Dec. 2007,
http://www.dollarsandsense.org/archives/2007/1207peterson.html.
2 See Anthony Camilleri, Know What You’re Signing Before Buying, News-
Messenger (Ohio), Aug. 20, 2008, at A5; Richard L. Cravatts, Ph.D., Victims
of the Subprime Meltdown: The Failure of Good Intentions, Am. Chron., Aug.
22, 2008, http://www.americanchronicle.com/articles/view/71619; Zachary
Goldfarb, The Housing Bubble, Still Burst, Wash. Post, Sept. 3, 2008, http://
voices.washingtonpost.com/washingtonpostinvestigations/2008/09/the_
housing_bubble_still_burst.html.
3 Curt Nickisch, NPR Morning Edition: Federal Reserve To Update Truth-In-
Lending Rules (NPR radio broadcast July 14, 2008) (available at http://www.
npr.org/templates/story/story.php?storyId=92510429). See also Truth in
Lending Act, 15 U.S.C. §§ 1601-1667f (1968) (amended 2009); Home
Ownership and Equity Protection Act of 1994, 15 U.S.C. § 1639 (1994).
4 Early in what we now call the “subprime mortgage crisis,” we distinguished
between predatory lending and “legitimate” subprime lending. As has become
clear over the past several years, even “legitimate” subprime lending can result
familiar story.
Helen realized there was no way she could pay her new mortgage
and manage her mounting credit card debt. She was afraid the bank was
going to come and take her house and her credit cards.6 She heard on the
radio and TV that there might be something she could do to get out of
the loan. She called a lawyer and told him the story about how she came
to refinance her house and that she needed help figuring out what to do
next.
For many years, law review articles have discussed the relationship
between narrative, story, and the law.7 I add my voice once again to this
in disastrous consequences certainly for borrowers, and even, eventually, for
lenders. As a result, what I refer to as a “predatory lending narrative” has
actually been subsumed into the broader subprime lending narrative. See
generally David Reiss, Subprime Standardization: How Rating Agencies Allow
Predatory Lending to Flourish in the Secondary Mortgage Market, 33 Fla. St. U.
L. Rev. 985 (2006); David Reiss & Baher Azmy, Modeling a Response to
Predatory Lending: The New Jersey Home Ownership Security Act of 2002, 35
Rutgers L.J. 645 (2004).
5 “Helen” (not her real name) was my client when I was a supervisor in a general
civil advocacy clinic from 2004 to 2005. While many details have been changed
to maintain “Helen’s” anonymity, her basic situation and its resolution was as I
describe it herein. The stories presented here should, therefore, be taken as true.
6 It is beyond the scope of this article to provide a comprehensive picture of the
various “movements” that describe these relationships. See generally Anthony
G. Amsterdam & Jerome Bruner, Minding the Law (Harvard University
Press 2000); ; Kathryn Abrams, Hearing the Call of Stories, 79 Cal. L. Rev. 971
(1991); Anthony V. Alfieri, Reconstructive Poverty Law Practice: Learning Lessons
of Client Narrative, 100 Yale L.J. 2107 (1991); Anthony G. Amsterdam, Telling
Stories and Stories About Them, 1 Clinical L. Rev. 9 (1994); Jane B. Baron &
Julia Epstein, Is Law Narrative?, 45 Buff. L. Rev. 141 (1997); Naomi R. Cahn,
Symposium, Critical Theories and Legal Ethics: Inconsistent Stories, 81 Geo. L.J.
2475 (1993); Richard Delgado, On Telling Stories in School: A Reply to Farber
and Sherry, 46 Vand. L. Rev. 665 (1993); William N. Eskridge, Jr., Gaylegal
Narratives, 46 Stan. L. Rev. 607 (1994); Daniel A. Farber & Suzanna Sherry,
Telling Stories Out of School: An Essay on Legal Narratives, 45 Stan. L. Rev. 807
(1993); Christopher P. Gilkerson, Poverty Law Narratives: The Critical Practice
and Theory of Receiving and Translating Client Stories, 43 Hastings L.J. 861
(1992); Carolyn Grose, A Field Trip to Benetton… and Beyond, 4 Clinical L.
Rev. 109 (1997) [hereinafter Grose, Benetton] (and sources cited therein);
Carolyn Grose, A Persistent Critique: Constructing Clients’ Stories, 12 Clinical
L. Rev. 329 (2006) [hereinafter Grose, A Persistent Critique]; Alex M. Johnson,
Jr., Defending the Use of Narrative and Giving Content to the Voice of Color:
discussion8 by examining how the lawyer acts as a client’s representative

to construct and tell a story.9 Specifically, I examine the process lawyers
go through and the choices they make in determining what stories to tell
and how to tell them.
The metaphor of the lawyer as constructor and teller of stories
implies the possibility of a multiplicity of stories. This concept, which I
call “narrative theory,”10 does not tell lawyers which stories to tell or how
to tell them. Instead, lawyers make those decisions on their own, as they
depend on a variety of factors, including the law, the facts, and the client’s
goals.
Nonetheless, the current legal response to the mortgage crisis,
as represented by the potential solutions available to people like Helen,
tends to privilege one kind of story over all others: the story of the
poor person as a victim in need of rescuing. Lawyers who represent the
indigent often fall back on this default narrative in the high-stakes, crisis-
driven, winner-take-all context of litigation. These narratives begin at
the moment of crisis, and not at any time before.11 In addition, these
Rejecting the Imposition of Process Theory in Legal Scholarship, 79 Iowa L. Rev.
803 (1994); Lawyers as Storytellers & Storytellers as Lawyers: An Interdisciplinary
Symposium Exploring the Use of Storytelling in the Practice of Law, 18 Vt. L. Rev.
567 (1994); Binny Miller, Telling Stories about Cases and Clients: The Ethics of
Narrative, 14 Geo. J. Legal Ethics 1 (2000); Kim Lane Scheppele, Foreword:
Telling Stories, 87 Mich. L. Rev. 2073 (1989); Lucie E. White, Goldberg v.
Kelly on the Paradox of Lawyering for the Poor, 56 Brook. L. Rev. 861 (1990).
7 See generally Carolyn Grose, Once Upon A Time in a Land Far Far Away, Lawyers
and Clients Telling Stories about Ethics (and everything else), 20 Hastings
Women’s L.J 163 (2009) [hereinafter Grose, Once Upon A Time]; Grose,
Benetton, supra note 6; Grose, A Persistent Critique, supra note 6.
8 Binny Miller and others have suggested that there is a difference between the
two terms “narrative” and “story” – that “story” involves the “raw material” of
life, while “narrative” is the construction of meaning from that raw material.
Miller, supra note 6, at 1. In this piece, I refer both to narrative and to the act
of storytelling.
9 See, e.g., Grose, Once Upon A Time, supra note 7, at 175 n.44 (and sources cited
therein).
10 This kind of narrative does not exist exclusively in the predatory lending realm,
but rather represents the dominant kind of “poor peoples” law. For example,
the landlord/tenant case begins with the eviction notice and ends with the
resolution of the action; the child welfare matter begins when the client’s
children are taken from her, or the report is filed with the social service agency,
and ends when the matter is resolved; the domestic violence case begins with
narratives do not take the long view of this crisis or its effects. As such,
these stories reinforce the status quo, by focusing attention on the victims’
bad choices and unscrupulous lenders, cabining the particular crisis as an
unfortunate confluence of events rather than as part of the larger picture
of a system that reinforces poverty.
But it does not have to be that way. Narrative theory allows us to
examine and deconstruct the stories that the media and lawyers are telling
about the mortgage crisis. These stories, when told without reflection
and intention, do little, if anything, to change the status quo. Narrative
theory further shows lawyers how to tell different stories in a way that
reveals the mortgage crisis as merely a symptom of a much larger systemic
problem, one that lawyers can play a part in remedying. In the face of
the biggest economic, housing, health care, and education crisis since the
Great Depression, when low and middle-income people are under threat
from all sides, anti-poverty lawyers must be more conscious than ever
about the kinds of solutions they employ. Their stories must be clear,
persuasive, and expressive of the context so that change can encompass
this larger picture, this larger story.
Looking through the lens of narrative theory, my paper constructs
counter-stories about those who find themselves faced with home
foreclosure: stories that envision the individual clients’ broader context
and their agency within that context; stories that imagine the clients’
ability to look and plan ahead. I perform this analysis by suggesting
that Helen’s situation presents lawyers with the opportunity to tell many
different – competing, alternative, serial – but equally “good” stories.
The choices about which of those stories to tell and how to tell them are
complex and nuanced; they depend on multiple variables that need to
be weighed by both the lawyer and the client. To illustrate this point,
I choose to tell two possible stories and examine the factors that go into
such choices. These choices and the stories they result in teach us about
the process of practicing law in a way that empowers clients and may
provide a legal framework that makes room for the multiplicity of their
stories.
In Part One, I tell Helen’s story against the backdrop of the
the client’s call to the police, or with her appearance in court and ends when the
restraining order is issued. See generally Lucie White, Subordination, Rhetorical
Survival Skills and Sunday Shoes: Notes on the Hearing of Mrs. G, 38 Buff. L.
Rev. 1 (1990).
predatory lending laws. In Part Two, I explore the metaphor of the lawyer
as storyteller by deconstructing12 both the elements of a story and the story
the lawyer tells about Helen. In Part Three, I offer alternative constructions
of Helen’s situation and suggest that lawyers can take an active role
to make law conform to our clients’ lives rather than vice-versa.
The piece concludes by suggesting that a lawyering theory that
is open to this multiplicity of stories – and does not privilege one over
the others – contributes to constructing lawyering models that empower
different client narratives. This approach allows those clients who would
otherwise assume victim roles in adversarial narratives to contribute to
constructing a narrative that does not involve them having to be “rescued.”
Moreover, it helps lawyers recognize their responsibility to construct these
stories collaboratively with their clients, and thus to move the law in a
direction that recognizes them as something other than victims.

II. The Predatory Lending Story
Many of the subprime mortgage cases are being handled pro

bono by lawyers who do not regularly practice in that area. Imagine
that Helen is directed to such a lawyer and her situation appears
to him to have many indicators of what could be a successful case:
Helen heard about the refinancing opportunity in a radio
commercial, which promised not only a lower interest rate than she was
currently paying but also $300 of free groceries and cash back to pay off
credit card debts. She contacted the company and a man came out to her
house and helped her fill out a mortgage application. She believed it was
for a fixed rate mortgage but at the time of the closing, it had changed to
an adjustable rate. Once the new rate kicked in, she was unable to make
her payments. She has missed two payments and is now afraid that the
bank is going to take her house. That is why she called the law office.

11 See generally, Jonathan Culler, On Deconstruction: Theory and
Criticism After Structuralism, (Cornell University Press 1982); Laurie C.
Kadoch, Seduced by Narrative: Persuasion in the Courtroom, 49 Drake L. Rev.
71 (2000) (discussing the contrast between a deconstructed story and the orally
reconstructed version).
A. The Law
There are three categories of lenders in the market: 13 those who

make prime loans, those who make subprime loans, and those who engage
in predatory lending.14 Lenders in the prime mortgage market provide
mortgages to low risk borrowers with strong credit histories.15 Legitimate
subprime lenders lend to borrowers who have experience shopping for
credit, however do not have good enough credit to borrow from prime
lenders.16 Predatory lenders, on the other hand, make mortgages available
to inexperienced borrowers who are closed off from the prime and
legitimate subprime loan markets due primarily to their poor credit rating.17
12 This is by no means an exhaustive discussion of predatory lending or the

subprime lending crisis. For such discussions, see generally Kurt Eggert, Held up
in Due Course: Predatory Lending, Securitization, and the Holder in Due Course
Doctrine, 35 Creighton L. Rev. 503 (2002); Kathleen Engel & Patricia
McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending,
80 Tex. L. Rev. 1255 (2002). This recitation of the law is meant merely to
provide a backdrop or framework for the story that follows. On its face,
predatory lending is a contract dispute. Based on that assumption, basic
contract defenses include fraud, mental incompetency, incapacity, infancy,
duress, undue influence, and mistake. See E. Allan Farnsworth, Contracts
§ 4 (2d ed. 1990). Beyond these basic contracts defenses, which are usually too
narrowly construed to permit relief, Congress passed the Home Ownership and
Equity Protection Act of 1994 (HOEPA) as an amendment to the Truth in
Lending Act statute. The Truth in Lending Act requires disclosures about the
terms and cost of consumer credit. The Truth in Lending Act was amended to
add the HOEPA. The HOEPA requires limitations on the amount of home
loans, as well as substantial disclosure requirements. The Act also bans equity
stripping and other abusive practices within mortgages. 15 U.S.C. § 1639.
13 Engel & McCoy, supra note 12, at 1258-59. See also Jason Howard, Developments
in Banking and Financial Law: 2003: Predatory Lending, 23 Ann. Rev. Banking
& Fin. L. 83, 88 (2004); Patricia Sturdevant & William J. Brennan, Jr., A
Catalogue of Predatory Lending Practices, 5 Consumer Advoc. 4, 36 (1999).
15 Id. Of course we have seen recently that even these “legitimate” lenders make
some very bad loans that are costing the country. See Aubrey Cohen, Subprime
Mortgage ‘Rip-off’ Has Legitimate Roots, Seattle Post Intelligencer, Nov. 20,
2008, at A1.
16 See Cathy Lesser Mansfield, The Road to Subprime ‘Hel’ Was Paved with Good
Congressional Intentions: Usury Deregulation and the Subprime Home Equity
Market, 51 S.C. L. Rev. 473, 475 (2000).
While at one time common discourse differentiated between legitimate

subprime and predatory loans, due to the mortgage crisis in the last couple
of years most, if not all, subprime loans have layers of “illegitimacy”
and have contributed to the meltdown of the mortgage system.18 For
purposes of this analysis, however, I focus specifically on predatory loans.
There is no exact definition of “predatory lending.”19 Rather,
predatory loans can be recognized by how they are structured and
whom they benefit and hurt.20 The most common and recognizable
predatory mortgages are: loans structured in ways that result in seriously
disproportionate net harm to borrowers; loans involving fraud or
deceptive practices; loans that lack transparency yet are not actionable as
fraud; loans that require borrowers to waive meaningful legal redress;21
loans with disproportionately high interest rates;22 loans given based on
assets rather than income and whose primary purpose is foreclosure;23
and loans with adjustable interest rates that are not easy to predict.24
Predatory lenders target low-income neighborhoods and potential
borrowers or homeowners based on race and social status.25 They use
marketing tools to deceive borrowers who are shut out from the legitimate
mortgage markets to trick them into signing on to loans they are unable
17 See Reiss, Subprime Standardization, supra note 4, at 998. See also Reiss &
Azmy, supra note 4, at 654-56.
18 Deborah Goldstein, Protecting Consumers from Predatory Lenders: Defining the
Problem and Moving Toward Workable Solutions, 35 Harv. C.R.-C.L. L. Rev.
225,227 (2000). See also HUD Predatory Lending, http://www.hud.gov/
offices/hsg/sfh/pred/predlend.cfm (last visited Jan. 2, 2009) (providing general
information regarding predatory lending); Patricia A. McCoy, A Behavioral
Analysis of Predatory Lending, 38 Akron L. Rev. 725 (2005); Sturdevant &
Brennan, Jr., supra note 13, at 36-41.
19 See Goldstein, supra note 18, at 226-28. See also Julia Patterson Forrester,
Mortgaging the American Dream: A Critical Evaluation of the Federal Government’s
Promotion of Home Equity Financing, 69 Tul. L. Rev. 373, 389-90 (1994).
21 Tania Davenport, An American Nightmare: Predatory Lending in the Subprime
Home Mortgage Industry, 36 Suffolk U. L. Rev. 531, 544 (2003).
22 See id. at 543.
23 See id. at 543-44.
24 See Engel & McCoy, supra note 12, at 1282. Often, these lenders use Home
Mortgage Disclosure Act (HMDA) data to identify areas of cities in which
there is minimal or no lending activity by prime lenders. Id. at 1281.
to repay.26 Further, even the most legitimate mortgage loan is difficult to

understand and predatory loans tend to be worse, written deliberately in
dense legalese over multiple pages and copies.27 Agents and brokers secure
the loans by telling the potential borrowers that if they do not sign the
papers now they will miss out on the deal.28 Because the class of borrowers
who are targeted by these lenders has little access to the legitimate prime
and subprime markets, it is hard for these potential borrowers to shop
around and judge for themselves whether the loan they are being offered
is a good one or not.29 That is precisely the point. Predatory lenders
purposely target low-income borrowers who do not know any better.30
Federal and state laws can and have been used to combat some
of these practices.31 The most common federal statutes used to combat
predatory lending are: the Truth in Lending Act (TILA),32 which requires
lenders to make certain disclosures to borrowers;33 the Real Estate
Settlement Procedures Act (RESPA),34 which covers all federally related
loans and requires that very particular procedures be followed at the
time of the closing of the loan, and which prohibits fee-splitting among
and kickbacks to agents and brokers;35 the Home Equity Protection Act
25 See id. at 1282.

26 Id.
27 Id.
28 Id. See also Davenport, supra note 21, at 557 n.54; McCoy, supra note 18, at
738-39.
29 Engel & McCoy, supra note 12, at 1257-58; See also Davenport, supra note 21,
at 533; McCoy, supra note 18, at 731-32.
30 15 U.S.C. § 1639; Real Estate Settlement Procedures Act of 1974 (RESPA), 12
U.S.C. §§ 2601–2617 (1974)(amended 1993).
31 15 U.S.C. §§ 1601-1667f.
32 Id. This is not particularly effective against predatory lenders because even if
the lenders technically make the required disclosures, they do so in convoluted
and opaque ways, capitalizing on the borrower’s lack of sophistication and
inability to understand the terms of the loan. See Davenport, supra note 21, at
546-48.
33 12 U.S.C. §§ 2601–2617.
34 Id. While there is no private right of action under RESPA for failing to make
mandatory disclosures, such claims may be able to be incorporated into state
consumer protection claims, which often cover RESPA violations. See, e.g.,
Jessica Fogel, State Consumer Protection Statutes: An Alternative Approach to
Solving the Problem of Predatory Mortgage Lending, 28 Seattle U. L. Rev. 435,
436-37 (2005).
(HOEPA), which sets limits on the amount of home loans, and requires
substantial disclosures by lenders;36 the Equal Credit Opportunity Act
(ECOA),37 which prohibits discrimination in lending on the basis of
race, public assistance, etc.;38 and the Fair Housing Act (FHA),39 which
prohibits discrimination by the lender and can be used to make reverse
redlining claims in these cases.40
35 15 U.S.C. § 1639. The HOEPA requires limitations on the amount of home

loans, as well as substantial disclosure requirements. The Act also bans equity
stripping and other abusive practices within mortgages. See id.
36 Equal Credit Opportunity Act, 15 U.S.C. § 1691 (1974).
37 Id. See also Federal Trade Commission, Facts for Consumers, http://www.ftc.
gov/bcp/edu/pubs/consumer/credit/cre15.shtm (last visited October 23, 2009)
(“When You Apply For Credit, Creditors May Not ... (1) Discourage you from
applying or reject your application because of your race, color, religion, natural
origin, sex, marital status, age, or because you receive public assistance. (2)
Consider your race, sex, or national origin, although you may be asked to
disclose this information if you want to. It helps federal agencies enforce anti-
discrimination laws. A creditor may consider your immigration status and
whether you have the right to stay in the country long enough to repay the
debt. (3) Impose different terms or conditions, like a higher interest rate or
higher fees, on a loan based on your race, color, religion, national origin, sex,
marital status, age, or because you receive public assistance. (4) Ask if you are
widowed or divorced. A creditor may only use the terms: married, unmarried,
or separated. (5) Ask about your marital status if you are applying for a separate,
unsecured account. A creditor may ask you to provide this information if you
live in “community property” states: Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and Wisconsin. A creditor in any
state may ask for this information if you apply for a joint account or one secured
by property. (6) Ask for information about your spouse, except: if your spouse
is applying with you; if your spouse will be allowed to use the account; if you
are relying on your spouse’s income or on alimony or child support income
from a former spouse; [or] if you reside in a community property state. (7) Ask
about your plans for having or raising children, but they can ask questions
about expenses related to your dependents. (8) Ask if you get alimony, child
support, or separate maintenance payments, unless they tell you first that you
do not have to provide this information if you aren’t relying on these payments
to get credit. A creditor may ask if you have to pay alimony, child support, or
separate maintenance payments.”).
38 Fair Housing Act, 42 U.S.C. §§ 3601-3619 (1968).
39 Id. (In years past, there was a real estate term called “redlining” which referred
to the practice of marking off areas that had a high minority population as a bad
area to make loans, and that made it difficult if not next to impossible to obtain
In addition, most states have consumer protection

statutes and other statutes that regulate the mortgage and lending
industry, many of which can be used in predatory lending
claims.41 And finally, common law claims of fraud and breach
of contract can sometimes be used in predatory lending claims.42
Because there is no set definition of “predatory lending”, these
federal and state remedies fall short of providing comprehensive relief
for the victims and deterrence for the perpetrators of “predatory lending”
practices.43 There appears to be a basic predatory lending story for the
financing, but since the passage of the FHA the term reverse redlining refers to
the practice of over-lending to minority populations). See also Hargraves v.
Capital City Mortg. Corp., 140 F. Supp. 2d 7 (2000) (group of African-
American borrowers alleged that mortgage company committed reverse
redlining which constituted a violation of the FHA when they intentionally
targeted plaintiffs for unfair and predatory loans on the basis of their race).
40 See, e.g., Arkansas Home Loan Protection Act, Ark. Code Ann. § 23-53-101
to -106 (2003); Mortgage Lender and Broker Act of 1996, D.C. Code § 26-
1112 (2001); District of Columbia Consumer Protection Procedures Act, D.C.
Code §§ 28-3901-3913 (2001); Fair Lending Act, Fla. Stat. §§ 494.0078-
.00797 (2002).
41 See, e.g., Snapka v. Bell Road Kia, No. 1-CA-CV 07-003, 2007 WL 5463517,
at *6 (Ariz. Ct. App. Div. 1, 2007); Melton v. Family First Mortg. Corp., 576
S.E.2d 365, 368 (N.C. Ct. App. 2003); Salley v. Option One Mortg. Corp. et
al., 925 A.2d 115, 119 (Pa. 2007).
42 See Fogel, supra note 34, at 435-36. Recognizing the shortcomings in these
statutes, various scholars and practitioners have proposed either alternative
legislation, or alternative readings of current legislation to better address the
problem of predatory lending. For example, Frank Lopez suggests that the Fair
Housing Act might be the best bet under current law. Frank Lopez, Using the
Fair Housing Act to Combat Predatory Lending, 6 Geo. J. on Poverty L. &
Pol’y 73, 73-108 (1999). Pat McCoy and Kathleen Engel propose a new cause
of action for breach of duty of suitability (suitability for brokers or lenders to
make loan to a person based on the data and expertise they have) to compensate
victims of predatory lending. Engel & McCoy, supra note 12, at 1339. Cecil
Hunt suggests various remedies but lands on economic hate crime as a remedy
for punishing predatory lenders that target racial minorities. Cecil J. Hunt, In
the Racial Crosshairs Reconsidering Racially Targeted Predatory Lending Under A
New Theory of Economic Hate Crime, 35 U. Tol. L. Rev. 211, 211-315 (2003).
See also Davenport, supra note 21, at 9; Engel and McCoy, supra note 12, at 8.
And of course, Congress has proposed new legislation, in light of the subprime
mortgage crisis, to prevent such loans in the future. Mortgage Reform and
Anti-Predatory Lending Act, H.R. 3915, 110th Cong. (2007); Predatory
borrower. It goes something like this: unscrupulous, devious, shady lenders

target vulnerable members of the population who have no access to other
lenders and trick them into signing on to loans they cannot afford so the
lenders can steal their homes. Also, the borrowers themselves, i.e. the victims,
are often complicit in some way, or at the very least, looking for that deal
that seems too good to be true, even in the face of its obvious impossibility.
B. The Facts
Against this backdrop of the law, the lawyer will meet with Helen and
briefly counsel her on the laws that might be able to help her. They lawyer
then will gather more facts to flesh out her particular predatory lending story.
Suppose Helen’s lawyer learns the following: Helen is a black
woman suffering from diabetes and high blood pressure, dependent
on social security and Medicare. Her husband, Samuel, is a black man
struggling with alcoholism. They have been married for about thirty
years. They are both in their early fifties. Helen stopped going to school
when she was thirteen, reads at an eighth grade level, and certainly does
not understand the technical language found in mortgage documents.
Samuel completed high school but is functionally illiterate and never
read any of the mortgage contracts. Helen runs the household, including
managing the finances, however Samuel often squanders their funds on
alcohol. Samuel has been an alcoholic throughout their entire marriage.
Helen and Samuel owned their house, which was in a very poor,
predominantly African-American neighborhood. One of the things
Helen really liked about the neighborhood was the local community
radio station, which she listened to all the time. Several months before
contacting the law office, she heard a particular advertisement. A company
was offering deals for refinancing houses in her neighborhood.
After hearing this commercial multiple times, Helen became intrigued by
the possibility. Her primary interest in refinancing was to pay off various
Mortgage Lending Practices Reduction Act, H.R. 2061, 110th Cong.

(introduced April 26, 2007); H.R. Con. Res. 391, 110th Cong. (introduced
July 17, 2008) (recognizing the disparities that are associated with predatory
lending abuses in minority communities and expressing the sense of the
Congress that as new abuses continue to emerge, such laws should ensure that
all those responsible for representing and protecting families have the authority
to act to address these new problems).
outstanding credit card bills and lines of credit. She was also lured by
the offer in the ad that she would receive $300 in free groceries from the
mortgage lender.
Helen called the company to discuss the possibility of refinancing
her home. She told the broker she spoke to, Mr. Robinson, that she was
interested in applying for a fixed-rate mortgage. He came to Helen and
Samuel’s home and interviewed them, using the answers they gave to fill
out the loan application on the spot. The Good Faith Estimate that he
gave them at the time of the application confirmed that they had applied
for a loan at the fixed rate of 6.25 percent.
Samuel was visibly intoxicated during the interview, as well
as during all subsequent interactions with the broker. Helen told the
lawyer that he was routinely drinking seven or eight forty ounce bottles
of malt liquor (“forties”) every day and that the day of the application
was no different. In the course of filling out the loan application, Helen
specifically informed Mr. Robinson that Samuel would likely lose his job
soon, which in fact he did.
Several weeks after they had filled out the application, Mr.
Robinson called Helen and told her over the phone that because of
her poor credit rating, she was not eligible for the fixed-rate loan and
would have to take a variable rate loan. He told her that the monthly
payment would be approximately $1,000. When Helen balked at that,
Mr. Robinson offered to lower the amount to $900 per month. He told
her she would never find such a good deal for her house and that, if she
did not jump on it now, it would disappear. She eventually agreed to
the $900 a month, knowing it would be a real struggle to make those
payments.
Helen never received anything in writing rejecting her application
for the fixed rate loan, nor did she ever fill out another application for an
adjustible rate loan.
Helen knew when she agreed to the loans that she and Samuel
would not be able to afford the loan at the new adjustable rate. However,
she knew that she had to refinance in order to cover her credit card debts
and other lines of consumer credit. She asked Mr. Robinson to confirm that
the loan amount would be enough to pay off these debts. Mr. Robinson
promised it would – she was to receive $15,000 in cash from the transaction.
At Mr. Robinson’s instruction, Helen called the credit card companies and
told them she was borrowing money from her sister to pay off her debts.
At the closing, Samuel was once again visibly intoxicated. In
fact, he was holding and drinking from a “forty” throughout the entire
process. The copies of the loan Helen received at the closing were
unsigned and the closing documents were dated three days earlier than
the date of the actual closing. In addition, Helen was not provided
with copies of various documents that she requested, including
signed copies of the closing documents. She never received either the
$15,000 in cash or the $300 in free groceries. She believed that her old
mortgage had been paid off and that she now had a new one at the new
adjustable rate because her monthly payments had gone up to the $900.
By the time she contacted the law office, she was two months
behind in her mortgage, unable to afford the $900 per month, and her
credit card bills were higher than ever.
C. The Lawsuit
The transaction between Helen and Mr. Robinson has all the
elements of a good juicy predatory lending story: big bad subprime
mortgage company targets poor black neighborhood, enticing clients with
free groceries and promises to pay off credit card debt. This particular client
was not only poor and black, she was also disabled and barely educated. Her
husband was an alcoholic who was drunk throughout the entire process
and could not read. The slick broker who came to her house played bait-
and-switch with the terms of the loan and then turned up the heat when
she started to balk, all along banking on getting her house out of the deal.
In this situation, the lawyer would draft a complaint against
the original lender and mortgage broker based on the tools available
to him: parts of the Truth in Lending Act (TILA),44 provisions of the
state Consumer Protection Procedures Act, provisions of the Real Estate
Settlement Procedures Act (RESPA),45 and common law fraud and
contract claims. It is likely that, after months of discovery and motion
practice, the case would probably settle, with the defendants agreeing to
rescind the loan and forgive the two months of nonpayment. Helen’s
mortgage would go back to being what it was before she contacted the
43 15 U.S.C. §§ 1601-1667f.
44 12 U.S.C. §§ 2601–2617.
company. Thus, it would be as if the whole thing never happened.

III. Looking at the Story More Carefully
The lawyer chose to tell Helen’s story because he understood it to

be the story the law required him to tell in order to protect Helen’s home
from foreclosure. Indeed, the various laws against predatory lending do
seem to imagine stories just like Helen’s: situations where poor people
have lost out either to the system, or to wealthy individuals. The solutions
offered by these laws are solutions to high stakes problems. They tend to
kick in only at the moment of crisis and not at any time before. 46 Further,
they tend to address only the immediate crisis and not its underlying
causes. In order to benefit from these policies, therefore, plaintiffs need to
assume the posture of victim in this high stakes, winner-take-all, reactive
system. The stories these plaintiffs tell are therefore victim stories.
How the lawyer chooses to frame the facts of the case is significant,
but it is not an inevitable framing. Lawyers choose what stories to tell
and how to tell them.47 The fact that a lawyer may have good reasons for
a choice does not negate its essential character as a choice. When a lawyer
chooses one particular story, he implicitly chooses not to tell other stories.
Lawyers have been reading and writing about the relationship
between narrative, story, and the law for many years.48 I would like to
examine more closely this idea that lawyers construct and tell stories when
they represent clients. Specifically, what is the process that lawyers go
through and the choices they make in determining what stories to tell and
how to tell them?
My analysis of this process involves three lines of inquiry. First,
45 I suggest that predatory lending is not the only issue in these situations. It is
beyond the scope of this article to explore more fully, but many of the laws that
“protect” poor people are structured this way: Their homes are going to be
foreclosed, their children are going to be taken away, and their medical care is
going to deplete their assets. See, e.g., Juliet M. Brodie, Post-Welfare Lawyering:
Clinical Legal Education and a New Poverty Law Agenda, 20 Wash. U. J.L. &
Pol’y 201 (2006); White, supra note 10. Another wonderful example of this is
bankruptcy. See Elizabeth Warren, What is a Women’s Issue? Bankruptcy,
Commercial Law, and Other Gender-Neutral Topics, 25 Harv. Women’s L.J. 19,
47-48 (2002).
46 Grose, A Persistent Critique, supra note 6, at 330-32.
47 See generally sources cited, supra note 6.
what are the components of a story? Second, what choices can and does
a lawyer make about the story he tells? Third, how does he make those
choices? In considering each of these questions in turn, I construct a
theory of lawyering based on storytelling that can help us to understand
how lawyers practice our craft, and also help us to engage in that practice
with intentionality and awareness of the consequences of our choices.49

A. What Is a Story
Thinking about the practice of law as a practice of storytelling

gives us the opportunity to look behind, between, over, and under
the black letter rules that comprise “the law.”50 In those interstices,
we find facts, language, structure, and ideas that go well beyond the
holding of an opinion or the mandate of a statute.51 By treating law as
narrative, we discover not only “how law is found but how it is made.”52
Cultural psychologist Jerome Bruner describes the act of
storytelling as so instinctive, so intuitive, as to render an explanation of
how we do it close to impossible. “We stumble when we try to explain,
to ourselves or to some dubious other, what makes something a story
rather than, say, an argument or a recipe.”53 And yet, if lawyers are
48 In doing so, I join a rich and well-established movement of scholars who have
been deconstructing and analyzing these concepts. See sources cited, supra note
6. See also Gary Bellow & Martha Minow, Introduction to Rita’s Case and Other
Law Stories, in Law Stories 1-29 (Gary Bellow & Martha Minow eds., 1996);
Law’s Stories: Narrative and Rhetoric in the Law (Peter Brooks & Paul
Gewirtz eds., Yale University Press, 1996); Stephen Ellmann, Empathy and
Approval, 43 Hastings L.J. 991 (1992); Michelle S. Jacobs, People from the
Footnotes: The Missing Element in Client-Centered Counseling, 27 Golden Gate
U.L. Rev. 345 (1997); Gerald P. Lopez, Lay Lawyering, 32 UCLA L. Rev. 1
(1984); Toni Massaro, Empathy, Legal Storytellings and the Rule of Law: New
Words, Old Wounds, 87 Mich. L. Rev. 2099 (1989).
49 Amsterdam & Bruner, supra note 6, at 110.
50 Brooks & Gewirtz, supra note 48, at 3.
51 Id.
52 Jerome Bruner, Making Stories: Law, Literature, Life, 3-4 (Harvard
University Press 2003). See also Scheppele, supra note 6, at 2088 (“gifted
practitioners know without reflection how to make accounts into legal narratives
the way native speakers of a language know how to express thoughts in
grammatical sentences. But that does not mean that those who can do it know
how to describe systematically what they have done.”).
to be effective legal storytellers – the kind who explain not only how
law is found, but also how it is made – they must be able to overcome
this asymmetry between doing and understanding what they do.54
They must be able to describe what goes in to the making of a story.
Starting with the basics, what is a story? Anthony Amsterdam and
Jerome Bruner provided a great service to the world of legal scholarship
with their book Minding the Law in which they translated literary theory
and rhetoric into terms that can be understood by the contemporary legal
(as opposed to literary) scholar.55 As described therein (and as we all
know instinctively and intuitively), stories are comprised of:
• A “steady state” – that is, a state “grounded in the legitimate
ordinariness of things.”56
• The “trouble” – that is, something that happened to disrupt the
“legitimate ordinariness.”57
• Efforts at redress, to cope or come to terms with the disruption.
• Outcome/resolution
• Coda or moral – a “retrospective evaluation of what it all might
mean” – which returns the audience from the “there and then
of the narrative to the here and now of the telling.”58

53 Bruner, supra note 52, at 4.
54 See generally, Amsterdam & Bruner, supra note 6. See also Bellow & Minow,
supra note 48; ; Brooks & Gewirtz, supra note 48; Bruner, supra note 52;
Thomas M. Leitch, What Stories Are: Narrative Theory and
Interpretation, (Penn. St. Univ. Press 1986); Alfieri, supra note 6; Robert M.
Cover, The Supreme Court, 1982 Term – Forward: Nomos and Narrative, 97
Harv. L. Rev. 4 (1983); Clark D. Cunningham, A Tale of Two Clients: Thinking
About the Law as Language, 87 Mich. L. Rev. 2459 (1989); Farber & Sherry,
supra note 6; Grose, Benetton, supra note 6; Jacobs, supra note 48; Binny Miller,
Give them Back Their Lives; Recognizing Client Narrative in Case Theory, 93
Mich. L. Rev. 485, 563-67 (1994) [hereinafter Miller, Their Lives]; Binny
Miller, Teaching Case Theory, 9 Clinical L. Rev. 293, 297-307 (2002)
[hereinafter Miller, Teaching Case].
55 Amsterdam & Bruner, supra note 6, at 113; See generally Bellow & Minow,
supra note 48; Brooks & Gewirtz, supra note 48; Alfieri, supra note 6; Cover,
supra note 54; Cunningham, supra note 54; Farber & Sherry, supra note 6;
Grose, Benetton, supra note 6; Jacobs, supra note 48; Miller, Teaching Case, supra
note 54; Miller, Their Lives, supra note 54.
57 Bruner, supra note 52, at 20.
Taken together, these five elements make up what we call “the

plot” of the story,59 i.e. the “what happened and why.” Plots usually fit
into particular “genres” –“mental models representing possible ways in
which events in the human world can go.”60 In other words, the story is
recognizable to the reader or listener almost from the outset, causing him or
her to register it as a comedy, tragedy, or drama, etc.61 These are established
or stock scripts that we recognize and expect to resolve in certain ways.62
The characters as free agents with minds of their own,63 make the
plot move by engaging in the “what happened and why” of the story.64
Theodore Leitch describes characters as representatives of different identities,
which, like plots, tend to register with readers or listeners as familiar, each
one expected to embody one or more general truths.65 Thus, in every story,
we expect to encounter and to recognize heroes, villains, lovers, enemies,
good guys, bad guys, clowns, tragic figures, protagonists, antagonists, etc.
The plot and the characters make up what I call the “what” of the
story – something happened to someone and the story is about how to fix
it. In addition to these substantive components, there is what I call the
“how” of the story. These are the technical pieces that literally make up
the story: timing, framing, pace, language, when the story begins, when
it ends, what gets described fully, what gets left out, setting, organization,
and structure.66 As much as the plot or the characters, these elements
make the story what it is, delivering it to the reader or listener in a form
that he or she recognizes and responds to.
58 See Leitch, supra note 54 (The plot consists of action and telos. It is a trope for
human experience; something more than just an intelligible sequence of
events.); see also Peter Brooks, Reading for the Plot: Design and
Intention in Narrative (Harvard University Press 1992).
59 Amsterdam & Bruner, supra note 6, at 133 (establishing that genres are tools
of narrative problem-solving that can shape human encounters and institutional
arrangements).
60 See id.
61 See id.; see generally Lopez, supra note 48.
62 See Amsterdam & Bruner, supra note 6; see also Leitch, supra note 54.
63 See generally Leitch, supra note 54.
64 See id.
65 See Amsterdam and Bruner, supra note 6 at 113; see also Scheppele, supra note
6, at 2094-97.

