Chapter 14

Objection to Settlement of Predatory Mortgage Lending Class Action

Irv Ackelsberg is a consumer specialist with Community Legal Services, Inc., in Philadelphia, where he has practiced for 26 years, now serving as a Managing Attorney. He has extensive experience in the areas of foreclosure defense, bankruptcy, real estate, student loans and consumer fraud. In recent years he has concentrated most of his work on the predatory lending practices of the subprime mortgage industry. He successfully litigated the first reported case decided under the Home Ownership and Equity Protection Act (HOEPA), Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444 (E.D. Pa. 1998). He served on the Official Creditors Committee in the United Companies Financial chapter 11 case and was actively involved in the legislative campaign to enact anti-predatory legislation before the Philadelphia City Council. Mr. Ackelsberg has authored a number of articles and is a contributor to the Pennsylvania Consumer Law treatise. He is a frequent lecturer at training events for lawyers, for Legal Services clients, and for the larger community. He was the 2001 recipient of the Philadelphia Bar Association's Andrew Hamilton Award for exemplary service in the public interest and the 1997 recipient of the Striving Towards Excellence Award presented by Pennsylvania Legal Services. Mr. Ackelsberg received his B.A. from Haverford College in 1972 and his J.D. from the RutgersCamden Law School in 1976. Community Legal Services, Inc., 3638 N. Broad Street, Philadelphia, PA 19140, (215) 227-2400, fax: (215) 227-2435, e-mail: iackelsberg@clsphila.org. Chapter 14 contains a memorandum in support of objections to the proposed settlement of a class action.1 The objections are based on variety of grounds but principally that most of the absent class members would give up all their federal and state claims and defenses in exchange for nominal relief. The objections describe all the powerful federal and state clams that would be given up, including the right to rescind under the Truth in Lending Act and HOEPA.2 The objections point out that the general release would protect brokers and holders of the mortgages who were not even parties to suit. The objections point out that the proposed settlement would release claims that were not even pled in the suit. Because of the great amount of money involved in a predatory mortgage, the long term for repayment, and the central importance of the home to families, it is paramount in predatory mortgage lending class settlements that the absent class members get substantial relief for any claims released and that the release be limited to just those claims. That is required by the Consumer Class Action Guidelines of the National Association of Consumer Advocates3 as well as Rule 23 of the Federal Rules of Civil Procedure. It is important to specifically preserve the as many legal claims of absent predatory lending victims from release as possible so the victims can defend their home if faced with foreclosure.

1 2 3

See NCLCs Consumer Class Actions Ch. 12 (5th ed. 2002). See NCLCs Truth in Lending Ch. 6 (5th ed. 2003). See Id. at 13.3.2.

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK [Consumer], on behalf of herself and all others similarly situated, et al., Plaintiffs v. DELTA FUNDING CORP., et al., Defendants : : : : : : Index No. [redacted] (Sifton, Ch. J.)

MEMORANDUM OF LAW IN SUPPORT OF OBJECTIONS TO THE SETTLEMENT AGREEMENT BY CLASS MEMBERS [Class Member 1] AND [Class Member 2] Table of Contents I. Backround

A. The Predatory Lending Explosion: Abusive Mortgage Loans Peddled by Rogue Elephants B. The Different Legal Theories Available to Consumers Seeking to Challenge Predatory Mortgage Lending II. III. The Facts of This Case Argument

A. The Settling Parties Have Failed to Meet Their Burden of Establishing that the Settlement is Fair, Adequate and Reasonable 1. Payments in the Range of $5-$10 to Class Members who Have Claims Worth Thousands of Dollars Are Grossly Inadequate 2. The Limited Relief Provided in Addition to the Token Payments under Paragraph 4 Does Little to Cure the Inadequacies of the Settlement Agreement a. The Limited Changes in Some Class Members Default Interest Rate Would Give Them Less than Federal Law Entitles Them To, and, Therefore, Does Not Represent a Real Benefit b. Only Some, Arbitrarily Identified Class Members with Genuinely Disputed HOEPA Loans Receive Relief, and Even Those that Get Some Debt Reduction Remain in Substantial Risk of Foreclosure.

3. The Incentive Relief to the Named Plaintiffs, while Representing a Reasonable Compromise of Their Own Claims, Cannot Fairly Be Denied to Class Members 4. The Scope of the Release Is Unfair and Improper

a. By Releasing Borrower Claims that Could Be Raised in Defense of Foreclosure, the Settlement Agreement Represents an Inappropriate Attempt by Delta and the Trustees of Its Loan Trusts to Launder Their Loan Portfolio b. The Release Should Not Be Any Broader than the Claims that Could Have Been Certified for Class Treatment D. Class Counsel Has Failed to Demonstrate Its Adequate Representation of the Class by Agreeing to a Settlement that Provides Little Relief to the Vast Majority of Class Members while Releasing All Possible Claims and Exposing Them to Foreclosure and that Launders the Loan Portfolio Originated by Delta and that Provides a Windfall to Deltas Assignees I. Backround A. The Predatory Lending Explosion: Abusive Mortgage Loans Peddled by Rogue Elephants

The 1990's saw a rapid increase in subprime mortgage lending to consumers, meaning loans made to homeowners who do not meet the credit standards of the prime market. See Joint HUD/Treasury Task Force Report 2-3, Curbing Predatory Home Mortgage Lending, June 2000, available at http://www.hud.gov/library/bookshelf18/pressrel/treasrpt.pdf (referred to hereafter as Joint HUD/Treasury Report). Between 1994 and 1999 subprime lending increased five fold, from a $35 billion industry in 1994 to a $160 billion industry in 1999. Id. at 13. This explosive growth, according to HUD and Treasury, has been most heavily concentrated in the nations low-income, minority neighborhoods and has contributed to a rapid growth in foreclosures in these neighborhoods. Id. Most of this explosion in subprime mortgage lending represents loans used for consumer debt rather than to purchase a home. Id. at 1. While this dramatic expansion in credit might, on the surface, appear to be a positive development for credit-starved communities, it has become increasingly apparent that much of

this credit is actually causing substantial damage to these very communities. As observed by Governor Edward M. Gramlich of the Federal Reserve Systems Board of Governors, [j]ust as the expansion of subprime lending has increased access to credit, the expansion of its unfortunate counterpart, predatory lending, has made many low-income borrowers worse off. Gramlich, Predatory Lending, Cascade (Philadelphia Federal Reserve Bank), Summer/Fall 2000, http://www.phil.frb.org/cca/capubs/cascade43.pdf . In some cases, Governor Gramlich observed, predatory lending involves outright fraud and deception, but it also includes the abuse of mortgage provisions that, in the context of an informed borrower, might be useful, but when imposed on uneducated, vulnerable borrowers, can cause real harm. Id. at 3. Noting that subprime lenders are, for the most part, reasonably sheltered from the normal bank regulatory apparatus, this can create an opportunity for undetected abuse.4 While in some cases unregulated lenders can improve the economic efficiencies of low-income markets, in others they can act as unregulated rogue elephants. Id.

A recent Ford Foundation-funded study conducted by The Reinvestment Fund in Philadelphia, has identified three key signs of abuse in mortgage terms that would suggest predatory conduct by the lender or by the broker that arranged the loan: Financing costs imposed on borrowers out of proportion to the additional risk being assumed by the lender. Unusually high points and other settlement costs that seem to bear no relation to the interest rate charged. Onerous payment terms that, given the financial situation of the borrower, make foreclosure or future refinancings a likely consequence of the transaction.

See Predatory Lending: An Approach to Identify and Understand Predatory Lending, available at http://www.trfund.com/pdf/FordForWeb.pdf.

Predatory mortgage lending practices and their devastating effects have been widely reported in the national press.5 A recent law review article suggested that [s]ubprime home equity lending is probably one of the most important public policy issues that America will have to address during the coming years. Mansfield, The Road to Subprime HEL Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market, 51 South Carolina Law Review 473 (Spring 2000) (hereafter cited as Mansfield). One important factor that is generally agreed both to explain the market forces behind the growth in predatory mortgage lending and the elusiveness of an effective legal response to the problem is the increased use of loan securitization as the favored method for financing loan originations. See Mansfield at 531; Joint HUD/Treasury Report at 40; LoPucki, The Death of Liability, 106 Yale L.J. 1, 23 (1996). In a securitization deal, loans are combined into pools and then securities representing fractional shares of the interest and principal payments due from the loans in the pool are purchased by Wall Street firms for resale to mutual funds and insurance companies. Id. Title to the loans pass to a loan trust that is established in the securitization transaction, with the original lender often transforming itself into a servicing agent for the trust, rather than the holder of the loan. Id. What this means is that undercapitalized rogue lenders can unload the fruits of their misdeeds and continue to make new loans, while the actual owners of
5