B. How Lawyers Tell Stories
Narrative theory, however, requires exploration beyond this

essential deconstruction of a story. Each one of those elements –
character, plot, genre, timing, framing, rendering of detail, pacing, etc.
– represents one, if not more than one, choice about the kind of story
to tell and how to tell it.67 In order to know how to tell a story, lawyers
need to understand the choices they make and why they make them.68
Lawyers are particular kinds of storytellers, influenced by variables
unique to their role as tellers of their clients’ stories. In that role, as
makers of legal arguments, we decide what story to tell and how to tell
it “guided by some vision of what matters.”69 Put another way, in order
to figure out what story to tell and how to tell it, the lawyer must weigh
three substantive factors, the same factors that make up the theory of
the case: the law, the facts, and the client’s goals.70 In addition, the
lawyer must consider contextual factors, e.g. the audience, the forum, the
availability of resources, the personality of the client, and the potential
supporting or detracting characters in the story. The lawyer must also
take into consideration particular cultural norms and values in deciding
among different stories and ways of telling them.71 And finally, the lawyer
must consider factors personal to him, such as whether he is comfortable
in a courtroom, whether he can pull off a humorous narrative, whether he
does better in a more formal or less formal setting, and whether the client’s
66 See Martha Minow, Stories in Law, in Law Stories: Narrative and Rhetoric
in the Law, supra note 48.
67 See generally Grose, A Persistent Critique, supra note 6.
69 Binny Miller has written extensively about the construction of case theory,
which is the incorporation of law and facts and client goals into a story that can
be used to drive a case or an organizing campaign. See Miller, Their Lives, supra
note 54, at 485-90.
70 At a more subtle level, though, lawyers make choices based on other things as
well. Each of these elements of narrative themselves is a portal into cultural and
personal norms and values. In order to understand what is behind these stories,
we can ask: what norms does the script embody, what vicissitudes derail the
script, what consequences follow the derailment? See Amsterdam & Bruner,
supra note 6, at 122.
situation raises personal moral or ethical concerns, among other issues.72

When a lawyer drafts a statement of facts, for example, she
does not simply record the known universe of “relevant” facts in an
interesting and persuasive way. Indeed, there is no such thing as an
absolutely neutral description of the facts.73 Lawyers repeatedly engage
in fact-gathering – at initial client interviews, after doing legal research,
in anticipation of the other side’s argument – and then they pick and
choose from available facts to present a picture of what happened74
that most accurately reflects their sense of what matters. In addition,
the other lawyers involved do exactly the same thing, with exactly
the same pool of facts; however, they emphasize different details,
draw different inferences, which results in quite a different picture. 75
This also goes for the story’s “how.” The law might define what is
relevant, but it cannot define “how the relevant facts, in a particular case,
are to be expressed.”76 It is up to the lawyer to figure out what words to
use and with what emphasis. A lawyer’s statement of facts thus “reflects –
by its inclusions and exclusions, the emphasis of its sentence construction
and the structures of its argumentation – choices.”77 Lawyers make choices
about the other technical elements of a story as well: when the story should
begin and when it should end, how quickly or slowly the action should
move, how fleshed out each character should be, etc. Kim Lane Scheppele
provides wonderful examples of choices judges make in the “how” of
their stories (in essence, appellate opinions are stories) both about word
choice (“lightly choke” v. “heavy caress”)78 and framing (beginning with
the defendant’s childhood v. beginning with the night of the crime).79
Thus, stories are not “recipes for stringing together a set of ‘hard
facts.” Rather storytellers construct the facts that comprise the stories81
80
71 See id; see also Grose, A Persistent Critique, supra note 6, at 363-67.
72 See Scheppele, supra note 6, at 2089-2091 (discussing ‘point of viewlessness’).
73 See Amsterdam & Bruner, supra note 6, at 110, 122-124.
74 Id.; see also Lopez, supra note 48, at 31.
75 Bernard Jackson, Narrative Theories and Legal Discourse, in Narrative in
Culture: The Uses of Storytelling in the Sciences, Philosophy, and
Literature 27 (1994).
76 Id.
77 Scheppele, supra note 6, at 2086.
78 See id. at 2096.
80 See id. at 116-17 (Endogenous theory of narrative – that narrative constructs a
by sorting through what is out there and figuring out both what to say
and how to say it, based on the storyteller’s own perspective about “what
matters.” Narrative is not a purely logical argument because there is not one
right solution. A set of events can be organized into alternative narratives
and the choice among them depends on perspective, circumstances, and
interpretive frameworks.82 These choices are governed by what lawyers care
about. Thus, the “fabric of narrative reflects the shape of [their] concerns.”83
For lawyers, then, figuring out “what matters” is a complex and
nuanced process.84 When they choose what story to tell and how to tell
it, lawyers must work hard and with awareness to reconcile and balance
these various facets of “what matters.”
C. Deconstructing Helen’s Story
What lawyers must appreciate is that in choosing to tell a

particular story in a certain way they are shaping future stories. If the
story presented is persuasive, then other stories will be shaped to fit that
“winning” story. This process reifies what the legal system recognizes as
actionable harms, thus, in essence, making law. Such reification may
prevent a deeper look at the problem we are trying to solve, which can have
significant consequences for those affected by that underlying problem.
world “not just according to how the world is, but according to its own
categories.” Endogenous theories can be called constructivism – the world is
constructed by mental activity, not found out there by the senses. Plight-
modeling theory of narrative – narrative form translates knowing into telling.
Legal narratives tend to conform – narratives model characteristic plights of
particular groups. Cultures convert plights and aspirations into narrative forms
that represent both the expected steady state and the expected trouble).
81 Cf. Amsterdam & Bruner, supra note 6, at 110. There is a rich body of
scholarship on assumptions and lawyer bias affecting the shape of their concerns.
See, e.g., Grose, A Persistent Critique, supra note 6 (and sources cited therein).
83 The client may play a significant role or a minor role in helping to craft the
story the lawyer tells on her behalf, depending on the client’s relationship with
the lawyer and the lawyer’s practicing style. See, e.g., Grose, Once Upon A Time,
supra note 7; Gerald Lopez, Rebellious Lawyering: One Chicano’s Vision
of Progressive Law Practice (Westview Press 1992); Lucie White,
Collaborative Lawyering in the Field? On Mapping the Paths from Rhetoric to
Practice, 1 Clin. L. Rev. 157 (1994); Ascanio Piomelli, Appreciating
Collaborative Lawyering, 6 Clin. L. Rev. 427 (2000).
The winning “predatory lending” story, which the lawyer told

about Helen, in its most caricatured, boils down to this:
Once upon a time, there was a poor disabled black woman who lived
in a house in a bad part of town, with her poor alcoholic black husband.
Along came a slick mortgage broker who offered her a great deal on her house
and promised to help her pay off all her debts so she could live happily ever
after. She accepted his offer, even though she knew in her heart that it was
too good to be true. Of course, it was too good to be true. The slick mortgage
broker took her money and got her to sign the papers and then he disappeared.
The poor disabled black woman never got the money to pay off her debts and
ended up even poorer than she was before. Now, she and her husband need
the government to step in and undo the deal so she can go back to being only
as poor as she was before, and live happily ever after like that.
Helen’s “steady state” was living beyond her means, buried

in credit card debt, in a house in a bad part of town. The “trouble”
comes along in the shape of the mortgage broker conning her into a
refinance deal she cannot afford. The resolution of the story returns
Helen to her original steady state – “only as poor as she was before.”
We recognize a number of characters in this story, and they help
us figure out what kind of story it is. The most prominent are the victims,
Helen and Samuel, identifiable by their poverty, their lack of education,
their lack of ability (both physical and mental) and their desire to do better
for themselves. They represent a certain kind of victim – not the totally
innocent one like Cinderella,85 but rather the one who wants to better
herself a bit sneakily and ends up getting into trouble, like the husband
and wife who have three wishes and end up turning each others’ noses into
sausages, only to have to use their final wishes to turn them back into noses.86
We also recognize the villain in the story – the mortgage broker,
identifiable by his slickness, his insistence, his persistence, and of course,
the fact that he cheats and lies and makes off with the victims’ hard-
earned house. However, he is not pure evil like the Wicked Witch of
84 See generally, Charles Perrault, Fairy Tales (University Press 1903) (This
version introduces the most widely accepted Cinderella character, including her
glass slipper and fairy godmother).
85 See generally, Gabriel Djurklou, The Sausage in Fairy Tales from the
Swedish 27-32 (J. B. Lippincott Company 1901).
the West, but rather manipulative and clever, playing on the victims’
own weaknesses. And we recognize the fairy godmother in the story,
in the form of the Law (as the “magic wand”) and the lawyer (who
wields the wand), identifiable by her power to swoop down and undo
the deal the foolish victims got themselves into. With a wave of
the “magic wand” (the laws against predatory lending), the lawyer
removes the sausages from Helen’s and Samuel’s noses, and they
are left with no more wishes, but with their noses back to normal.
We learn through these characters that this story is not a fairy tale,
but rather a morality tale – a “be careful what you wish for” story. Much
like the sausage story, this one warns Helen and Samuel, and through
them, us, not to try to get more than we are entitled to through our
own hard work and honest means, and to be content with our lot as is.
Otherwise, we will end up losing our houses or with sausages for noses.87
Written literally in the language of predator and prey, the story
is framed tightly around the loan itself. We learn very little about Helen
and Samuel, other than that they are victims of the predatory lending
scheme. They have been boiled down to the caricatures of the poor, black,
disabled, alcoholic victims. Thus, we learn very little about the plots of
their lives beyond that scheme. The story provides historical background
only to flesh out Helen and Samuel’s roles as victims and Mr. Robinson’s
role as villain; and only those details necessary to make a compelling
argument that the fairy godmother government should come in to right
the wrongs they have suffered. In the complaint, Helen’s lawyer tells the
very simple story about the predatory loan and its effect on the plaintiffs.
Indeed, Helen’s lawsuit was successful. Faced with the threat of
the fairy godmother swooping down and waving her magic wand, the
defendants agreed to settle the case and the plaintiff was returned to her
pre-trouble steady state.
86 This story is consistent with the stories we’ve heard in the press about these
predatory loans and their victims. See NPR Morning Edition: Foreclosures Hit
Rural America, But Quietly (NPR radio broadcast Oct. 7, 2008); NPR Tell Me
More: Black Households Hit Hard by Mortgage Crisis (NPR radio broadcast Jan.
15, 2008); Joshua Michael Stolly, Subprime Lending: Ohioans Fall Prey to
Predatory Lending at Record Levels, What Next?, 34 Ohio N.U. L. Rev. 289
(2008).
IV. Other Stories
Helen’s lawyer told her story as an adversarial story about victims

and perpetrators in the form of a complaint in the particularized context of
a lawsuit. In the complaint, he identified Helen’s situation as a mortgage
crisis and the legal remedies available to ameliorate that crisis. Those
remedies, i.e. the various laws against predatory lending practices, in turn
dictated the kind of story the lawyer told and the way he told it. These
remedies allowed the lawyer to determine “what matters” in Helen’s case.
Helen’s lawyer understood that Helen wanted to avoid foreclosure;
he appropriately researched the law of predatory lending and gathered the
facts in light of the law he found. Helen was behind in her mortgage
payments and told the lawyer that she needed help saving her house.
Helen herself understood the litigation route to be her only remedy. Her
lawyer therefore told the story he needed to tell in order to get the remedy
the law provided. Further, he framed the story to conform to the legal
requirements of a particular context – the landscape of predatory lending law.
The fact that this story did not completely or adequately describe
Helen and Samuel’s lives, or that it played on ugly racial and class
stereotypes, should have given the lawyer pause. He liked Helen a lot
based on their few meetings, but he felt that the legal remedies available
to Helen defined the story he had to tell. It was a story about a crisis
with high stakes that required intervention in order to salvage the victim’s
house.
A. The Realm of Possibilities
But what about Helen’s underlying goals of getting cash

and paying off her debt, the very reasons Helen looked into the loan
to begin with? Has this solution really improved Helen’s lot in life?
The immediate crisis was averted, but how can she be sure another
similar crisis will not happen at some point in the near future?
The basic premise that lawyers choose what stories to tell and
how to tell them is not just about facts or framing or language; it is also
about the law itself. The law is not just there, waiting for us to come
along and plug our clients’ lives into it or the other way around (plug it
in to our clients’ lives). The process lawyers go through to make choices
about what story to tell and how to tell it is, in fact, what constructs the
law.88 Lawyers make the law by telling stories about their clients’ lives.89
This is the most powerful part of the storytelling metaphor
– by being sensitive to narrative, we begin to see the law differently:
“it ceases to be limited, settled and formal and, instead, becomes
fluid, contested and even contradicted.”90 In addition, when
lawyers see themselves as storytellers about, inter alia the law, they
begin to understand that the law is not objectively created and
applied, but rather that it is subjective and constructed by them.91
As storytellers about the law, lawyers are powerful actors in the
legal system who can and must make choices about the kind of stories
to tell and therefore the kind of law to make. As such, they “participate
in the ongoing process of re-creating the law. Bearing legal narrative in
mind, we can understand law not as restriction and control but rather as
a realm of possibilities.”92
What is the realm of possibilities in Helen’s case? What other
stories could the lawyer have told?
Helen’s lawyer could have told another kind of “victim” story: one
that played less on racial and economic stereotypes, one that defined the
defendants more broadly and sought greater remedies, or one that developed
the client’s character as more of a change agent than a helpless victim.
The lawyer could also have widened his frame a bit in telling the
story so that the fact-finder learned more about Helen and Samuel. He
could have provided more historical background of the subprime lending
crisis to place this particular loan in a social, political, and economic
context. He could have described the villains more broadly to include
not only the slick mortgage broker, who was, after all, just a minnow in
87 See generally, Grose, Benetton, supra note 6; Grose, A Persistent Critique, supra
note 6.
88 See Robert Weisberg, Proclaiming Trials as Narratives: Premises and Pretenses, in
Law’s Stories: Narrative and Rhetoric in the Law, supra note 48, at 62
(“[T]elling a legal narrative . . . motivate[s] us to be the artificers of our own
law.”). See also generally Brooks & Gewirtz, supra note 48.
89 David Ray Papke, Preface to Narrative and the Legal Discourse: A Reader
in Storytelling and the Law 1, 5 (Deborah Charles Publications 1991).
90 Id. See also Grose, A Persistent Critique, supra note 6, at 331-32.
91 Papke, Preface to Narrative and the Legal Discourse: A Reader in
Storytelling and the Law, supra note 89, at 1, 5.
the subprime lending war,93 but also the various lending institutions that
made this loan and others like it possible. He could even have told a story
that named the FDIC and other federal oversight agencies as the bad guys.
In all of these stories, the essential plot structure and characters
remain consistent – Helen and Samuel are the victims, living in their house
above their means, who are conned by some bad guys into a loan they cannot
afford, and the Fairy Godmother (in the form of the law and the lawyer)
swoops down and gets them back to their pre-trouble steady-state, maybe
with a little extra cash, so they end up a bit better off than when they started.
The genre of these stories also remains essentially the same: they
are good-guy/bad-guy stories with varying degrees of blame placed on the
victim relative to the villain. They are stories that take place in and around
a crisis that needs to be resolved. Their morals are also the same: if you are
living beyond your means and get into a situation that seems too good to be
true, it probably is, and you are going to need help getting out of it. Not quite
the sausage story, but certainly not the innocent Cinderella story either.
Finally, these stories all take place against the same essential
backdrop and in the same context: the laws against predatory lending and
the specter of a lawsuit define the stories’ plot, characters, and structure. The
stories are still written in the language of predator and prey; there are still
good guys and bad guys; they are still framed tightly around the loan and the
only background facts that are given are those that explain the characters’
behavior or the applicability of the law to the situation. The essential
narrative structure – steady state, trouble, resolution, moral – is consistent
among all of these stories, as well as the story Helen’s lawyer told initially.

B. Another Kind of Story
What if we changed the narrative structure of Helen’s situation

by fiddling with her steady state and the trouble that disrupted it and the
92 Cf. Elliot G. Hicks, Shooting Ourselves in the Foot in the Drug War, 1999 W. Va.
Law. 4, 4 (1999) (explaining that mandatory minimum sentencing laws for
drug-related violations result in “little minnows going to prison, while the big
fish continue to swim in a sea of crime.”); Andrew N. Sacher, Inequities of the
Drug War: Legislative Discrimination on the Cocaine Battlefield, 19 Cardozo L.
Rev. 1149, 1190 (1997) (explaining the disparity between small-time drug
dealers who are aggressively prosecuted and replaced and the drug kingpins,
whose power is enhanced by this legal regime) .
resolution she sought? Would that not affect the rest of the story’s plot –
the resolution itself and the moral of the story? Would it not change who
the characters were? Might it alter the story’s genre? And what about the
story’s structure – how it is framed, organized, where it begins, and where
it ends?
Imagine the following scenario:
Helen realized there was no way she could pay her new mortgage
and manage her mounting credit card debt. She was afraid the bank was
going to come and take her house and her credit cards. She heard on the
radio and TV that there might be something she could do to get out of
the loan. So she called a lawyer and told him the story about how she
came to refinance her house and that now she needed help figuring out
what to do next.
The lawyer sat down with Helen who told him that she and her
husband Samuel owned their home and had been employed for many
years, but they recently had been having a hard time making ends meet.
Gradually, Helen, who had always run most aspects of the household,
began putting things on credit cards and installment plans. Initially, she
made the payments every month, however, lately, she had started to miss
payments or was not able to make them fully. Thus, the balances began
adding up.
When she realized she was paying back more in interest than
she had spent on any particular thing, she decided to try to refinance
her house, lured by the infamous commercial on the radio. Because
the new monthly payments turned out to be more than her original
mortgage, Helen was now two months behind in paying the mortgage.
Helen became overwhelmed by the burden of juggling all the
different accounts and was scared by the phone calls and threatening
letters she had started to receive. She wished there were something
she could do to prevent the debt from continuing to escalate.
The lawyer felt compelled by Helen and her story and wanted
to help her. He asked her to bring him all of the documents associated
with the refinancing and all of her credit card statements, her installment
plan receipts, her bank statements, her pay stubs, Samuel’s pay stubs,
and anything else that might have anything to do with their finances.
Helen asked if she should bring her grocery receipts and the like, and
the lawyer said absolutely – anything she had that could help him
get a complete picture of their financial situation. They made an
appointment to meet again once Helen had gathered all of this material.
In the meantime, the lawyer did some research into consumer
protection, contract law, and banking and real estate law. He did not
find a particular case or statute that would completely solve Helen’s
problem, but he believed he could cobble something together with
what he found. However, before doing so, he wanted to learn more
about Helen and her life and have a better understanding of her goals.
At the next appointment, the lawyer explained to Helen that
he was unsure exactly how he could use the law to help her, but that
they would figure out a way to ease her financial burden. He suggested
that they go through her bills and financial documents together in
order to develop a fiscal plan. In addition, inquired about more
details of Helen’s life in an effort to better understand how to help her.
Luckily, Helen had kept meticulous records of what she and
Samuel spent, what they made, and what they owed. Over the next
several hours and two subsequent meetings where Helen brought
documents she either had not yet received or had since discovered,
they pored through these records, while Helen narrated them, filling
in gaps when prompted by her lawyer’s questions or her own sense that
further explanation might be needed. Here is the story that emerged.
Helen and Samuel had known each other their whole lives.
Growing up, because Samuel was a couple of years older than Helen, he
never much gave her the time of day. It was his younger sister Jeannie
with whom Helen used to spend every waking moment. But once Helen
became a teenager, Samuel started to notice her, and the two began
dating. Samuel joined the service on his twenty first birthday, and he was
immediately deployed to Vietnam. Two years later he came home, and
they got married.
Until about three years ago, Samuel worked regularly as a carpenter
and continued to be active in the army reserves. Helen had always loved
kids and had worked with them for as long as she could remember. She
left school after eighth grade so she could help her mother take care of
her eight younger siblings, and she started getting jobs as a paid nanny
for other people or as a helper in day care centers. She and Samuel
tried for many years to have children but never succeeded. Not having
children of her own has been one of Helen’s biggest disappointments.
With both of them working steadily, plus Samuel’s veteran’s
pay, Helen and Samuel managed to get by pretty well. About ten
years ago, they decided they had enough money saved to buy the
house they had been living in as renters for almost their entire
marriage. They even got a pretty decent fixed rate mortgage.
Things got difficult over the last three years. Helen, who had
always struggled with her weight and had a history of obesity and
diabetes in her family, had grown increasingly infirm, and she finally
had to confront the reality that she could no longer get around well
enough to work with kids or really do anything much on her own outside
the house. She started to get social security disability benefits, which
helped, but did not fully replace the income she was making before.
Samuel was also having trouble making money. According to
Helen, Samuel was never the same after he got back from the war. She
said something seemed broken inside of him, which is why she thinks
he began to drink. However, Helen did not care that much because he
never got violent and the beer took the edge off and made it possible
for him to be in the world with her. But, his drinking got worse and
began getting in the way of his work; he could not seem to hold down
jobs for very long. There were long stretches when his only income
was his army benefits, and those did not replace his carpentry earnings.
Thus, Helen turned to credit cards and installment plans and then
to refinancing their house. This is how they got to where they are now.
As he gathered this information from Helen, her lawyer began
imagining the role he could play in helping Helen resolve, at the very
least, her financial struggles. They punched numbers into the calculator
to get a sense of what Helen and Samuel could count on for income, and
what they absolutely needed to spend every month. The lawyer came to
understand that for a homebound woman not to have access to television,
for example, was an unreasonable sacrifice, so cutting out cable was not an
option. And Helen came to understand, for example, that monthly trips
to Atlantic City were not possible, but that once she got some of her debt
paid off, they could start going every 6-8 weeks. Helen and her lawyer
developed both a short-term and a long-term budget that would allow
her and Samuel to live but also to continue to pay down their debts so
they could avoid having to declare bankruptcy or another credit crunch.

Because the threat of foreclosure was imminent, the lawyer
began working on a strategy to protect their mortgage. On the advice
of a local nonprofit agency that acted as both a watchdog of banks and
mortgage brokers and a counselor for low-income clients in mortgage
crisis, the lawyer bypassed the mortgage broker and initial lender, and
instead focused on tracking down the current holder of Helen’s mortgage
using Helen’s monthly mortgage statements as a kind of trail map.
Once the lawyer found the current lender, he proposed a simple
solution to the mortgage crisis: “rescind the loan, refinance at a fixed
rate with monthly payments that Helen could afford, and avoid the
financial and logistical costs of foreclosure, and having a bad loan on
your books.” The lender countered by offering a probationary six month
loan at the lower rate, during which time Helen had to make all her
payments on time and in full. If Helen could meet these requirements,
the lender would convert the loan to a thirty year loan at the fixed rate.
The lawyer agreed, provided that the lender would waive the two months
of nonpayment. The lender agreed, and thus foreclosure was averted.
Helen’s lawyer did not stop there. He then negotiated with the
individual credit card companies, varying his approach depending on the
size and nature of the debt, and on the personality of the particular employee
whom he was dealing with. He was able to convince some of Helen’s
creditors to discharge her debts completely, however, for the most part
he was able to negotiate to have them consolidated and reduced through
interest-free, low monthly payment plans over the next six to twelve months.
After two months, Helen’s lawyer had resolved all of her debts –
either discharged or packaged into a payment plan. As a result, Helen
was no longer receiving threatening letters, she had a mortgage she could
manage, and she was in control of her finances.
C. Deconstructing This Story
This story about Helen and Samuel is very different from

the predatory lending story, both substantively and technically.
First, the plot: Helen’s “steady state” is simply living her life,
struggling to make ends meet on limited resources and mounting expenses.
The “trouble” is Samuel’s increased inability to work steadily and Helen’s
increased infirmity, resulting in rising credit card and consumer debt and
a mortgage they could not afford. The resolution, rather than to return
Helen to her pre-trouble steady state, was a new steady state where Helen
was financially stable and had a long-term plan to maintain this stability.
In this story, the “steady state” and the “trouble” are subtle
and slow-moving, almost intertwined. There is no clear moment
when things shift from “okay” to “not-okay” – the crisis was slow
in developing and slow to resolve. The story is not over when Helen
goes to the law office. In fact, part of the plot of the story is the
relationship between Helen and her lawyer – together they identified
and worked toward the transformation that resolved the trouble.
The main character is still Helen, but she is not the victim that she
was in the predatory lending story. Rather, she is an empowered black
woman who is struggling in the face of life’s challenges – the challenge
of poverty, the challenge of disappointment, the challenge of devastation
caused by war, the challenge of a loved one’s alcoholism, the challenge of poor
health. We recognize in this protagonist not the wife whose nose turns into
a sausage, but rather someone closer to Willie Loman94 or George Bailey95
– characters who work hard, may have made some poor choices, but who
are not trying to deceive anyone or attain anything they do not deserve.
There is no villain in this story, nor is there a fairy godmother who
swoops down to fix the mess that Helen got herself into. The lawyer, a
main character in the story, is not the traditional litigator of predatory
lending cases whose goal is to defeat the bad guys, even though, here
there are no bad guys. Rather, the lawyer is Helen’s guide, her advisor,
and her counselor,96 negotiating with her creditors (negotiations
which could have ended up in litigation), but also helping Helen put
together a financial plan that she and Samuel could live with. 97
93 See Arthur Miller, Death of a Salesman (1949).
94 See It’s a Wonderful Life (Liberty Films 1946).
95 See Model Rules of Prof ’l Conduct R. 2.1 (2007); Model Rules of
Prof ’l Conduct R. 2.1 Cmt. 1 (2007).
96 In addition to the various proposals and current legislation aimed to remedy
the plight of victims of predatory lending, various scholars and policymakers
are calling for new and different approaches, focused on things like financial
education. Surveys have shown that low-income consumers do less comparison
shopping and know less about personal financial issues than those consumers in
higher income brackets. Because the market itself–and particularly the loan
market–is so opaque, folks who do not have market or financial savvy are at a
The moral of this story is more complicated than that of the

predatory lending story, perhaps because it is more nuanced, less
caricatured. The story derives from the facts of Helen and Samuel’s
reality – their history, their struggles, their worries, and their desires.
In addition, the plot is driven by Helen’s vision of a future with greater
economic stability and less financial stress. The story boils down to the
protagonist and her husband getting their affairs in order and taking a
strong disadvantage, and more likely to fall prey to the high interest, high stakes
loans. A solution to this would be to offer educational opportunities targeted
at low-income communities to give families and individuals in those
communities more information that they can use to shop around and recognize
predatory or other bad loans. See, e.g., Matt Fellowes, Making Markets an Asset
for the Poor, 1 Harv. L. & Pol’y Rev. 433, 453-55 (2007). Many states offer
general financial literacy courses in high school and beyond. See id.; see also
Laurie A. Burlingame, A Pro-Consumer Approach to Predatory Lending: Enhanced
Protection Through Federal Legislation and New Approaches to Education, 60
Consumer Fin. L.Q. Rep. 460, 484-85 (2006) (describing, “harnessing the
power of the online environment” both to provide information to would-be
borrowers and to keep would-be lenders accountable (and thereby less
unscrupulous?). In addition, state and local initiatives are springing up to
provide more appropriate financial services to low-income people. For example,
the city of San Francisco has formed a partnership with 20 banks and credit
unions whereby the financial institutions are working together to design
banking products that will more effectively meet the needs of low-income
consumers, thus reducing the lure of high-priced, often predatory alternatives.
See Fellowes, supra, at 447-48. Michael Barr and Rebecca Blank propose that
government and financial institutions develop a range of financial service
products specifically designed to help low and middle-income households meet
their financial needs of receiving income and paying bills. See Michael S. Barr,
Financial Services, Saving and Borrowing Among Low-and Moderate-Income
Households: Evidence from the Detroit Area Household Financial Services Survey,
in Insufficient Funds: Savings, Assets, Credit and Banking Among Low-
Income Households 66 (Michael S. Barr & Rebecca Blank, eds., April 2009).
Rather than traditional bank accounts, which usually have overdraft and other
hidden or back-end fees, they propose accounts and services that are more
realistic and responsive to the actual needs of low-income persons. See Barr,
supra, at 30-31. In addition, Jeanne Charn has done a number of projects
describing alternative kinds of legal services that could be provided to help
clients either stay in their at-risk homes, or move out and into more stable
financial situations. See, e.g., Jeanne Charn, Preventing Foreclosure: Thinking
Locally, Investing in Enforcement, Playing for Outcomes, (March 2006) (draft on
file with the author).
realistic look at what they can and cannot afford and preparing to do
what it takes to keep their finances in order. As a reward for that hard
work and pragmatism, their burden is lightened – some of their debts
are discharged, some are reduced, and some are stretched out. Just as
there are no good guys and bad guys, there are no winners and losers.
Helen and Samuel tighten their belts a bit and their creditors agree
to accept fifty cents on the dollar. Everyone lives happily ever after.
This story is also different because it is not written down anywhere
(except here). It is a story that Helen and the lawyer spun together over
the course of their relationship. Pieces of it were uncovered in the initial
client interview and then in the subsequent fact-gathering. Other parts
evolved as the lawyer worked with Helen to develop a plan for discharging
or consolidating the debts. And still others emerged as they constructed
a budget and planned for the months and years to come. As such, it is a
fluid story, one that is flexible and changing.98
Finally, this story is not a case.99 It does not take place
against the backdrop of litigation or a judge’s ruling. Thus, the
role of the law is very different from what it was in the predatory
lending story where Helen’s lawyer worked hard to fit the facts into
what he understood the law to require.100 In this second story, the
97 See Grose, Once Upon A Time, supra note 7, at 181.
98 As a relatively recent crossover from the world of litigation to the world of “legal
planning” and transactional work, I was curious about whether this term was
used in the latter context. I ran a query on the law clinic listserv and the
transactional/business clinic listserv and discovered that no, it is not, except by
crossovers like me. In the non-litigation context client work is described as
“matters,” “files,” “projects,” etc. When pushed to explain the differences
between those kinds of terms and the term “case,” non-litigation lawyers
described a “case” as more narrow, driven by the context and rhythm of the
courtroom, and with a definite beginning and end. The other terms represented
more open-ended and self-defined kinds of lawyering work for clients.
99 I am reminded here of the famous scene in “Anatomy of a Murder” where
Jimmy Stewart, as the defense attorney, coaches his client to come up with a
story that would fit into a murder defense:
“Defense Attorney (DA): There are four ways I can defend murder. Number one,
it wasn’t murder . . . Number two, you didn’t do it. Number three, you were
legally justified . . . Number four, the killing was excusable.
Defendant (D): Where do I fit in to this rosy picture?
DA: I’ll tell you where you don’t fit – you don’t fit in to any of the first three.
...
law took a back seat to the facts and lived context of Helen’s life.101
In the second story, rather than striving to fit the facts into a
predetermined substantive and technical context, the lawyer gathered
Helen’s facts first. He heard her story, pored through her documents,
consulted with her about her concerns, and then he found the legal
means and methods that could interact with those facts to achieve
Helen’s goals. Also, the law itself was no magic wand. Sure the lawyer
conducted legal research and came up with some consumer protection
D: What are you telling me to do?
DA: I’m not telling you to do anything. I just want you to understand the letter of
the law.
D: Go on.
DA: Go on with what?
D: Whatever it is you’re getting at.
DA: You know, you’re very bright Lieutenant. Now let’s see how really bright you
could be.
D: Well I’m working at it.
DA: All right now because your wife was raped you’ll have a favorable atmosphere
in the courtroom . . . What you need is a legal peg so the jury can hang their
sympathy in your behalf. You follow me?
D: Uh huh.
DA: What’s your legal excuse Lieutenant? What’s your legal excuse for killing
Barney Quill?
D: Not justification?
DA: Not justification.
D: Excuse, just excuse. What excuses are there?
DA: How should I know? You’re the one who plugged Quill.
D: I must have been mad.
DA: How’s that?
D: I said I must have been mad.
DA: No, bad temper’s not an excuse.
D: I mean I must have been crazy. Am I getting warmer?
DA: Okay see you around.
D: Am I getting warmer?
DA: I’ll tell you that after I talk to your wife. In the meantime, see if you can
remember just how crazy you were.”
Anatomy of a Murder (Columbia Pictures 1959).
100 See Brooks & Gewirtz, supra note 48, at 31; see also generally Grose, A Persistent
Critique, supra note 6; Peggy C. Davis, Law and Lawyering: Legal Studies with
an Interactive Focus, 37 N.Y.L. Sch. L. Rev. 185, 186-87 (1992); Gerald P.
Lopez, Reconceiving Civil Rights Practice: Seven Weeks in the Life of a Rebellious
Collaboration, 77 Geo. L. J. 1603 (1989).
and other regulatory tools to use as leverage with creditors, but what
really resolved Helen’s “trouble” was the lawyering he did, i.e. fact-
gathering, investigation, client counseling, negotiation, contract-
drafting, letter-writing. Unbundled from the law, these legal skills helped
Helen, Samuel, and the rest of the characters live happily ever after.102
D. Imagining That Everything is Relevant
In telling these two stories, I suggest that lawyers, in representing

their clients, could do more to imagine the universe of problems and
solutions before settling on one story. People tend to define problems
by what solutions might be available. Put another way, we recognize the
“trouble” in part by understanding its possible resolution. That is what
happened in the first story: Helen’s lawyer constructed her story to fit in
to the lawyer’s understanding of how it could be resolved, based on the
currently existing predatory lending laws.103
The second story, however, developed in a different way. Neither
the lawyer nor Helen knew the solution, and the lawyer indicated as
much to Helen at their second meeting. But he did not say, “Therefore,
I can’t help you;” or, “I can help you with the juicy predatory lending
101 When I presented an earlier version of this piece, and indeed, in the case rounds
discussions of the actual client’s situation, some form of this question was
raised: Is this really legal work, helping clients figure out budgets and consolidate
credit card balances? A discussion of the difference between law and social
work, let alone the problems with multi-disciplinary practice, is beyond the
scope of this piece. However, Nathalie Martin at the University of New Mexico
School of Law has done some work on training law students to be proficient in
financial terms so that they may provide a form of financial counseling to their
clients. See generally Nathalie Martin, Poverty, Culture and the Bankruptcy Code:
Narratives from the Money Law Clinic, 12 Clinical L. Rev. 203 (2005). Her
website is also a wonderful resource. See University of New Mexico School of
Law, Financial Literary Class, http://lawschool.unm.edu/finlit/class.php (last
visited January 18, 2009); see also Jeanne Charn & Rebecca Sandefur, Learning
from Service: Using Service-Embedded Research to Improve the Practice and Target
of Legal Assistance (2005) (presenting the research design and preliminary
results from a study on the impact of a foreclosure prevention project on clients’
foreclosure outcomes) (draft on file with author); infra note 102 (discussing
lawyering for poor people as opposed to wealthy people).
102 See Robert Dinerstein, Stephen Ellmann, Isabelle Gunning & Ann Shalleck,
Legal Interviewing and Counseling: An Introduction, 10 Clinical L. Rev. 281,
307 (2003).
case, but not with the other problems because they’re not really legal
problems.” Instead, he told her he was unsure exactly what legal
remedies might be available, but that he was interested in working with
her to figure it out. The “trouble” was defined simply as what it was –
a stack of cancelled checks and credit card bills and nasty letters from
creditors. It was only one piece of Helen’s life, not her whole life and
not what defined her. Thus, the solution emerged from that stack of
papers, slowly, piece by piece, until the client’s trouble had been resolved.
These two stories reveal that context can change everything.
It can change the plot and characters of the story, the genre and
moral of the story, how the story is framed, when it begins and
when it ends, and it can change the role of the law and the role of
the lawyer in constructing the story. Helen’s lawyer in the second
story, because he was open to different plots, characters, genres, and
morals, was able to free himself from a particular role and a particular
relationship with the law, and thus construct a different kind of story.104
Lawyers are not the only ones who need to be freed up in this
way. Why, do we imagine, did Helen in the first story not insist that
the lawyer deal with her credit card debt as well as her mortgage crisis?
I suggest it is because she did not believe that she had a story to tell
to a lawyer, let alone one that would entitle her to any legal relief. In
Helen’s world, folks go to lawyers armed with their crisis stories: the
child welfare worker has taken their kids, they have received an eviction
notice, and their husbands have beaten them up. In her mind, no less
than in the mind of the lawyer, laws that work for poor people do so
only at the moment of crisis, when they are the most vulnerable, the
most desperate, and the most in need of that fairy godmother. 105
As a result, the stories available to clients like Helen are exactly
like the first story her lawyer told: the story about the victim who needs
to be rescued, even though, behind that story, there are a multitude
103 See Davis, supra note 100, at 186-87; Grose, A Persistent Critique, supra note 6,
at 332; see also Grose, Once Upon A Time, supra note 7, at 189.
104 As Claudia Angelos remarked at the Clinical Legal Theory Workshop where I
presented an earlier version of this piece, this really is an issue for lawyers for
poor people. Lawyers for rich people (and certainly for corporations) do this
kind of preventative or planning work all the time. Why do we frame it
differently for poor people? See Claudia Angelos, Remarks at the New York
Law School Clinical Legal Theory Workshop (Oct. 16, 2008).
of others that could be told that may result in a better long-term and
empowering solution for the client. Because of what Helen and
the first lawyer believed about the role of the law in the lives of poor
people, the stories with the better results do not end up getting told.
This article began with the proposition that lawyers are not only
storytellers but also active participants in the construction of stories, by
choosing what story to tell and how to tell them.106 What the two stories
have illustrated, however, is that lawyers must act with greater awareness
and intentionality about the choices they make when constructing and
telling their client’s stories.
In particular, lawyers need to recognize their power in relation to
the law, but remember that it is only one element, amongst many, in the
stories we hear, construct, and tell. Lawyers must have the confidence to
wrestle with the law to make it fit their clients’ lived realities, rather than
funneling our clients’ lived realities into what they understand the law to
require.107 When the law defines the story, the point is missed. In order
to determine the circumstances in which predatory lenders find their prey,
lawyers must be open to hearing and telling different stories in different ways.
A concrete way to do this would be to begin with the proposition
that everything the client tells the lawyer is “relevant;”108 that every
trouble the client has will be resolved (because we know all stories have to
end somehow), and that lawyers have the skills to figure out how to get
there.109
105 See Grose, Once Upon A Time, supra note 7, at 189.
106 I am reminded here of Lucie White’s description in “Notes on the Hearing of
Mrs. G” of the process the lawyer went through in “choosing” which story to
tell at the hearing – the “estoppel” story or the “life necessities” story. See Lucie
White, supra note 10, at 27. That piece was the first to articulate the theory of
collaborative lawyering or critical lawyering theory that the client is actually an
expert in her own life, and should be seen as such by the lawyer.
107 Davis, supra note 100, at 188.
108 It is beyond the scope of this piece to do justice to the related but distinct
therapeutic and preventative lawyering movements. For more on each one, see,
e.g., Pearl Goldman & Leslie Larkin Cooney, Beyond Core Skills and Values
Integrating Therapeutic Jurisprudence and Preventive Law Into the Law School
Curriculum, 5 Psychol. Pub. Pol’y & L. 1123, 1128 (1999) (citing Rudolph J.
Gerber, Legal Education and Combat Preparedness, 34 Am. J. Juris. 61, 69
(1989)); Cindy E. Faulkner, Therapeutic Jurisprudence and Preventative Law in
the Thomas M. Cooley Sixty Plus, Inc., Elder Law Clinic, 17 St.Thomas L. Rev.
685, 686 (2005). See also generally Practicing Therapeutic Jurisprudence:
IV. Other Stories
I, too, made choices about what stories to tell and how

to tell them. I made those choices with the particular intent to
demonstrate the stark differences between the two stories and what
those differences tell us about lawyers ability to craft such stories.
The first story was one framed by the litigation. As such, it was
adversarial and crisis-driven, with very high stakes. There were clear winners
and losers, good guys and bad guys. The second story, on the other hand,
was one framed by the relationship between the lawyer and the client. It was
more slow-moving and fluid. The characters were more nuanced and the
story evolved in such a way as to make real change and progress seem possible.
The lawyer in the first story was written to seem less reflective about
and hamstrung by his understanding of the law. He represented the default
reaction that lawyers should not have when working with their clients to
construct stories about the intersection between the clients’ lives and the law.
The lawyer in the second story, on the other hand, was written to seem more
reflective, more collaborative, and more holistic in his approach to working
with the client to solve her troubles. He represented the reactions lawyers
should have when working to construct stories with their clients that both
accurately reflect their clients’ lives and succeed in achieving their goals.
Law as a Helping Profession (Dennis P. Stolle, David B. Wexler & Bruce J.
Winick eds., Carolina Academic Press 2000) (collecting essays on how to
practice law from a therapeutic orientation); Law in a Therapeutic Key:
Developments in Therapeutic Jurisprudence (David B. Wexler & Bruce J.
Winick eds., Carolina Academic Press 1996) (applying therapeutic jurisprudence
to a variety of substantive law areas); David B. Wexler & Bruce J. Winick,
Essays in Therapeutic Jurisprudence (Carolina Academic Press 1991)
(extending the application of therapeutic jurisprudence to various areas of the
law); Therapeutic Jurisprudence: The Law as a Therapeutic Agent 3
(David B. Wexler ed., Carolina Academic Press 1990) (introducing the concept
of therapeutic jurisprudence); Dennis P. Stolle, David B. Wexler, Bruce J.
Winick & Edward A. Dauer, Integrating Preventive Law and Therapeutic
Jurisprudence: A Law and Psychology Based Approach to Lawyering, 34 Cal. W.
Int’l L.J. Rev. 15 (1997) (proposing the integration of therapeutic jurisprudence
with another “vector” of the comprehensive law movement, preventive law);
International Network on Therapeutic Jurisprudence, http://www.law.arizona.
edu/depts/upr-intj/ (last visited Feb. 22, 2008); Christopher Slobogin,
Therapeutic Jurisprudence: Five Dilemmas To Ponder, 1 Psychol. Pub. Pol’y &
L. 193 (1995) (critiquing therapeutic jurisprudence generally).
Let me be clear: it is not that high-stakes litigation based storytelling

is bad and that lawyers who tell such stories are unreflective and unholistic.
Nor is it that the kind of storytelling that took place in the second story is good
and the lawyers who tell those stories are necessarily reflective and holistic.
On the contrary, all lawyers and all lawyering have the potential
to be both reflective and holistic (and unreflective and unholistic). None
of these stories should necessarily, automatically, and unreflectively be
privileged as the default story to tell. Lawyers should view everything their
clients tell them as relevant – not only the facts, but also the client’s goals
and desires as well. Lawyers, as the constructors of their client’s stories,
must understand the law and how to use it to meet such goals and desires.
These two stories are both equally possible. They are, perhaps,
serial, not alternate stories.110 If lawyers can come up with long-term,
empowering solutions to their client’s problems, new clients will go to them
seeking such solutions. If lawyers start telling these stories and continue to
tell them, others will start hearing them too. That is how the law changes.
Ultimately, this article discusses the use of the narrative
framework as a way to expose lawyering techniques. The lens of
narrative theory is a variable lens: it can widen when necessary to
better understand and achieve the client’s goals, and it can contract
when a narrower view better presents the client’s stories. Likewise,
the skills lawyers employ are variable skills – when necessary they can
be used to bully, to persuade, to smooth over, to rough up, but most
importantly, to better understand and achieve our clients’ goals.
A lawyer who is open to narrative can acknowledge the complexity
of the problem presented and incorporate the context in which the
problem arises. Lawyers should seek to hear and understand their clients’
stories, with an eye toward collaboratively constructing new stories
that address their clients’ goals and concerns. This approach to solving
problems recognizes the agency of the client, yet makes room for the
reality that agency might mean very different things to different people.
Thus, lawyers who are open to narrative allow Helen and Samuel – the
individuals at the center of these problems – to determine what story to
tell, when to tell it, and what role they want to play in its construction.
109 And in fact, that is what they were. In “real life,” the student lawyers who
represented “Helen” told her predatory lending first, and then, the following
year, a team of students worked with her to get her credit and debt situation in
shape to avoid bankruptcy or another housing crisis.
Causes of the Subprime Foreclosure Crisis and the 137
Availability of Class Action Responses
CAUSES OF THE SUBPRIME FORECLOSURE CRISIS

AND THE AVAILABILITY OF CLASS ACTION RESPONSES
Gary Klein & Shennan Kavanagh*
The pervasiveness of toxic subprime1 refinance2 mortgage loans is

destroying entire communities.3 Record numbers of foreclosures are being
driven by astronomical default rates on subprime loans, rates that exceed
twenty percent on some portfolios.4 More problems are anticipated in
* Gary Klein and Shennan Kavanagh handle predatory lending class actions at
Roddy Klein & Ryan in Boston, Massachusetts. Mr. Klein is a former Senior
Attorney at the National Consumer Law Center in Boston and at Community
Legal Services in Philadelphia, Pennsylvania. Ms. Kavanagh and Mr. Klein
serve or have served as lead counsel in many of the class action cases discussed
in this article. They appreciate the research assistance of Sasha Kopf in
connection with Section H of the article.
1 See Faten Sabry & Thomas Schopflocher, The Subprime Meltdown: A
Primer 1 (2007), available at http://www.nera.com/publication.asp?p_
ID=3209 (noting subprime loans are high interest loans made to borrowers
who are perceived to present higher risk of default). Between 1995 and 2005
the percentage of subprime mortgage refinance loans increased from five
percent to twenty percent of all mortgages made. Id. As of 2007, there is
approximately $1.3 trillion in subprime mortgage loans outstanding. Id.
2 Refinance loans are distinct from purchase-money loans in that the borrower
already owns the home that will be security for the loan. Federal law recognizes
this distinction and provides cancellation rights to homeowners who obtain
refinance loans. 15 U.S.C. § 1635 (2006). As discussed below, these rights
have proven insufficient to prevent a crisis grounded in predatory lending
practices.
3 See Alex Kotlowitz, All Boarded Up – How Cleveland is Dealing With Mass
Foreclosures, N.Y. Times, Mar. 8, 2009, at MM28. See also Jennifer Steinhauer,
A Cul-de-sac of Lost Dreams and New Ones, N.Y. Times, Aug. 22, 2009, at A1;
George Packer, The Ponzi State, New Yorker, Feb. 9, 2009, at 81.
4 According to the Federal Reserve Board, more than twenty percent of all
subprime loans are seriously delinquent, as are one in ten securitized near-
prime loans. Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve
Sys., Housing, Mortgage Markets, and Foreclosures, Speech at the Federal
Reserve System Conference on Housing and Mortgage Markets (Dec. 4, 2008)
(transcript available at http://www.federalreserve.gov/newsevents/speech/
bernanke20081204a.htm). See also, e.g., Dan Immergluck, Foreclosed:
High-Risk Lending, Deregulation, and the Undermining of America’s
Mortgage Market 30 (Cornell University Press 2009). See also Vikas Bajaj &
the future as the bill comes due on certain forms of gimmicky products
that defer interest by negative amortization, leading to significant
payment increases two or three years into the loan term. These increases
are virtually guaranteed to generate monthly obligations that are beyond
many borrowers’ ability to pay.5
Foreclosures are not just a catastrophe for individual homeowners;
they also reduce tax rolls, lead to neighborhood deterioration due to
property abandonment and vandalism, and generate a cycle of declining
property values.6 Indeed, many point to the poor credit quality of
subprime loan portfolios as a leading cause of the nation’s current
economic problems.7
Loan-by-loan solutions, whether by individual litigation or
negotiated loan restructuring arrangements, are costly and inefficient.
Louise Story, Mortgage Crises Spreads Past Subprime Loans, N.Y. Times, Feb. 12,
2008, at A1; Joe Nocera, Subprime and the Banks: Guilty as Charged –
Executive Suite Blog, N.Y. Times (Oct. 14, 2009, 07:00 EST), available at
http://executivesuite.blogs.nytimes.com/2009/10/14/subprime-and-the-
banks-guilty-as-charged; Kotlowitz, supra note 3.
5 As of December 2008, twenty-eight percent of Payment Option Arm (“POA”)
Loans were delinquent or in foreclosure, according to LPS Applied Analytics, a
data firm that analyzes mortgage performance. Ruth Simon, Option Arms See
Rising Defaults, Wall St. J., Jan. 30, 2009, at A1. Nearly sixty-one percent of
POAs originated in 2007 will eventually default, according to a recent analysis
by Goldman Sachs. Id. Goldman further estimates that more than half of all
POAs originated in any year will default. Id. See also John Leland, Loans that
Looked Easy Pose Threat to Recovery, N.Y. Times, Aug. 27, 2009, at A12.
6 The City of Cleveland unsuccessfully pursued a lawsuit against a variety of
subprime mortgage lenders in which the core claim was that lending practices
constituted a public nuisance because of the resulting foreclosures and
neighborhood deterioration. See City of Cleveland v. Ameriquest Mortgage
Sec., Inc., 621 F. Supp. 2d 513, 516 (N.D. Ohio, 2009).
7 E.g., Immergluck, supra note 4, at 3; Kurt Eggert, The Great Collapse: How
Securitization Caused the Great Subprime Meltdown, 41 Conn. L. Rev. 1257,
1260-61 (May 2009). The national economic downturn reinforces the
foreclosure problem as joblessness and underemployment lead to new rounds
of defaults. Because many subprime borrowers have loans that require an
extraordinary portion of their income, even small economic changes like loss of
overtime income, divorce, or wage concessions can lead to default or foreclosure.
See Elizabeth Warren & Amelia Warren Tyagi, The Two Income Trap:
Why Middle Class Mothers and Fathers are Going Broke 136-37
(2003).
Affected homeowners have inadequate funds to cover the costs of private

counsel, and relatively few cases have sufficient damage potential to justify
contingent fee arrangements. Despite the heroic work of legal services
lawyers and housing counseling agencies,8 legal and counseling resources
are inadequate to the problem.9
This article, written by lawyers experienced in consumer
protection and class actions, will describe some of the systemic
problems that led so many homeowners into unaffordable subprime
loans. For each contributing factor, the authors discuss recent and
current class litigation generated to create aggregate remedies. Some
of that litigation has been successful, some less so. The article will
conclude with a discussion of the role of class litigation in the current
policy debate. The authors describe the value of case resolutions that
include effective loan modification relief as a class remedy and how such
resolutions may address homeowner needs more effectively than cash.
A. The Illusion of “Risk Based” Pricing
“Risk-based” mortgage pricing is a frequently overlooked

contributing factor to both the explosion of subprime lending abuses and
to foreclosures. The proponents of risk-based pricing have asserted that a
closer tie between credit risk and mortgage prices leads to more borrowing
opportunities for borrowers with fewer resources or with checkered credit
8 Press Release, Legal Servs. Corp., LSC Urges Congress to Increase Legal Aid
Funding (Apr. 1, 2009), available at http://www.lsc.gov/press/pressrelease_
detail_2009_T248_R9.php. Income limits on legal services eligibility also
contribute to the problem. Many victims of subprime lending abuses have too
much income for legal services, but not enough income to afford to pay for
legal counsel.
9 Few lawyers have the background to fully understand, let alone litigate, under
complex and often technical consumer protection laws. The National
Consumer Law Center, an advocacy organization, publishes a helpful series on
virtually every aspect of consumer law. Several of the manuals in the series are
directly relevant to the issues discussed in this article. See generally John Rao
et al., Nat’l Consumer L. Ctr., Foreclosures (2d ed. 2007) [hereinafter
Rao et al., Foreclosures]; Elizabeth Renuart et al., Nat’l Consumer L.
Ctr., Truth in Lending (6th ed. 2007) [hereinafter Renuart et al., Truth
in Lending]; Elizabeth Renuart et al., Nat’l Consumer L. Ctr., Cost of
Credit (4th ed. 2009) [hereinafter Renuart et al., Cost of Credit].
profiles.10 Risk-based pricing has thus been closely linked with policies
favoring expansion of homeownership.11
Another argument in favor of risk-based pricing is that it protects
responsible borrowers with good credit scores from paying an interest rate
premium justified by the expectation of higher default rates associated
with loans to more risky borrowers.12 Certainly this is appealing,
conceptually, because it implies that the mortgage industry can serve low-
income borrowers’ needs and assign the extra cost of doing so where it
belongs – on those who generate additional risk.
In practice, however, risk-based pricing is a disaster for those
at the bottom of the economic ladder. There are three reasons for this
result. First and most obviously, charging higher interest rates to people
with fewer resources leads to a self-fulfilling prophecy. When those
facing economic pressures need more of their limited economic resources
to service their mortgage debt, the default risk goes up.13 Higher rate
loans are, de facto, more expensive and, therefore, harder for vulnerable
homeowners to manage.14 In short, default and foreclosure rates naturally
increase as loan rates increase.15
Second, the idea that a lender can effectively assign risk based
on credit factors is chimerical. In more than one study, credit reports
have been found to be replete with errors.16 A borrower whose profile
10 Consumer Fed’n of Am., Credit Score Accuracy and Implications for
Consumers 4 ( 2002); Alan White, Risk-Based Pricing: Present and Future
Research, 15 Hous. Pol’y Debate 503, 504 (2004). See generally, John C.
Weicher, The Home Equity Lending Industry: Refinancing Loans for
Borrowers with Impaired Credit (Hudson Institute 1997).
11 Consumer Fed’n of Am., supra note 10, at 4.
12 White, supra note 10, at 504.
13 The problem is exacerbated because these same borrowers are also likely to be
charged higher rates for car loans, credit cards, student loans, and, according to
some studies, even for groceries. See Warren & Tyagi, supra note 7, at 136-37.
14 Anne Kim, Taken for a Ride: Subprime Lenders, Automobility, and the
Working Poor 9 (Progressive Policy Institute 2002), available at www.
ppionline.org/documents/Automobility_1102.pdf (Table 2: Impact of
Subprime Interest Rates shows a five year loan with a principal balance of
$10,000).
15 Alan M. White, The Case for Banning Subprime Mortgages, 77 U. Cin. L. R.
617, 618 (2008).
16 Consumer Fed’n of Am., supra note 10 at 6-7; Robert B. Avery et al., An
Overview of Consumer Data and Credit Reporting 50 (2003).
includes a poor credit score may have been a victim of identity theft or
simple error.17 Further, even if credit reports were solely based on accurate
information, people can have low credit scores for entirely benign reasons
that are unconnected to future risk. A borrower whose low credit rating
reflects a temporary period of unemployment due to a now-resolved
family health need, for example, can have the same poor credit score as
someone whose problems arose from an unresolved gambling addiction.
Yet, in risk-based pricing models, both would receive the same subprime
interest rate.
Third, and most problematic, unscrupulous lenders have seized
on popular perceptions of risk-based pricing to manipulate some
borrowers into accepting more profitable higher rate loans. Loan officers
and mortgage brokers have long been incentivized to mark-up borrowers’
interest rates. A popular way of getting a borrower to accept a marked-
up rate is to tell that borrower that her credit score was lower than
anticipated, whether that information is true or not, or that some other
perceived blemish mandates a mark-up. Often this occurs at the closing
table, to justify a rate higher than originally promised. At the end of the
day, there is little evidence that prices on subprime loans accurately reflect
their risk.18
The psychology that allows the latter abuse is grounded in the
perceptions that lenders’ pricing models are effectively objective and that
credit scores do not lie. The reality, however, is not only that credit scores
do not accurately reflect risk, but also that loan officers and mortgage
brokers have lied and have done so often.
Yet, a class action response to this problem has been elusive.
Because credit scores are ordered from third party credit reporting
agencies,19 it is difficult to pin inaccuracies on the lending community
unless the inaccuracies originated with information reported by that
17 C. Wu & E. DeArmond, Nat’l Consumer L. Ctr., Fair Credit Reporting,

§§ 7, 14.8 (6th ed. 2006 and 2009 supp.). One survey concluded that more
than 8.9 million people were victims of identity theft in 2009. Council of
Better Business Bureaus, 2006 Identity Fraud Survey Report, available at
http://www.bbbonline.org/idtheft/safetyQuiz.asp.
18 See White, supra note 10, at 506.
19 See Experian, http://www.experian.com (last visited Oct. 14, 2009); Transunion,
http://www.transunion.com (last visited Oct. 14, 2009); Equifax, http://www.
equifax.com (last visited Oct. 14, 2009).
lender.20 Moreover, the misuse of credit scores, including misrepresentation

to consumers about their impact on borrowing options, tends to be an
individual issue that is not susceptible to class treatment.21 There may
be a different result when mortgage lenders override credit scores with
their own, generally proprietary, mortgage scoring systems. When those
systems include consistent errors, class litigation may be possible.22
More tangentially, many class action cases under the Fair Credit
Reporting Act23 challenge systemic problems in credit reporting. One
recent set of such cases, for example, challenged the way in which debt
discharged in bankruptcy is reported.24 Other cases have challenged
reporting of bankruptcies in the record of non-debtor cosigners,25
improper use of credit reports in insurance pricing,26 and failure to
disclose complete information to requesting consumers about their own
20 Furnishers of information to credit reporting agencies are generally protected

from liability except in limited circumstances. See generally Wu & DeArmond,
supra note 17, at § 6.10. The creditor does, however, have a duty to reinvestigate
based on request by the consumer and can be held liable for failure to
reinvestigate. 15 U.S.C. § 1681s-2(b) (2006). See also Nelson v. Chase
Manhattan Mortgage, 282 F.3d 1057, 1059-60 (9th Cir. 2009) (finding private
right of action for failure to reinvestigate).
21 See Ori v. Fifth Third Bank, 603 F. Supp. 2d 1171, 1173 (E.D. Wis. 2009).
The consumer’s obligation to request reinvestigation described in the previous
footnote makes class treatment difficult. Id. at 1174.
22 Cf. DeHoyos v. Allstate Corp., 240 F.R.D. 269, 279-285 (W.D. Tex. 2007)
(settlement of discrimination case based on problems with proprietary credit
scoring models).
23 15 U.S.C. §§ 1681n, 1681o (2006).
24 The following cases are pending in the Central District of California: White v.
Experian Info. Solutions Inc., No. SA CV 05-1070 DOC (MLGx) (C.D. Cal.
Nov. 23, 2009); Pike v. Equifax Info. Servs. LLC, No. SA CV 05-1172 AHS
(ANx) (C.D. Cal. Aug. 19, 2008); and White v. Equifax Info. Servs., LLC, No.
CV 05-7821 DOC (MLGx) (C.D. Cal. Aug. 19, 2008). See also White v. Trans
Union LLC, 462 F. Supp. 2d 1079, 1081-84 (C.D. Cal. 2006); Jane J. Kim,
Dealing with Debt that Refuses to Die, Wall St. J., Sept. 30, 2009 at B9.
25 Clark v. Experian Info. Solutions, Inc., No. Civ.A.8:00-1217-24, 2002 WL
2005709, at *1 (D.S.C. June 26, 2002).
26 In re Farmers Ins. Co. FCRA Litigation, No. CIV-03-158-F, 2006 WL
1042450, at *1 (W.D. Okla. Apr. 13, 2006); Braxton v. Farmer’s Insurance
Group, 209 F.R.D. 654, 654 (N.D. Ala. 2002) aff’d, 91 Fed. Appx. 656, 656
(11th Cir. 2003).
reports.27 A handful of other cases have challenged negligent conduct

leading to increased risk of identity theft.28 These cases, when successful,
should have the effect of improving the credit reporting and credit scoring
system. This should, in turn, help alleviate the unfairness inherent in a
risk-based price that is grounded in a fundamental mis-assessment of risk.
B. Excessive Origination Costs and Fees
Although a lender’s main profit center is the resale of mortgages

to investors on the secondary market, and has been so for many years,
those profits are now enhanced by virtually unfettered access to fee-based
origination income. This income takes many forms. Lenders typically
charge application fees, underwriting fees, processing fees, origination
points, and a host of other mystifying and often unexplained settlement
charges. These fees are typically financed from the proceeds of the loan
and add to a borrower’s loan costs.29 Additionally, the fees are often
duplicative such that many borrowers pay application fees to both lenders
and brokers. In other cases, fees are charged for work that is not actually
performed.30 Moreover, fees can be in amounts that bear no relation to
27 Campos v. ChoicePoint, Inc., 237 F.R.D. 478, 481-84 (N.D. Ga. 2006).
28 See Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 634 (7th Cir. 2007) (consumer
has standing to raise negligence based on threat of future harm); Caudle v.
Towers, Perrin, Forster & Crosby, Inc., 580 F. Supp. 2d 273, 280 (S.D.N.Y.
2008) (same). But see Randolph v. ING Life Ins. & Annuity Co., 486 F. Supp.
2d 1, 6-8 (D.D.C. 2007) (no standing where laptop computer stolen during
burglary and plaintiffs pled increased risk of identity theft); Bell v. Acxiom
Corp., No. 06-00485, 2006 WL 2850042, at *1-4 (E.D. Ark. Oct. 3, 2006)
(class action dismissed for lack of standing where hacker downloaded
information and sold it to marketing company); Key v. DSW, Inc., 454 F.
Supp. 2d 684, 690 (S.D. Ohio 2006) (class action dismissed for lack of standing
where unauthorized persons obtained access to information of approximately
96,000 customers).
29 The Truth in Lending Act and its implementing regulations contain a basic
definition of finance charge such that it includes fees that add to the cost of
credit. 15 U.S.C. § 1605 (1995); 12 C.F.R. § 226.4 (2009). Unfortunately,
many consumers still look only at the interest rate without recognizing these
additional credit costs.
30 E.g., Jenkins v. Mercantile Mortgage Co., 231 F. Supp. 2d 737, 749-50 (N.D.
Ill. 2002) (charges for which no benefit was provided may violate state unfair
trade practice law).
the value of the service provided.31

Origination points are often the largest single source of fee-based
income. These points are calculated as a percentage of the loan balance,
and one to five origination points are common in subprime transactions.32
These amounts come off the top of the borrower’s loan. For example, a
subprime borrower with a loan of $200,000 paying three “origination
points” really receives only $194,000 in loan proceeds but pays interest
for the life of the loan on the full $200,000. Not only does the borrower
never have real use of $6,000, but, to add insult to injury, she pays interest
for use of that amount. Other loan fees financed in the transaction have
the same effect.33
When charged, the effect of such points on a borrower’s effective
rate can be profound. If the borrower finances the additional $6,000 in
points over thirty years at eight percent interest, the total carrying costs
for money that the borrower never really received is nearly $16,000.
Even more perniciously, if the loan is paid back early by refinancing, the
points (and other prepaid finance charges) act as a de facto prepayment
penalty.34 The borrower must repay the fees in full from the proceeds
of the refinancing as, unlike interest, prepaid finance charges come due
in full as of the date the loan is closed. The new refinance loan thus
effectively capitalizes these finance charges and the borrower is obligated
to pay additional fees and interest to repay sums that she never actually
received.
Another common problem involves payment of points to receive
a purported rate buy down or discount. Some lenders charge discount
points that do not provide a real discount – thus charging borrowers but
providing nothing in return.35 Other lenders load the dice by providing
31 See Renuart et al., Cost of Credit, supra note 9, § 12.2.1.7 (discussing
excessive, unearned and duplicative fees).
32 One point represents one percent of the loan amount. E.g., Black’s Law
Dictionary 1275 (9th ed. 2009).
33 The interest rate can thus effectively mislead borrowers about the real cost of
borrowing. See Renuart et al., Truth in Lending, supra note 9, § 3.2.3.
34 Id. § 3.8.3; Renuart et al., Cost of Credit, supra note 9, §§ 6.3, 7.2.2.
35 Wash. Admin. Code § 208-660-500(3)(e) (2009) (enumerating prohibited
practices of loan originators); 209 Mass. Code Regs. 40.02 (2009) (defining
“bona fide” discount points). See Gunter v. Chase Bank U.S.A., N.A., No. 07-
00403-KD-M, 2008 WL 3211293, at *1 (S.D. Ala. Aug. 6, 2008) (claiming
that borrowers received no discount).
discounts that are not a fair exchange for the number of points charged.
Consumers are rarely able to do the necessary calculations to
evaluate the costs and fees on their loans. They are misled by the idea that
they are receiving a “discount” without understanding what they pay for
that perceived privilege.36 The benefit of the discount, if any, can only be
achieved by staying in the loan long enough that lower monthly payments
attributable to the lower rate exceed the amount paid in points.37 Because
consumers do not understand this trade-off and can rarely calculate the
latter crossover point, many have paid thousands (or tens of thousands)
in discount points with little or no benefit in return. In the boom years
of refinancing, consumers rarely kept the loan long enough to receive
sufficient benefit. And lenders exacerbated the problem by touting the
chimerical benefits of early refinancing, which often imposed a new set of
points and fees.38
Similar problems arose with prepayment penalties. For many years
borrowers agreed to loans with prepayment penalty provisions without
receiving any benefit in return.39 When lenders marketed aggressively
to borrowers during the period of the penalty, borrowers often failed
to understand the prepayment penalty as a hidden cost of refinancing.
Undoubtedly, some lenders do provide lower rates to borrowers whose
loans include prepayment penalties and offer consumers a meaningful
choice between the higher rate and the penalty provision.40 But again,
36 Lenders are not required to inform consumers of the amount of the rate
discount they are paying for. Unsophisticated consumers are unlikely to ask.
37 One financial reporter illustrates the complications of calculating the benefits
associated with payment of discount points. Among other things, the
calculations are complicated and require the homeowner to make an assumption
about how long he or she is likely to stay in the home—an issue that depends
on life events and planning that is far beyond the average homeowner’s capacity
to control. Terri Ewing, Discount Point, Mortgage Insider, Aug. 1, 2008,
http://themortgageinsider.net/glossary/discount-points.html.
38 Besta v. Beneficial Loan Co. of Iowa, 855 F.2d 532, 534 (8th Cir. 1988); In re
Milbourne, 108 B.R. 522, 528-529 (Bankr. E.D. Pa. 1989); Renuart et al.,
Cost of Credit, supra note 9, § 6.3.2.
39 Keith S. Ernst, Ctr. for Responsible Lending, Borrowers Gain No
Interest Rate Benefits from Prepayment Penalties on Subprime
Mortgages 7 (2005), available at http://www.responsiblelending.org/
mortgage-lending/research-analysis/prepayment-penalties-convey-no-interest-
rate-benefits-on-subprime-mortgages.html.
40 Michael LaCour-Little & Cynthia Holmes, Prepayment Penalties in Residential
even when the rate discount associated with the penalty is disclosed, it is
virtually impossible for a consumer to calculate the necessary trade-offs.
Notably, though, improper fees have been challenged in a
variety of class action cases. Theories have included unfair trade practice
laws,41 unconscionability,42 and the anti-kickback provision of the Real
Estate Settlement Procedures Act Amendments of 1975 (“RESPA”).43
Many such cases have led to successful settlements or judgments with
commensurate refunds to homeowners.44
Finally, consumers have sued lenders who generate profit centers
by creating businesses or joint ventures that capture settlement charges
in loans they make.45 These lenders pay themselves or a related company
for settlement services at marked-up rates. Additionally, lenders have
Mortgage Contracts: A Cost-Benefit Analysis, 19 Hous. Pol’y Debate 631, 667

(2008), available at http://www.mi.vt.edu/date/files/hpd%2019.4/little-
holmes_web.pdf.
41 Renuart et al., Cost of Credit, supra note 9, § 12.5.3.6 (2009). See also
Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 126-27 (2d Cir. 2007)
(reversing dismissal of UDAP claim; charging of illegal fee may constitute
deception even if it was disclosed); McKell v. Wash. Mut., Inc., 49 Cal. Rptr.
3d 227, 234, 240-41 (Cal. Ct. App. 2006) (finding that lender may commit an
unfair and deceptive act by leading borrowers to believe that it is merely passing
through third-party charges when in fact it is charging significantly more than
its costs).
42 United Companies Lending Corp. v. Sargeant, 20 F. Supp. 2d 192, 206-207
(D. Mass. 1998) (considering defendant borrower’s counterclaim that points
charged by plaintiff lender were unconscionable).
43 12 U.S.C. § 2607 (2006). See also Kruse v. Wells Fargo Home Mortgage Inc.,
383 F.3d 49, 62 (2d Cir. 2004) (holding that plaintiffs stated a cause of action
under RESPA by alleging defendants marked-up third parties’ fees without
providing additional services); Sosa v. Chase Manhattan Mortgage Corp., 348
F.3d 979, 981, 983 (11th Cir. 2003) (finding that a lender may violate RESPA
by marking-up the charges of another service provider); Boulware v. Crossland
Mortgage Corp., 291 F.3d 261, 265 (4th Cir. 2002) (stating that overcharges
only violate RESPA when kicked back to a third party).
44 E.g., Cohen v. J.P. Morgan Chase & Co., No. 04-CV-4098, 2009 WL 3076700,
at *2, *4 (E.D.N.Y. Sept. 24, 2009) (approving preliminarily a settlement
involving potential for $20 million in cash refunds for mortgage overcharges).
45 See In re Countrywide Fin. Corp. Mortgage Mktg. & Sales Practices Litig., 601
F. Supp. 2d 1201, 1212-14 (S.D. Cal. 2009) (describing role of Countrywide’s
subsidiaries “Landsafe companies” performing appraisal, credit reporting and
flood search for Countrywide in alleged RICO class actions).
attempted to capture their own business for appraisals,46 title services,

flood insurance,47 and even loan closings.48
C. Incomprehensible Disclosures
In the last twenty years, regulation of subprime lending has largely

been through disclosures of loan terms to consumers.49 The working
legislative and regulatory assumption has been that if a consumer is told
about various loan features, even if predatory, the consumer has sufficient
information to make an informed choice.50
One problem with a disclosure approach to consumer protection
in mortgage lending is the sheer amount of paperwork associated with
a given loan. Most loans involve hundreds of pages of documents at
the closing table. For some, finding the most relevant disclosures is like
locating a needle in a haystack.51
A second problem is that mortgage loans are increasingly
complicated.52 Variable rate loans typically contain references to obscure
46 Id. See also Macheda v. Household Fin. Realty Corp. of N.Y., 631 F. Supp. 2d
181, 188 (N.D.N.Y. 2008) (alleging undisclosed relationship between
Household Finance and its settlement service provider).
47 See, e.g., Countrywide, 601 F. Supp. 2d at 1207.
48 Macheda, 631 F. Supp. 2d at 188.
49 See generally Nat’l Consumer L. Ctr. et al., Comments from the National
Consumer Law Center, and Consumer Action, Consumer Federation
of America, Consumers Union, Leadership Conference on Civil Rights,
National Association of Consumer Advocates, National Fair Housing
Alliance, and the Empire Justice Center to the Board of Governors of
the Federal Reserve System Regarding Proposed Regulations Relating
to Unfair Trade Practices in Connection with Mortgage Lending
(2008), available at http://www.consumerlaw.org/issues/predatory_mortgage/
content/HOEPACommentsApril08.pdf (describing the failure of the disclosure
regime).
50 See 15 U.S.C. § 1601 (2006) (statement of legislative purpose and congressional
findings).
51 Even lending industry advocacy groups recognize that consumer disclosures are
complicated and often insufficient in the face of complex loan products. See,
e.g., Letter from Steve Bartlett, President and CEO, The Financial Services
Roundtable, et al., to Senators Christopher J. Dodd and Richard C. Shelby
(June 27, 2007), available at http://www.americansecuritization.com/
uploadedFiles/LetterToSenateReSubprime062706.pdf.
52 Emery v. Am. Gen. Fin., Inc., 71 F. 3d 1343, 1346 (7th Cir. 1995) (describing
interest rate matrices that are both unavailable and incomprehensible to

the average consumer.53 The problem is exacerbated by gimmicky loan
features that are designed to obscure the real cost of the loan, sometimes
by overshadowing the true price of the loan with an initial rate that will
only be in effect for a matter of days.54 Similarly, deregulation has led to
ineffectiveness of TILA in conveying relevant information in a complex
refinancing transaction and concluding, “[s]o much for the Truth in Lending
Act as a protection for borrowers”). See also Bd. of Governors of the Fed.
Reserve Sys. & Dep’t Of Hous. and Urban Dev., Joint Report to the
Congress Concerning Reform to the Truth In Lending Act and the
Real Estate Settlement Procedures Act 9, 17, 62 (1998), available at
http://www.federalreserve.gov/boarddocs/RptCongress/tila.pdf (noting
consumers’ difficulty in understanding mortgage terms with or without
disclosure).
53 One loan recently reviewed by our office generates a variable rate based on the
following index: “[T]he weighted average of the interest rates in effect as of the
last day of each calendar month on the deposit accounts of the federally insured
depository institution subsidiaries (‘Subsidiaries’) of Golden West Financial
Corporation (‘GDW’), as made available by GDW. Included in the deposit
accounts for purposes of the Index calculation are all of the items and
adjustments that GDW uses to calculate the line item currently called ‘costs of
deposits’ that appears in its quarterly and annual reports to shareholders as well
as in other financial reports publicly distributed by GDW. The Index does not
include deposit accounts owned by GDW or its Subsidiaries or other affiliates.
The calculation of the Index includes adjustments for the effects of financial
instruments related to the deposit accounts and other adjustments determined
by GDW in its sole discretion as appropriate to accurately reflect the weighted
average of interest rates on the deposit accounts. If an index is substituted as
described in Section 2(F) of this Note, the alternative index will become the
index. The most recent Index figure available on each Interest Change Date is
called the ‘Current Index.’” First Amended Class Action Complaint at 7,
Bettinelli et al. v. Wells Fargo Home Mortgage, Inc., No. 09-11079-MLW (D.
Mass. June 24, 2009) [hereinafter Bettinelli Complaint]. The loan was made to
borrowers with a high school-level education who could never have understood
this index even if it were publicly available.
54 Another loan recently reviewed, also given to a borrower with a high school
education, had a low fixed teaser rate in effect for just sixty days followed by the
following provision for biannual payment changes: “At least 30 days before
each Payment Change Date, the Note Holder will calculate the amount of the
monthly payment that would be sufficient to repay the unpaid Principal that I
am expected to owe at the Payment Change Date in full on the maturity date
in substantially equal payments at the interest rate effective during the month
preceding the Payment Change Date. The result of this calculation is called the
increasingly complex loan provisions, including confusing prepayment

penalty terms,55 complex provisions for negative amortization and
payment changes,56 holdbacks from loan proceeds,57 and mysterious fees
and costs. Thus, as loans themselves become more complex, disclosures
become increasingly inadequate.58
Equally important is that loan officers and mortgage brokers have
strong incentives to close loans in order to earn out-sized commissions.59
Their interactions with consumers are often designed to override disclosed
information. Finally, the disclosure regime is poorly equipped to deal
with the educational level of many American consumers. Many recent
studies show that consumers rarely understand complex disclosures of
‘Full Payment.’ Unless Section 3(F) or 3(G) apply, the amount of my new
monthly payment effective on a Payment Change Date, will not increase by
more than 7.500% of my prior monthly payment. This 7.500% limitation is
called the ‘Payment Cap.’ This Payment Cap applies only to the Principal and
interest payment and does not apply to any escrow payments Lender may
require under the Security Instrument. The Note Holder will apply the
Payment Cap by taking the amount of my Minimum Payment due the month
preceding the Payment Change Date and multiplying it by the number 1.075.
The result of this calculation is called the ‘Limited Payment.’ Unless Section
3(F) or 3(G) below requires me to pay a different amount, my new Minimum
Payment will be the lesser of the Limited Payment and the Full Payment.”
Amended Class Action Complaint at 8, Hart v. Bank of Am. Home Loans,
Inc., No. 09-11096-RWZ (D. Mass. July 13, 2009) [hereinafter Hart
Complaint]. Importantly, the loan included complicated provisions making it
virtually certain that the loan principal would increase over time triggering
significant and unaffordable payment changes to amortize the balance. See
generally id.
55 See Renuart et al., The Cost of Credit, supra note 9, § 5.8.
56 Id. § 4.3.1.2.
57 Prepaid payments are regulated only for very high rate loans. See 15 U.S.C. §
1639(g) (2006). See generally Therrien v. Resource Fin. Group, Inc., 704 F.
Supp. 322 (D.N.H. 1989).
58 See Michael Barr et al., Harvard Univ. Joint Ctr. for Hous. Studies,
Behaviorally Informed Home Mortgage Regulation 3 (2008). See also
Michael Barr et al., A One Size Fits All Solution, N.Y. Times, Dec. 26. 2007, at
A31. The Federal government has preempted almost all substantive state
regulation of mortgage terms, without substituting commensurate consumer
protections. See, e.g., The Alternate Mortgage Transactions Parity Act, 12
U.S.C. §§ 3801-05 (2006).
59 See infra Part E (discussion of compensation as incentives to fraud).
loan terms.60
Despite these weaknesses in disclosure laws as consumer protection,
failure to make disclosures does in some cases61 provide consumers with
remedies, 62 often on a strict liability basis.63 Individual truth-in-lending
rescission cases for failure to make material disclosures, for example, can
be an effective tool to prevent a foreclosure.64 Unfortunately, several
courts have recently ruled that such disclosure failures cannot give rise
to a class remedy for rescission.65 In these jurisdictions, only damage
remedies are available to a class.66
Perhaps more promising, though, is that non-disclosure can lead
to state unfair trade practice remedies.67 The absence of a disclosure of
a material term can be actionable for a class. The Fair Debt Collection
Practices Act also requires certain disclosures in circumstances that involve
servicing abuses.68 That statute specifically authorizes class claims but
60 See supra note 52.
61 Unfortunately, one area in which there has been no private right of action is for
violations of the Real Estate Settlement Procedures Act requirement for early
disclosure of estimated loan costs. See 12 U.S.C. § 2604(c) (2006); 24 C.F.R.
§ 3500.7 (2008). See also Collins v. FMHA-USDA, 105 F.3d 1366, 1368 (11th
Cir. 1997). It appears that some lenders, absent potential liability and/or
meaningful regulatory concerns simply dispensed with these disclosures. Note
too that the regime for such disclosures will change, by amendments effective
on January 1, 2010. 73 Fed. Reg. 68239 (Nov. 17, 2008) (to be codified at 24
C.F.R. § 3500.2).
62 15 U.S.C. § 1640 (2006).
63 Id. See generally Renuart et al., Truth in Lending, supra note 9, §§ 8.1-
8.11.2.
64 See 15 U.S.C. § 1635 (2006). See generally Renuart et al., Truth in Lending,
supra note 9, §§ 6.1-6.9.9.
65 See, e.g., Andrews v. Chevy Chase Bank, FSB, 474 F. Supp. 2d 1006, 1008
(E.D. Wis. 2007); McKenna et al. v. First Horizon Home Loan Corp., 475 F.3d
418, 422 (1st Cir. 2007).
66 15 U.S.C. § 1640(a)(2)(B). See, e.g., Williams v. Chartwell Fin. Servs., 204 F.3d
748, 760 (7th Cir. 2000) (describing importance of TILA’s class action remedy).
It is also possible that there can be a continue class claim under the TILA for
consumers who have actually rescinded. See, e.g., Andrews, 474 F. Supp. 2d at
1008-1010 (decision appears to leave this possibility open).
67 For example, some courts have found that failure to make the early disclosures
properly may violate state unfair trade practice laws. See, e.g., Chow v. Aegis
Mortgage Corp., 286 F. Supp. 2d 956, 963 (N.D. Ill. 2003).
68 Fair Debt Collection Practices Act, 15 U.S.C. § 1692g(a) (2006). Mortgage
caps damages at a fairly low level.69
D. Variable Rate Loan Structures Designed for Failure
At one time, subprime lending provided unprecedented wealth

to various elements of the American financial services industry.70 As
discussed elsewhere in this article, mortgage originators skimmed fees
from their customer’s home equity.71 Lenders, in turn, sold mortgages
virtually overnight for more than their face amounts to investors on Wall
Street.72 And Wall Street reaped fee income for underwriting, packaging,
marketing, and selling the securities, often to each other (or at least each
other’s investors).73
In order to sustain the boom, all of these market players needed
to find new and creative ways to sustain the source of their wealth –
origination volume. That is, sufficient numbers of new mortgages had to
be originated each day to feed the hunger for fee income and profits in
the secondary market. By late 2005, credit quality had reached bottom.74
It could not be reduced any further to create additional markets among
previously underserved populations. The only alternative was for Wall
Street to create ever more gimmick-laden products in order to convince
servicers are defined as debt collectors when the mortgage was in default at the
time the debt was acquired for servicing. 15 U.S.C. § 1692a(6).
69 15 U.S.C. § 1692k(2)(B).
70 See, e.g., Paul Muolo & Mathew Padilla, Chain of Blame: How Wall
Street Caused the Mortgage and Credit Crisis 6 (John Wiley & Sons,
Inc. 2008). See also Charles R. Morris, The Two Trillion Dollar
Meltdown: Easy Money, High Rollers, and the Great Credit Crash 69
(Public Affairs 2008).
71 See supra Part B (discussing the use of “origination points” by lenders that result
in a decrease of the loan’s value for the borrower).
72 See infra Part I (explaining how the sale of loans on the secondary market allows
lenders to utilize that capital to immediately originate new loans).
73 E.g., Eric Dash & Julie Creswell, Citigroup Saw No Red Flags Even As it Made
Bolder Bets, N.Y. Times, Nov. 22, 2008, at A1 (describing how Citibank
ultimately stashed mortgage linked securities in its own portfolio), available at
http://www.nytimes.com/2008/11/23/business/23citi.html?emc=eta1&
pagewanted=print.
74 See Immergluck, supra note 4, at 130.
homeowners to refinance,75 often with limited or dubious benefits.76

The goal with most of these new product types was to allow
homeowners to believe that they could get more for less. Making use of
tactics first implemented in the credit card industry, lenders increasingly
offered products with temporary fixed, “teaser” rates, designed to keep
initial payments at artificially low-levels. These teaser rate products
allowed originators to focus borrowers on temporarily affordable, low
monthly payments and to distract them from the virtually guaranteed
higher long-term monthly payments anticipated for the duration of the
loan.
These products were offered in various permutations. Some
involved teaser rates for time periods as limited as thirty days with
correspondingly higher rates thereafter.77 Most commonly, the loans had
fixed interest periods of two years, followed by higher rates and higher
payments in effect for twenty-eight years. These products were commonly
known as 2/28 ARMS, representing two years of fixed payments, followed
by twenty-eight years of payments floating at a higher, fully indexed rate.
Most purveyors of such loans deliberately used the temporarily
low interest rates as a selling point. “I can get you a loan at three percent
fixed” was a nice sales line that conveniently omitted that the variable
rate for the other twenty-eight years of the loan was likely to exceed ten
percent and vary unpredictably with interest rates.78 For those borrowers
who saw through the deception, the loan originator had a different easy
answer: “we’ll help you refinance before the payment goes up.” Not only
did the promise of refinance entice many borrowers to take a loan they
75 The Alternative Mortgage Transactions Parity Act (“AMTPA”), 12 U.S.C. §§