See, e.g., Fleishman, Bill Targets Predatory Mortgage Loans, Washington Post, May 2, 2002, E3; Leonhardt, Wide Racial Disparities Found in Costs of Mortages, The New York Times, May 1, 2002; Hechinger, At a Price, Low-Income Borrowers Forfeit Cheaper Mortgages to Pay off Their Debt, The Wall Street Journal, December 7, 2001, 1; DiStefano, Foreclosures Follow Flood of High-Cost Loans, The Philadelphia Inquirer, August 2, 2000, 1; Fed, Justice Eye Existing Laws to Curb Predators, American Banker, Monday, June 5, 2000; Foust, Easy Money: Subprime Lenders Make a Killing Catering to Poorer Americans. Now Wall Street Is Getting in on the Act, Business Week, April 24, 2000, 107; Henriques, Profiting from Fine Print with Wall Streets Help, The New York Times, March 15, 2000, 1; Associated Press, Fed Chief Sees Abuses in Loans to the Poor, The New York Times, March 23, 2000; Special Report: Poverty, Inc., Consumer Reports, July 1998.

the loans, legally separate trust entities, can acquire the income streams represented by the loans while attempting to insulate themselves from responsibility for the wrongdoing of the lenders. LoPucki, supra. B. The Different Legal Theories Available to Consumers Seeking to Challenge Predatory Mortgage Lending The existing array of consumer protection laws has spawned different legal approaches to the problem of predatory lending. See Joint HUD/Treasury Report, supra, at 52. Within federal law this includes the Homeownership and Equity Protection Act of 1994 (HOEPA), the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), RICO, the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. State law, both statutory provisions dealing with unfair and deceptive business practices (known as state UDAP laws) and the common law of fraud and unconscionability, have also been used to challenge predatory lending practices. Because the settlement agreement at issue in this case seeks to release all consumer claims under all of these possible theories, despite the fact that the complaint only raised claims under HOEPA, TILA, and state law, it is important to understand the differences between these alternative legal theories and the entities that can be sued under them. HOEPA,6 which is codified in several sections of the Truth in Lending Act, see 15 U.S.C. 1602(aa), 1639, 1640(a)(4), was specifically targeted at the predatory mortgage industry that sells credit on unfair terms, . . . peddling high-rate, high-fee home equity loans to cash-poor homeowners. House Conf. Rep. No. 652, 103rd Cong., 2d Sess. 158 (1994) reprinted in 1994 U.S.C.C.A.N. 1977, 1988 (the Conference Report ); Senate Rep. No. 169, 103rd Cong., 2d Sess. 21, reprinted in 1994 U.S.C.C.A.N. 1881, 1905 (Senate Report). HOEPA creates a Title I, Subtitle B of the Riegle Community Development and Regulatory Improvement Act of 1994, P.L. 103-325, 108 Stat. 2160.
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special class of regulated mortgage-secured loans made at high rates or which include excessive charges and fees. 15 U.S.C. 1602(aa). A covered, high-cost mortgage includes one where points and fees total 8 per cent or more of the total loan amount. Id.7 Lenders who make such loans to homeowners are subjected to additional pre-closing disclosure requirements, 1639(a)-(b), and to various substantive limitations on their lending practices, 1639(c)-(i), including prohibitions against default interest rates, prepayment penalties and lending based on the value of the house rather than on the consumers ability to repay the loan. Violations of either the three-day advance disclosure requirement or the substantive prohibitions give rise to civil liability under 1640(a), an extended right of rescission under 1635, see 1639(j), and enhanced damages pursuant to 1640(a)(4). See Newton v. United Companies Financial Co., 24 F.Supp. 2d 444, 451 (E.D. Pa. 1998). One additional protection accorded to HOEPA borrowers is that all borrower claims and defenses can, as a matter of federal law, be asserted against subsequent holders of the loan. 15 U.S.C. 1641(d). What this means in the context of loan securitization is that loan trusts that purchase HOEPA loans are on the hook for all the misdeeds of the originating lender, a fact that is obviously taken into account in the structuring and pricing of such transactions. Another federal statute that is available in litigating predatory lending cases is TILA, 15 U.S.C. 1601 et seq. TILA is a disclosure statute that is designed to provide meaningful information to consumers about the cost of credit and other terms included in the particular HOEPA, and the Federal Reserve Boards regulations implementing it, 12 C.F.R. 226.32 (Section 32"), set strict, technical rules for classifying settlement charges in order to determine whether the points and fees threshold has been past. See 12 C.F.R. 226.32(b)(1); Official Staff Commentary (commentary relating to subsections 226.32(a) and (b)). The loans of class members in this case include some that the defendant acknowledges were over the threshold and, therefore, HOEPA loans, and, and some concerning which the proper classification of certain settlement fees has given rise to a dispute as to whether or not they are covered by HOEPA.
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transaction. The disclosure regime is enforced through a strict liability, private-attorney-general mechanism that imposes the heavy penalties of statutory penalties, attorney fees, and mortgage rescissions on lenders that violate the disclosure requirements. See Porter v. Mid-Penn Consumer Discount Co., 961 F.2d 1066 (3d Cir. 1992). TILA claims can be raised against the original lender, and, in some cases, against the lenders assignees. 15 U.S.C. 1641. RESPA, 12 U.S.C. 2601 et seq., is focused on the real estate settlement transaction and is designed, among other things, to protect consumers from unnecessarily high settlement charges. It specifically prohibits kickbacks, referral fees and fee-splitting, and creates a trebledamage cause of action to recover improper fees paid, for example, to brokers. 12 U.S.C. 2607. See Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998), rehg denied, 144 F.3d 717 (11th Cir. 1998), cert. denied 122 S.Ct. 930 (2002). RESPA claims can be brought against the broker that received the fee, as well as the lender that paid it. 12 U.S.C. 2607(a),(b). The federal RICO statute, 18 U.S.C. 1961 et seq., has also been used to attack predatory lending schemes. Under a RICO theory, liability would tend to run not against the lender itself, but against its officers and employees and outside entities that participate in the scheme. See Eva v. Midwest Natl Mortgage Banc, Inc., 143 F.Supp. 2d 862 (N.D.Ohio 2001). Two federal statutes, ECOA, 15 U.S.C. 1691 et seq., and the Fair Housing Act, 42 U.S.C. 3601, address the problem of credit discrimination, and also have been used to challenge aspects of the predatory lending problem. Both statutes provide for significant relief, including a $10,000 statutory penalty, 15 U.S.C. 1691e(b), and unlimited punitive damages, 42 U.S.C. 3613(c). Besides prohibiting discrimination, ECOA imposes certain requirements on the loan application process which, if violated, can trigger a statutory penalty. See Newton v. United Companies Lending Corp., 24 F.Supp. 2d at 457-463. A Fair Housing Act claim alleging