3801-06 (2006), provided for deregulation of complex loan products.
76 Office of Attorney General Martha Coakley, Commonwealth of
Massachusetts, The American Dream Shattered: The Dream of Home
Ownership and the Reality of Predatory Lending 11 (2007) [hereinafter
The American Dream Shattered]. Mass. Gen. Laws ch. 183, § 28C (2004),
is one attempt to address the problem in Massachusetts.
77 See Hart Complaint, supra note 54, at 4.
78 One reason for current interest rate policy is to keep rates on these variable rate
products from spiking, thereby generating a new round of home mortgage
defaults. Cf. Ruth Simon, Sounding the ARM Alarm, Wall Street Journal Blog,
http://blogs.wsj.com/developments/2009/09/09/sounding-the-arm-alarm/
(Sept. 9, 2009, 10:35 EST).
could not really afford,79 but it also kept the borrower on the hook for
the next expensive, equity stripping product. When the housing bubble
burst, it was the homeowner left holding the bag for higher monthly
payments.80
Another gimmicky product was the Payment Option ARM loan
(“POA”). The hallmark of a POA mortgage is a limited time period
during which the minimum payment is fixed – typically one to three
years. During this period, if the initial rate was a teaser (or if the interest
rate otherwise goes up), negative amortization results. This leads to a
steady increase in the principal owed on the loan.81
In a POA loan a borrower has, in theory, a choice of three
payments: a minimum payment based on an initial, low teaser interest
rate; an interest only payment that covers the actual interest accruing;
and a fully amortizing payment. In practice, because the loans are sold
to borrowers of limited means, three-quarters of all borrowers pay only
the minimum payment, thus generating further negative amortization.82
POAs have been aggressively pressed on unsophisticated borrowers
as a way to borrow more money with temporarily and artificially low
monthly payments.83 Nearly $750 billion in these loans were issued
79 After all, loan brokers were ostensibly looking after the best interests of their
customers.
80 See, e.g., Morgan J. Rose, Predatory Lending Practices and Subprime Foreclosures
– Distinguishing Impacts by Loan Category, 60 J. Econ. and Bus. 13 passim
(2008) (examining the impact of long prepayment penalty periods, balloon
payments and reduced documentation on the probability of foreclosure). See
also Lynn Dearborn, Mortgage Foreclosure and Predatory Practices in St. Clair
County Missouri, 1996-2000 (2003), available at http://www.eslarp.uiuc.edu/
publications/predlending.pdf (tying foreclosures to ARM products).
81 Les Christie, Pick-a-Payment Loans Turn Poisonous, CNNMoney.com, Sep. 3,
2008, http://money.cnn.com/2008/09/02/real_estate/pick_a_poison/index.
htm (more than sixty-five percent of option ARM borrowers make only
minimum payments).
82 Indeed, these borrowers can afford to make only the minimum monthly
payment—an amount that will never pay off the loan. Joint Ctr. for Hous.
Studies of Harvard U., State of the Nation’s Housing 17 (2007), available
at http://www.jchs.harvard.edu/publications/markets/son2007/son2007.pdf.
83 See Michael Moss & Geraldine Fabrikant, Once Trusted Mortgage Pioneers, Now
Pariahs, N. Y. Times, December 25, 2008, at A1 (retitled Once Trusted Mortgage
Pioneers, Now Scrutinized in the online edition) (describing the rise of World
Savings Bank, the pioneer in originating payment option ARM loans).
between 2004 and 2007.84 Unsurprisingly, POAs are a substantial cause

of defaults and foreclosures across the country.85 As of December 2008,
twenty-eight percent of option ARMs were delinquent or in foreclosure.86
Nearly sixty-one percent of option ARMs originated in 2007 will
eventually default, according to a recent analysis by Goldman Sachs.87
Given the low initial teaser rates in POA loans – rates below the
long-term margin and index rate that are contractually applicable to the
loan – negative amortization occurs whenever minimum payments are
made after the initial fixed rate period. This is by design in order to render
payments ultimately unaffordable and to force prepayments, refinancings
(with new sets of points and fees), and, more commonly now, expensive
loan modification agreements with obligations to pay interest on top of
interest.
Once POA principal caps are reached (typically at 110% to
125% of the principal), the borrower must pay an amount sufficient to
pay off the loan in the remaining time of the loan term. This means
that if the original loan term was thirty years and the remaining term is
now twenty-five years, the aggregate principal will be amortized over the
remaining twenty-five years of the loan. The combination of negative
amortization and low teaser rates results in significant payment shock
– often a doubling or tripling of the borrower’s payment obligations
thirty to sixty months after loan consummation – generally with limited
contractual notice of payment changes. Thus, POA loans are complex
and involve concepts that are unfamiliar and confusing to most, even
fairly sophisticated homeowners.88 Lenders make these loans knowing
84 Ruth Simon, Option ARMs See Rising Defaults – Woes Mount in $750 Billion
Home-Loan Market; Analysts’ Dim Views, Wall St. J., Jan. 30, 2009, at C1.
85 Id. See also Susan E. Barnes et al., Standard & Poor’s Weighs in on the U.S.
Subprime Mortgage Market, Standard & Poor’s, Apr. 5, 2007, at 12, available
at www2.standardandpoors.com/spf/pdf/media/TranscriptSubprime_040507.
pdf (increase in early payment defaults within four months of origination).
86 Simon, supra note 84, at C1.
87 Id. (Goldman further estimates that more than half of all option ARMs
outstanding will default).
88 See, e.g., Press Release, Consumer Fed’n of Am., Lower-Income and Minority
Consumers Most Likely to Prefer and Underestimate Risks of Adjustable Rate
Mortgages 5 (July 26, 2004), available at http://www.consumerfed.org/
elements/www.consumerfed.org/file/housing/072604_ARM_Survey_Release.
pdf (consumers cannot calculate the increase in the payment in an adjustable
that borrowers cannot afford the fully indexed rate or the anticipated fully
amortizing payments.89
The problems with loan gimmicks are exacerbated by
incomprehensible explanations of the basis on which rates would change.
In one such loan, the interest rate is described as being based on a margin
and an index: “The margin is 3.5% added to the ‘Index.’”90 The “Index”
described in the note is the “‘Twelve Month Average’ of the annual
yields on actively traded United States Treasury Securities adjusted to a
constant maturity of one year as published by the Federal Reserve Board
in the Federal Reserve Statistical Release entitled ‘Selected Interest Rates
(H.15).’”91
The note goes on to state that “[t]he Twelve Month Average is
determined by adding together the Monthly Yields for the most recently
available twelve months and dividing by 12. The most recent Index figure
available as of the date 15 days before each Interest Rate Change Date is
called the ‘Current Index.’”92 Plainly, a sophisticated lender could calculate
the likely long-term rate by reading the loan note, while unsophisticated
borrowers could not even read to the end of the first subclause, let alone
find or predict the trend in the relevant index.
Several class actions are pending on Payment Option Arm issues.93
rate mortgage and minimize the interest rate risk by understating the increase
in the payment).
89 See, e.g., Subprime Mortgage Market Turmoil: Causes and Consequences: Hearings
Before the S. Comm. On Banking, Hous., & Urban Affairs, 110th Cong. 3
(2007). See also Steven Sloan & Joe Adler, How Freddie Cutback in Hybrids May
Reverberate, Am. Banker, Feb. 28, 2007, at 1 (quoting Wright Andrews, a
lobbyist for nonbank lending institutions, as saying that most subprime
borrowers cannot afford the fully indexed rate and that requiring underwriting
to the fully indexed rate would prevent adjustable rate mortgages from being
made).
90 Exhibit 1 of Amended Complaint, Bettinelli v. Wells Fargo Home Mortgage,
NO. 09-11079-MLW (D. Mass. June 24, 2009).
91 Id.
92 Id.
93 E.g., Bettinelli Complaint, supra note 53; Amended Complaint ¶¶ 9-18, 76-
77, Hart v. Bank of Am. Home Loans, No. 09-11096-RWZ (D. Mass. July 13,
2009). These two cases are based on the theory that these loans are unfair
within the meaning of Commonwealth v. Fremont Inv. & Loan, 897
N.E.2d 548 (D. Mass. 2008). See also In Re Wachovia Corp. Pick-A-Payment
Mortgage Mktg. and Sales Practices Litig., 598 F. Supp. 2d 1383 (J.P.M.L.
In addition, there are class cases alleging that some lenders used “bait and
switch practices” by promising fixed rates and then converting to variable
at closing.94 Finally, several class and individual cases have challenged
loan disclosures in connection with complicated variable rate structures.95
E. Loan Officer Compensation Structures As Incentives for Fraud
Lenders market and originate subprime loans through retail,

wholesale, and correspondent lending channels.96 Many lenders primarily
used mortgage brokers in the wholesale channel to transact subprime
loans. But, lenders also maintained retail offices97 using loan officers
to market and sell loans through aggressive and relentless telemarketing
and other sales campaigns.98 Loan officers have described their offices
2009) (consolidation of cases pending in the federal system). But see Nkengfack
v. Homecomings Fin., LLC, No. RDB 08-2746, 2009 WL 1663533, at *6 (D.
Md. June 15, 2009) (rejecting claims); Biggs v. Eaglewood Mortgage, LLC, 636
F. Supp. 2d 477, 480 (D. Md. 2009) (same).
94 See First Amended Complaint and Consolidated Complaint ¶¶ 93-97, In re
Ameriquest Mortgage Co. Mortgage Lending Pracs. Litig., No. 05-cv-07097
(N.D. Ill. Dec. 6, 2006) [hereinafter In re Ameriquest Litigation Complaint].
95 See, e.g., Mincey v. World Sav. Bank, FSB, 614 F. Supp. 2d 610 (D.S.C. 2008).
See also Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612, 616-21 (E.D.
Wis. 2007), vacated, 543 F.3d 570 (7th Cir. 2008) (describing disclosure
violations; certification of a rescission class in this case was later overturned).
See generally Renuart et al., Truth in Lending, supra note 9, § 4.8.
96 See Realestateabc.com, Types of Mortgage Lenders, http://www.realestateabc.
com/loanguide/typesof.htm (last visited Oct. 4, 2009). See also, Santoro v.
CTC Foreclosure Serv. Corp., 12 F. Appx. 476, 479 (9th Cir. 2001) (noting
that retail loans are those that lenders make available directly to consumers,
consumers would contact a loan broker to obtain a loan through a lender’s
wholesale channel).
97 Realestateabc.com, supra note 96.
98 E.g., In re First Alliance Mortgage Co., 471 F.3d 977, 984-85, 991-92 (9th Cir.
2006) (describing a lender’s retail marketing strategy, which used loan officers
to target individuals who had built up substantial equity in their homes and
make a standardized sales presentation to persuade borrowers to take out loans
with high interest rates and hidden high origination fees or “points” and other
“junk” fees, of which the borrowers were largely unaware); Wong v. HSBC
Mortgage Corp., No. C-07-2446 MMC, 2008 WL 753889, at *6-7 (N.D. Cal.
Mar. 19, 2008) (citing loan officers’ testimony that their primary job duty was
to sell as many loans as possible).
as“boiler rooms,”99 where they would “work the phones hour after hour
. . . trying to turn cold calls into lucrative ‘subprime’ mortgages.”100 As
one news article reported, “[loan officers] described 10- and 12-hour days
punctuated by ‘power hours’ – nonstop cold-calling sessions to lists of
prospects burdened with credit card bills; the goal was to persuade these
people to roll their debts into new mortgages on their homes.”101 Lenders
provided their loan officers with scripts designed to convince unwitting
borrowers to take unaffordable and unfavorable loans, and to avoid
borrowers’ questions and concerns.102 This marketing strategy targeted
financially struggling homeowners in immediate need of capital and those
with equity in their homes.103 While lenders trained their loan officers
how to sell the most loans possible, they failed to provide loan officers any
meaningful training on mortgage lending laws and regulations.104
Loan officer compensation in the subprime boom was volume based
– the more loans originated, the higher the loan officer’s commission.105
99 Mike Hudson & E. Scott Reckard, Workers Say Lender Ran “Boiler Rooms,” L.A.
Times, Feb. 4, 2005, at A1. See also Dean Starkman, Boiler Room: The Business
Press is Missing the Crooked Heart of the Credit Crisis, 47 Colum. Journalism
Rev. 48 (2008).
100 Hudson & Reckard, supra note 99, at A1.
101 Id.
102 See supra note 96; Complaint ¶¶ 29-30, Williams v. Ameriquest Mortgage Co.,
No. 1:05-CV-06189-LTS (S.D.N.Y. July 1, 2005).
103 Press Release, Fed. Trade Comm’n, FTC Charges One of Nation’s Largest
Subprime Lenders with Abusive Lending Practices (Mar. 6, 2001), available at
http://www.ftc.gov/opa/2001/03/associates.shtm.
104 See In re First Alliance Mortgage Co., 471 F.3d 977, 985 (9th Cir. 2006) (“First
Alliance trained its loan officers to follow a manual and script known as the
‘Track,’ which was to be memorized verbatim by sales personnel and executed
as taught. The Track manual did not instruct loan officers to offer a specific lie
to borrowers, but the elaborate and detailed sales presentation prescribed by the
manual was unquestionably designed to obfuscate points, fees, interest rate,
and the true principal amount of the loan. First Alliance’s loan officers were
taught to present the state and federal disclosure documents in a misleading
manner.”). See, e.g., Report of the Mortgage Summit Working Groups 12
(2007), available at http://www.mass.gov/Eoca/docs/dob/Mortgage_Summit_
Final_20070409.pdf (noting that in Massachusetts there was no testing or
education requirements for loan officers to ensure they were fully informed on
all of the obligations in Massachusetts).
105 Center for Responsible Lending, CLR Policy Brief: Neglect and
Inaction: An Analysis of Federal Banking Regulators’ Failure to
Furthermore, lenders provided additional incentives to increase

loan volume by rewarding successful loan officers with extravagant gifts
such as vacations, cars, and sports tickets.106 Lenders themselves obtained
a significant percentage of their revenue from loan origination points.107
Because management level employees received commissions based in part
on revenue earned by their subordinates, they trained loan officers to
convince homeowners to borrow more often in ever larger amounts.108
These high-pressure sales environments and incentives encouraged
massive underwriting fraud.109 Loan officers manipulated loan applications
to qualify otherwise ineligible borrowers with poor credit histories for
Enforce Consumer Protections (July 13, 2009), http://www.

responsiblelending.org/mortgage-lending/policy-legislation/regulators/
regulators-failure-to-enforce-consumer-protections.html (citing a 2005 OCC
survey of credit underwriting practices acknowledging that “ambitious growth
goals in a highly competitive market can create an environment that fosters
imprudent credit decisions”). See also The American Dream Shattered,
supra note 76, at 8.
106 Tellin’ Stories, a media production company, filmed a video advertisement for
Ameriquest’s 2005 annual sales meeting that took place in Las Vegas. The video
opener can be found on its website under the link “Portfolio,” entitled
“Ameriquest Big Spin.” The video explains that the “Big Spin” includes prizes
and a free concert for Ameriquest’s employees who have exceeded their loan
quotas. Tellin’ Stories, http://www.tellinstories.com (last visited Oct. 17,
2009). See also Mayor and City Council of Baltimore v. Wells Fargo Bank,
N.A., 631 F. Supp. 2d 702 (D. Md. 2008).
107 See supra Part B, (explaining the detrimental effect of loan origination points on
a borrower’s effective rate and thus, the high profit margin to the lender).
108 See Press Release, Wash. State Office of the Att’y Gen., Washington Homeowners
to Receive Millions in Ameriquest Settlement (Jan. 23, 2006), available at
http://www.atg.wa.gov/pressrelease.aspx?&id=16354 (Ameriquest required to
revise its compensation system to eliminate employee incentives for prepayment
penalties or other fees as part of a $295 million dollar settlement with state’s
attorney general).
109 See, e.g., The American Dream Shattered, supra note 76, at 6. See also
Denise James, Jennifer Butts & Michelle Donahue, MARI’s Eleventh
Periodic Mortgage Fraud Case Report to: Mortgage Bankers
Association 1, 6, app. 1, T. 6 (Mar. 2009), available at http://www.
marisolutions.com/resources-news/reports.asp (discussing common fraudulent
underwriting practices; reporting that mortgage fraud, particularly relating to
underwriting practices, is still rampant, indicating lenders’ desperation to keep
loan volume up).
loans to meet and exceed their quotas.110 These manipulations included

forging signatures on loan documents, cutting and pasting portions of
borrowers’ W-2 forms to substitute income information, and otherwise
mischaracterizing and misreporting income and assets.111
Moreover, loan officers typically took a borrower’s loan application
over the telephone, and the borrower would not see a copy of the
application until the closing.112 Retail offices used closing agents to meet
with borrowers and complete the necessary paperwork to transact the
loan. Lenders paid these closing agents a flat fee for every loan, regardless
of the amount or quality of work the closing agent did.113 These fees are
generally regulated and capped on a state-by-state basis.114 Therefore,
closing agents’ compensation depended on the number of loans they
closed.115 Borrower complaints of hurried or rushed closings, often in
inappropriate places like parking lots and bars, became commonplace.116
Recently, there have been a number of class actions challenging
loan officers’ sales and marketing tactics, claiming that the loan officers
participated in a common scheme to place borrowers into bad loans.117
110 Jonathan Sheldon et al., Unfair and Deceptive Acts and Practices §
6.3.4.1 (7th ed. 2008) [hereinafter Sheldon et al., Unfair and Deceptive
Acts and Practices].
111 See The American Dream Shattered, supra note 76, at 12-13, 15, 18. See
also Sheldon et al., Unfair and Deceptive Acts and Practices, supra note
110, §§ 6.3.4.1, 6.3.4.2.
112 See, e.g., Wells Fargo Home Mortgage, https://www.wellsfargo.com/mortgage/
apply/expect (last visited Oct. 8, 2009) (“Applying over the phone allows you
to give your information directly to a mortgage consultant. This person will
walk you through the application and complete it for you based on your
answers.”).
113 Cedeno v. IndyMac Bancorp, Inc., No. 06 Civ. 6438 (JGK), 2008 WL
3992304, at *2 (S.D.N.Y. Aug. 26, 2008) (alleging “inflated” closing costs in a
class action); Complaint ¶¶ 19, 21, Johnson and Harris v. Best Rate Funding
Corp. and Nat’l Doc. Signing Servs. Corp, No. 07-30070-MAP (D. Mass. Apr.
30, 2007).
114 See Bankrate.com, State-by-State Closing Costs, http://www.bankrate.com/
finance/mortgages/state-by-state-closing-costs8-131404.aspx? (last visited Oct.
6, 2009).
115 The American Dream Shattered, supra note 76, at 8.
116 Id.
117 In re Ameriquest Litigation Complaint, supra note 94, ¶¶ 106-15; In re First
Alliance Mortgage Co. 471 F.3d 977, 983 (9th Cir. 2006); In re Countrywide
Fin. Corp. Mortgage Mktg. & Sales Pracs. Litig. (Countrywide), 601 F. Supp.
To show that a common scheme existed, the plaintiffs pointed to scripts

provided by the lender for loan officers to use to overcome borrowers’
objections to unwanted loans.118 These cases also assert that loan officers’
compensation structure incentivizes them to act against the borrowers’
best interest.119
Establishing a common practice is essential in a class action.120
Class action lawsuits against loan officers for misrepresenting the terms of
the loans they sold may be difficult to maintain because of the necessity
to show borrowers’ relied upon the misrepresentations in a common
way.121 However, where a misrepresentation is made in a uniform way
and the members of the putative class had damages that they would not
have incurred but for the misrepresentation, reliance can sometimes be
inferred and a misrepresentation class certified.122
F. Wholesale Marketing Abuses
The subprime lending market expanded rapidly from the 1990s

through 2007,123 fueled by loosened underwriting standards and the
2d 1201, 1207 (S.D. Cal. 2009); Pierceall v. Ameriquest Mortgage Company,

et al., Case No. 415620 (Superior Court of California, County of San Mateo)
118 E.g., In re Ameriquest Litigation Complaint, supra note 94, ¶¶ 109-10.
119 E.g., id. ¶¶ 116-17.
120 Fed. R. Civ. P. 23(a)(2).
121 E.g., Sandwich Chef of Tex., Inc. v. Reliance Nat’l Indem. Ins. Co., 319 F.3d
205, 211 (5th Cir. 2003) (“Fraud actions that require proof of individual
reliance cannot be certified as Fed. R. Civ. P. 23(b)(3) class actions because
individual, rather than common, issues will predominate.”).
122 E.g., Mounce v. Wells Fargo Home Mortgage (In re Mounce), 390 B.R. 233,
255 (Bankr. W.D. Tex. 2008) rev’d on other grounds 2009 WL 2767134, at *1
(W.D. Tex. Aug. 26, 2009).
123 Press Release, Fed. Trade Comm’n, FTC Testifies on Enforcement and
Education Initiatives to Combat Abusive Lending Practices (Mar. 16, 1998),
available at http://www2.ftc.gov/opa/1998/03/subprime.shtm (“Subprime
lending refers to the extension of high interest rates or higher fee loans to higher
risk borrowers. This segment of the lending industry has grown substantially
since the early 1990s. In 1997 alone, subprime lenders originated over $125
billion in home equity loans. In addition to an expansion in the number of
loans, the Commission’s testimony notes that the composition of the industry
is changing. One of the most dramatic changes has been the growth in subprime
mortgage lending by large corporations that operate nationwide.”); Press
appetite of the secondary market,124 and with a primary goal of closing as

many loans as possible.125 Opportunistic lenders expanded their presence
beyond retail offices and set up national broker networks for wholesale
marketing. Brokers then saturated low-income and minority communities
where credit was previously less available.126 A 2006 Mortgage Bankers
Association Study estimated that broker-originated loans constituted
fifty percent of the overall market and seventy percent of the subprime
market.127
Broker-originated loans exposed borrowers to substantial closing
costs such as additional brokers’ fees. Brokers receive commissions based
on the number of loans they close, the principal balance of the loan, and
the interest rate on the loan.128 To close more loans, similar to abuses by
retail offices, brokers routinely manipulated underwriting information to
Release, Total Mortgage Servs., LLC., National Mortgage Lender Launches

Wholesale Lending Division (Sept. 20, 2009), available at http://www.24-
7pressrelease.com/press-release/national-mortgage-lender-launches-wholesale-
lending-division-117023.php (“Considering that the financial services industry
continues to battle through its worst crisis in 75 years, expansion may seem like
a bold stroke. However, it makes excellent sense for Total Mortgage, which is
thriving despite serious problems faced by other companies in the industry.
The mortgage lender is excelling thanks to its decision not to participate in
subprime and other high-risk loans, as well as its historical focus on low
mortgage rates and customer service.”).
124 Ruth Simon, Mortgage Lenders Loosen Standards, Wall St. J. Online, July 27,
2005, http://www.realestatejournal.com/buysell/mortgages/20050727-simon.
html (“Mortgage lenders are continuing to loosen their standards, despite
growing fears that relaxed lending practices could increase risks for borrowers
and lenders in overheated housing markets.”). See infra Part I (discussing how
increased securitization of mortgages and the proliferation of a secondary
market for mortgage-backed securities have led to relaxed lending standards to
increase the volume of loans).
125 See supra Part E (discussing high pressure sales tactics and compensation
incentives that rewards a high volume lending).
126 See infra Part G (discussing discrimination in the mortgage industry).
127 Mike Fratantoni, Mortgage Bankers Ass’n, Wash., D.C., MBA Research
Datanotes: Residential Mortgage Origination Channels 1 (2006),
available at, http://www.mortgagebankers.org/files/Bulletin/
InternalResource/44664_September2006-ResidentialMortgageOriginationCh
annels.pdf.
128 Sheldon et al., Unfair and Deceptive Acts and Practices, supra note
110, § 6.2.1. See discussion infra Part G (discussing compensation for brokers).
qualify otherwise ineligible borrowers.129 This practice was rampant in

wholesale subprime lending.130 Lenders no longer required a borrower
to complete her own loan application. Rather, brokers completed
applications on borrowers’ behalf, usually by taking limited information
from the borrower through a telephone call or by email.131 While a
borrower met directly with a broker instead of a closing agent, she often
did not receive the completed loan application from the broker until
the day of the closing, and thus never had an opportunity to verify the
accuracy of the information before the lender qualified her for the loan.132
Lenders also created loan products that allowed for “no income
verification,” “no doc,” or “stated income” that did not require borrowers
to submit supporting documentation to verify the income stated on their
loan applications. Additionally, brokers routinely inflated borrowers’
income to qualify them for loans that were otherwise impossible to repay
on the borrowers’ true salaries.133
Another way brokers were able to close more loans was through
“bait and switch” tactics – inducing a borrower into taking a loan by
promising certain terms, then pressuring the borrower into a loan with
worse terms at the closing.134 Often, a broker would initially promise
129 Kimberly Blanton, AG Charges Mortgage Broker With Fraud, Boston Globe,
Mar. 8, 2008, at F1 (discussing Massachusetts Attorney General’s complaint
against a brokerage firm, in which the Attorney General alleged the firm
“‘engaged in a widespread practice’ of submitting false information about bank
accounts and incomes that ‘it knew or should have known were inflated’”). See
also Hardy v. Indymac Federal Bank, No. CV F 09-935 LJO SMS, 2009 WL
2985446, at *4 (E.D. Cal. Sept. 15, 2009) (upholding fraud claim, in part,
because the plaintiff alleged falsification of income); Ware v. Indymac Bank,
534 F. Supp. 2d 835, 842 (N.D. Ill. 2008) (refusing to dismiss UDAP claim
based on broker’s and lender’s falsification of loan application); Vincent v.
Ameriquest Mortgage Co. (In re Vincent), 381 B.R. 564, 574 (Bankr. D. Mass.
2008).
130 See Hardy, 2009 WL 2985446, at *4; Ware, 534 F. Supp. 2d at 842; Vincent,
381 B.R. at 574; Blanton, supra note 129.
131 See The American Dream Shattered, supra note 76, at 7, 12.
132 Moreover, brokers frequently rushed unrepresented borrowers through the
closing process, which involves reviewing and signing voluminous documents,
so that most borrowers never had the opportunity to carefully review documents
pertaining to the fees and costs of their loans. See id. at 18-19.
133 Id. at 6-7, 16-17.
134 Hardy, 2009 WL 2985446, at *4; Patetta v. Wells Fargo Bank, N.A., No.
an interest rate that was lower than the interest rate on the final loan
documents.135 Or, a broker would promise the borrower a fixed interest
rate, but ultimately give the borrower a variable rate.136 Other empty
promises included that the loan would lower a borrower’s monthly
payment, the loan would not contain a prepayment penalty, or the loan
would not require the payment of certain fees and costs.137 Even if the
borrower became aware of the change in terms at the loan closing, which
she often did not,138 she unwillingly accepted the less-favorable loan
because she did not understand that she could walk away from it. In
fact, many borrowers did not question what brokers told them about
their loans and options because they believed that the broker’s role was to
act in their best interests – to find the borrower a loan on the best terms
possible.
Some brokers received compensation in the form of “broker” or
“origination” points.139 Because broker points are based on a percentage of
the loan amount, loans with higher principal balances increased brokers’
overall commissions.140 Lenders hid these broker fees from borrowers
by rolling them into the principal amount of the loan so that borrowers
financed them. Financing these fees increases the Annual Percentage Rate
(“APR”) on the borrower’s loan,141 which makes the loan more expensive
to the borrower for its entire term.
Lenders also cavalierly extended large amounts of credit offering
3:09-cv-2848-FLW, 2009 WL 2905450, at *4 (D.N.J. Sept. 10, 2009) (alleging
bait and switch based on receiving a loan with an adjustable rate when promised
a fixed rate); In re Ameriquest Litigation Complaint, supra note 94, ¶¶ 3-4, 93-
97 (alleging a variety of bait and switch practices); but see Chiles v. Ameriquest
Mortgage Co., 551 F. Supp. 2d 393, 400 (E.D. Pa. 2008) (borrower admitted
he misrepresented his own income to qualify for a refinance).
135 In re Ameriquest Litigation Complaint, supra note 94, ¶¶ 8, 93-97.
136 See Sheldon et al., Unfair and Deceptive Acts and Practices, supra note
110, § 6.2.1, at 329.
137 See id.
138 Id.
139 Brokers sometimes receive loan origination points, or “broker’s points,” which
are based on a percentage of the loan amount. See supra Part B (discussing how
origination points are paid).
140 Id.
141 The Annual Percentage Rate is the effective interest rate on a loan, including all
financed fees and interest. See Truth in Lending Act § 107, 15 U.S.C. § 1606
(2006).
“cash out” and encouraging borrowers to consolidate non-mortgage

debts, such as credit card debts, car loans, student loans, and/or medical
debt into their mortgage loans.142 Jumbo loans – loans that exceeded the
industry standard for limits on principal amounts – became commonplace
as lenders encouraged more borrowing and loosened down-payment
requirements.143 Such reckless lending coupled with the housing market
crash left borrowers saddled with hundreds of thousands, sometimes over
a million dollars, in mortgage debt. According to the 2009 U.S. Census
Report, total U.S. mortgage debt increased from $205.5 billion in 1990
to $1,061.5 billion in 2006. 144 Brokers, on the other hand, profited
handsomely from their percentage-based commissions on these loans.
Lenders also compensated brokers by allowing them to mark
up interest rates with yield spread premiums.145 The yield spread is
the difference between the par rate (the lowest interest rate for which a
borrower could qualify) and the marked-up interest rate, expressed as a
percentage.146 Thus, the dollar amount brokers received as a premium
correlated with the size of the mark-up on the interest rate. The higher
interest rate would remain in effect for the entire term of the loan and
could continue long after the lender recouped the broker’s compensation
through the borrower’s higher interest payments.147 Not privy to lenders
internal underwriting standards, borrowers did not know the lowest
142 Various lenders’ online advertisements claim that consolidating credit card and
other debt into a mortgage loan saves homeowners hundreds and thousands of
dollars per month by lowering their total monthly obligations. See, e.g.,
BrokerOutpost.com, Consolidating Credit Card Debt Into Your Mortgage,
http://www.brokeroutpost.com/reference/23651.htm (last visited Dec. 16,
2009); Dan Moore, Ask an Expert: Using a Mortgage to Consolidate Debt,
http://www.lendingtree.com/debt-consolidation/advice/debt-consolidation/
consolidate-debt-with-mortgage/ (last visited Dec. 16, 2009); Nation Star
Mortgage, Consolidate Your Debt, https://www.nationstarmtg.com/
FindALoan/ConsolidateYourDebt.aspx?cm_re=HowCanWeHelpYou*LNv*C
onsolidateYourDebt (last visited Dec. 16, 2009).
143 See Anchor Sav. Bank, F.S.B. v. United States, 81 Fed. Cl. 1, 18 (Fed. Cl. 2008).
144 U.S. Census Bureau, Statistical Abstract of the United States: 2009 §
13, at 431 (128th ed. 2009), available at http://www.census.gov/
prod/2008pubs/09statab/income.pdf.
110, § 6.2.3, at 331.
146 Id.
147 Id.
interest rate for which they could qualify independent of brokers’

representations.148 They, therefore, had no basis with which to challenge
the mark-up on their interest rate.
In a series of class actions brought by borrowers against mortgage
lenders and brokers in the early 1990s, borrowers challenged brokers’
charging of YSPs on the ground that they constituted referral, or
“kickback”, fees prohibited by the Real Estate Settlement Procedures Act
(“RESPA”).149 The two primary issues courts initially faced were whether
the fee was for actual and legitimate services performed by the broker and,
if so, whether the amount of the fee was reasonable.150 Unfortunately,
the majority of courts found that these issues are not suitable for class-
wide treatment, claiming they require individual factual determinations
as to whether YSPs bore any reasonable relationship to the value of the
services brokers provided.151 Ultimately, the United States Department
of Housing and Urban Development (“HUD”) effectively eliminated
the potential to raise these issues in a class action in its October 18,
2001 policy statement, which stated that it is necessary to look at each
mortgage loan transaction individually to determine whether excessive
fees constitute a RESPA violation.152
Many individual brokers and brokerage firms have long since
exited the market,153 generally escaping accountability. Although brokers
148 Id.
149 Glover v. Standard Fed. Bank, 283 F.3d 953, 966 (8th Cir. 2002) (overturning
the district court’s class certification order, finding that the determination of
whether a broker’s fee was commensurate with the work the broker performed
had to be done on a loan-by-loan basis). See also Heimmermann v. First Union
Mortgage Corp., 305 F.3d 1257, 1264 (11th Cir. 2002); Schuetz v. Banc One
Mortgage Corp., 292 F.3d 1004, 1015 (9th Cir. 2002).
150 Culpepper v. Inland Mortgage Corp., 132 F.3d 692, 697 (11th Cir. 1998);
Brancheau v. Residential Mortgage, 182 F.R.D. 579, 584 (D. Minn. 1998).
151 See, e.g., Golan v. Ohio Sav. Bank, No. 98 C 7430, 1999 U.S. Dist. LEXIS
16452, at *26 (N.D. Ill. Oct. 15, 1999) (class certification denied); McBride v.
Reliastar Mortgage Corp., No. 1:98-CV-215-TWT, 1999 U.S. Dist. LEXIS
21654, at *10 (N.D. Ga. Apr. 29, 1999) (same); Richter v. Banco One Mortgage
Corp., No. CIV 97-2195 PHX RCB, 1999 U.S. Dist. LEXIS 16074, at *29
(D. Ariz. Mar. 19, 1999) (same).
152 Dep’t of Hous. and Urban Dev., Real Estate Settlement Procedures
Act Statement of Policy, 66 Fed. Reg. 53052, at 53054 (October 18, 2001).
153 Note lenders are shedding their wholesale channels. See, e.g., Les Christie,
Lenders Drop Mortgage Brokers, CNNMoney.com, Feb. 12, 2009, http://www.
are regulated under state law,154 they are difficult to hold accountable
for their illegal acts because many go out of business or are not solvent
enough to sue.155 But lenders are liable for the conduct of their brokers
under a variety of legal theories, such as agency,156 direct participation,157
aiding and abetting,158 joint venture,159 and conspiracy.160 In addition,
if the lender obtained a benefit from the broker’s fraudulent act or the
lender induced the broker to breach its fiduciary duty to the borrower, the
lender could be held liable for those acts.161
G. Discrimination Against Minority Homeowners

Despite the Equal Credit Opportunity Act (“ECOA”), enacted to
ameliorate discrimination in credit transactions,162 credit discrimination
money.cnn.com/2009/02/12/real_estate/lenders_drop_mortgage_brokers/
index.htm (“JP Morgan Chase announced in January that it would end its so-
called wholesale operations. It will no longer fund loans arranged through
brokers, instead it will make loans mostly through its own offices. And
Citigroup said it will cut back the number of mortgage brokers it works with to
1,000 from 10,000.”).
154 See Bankrate.com, State-By-State Tally of Mortgage Broker Rules, http://www.
bankrate.com/brm/news/mtg/20010104b.asp (last visited Dec. 18, 2009).
155 See Mary Ellen Podmolik, Mortgage Brokers Ditching Day Jobs, Chi. Trib., Oct.
31, 2008, at C1.
156 See Whitley v. Taylor Bean & Whitaker Mortgage Corp., 607 F. Supp. 2d 885,
895-96 (N.D. Ill. 2009) (denying motion to dismiss claim that broker was
lender’s agent where plaintiff alleged that broker used lender’s credit granting
policies, rate sheets, product sheets, loan pricing software, closing documents,
and training materials to process borrowers loans, and broker and lender shared
YSPs).
157 See Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 260 (D. Mass.
2008) (denying motion to dismiss, finding that a lender’s liability flows directly
from its own participation in the transactions as the “creditor” which set the
markup policy at issue).
158 See In re First Alliance Mortgage Co., 471 F.3d 977, 992-93 (9th Cir. 2006).
159 See George v. Capital S. Mortgage Invest., Inc., 961 P.2d 32, 45 (Kan. 1998)
(lender and broker liable for fraud and usury under joint venture theory).
110, § 11.5.3.3, at 644.
161 Id. § 11.5.3.4.
162 See 15 U.S.C. § 1691 (1991); 12 C.F.R. § 202.6 (2003). The 1974 version of
ECOA only prohibited discrimination on the basis of sex or marital status. The
remains a widespread problem in America’s mortgage lending industry.163

Racial redlining was a prevalent form of mortgage lending discrimination
practice from the 1930s to the 1990s which was ameliorated largely by
aggressive fair housing advocacy for home purchase mortgages.164
Reverse redlining – the practice of targeting minority communities
“Findings and Statement of Purpose” of the session law stated that “Congress
finds . . . a need to insure that the various financial institutions . . . engaged in
the extensions of credit exercise their responsibility to make credit available
with fairness, impartiality, and without discrimination on the basis of sex or
marital status.” Equal Credit Opportunity Act of 1974, Pub. L. No. 93-495, §
502, 88 Stat. 1500 (1975) (amended 1976). In 1976, Congress amended the
ECOA, significantly expanding its scope, to include anti-discriminatory acts on
the basis of race, color, religion, national origin, and age. See Equal Credit
Opportunity Act of 1976, Pub. L. No. 94-239, § 2, 90 Stat. 251 (1976)
(current version at 15 U.S.C. § 1691(a)(1) (1991)).
163 See William C. Apgar & Allegra Calder, Joint Ctr. for Hous. Studies at Harvard
U., The Dual Mortgage Market: The Persistence of Discrimination in Mortgage
Lending, in The Geography of Opportunity: Race and Housing Choice
in Metropolitan America (Xavier de Souza Briggs ed., Brookings Inst. Press,
2005), available at http://www.jchs.harvard.edu/publications/finance/w05-11.
pdf (finding that mortgage lending discrimination today is subtle but pervasive,
with minority consumers continuing to have less-than-equal access to loans at
the best price and on the best terms that their credit history, income, and other
individual financial considerations merit more than three decades after the
enactment of national fair lending legislation); Ass’n of Cmty. Orgs. for
Reform Now (ACORN), The High Cost of Credit: Disparities in High-
priced Refinanced Loans to Minority Homeowners in 125 American
Cities 1 (2005), available at http://www.acorn.org/index.php?id=9755 (follow
link at bottom of page to download .doc format) (finding that, nationally, black
home purchasers were 2.7 times more likely and Hispanics were 1.4 times more
likely than white borrowers to be issued a problematic, subprime loan); Robert
B. Avery, Kenneth P. Brevoort & Glenn B. Canner, Higher-Priced Home Lending
and the 2005 HMDA Data, in Federal Reserve Bulletin A124, A159
(2006), available at http://www.federalreserve.gov/pubs/bulletin/2006/hmda/
bull06hmda.pdf (revealing that, according to HMDA data from both 2004
and 2005, “Blacks and Hispanic whites were more likely . . . to have received
higher-priced loans than non-Hispanic whites . . . [which has] increased
concern about the fairness of the lending process”); California Reinvestment
Coal., et al., Paying More for the American Dream: A Multi-State
Analysis of Higher Cost Home Purchase Lending 1 (2007), available at
http://www.nedap.org/resources/documents/2007_Report-2005_HMDA.pdf.
164 Alys Cohen et al., Nat’l Consumer L. Ctr., Credit Discrimination §
7.1, at 155 (5th ed. 2009) [hereinafter Cohen et al., Credit Discrimination].
and steering them into bad loans – emerged with the subprime lending
boom.165
Deregulation allowed lenders to aggressively market
unconventional mortgage loan products to borrowers with tarnished
credit histories in the subprime market.166 Loan origination volume
contributed greatly to lenders’ profitability.167 To maximize volume,
mortgage lenders increasingly used brokers, which allowed them to
market and process their loans nationally while maintaining a limited
number of retail offices.168 Prior to the economic downturn,169 the
wholesale market170 was an immeasurably profitable channel for loan
origination, and for brokers, lenders and the secondary market.171
Mortgage lenders controlled borrowers’ access to their loan
products by choosing in which communities to place their retail, or brick-
and-mortar offices, and in which communities to use mortgage brokers.172
165 See, e.g., id. (listing a number of cases challenging reverse redlining practices
between the years 2000 to 2008).
166 E.g., Depository Institutions Deregulatory and Monetary Control Act of 1980,
12 U.S.C. § 1735f-7a(a)(1) (1981) (eliminating state rate and fee caps on
residential real property).
110, § 6.3.4.1, at 334.
168 See supra Parts E and F. Lenders used wholesale brokers to solicit mortgages and
who used high pressure tactics and targeted minority borrowers.
169 E.g., Chase, http://www.chaseb2b.com/Wholesale-Lending (last visited Sept.
30, 2009) (announcing that Chase shut down its wholesale lending business in
March 2009); HSBC, http://www.hsbcusa.com/ourcompany/pressroom/2007/
news_21092007_decision_one. html (last visited Sept. 30, 2009) (announcing
that HSBC shut down its wholesale lending business in September 2007);
Greenpoint, http://www.greenpointservice.com/ (last visited Sept. 30, 2009)
(announcing that Greenpoint shut down its wholesale lending business in
August 2007).
170 See supra Part F. Brokers earned fees on top of the loan costs. More, since they
were paid based on volume, many brokers downplayed or avoided altogether
concerns of prospective borrowers and, since the brokers themselves frequently
filled out the applications, they often altered the applicants’ information in
order to sign them to loans they otherwise would not have been able to obtain.
171 Id.
172 In 2003, the National Community Reinvestment Coalition (“NCRC”) released
a report on credit discrimination. See Nat’l Cmty. Reinvestment Coal., The
Broken System: Discrimination and Unequal Access to Affordable
Loans by Race and Age 5 (2003), available at http://www.omm.com/omm_
Mortgage lenders rarely placed their retail operations in predominately

minority neighborhoods.173 Instead, mortgage lenders overwhelmingly
used brokers to market and process their loans in these communities.174 As a
result, minority borrowers did not have ready access to retail prime loans.175
Mortgage brokers infiltrated minority communities. Minority
homeowners often say they met a mortgage broker on the street in
their neighborhood. A former Wells Fargo loan officer, and current
whistleblower, submitted a declaration in support of a racial redlining
case brought by the City of Baltimore.176 Among other things, the
distribution/newsletters/client_alert_financial_services/pdf/ncrcdiscrimstudy.
pdf (indicating that consumers living in areas with more minority residents are
more likely to have mortgages with interest rates higher than the “prevailing
and competitive” rates, often because of discrimination in lending). See also
Remarks of Martin J. Gruenberg, Vice Chairman, FDIC, Inter-American
Development Bank, October 18, 2006, http://www/fdic.gov/new/speeches/
archives/2006/chairman/spsep1906.html (“[P]revious studies have also
suggested higher-priced, subprime lenders are more active in lower income,
urban areas and that minority access to credit is dominated by higher cost
lenders.”); Center for Responsible Lending, Unfair Lending: The Effect
of Race and Ethnicity on the Price of Subprime Mortgages 16 (2006),
http://www.responsiblelending.org/mortgage-lending/research-analysis/unfair-
lending-the-effect-of-race-and-ethnicity-on-the-price-of-subprime-mortgages.
html (compared to their otherwise similarly-situated white counterparts, blacks
were thirty-one to thirty-four percent more likely to receive higher rate fixed-
rate loans and six to fifteen percent more likely to receive adjustable-rate loans).
173 E.g., Jonathan Brown, Racial Redlining: A Study of Racial
Discrimination by Bankers and Mortgage Companies in the United
States § I(C)(1) (1993), available at http://public-gis.org/reports/red1.html#C
(reporting that “[t]he 62 worst case lending patterns identified in this report
demonstrate that the 49 major mortgage lenders responsible for these patterns
have excluded minority neighborhoods from their effective lending territories
or substantially undeserved such neighborhoods”).
174 See California Reinvestment Coal., supra note 163, at 7. See also Rick
Cohen, Kirwan Inst. for the Study of Race and Ethnicity, A Structural
Racism Lens on Subprime Foreclosures and Vacant Properties 7 (2008),
available at http://4909e99d35cada63e7f757471b7243be73e53e14.
gripelements.com/pdfs/Rick_Cohen_paper.pdf.
175 Because there is no broker involved in a direct lender, or retail, transaction, the
borrower is not required to pay any brokers’ related fees and costs.
176 Affidavit of Elizabeth M. Jacobson ¶¶ 26-30, Mayor & City Council of
Baltimore v. Wells Fargo Bank, N.A., 631 F. Supp. 2d 702 (D. Md. 2008) (No.
1:08-cv-00062) [hereinafter Jacobson Affidavit] (suit alleging FHA violation).
whistleblower revealed that Wells Fargo targeted African Americans

through special events in African American communities called “wealth
building” seminars and targeted African American churches.177 Wells
Fargo steered minority borrowers with prime credit into subprime loan
products,178 and it did so by incentivizing its loan officers to originate the
highest volume of subprime loans possible.179
Lenders also gave their brokers and loan officers discretion to
mark up loans, which was then used to mark up loans made to minority
borrowers more than those made to whites.180 Based on a number of
objective credit criteria, lenders set par (i.e., no points) interest rates for
its various loan products. Lenders gave their brokers and loan officers’
discretion to increase a borrowers’ par rate in return for increased
compensation. In some cases, brokers and loan officers received tens of
thousands of dollars for closing just a single mortgage loan.181
Under HMDA, lenders are required to report to HUD the
number of high cost loans they originated, both by race and by year.182
Data in the past ten years show that a statistically significant percentage
of minority borrowers, primarily African Americans and Hispanics,
consistently received more high cost loans than white borrowers.183
177 Id.
178 Id.
179 Id.
180 See, e.g., Miller v. Countrywide Bank, N.A., 571 F. Supp. 2d 251, 255 (D.
Mass. 2008); Ware v. Indymac Bank, FSB, 534 F. Supp. 2d 835, 840 (N.D. Ill.
2008); Hoffman v. Option One Mortgage Corp., 589 F. Supp. 2d 1009, 1011
(N.D. Ill. 2008); Zamudio v. HSBC N. Am. Holdings, Inc., No. 07-C-4315,
2008 WL 517138, at *1 (N.D. Ill. Feb. 20, 2008); Guerra v. GMAC, LLC, No.
2:08-CV-08-1297-LDD, 2009 WL 449153, at *5 (E.D. Pa. Feb. 20, 2009);
Payares v. JPMorgan Chase & Co., No. CV 07-5540, 2008 WL 2485592
(C.D. Cal. June 17, 2008) (denial of defendants’ motion for interlocutory
appeal); Beaulialice v. Fed. Home Loan Mortgage Corp., No. 8:04-CV-2316-
T-24-EAJ, 2007 WL 744646 (M.D. Fla. Mar. 6, 2007).
181 E.g., Jacobson Affidavit, supra note 176, ¶ 6.
182 Home Mortgage Disclosure Act (“HMDA”), 12 U.S.C. § 2803 (2006).
183 HMDA data for 2006 revealed that black and Hispanic borrowers are more
likely to obtain higher-priced loans than are white borrowers. The data
indicated that black homeowners who received subprime mortgage loans were
much more likely to be issued a higher-rate loan than white borrowers with the
same qualifications. Federal Financial Institutions Examination Council,
Home Mortgage Disclosure Act, http://www.ffiec.gov/hmda (last visited Oct.
While the HMDA data raises an eyebrow, it does not explain the
reasons why minority borrowers received more high cost loans than
white borrowers.184 To understand whether this discrepancy occurred
because of credit discrimination, further analysis of the relevant data is
necessary.185 Statistical experts have performed regression analyses on
loan level account data, by which they removed all objective credit factors
and determined discrepancy results based on purely subjective criteria.186
Several academic and empirical expert studies discussing the results of
regression analyses find that minority borrowers, after controlling for
objective credit risk factors, received higher cost loans than whites.187
The nature of this kind of credit discrimination is subtle and, as a result,
there historically has been little remedial action under ECOA or similar
statutes. However, as research and publicity bring this problem to light,
public and private litigants are taking action.
In a recent effort to combat credit discrimination, private
attorneys, Attorneys General, and civil rights organizations have sued
mortgage lenders under ECOA, FHA, and state statutes, in their various
representative capacities. Courts across the country adjudicating these
3, 2009) same data for 2005, available at http://www.federalreserve.gov/pubs/

bulletin/2006/hmda/bull06hmda.pdf (last visited Oct. 3, 2009). See also supra
note 163 (both 2004 and 2005 HMDA data revealed that “Blacks and minority
borrowers were more likely . . . to have received higher-priced loans than non-
Hispanic whites . . . [which has] increased concern about the fairness of the
lending process.”). African Americans were 3.3 times more likely and Hispanics
were three times more likely than similarly-situated whites to be issued a high-
cost, subprime loan. ACORN Fair Housing, The High Cost of Credit:
Disparities in High-priced Refinanced Loans to Minority Homeowners
in 125 American Cities 11-13 (2005), available at http://www.74.125.93.132/
search?q=cache:KkNtaP6_XFcJ:www.acorn.org/fileadmin/Affordable_
Housing/hmda/High_Cost_of_Credit_Report.doc+%22acorn+fair+housing
%22+and+%22high+cost+of+credit%22&cd=3hl=en&ct=clnk&gl=us.
184 See Cohen et al., Credit Discrimination, supra note 164, § 4.4.5.4, at 91.
185 Id.
186 See Howell E. Jackson & Laurie Burlingame, Kickbacks Or Compensation: The
Case Of Yield Spread Premiums, 12 Stan. J.L. Bus. & Fin. 289, 350 (2007);
Debbie Grunstein Bocian et al., Ctr. for Responsible Lending, Unfair
Lending: The Effect of Race and Ethnicity on the Price of Subprime
Mortgages (2006), available at http://www.responsiblelending.org/pdfs/
rr011-Unfair_Lending-0506.pdf.
187 See supra notes 163, 172, and 186.
cases have upheld plaintiffs’ disparate impact theories in a series of cases

brought by private attorneys.188 That is, without alleging that lenders have
intentionally discriminated against minority borrowers, these actions have
challenged lenders’ pricing policies, which statistical data shows result
in minority borrowers receiving higher cost mortgage loans than white
borrowers with the same credit qualifications.189 These price disparities
cannot be explained by any factor other than race.190 These lawsuits seek,
among other goals, to stop mortgage lenders from maintaining loan-
pricing policies that cause discrimination and to provide restitution to
minorities for the disparities in the costs of their mortgage loans.191
Attorneys General in several states have also launched investigations
and brought enforcement actions to address the discriminatory effect of
lenders’ pricing practices.192 Government investigations have found that
credit discrimination is taking place in a new area – loan modifications.193
The National Association for the Advancement of Colored People is
pursuing a lawsuit against fifteen of the country’s largest mortgage
lenders, alleging claims under the FHA, ECOA, and the Civil Rights
Act with regard to the lenders’ practices towards African Americans.194
188 See Sheldon et al., Unfair and Deceptive Acts and Practices, supra note
110 (listing cases).
189 Id.
190 Id.
191 Id.
192 E.g., Home Lender to Repay Minority Buyers, N.Y. Times, Dec. 6, 2006, at C6,
available at http://www.nytimes.com/2006/12/06/business/06settle.htm (then
New York Attorney General Eliot Spitzer filed suit against Countrywide Home
Loans); Office of the Attorney General, Media Center, Attorney General
Cuomo Obtains Approximately $1 Million For Victims Of Greenpoint’s
Discriminatory Lending Practices (July 16, 2008), http://www.oag.state.ny.us/
media_center/2008/jul/july16a_08.html; Paul Jackson, Massachusetts AG Sues
Option One, H&R Block, HousingWire.com, June 4, 2008, http://www.
housingwire.com/2008/06/04/massachusetts-ag-sues-option-one-hr-block.
193 Eric Holder, Attorney General, Remarks as Prepared for Delivery at the
Foreclosure Rescue Scams and Loan Modification Fraud Press Conference
(Apr. 6, 2009), available at http://www.usdoj.gov/ag/speeches/2009/ag-
speech-090406.html (“Already, we are hearing increasing concerns that not all
distressed borrowers are receiving the same opportunities for loan modifications.
We are also hearing that the terms and fees for such modifications are not being
made available on a non-discriminatory basis.”).
194 The lender defendants in the NAACP lawsuit are Accredited Home Lenders,
Due to the seriousness and pervasiveness of credit discrimination, these

lawsuits are the most effective means for remedying past discrimination
and preventing future discriminatory conduct.
H. Loan Servicing Abuses
In today’s mortgage lending marketplace, subprime loans are often

serviced, under contract with an investor, by a servicing company with no
connection to the originating lender.195 In these instances, servicers collect
payments and handle customer service to homeowners on their mortgage
loans but do not bear the risk of default.196 Consumer advocates believe
that a resulting indifference to risk of nonpayment permits servicers to
engage in a variety of profitable but predatory practices.197

Predatory servicing problems often go hand in hand with predatory
lending. Servicing subprime loans can be highly profitable when default
and foreclosure rates are high.198 Late payments charges, for example, are
a profitable source of fee-based income for servicers because, by contract,
Inc., Ameriquest Mortgage Co., Bear Stearns Residential Mortgage Corp. d/b/a
Encore Credit, Chase Bank USA, N.A., Citigroup Inc., CitiMortgage, First
Franklin Fin. Corp., First Tennessee Bank d/b/a/ First Horizon Nat’l Corp.,
Fremont Investment & Loan Corp., GMAC Mortgage Group LLC, GMAC
Residential Capital LLC, HSBC Finance Corp., JP Morgan Chase & Co.,
Long Beach Mortgage Co., Nat’l City Corp., Option One Mortgage Corp.,
SunTrust Mortgage, Wash. Mutual, Inc., and WMC Mortgage Corp. See
NAACP v. Ameriquest Mortgage Co., et al., 635 F. Supp. 2d 1096, 1098 (C.D.
Cal. 2009).
195 As described elsewhere in this article, most mortgages are transferred on the
secondary market. The servicing rights are then sold separately, typically
pursuant to “Pooling and Servicing Agreements.” See Nat’l Consumer L.
Ctr., Finding Pooling And Servicing Agreements (“PSAs”) For
Securitized Mortgage Loans passim (2002), available at http://www.
consumerlaw.org/fprc/content/Pooling.pdf. See also In re Nosek, 406 B.R.
434, 438-40 (Bankr. D. Mass. 2009).
196 Nat’l Consumer L. Ctr., supra note 195, at 187-88.
197 Even Fannie Mae and Freddie Mac recognize that some servicing practices are
predatory. See Freddie Mac, Promoting Responsible Servicing Practices
1-2 (2006), available at http://www.freddiemac.com/service/msp/pdf/
responsible_practices.pdf.
198 Peter S. Goodman, Late-Fee Profits May Trump Plan To Modify Loans, N.Y.
Times, July 30, 2009, at A1.
the servicer is allowed to retain them. Deregulation in the form of federal

preemption of state laws has allowed the size of late payments to become
unmoored from any connection to the real harm associated with short-
term delinquency.199 Several subprime servicers have been accused of
deliberately posting payments to borrowers’ accounts long after they are
received in order to generate late fees despite timely payments.200

Because a delinquent loan generates a new late fee each month,
delinquencies can generate a steady stream of income from large monthly
late payment charges. In some cases, an inference can be raised that
servicers deliberately generate chronic delinquencies and then refuse to
work with borrowers to resolve them.201 Ironically, due to late fee and
other default and delinquency charges described below, this can be good
for the servicer’s bottom line.
Other servicing problems are equally endemic. Many servicers
profit from relationships with insurance companies. These servicers will
receive commissions (kickbacks) from those insurers for placing expensive
hazard insurance policies with those insurance companies to cover the
property secured by the mortgage.202 In order to do so, servicers will
199 Most loans allow late fees that are a percentage of the late payment. A three
percent late payment fee on a monthly mortgage payment of $2500 is $75.
This amount is significant to a homeowner already struggling to make timely
monthly payments. But see, Manuel Adelino, Kristopher Gerardi & Paul
Willen, Federal Reserve Bank of Boston, Why Don’t Lenders
Renegotiate More Home Mortgages? 25-26 (2009), available at http://
www.bos.frb.org/economic/ppdp/2009/ppdp0904.pdf (concluding that re-
default risk rather than servicer profits prevents loss mitigation).
200 Mara Der Hovanesian, The “Foreclosure Factories” Vise, Bus. Wk., Dec. 25,
2006, at 37.
201 See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Services, 15
Hous. Pol’y Debate 753, 758-60 (2004), available at http://www.mi.vt.edu/
data/files/hpd%2015(3)/hpd%2015(3)_article_eggert.pdf; Second Amended
Consolidated Class Action Complaint at 3-4, In re Ocwen Fed. Bank FSB
Mortgage Servicing Litig., No. 04-02714 (N.D. Ill. Sept. 24, 2007) [hereinafter
Ocwen Complaint].
202 See First Amended and Consolidated Class Action Complaint at 19, Curry v.
Fairbanks Capital Corp., 2004 WL 3322609, at *1 (D. Mass. May 12, 2004)
(No. 03-10895-DPW) [hereinafter Curry Complaint]; Complaint for
Permanent Injunction and Other Equitable Relief and Monetary Civil Penalties
at 4-5, United States v. Fairbanks Capital Corp., 2004 WL 3322609, at *1 (D.
Mass. May 12, 2004) (No. 03-12219-DPW).
sometimes ignore or misplace the borrower’s proof of an existing policy.

In other instances, proof of insurance is never transferred when servicing
is passed from one entity to another, and little or no inquiry is made of the
homeowner. Servicer arranged hazard insurance policies, known as “force
placed insurance,” are far more expensive than similar policies borrowers
could obtain themselves.203 Placement of such a policy, particularly when
unnecessary because it is on top of a cheaper, existing policy, can cause
payments to swell and lead to delinquencies and default. Similar issues
arise for servicer arranged property inspections, some of which are billed
to consumers even when no inspection is performed.204

Additionally, some servicers generate fees for routine customer
service work. Such fees include charges for providing pay-off information
to customers, handling telephone payments, and other similar routine
matters.205 Some advocates question whether fees for such work are
permitted by contract, particularly in situations where the work is not
performed.206

Many consumers experience frustration when attempting to
resolve disputes with their loan servicers.207 Some subprime servicers
keep costs low by cutting customer service staff or by transferring call
centers to far-flung jurisdictions. Call center employees often do not have
full access to customer records, including back-up documentation for fees
and, therefore, cannot resolve disputes. Some lawsuits have alleged that
203 See, e.g., Booker v. Wash. Mut. Bank, F.A., No. 1:06-cv-00274, 2007 WL
475330, at *1 (D.N.C. Feb. 9, 2007); Vician v. Wells Fargo Home Mortgage,
No. 2:06-cv-144, 2006 WL 694740, at *1-2 (D. Ind. Mar. 16, 2006); Norwest
Mortgage, Inc., v. Superior Court, 85 Cal. Rptr. 2d 18, 20-21 (Cal. Ct. App.
1999); Curry Complaint, supra note 202, ¶¶ 3-4; Ocwen Complaint, supra
note 201, ¶ 3.
204 See, e.g., Scott v. Fairbanks Capital Corp., 284 F. Supp. 2d 880, 889-90 (S.D.
Ohio 2003); Jones v. Wells Fargo Home Mortgage (In re Jones), 366 B.R. 584,
597-98 (Bankr. E.D. La. 2007); In re Parrish, 326 B.R. 708, 721-22 (Bankr.
N.D. Ohio 2005); Curry Complaint, supra note 202, ¶ 13; Ocwen Complaint,
supra note 201, ¶ 20.
205 Curry Complaint, supra note 202, ¶ 18; Ocwen Complaint, supra note 201, ¶¶
16-18.
206 Rao et al., Foreclosures, supra note 9, § 7.7, at 186 (breach of contract for
unauthorized fees is a common claim raised by advocates).
207 See, e.g., Posting of Katie Porter, The Really Sad State of Mortgage Servicing, to
Credit Slips, http://www.creditslips.org/creditslips/2008/07/the-really-sad.
html (July 15, 2008, 10:01 AM EST).
the lack of customer service is deliberate because failed dispute resolutions

further increase fees.208

Foreclosures can also be profitable to servicers. In addition to
generating delinquency-related charges, 209 some servicers have set up
property management companies that profit from managing real estate
after foreclosure. Mortgage holders and investors pay the servicers for
managing and sometimes for reselling foreclosed homes.

Problems also arise because servicing frequently gets transferred
from one entity to another. Although the RESPA has a provision for
notice of transfers of servicing,210 these notices are easily lost or overlooked
by consumers. In other instances, proper notice is never sent.211 In these
instances consumers can make payments to the wrong entity, resulting in
confusion, lost payments, and default.

Federal preemption of state laws has made it difficult for states to
regulate on issues like appropriate late fees or pay-off statement fees.212
Servicers have frequently argued that substantive state limits on the
amounts they can charge are invalid. They have also argued, with less
success, that even state contract law is preempted.213 There is significant
difference of opinion about the scope of federal preemption of state unfair
trade practice laws.214
208 See, e.g., Ocwen Complaint, supra note 201, ¶¶ 18-19, 23-24 (alleging the
failed dispute resolution experience of Plaintiff Cyd Bowman); Goodman,
supra note 198, at A1.
209 See Curry Complaint, supra note 202, at ¶ 17; Ocwen Complaint, supra note
201, ¶ 18; Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage
Claims, 87 Tex. L. Rev. 121, 140-44 (2009).
210 12 U.S.C. § 2605(b) (2006); 24 C.F.R. § 3500.21(d) (2009). See also Holland
v. GMAC Mortgage Corp., No. 03-2666, 2006 WL 1133224, at *2 (D. Kan.
Apr. 26, 2006).
211 Curry Complaint, supra note 202, ¶ 4; Ocwen Complaint, supra note 201, ¶
19.
212 See 12 C.F.R. § 560.2(b)(5) (2009). See, e.g., Barnett Bank of Marion County,
N.A. v. Nelson, 517 U.S. 25, 32 (1996); Bank of Am. v. City and County of
San Francisco, 309 F.3d 551, 559 (9th Cir. 2002).
213 See In re Ocwen Mortgage Loan Servicing, LLC Mortgage Servicing Litig., 491
F.3d 638, 643-46 (7th Cir. 2007); Gibson v. World Sav. and Loan Ass’n, 128
Cal. Rptr. 2d 19, 25-31 (Cal. Ct. App. 2002).
214 Compare Alkan v. Citimortgage, Inc., 336 F. Supp. 2d 1061, 1064 (N.D. Cal.
2004), and Morse v. Mut. Fed. Sav. and Loan Ass’n, 536 F. Supp. 1271, 1280-
81 (D. Mass. 1982) (“The fact that federal statutes or regulations covering some

Nevertheless, there has been substantial public and private action
to reign in servicing abuses. The Federal Trade Commission (“FTC”) has
reached a settlement, for example, with EMC Mortgage Corp., formerly a
division of Bear Stearns. That settlement provides for damages to affected
consumers and injunctive relief to borrowers to prevent further abuses.215
In another case, against the servicer Fairbanks Capital Corp., a settlement
was reached that addressed both class action claims and those brought
by the FTC. That settlement resulted in recovery of approximately $55
million for consumers in 2003.216
More than twenty class actions against the subprime servicer
Ocwen Mortgage have been consolidated in a single multi-district
litigation proceeding in the Northern District of Illinois.217 The complaint
in that matter asserts a panoply of claims grounded in breach of contract
and the unfair trade practice law of various states.218 The underlying
legal problems include allegations of improper charges for force-placed
aspects of a regulated area are, by necessity, complex and detailed, does not
imply that Congress intended to occupy the entire field to the exclusion of state
law”), with Boursiquot v. Citibank F.S.B., 323 F. Supp. 2d 350, 356 (D. Conn.
2004) (preemption found where statute had “a direct bearing on the lending
operations of federal savings associations”) and Chaires v. Chevy Chase Bank,
F.S.B., 748 A.2d 34, 46-47 (Md. Ct. App. 2000) (claim that bank charged fees
in excess of those allowed by state statute was not actionable, because state law
required insurance as loan collateral and was therefore preempted).
215 Press Release, Fed. Trade Comm’n, Bear Stearns and EMC Mortgage to Pay
$28 Million to Settle FTC Charges of Unlawful Mortgage Servicing and Debt
Collection Practices (Sept. 8, 2008), available at http://www.ftc.gov/
opa/2008/09/emc.shtm.
216 See Rao, supra note 9, at 196. See also Press Release, Fed. Trade Comm’n,
Fairbanks Capital Settles FTC and HUD Charges (Nov. 12, 2003), available
at http://www.ftc.gov/opa/2003/11/fairbanks.shtm.
217 Ocwen Complaint, supra note 201, ¶¶ 2, 5-8. A similar case, also in the
Northern District of Illinois, is pending against Litton Loan Servicing. See
Complaint Class Action Matters Common to Multiple Claims ¶ 1-5, Gburek
et al. v. Litton Loan Servicing LP, No. 1:08-cv-03188 (N.D. Ill. June 3, 2008).
Some predatory lending cases also include predatory servicing claims, which
occur when lenders service their own loans. See Borrowers’ Consolidated Class
Action Complaint ¶ 1-14, In re Ameriquest Mortgage Co., Mortgage Lending
Pracs. Litig., No. 1:05-cv-07097 (N.D. Ill. Dec. 6, 2006).
218 Ocwen Complaint, supra note 201, ¶¶ 1-14. See also Order, Schaffer v. Litton
Loan Servicing, No. 2:05-cv-07673 (C.D. Cal. Aug. 6, 2007) (certifying
nationwide class in claims against mortgage loan servicer).
insurance, late fees, “recoverable breach fees,” and foreclosure related fees
and costs.219 The complaint also alleges that Ocwen charges bankruptcy
fees that are impermissible under federal bankruptcy law and/or that are
never approved by a bankruptcy court.220

Class actions on late posting of payments have had mixed success.
Surprisingly, claims that servicers charge impermissible or excessive fees for
payoff statements have been largely unsuccessful because such fees typically
have no grounding in any contractual obligation by the borrowers.221
Improper force-placed insurance cases have been more successful.222
Other cases have challenged inspection fees,223 collection of prepayment
penalties that are not owed,224 telephone payment fees, failure to provide
notice of change of servicing,225 and foreclosure-related servicing fees.226

There is also litigation challenging the perceived failure of
some servicers to offer legitimate loan modification relief to struggling
homeowners, including options mandated by receipt of government
bailout monies.227 Another area of class action activity is breach of
219 Ocwen Complaint, supra note 201, ¶¶ 5-7.

220 Id. ¶ 9.
221 See Sandlin v. Shapiro & Fishman, 919 F. Supp. 1564, 1567 (M.D. Fla. 1996);
Colangelo v. Norwest Mortgage, Inc., 598 N.W.2d 14, 18 (Minn. Ct. App.
1999).
222 See, e.g., Vician v. Wells Fargo Home Mortgage, 2006 WL 694740, at *3-6
(N.D. Ind. Mar. 16, 2006) (plaintiffs’ allegations of force-placing held to
support an actionable claim under RESPA, TILA, the Illinois Consumer Fraud
Act, and state contract law).
223 See, e.g., Scott v. Fairbanks Capital Corp., 284 F. Supp. 2d 880, 894-95 (S.D.
Ohio 2003) (plaintiffs claims of padded inspection fees held to be adequate
under state law and the FDCPA); In re Jones, 366 B.R. 584, 604 (Bankr. E.D.
La. 2007) (lender ordered to return to mortgagee excess funds collected in part
on the basis of inflated inspection fees); In re Parrish, 326 B.R. 708, 721 (Bankr.
N.D. Ohio 2005) (lender should be able to document the inspection fees it
charges).
224 See, e.g., Sandlin, 919 F. Supp. at 1569 (finding a cause of action where plaintiff
alleged the improper collection of prepayment fees).
225 See, e.g., Laskowski v. Ameriquest Mortgage Co. (In re Laskowski), 384 B.R.
518, 533 (Bankr. N.D. Ind. 2008) (whether assignor notified debtor of change
of servicer was a material issue of fact).
226 See, e.g., In re Jones, 366 B.R. at 590 (court reduced charges incurred by
mortgagee to reflect foreclosure costs).
227 Porter, supra note 209, at 179.
contractual agreements for loan workouts.228 Servicers have agreed to

forebear in foreclosure, but have gone forward with foreclosure sales
despite the agreement.229 Other cases challenge failure to properly modify
payment records to make them consistent with loan modifications.230
I. The Secondary Market and Its Facilitation of Lending Abuses
In response to the collapse of the housing market during the

Great Depression,231 Congress passed three acts intended to stabilize the
housing industry: the Federal Home Loan Bank Act of 1932, the Home
Owners’ Loan Act of 1933, and the National Housing Act of 1934.232
This legislation provided, for the first time, direct federal government
involvement in the mortgage market.233 Among other purposes, the
National Housing Act, through the creation of the Federal Housing
Administration,234 was designed to free up capital for lenders to extend
more mortgage loans by enabling them to sell their loans to investors.235
228 See Larffarello v. Wells Fargo Home Mortgage, Inc., No. SUCV2006-04962-
BLS2 (Mass. Sup. Ct. 2006); Complaint ¶¶ 23-24, Pestana v. Wash. Mut.,
F.S.B. Inc., No. 1:08-CV-11593-DPW (D. Mass. Sept. 17, 2008) [hereinafter
Pestana Complaint].
229 Pestana Complaint, supra note 228, ¶¶ 13-14.
230 Larffarello, No. SUCV2006-04962-BLS2 at ¶¶1, 14-26, 31-48, 54-58, 71-77.
231 During the Great Depression forty percent of the United States’ $20 billion in
home mortgages fell into default and about 1,700 of the United States’
approximately 12,000 savings institutions failed. U.S. v. Winstar Corp., 518
U.S. 839, 844 (1996) (citing H.R. Rep. No. 101-54, pt. 1, at 292-93 (1989)).
232 See Immergluck, supra note 4, at 27-34. See also Globe Sav. Bank, F.S.B. v.
U.S., 55 Fed. Cl. 247, 248 (Fed. Cl. 2003) (discussing the origins of the
modern regulatory regime for the thrift industry, specifically as it stemmed
from the aforementioned Congress acts of the Great Depression Era); Federal
Home Loan Bank Act of 1932, Pub. L. No. 72-304, 47 Stat. 725 (codified as
amended at 12 U.S.C. §§ 1421-49 (2006)); Home Owners’ Loan Act of 1933,
Pub. L. No. 73-42, 48 Stat. 128 (codified as amended at §§ 12 U.S.C. 1461-70
(2006)); National Housing Act of 1934, Pub. L. No. 73-479, 48 Stat. 1246
(codified as amended at 12 U.S.C. §§ 1701-50g (2006)).
233 Immergluck, supra note 4, at 27-29.
234 Federal Housing Administration, About the Federal Housing Administration,
http://portal.hud.gov/portal/page/portal/FHA_Home/about (last visited Oct.
17, 2009). The Federal Housing Administration (“FHA”) insures mortgages
and has insured over 37 million home mortgages since 1934. Id.
235 12 U.S.C. § 1719(d) (2006) (“To provide a greater degree of liquidity to the
Rather than holding loans and having to wait for full repayment until
the end of the loan term,236 the ability to sell loans on the secondary
market allowed lenders to obtain repayment immediately and use the
returned capital to originate more loans. Congress amended the National
Housing Act over the years and created three hybrid governmental-
corporate entities, commonly known as Ginnie Mae, Fannie Mae, and
Freddie Mac.237 These entities became a vehicle for purchasing loans and
converting them into securities, known as mortgage-backed securities,238
for resale to investors.239
These rational policy choices were turned on their head as big
investment banks set up a private secondary market for subprime and
other non-conforming loans.240 Investors’ demand for mortgage-backed
securities skyrocketed in the mid-2000s. According to Ginnie Mae, the
cumulative total of the dollar amount of mortgage-backed securities
increased exponentially from about $5 billion in 1975 to approximately
$2,660 billion in 2007.241
mortgage investment market and an additional means of financing its operations
. . . the corporation is authorized to set aside any mortgages held by it . . . and,
upon approval of the Secretary of the Treasury, to issue and sell securities based
upon the mortgages so set aside.”).
236 The Federal Home Loan Bank Act standardized the thirty-year fixed mortgage
product. See Federal Home Loan Bank Act of 1932, Pub. L. No. 72-304, 47
Stat. 725 (codified as amended at 12 U.S.C. §§ 1421-49 (2006)).
237 For information relating to these entities, see their websites: http://www.
ginniemae.gov, http://www.fanniemae.com, and http://www.freddiemac.com.
238 See U.S. Securities Exchange Commission, Mortgage-Backed Securities (June
25, 2007), http://www.sec.gov/answers/mortgagesecurities.htm (“Mortgage-
backed securities (‘MBS’) are debt obligations that represent claims to the cash
flows from pools of mortgage loans, most commonly on residential property.
Mortgage loans are purchased from banks, mortgage companies, and other
originators and then assembled into pools by a governmental, quasi-
governmental, or private entity. The entity then issues securities that represent
claims on the principal and interest payments made by borrowers on the loans
in the pool, a process known as securitization.”).
239 See, e.g., Ginnie Mae, History of Ginnie Mae, http://www.ginniemae.gov/
about/history.asp?Section=About (last visited Dec. 21, 2009).
240 For an entertaining description of the origins of the secondary market for non-
conforming mortgages, see Michael Lewis, Liar’s Poker: Rising Through
the Wreckage on Wall Street (Penguin 1990).
241 Ginnie Mae, Annual Report: Bringing Wall Street to Main Street 5
(2007), available at http://www.ginniemae.gov/about/ann_rep/annual_
Securitization freed up capital for lenders to originate more loans.242

With high demand from investors, lenders had an easy opportunity to sell
their loans.243 Lenders became mere pass-through agents – originating
loans and flipping them to investors – while making enormous profits on
origination-related fees and shifting the risk of default onto investors.244
All of these factors, coupled with a deregulated market,245 incentivized
lenders to aggressively market and originate large volumes of high-cost
loans.246
For borrowers, the expansion of the secondary market meant
exposure to relentless predatory lenders and an increased risk of foreclosure
from falling prey to bad loans. Lenders targeted unsophisticated borrowers
with subprime credit with promises of lower interest rates, lower monthly
payments, or cash out if they refinanced their loans.247 Lenders used
inflated appraisals to convince borrowers they had plenty of equity to
borrow against.248 When the housing bubble burst and home values sank,
borrowers were left with costly loans and owing tens and hundreds of
thousands of dollars more on their homes than their homes were worth,
report07.pdf.
242 Kathleen C. Engel & Patricia A. McCoy, A Tale of Three Markets: The Law and
Economics of Predatory Lending, 80 Tex. L. Rev. 1255, 1273-74 (2002).
243 See supra note 238.
244 In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132, 1151 (C.D.
Cal. 2008).
245 See In re 2007 Novastar Fin. Inc., Sec. Litig., 579 F.3d 878, 880 (8th Cir. 2009)
(explaining that a subprime lender can “raise[] additional capital by bundling
groups of loans into mortgage-backed securities and selling the rights to the
income generated by these securities”); Immergluck, supra note 4, at 41.
246 See Eggert, supra note 7, at 1292 (citing John Kiff & Paul Mills, Money for
Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage
Markets, in Int’l Monetary Fund, IMF Country Report No. 07/265,
United States: Selected Issues 45 (2007)).
247 The American Dream Shattered, supra note 76, at 1.
248 See, e.g., Spears v. Wash. Mut., Inc., No. C-08-00868 (RMW), 2009 WL
2761331, at *1 (N.D. Cal. Aug. 30, 2009) (plaintiffs in class action alleged that
Washington Mutual Bank and others engaged in a scheme to inflate the
appraised values of homes receiving loans in order to sell the aggregated security
interests in the financial markets at inflated prices); Watkins v. Wells Fargo
Home Mortgage, 631 F. Supp. 2d 776, 787 (S.D.W. Va. 2008) (decision
regarding a motion to amend a complaint in a class action in which plaintiffs
allege they were induced into larger loans because of lenders’ inflated appraisals).
making it impossible to obtain a new loan or sell their home when their
mortgage loans became unaffordable.249
Moreover, as borrowers defaulted on their high cost loans with
alarming frequency, they were often unable to turn back to their original
lenders (who long since sold the loans on the secondary market) to evaluate
forbearance of loan modification options.250 For example, to cope with
the vast pools of securitized loans the real estate finance industry created
the Mortgage Electronic Registration System (“MERS”), an automated
system that registers and processes chain of title documents, such as
mortgages and assignments, for lenders.251 MERS was intended to make
it cheaper and faster for lenders to buy and sell loans without all the extra
paperwork and fees they would have incurred had they done it by the
traditional method¾through local registries of deeds. The idea was that
while a mortgage was packaged, securitized, sold, and resold, the ownership
interests would be electronically tracked by MERS. However, while
MERS may have saved the real estate industry over a billion dollars,252 it
has been nothing but a disservice to homeowners. Often, MERS remains
listed as the holder of these loans rather than investors. MERS, therefore,
frequently brings foreclosure actions against borrowers, who usually have
249 See Mortgage Lending Reform: A Comprehensive Review of the Am. Mortgage Sys.:
Hearings Before the Subcomm. on Fin. Institutions and Consumer Credit of the H.
Comm. on Fin. Servs., 111th Cong. 2 (2009) (statement of David Berenbaum,
Executive Vice President, Nat’l Comty. Reinvestment Coal) (with the decrease
in available credit, housing prices have plummeted and homeowners lost an
estimated $3.3 trillion in equity in 2008); David Streitfeld, Home Prices in
January Fell by a Record Amount, N.Y. Times, Apr. 1, 2009, at B3.
250 See Kurt Eggert, Comment on Michael A. Stegman et al.’s “Preventive Servicing Is
Good for Business and Affordable Homeownership Policy”: What Prevents Loan
Modifications?, 18 Hous. Pol’y Debate 279, 285-87 (2007) (noting “several
barriers to effective preventive servicing and its attendant loan modifications”);
Foreclosure Prevention and Intervention: The Importance of Loss Mitigation
Strategies in Keeping Families in Their Homes: Hearing Before the H. Subcomm.
on Hous. and Cmty. Opportunity, 110th Cong. 4 (2007) (written testimony of
Tara Twomey, Of Counsel, National Consumer Law Center)[hereinafter
Testimony of Twomey].
251 By 2007, more than fifty million mortgages were registered with MERS. Press
Release, Mortgage Elec. Registration Sys. (“MERS”), 50 Millionth Loan
Registered on the MERS® System (May 24, 2007), available at http://www.
mersinc.org/newsroom/press_details.aspx?id=194.
252 Id.
never heard of MERS and who have no way of contacting it. Several
pending lawsuits across the country are challenging the ability of MERS
to foreclose in the name of the actual mortgage holder.253
Moreover, borrowers’ loan servicers are unable to modify loans
without investor authorization. Unfortunately, some subprime lenders
went out of business for various reasons and were unable to repurchase
problem loans.254 In some cases, investors have been shielded from
liability for the origination-related conduct of the lenders from whom they
purchased loans.255 However, there are theories under which investors
have been sued for their role in the transaction.256 For example, in the
landmark case In re First Alliance Mortgage Co., 298 B.R. 652 (C.D. Cal.
2003), the jury found Lehman Brothers, Inc. liable for First Alliance’s
mortgage fraud under an aiding and abetting theory.257
J. The Absence of Bankruptcy As a Backstop
Bankruptcy law is intended to give insolvent debtors a fresh

start.258 Filing for bankruptcy is often a last resort for financially struggling
homeowners to avoid foreclosure.259 Today, with the country in the midst
253 See, e.g., Manson v. GMAC Mortgage, LLC, 602 F. Supp. 2d 289, 291-92 (D.
Mass. 2009); In re Foreclosure Actions, No. 1:07cv3306 et al., 2007 WL
4034554, at *1 (N.D. Ohio Nov. 14. 2007); In re Foreclosure Cases, No.
1:07cv3029 et al., 2007 WL 3232430, at *1 (N.D. Ohio Oct. 31, 2007); ;
Landmark Nat’l Bank v. Kesler, 216 P.3d 158, at *25 (Kan. 2009), available at
h t t p : / / w w w. k s c o u r t s . o r g / C a s e s - a n d - O p i n i o n s / o p i n i o n s /
supct/2009/20090828/98489.htm; Jackson v. Mortgage Elec. Registration
Sys., Inc., 770 N.W.2d 487, 489 (Minn. 2009).
254 See The Mortgage Lender Implode-O-Meter, http://ml-implode.com (noting
that “[s]ince late 2006, 362 major U.S. lending institutions have ‘imploded’”).
255 Eggert, supra note 7, at 1259.
256 E.g., Plascencia v. Lending 1st Mortgage, 583 F. Supp. 2d 1090, 1099-1100
(N.D. Cal. 2008) (refusing to dismiss fraud claim against entity that purchased
and then securitized option ARMs; it did not make misrepresentations to
consumers, but complaint sufficiently alleged that it substantially assisted
lender’s misrepresentations).
257 In re First Alliance Mortgage, 298 B.R. at 668-70.
258 Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, 554-55 (1915).
259 See 11 U.S.C. § 362(a)(1) (2009) (a filed bankruptcy petition operates as an
automatic stay, applicable to all entities, of “the commencement or continuation
. . . of a judicial, administrative, or other action or proceeding against the
of an unprecedented foreclosure crisis,260 the integrity of the bankruptcy

system is essential. Nevertheless, bankruptcy is not a feasible option for
many homeowners. Even if a homeowner is able to stop a foreclosure
sale by filing for bankruptcy, only about one third of debtors successfully
emerge from bankruptcy able to keep their homes.261 Economic realities,
unaddressed in recent Bankruptcy Code legislation, play a part. Creditor
abuses of the bankruptcy system also prevent debtors from successfully
completing their bankruptcies.262
Debtors who file a Chapter 13 bankruptcy – a debt repayment
plan that includes their mortgage263 – must be able to afford their entire
monthly mortgage payments together with a portion of their arrears,
required trustees’ fees, plus a percentage of their unsecured debts.264
Today, homeowners in foreclosure are in far more dire financial straits than
merely being unable to pay their credit card bills.265 Thus, bankruptcy
often does not help homeowners with limited means. Mortgage payments
alone are too high for homeowners to afford, irrespective of any required
payments on unsecured debts.266 Borrowers’ debt-to-income ratios exceed
fifty percent.267 Mortgage loan affordability is only possible if the loan
debtor”); Fred Yager, Mortgage Crisis? Act Now to Avoid Foreclosure,

Consumer Affairs.com (Feb. 14, 2007), available at http://www.consumeraffairs.
com/news04/2007/02/arm_mortgage.html (“If all other options are exhausted,
and the only thing standing between you and foreclosure is to declare personal
bankruptcy.”).
260 See Bernanke, supra note 4.
261 Bankruptcy Site: Statistics, http://www.bankruptcylawinformation.com/index.
cfm?event=dspStats (last visited Nov. 29, 2009) (“Nationally, only one third of
all [C]hapter 13 filings reach a successful discharge. That is, only one third of
[C]hapter 13 cases reach the end of the repayment plan. The other two thirds
. . . are either dismissed or converted to a [C]hapter 7 bankruptcy.”).
262 Id.
263 11 U.S.C. § 1322 (2009).
264 Id. at §§ 1322(a)(2), 1325.
265 World Bank: Economy Worst Since Depression, CNNMoney.com, Mar. 9, 2009,
http://money.cnn.com/2009/03/09/news/international/global_economy_
world_bank; Jon Hilsenrath, Serena Ng & Damian Paletta, Worst Crisis Since
‘30s, With No End Yet in Sight, Wall St. J., Sept. 18, 2008, at A1, available at
http://online.wsj.com/article/SB122169431617549947.html.
266 See supra Part D.
267 A debt-to-income ratio is the relationship between monthly income and
minimum monthly debt payments; frequently used by financial institutions as
is modified based on a borrower’s ability to pay.268 But lenders are not

legally required to modify loans – leaving borrowers with no enforceable
options. Congress ignored this reality when the Senate struck down the
House-passed (by a vote of 234-191) Bankruptcy Bill – HR 1106,269
which would have allowed bankruptcy judges to modify mortgages on
primary home loans. 270
Congress also failed to recognize the extent of borrowers’
financial distress at the height of the subprime lending market when it
passed the Bankruptcy Abuse Prevention and Consumer Protection Act
(“BAPCPA”).271 BAPCPA, enacted in 2005, was designed, in part, to
make it more difficult for individuals to file Chapter 7 bankruptcy.272
Among other obstacles, BAPCPA imposed several new prerequisites to
filing bankruptcy on debtors, such as credit counseling and satisfaction
of a “means test.”273 These new administrative hurdles have sometimes
an indicator of a borrower’s ability to take on additional debt.
268 See, In re Nowlin, 576 F.3d 258 (5th Cir. 2009).
269 On April 30, 2009, the United States Senate voted forty-five to fifty-one on a
rewritten version of the House Bill, thus mooting H.R. 1106, 111th Cong.
(2009). See Washingtonwatch.com – H.R. 1106, The Helping Families Save
Their Homes Act of 2006, Washingtonwatch.com, http://www.
washingtonwatch.com/bills/show/111_HR_1106.html (last visited Dec. 18,
2009).
270 H.R. 1106, 111th Cong. (2009). One of the primary purposes of H.R. 1106
was to overhaul the legislation that created the Hope for Homeowners Program,
H.R. 3221, 110th Cong. (2008), which the House found had “floundered due
to rigid application standards.” Major Housing Legislation Set for House Floor
Consideration, Appraisal Institute, Appraiser News Online, http://www.
appraisalinstitute.org/ano/current.aspx?volume=10&numbr=3/4 (last visited
Nov. 29, 2009).
271 11 U.S.C. §§ 101-1502 (2009).
272 Opening Statement of Sen. Chuck Grassley at the Bankruptcy Reform Hearing
(Feb. 10, 2005), available at http://grassley.senate.gov/news/Article.
cfm?customel_dataPageID_1502=9716 (“Most people think it should be more
difficult for people to file for bankruptcy. Americans have had enough; they are
tired of paying for high rollers who game the current system and its loopholes
to get out of paying their fair share. This legislation eliminates some of the
opportunities for abuse that exist under the current system. Our current system
allows wealthy people to continue to abuse the system at the expense of everyone
else. People with good incomes can run up massive debts and then use
bankruptcy to get out of honoring them.”).
273 Section 109(h) provides that a debtor will no longer be eligible to file under
prevented debtors from being able to file bankruptcy in time to stop a

foreclosure.274
Lenders abuse the bankruptcy system by charging hidden, illegal
bankruptcy and mortgage related fees and by failing to account pre and
post-petition payments properly.275 These abuses prevent debtors from
completing their bankruptcies and obtaining a fresh start. Lenders hide
fee overcharges by placing the improper fees on borrowers’ accounts but
waiting to collect them after the bankruptcy is discharged – when the
debtor is no longer under the bankruptcy court’s protection.276 They
improperly apply debtors’ funds to questionable fee balances rather than
either Chapters 7 or 13 unless within 180 days prior to filing the debtor received
an “individual or group briefing” from a nonprofit budget and credit counseling
agency approved by the United States trustee or bankruptcy administrator. 11
U.S.C. § 109(h) (1978).
274 In re Sosa, 336 B.R. 113, 114 (Bankr. W.D. Tex. 2005) (calling the legislation’s
adoption in its title of the words “consumer protection” the “grossest of
misnomers.”);
U.S. Gov’t. Accountability Office, GAO-07-203, Bankruptcy Reform:
Value of Credit Counseling Requirement Is Not Clear (2007) (“[T]he
value of the counseling requirement is not clear. The counseling was intended
to help consumers make informed choices about bankruptcy and its alternatives.
Yet anecdotal evidence suggests that by the time most clients receive the
counseling, their financial situations are dire, leaving them with no viable
alternative to bankruptcy. As a result, the requirement may often serve more as
an administrative obstacle than as a timely presentation of meaningful options.
Because no mechanism currently exists to track the outcomes of the counseling,
policymakers and program managers are unable to fully assess how well the
requirement is serving its intended purpose.”).
275 See Padilla v. Wells Fargo Home Mortgage, Inc. (In re Padilla), 379 B.R. 643,
654-56 (S.D. Tex. 2007); Cano v. GMAC Mortgage Corp., 410 B.R. 506, 528
(Bankr. S.D. Tex. 2009).
276 Wilborn v. Wells Fargo Bank, 404 B.R. 841 (Bankr. S.D. Tex. 2009); Walton v.
Countrywide Home Loans, Inc. (In re Sanchez), No. 08-001176 (Bankr. S.D.
Fla. Oct. 2, 2008) (United States Trustee (“UST”) alleged the debtors “stripped
off” Countrywide’s lien during the bankruptcy but Countrywide sued for
foreclosure anyway after discharge, forcing debtors to reopen case, and that
Countrywide’s widespread actions constitute abuse of the bankruptcy process);
In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008); Jones v. Wells Fargo Home
Mtg., 366 B.R. 584 (Bankr. E.D. La. 2007); In re Miller, 2007 WL 81052
(Bankr. W.D. Pa. Jan. 9, 2007); McDonald v. Bank Fin. (In re McDonald), 336
B.R. 380 (Bankr. N.D. Ill. 2006); In re Chess, 268 B.R. 150, 158-59 (Bankr.
W.D. Tenn. 2001).
to their current monthly mortgage payment, putting debtors further into

default.
Relatively few debtor class actions have been brought to address
these abuses. Debtors’ account histories are usually incomprehensible,
making it nearly impossible for an individual debtor to uncover lenders’
illegal practices. Bankruptcy lawyers without litigation or class action
experience are unable and/or unwilling to bring these claims. Moreover,
since the damages oftentimes consist of relatively small fees and charges
the claims are uneconomical to pursue for individual debtors.277
Moreover, litigants face a complex subject matter jurisdiction
issue in these cases.278 Even though the Bankruptcy Rules incorporate
Federal Rule of Civil Procedure 23 and bankruptcy courts routinely hear
claims against lenders for violations of the Bankruptcy Code, there is a
split of authority about whether bankruptcy courts have subject matter
jurisdiction over debtor class actions.279 Lenders have aggressively litigated
277 E.g. Mounce v. Wells Fargo Home Mortgage, Inc. (In re Mounce), Adversary
No. 04-5182-lmc, 2008 WL 2714423, at *9 (July 10, 2008) (denying Wells
Fargo’s request for a discovery stay, finding, “…the potential claim that each
class member holds against Wells Fargo, if proven, may be a small number by
Wells Fargo’s standards, but it could be relatively more significant to those class
members who may be a few hundred dollars behind in their mortgage or credit
card payments. In this regard, the court finds that the harm to the class members
should this court grant Wells Fargo’s stay would be greater than the prospective
harm suggested by Wells Fargo in the absence of a stay pending appeal.”).
278 See, e.g., N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50
(1982).
279 See Bank United v. Manley, 273 B.R. 229 (N.D. Ala. 2001) (affirming
certification of a nationwide class of debtors challenging mortgage overcharges);
Mounce v. Wells Fargo Home Mortgage, Inc. (In re Mounce), 390 B.R. 233
(Bankr. W.D. Tex. 2008) (Bankruptcy Court certified a class of Chapter 7
bankruptcy debtors); Noletto v. NationsBanc Mortgage Corp. (In re Noletto),
281 B.R. 36 (Bankr. S.D. Ala. 2000) (certifying class of debtors who alleged
lender’s failure to satisfactorily disclose post-petition, pre-confirmation attorney
fees that it included in its proof of claim); Dean v. First Union Mortgage Corp.
(In re Harris), 280 B.R. 876 (Bankr. S.D. Ala. 2001) (in case challenging
attorney fees improperly posted to debtors’ mortgage accounts, class certification
under Rule 7023(b)(2) was appropriate because most fees had not yet been
collected or only partially paid by debtors, and declaratory and injunctive relief
removing fees from accounts and providing restitution for those paid was
predominant form of relief ); Sheffield v. Homeside Lending Inc. (In re
Sheffield), 281 B.R. 24 (Bankr. S.D. Ala. 2000) (certification granted of
this issue, which prolongs and sidetracks the litigation.