that a lender has targeted minority borrowers with particularly damaging credit terms is especially powerful, given that the courts have interpreted the statute of limitations as being tolled as long as the discriminatory practices continue, see Matthews v.New Century Mortgage Corp., 185 F.Supp. 2d 874 (S.D. Ohio, 2002); Hargraves v. Capital City Mortgage Corp., 140 F.Supp.2d 7 (D.D.C. 2000), and given that liability can also attach to company officers and employees, Eva v. Midwest Natl Mortgage Banc, Inc., supra, and to those other entities that purchase these loans or that provide financial assistance to the lenders. 42 U.S.C. 3605. State law claims have also been used to challenge predatory lending transactions, particularly, where it can be shown that an individual transaction is the result of deceptive inducement or is clearly unconscionable. See, e.g., Besta v. Beneficial Loan Co., 855 F.2d 532 (8th Cir. 1988); Stewart v. Associates Consumer Discount Co., 183 F.R.D. 189 (E.D. Pa. 1998). II. The Facts of This Case This class action was filed in 1998 against a lender of some notoriety, Delta Funding Corp., and its parent company, Delta Financial Corp.8 Also named as defendants were two commercial banks that function as trustees for the various loan trusts that purchased the loans from Delta,9 the mortgage broker that arranged plaintiff [Consumer]s loan, and unidentified