As of the date of this article, there are a variety of debtor class
actions against mortgage lenders pending in bankruptcy courts. Overall,
these actions challenge mortgage lenders’ charging and/or overcharging
of improper bankruptcy related fees and costs and/or misapplication of
debtors’ payments under their Chapter 13 plans.280 Such acts violate
the provisions of the Bankruptcy Code, debtors’ Chapter 13 bankruptcy
plans and various bankruptcy court orders.

Conclusion
The social and economic consequences of the foreclosure

crisis continue to be catastrophic as the foreclosure rate shows no sign
of abatement.281 Foreclosures have now become a significant cause of
homelessness.282 The best remedy to address this crisis is affordable
nationwide class of debtors challenging lender’s failure to adequately disclose
attorney fees in proofs of claim). Contra Guetling v. Household Fin. Servs., 312
B.R. 699 (M.D. Fla. 2004); Cline v. First Nationwide Mortgage Corp. (In re
Cline), 282 B.R. 686 (W.D. Wash. 2002); Williams v. Sears, Roebuck & Co.
(In re Williams), 244 B.R. 858 (S.D. Ga. 2000); Padilla v. GMAC Mortgage
Corp. (In re Padilla), 389 B.R. 409 (Bankr. E.D. Penn. 2008); Knox v. Sunstar
Acceptance Corp. (In re Knox), 237 B.R. 687 (Bankr. N.D. Ill. 1999); Fisher v.
Fed. Nat’l Mortgage Ass’n, 151 B.R. 895, 897 (Bankr. N.D. Ill. 1993).
280 Rodriguez v. Countrywide Home Loans, Inc. (In re Rodriquez), 396 B.R. 436,
439 (Bankr. S.D. Tex. 2008) (challenging improper fees, costs, and
misapplication of payments. Court denied Countrywide’s motion to dismiss,
noting that “[f ]or nearly a century, the Supreme Court has recognized that
individual debtors who successfully emerge from bankruptcy should receive a
fresh start”) (citing Williams v. U.S. Fid. & Guar. Co., 236 U.S. 549, 554-55
(1915)); In re Cano, 410 B.R. 506 (Bankr. S.D. Tex. 2008) (challenging
improper fees and costs and misapplication of payments); Mounce v. Wells
Fargo Home Mortgage, Inc. (In re Mounce), 390 B.R. 233 (Bankr. W.D. Tex.
2008) (challenging overcharges of attorney’s fees for motions to lift the
automatic stay).
281 Les Christie, Worst Three Months of All Time, CNNMoney.com, Oct. 15, 2009,
http://money.cnn.com/2009/10/15/real_estate/foreclosure_crisis_
deepens/?postversion=2009101507 (finding that one in every 136 U.S. homes
were in foreclosure in the third quarter of 2009, representing a five percent
increase from the second quarter and a twenty-three percent jump over the
third quarter of 2008).
282 Nat’l Coal. for the Homeless et al., Joint Report: Foreclosure to
loan modifications.283 Immediate modification of subprime loans and

particularly toxic products, such as Payment Option Arm loans, is crucial
because these loans have the highest delinquency rates.284
Because the problems are so widespread, class action litigation
is a necessary and important mechanism for remedying the foreclosure
crisis.285 An editorial writer for the New York Times recently opined,
Class actions can be a powerful tool in challenging
practices, like predatory lending, that affected large
numbers of homeowners. Right now the Legal Services
Corporation, which provides essential civil legal services to
low income Americans, is barred by law from representing
clients in class action suits. Congress should lift that and
other unwarranted restrictions on legal service providers.
Homelessness 2009: The Forgotten Victims of the Subprime Crisis 5

(2009), available at http://www.nationalhomeless.org/advocacy/
ForeclosuretoHomelessness0609.pdf (estimating that more than ten percent of
homeless people that social services agencies have assisted over the last year
became homeless because of foreclosure).
283 Testimony of Twomey, supra note 250; U.S. Dep’t of Hous. and Urban Dev.,
Office of Pol’y Dev. and Research, Interim Report to Congress on the
Root Causes of the Foreclosure Crisis 44 (2009), available at http://www.
huduser.org/Publications/PDF/int_foreclosure_rpt_congress.pdf (“Loan
modifications that include interest rate and/or principal reductions represent
the mot powerful tool for keeping borrowers in their homes . . .”).
284 David A. Graham, Fixing Troubled Mortgages for the Elderly, Wall St. J., Oct.
21, 2009, at D1 (referring to an industry expert’s findings that as of August 31,
2009, thirty-two percent of option ARMs and forty-eight percent of subprime
loans were delinquent or in foreclosure).
285 See, e.g., Raymond H. Brescia, Tainted Loans: The Value of a Mass Torts Approach
to Subprime Mortgage Litigation, 78 U. Cin. L. Rev. (forthcoming 2010), draft
manuscript available at http://papers.ssrn.com/sol3/papers.cfm?abstract_
id=1420792 (concluding that the class action technique is one of the legal
interventions best suited to achieve what the author identifies as goals for a legal
response to the financial crisis: “reducing the number of foreclosures; correcting
for past illegality in the mortgage market to root out and remedy the harmful
consequences of such conduct; uncovering and spreading information about
the presence of such illegality in the market; promoting the modification of
outstanding mortgage loans; applying pressure on banks and other institutions
to strengthen and expand voluntary efforts to overcome past abuses in the
market; preserving home values to the greatest extent possible; and improving
oversight and regulation of this market.”).
Too many Americans urgently need help.286
The Brennan Center for Justice, a renowned and respected public

policy institute, and various legal services organizations agree, declaring,
“challenging ‘illegal but widespread practices’ [causing foreclosures]
without a class action is ‘impossible.’”287
Indeed, years before the federal government took action, class
actions have resulted in settlements providing for sustainable and valuable
loan modification programs.288 Loan modification programs that result
from litigation are more valuable than voluntary-based programs because
the types of modifications available under these programs consider the
illegal and predatory conduct of the lender rather than being based merely
on a cost-benefit analysis.289 Moreover, lenders have a greater incentive
to offer loan modification programs when they are settling costly legal
claims against them, as opposed to only doing so on a voluntary basis.290
Private loss mitigation and government programs have not
achieved the necessary level of loan modifications to curb the rate of
foreclosures.291 Despite promises and bailout funds, the country’s biggest
286 Editorial, Another Kind of Foreclosure Crisis, N.Y. Times, Oct. 8, 2009, at A30.
287 Melanca Clark & Maggie Barron, Brennan Ctr. for Justice,
Foreclosures: A Crisis in Legal Representation 31 (2009) (citing N.C.
Legal Servs. Planning Council, North Carolina Statewide Legal
Needs Assessment 49 (2003), available at https://www.legalaidnc.org/Public/
Participate/Legal_Services_Community/EqualJusticeAlliance/NC%20
Statewide%20Needs%20Assessment%2003%2024%2003.pdf ).
288 In re Household Lending Litigation, No. C 02-1240 CW (N.D. Cal. Apr. 30,
2004) (settlement created a Foreclosure Avoidance Program that required
Household to modify class members’ loans based on an ability to pay model).
289 HAMP contains a net present value test, where servicers compare the net
present value of the proceeds of a foreclosure with the net present value of the
proceeds of a loan modification. If the proceeds from a loan modification are
greater, the servicer is required to modify the loan.
290 There is a question of carrots and sticks: Under HAMP, servicers receive $1,000
for every loan they modify. On the other hand, the aggregate damages that
could be awarded in a successful class action would have a much greater
financial impact on lenders.
291 See Cong. Oversight Panel, October Oversight Report: An Assessment
of Foreclosure Mitigation Efforts After Six Months 48 (2009) (finding
that only 1.26% of HAMP modifications had become permanent after a three
month trial period); Carrie Bay, Wells Fargo Under Fire for Denied Modifications,
mortgage servicers have not delivered.292 The government’s Home

Affordable Modification Plan (“HAMP”) was not effectuated swiftly
enough and has not produced the desired results.293 These problems exist
primarily because the HAMP lacks a clear enforcement mechanism.294
The role of class actions to address the needs of struggling homeowners
should be embraced. As detailed above, they can provide restitution to
homeowner, disgorgement of ill-gotten gains, opportunities for supervised
loan restructuring plans, and injunctive relief to stop the predatory and
discriminatory lending practices that caused the foreclosure crisis in the
first place.
DSNews.com, Sept. 8, 2009, http://www.dsnews.com/articles/wells-fargo-

under-fire-for-denied-modifications-2009-09-08; John Collins Rudolf, Judges’
Frustration Grows With Mortgage Servicers, N.Y. Times, Sep. 3, 2009, at B1
(discussing a recent bankruptcy case where the judge summoned a Wells Fargo
senior executive to answer questions about Wells Fargo’s failure to properly
process the debtors’ loan modification application); Dawn Kopecki, Bank of
America Among Worst for Loan Modifications, Bloomberg.com, Aug. 4, 2009,
http://www.bloomberg.com/apps/news?pid=20601087&sid=aoO9FGsvnJOk.
292 Ctr. for Responsible Lending, Mortgage Repairs Lag Far Behind
Foreclosures (2009), available at http://www.responsiblelending.org/
mortgage-lending/research-analysis/mortgage-repairs-lag-far-behind-
foreclosures.html.
293 See Cong. Oversight Panel, supra note 291; Nick Carey & Al Yoon, Home
Rescue Plan Delaying, Not Solving Crisis, Reuters (Oct. 13, 2009), http://
www.reuters.com/article/topNews/idUSTRE59C00620091013.
294 See, Williams v. Timothy F. Geithner, No. 09-1959 ADM/JJG, 2009 WL
3757380, at *6 (D. Minn. Nov. 09, 2009) (finding, “…[HAMP] does not
create an absolute duty on the part of the Secretary to consent to loan
modifications; it is not “language of an unmistakably mandatory character.”).
POLICY AND LITIGATION BARRIERS TO FIGHTING

PREDATORY LENDING
Deborah Goldstein & Matthew Brinegar*
I. Introduction
As the Obama Administration implements programs to help

borrowers keep their homes,1 it is imperative that we examine the policy
choices, laws, and judicial opinions that have created the “subprime
foreclosure crisis” and made it necessary to subsidize loan modifications.
After reviewing these issues in brief, we offer solutions to further
ameliorate the deleterious effects of the crisis and to prevent similar issues
from arising in the future.
Ultimately, the set of legal standards that protect lenders and
loan purchasers from accountability for predatory loans has resulted in
a significant increase in foreclosure filings2 and the destabilization of
financial markets.3 For many years, Congress, states, regulators, and the
courts have shielded lenders and investors from the risks of improvidently
extending credit through, inter alia, the holder in due course and
preemption doctrines, layered on top of anemic standards for origination
practices. The industry has long argued that these limitations on

*
Debbie Goldstein serves as the Executive Vice President of the Center for
Responsible Lending in Durham, NC, where she coordinates the organization’s
policy agenda. She is a graduate of Harvard Law School. Matthew Brinegar
works as Litigation Counsel for the Center for Responsible Lending in
Washington, DC, where he represents individual homeowners in predatory
lending litigation. He is a graduate of the University of Washington School of
Law. Goldstein and Brinegar thank Daniel Mosteller, Eric Halperin, Julia
Gordon and Kathleen Keest for their editing and input.
1 Dept. of the Treasury, Home Affordable Modification Program
Guidelines (2009), available at http://www.treas.gov/press/releases/reports/
modification_program_guidelines.pdf.
2 Press Release, RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008
(Jan. 15, 2009), available at http://www.realtytrac.com/ContentManagement/
pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847.
3 Günter Franke & Jan Pieter Krahnen, The Future of Securitization, (Center for
Fin. Stud., Working Paper No. 2008/31), available at http://www.ifk-cfs.de/
fileadmin/downloads/publications/wp/08_31.pdf.
liability increase consumer access to credit4 and lower transaction costs.5

Nevertheless, without meaningful rules and remedies, lenders have no
incentive to avoid making bad loans in the first place, and purchasers
on the secondary market have no incentive to monitor the quality of the
loans they buy. Holder in due course status facilitates the securitization of
subprime mortgages6 and misaligns the interests of borrowers, investors,
and consumers,7 which leads to weak underwriting8 and fraud.9
Worse, these doctrines rob many victims of predatory lending of
any chance to receive compensation for their losses. Many loan originators
are thinly capitalized,10 and the law provides scant substantive consumer
protection for loans originated or assigned to national banks that are not
otherwise designated “high-cost.”11 Finally, not only do individuals face
4 Mark B. Greenlee & Thomas J. Fitzpatrick IV, Reconsidering the Application of

the Holder in Due Course Rule to Home Mortgage Notes, 41 UCC L.J. 3 Art. 2
(2009).
5 Legislative Solutions to Abusive Mortgage Lending Practices: Hearing Before the
Subcomms. on Financial Institutions and Consumer Credit and Housing and
Community Opportunity of the H. Comm. on Financial Services, 109th Cong. 1
(2005) (statement of Ms. Regina Lowrie, President, Mortgage Bankers
Association).
6 Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street
Financing of Predatory Lending, 75 Fordham L. Rev. 2039, 2098-99 (2007)
(explaining that in Georgia, Standard & Poor’s refused to rate pools of mortgages
because of expanded assignee liability).
7 Testimony before the Committee on Financial Services, U.S. House of Representatives:
Subprime Mortgage Lending and Mitigating Foreclosures (2007), available at
http://www.federalreserve.gov/newsevents/testimony/bernanke20070920a.
htm [hereinafter “Statement of Ben S. Bernanke”] (statement of Ben S.
Bernanke, Chairman, Fed. Reserve Sys.).
8 Id.
9 Kurt Eggert, Held up in Due Course: Predatory Lending, Securitization, and the
Holder in Due Course Doctrine, 35 Creighton L. Rev. 503, 522-23 (2002)
(discussing the infamous Diamond Mortgage example).
11 The Home Equity Protection Act (hereinafter “HOEPA”) prohibits balloon
payments, negative amortization and prepayment penalties on very high-cost
loans, a very small portion of the market, representing the most costly of
subprime loans (those with very high interest rates or excessive fees). 15
U.S.C.A. § 1639 (West 2009). Most subprime and nontraditional loan
products that contributed to the current economic meltdown would not have
been covered by HOEPA. The Truth in Lending Act, of which HOEPA is a
the prospect of not recovering damages, but preemption deters state-led

innovation in combating predatory lending,12 resulting in a “race-to-the-
bottom” for consumer protection.13
For the rights that do exist, courts have gradually tightened proof
standards and barred certain avenues of relief. For instance, although the
Truth in Lending Act (“TILA”) was passed to promote “the informed use
of credit” by assuring “meaningful disclosure of credit terms,”14 federal
courts have fashioned a nearly impossible to satisfy test for consumers
seeking actual damages in TILA claims15 and have also barred class-wide
rescissions under the Act.16 Because lenders only face relatively small
statutory damages liability and individualized rescissions of illegal loans,
these judicial opinions have diminished the incentives to comply with
TILA.
Even if a consumer manages to pass these gauntlets, there are
significant tax liabilities created by the receipt of damages,17 especially
for principal write downs18 and punitive damages.19 Given that many
victims of predatory lending are already economically insecure, this tax
burden can deprive them of any real chance of fully recovering from the
fraud perpetrated upon them. Congress has partially recognized the tax
liability problems created by unaffordable mortgages and, in response,
has temporarily suspended the taxation of some principal reductions.20
While temporary suspension is valuable for many innocent borrowers, it
makes little sense to tax proven victims of predatory lending.
subpart, applies to all consumer mortgages, but is primarily a disclosure statute.
15 U.S.C. § 1641 (2006); see also Turner v. General Motors Acceptance Corp.,
180 F.3d 451, 454 (2d Cir. 1999) (explaining that TILA is a disclosure statute).
12 Modernizing Bank Supervision and Regulation: Hearing Before the S. Comm. on
Banking, Hous., & Urb. Aff., 111th Cong. 1 (2009) [hereinafter “statement of
Sheila C. Bair”] (statement of Sheila C. Bair, Chairman, Federal Deposit
Insurance Corporation).
13 Id.
14 15 U.S.C. § 1601(a) (2006).
15 See, e.g., Turner v. Beneficial Corp., 242 F.3d 1023, 1024 (11th Cir. 2001).
16 See, e.g., Andrews v. Chevy Chase Bank, 545 F.3d 570, 571 (7th Cir. 2008).
17 26 U.S.C. § 108 (2006).
18 Stephen Cohen & Laura Sager, Why Civil Rights Lawyers Should Study Tax Law,
22 Harv. Blackletter L.J. 1, 11-12 (2006).
19 26 U.S.C. § 61(a) (2006).
20 Mortgage Forgiveness Debt Relief Act of 2007, Pub. L. No. 110-142, 121 Stat.
1809.
Finally, while borrowers can have the principal and interest of all
types of loans reduced in Chapter 13 bankruptcy, homeowners do not
have the same rights with respect to their principal residences.21 This is
especially problematic because loan servicers are – in large part – unwilling
to significantly modify loans voluntarily, even though such modifications
would benefit all parties concerned. 22 One reason frequently cited for
failure to modify is that servicers fear investor lawsuits.
The policy and litigation barriers that prevent borrowers from
keeping their homes also make it difficult to fight predatory lending on
an ongoing basis. Nevertheless, multiple solutions exist. One of the
best strategies in the current crisis for achieving loan modifications on
a much larger scale would be to lift the ban on judicial modifications
of home loans by allowing consumers to have the principal and interest
of their loans modified in Chapter 13 bankruptcy. Bankruptcy is
advantageous because it costs taxpayers very little and avoids many of
the above-stated barriers to voluntary modifications. It is also likely to
encourage voluntary modifications because servicers face the prospect of
a borrower filing for bankruptcy. The Obama Administration has already
implemented policies to reduce foreclosures such as the Making Home
Affordable Program. The Program has made funds available to improve
incentives for loan servicers to do more loan modifications and provide
guidelines for what successful modifications would look like.
Holder in due course rules, moreover, should be abrogated for
most residential loans, so as to create incentives for investors to demand
more careful underwriting of residential loans. In tandem with expanded
assignee liability, federal banking regulations should not bar state-specific
consumer protection laws that will ensure better local control over unique
and ever-evolving predatory lending problems.
While the expansion of state consumer protection laws would
curb predatory lending in many respects, new federal laws should also
improve requirements for sound underwriting standards, such as making
21 See William Norton Jr., Norton Bankruptcy Law and Practice § 149:8 (3d ed.
2008) (“[Section] 1322(b)(2) permits a Chapter 13 debtor to modify the rights
of the holders of secured claims or unsecured claims ‘other than a claim secured
only by a security interest in real property that is the debtor’s principal
residence.’”).
22 Joe Nocera, Facing Crisis, Congress Makes Sense, N.Y. Times, Nov. 14, 2008, at
B1.
sure lenders consider a borrower’s ability to repay the loan, and ban
financial incentives like yield spread premiums (“YSPs”), which reward
brokers for steering consumers to more expensive loans,23 as well as other
incentives that drive predatory lending. To provide borrowers with
more meaningful remedies and deter widespread abuse, TILA should be
amended to clarify that actual damages should be awarded without proof
of detrimental reliance, the statutory damages cap should be drastically
increased, and that TILA class actions rescissions should be specifically
permitted. Finally, tax laws should be redrafted to end penalties for
receiving settlements or judgments related to predatory lending disputes.
II. Barriers to Holding Culpable Parties

Accountable for Predatory Lending
While there are many difficulties in litigating predatory lending

matters, chief among them are the holder in due course (“HDC”) doctrine
and, in many cases, the preemption of state law claims. The HDC
doctrine prevents consumers from holding the assignees of loans – often
the ultimate funders of the loan24 – accountable for violations of laws
intended to protect against predatory lending practices.25 Preemption,
on the other hand, shields federally-supervised financial institutions from
state predatory lending statutes. This has led to a considerable weakening
of consumer rights26 since the federal bank regulators, whose budgets
are supported by fees of the institutions they regulate,27 have not created
meaningful protections to replace the preempted state laws. Federal
preemption has further discouraged states from doing enough to protect
consumers where they can because states fear an uneven28 playing field for
23 Margot Saunders, The Increase in Predatory Lending and Appropriate Remedial
Actions, 6 N.C. Banking Inst. 111, 120 (2002).
26 Arthur E. Wilmarth, The OCC’S Preemption Rules Exceed the Agency’s Authority
and Present a Serious Threat to the Dual Banking System and Consumer Protection,
23 Ann. Rev. Banking and Fin. L. 225, 348 (2004).
27 Id. at 356.
28 Office of the Comptroller of the Currency Preemption: Hearing Before the Comm.
on House Financial Services and the Subcomm. on Oversight and Investigations,
108th Cong. (2004) (statement of Diana Taylor, Superintendent, Banks for the
State of New York).
state-supervised institutions and states listen to claims by federal regulators

that state protections do not work or are not needed.29 To protect the
consumer and the integrity of the market, the HDC doctrine must be
abrogated or weakened in the consumer lending market. Moreover,
states should be able to supplement federal anti-predatory laws so that
protections against abusive mortgage lending practices are strong across
the board, regardless of the type of lender.
A. The Holder in Due Course Doctrine
The HDC doctrine insulates mortgage assignees from most of

the claims that a consumer could assert against the original lender.30 The
Uniform Commercial Code outlines the requirements for HDC status:
(1) the instrument when issued or negotiated to the
holder does not bear such apparent evidence of forgery or
alteration or is not otherwise so irregular or incomplete as
to call into question its authenticity; and (2) the holder
took the instrument (i) for value, (ii) in good faith, (iii)
without notice that the instrument is overdue or has
been dishonored or that there is an uncured default with
respect to payment of another instrument issued as part
of the same series, (iv) without notice that the instrument
contains an unauthorized signature or has been altered, (v)
without notice of any claim to the instrument described
in § 3-306, and (vi) without notice that any party has a
defense or claim in recoupment described in § 3-305(a).31
There are only limited ways to overcome HDC status, including in some
29 See, e.g., Review of the National Bank Preemption Rules: Hearing Before the S.
Comm. on Banking, Hous., & Urban Aff., 108th Cong. 6-7 (2004) (statement
of John D. Hawke, Jr., Comptroller of the Currency), available at http://www.
occ.treas.gov/ftp/release/2004-28b.pdf (“Some may ask, why not allow State
and local predatory lending laws to apply as well? Isn’t more regulation better?
To that I would answer, not unless there has been a demonstration that more
regulation is needed because the existing regulatory scheme does not work.
That is not the case with respect to the national banking system.”).
31 U.C.C. § 3-302(2005).
cases with the right fact pattern, through the civil conspiracy32 or the
close connectedness doctrine.33 First, a civil conspiracy exists when “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.”34 If a civil conspiracy claim is warranted, that would
break the barrier between the loan originator and the securitizer, the
latter often having more resources to pay judgments35 and without whom
the market for predatory loans would have been much smaller.36 While
an agreement between these entities is unlikely to include an explicit
solicitation of illegal loans, there may be circumstantial evidence of
the securitizer’s acquiescence to predatory tactics.37 Second, the “close
connectedness” doctrine abrogates the HDC doctrine when, for example,
the financier provides the sales contract, which is simultaneously assigned
upon execution.38 The rationale for the close connectedness doctrine is
that HDC status was created in order to facilitate the free negotiability
of commercial paper amongst strangers; the more connected parties are,
however, the less free negotiability should be a concern.39
Unfortunately, often these “solutions” to the HDC problem are
difficult to prove, especially based on evidence available to the consumer.
Further, by the time the abuse is discovered, and particularly in the current
economic environment, the original perpetrators of improvident lending
32 Petry v. Wells Fargo Bank, N.A., 597 F. Supp. 2d 558, 565 (D. Md. 2009).
33 Greene v. Gibraltar Mortg. Inv. Corp., 488 F. Supp. 177, 181 (D.D.C. 1980).
34 Matthews v. New Century Mortg. Corp., 185 F. Supp. 2d 874, 889 (S.D. Ohio
2002) (quoting Williams v. Aetna Fin. Co., 700 N.E.2d 859, 868 (Ohio
1998)). A claim for aiding and abetting fraud or misrepresentation is similar to
civil conspiracy, although the abettor “does not adopt as her own the wrongful
act of the primary violator through concerted action or agreement.” Christopher
R. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185, 2250
(2007).
36 U. S. Gen. Acct. Office, Rep. to the Chairman and Ranking Minority
Member, Spec. Comm. on Aging, U.S. Senate, GAO-04-280, Consumer
Protection: Federal and State Agencies Face Challenges in Combating
Predatory Lending, 72-77 (2004), http://www.gao.gov/new.items/d04280.
pdf.
38 Greene, 488 F. Supp. at 180.
39 Unico v. Owen, 232 A.2d 405, 410, 417 (N.J. 1967).
are increasingly out of business40 or have been taken over by the Federal
Deposit Insurance Corporation (“FDIC”).41 The FDIC receivership
process is particularly difficult for consumers because failed bank assets
are bifurcated and new owners purchase only the benefits (i.e. the right to
enforce a security interest), while leaving behind any potential claims for
predatory lending.42 The FDIC keeps the potential liability but enjoys
“super holder in due course”43 status, which leaves consumers with little
or no recourse for their losses.
The HDC doctrine has, to a large extent, made securitization
possible.44 That is, investors will not purchase and rating agencies will
not put their imprimatur on pools of mortgages unless there is minimal
liability for predatory tactics.45 While securitizers could expend the time
and money to evaluate the quality of loans they sell, the industry has
found it more efficient to rely upon HDC law.46 Because loan originators
are thinly capitalized and pass loans quickly to securitizers, they also have
little incentive to properly underwrite loans.47 In the end, this leads to a
disconnect between the interests of all the parties to the transaction and
the consequent production of unaffordable and unsustainable loans.48
The best way to prevent a recurrence of Wall-Street-fueled
predatory lending is for Congress to require the secondary market to have
“skin in the game” (i.e. a financial interest in the underlining loans that
make up an asset-based security) through meaningful assignee liability.
Risk associated with the origination of a loan needs to travel with the
loan, rather than be stripped from the loan when the loan is securitized.
In that way, when Wall Street purchases high-risk mortgages and any

41 For example, the FDIC reports that three banks failed in 2007, in contrast to
the twenty-five bank failures in 2008. FDIC, Failed Bank List, http://www.
fdic.gov/bank/individual/failed/banklist.html (last visited Oct. 18, 2009).
42 UMLIC-Nine Corp. v. Lipan Springs Dev. Corp., 168 F.3d 1173 (10th Cir.
1999); Jackson v. Thewatt, 883 S.W.2d 171 (Tex.1994).
43 FDIC v. Wood, 758 F.2d 156, 161 (6th Cir. 1985) (holding that the FDIC is
not liable for a flagrantly usurious note, as super holder in due course status is
necessary to effectuate the FDIC’s congressional purpose).
47 Statement of Ben S. Bernanke, supra note 7.
48 Id.
corresponding financial benefits, it also accepts responsibility for what its

purchases will encourage at the origination level. The holder of the loan
(i.e. the individual or entity that is entitled to foreclose on the loan if the
homeowner defaults) should maintain some level of ultimate responsibility
for the terms of the loan. The result of meaningful secondary market
liability is that the market can accurately price risk and thereby police
itself.
While both the borrower and the ultimate note holder may, in
most situations, be without specific responsibility for creating abusive
loans, the holder is in a far better position than the homeowner to bear
the risk of a bad mortgage for three reasons. First, the holder can spread
this loss across thousands of other loans, while the borrower has but one
home. Second, the holder can choose from whom to buy their loans and
can therefore choose reputable originators who are likely to make quality
mortgages and who are strong enough to purchase the loans back if they
violate the representations and warranties that the secondary market
purchaser imposes. Third, the holder can conduct stringent due diligence
to ensure that it is not unwittingly purchasing bad mortgages.
B. Preemption of State Anti-Predatory Lending Statutes
Under the Supremacy Clause, Congress may preempt state law,

provided that it does so within its constitutionally delegated powers.49
Preemption occurs under two main circumstances: “when a conflict
between federal and state law preclude[s] obedience to both sovereigns,
or when a federal statute so completely occupie[s] a field that it left no
room for additional state regulation.”50
The National Bank Act51 and Home Owner’s Loan Act52 have
long blocked states from completely regulating nationally charted banks
and thrifts.53 The Office of Thrift Supervision (“OTS”) preempts the
49 U.S. Const. art. VI, cl. 2.

50 Waters v. Wachovia Bank, N.A., 550 U.S. 1, 44 (2007) (internal citations
omitted).
51 National Bank Act, 12 U.S.C. § 38 (2006) (amending and reenacting the
National Currency Act, 12 U.S.C. § 39 (2006)).
52 12 U.S.C.A. § 1461 (West 2009).
53 Tiffany v. Nat’l Bank of Mo., 85 U.S. 409 (1873).
entire field of lending regulation,54 which prohibits states from regulating

certain features of the lending process, inter alia, by passing laws that
mandate lender licensing or limit loan terms related to amortization,
disbursement, and repayments for its chartered entities.55 In addition,
the Office of the Comptroller of the Currency (“OCC”) has asserted
a broad interpretation of conflict preemption resulting in all but field
preemption over lending activities of national banks, 56 despite Supreme
Court precedent to the contrary.57
Historically, the Supreme Court justified the OCC’s preemption
rule by stating that inconsistent state law would frustrate the purpose of the
National Bank Act and impair banking institutions’ ability to efficiently
discharge their duties.58 Banks, moreover, defend the preemption of
state law as a way to provide cheaper consumer services, alleging that
compliance with multiple state laws increases transaction costs.59
The value of state regulation of lending, regardless of the charter
of the entity, is manifold, particularly with the current consolidation
of financial institutions that has resulted in an increased dominance of
54 Silvas v. E* Trade Mortg. Co., 514 F.3d 1001, 1005 (9th Cir. 2008).
55 12 C.F.R. § 560.2(b) (2009).
Indeed, some critics argue that the practical import of preemption efforts has
been to achieve field preemption in practice, if not through clear declaration as
such. Wilmarth, supra note 26, at 234; 12 C.F.R. §§ 7.4007-9 (2009), 34.3-.4
(2009).
57 Atherton v. FDIC, 519 U.S. 213, 222-23 (1997); Barnett Bank of Marion
County, N.A. v. Nelson, 517 U.S. 25, 33 (1996) (holding that “in defining the
pre-emptive scope of statutes and regulations granting a power to national
banks, these cases take the view that normally Congress would not want States
to forbid, or to impair significantly, the exercise of a power that Congress
explicitly granted.”). According to the OCC, preemption does not ban
consumer lawsuits against national banks in toto: “[S]tate laws escape
preemption only ‘to the extent that they only incidentally affect the lending
operations of Federal savings associations . . . .” In re Ocwen Loan Servicing,
LLC Mortg. Servicing Litig., 491 F.3d 638, 643 (7th Cir. 2007) (quoting 61
Fed. Reg. 50951, 50966 (Sept. 30, 1996)) (emphasis added). Therefore, basic
common law claims for breach of contract and fraud remain. Id. at 643-44.
The OTS has issued similar regulations pertaining to thrifts and consumer
lawsuits. 12 C.F.R. § 560.2(c) (2009).
58 First Nat’l Bank v. California, 262 U.S. 366, 369 (1923).
59 American Bankers Association, National Standards/Federal Preemption, http://
www.aba.com/Issues/Issues_NationalStandards.htm (last visited Apr. 16,
2009).
nationally chartered banks over the lending market.60 First, states can
act as “‘laboratories’ in experimenting with new banking products,
structures, and supervisory approaches, and Congress has subsequently
incorporated many of the states’ successful innovations into federal
legislation.”61 Second, state laws tend to be more ideologically aligned
with their citizens’ views of consumer protection.62 Third, federal law
enforcement is unlikely to prosecute small-time lenders.63
Robust preemption of state law, on the other hand, has led to a
race to the bottom of consumer protection.64 For instance, banks may
switch from a state to a federal charter (or vice versa) in order to find
the most hospitable regulations.65 This, in combination with federal
agency interest in attracting banks to regulate, leads to weak consumer
protection.66 Federal regulators have disputed the need for stronger
consumer protections,67 and these comments, along with a desire to
maintain a level playing field for state-supervised institutions, have
made some states reluctant to pursue meaningful reforms on behalf of
consumers.
The solution is to end or severely limit preemption for consumer
financial products. Federal law should act as a floor, not a ceiling, and
enforcement efforts at the federal and state levels should be complementary,
not in competition for territory. Limits on preemption will allow states to
experiment with the allocation for risk between consumers and business
In the first half of 2009, Wells Fargo and Bank of America originated
approximately 50 percent of all mortgages. In contrast, the top three lenders
accounted for only 37 percent of the market share in 2007. Leslie Scism et al.,
Slump Spurs Grab for Markets, Wall St. J., Aug. 24, 2009, at A1.
61 Wilmarth, supra note 26, at 259; see also Wei Lei & Keith S. Ernst, Ctr. for
Responsible Lending, The Best Value in the Subprime Market: State
Predatory Lending Reforms 2 (2006), available at http://www.
responsiblelending.org/mortgage-lending/research-analysis/rr010-State_
Effects-0206.pdf (showing effectiveness of state laws at curbing predatory
lending).
62 Julia Paterson Forrester, Still Mortgaging the American Dream: Predatory Lending,
Preemption, and Federally Supported Lenders, 74 U. Cin. L. Rev. 1303, 1360-1
(2006).
63 Id. at 1362.
64 Statement of Sheila C. Bair, supra note 12.
65 Forrester, supra note 62, at 1370.
66 Id.
67 See generally Hawke, supra note 29.
in accordance with their constituents’ wishes. As stated above, it will also

inspire more innovation in the delivery of banking services.
III. Clear and Reasonable Underwriting Standards
In light of what has happened in the mortgage market, it is more

essential than ever that TILA be strengthened with sensible lending rules
to permit the mortgage market to resume functioning properly, but also
to prevent abusive, unsustainable lending in the future. The key to reform
is to realign the incentives of the market with as many bright-line rules
as possible, while also providing adequate remedies to ensure that no one
will fall through the cracks.
To change the incentives for mortgage originators, all mortgage
originators should have a duty of good faith and fair dealing. Among
other things, this requirement would mandate that an originator make
reasonable efforts to secure a home mortgage loan that is appropriately
advantageous to the consumer. The originator would have to sell a
product that was appropriate with respect to product type, rates, charges,
and repayment terms of the loan.
Independent mortgage brokers, however, should be held to an
even higher standard than retail lenders: they should have a fiduciary
duty to their customers – just as stockbrokers do.68 Experts on mortgage
financing have long raised concerns about the problems inherent in a
market dominated by broker originations. For example, the chairman of
the Federal Reserve Board, Ben S. Bernanke, noted that placing significant
pricing discretion in the hands of financially motivated mortgage brokers
in the sales of mortgage products can be a prescription for trouble, as it
can lead to behavior not in compliance with fair lending laws.69 Similarly,
a report issued by Harvard University’s Joint Center for Housing Studies,
68 Unlike retail lenders, who are obviously in business to sell loans to consumers,
brokers hold themselves out to consumers as trusted advisers for navigating the
complex mortgage market. Like stockbrokers, that is the value-added service
they sell, and it is the service consumers assume they are buying. Yet most
mortgage brokers and their trade associations deny that they have any legal or
ethical responsibility to refrain from selling inappropriate, unaffordable loans,
or to avoid benefiting personally at the expense of their borrowers.
69 Ben S. Bernanke, Chairman, Fed. Reserve Bd., Remarks at the Opportunity
Finance Network’s Annual Conference (Nov. 1, 2006).
stated, “[h]aving no long term interest in the performance of the loan,

a broker’s incentive is to close the loan while charging the highest
combination of fees and mortgage interest rates the market will bear.”70
A. Yield Spread Premiums
The way brokers are compensated creates strong incentives for

them to sell unconscionably expensive loans to their customers, even
when those customers qualify for better loans. Currently, most brokers
receive a YSP in return for making a loan on behalf of a lender. Abusive
YSPs create a perverse incentive for mortgage brokers to steer borrowers
into loans that are more costly and dangerous even though they could
qualify for a more affordable product.71 Lenders then provide additional
70 Credit, Capital and Communities: The Implications of the Changing Mortgage

Banking Industry for Community Based Organizations, Joint Ctr. for Housing
Studies (Harvard Univ., Cambridge M.A.), Mar. 9, 2004, at 4. Moreover,
broker-originated loans “are also more likely to default than loans originated
through a retail channel, even after controlling for credit and ability-to-pay
factors.” Id. at 42 (citing Alexander et al., Some Loans are More Equal Than
Others: Third Party Originations and Defaults in the Subprime Mortgage Industry,
30(4) Real Estate Econ. 667-97 (2002)).
71 Keith Ernst, Debbie Bocian & Wei Lei, Ctr. for Responsible Lending,
Steered Wrong: Brokers, Borrowers and Subprime Loans (2008),
available at http://www.responsiblelending.org/mortgage-lending/research-
analysis/steered-wrong-brokers-borrowers-and-subprime-l-oans.html.
Mortgage lending legislation should also absolutely prohibit racially
discriminatory steering. While an efficient financial market theoretically would
provide equally qualified borrowers with equally competitive prices on subprime
home loans, both quantitative research and anecdotal evidence show that some
borrowers, particularly African-American and Latino families, pay more than
necessary for subprime mortgages. In May 2006, CRL analyzed data submitted
by mortgage lenders for loans made in 2004 to assess the effects of race and
ethnicity on pricing in the subprime market while controlling for the major risk
factors used to determine loan prices. Our findings showed that, for most types
of subprime home loans, African-American and Latino families were at greater
risk of receiving higher-rate loans than white borrowers, even after controlling
for legitimate risk factors. In other words, if two families received subprime
loans, one African American and one white, and they had the same credit score
and were similarly qualified in every other way, the African-American family
has a significant chance of receiving a higher-cost loan. See, e.g., Jeffrey D.
Dillman, Samantha Hoover & Carrie Pleasants, Housing Research &
compensation to brokers to lock borrowers into these higher-rate loans

with a prepayment penalty to provide an income stream to pay off
that upfront YSP payment. Banning YSPs would significantly reduce
incentives for brokers to upsell borrowers into more expensive and riskier
loans than those for which they qualify.72
In theory, consumers can use YSPs to buy down upfront
origination costs. However, the reality is that, especially in the subprime
and nontraditional mortgage markets, this trade-off rarely (if ever) occurs.
The Department of Housing and Urban Development (“HUD”), in the
regulatory review accompanying the issuance of their recently-enacted
proposed rule in March 2008, cited extensive evidence that, even in the
prime market, borrowers with YSPs pay in the aggregate more in fees,
interest, and other closing costs than borrowers who do not pay YSPs.73
B. Prepayment Penalties
Similarly, prepayment penalties, a pervasive and insidiously

harmful feature of the now-collapsed subprime market, should be banned
on mortgage loans generally. During the current crisis, many families that
might have escaped their mortgage by refinancing before housing values
became prohibitively low found themselves trapped by a prepayment
penalty. Commonplace in the subprime market, a prepayment penalty
on a $250,000 loan could be expected to range from $8,000 to $10,000
Advocacy Center, Persisting Racial & Ethnic Disparities in Ohio
Mortgage Lending (2009), available at http://www.thehousingcenter.org/
Publications/Research-Reports.html.
72 Alternatively, YSPs should be banned for subprime and nontraditional loans
and permitted in the prime market only when they are a true trade-off, i.e.,
when (1) the borrower pays no origination costs, either out of pocket or from
the loan proceeds (except for fees paid to government officials or amounts to
fund escrow accounts for taxes and insurance); and (2) the loan does not
contain a prepayment penalty. If that approach is taken, any payment of such
a premium by a lender should be recognized as a per se acknowledgment of
agency between the broker and originating lender, with liability for the broker’s
acts and omissions irrebuttably attaching to the originating lender and
subsequent holders of the note.
73 Susan Woodward, HUD Office of Policy Dev. and Research, A Study
of Closing Costs for FHA Mortgages (2008); see also Howell E. Jackson &
Laurie Burlingame, Kickbacks or Compensation: The Case of Yield-Spread
Premiums, 12 Stan. J. L., Bus. & Fin. 289, 353 (2007).
– enough to prevent or discourage refinancing. Independent research has

fixed the increased risk of default on subprime mortgages with prepayment
penalties from sixteen to twenty percent over already high baseline rates.74
Contrary to some industry claims, empirical analysis of the
effects of anti-predatory lending laws, including those with limitations on
prepayment penalties, shows that banning prepayment penalties causes a
decrease in the targeted abuse, without any restriction in access to credit.75
In fact, in states that have limited prepayment penalties as part of their
approach to curbing predatory lending, interest rates have stayed the
same or lower compared with control states where such protections are
absent.76 Eliminating prepayment penalties and YSPs would be a major
74 Roberto G. Quercia, Michael A. Stegman & Walter R. Davis, The Impact of
Predatory Loan Terms on Subprime Foreclosures: The Special Case of Prepayment
Penalties and Balloon Payments, CCC Research Paper (Univ. of N.C. Ctr. for
Cmty. Capitalism, Chapel Hill, N.C.), Jan. 25, 2005, at 2, http://www.kenan-
flagler.unc.edu/assets/documents/foreclosurepaper.pdf.
75 Wei Li & Keith S. Ernst, Ctr. for Responsible Lending, The Best Value
in the Subprime Market: State Predatory Lending Reforms 2-3, 13-17
(2006).
76 Id. at 6. The study ranked states as to six substantive protections, prepayment
penalties among them, as well as the scope of coverage to which the protections
applied and the remedies available. The lowered interest rates likely result from
the perverse relationship between YSPs and prepayment penalties in the
subprime market, as we discuss above. We also note that at least thirty-five
states regulate prepayment penalties, including eleven states that have
prepayment penalty bans on broad categories of mortgage loans. There is no
evidence that consumers feel deprived of “choice” in those states. Alabama
(unless approved mortgagee under National Housing Act or where creditor is
exempt from licensing, per Ala. Code § 5-19-31 (LexisNexis 1996 & Supp.
2008) (this version of the law only effective until November 21, 2009)); (Ala.
Code § 5-19-4(c) (LexisNexis 1996 & Supp. 2008)); Alaska (except federally
insured loans requiring prepayment penalty) (Alaska Stat. § 45.45.010(g)
(2008)); Indiana (prepayment penalty banned for a consumer loan (key
requirement: secured by an interest in land or by personal property that is the
borrower’s principal dwelling) that is not “primarily secured by an interest in
land” (i.e., that is not a first lien mortgage) as well as for a refinancing or
consolidation (junior lien)) (Ind. Code Ann. § 24-4.5-3-209 (West 2006 &
Supp. 2008) (limitation on penalty); § 24-4.5-3-104 (West 2006) (definition
of “consumer loan”); § 24-4.5-3-105 (West 2006) (explanation of “primarily
secured by land”)); Iowa (purchase money or refinance of purchase money loan
secured by 1- or 2-family dwelling or by agricultural land) (Iowa Code Ann. §
535.9 (West 1997 & Supp. 2009)); (reverse annuity or graduated payment
step forward in protecting consumers and returning fairness to the market

for responsible lenders.
C. Excessive Fees
Another key protection, and one that has long been at the
forefront of preventing predatory lending, is limiting excessive fees.77
Historically, mortgage loans primarily generated income and profits
through the performance of the loans and the payment of interest. In
recent years, this model was abandoned for quick payments generated at
closing that were divorced from the long-term sustainability of the loan.
The result has been the loss of home equity for families and an unstable
and unsustainable mortgage system that has badly wounded our overall
economy.
TILA should also establish transparent limits on up-front fees.
Originator fees should be limited to no more than two percent of the
loan amount, with additional costs and profits recovered through the
mortgage loans) (Iowa Code Ann. § 528.4 (West 2001)); Minnesota

(prohibited in residential mortgages under Fannie Mae conforming limit)
(Minn. Stat. Ann. § 58.137(2)(c) (West 2002 & Supp. 2009)); New Jersey
(for loans with interest rates exceeding six percent) (N.J. Stat. Ann. § 46:10B-
1, B-2 (West 2003)); New Mexico (N.M. Stat. Ann. § 56-8-30 (LexisNexis
1996 & Supp. 2009)); North Carolina (banned on first mortgage loans below
$150,000) (N.C. Gen. Stat. § 24-1.1A(b)(1)) (2007); Ohio (prohibited in
residential mortgage under $75,000) (Ohio Rev. Code Ann. §1343.011(2)(a)
(LexisNexis 2006)); South Carolina (banned on loans below $150,000) (S.C.
Code Ann. §§ 37-23-80, 37-10-103 (2002 & Supp. 2008); Vermont (Vt.
Stat. Ann. tit. 8 § 2232a (2001), Vt. Stat. Ann. tit. 9 § 45 (2006)).
77 When widespread abusive lending practices in the subprime market initially
emerged during the late 1990s, the primary problems involved equity
stripping—that is, charging homeowners exorbitant fees or selling unnecessary
products on refinanced mortgages, such as single-premium credit insurance.
By financing these charges as part of the new loan, unscrupulous lenders were
able to disguise excessive costs. To make matters worse, these loans typically
came with costly and abusive prepayment penalties, meaning that when
homeowners realized they qualified for a better mortgage, they had to pay
thousands of dollars before getting out of the abusive loan. See, e.g., Eric
Stein, Ctr. for Responsible Lending, Quantifying the Economic Costs
of Predatory Lending 4 (2001), available at http://www.selegal.org/Cost%20
of%20Predatory%20Lending.pdf.
interest rate. This provides pricing transparency, which is essential for

competition to work, and it rewards lenders who provide sustainable
loans instead of lenders who extract the greatest amount of equity at
closing. To the extent loans that exceed these limits are permitted, there
should be additional safeguards and lender responsibilities to ensure that
homeowners benefit from any additional charges.
D. Failure to Consider the Borrower’s Ability to Repay
Perhaps one of the most astonishing aspects of the recent reckless

lending spree was that the market utterly ignored whether a borrower
could actually afford the mortgage. This core underwriting principle –
a basic, common-sense business principle that would be understood by
virtually anyone – was not only ignored, it was affirmatively shunned.
The mortgages that sparked the market meltdown were “designed to
terminate” specifically to ensure a continuing stream of new originations.78
TILA should require an analysis of a borrower’s ability to repay, and it
should take into account the borrower’s debt-to-income ratio and residual
income. Lenders should also be required to verify income through written
materials and escrow for taxes and insurance.
The failure to consider a borrower’s ability to repay was especially
dangerous in the case of adjustable rate mortgages (“ARMs”) that
incorporated an element of payment shock to the borrower. Payment
shocks are created by a variety of dangerous loan structures: loans made
without documenting incomes because the families simply did not afford
the payment; subprime exploding ARMs where the payment increases
by thirty percent to forty percent after the second year, even if rates in
the economy stay constant; interest-only loans where the payment can
increase by fifty percent when the loan starts amortizing over a shorter
remaining life; and payment option ARMs where the payment can
double when it recasts at the fifth year, for lenders who require recasting
at that time rather than ten years out. If these loans were not carefully
underwritten at the fully indexed, fully amortizing payment when made,
78 Souphala Chomsisengphet, Timothy Murphy & Anthony Pennington-Cross,
Product Innovation and Mortgage Selection in the Subprime Era, Univ. of Iowa
Presentation (Univ. of Iowa, Iowa City, I.A.), Oct. 10-11, 2008, http://ppc.
uiowa.edu/dnn4/PenningtonCross_Anthony.pdf (referring to loans “designed
to terminate”).
as many lenders failed to do, they set the borrowers up for almost certain
failure.79
What is more, during the recent heyday of reckless lending, loan
originators – particularly independent mortgage brokers – encouraged
borrowers to take out so-called “no doc” or stated-income loans even when
those borrowers had easy access to their W-2s. Without adequate income
verification, a lender’s approval of a loan is meaningless. Borrowers often
do not understand that they are paying a higher interest rate so as not
to document their income, even though their W-2s are readily available.
They also often do not realize that the broker has inflated their income on
the loan application. A review of a sample of stated-income loans disclosed
that ninety percent had inflated incomes compared to IRS documents
and almost sixty percent of the stated amounts were exaggerated by more
than fifty percent.80 Overstated incomes lead to overestimated repayment
ability and then to foreclosures.
Finally, federal legislation should mirror successful state laws
requiring a net tangible benefit for mortgage refinances. Loan flipping
has been a prime tool for stripping the equity from homeowners since
the beginning of the subprime market. These state laws prevent the serial
refinancing by unscrupulous originators and have been shown not to
reduce access to legitimate credit.81
79 Most loan originators understood that they were putting borrowers into loans
that were unsustainable and that would need to be refinanced prior to reset. In
2004, the General Counsel of New Century, then the nation’s second-largest
subprime lender, referred to its 2/28 interest-only product and stated that “we
should not be making loans to borrowers with the expectation that the borrower
will be able to refinance in a couple years.” Debra Cassens Weiss, New Century
GC Sounded Early Warning About Subprime Exposure, A.B.A. Journal, Mar.
31, 2008, http://www.abajournal.com/index.php?/news/new_century_gc_
sounded_early_warning_about_subprime_exposure/.
80 Merle Sharick, et al., Mortgage Asset Research Inst., Inc., Eighth
Periodic Mortgage Fraud Case Report to Mortgage Bankers
Association 12 (2006), available at http://www.mari-inc.com/pdfs/mba/
MBA8thCaseRpt.pdf; see also Fitch Ratings, 2007 Global Structured
Finance Outlook: Economic and Sector-by Sector-analysis 21 (2006)
(commenting that the use of subprime hybrid arms “poses a significant challenge
to subprime collateral performance in 2007”).
81 The practices of IndyMac, one of the largest originators of Alt A loans until it
went defunct, demonstrate that perverse incentives drove abuse even outside of
the subprime market. IndyMac routinely avoided including income
IV. The Apparent Erosion of Truth in Lending Act Remedies
The Truth in Lending Act82 was passed in 1968 and has been
modified substantially since then, primarily to cap and limit statutory
damages with regard to triggering violations (not amount).83 Remedies
in TILA serve two purposes: (1) they make the borrower whole or return
them to where they were before the predatory transaction took place; and
(2) the threat of strong remedies deters bad lending practices. Lately,
however, courts have gone further than Congress in limiting relief by
functionally banning actual damages84 and loan rescissions for classes of
borrowers.85 This has made fighting predatory lending substantially more
difficult because the economies of scale associated with class actions86 make
the possibility of helping large numbers of consumers more feasible. As
such, Congress needs to clarify that detrimental reliance is not required to
receive actual damages (in a class context or otherwise) and that rescissions
of illegal loans can be done on a class-wide basis.
A. The End of Actual Damages under the Truth in Lending Act
In recent years, courts have defied long-settled TILA precedent87

and uniformly required detrimental reliance for actual damages.88 This
standard is nearly impossible for individuals to satisfy, as they have to prove
information on their loans or pushed through loans with inflated income data,
even from retirees. As recently as the first quarter of 2007, only 21 percent of
IndyMac’s total loan production involved “full-doc” mortgages. IndyMac
Bancorp Inc., Current Report (Form 8K) (May 12, 2008).
82 Truth and Lending Act, 15 U.S.C. § 1641 (2006).
83 See, e.g., Act of Oct. 28, 1974, Pub. L. No. 93-495, § 408, 88 Stat. 1500, 1518-
19; Truth in Lending Simplification and Reform Act, Pub. L. No. 96-221, §
615(b), 94 Stat. 132, 168 (1980).
84 See, e.g., Peters v. Jim Lupient Oldsmobile Co., 220 F.3d 915 (8th Cir. 2000).
85 See, e.g., Andrews v. Chevy Chase Bank, 545 F.3d 570 (7th Cir. 2008).
86 Elizabeth J Cabraser, Enforcing the Social Compact Through Representative
Litigation, 33 Conn. L. Rev. 1239, 1255 (2001).
87 In re Russell, 72 B.R. 855, 863 (Bankr. E.D. Pa. 1987); In re Murray, 239 B.R.
728, 734 (Bankr. E.D. Pa. 1999).
88 Perrone v. Gen. Motors Acceptance Corp., 232 F.3d 433, 436-40 (5th Cir.
2000);
they understand often complicated disclosures and would have shopped

for and received a better deal in an often uncompetitive marketplace.89
Moreover, the standard has no support in the plain meaning or legislative
history of TILA.90 As a result, commentators have sounded the death
knell for actual damages class actions, if not for individual cases.91
Because statutory damages are unavailable for many TILA
violations,92 lenders are now virtually free to violate many disclosure
regulations. Moreover, statutory class action damages are capped at a
miniscule $500,000 or one percent of the lender’s net worth – whichever
is lower.93 This will hardly deter multi-billion dollar banks from wholesale
violations, especially because some disclosure violations (and the
consequent fees earned from hoodwinked consumers that would follow)
could be more profitable than any potential liability.94 Given that lenders
no longer have sufficient incentive to properly disclose loan terms, these
recent court decisions have undermined the primary purpose of TILA: to
incentivize the more informed use of credit.
To remedy this erosion of TILA rights, Congress should clarify
that consumers need not show detrimental reliance to receive actual
damages, which is similar to many state unfair and deceptive trade practices
acts.95 Instead, consumers should receive the benefit of the bargain (the
difference between what was disclosed and what they were actually
charged) or restitution of the improperly disclosed charges. This would
make TILA violations more expensive for unscrupulous lenders, thereby
restoring incentives for better and more transparent loan disclosures.
89 Id. at 437.
90 Elizabeth Renuart & Kathleen Keest, Nat’l Consumer Law Ctr., Truth In
Lending § 8.5.4 (6th ed. 2007).
91 William L. Stern, Morrison & Foerster LLP, The Reliance Element in State
Consumer-Fraud Actions, 1657 PLI/Corp 247 (2008).
92 Truth in Lending Simplification and Reform Act, Pub. L. No. 96-221, §615(b),
94 Stat. 132, 168 (1980).
93 15 U.S.C.A. § 1640(a)(2)(B) (West 2009).
94 See, e.g., Vallies v. Sky Bank, 583 F.Supp.2d 687, 688, 694 (W.D. Pa. 2008)
(limiting Sky Bank’s liability to $500,000 because detrimental reliance was
required to award actual damages and since auto-finance company failed to
properly disclose $395 for Guaranteed Auto Protection, the total loss for a
potential class of 10,000 members would have been $3,950,000).
95 Carolyn L. Carter & Jonathan Sheldon, Nat’l Consumer Law Ctr.,
Unfair and Deceptive Acts and Practices § 4.4.12.3.1 (7th ed. 2008).
B. The Judicially Imposed Ban on TILA Rescission Class Actions
Similar to actual damages, courts have read a prohibition against

class-wide rescissions into TILA, 96 despite the lack of any statutory or
legislative history support. TILA allows consumers to pursue rescission
only where a non-purchase money mortgage is secured by the borrower’s
principal dwelling.97 Nothing in the statute’s text limits this right
to individual lawsuits.98 Moreover, TILA was amended in 1995 to
limit rescissions from the overstatement of finance charges and related
disclosures.99 This modification occurred after a temporary moratorium
on TILA class actions.100 Had Congress intended to permanently limit
class-wide relief for rescissions or any other avenues of relief, it certainly
could have. Because neither the plain meaning nor the legislative history
of TILA excludes TILA class-wide rescissions, the default rules of civil
procedure, which permit class actions, should apply.101
Congress should revisit TILA to make the right of rescission on
a class-wide basis explicit. As with damages cases, the economies of scale
offered by the class action mechanism helps to ensure that many more
consumers will have access to competent representation to rescind their
loans. More importantly, because more borrowers will have the means to
96 Andrews, 545 F.3d 571 (7th Cir. 2008); McKenna v. First Horizon Home Loan
Corp., 475 F.3d 418 (1st Cir. 2007). Both of these cases find support for their
ban on class-wide TILA rescissions in a mistaken reading of James v. Home
Constr. Co. of Mobile, Inc., 621 F.2d 727 (5th Cir. 1980), Andrews, 545 F.3d
at 571, and McKenna, 475 F.3d at 423. Two months after James, the same
panel directed that a homeowner be included as a class member in a rescission
class action settlement, a ruling that is contrary to the interpretation in McKenna
that James ruled out rescission class actions. See Tower v. Moss, 625 F.2d 1161,
1163 (5th Cir. 1980).
97 15 U.S.C.A. § 1635(a) (West 2009).
98 See 15 U.S.C.A. § 1635 (West 2009).
99 15 U.S.C.A. § 1605(f ) (West 2009).
100 VanDenBroeck v. Commonpoint Mortg. Co., 22 F. Supp. 2d 677, 689 (W.D.
Mich. 1998).
101 See Johnson v. W. Suburban Bank, 225 F.3d 366, 369 (3d Cir. 2000); see also
Califano v. Yamisaki, 442 U.S. 682, 700 (1979) (“In absence of direct expression
by Congress of intent to depart from usual course of trying all suits of civil
nature under Rules of Civil Procedure established for such purpose, class relief
is appropriate in civil actions brought in federal court . . . .”).
rescind their loans, lenders will have an additional incentive to make sure
their disclosures comply with TILA.
V. The Tax Burdens of Winning

a Predatory Lending Case
Even if a consumer manages to overcome preemption and the

HDC doctrine for their common law claims and the diminishing remedies
for TILA violations, a large tax burden awaits for those who receive
significant damages.102 This tax burden can render a house unaffordable.
There are several ways to circumnavigate this tax problem: for example,
if the debt in question is not bona fide, and thus is a “disputed debt,” it
is not subject to taxation.103 Also, many consumers who are victims of
predatory lending are insolvent at the time the debt is forgiven, which
negates any tax liability.104
In contrast to the litigation context, the Mortgage Forgiveness
Debt Relief Act of 2007,105 while helpful, only applies to individuals
whose principal has been written down pursuant to a voluntary loan
modification.106 The loan must have been used to acquire, construct,
or substantially improve their principal residence.107 Thus, the Act will
not reach many lower-income borrowers because most subprime loans
originated in the last few years were home equity loans,108 the proceeds of
which were often used to pay off unsecured debt (i.e. hospital debts).109
102 Many of the taxes will result from a “cancellation of indebtedness.” 26 U.S.C.A.
§ 6050(p) (West 2009). Moreover, attorney’s fees and emotional distress
damages are taxable. Comm’r of Internal Revenue v. Banks, 543 U.S. 426, 429
(2005); 26 U.S.C.A. § 104(a) (West 2009).
103 See Zarin v. Comm’r of Internal Revenue, 916 F.2d 110 (3d Cir. 1990).
104 26 U.S.C. § 108(a)(1)(B) (West 2009).
105 Mortgage Forgiveness Debt Relief Act of 2007, 26 U.S.C.A. § 108 (West
2009).
106 26 U.S.C.A. § 108(a)(1)(E) (West 2009).
107 Id.
108 Office of the Chief Economist, Freddie Mac, Cash-Out Refi Report 3Q 2005
(2005), available at http://www.alta.org/indynews/2005/qtrly_refi-03.pdf; see
also Loan Performance, Inc., Loan Performance Asset Backed Securities
Database (2004).
109 Melissa B. Jacoby & Elizabeth Warren, Beyond Hospital Misbehavior: An
Alternative Account of Medical-Related Financial Distress, 100 Nw. U. L. Rev.
535, 559 n.123 (2006) (citing Press Release, HUD-Treasury Task Force on
Thus, a victim of predatory lending may have to pay taxes on damages,

while a homeowner who is only harmed by a declining market for real
estate pays none.
The solution is to carve out a specific tax exemption for damages
received in compensation for predatory lending.110 This would further
stabilize neighborhoods by keeping individuals in their homes and ensure
full compensation for victims of disreputable lending tactics.
VI. Large Scale Loan Modifications during

the Current Foreclosure Crisis
Since the subprime foreclosure crisis began, over 1.5 million

homes have already been lost to foreclosure, and another two million
families with subprime loans are currently delinquent and in danger of
losing their homes in the near future.111 New projections of foreclosures
on all types of mortgages during the next five years estimate that there will
be thirteen million defaults from 2008 until 2014.112 The spillover costs
are massive, even if only subprime mortgages are considered. At least forty
million homes – households where, for the most part, people have paid
their mortgages on time every month – are suffering a decrease in their
property values that amounts to hundreds of billions of dollars in losses.113
These losses, in turn, are impacting nearly every aspect of American
Predatory Lending, Predatory Lending Report 33 (July 15, 2000)), available at
http://www.treas.gov/press/releases/reports/treasrpt.pdf (“[A] survey by the
National Home Equity Mortgage Association found that approximately 45
percent of subprime home equity loans (second lien) are used for debt
consolidation, 30 percent for covering medical, educational, and other expenses,
and 25 percent for home improvement.”).
110 Cohen & Sager, supra note 18, at 14.
111 Ctr. for Responsible Lending, Continued Decay and Shaky Repairs:
The State of Subprime Loans Today 2 (2009), available at http://www.
responsiblelending.org/mortgage-lending/research-analysis/continued-decay-
and-shaky-repairs-the-state-of-subprime-loans-today.html [hereinafter
“Continued Decay”].
112 Goldman Sachs Global ECS Research, Home Prices and Credit Losses: Projections
and Policy Options 16 (2009); see also Credit Suisse Fixed Income Research,
Foreclosure Update: Over 8 Million Foreclosures Expected 1 (2008), available at
www.chapa.org/pdf/ForeclosureUpdateCreditSuisse.pdf.
113 Continued Decay, supra note 111, at 3.
communities, from police and fire protection to community resources for

education. So far, voluntary, loan-by-loan modification efforts are not
effectively stemming the tide of foreclosures. The modifications that are
made are too often unsustainable. In addition, there are many structural,
legal, and financial obstacles to making modifications at all.
Streamlined and sustainable modifications are necessary to
get ahead of the foreclosure curve, and servicers and creditors need
substantial incentives to get them to participate in such programs. Thus
far, two of the most promising proposals have been to remove the ban on
judicial loan modifications for personal residences under the Bankruptcy
Code and President Obama’s Home Affordability Modification Program
(“HAMP”), which is intended to provide incentives to encourage
standardized loan modifications that are likely to succeed.
Currently, judicial modification of loans in bankruptcy court
is available for owners of commercial real estate and yachts, as well as
subprime lenders like New Century and investment banks like Lehman
Brothers. Yet current law makes a mortgage on a primary residence
the only debt that bankruptcy courts are not permitted to modify in
Chapter 13 payment plans.114 Eliminating this exception will provide
a backstop for homeowners in trouble and an incentive for mortgage
holders to participate in voluntary modification programs. By providing
an alternative to foreclosure for homeowners whose servicers or lenders
will not or cannot agree to economically rational modifications, court-
supervised loan modifications would provide an important last resort for
homeowners with no other option.
A. Home Affordability Modification Program
The Obama Administration’s Making Home Affordable

Program, which includes HAMP115, represents a minor step forward.
The Program includes concrete and pragmatic measures to counter the
perverse incentives that severed the interests of servicers from those of
the borrowers and investors and led servicers to pursue foreclosure even
where the homeowner could afford a loan modification that would
114 11 U.S.C. § 1322(b)(2) (2007).

115 Information about the Making Home Affordable Program, http://
makinghomeaffordable.gov/about.html (last visited Dec. 18, 2009).
produce greater returns for investors as a whole.116 It also recognizes

that, without government action, relying on servicers and investors to
voluntarily modify troubled loans does not work. In particular, HAMP
includes several key improvements to realign misplaced incentives, bring
relief to struggling families, and get the housing market back on track.
First, it sets a standard to establish the basic requirements of a
sustainable loan modification for troubled mortgages. Among other
things, the modification must be set so that the homeowner’s first
mortgage debt-to-income ratio (“DTI”) is no higher than thirty-one
percent based on the homeowner’s documented income.117 This goes a
long way toward ensuring that the loan is affordable, thus protecting the
homeowner, the investor, and the taxpayer by lowering the risk of re-
default. Second, it incentivizes servicers and investors to meet this standard
by sharing the cost with investors to move the borrower from a thirty-
eight percent DTI to a more affordable thirty-one percent ratio. Servicers
get a $1,000 up-front payment for each qualifying loan modification.
Further, an additional “pay for success” fee rewards homeowners for five
years because the loan remains current, and rewards servicers for three
years because the loan avoids default.118 Investors also receive payments
as compensation for declines in property value. These incentives both
encourage sustainable loan modifications and compensate servicers for
the costs entailed. Third, the program encourages lenders and servicers
to work with at risk borrowers before they default by providing bonus
payments to both the investor and the servicer for modifying loans in
which default is imminent and the borrower is still current.119
However, unfortunately HAMP has not lived up to its original
promise. As of October 2009, only 500,000 consumers have enrolled
in trial modifications.120 The Congressional Oversight Panel, which is
charged with overseeing HAMP, reports that a paltry 1,711 homeowners
116 Christopher Mayer, Edward Morrison & Tomasz Piskorski, Essays from the
Weil, Gotshal & Manges Roundtable on the Future of Financial Regulation, Yale
Law School, 26 Yale L. J. on Reg. 417, 418-19 (2009).
117 Home Affordable Modification Program Supp. Directive 09-01, at 8 (Dep’t of
Treasury April 6, 2009), available at https://www.hmpadmin.com/portal/docs/
hamp_servicer/sd0901.pdf.
118 Id. at 24.
119 Id.
120 Peter S. Goodman, In Trial Phase, Mortgage Bills Fall for 500,000, N.Y. Times,
Oct. 9, 2009, at B1.
graduated to permanent modifications by September 2009.121 Given

that 5.2 million foreclosures were started between July 2007 and August
2009,122 this number barely impacts the mortgage market.
We propose several minor adjustments to HAMP that could
result in a significant increase in the number of homeowners saved
from foreclosure. Chief amongst them is compelling investors to write
down a portion of the principal balance of loans to allow consumers
to get their payments down to thirty-one percent of DTI. As of now,
servicers need only forebear a limited percentage of principal (provided
that investors approve) as a last resort to get consumers into the HAMP
program.123 Studies have demonstrated that principal reductions lead to
fewer defaults.124 Further, the risk of foreclosure increases significantly if
borrowers owe more than their house is worth.125
HAMP can also be improved by making the Net Present Value
(“NPV”) test more transparent. The NPV is used by servicers to determine
whether the present value of the modified loan is worth more than the
expected foreclosure value of the property.126 If it is, then the servicer (once
again, consistent with investor rules) is required to modify the loan.127
The NPV test, however, is not accessible to the general public, which
makes it impossible for consumers and advocates to understand why loan
modifications are denied. The Treasury Department’s new Supplemental
Directive 09-08, which does not become effective until January 1, 2010,
is an improvement, but it only requires servicers to disclose the numbers
put into the NPV test and not the source or reasoning behind those
121 Cong. Oversight Panel, October Oversight Report: An Assessment of

Foreclosure Mitigation Efforts After Six Months at 48 (2009), available
at http://cop.senate.gov/documents/cop-100909-report.pdf.
122 Id. at 3.
123 Home Affordable Modification Program Supp. Directive, supra note 118, at 9.
124 John Geanakoplos, The Leverage Cycle, Cowles Foundation Discussion
Paper No. 1715, July 2009, at 4, available at http://cowles.econ.yale.
edu/~gean/crisis/d1715.pdf.
125 Kristopher Gerardi, Adam Hale Shapiro and Paul S. Willen, Subprime Outcomes:
Risky Mortgages, Homeownership Experiences, and Foreclosures, Federal Reserve
of Boston Working Papers No. 07‑15, May 4, 2008, at 1, available at http://
www.bos.frb.org/economic/wp/wp2007/wp0715.htm.
126 Home Affordable Modification Program Supp. Directive, supra note 118, at 4.
127 Id.
numbers.128 For example, servicers are not compelled to disclose how

consumers’ homes are valued. Without this information, homeowners
are unable to fully challenge any flaws in property valuation and prevent
erroneous HAMP denials.
Additionally, while Supplemental Directive 09-08 does require
servicers to provide a generic notice of why HAMP applications are denied,
the Treasury Department still does not afford homeowners complete
due process protections. Servicers need only re-run the NPV test upon
receiving a notice by a consumer of a mistake and subsequent verification
that the consumer’s new numbers are accurate.129 Homeowners do not
have a right to appeal or an independent review of their eligibility.
Finally, HAMP needs to be amended to stop all foreclosure-related
activity during the application process. Currently, servicers are prohibited
from completing a foreclosure sale while a borrower is applying for a
HAMP modification, but they are permitted to continue with all other
steps toward foreclosure.130 However, because the foreclosure and loss
mitigation proceed along entirely separate tracks with different personnel,
numerous foreclosure sales are going forward while the borrower is still
being considered for the modification.131 Therefore, HAMP should be
amended to force servicers to better manage internal communications to
prevent unnecessary costs and mistakes.
VII. Conclusion
Today’s financial crisis is a result of destructive lending practices –

bad lending that never before had been practiced on such a large scale and
with so little oversight. These practices have now undermined not only
the entire United States economy but the world economy as well. There
is no single solution to the challenges we face today, but many of the
128 Home Affordable Modification Program Supp. Directive 09-08, at 3 (Dep’t of
Treasury Nov. 3, 2009), available at https://www.hmpadmin.com/portal/docs/
hamp_servicer/sd0908.pdf.
129 Id.
130 Home Affordable Modification Program Supp. Directive 09-01, supra note
118, at 14.
131 Alys Cohen & Diane Thompson, Nat’l Consumer L. Ctr., Home
Affordable Modification Program Updated Recommendations 5
(2009), http://www.consumerlaw.org/issues/mortgage_servicing/content/
HAMP-Recommendations0709.pdf.
proposals outlined in this article could help to strengthen the mortgage

market and keep many more borrowers in their homes.
As our nation struggles in the ruins of a broken mortgage market,
it is important to remember that the benefits of homeownership have not
changed. Long-term homeownership remains one of the best and most
reliable ways that families can build a better economic future, and we all
have a strong national interest in ensuring that the mortgage market works
to build our economy, not tear it down. In an effective home lending
market, lenders and borrowers will enter transactions with the same
fundamental measure of success – sustainable home mortgages that build
wealth. Reforms that prevent abuses on the front-end, increase remedies
for borrowers, and facilitate sustainable loan modifications will help to
encourage sensible home loans, competent risk management, profitable
mortgage-backed investments, and sustainable homeownership.
DEFENDING FORECLOSURE ACTIONS BY BRINGING IN

THIRD PARTIES
Turning Foreclosure Defense into a Plaintiff’s Action
Michelle Weinberg*
The current mortgage crisis requires zealous consumer advocates

to use all available tools and strategies in defending foreclosures. Many
homeowners facing foreclosure have been the victims of fraud, “predatory
lending,” or unfair and deceptive practices at the time they entered into
the mortgage loans. Nonetheless, because the foreclosing institution is
seldom the entity that originally made the loan, the homeowner may not
be able to raise these issues as a defense against the current holder of the
loan. Therefore, oftentimes the strongest and most sympathetic claims
lie against persons other than the entity that filed the foreclosure action.1
Foreclosure plaintiffs in such cases, typically the investment trusts
and servicers of bundles of pooled mortgages, argue that, as assignees,
they are remote from the subject transactions. Thus, they argue that
they are not liable for fraud and abuse committed by mortgage brokers,
loan originators, title companies, closing agents, and others involved in
the loan origination. Claims against foreclosure plaintiff assignees may
be limited by statute. For example, portions of the Truth In Lending
Act (“TILA”) require that a violation be “apparent on the face of the
* Michelle Weinberg is a Supervisory Attorney at the Legal Assistance Foundation

of Metropolitan Chicago, director of the Chicago Seniors/Consumer Law
Project. She is a 1992 graduate of Chicago-Kent College of Law, and began her
career as a consumer lawyer in 1993. Ms. Weinberg has handled a wide range
of consumer cases, including claims under the FDCPA, TILA, the Illinois
Consumer Fraud Act and other consumer protection statutes. In May 2005,
Ms. Weinberg received the Excellence in Public Interest Service Award from the
United States District Court for the Northern District of Illinois and the
Chicago Chapter of the Federal Bar Association. She was also named Advocate
of the month for July 2007, by Illinois Legal Aid Online. Ms. Weinberg has
been a member of the National Association of Consumer Advocates (“NACA”)
since 1997 and is a former member of the board of directors of NACA.
1 This article is written from the perspective of a judicial foreclosure state. In
non-judicial foreclosure states, advocates should be able to use these theories to
bring in additional defendants as part of their affirmative case.
documents assigned.”2 Traditional holder-in-due-course doctrines may

also limit claims against the foreclosing entity.
Borrower claims may also be preempted by federal regulations
applicable to national banks. Nonetheless, “basic common-law-type
remedies” are not generally preempted under federal preemption of
national bank entities.3 Therefore, common law fraud and breach of
fiduciary duty claims are not preempted even if the originator was a
national bank. Moreover, statutory codifications of unconscionability
law found in state unfair and deceptive practices statutes should qualify
as “common-law-type remedies,” and thus should also not be preempted
under that standard.
This article examines a number of nuts-and-bolts theories for how
to defend a foreclosure by raising affirmative third party claims against a
variety of players in the mortgage loan process.4
I. Determining What Legal Claims Are Available
The borrower will likely have strong claims that she has been
the victim of misrepresentations or fraudulent conduct by the broker,
appraiser, notaries, or others involved in the loan origination process.
Typical claims against brokers, closing agents, and notaries may include
common law fraud, violation of unfair and deceptive practices or consumer
fraud statutes, breach of fiduciary duty,5 unjust enrichment, and notarial
2 15 U.S.C. § 1641(a)-(b) (2006).

3 In re Ocwen Loan Servicing, 491 F.3d 638, 643 (7th Cir. 2007).
4 The current crisis has rendered many responsible parties insolvent, and
numerous financial institutions, small and large, have dissolved or disappeared.
Unfortunately, you cannot sue a ghost, but perhaps this article will still be of
some use for advocates representing homeowners. Given the cyclical nature of
our economy, it can be predicted that, at some point, the mortgage market will
recover, and history tells us that when that happens, scams and schemes will be
revived as well.
5 Note that generally speaking, a lender owes no fiduciary duty to a borrower.
However, a mortgage broker who is retained and paid by the borrower to shop
around for the best terms or advise the borrower as to loan products appropriate
to the borrower’s situation does have such a duty. See DeLeon v. Beneficial
Constr. Co., 998 F. Supp. 859, 865 (N.D. Ill. 1998) (“DeLeon I”); see also
DeLeon v. Beneficial Constr. Co., 55 F. Supp. 2d 819, 827 (N.D. Ill. 1999)
(“DeLeon II”).
misconduct. Additional claims that the borrower can raise against brokers
and lenders include civil conspiracy, commercial bribery, interference
with contractual relationship (against the lender who induced the broker
to breach its fiduciary duty to the borrower), and violation of the Real
Estate Settlement Procedures Act (“RESPA”),6 for unlawful kickbacks in
the form of Yield Spread Premiums (“YSP”), where the lender paid the
broker “outside closing” in order to increase the interest rate above the
rate for which the borrower otherwise qualified.7 Where the loan terms
are particularly harsh or the borrower never had any hope of affording the
loan, the borrower can allege improvident lending as an unfair practices
claim.
If the advocate can plead sufficient facts to assert a claim for
common law fraud, claims for breach of fiduciary duty and violation
of unfair and deceptive practices statutes will easily follow.
A. Common Law Fraud
The claim of common law fraud generally encompasses five or

six elements, depending on how they are phrased. To establish a cause of
action, the plaintiff must allege and prove the following:
(1) a false statement of material fact; (2) the party making
the statement knew or believed it to be untrue; (3) the
party to whom the statement was made had a right to rely
on the statement; (4) the party to whom the statement was
made did in fact rely on the statement; (5) the statement
was made for the purpose of inducing the other party
to act; and (6) the reliance by the person to whom the
statement was made led to that person’s injury.8 9
6 12 U.S.C. § 2601 et seq.

7 Cunningham v. Equicredit Corp. of Ill., 256 F. Supp. 2d 785, 796 (N.D. Ill.
2003); Jenkins v. Mercantile Mortgage Co., 231 F. Supp. 2d 737, 750 (N.D.
Ill. 2002).
8 Cramer v. Ins. Exch. Agency, 675 N.E.2d 897, 905 (1996) (quoting Siegel v.
Levy Org. Dev. Co., Inc., 607 N.E.2d 194, 199 (Ill. 1992)); see also United
States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 188 (5th Cir. 2009); Colaizzi
v. Beck, 895 A.2d 36, 39 (Pa. Super. Ct. 2006).
9 It is also important to keep in mind that claims sounding in fraud generally
require pleading of facts with particularity. See Fed. R. Civ. P. 9(b).
Most mortgage fraud falls into the category of “fraud in the

inducement,” where the victim is persuaded to enter into the mortgage
loan based on misrepresentations as to the terms or benefits of the
transaction. “Fraud in the factum,” sometimes called “real fraud,”
occurs when someone misleads the victim into signing a document by
representing that it is something entirely different than what it really is.
For example, the borrower believed she was signing an application, but
instead she signed a promissory note or a deed transferring title to her
house.10 Such fraud with respect to the execution of the document is a
viable defense to collection efforts even by a holder in due course.11
Not all frauds fit strictly within the traditional elements, however.
For example, forgery is clearly fraudulent.12 Actual fraud is a much
broader concept than plain misrepresentation.13 Representations that are
technically correct may be actionable if they are found to be misleading.14
Further, the court should consider the circumstances and relative
position of the parties.15 “The financial sophistication of a borrower
can be critically important, [particularly where] their lack of financial
sophistication prevented them from appreciating the inordinate cost of
the refinancing.”16 Fraud may include “anything calculated to deceive
10 See, e.g., Ohio Sav. Bank v. Progressive Cas. Ins. Co., 521 F.3d 960, 963 (8th
Cir. 2008); Brown v. Wells Fargo Bank, 85 Cal. Rptr. 3d 817, 833 (Cal. Ct.
App. 2008); Rosenthal et al., v. Great W. Fin. Sec. Corp., 926 P.2d 1061, 1073,
1079-82 (Cal. 1996).
11 Laborers’ Pension Fund v. A & C Envtl., Inc., 301 F.3d 768, 780 (7th Cir.
2002).
12 Howell v. Midway Holdings, Inc., 362 F.Supp.2d 1158, 1165 (D. Ariz. 2005)
(“[T]he conscious evil of such behavior [forgery and alteration of a car lease
contract] is obvious.”); Walker Bank & Trust Co. v. Thorup, 317 P.2d 952, 953
(Utah 1957).
13 In re Vitanovich, 259 B.R. 873, 877 (B.A.P. 6th Cir. 2001) (citing McClellan
v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000)).
14 Chrysler Corp. v. Fed. Trade Comm’n, 561 F.2d 357, 363 (D.C. Cir. 1977);
Goodman v. Fed. Trade Comm’n, 244 F.2d 584, 604 (9th Cir. 1957), reaff’d in
Simeon Mgmt. Corp. v. Fed. Trade Comm’n, 579 F.2d 1137, 1146 n.11 (9th
Cir. 1978).
15 Spiegel, Inc. v. Fed. Trade Comm’n, 411 F.2d 481, 483 (7th Cir.
1969); Exposition Press, Inc. v. Fed. Trade Comm’n, 295 F.2d 869, 873 (2d
Cir. 1961), cert. denied, 370 U.S. 917 (1962).
16 Chandler v. American Gen. Fin., Inc., 768 N.E.2d 60, 68, 70 (Ill. App. Ct.
2002).
and may consist of a single act, a single suppression of truth, suggestion of

falsity, or direct falsehood, innuendo, look or gesture.”17 The court should
examine “all the circumstances surrounding the transaction including the
manner in which the contract was entered into, whether each party had
a reasonable opportunity to understand the terms of the contract, and
whether important terms were hidden in a maze of fine print.”18
While simple failure to perform as promised is generally viewed as
a breach of contract, not fraud, a systematic pattern of intentionally failing
to perform as promised can certainly be the basis of a fraud claim.19 An
exception to the general rule that fraud cannot be based on promissory
statements is where there was no intent to fulfill the promise at the time
it was made.20
B. Unfair and Deceptive Practices Act – Consumer Fraud Statutes
Most states’ consumer fraud statutes provide that the plaintiff

need not establish all of the elements of common law fraud in order to
prevail under the statute.21 Therefore, if the plaintiff can establish all of
17 Miller v. William Chevrolet/Geo, Inc., 762 N.E.2d 1, 7 (Ill. App. Ct. 2001),
(citing Russow v. Bobola, 277 N.E.2d 769, 771 (Ill. App. Ct. 1972)); see also
Stapleton v. Holt, 250 P.2d 451, 453-4 (Okla. 1952); Delahanty v. First Pa.
Bank, N.A., 464 A.2d 1243, 1251 (Pa. Super. Ct. 1983).
18 Frank’s Maint. & Eng’g, Inc. v. C.A. Roberts Co., 408 N.E.2d 403, 410 (1980)
(discussing unconscionability); see also Layne v. Garner, 612 So.2d 404, 408
(Ala. 1992); Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 828
(N.Y. 1988) (“The procedural element of unconscionability requires an
examination of the contract formation process and the alleged lack of
meaningful choice”).
19 E.g., Desnick v. American Broadcasting Co., 44 F.3d 1345, 1354 (7th Cir.
1995) (holding Illinois law supports a cause of action for “promissory fraud” if
failure to perform is part of scheme to defraud); General Elec. Credit Auto
Lease, Inc. v. Jankuski, 532 N.E.2d 361, 364 (Ill. App. Ct 1988) (same); People
ex rel. Hartigan v. Knecht, 575 N.E.2d 1378, 1387 (Ill. App. Ct 1991) (finding
systematic pattern of charging exorbitant prices and failing to properly perform
home improvements).
20 England v. M.G. Investments, Inc., 93 F. Supp. 2d 718, 722 (S.D.W.Va. 2000);
Spoljaric v. Percival Tours, Inc., et al., 708 S.W.2d 432, 435 (Tex. 1986)
(employer never intended to deliver promised bonus).
21 A full examination of the many different state statutes is beyond the scope of
this article. Practitioners should be very familiar with the consumer fraud
the elements of common law fraud, the plaintiff can necessarily establish a
violation of the statute as well.22 For example, justifiable reliance is often
not required, although courts may require the plaintiff to establish that
the deceptive act or practice caused the alleged injury. Additionally, it
may be easier to assert a statutory claim for omission or concealment of a
material fact where a common law duty to disclose does not exist.23
Most, if not all, states’ consumer fraud statutes provide that
in determining whether a practice is unfair or deceptive, the court
should consider interpretations under section five of the Federal Trade
Commission Act (“FTCA”).24 An “unfair practice” under FTCA section
five has been interpreted as one that “offends established public policy
and . . . is immoral, unethical, oppressive, unscrupulous, or substantially
injurious to consumers.”25
C. But They Signed the Documents . . .
Many defendants in fraud cases point to disclosures and other

contract documents signed by the borrowers, claiming that all the
information was available and therefore no misrepresentations were made,
regardless of what the individual broker said to the borrower. Contract
defenses simply do not apply to claims of deception, however.26 Parol
evidence is admissible in fraud cases, even if the oral representations are
completely contradicted by the documents, especially if the borrower was
unable to read or understand the contents of the documents. “[A] party
statutes of their state when undertaking these cases.

22 E.g., Siegel v. Levy Organization Development Co., 607 N.E.2d 194, 199 (Ill.
1992).
23 E.g., Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 596 (Ill. 1996).
24 E.g., Illinois Consumer Fraud Act, 815 Ill. Comp. Stat. 505/2 (1965),
amended by P.A. 78-904 § 1(1973); Hartford Electric Supply Company v.
Allen-Bradley Co., Inc., et al., 736 A.2d 824, 843 (Conn. 1999).
25 F.T.C. v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972); Spiegel v.
F.T.C., 540 F.2d 287, 293 (7th Cir. 1976); Rogers et al., v. Hill, 706 N.E.2d
438, 440 (Ohio Ct. App. 1998); Bauer v. Giannis, 834 N.E.2d 952, 960 (Ill.
App. Ct. 2005).
26 Lefebvre Intergraphics v. Sander Machine, Inc., 946 F.Supp. 1358, 1369 (N.D.
Ill. 1996); Mother Earth Ltd. v. Strawberry Camel, Ltd., 390 N.E.2d 393, 406,
aff’d on other grounds, 424 N.E.2d 758 (Ill. App. Ct. 1979) (holding terms of
contract are irrelevant to claim of fraud).
guilty of fraud cannot, by way of estoppel against the party injured, rely
upon provisions in a contract” that state that no representations have
been made.27 The courts will not enforce an exculpatory clause waiving
claims of fraud. A term unreasonably exempting a party from the legal
consequences of a misrepresentation is unenforceable on grounds of
public policy.28 Defendants’ purported “disclosures,” which essentially
assert, “don’t believe a word we say, and we didn’t say anything,” do not
create a defense to fraud. As the Fourth Circuit has stated:
There is nothing in law or in reason which requires one to
deal as though dealing with a liar or a scoundrel, or that
denies the protection of the law to the trustful who have
been victimized by fraud. The principle underlying the
caveat emptor rule was more highly regarded in former
times than it is today; but it was never any credit to the
law to allow one who had defrauded another to defend
on the ground that his own word should not have been
believed.29
The case of Bellville National Bank v. Rose30 explains one exception

to the general rule that parties have a duty to ascertain the effect of the
documents they sign and are bound regardless of whether they actually
read the documents, as long as they had an opportunity to read them.
27 Ginsburg v. Bartlett, 262 Ill. App. 14, 34 (Ill. App. Ct. 1931) (holding parol
evidence of fraud is admissible in the face of contract stating no such
representation had been made); Schaffner v. 514 W. Grand Place Condo. Ass’n,
756 N.E.2d 854, 865 (Ill. App. Ct. 2001); Gilliland v. Elmwood Prop., 391
S.E.2d 577, 580-81 (1990) (majority of jurisdictions do not allow the parole
evidence rule to bar evidence in fraud cases); Betz Lab., Inc. v. Hines et al. 647
F.2d 402, 408 (3d Cir. 1981).
28 Bauer v. Giannis, 359 Ill.App.3d 897, 908 (Ill. App. Ct. 2005); Sound
Techniques, Inc. v. Hoffman, 737 N.E.2d 920, 924 (Mass. App. Ct. 2000)
(“Whether we refer to the clause in question as a merger clause, an integration
clause, or an exculpatory clause, the settled rule of law is that a contracting
party cannot rely upon such a clause as protection against claims based upon
fraud or deceit.”); see also Restatement (second) of Contracts § 196.
29 Schmidt v. Milhauser, 130 A.2d 572, 576 (Md. 1957) (quoting Bishop v. E.A.
Strout Realty Agency, 182 F.2d 503, 505 (4th Cir. 1950)).
30 Belleville Nat’l Bank v. Rose et al., 456 N.E.2d 281, 285 (Ill. App. Ct. 1983)
(holding that sophisticated real estate developers would be bound to what they
signed even if they had not read it).
Where a misrepresentation is made to an inexperienced or under-educated

person – where there is a “manifestly unequal position of the parties” –
the existence of signed documents does not bar a claim for fraud.31 As
the court explained, “fraud in the execution of an instrument is practiced
‘where the instrument is misread to the party signing it, or where there is
a surreptitious substitution of one paper for another, or where by some
other trick or device a party is made to sign an instrument which he did
not intend to execute.’”32
II. Who Are the Third Party Defendants?
In some particularly egregious cases virtually everyone involved

in the loan transaction is potentially liable, including the originating
lender, the mortgage broker, title companies, closing agents and notaries,
appraisers, and home improvement contractors. Successful prosecution
of these claims requires an understanding of state agency law. Some of
the parties are agents of the borrower. Moreover, whereas a lender is
not the agent of the borrower, traditional agency law operates to make
lenders liable for the misconduct of their agents who dealt directly with
the borrower.
Because the companies might no longer be in business, it is
important to name both the entities and individuals as well.33 It is well
established that an individual is personally liable for fraud where her
participation in the fraud was active and direct.34 Moreover, a person who
controls a corporation is liable if she knowingly permits illegal activities
on the part of the corporation because a corporation can only act through
31 Id. at 285; see also Koral Industries v. Security-Connecticut Life Ins. Co., 802
S.W.2d 650, 651 (Tex. 1990).
32 Bellville Nat’l Bank, 456 N.E.2d at 283 (citations omitted).
33 Although, given the fractured nature of the mortgage market, it is not likely
that the foreclosure was filed by the original lender. If the original lender is the
plaintiff on a fraudulently induced or predatory loan, the homeowner’s counsel
should file counterclaims as well.
34 Jackson v. S. Holland Dodge, 755 N.E2d 462, 466 (2001); Cumis Ins. Soc’y,
Inc. v. Peters et al., 983 F. Supp. 787, 794 (N.D. Ill. 1997) (holding under
Illinois law defendant is liable if he “either knowingly participated in the fraud
or knowingly accepted the fruits of the fraudulent conduct”); Hearthside
Baking Co., Inc. v. Maurice Lenell Cookie Co., 402 B.R. 233, 251 (Feb. 27,
2009).
the human beings who manage and control it.35

Under basic agency law, an agent is someone “who undertakes
to manage some affairs to be transacted for another by his authority, on
account of the latter, who is called the principal . . . The test of agency is the
existence of the right to control the method or manner of accomplishing
a task by the alleged agent, as well as the agent’s ability to subject the
principal to liability.”36 An agent owes fiduciary duties to his principal
as a matter of law, including a duty of exercising reasonable care, skill,
and diligence on behalf of the principal. The principal can recover under
common law for any loss or damage resulting from the agent’s breach of
this duty.37
Mortgage brokers are the agents of the borrowers when they hold
themselves out as having the expertise to provide financial advice and
undertake to act as the borrower’s fiduciary by functioning as her broker
to obtain financing from a third party lender. Mortgage brokers purport
to help their customers find a lender that can provide a mortgage with
terms best suited to the customer’s situation. Therefore, a principal and
agent relationship is created when one party undertakes to find financing
35 Heastie v. Cmty. Bank of Greater Peoria, 690 F. Supp. 716, 722 (N.D. Ill.
1988); People ex rel Hartigan v. All Am. Aluminum & Constr. Co., 524 N.E.2d
1067, 1070 (Ill. App. Ct. 1988) (officer and controlling shareholder held liable
where company took money to perform home improvements and did not
perform them); People ex rel Fahner v. Am. Buyer’s Club, Inc., 450 N.E.2d
904, 905-06 (Ill. App. Ct. 1983) (individual president and principal shareholder
held liable where corporation collected down payments for furniture purchases
from numerous club members and failed to either forward the money to the
manufacturers or refund them to the members); People ex rel Hartigan v.
Dynasty System Corp., 471 N.E.2d 236, 240, 244 (Ill. App. Ct. 1984) (holding
“founders and sole shareholders” of pyramid scheme personally liable).
36 Wargel v. First Nat’l Bank of Harrisburg, 460 N.E.2d 331, 334 (Ill. App. Ct.
1984); see also Alabastro v. Cummins, 413 N.E.2d 86, 87-88, (Ill. App. Ct.
1980); Indian Harbor Ins. Co. v. Valley Forge Ins. Group, et al., 535 F.3d 359,
364 (5th Cir. 2008) (agency test under Texas Law); Renteria-Marin, et al. v.
Ag-mart Produce, Inc. et. al., 537 F.3d 1321, 1325-26 (11th Cir. 2008) (agency
under Florida law); Risdon, Inc, v. Miller Distributing Co., Inc., 139 N.W.2d
12, 15-16 (1966).
37 Allabastro, 413 N.E.2d at 88; Kirkruff v. Wisegarver, 697 N.E.2d 406, 410 (Ill.
App. Ct. 1998); Ores v. Willow W. Condo. Ass’n., No. 94 C 4717, 1998 U.S.
Dist. LEXIS 19429, at *19 (N.D. Ill. Nov. 30, 1998).
on behalf of another.38 Under the typical facts of a predatory lending

case, the breach of fiduciary duty is a species of fraud.
Title companies and closing agents are primarily the agents of the
lender,39 although the title company is also the agent of the borrower with
respect to certain functions. A loan closing agent often acts as an agent for
several parties to the transaction: the title company’s agent for the purpose
of examining the title and issuing title insurance; the lender’s agent for the
purpose of delivering loan documents, obtaining the borrower’s signature,
and for the purpose of recording mortgage liens; and as an escrow agent of
both the borrower and lender in disbursing the loan proceeds.40 Even in
a case in which the closing agent was actually the borrower’s attorney, one
court has held that in his capacity as the settlement agent, the borrower’s
attorney functioned as an agent for the title insurer and its insured.41
As the court explains in Bell v. Safeco Title Insurance Co., an escrow
closer has a special fiduciary duty to both the borrower and lender.
The fiduciary duty consists of (1) the duty of loyalty,
38 DeLeon v. Beneficial Constr. Co., 998 F. Supp. 859, 865 (N.D. Ill. 1998);
DeLeon v. Beneficial Constr. Co., 55 F. Supp. 2d 819, 827 (N.D. Ill. 1999);
Weller v. Accredited Home Lenders, Inc., No. 08-2798, slip op. at 9 (D. Minn.
Mar. 31, 2009) (“Residential mortgage originators who solicit or receive an
advance fee in exchange for assisting a borrower located in this state in obtaining
a loan secured by a lien on residential real estate, or who offer to act as an agent
of the borrower located in this state in obtaining a loan secured by a lien on
residential real estate shall be considered to have created a fiduciary relationship
with the borrower”). Cf. Ellipso, Inc. v. Mann, et al., 541 F. Supp. 2d 365,
373-74 (D.D.C. 2008) (lender normally has no fiduciary duty to borrower, but
duty may arise if “special relationship of trust of confidence” exists).
39 Newman v. 1st 1440 Investment, Inc., No. 89 C 6708, 1993 U.S. Dist. LEXIS
354, at *12 (N.D. Ill. Jan. 14, 1993).
40 Hickey v. Great W. Mortgage Corp., No. 94 C 3638, 1995 U.S. Dist. LEXIS
4495, at *13 (N.D. Ill. Apr. 4, 1995); Cowen v. Bank United of Texas, FSB, 70
F.3d 937, 942 (7th Cir. 1995) (“ The title company in this case was wearing two
hats. Primarily it was an insurance company, with its own interest in removing
the prior liens. In this respect it was a principal in the transaction. It was also
the closing agent, which means that it was the agent of the bank. Sibley v. Fed.
Land Bank, 597 F.2d 459, 462-63 (5th Cir.1979).”). Bell v. Safeco Title Ins.
Co., 830 S.W.2d 157, 161 (1992) (holding title company agent not liable for
failing to explain to aging attorney-seller the consequences of changes to the
documents in a real estate transaction); Wilson v. Carver Fed. Savings & Loan
Ass’n, et al., 774 S.W.2d 106, 107 (Tex. App. 1989).
41 Sears Mortgage Corp. v. Rose, 134 N.J. 326, 342-343 (1993).
(2) the duty to make full disclosure, and (3) the duty to
exercise a high degree of care to conserve money and pay
it only to the persons entitled to it. A fiduciary must
act with utmost good faith and avoid any act of self-
dealing that places his personal interest in conflict with
his obligations to the beneficiaries.42
In addition to presenting the documents and disclosing the

terms of the loan, a loan closer may also be called upon to respond to the
borrower’s questions during the closing transaction.43 Where the closing
agent participated in or turned a blind eye to obvious broker fraud at the
closing, it could be argued that although an escrow agent may not have
a duty to explain all of the possible consequences of taking out a loan,
the closing agent does have a “duty to point out the interlineations,” or
changes in the basic terms of the transaction, to the borrower.44
The typical practices of closing agents demonstrate that the title
company is the lender’s agent for the purpose of conducting the loan
closing, delivering the documents, obtaining borrower signatures, etc.,
notwithstanding the fact that the contract between the lender and closing
agent states that the closer is an “independent contractor.” For example,
in Wargel v. First Nat’l Bank of Harrisburg,45 the evidence established
that a bank was the agent of an insurance company, despite the contrary
statement in the written contract between them, because the insurance
company prescribed the forms, procedures, and guidelines used by the
bank in processing insurance applications in connection with loans. The
insurance company authorized the bank to accept premiums, notify the
borrower that her application had been approved, and send documents
42 Bell, 830 S.W.2d at 161 (citing Trevino v. Brookhill Capital Resources, Inc.,
782 S.W.2d 279, 281 (Tex. App. 1954). See also Tucson Title Ins. Co. v.
D’Ascoli , 383 P.2d 119, 121-22 (Ariz. 1963) (escrow agent is fiduciary and
must conduct its affairs with scrupulous honesty, skill, and diligence); Amen v.
Merced County Title Co., 375 P.2d 33, 35 (Cal. 1962) (escrow agent is fiduciary
and must disclose facts affecting customers’ rights).
43 Reich v. Chicago Title Ins. Co., 853 F. Supp. 1325, 1327-28 (D. Kan. 1994)
(Fair Labor Standards Act case that closely examined the work and duties of
residential loan closers).
44 Bell, 830 S.W.2d at 161.
45 460 N.E.2d 331, 334 (Ill. App. Ct. 1984).
to the insured borrower.46 Thus, the court held that the bank acted as the
insurance company’s agent.47 Similarly, in a mortgage transaction, the
originating lender prescribes and provides the closing instructions, forms,
documents, procedures, and guidelines to be used at the closing.
The lender is deemed present at the closing through its agent.
Therefore, the knowledge of the agent is attributable to the lender if the
closing agent had actual or constructive knowledge of the fraudulent
conduct.48 Bank lenders do not simply send prepared loan documents
arbitrarily to random brokers and title agents, or authorize the signing
of documents obliging them to extend a loan in a state where the bank
maintains no offices, without first entering into agreements with those
who generate and consummate the loans on the bank’s behalf. Moreover,
the lender cannot delegate its TILA obligations to the title agent, and thus
remains responsible for the disclosures made or not made by the agent.
Where the plaintiff is a third party to this agency relationship,
the existence of an agency relationship will be liberally construed in the
plaintiff’s favor.49 Moreover, where an intentional tort by an employee is
motivated in part by intent to serve the employer’s purpose, the employer
may be vicariously liable.50 An employer’s liability for the intentional tort
of an individual employee will also depend in part on whether the act was
a predictable outgrowth of acts the employer authorized the employee to
46 Id.
47 Id.
48 See Triple A Mgmt. Co., Inc. v. Frisone, et al., 81 Cal. Rptr. 2d 669, 679 (Cal.
Ct. App. 1999).
49 Capitol Indem. Corp. v. Stewart Smith Intermediaries, Inc., 593 N.E.2d 872,
877 (Ill. App. Ct. 1992).
50 Sunseri v. Puccia, 422 N.E.2d 925, 930 (Ill. App. Ct. 1981) (tavern liable for
bartender’s fistfight with customer where employee’s action was conducted
substantially within authorized time and location of employment and was
motivated at least in part to further employer’s business); Olson v. Connerly,
457 N.W.2d 479, 490 (Wis. 1990) (even a small motivation to serve an
employer can be considered working within the scope of one’s employment);
Martin et al. v. Cent. Ohio Transit Auth. et al., 590 N.E.2d 411, 417 (Ohio Ct.
App. 1990) (citing Tarlecka v. Morgan, 181 N.E. 450, 452 (Ohio 1932)) (“The
act of an agent is the act of the principal within the course of the employment
when the act can fairly and reasonably be deemed to be an ordinary and natural
incident or attribute of the service to be rendered, or a natural, direct, and
logical result of it”); Lange v. Nat’l Biscuit Co., 211 N.W.2d 783, 785-86
(Minn. 1973) (scope of employment under Minnesota law).
perform.51 In Maras v. Milestone, the court noted that a “tort can fall within
the scope of a person’s employment even if the conduct was unauthorized
or forbidden by the employer.”52 Here, it is entirely predictable and
expected that an individual closer or mortgage broker might misrepresent
loan terms or the broker-borrower-lender relationship, as they generally
only get paid if the loan is consummated. In many mortgage fraud cases,
the alleged acts of the corporate defendant’s employees are no further
afield than that in Sunseri and Maras and are natural examples of the
sort of behavior that may be a result of dual motivation to serve both the
employer and the individual employee.
The title company is also liable for closing agent misconduct.
The notary or individual closer is obviously the employee or agent
of the title company hired or permitted by the lender to conduct the
closing. Presumably, the title companies expect the individual closers
to follow the instructions provided by the lender. Apparently, however,
title companies often have done nothing to determine whether the closer
actually followed those instructions. Traveling notaries are acting within
the apparent scope of their duties when they bring documents to the
borrower’s home to be signed. These agents are also acting within the
apparent scope of their duties when they misleadingly instruct or advise
borrowers, for example, by telling them that they could cancel within
three days by simply making a phone call, instead of sending in the three-
day cancellation notice. In such cases, it follows that the title company is
liable for the misrepresentations of its agent-employee.
In a slightly different context, the Sixth Circuit noted that a
principal may be vicariously liable for an agent’s tortious conduct based
upon an apparent authority theory, “if . . . [the principal] held the agent
out to third parties as possessing sufficient authority to commit the
particular act in question, and there was reliance on the apparent authority
. . . liability is based upon the fact that the agent’s position facilitates the
consummation of the fraud, in that from the point of view of the third
person the transaction seems regular on its face and the agent appears to
51 Sunseri, 422 N.E.2d at 930 (employer liable for employee’s intentional torts
which are not unexpected in view of employee’s duties); Maras v. Milestone,
Inc., 809 N.E.2d 825, 829 (Ill. App. Ct. 2004) (residential disabled-child care
facility liable for intentional battery by worker); Restatement (Second) of
Agency §§ 228(1)(d) (1958).
52 Maras, 348 Ill. App. 3d at 1007.
be acting in the ordinary course of the business provided to him.53

Under the same common law agency principles, the mortgage
broker may be found to be the agent of the lender where the originating
lender had no local offices, made no direct loans, had a close relationship
with the broker, purchased most or all of its generated loans, provided
guidelines and marketing materials, and essentially relied on brokers to
sell its products.54 Therefore, it is important to explore the relationship
between the broker and originating lender. The necessary information
may not be obtainable without discovery, however. In cases where
the title company gave the loan documents to the broker to conduct a
closing in the borrower’s home, the broker actually becomes the agent
for the originating lender, thus allowing additional claims against the
originating lender.
A. Defendants Who Knowingly Accept the Fruits of the Fraud Are

Liable to the Same Extent As the Perpetrator of the Fraud
Courts in numerous jurisdictions have recognized that tort liability

can go beyond the immediate wrongdoer to those who have planned,
assisted, encouraged or ratified the wrongdoer’s acts.55 Therefore, a
defendant who knowingly accepts the fruits of the fraud is liable to the
same extent as the perpetrator of the fraud.56
53 Jones v. Federated Fin. Reserve Corp., 144 F.3d 961, 965 (6th Cir. 1998); see
also Walker v. Winchester Mem’l Hosp., 585 F. Supp. 1328, 1330 (W.D.Va.
1984) (doctrine of apparent authority under Virginia law).
54 E.g., Christinson v. Venturi Constr. Co., , 440 N.E.2d 226, 228 (Ill. App. Ct.
1982); England v. M.G. Invs., Inc., 93 F. Supp. 2d 718, 723 (S.D.W.Va. 2000);
Commercial Credit Corp. v. Orange County Mach. Works, 214 P.2d 819, 822
(Cal. 1950).
55 Adcock v. Brakegate, Ltd., et. al., 164 Ill.2d 54, 62 (Ill. 1994) (civil conspiracy
claim); Williams v. Aetna Fin., 700 N.E.2d 859, 867 (Ohio 1998), cert. denied,
526 U.S. 1051 (1999); Jeminson v. Montgomery Real Estate & Co., 210
N.W.2d 10, 12-13 (Mich. Ct. App. 1973), rev’d, 240 N.W.2d 205 (Mich.
1976). See also Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d
874, 893 (S.D. Ohio 2002); and Eva v. Midwest Nat’l Mortgage Bank, Inc.,
143 F. Supp. 2d 862, 874 (N.D. Ohio 2001).
56 Moore v. Pinkert, 171 N.E.2d 73, 78 (Ill. App. Ct. 1960); Cumis Ins. Soc’y,
Inc. v. Peters et al., 983 F. Supp. 787, 795 (N.D. Ill. 1997) (creditor sued
collection agency for not paying proper share of amounts collected; held under
Illinois law defendant liable if he “either knowingly participated in the fraud or
The lender is liable where the evidence indicates that the lender
knew or should have known of the broker’s fraud, for example, where
there is a close relationship between the remote lender and the broker,
a high volume of dealings between the entities, or other information
available to the lender from the transaction documents that suggests
a fraud has occurred.57 In addition, a defendant who does not guard
against reasonably foreseeable fraud is liable even when the defendant did
not make any representations directly to the plaintiff.58
knowingly accepted the fruits of the fraudulent conduct”); Terrell v. Childers,
920 F. Supp. 854, 866 (N.D. Ill. 1996) (defendant held liable where evidence
showed she had accepted commissions she knew were based on fraudulent
transactions); Servpro Indus., Inc. v. Schmidt, 905 F. Supp. 475, 481 (N.D. Ill.
1995); Shacket v. Philko Aviation, Inc., 590 F. Supp. 664, 668 (N.D. Ill. 1984)
(fraud in sale of airplane, held a person “who knowingly accepts the fruits of
fraudulent conduct is also guilty of that fraud”); Beaton & Assocs. v. Joslyn
Mfg. & Supply Co., 512 N.E.2d 1286, 1291 (Ill. App. Ct. 1987) (defendant
“accepted the fruits of the fraud knowing of the means by which they were
obtained”). See also Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 452-53
(7th Cir. 1982) (securities fraud action against auditors who allegedly covered
up fraud by corporation management); Beaver v. Union Nat’l Bank & Trust
Co., 414 N.E.2d 1339, 1341 (Ill. App. Ct. 1980) (holding trustee bank not
liable for fraud by beneficial owner of real estate where bank had no knowledge
of the fraud citing 37 C.J.S. Fraud § 61 at 347 (1943) (defendant not liable
absent participation or ratification of misconduct)); Callner v. Greenberg et al.,
33 N.E.2d 437, 440 (Ill. 1941) (“At law, it has been held that a knowing
beneficiary of a fraud may be held liable with the perpetrator”); Walters v.
Maloney, 758 S.W.2d 489, 500 (Mo. Ct. App. 1988) (realtor held not liable
because she did not know of the fraud, but one who knows about fraud, does
not personally participate in it, but receives the fruits of the fraud may be held
liable); Malakul v. Altech Ark., Inc., 766 S.W.2d 433, 436 (Ark. 1989) (wife
liable for husband’s fraud of investors because she knowingly received the fruits
thereof ); Childs, et al. v. Charske et al., 822 N.E.2d 853, 858 (Ohio Ct. Com.
Pl. 2004) (“Willful blindness exists ‘only where it can almost be said that the
defendant actually knew. He suspected the fact; he realised [sic] its probability;
but he refrained from obtaining the final confirmation because he wanted in
the event to be able to deny knowledge.’”).
57 See, e.g., Maberry v. Said, 911 F. Supp. 1393, 1399-1401 (D. Kan. 1995), later
opinion, 927 F. Supp. 1456 (D. Kan. 1996) (lender held liable for odometer
fraud where it ratified the fraud and accepted the benefits therefrom).
58 O’Brien v. B.L.C. Ins. Co., 768 S.W.2d 64, 68-69 (Mo. 1989) (insurance
company liable for failing to obtain salvage title prior to selling wrecked car to
a dealer, because it knew dealer was unlikely to disclose to true condition of the
Courts have repeatedly held defendants liable where they accepted

the benefits of the fraud and knew of the means by which they were
obtained, even when they did not personally participate in the fraud.
Therefore, an assignee may be found liable where the evidence indicates
that the lender knew or should have known of the broker’s fraud.
The “fruits of the fraud” doctrine reflects a policy choice
to hold those who passively participate in fraud as
responsible as those who actually make the fraudulent
misrepresentations. Liability for actively perpetrating
fraud is not limited to those who have actual knowledge
that the statements they made are false. Rather, liability
can be imposed if the defendant made the statements
with reckless disregard for their truth or falsity. Given
the Illinois courts’ decision to treat the perpetrators and
the conscious beneficiaries of fraud identically, the same
knowledge standard should apply to both. Thus, we hold
that plaintiffs can state fruits of the fraud claims against
[the defendant lenders] if they allege that those defendants
deliberately ignored facts that suggested the loans were
fraudulent.59
B. A Party is Deemed to Have Knowledge of the Fraud Where It Willfully

Blinded Itself to Obvious Indications
Where a claim requires proof of intent to defraud, knowledge of

the fraud can be shown where the defendant had limited information
but “failed to inquire further because he was afraid of what the inquiry
would yield. Willful blindness is knowledge enough.”60 A person engages
car absent the salvage title).
59 Pulphus v. Sullivan, et al., No. 02 C 5794, 2003 U.S. Dist. LEXIS 7080, at
*61-62 (N.D. Ill. April 25, 2003) (citations omitted).
60 Louis Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989) (trademark
infringement by selling counterfeit goods); United States v. Campbell, 977 F.2d
854, 857 (4th Cir. 1992) (“A defendant is willfully blind when he ‘purposefully
and deliberately contrive[s] to avoid learning all the facts.’”); United States v.
Flood, No. 08-2937, slip op. at 2-3 (Del. App. 2009) (jury instruction on
deliberate or intentional ignorance or willful blindness). See also Bill Spreen
Toyota, Inc. v. Jenquin, 294 S.E.2d 533, 537 (Ga. Ct. App. 1982) (car dealer
liable for misrepresentation of vehicle that consisted of two halves of vehicles
in “knowing” conduct when he intentionally avoids actual knowledge

by closing his eyes to facts that should prompt him to investigate.
Intentionally avoiding knowledge “implies something verging on
knowledge, combined with a desire to escape the consequences of
knowledge.”61 Defendants who deliberately close their eyes so as not
to discover what they suspect is occurring can be charged with a form
of knowledge or reckless disregard for the truth.62 A defendant “cannot
escape liability by deliberately avoiding knowledge of the illegal nature of
the scheme.”63 In other words, a person’s reckless disregard for the truth
is equivalent to intent to defraud.64 “Culpable ignorance” of the falsity is
the same as knowing the statement was untrue.65
Therefore, where the evidence indicates that the lender knew or
should have known of the broker’s or title company’s fraud – for example,
through red flags in the closing file – it is possible to successfully seek
relief from the lender.
III. Determining Whether Your Client

Has Viable Third Party Claims
In order to determine whether your client has been the victim of

fraud, deceptive practices, statutory violations, predatory loan terms, or
welded together; dealer’s claimed lack of knowledge rejected because one “may
not blind himself to truth or falsity of a condition which he recklessly represents
to his own advantage; such refusal to know, like admitted knowledge, involves
actual, moral guilt”) (internal citations omitted).
61 United States v. Josefik, 753 F.2d 585, 589 (7th Cir. 1985) (possession of stolen
goods).
62 Bosco v. Serhant, 836 F.2d 271, 276 (7th Cir. 1987) (involving brokerage’s
liability in securities fraud case).
63 Terrell v. Childers, 920 F.Supp. 854, 866 (N.D. Ill. 1996).
64 Hurley v. Frontier Ford, 299 N.E.2d 387, 390 (Ill. App. Ct. 1973) (rejecting
used car buyer’s fraudulent breach of warranty claim failed because he signed
clear “as is” statement, but it is “well established” that action for fraud lies where
defendant made a reckless false representation about a matter as to which he
had no knowledge).
65 Gordon v. Dolin, 434 N.E.2d 341, 347 (Ill. App. Ct. 1982) (explaining that
fraud plaintiff must establish that defendant made a false statement, and such
statement may have been made intentionally, recklessly or otherwise with
culpability).
improvident lending, and therefore may have strong third party claims
against the individuals and companies with whom she dealt when she
agreed to the loan, a thorough understanding of the facts surrounding
the loan application process is necessary. Since we are primarily looking
for fraud and deceptive practices claims, start with a thorough interview
of the client: the who, what, when, where, and everything that was said
about the loan, before, during, and after the closing. Where it appears
that the borrower was the victim of deception or unfair practices, this
interview should take at least an hour, if not longer. Take the client
through every step she went through to get the loan in question, from start
to finish. Ask the client how she found or chose the broker, for example,
whether she responded to any advertisements or telemarketing calls. Ask
whether the client was referred by a friend, such as an acquaintance from
church.66 Establish what the client told her broker about her financial
situation and her intended purpose for the loan. Ask what the broker
or other individuals, such as home improvement contractors, said to her
about the transaction – was anything promised and not delivered? Was
there any aggressive solicitation or a high-pressure sales technique? Did
they discuss interest rates or monthly payments? Was there any "bait and
switch,” meaning did the interest rate or monthly payment end up being
much higher than initially represented? If the client complained about or
questioned a high interest rate or payment, did the broker persuade her
to sign with a promise to refinance at a lower rate in six months to a year?
If English is the client’s second language, did the mortgage representatives
speak her native language? If so, were any of the documents translated?
In order to get a thorough understanding of the circumstances
surrounding your client’s loan process and therefore whether your client
has a valid claim, it is imperative to nail down the chronological sequence
of events. Ask the client when she first spoke to the broker or when
she first completed the application. Establish when the client signed
the documents and check whether the dates are accurate? Did she sign
the documents at more than one time? Did she sign at home or in an
office, in a fast food restaurant or on the hood of a car? Are any of the
signatures forged? Was the notary present when they signed? Did she
read the documents, either before or after she signed? Ask what the
66 In this writer’s experience, it seems that if a church acquaintance is involved, it

is more likely to be fraudulent.
client understood from looking at the documents. Did she get copies
of everything she signed at the time she signed? Was anything mailed
to her? If home improvements were involved, was the work completed
correctly and timely? Ask whether the client knew that she had the right
to cancel the application for three days (where applicable). Were there
any surprises at closing or after? Does the client feel that she was lied to
in any way?
Because the court will consider the circumstances and relative
position of the parties, including financial sophistication, it is also
essential to evaluate the client’s credibility, vulnerability, physical and
mental disability, literacy, and language barriers. Inquire about her
education, business experience, and profession or line of work. Ask if she
takes medications that affect her alertness or ability to concentrate, if she
wears reading glasses, and, if so, whether she was wearing her glasses when
she signed the paperwork. Note whether she kept her papers organized
or likely lost some of the documents through shuffling, as opposed to not
having received them in the first place. Make a determination about the
client’s knowledge or experience in real estate and mortgage transactions.
How long has she owned the home? How many times has she refinanced?
After the client interview, review the documents and investigate
potential defendants. Ask the client to give you every scrap of paper
relating to the loan in question. If the client has entered into several loans
within a short time, get the earlier loan documents as well. If you can, get
the loan file from the plaintiff as soon as possible. You may find things
that are omitted from the client’s closing package, such as correspondence
between the broker and lender or the broker and the title company,
demonstrating that the broker or closer was the agent of the lender.
It is also important to review with the client all of the financial
data on the loan application for accuracy. If the loan application contains
inflated or fictitious income or assets, determine whether the client was
aware of this falsification. Try to discern whether the lender processed the
application with little or no verification of income, as a “no doc,” “low
doc,” or “NINJA” (no income, no job, no assets) loan. At the height of
the mortgage bubble, many lenders made loans primarily on the basis of
the appraised value of the property rather than on the borrower’s ability to
pay. Many borrowers went into these loans believing that the bank would
not approve them for the loans unless the bank thought they could make
the payments.
Review the loan terms, fees, and costs, and see whether all the
required TILA disclosures were accurate.67 Is it a fixed rate or adjustable;
was there a low teaser rate? Does the interest rate seem unusually high?
Are the various closing costs reasonable or outrageous as compared to
similarly situated properties? Was a Yield Spread Premium (“YSP”)
paid to the broker? Are there any “exotic” terms such as “payment
option” or “Pick-A-Payment” (which give the borrower an “option” to
make minimum payments of less than all accruing interest), or large
“balloon” payments? Did the client purchase credit insurance? Does the
loan contain excessive prepayment penalties (over 3% of the principal
balance or payable more than three years after the loan date)? Do the
monthly payments include taxes and insurance escrows? Ask whether
the representative of the broker or the lender told the client that tax and
insurance would be included in the monthly payments. One common
misrepresentation occurs when the representative states that the new loan
has a lower monthly payment, without disclosing that the new payment
does not include escrow. Determine the loan to value ratio as set forth
in the loan documents, keeping in mind the possibility of fraudulently
inflated appraisals.
The next critical step to representing your client is to check the
borrower-broker agreement for compliance with state regulations and any
representations of interest rates or terms. Even if the agreement’s fine print
says the broker is not the borrower’s agent, agency may be found due to
verbal misrepresentations or indications that the broker held herself out
as an expert or trustworthy advisor.
You should also try to get copies of all of the loan checks from the
title company – did the client receive or endorse those made payable to
her? Were checks given to the broker or others that should have gone to
the client? Were any unsecured debts paid out of the loan proceeds? Did
contractors steal the money? Did any of the disbursements differ from
those listed on the HUD-1 Settlement Statement?68 Does it appear that
the HUD-1 was altered after signing (some have a time/date stamp)?
67 A full evaluation of TILA compliance and other direct foreclosure defenses
should be done; however, that is not the focus of this article.
68 This document, also known as a “RESPA” (Real Estate Settlement Procedures
Act) in the mortgage business, is a final accounting of all fees, charges, and
payouts from the loan proceeds, listed on numbered lines from 100 to 1400.
Evaluate realistically whether the client can afford the home, with
or without a potential modification of the interest rate if the rate is very
high. Determine the monthly payment as a percentage of household
income. Was this a loan that the client could never afford? Or did she
lose income as a result of a job loss, illness, or the death of a spouse?
Determine whether changes in income are likely to be temporary or
permanent. Were there changes in the amount of the monthly payment
due to interest rate adjustments? Was the client able to make the payments
before the rate and payment change?
Estimate the current value of the property and the amount of
equity above the loan balance, then consider whether the lender’s appraisal
was an accurate estimate at the time of the loan. Find out whether
property taxes have been paid and whether there are additional liens on
the property. A thorough review of the client’s financial situation and
capabilities is necessary to determine whether she can ultimately retain
the home; if she cannot, consider how much, if any, equity would be
available if the house is sold. Keep in mind that at the end of the day, the
client is still likely to owe a substantial sum of money. The client will be
required to either refinance or obtain a loan modification in settlement.69
If the client cannot reasonably afford the payments, she will likely have to
sell the house to satisfy the balance due.
Finally, it is critical to investigate the various parties involved
in the transaction in order to determine what parties to name in the
complaint. Find out if the brokerage or originating lender is still in
business. Sometimes the individual broker has moved to a different
company; however, she may still be personally liable for fraud or deceptive
practices. Check the licenses of the brokers and appraisers and whether
there have been any consumer complaints to the licensing authorities.
Check the court in your jurisdiction to see if they have been sued by other
consumer borrowers or if there have been any actions brought by the state
Attorney General against the wrongdoers.
IV. Conclusion
To summarize, where the client has been the victim of fraud,
69 Consider a reverse mortgage if the client is over age sixty-two and there is
sufficient equity in the property.
deceptive practices, statutory violations, predatory loan terms, or

improvident lending, she may have strong third party claims against the
individuals and companies with whom she dealt when she agreed to the
loan. A thorough understanding of the applicable state law in the areas
of common law fraud, consumer fraud or unfair and deceptive practices
statutes, agency law, fiduciary duties of brokers and title companies, and
notary misconduct law is essential.
Foreclosure cases are extremely labor-intensive. If the parties
responsible for defrauding the borrower are insolvent or have disappeared,
it may be possible to get a judgment but be unable to collect, and,
therefore, bringing suit would likely be a waste of time. If you have a
case in which, even if you obtain all of the reasonably available relief, the
client is still left with an unaffordable loan and no equity in the house,
question whether you really want to put two or three years of litigation
effort into the case if the client is ultimately going to lose the house.
Many advocates insist that foreclosure clients pay monthly into an escrow
account or the attorney’s client trust account as a way of demonstrating
their ability to make payments and to have a lump sum in the event of
settlement. Even in the current climate, where the lending entity is still
in business or individual defendants can be named, it is often possible to
cobble together a global settlement from relatively small contributions
from a number of defendants that could operate to reduce the principal
balance owed and thereby save the home from foreclosure.

Law Journal Vol. 2, No. 1 Spring 2010

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Law Journal Vol. 2, No. 1 Spring 2010

Uploaded by

Copyright:

Available Formats

Northeastern University

Caveat Venditor: Predatory Purchasing in the

Of Victims, Villains and Fairy Godmothers:

Causes of the Subprime Foreclosure Crisis and the

Policy and Litigation Barriers to Fighting Predatory Lending 193

Defending Foreclosure Actions by Bringing in Third Parties 221

© 2010 Northeastern University Law Journal

MANAGING EDITOR ARTICLES EDITOR

All works are copyright by their authors.

Kasey Baker ‘10 Vanessa Madge ‘10

The Northeastern University Law Journal is devoted to intellectual

residential mortgage lending market. What followed was the collapse of

2 Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System,

7 897 N.E.2d 548 (Mass. 2008).

used to guide the continued legislative response to the subprime fallout

Northeastern University Law Journal

REGAINING THE WONDERFUL LIFE OF

DEFENDING HOMEOWNERS FROM EVICTION AFTER

“But he did help a few people get out of your slums,

Jimmy Stewart as George Bailey, It’s a Wonderful Life

In It’s a Wonderful Life, George Bailey, a local businessman and

hero, supported the community by offering townsfolk affordable loans

As Mr. Cohen aptly described, the originating lender, or originator,

Confusion can lead to inaction or ineffective action, which ultimately

20 See ch. 244, § 1.

foreclosure, it is important to ensure that the foreclosing entity properly

assignments of mortgage, must be in writing.29 Moreover, when challenged,

I. Legal Requirements for Assignments of Mortgages

Massachusetts imposes two different sets of requirements

The mortgage and note are governed by different bodies of

34 See Mass. Gen. Laws ch. 259, § 1 (2004).

many homeowners facing foreclosure may allow the unknown entity

1. Property Principles and the Statute of Frauds Relevant to

An assignment of mortgage is a contract between the current

assignment.42 Moreover, the assignment of mortgage must be produced

Countrywide Home Loans, Inc. v. Taylor, MERS executed an assignment

While property and common law contract principles govern the

mortgage when the note is properly transferred, but the assignment of

74 See Reading Savings Bank, 137 Mass. at 443.

82 In re Maisel, 378 B.R. 19, 20-21 (Bankr. D. Mass. 2007).

based on defects in the indorsement of note and assignment of mortgage

B. Special Requirements for Assignments of Mortgage and Transfers of

Many mortgages have been assigned to REMIC trusts as a part

1. Requirements Imposed by the Internal Revenue Code

Due to the favorable tax treatment, the IRS imposes strict

REMIC within three months of the startup date.92 If the mortgage is

if it is one of several defects. Thus, it is advantageous to evaluate whether

In addition to following the REMIC rules, any securitized trusts

But even with these detailed protocols, some assignments of mortgage

were included in the prospectus information given to investors.112 Also like

C. Summary of Requirements for Assignment of Mortgage and

Ultimately, it is the lender’s burden to show that it holds the

Mortgage and Indorsement of Note: MERS As Assignor

v. Lamy, the plaintiff proffered an assignment of mortgage that alleged

III. Legal Theories That Can Be Utilized to Challenge

In order to foreclose upon the mortgage, the foreclosing entity

A. The Foreclosing Entity is Not a Real Party in Interest, Nor Does it

Massachusetts courts require that every claim “be prosecuted by a

“reasonable time has been allowed after objection for ratification.”142

Often the homeowner in a post-foreclosure, pre-eviction case

wishes to invalidate the foreclosure.148 Because an earlier action brought

C. Because the Entity Foreclosed on the Property without a Valid

157 See Bottomly, 434 N.E.2d at 669-70.