This notoriety has come not only from this case, but from the separate enforcement actions filed against the companies by the United States Department of Justice, U. S. v. Delta Funding Corp., CV 00-1872 (E.D.N.Y.), by the New York State Attorney General, People of the State of New York v. Delta Funding Corp., 99-4951 (E.D.N.Y), by the New York State Department of Banking, and by other class action plaintiffs, Kidd v. Delta Funding Corp., 2000 N.Y. Misc. LEXIS 378 (certifying borrower class). As made clear in all of its publicly filed disclosures, Delta originates loans for the purpose of selling them. This has generally taken place through securitization transactions, as described above, see supra at 4-5. Originally, Delta would function as the servicer for the loan trusts acquiring its loans, but recently, Delta has sold all of its servicing operations to a company named Ocwen.
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John Doe brokers and correspondents that refer loan business to Delta.10 The complaint described eight Delta transactions involving New York, minority homeowners that were originated during the 1996-1998 time period. See Third Amended Complaint. The following common questions of law and fact concerning Deltas compliance with HOEPA and TILA were alleged to unify these eight different stories: a. Whether Delta engaged in a pattern or practice of refinancing mortgages and extending home improvement loans based on the equity in borrowers' homes, rather than on their ability to repay the loans, and thereby violated HOEPA; b. Whether Delta's standard form mortgage documents contained terms providing for increased default interest and pre-payment penalties, and thereby violated HOEPA; c. Whether Delta consistently and continuously failed to provide, or provided in an inappropriate manner, certain disclosures that are mandated under HOEPA and TILA, respectively, to be disclosed three days prior to, and at, borrowers' closings, and thereby violated HOEPA or TILA; d. Whether Delta consistently and continuously failed to provide, or provided in an inappropriate manner, certain notices of right to rescind,that are mandated under HOEPA and TILA, respectively, at least three days prior to, and at, borrowers' closings, and thereby violated HOEPA and TILA. Third Amended Complaint, 225. In addition, the complaint alleged the existence of common questions under state law concerning various alleged deceptive, fraudulent and unconscionable practices committed by Delta and the one named mortgage broker, defendant All-State Consultants, Inc. Id. at (e)-(g). Listing three causes of action under, respectively, HOEPA, TILA and state law, the complaint sought to obtain loan rescissions and statutory damages under 15 U.S.C. 1640(a) and other equitable and monetary relief for all similarly situated Delta borrowers. Id. at 66-108. Plaintiffs did not plead any claims under the other available federal statutes, such as RESPA, RICO, ECOA or the Fair Housing Act. In December 1998 the Court granted Plaintiffs motion for preliminary injunction, enjoining the scheduled foreclosure sales of three of the named plaintiffs homes. Order of
10

No defendant class was alleged.

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12/23/1998, 1998 U.S. Dist. LEXIS 23318. The Court held in that proceeding that the three loans appeared to be HOEPA loans, despite Deltas contention that large broker fees and legal fees included in the loan principals were not points and fees within the meaning of HOEPA, and that, because HOEPA disclosures were not provided and because the mortgages included prohibited terms (default rates and pre-penalty provisions), the three plaintiffs had a reasonable likelihood of obtaining rescission of their mortgages. On March 1, 2002, prior to any class being certified, Plaintiffs filed a motion for preliminary approval of a settlement agreement. The proposed agreement (hereafter Settlement Agreement) gives different relief to the named plaintiffs and to a newly identified settlement class.11 The class includes all individuals (Class Members) who entered into mortgage loan transactions on or after November 19, 1992 and on or before October 31, 1999 with Delta Funding or another lender where the loan was subsequently purchased by Delta Funding (Covered Loans), other than those borrowers who have otherwise released Delta. Settlement Agreement at 2. Under the agreement Delta will provide the following relief to the Named Plaintiffs are to receive the following relief: Debt reduction and restructuring. Each Named Plaintiff will receive a $10,000 reduction in the principal balance of her loan, Settlement Agreement, 8(a), a possible reduction in her interest rate and a reamortization over a new 30-year period. 8(b). Waiver of collection charges. Delta will waive all accrued foreclosure costs and fees and any other collection costs (defined as arrears other than overdue principal and interest or outstanding servicing advances12) currently owed by the Named Plaintiffs. 8(b).

The class alleged in the complaint consisted of three subclasses linked to the three causes of action, i.e., all Delta borrowers who, after November 18, 1992, entered into loans that violated HOEPA, TILA or state law. Third Amended Complaint, 217-18. Such advances are defined in the Agreement to include advances for insurance, taxes, maintenance, repairs, inspections, and protecting the security of the related mortgage, but do not include collection fees and costs. Settlement Agreement, 5(a). 11
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Forgiveness of portion of remaining arrears. After the collection charges are deducted from their arrears, 50% of their remaining arrears will be forgiven. Id. Deferment of unforgiven arrears to end of loan. After deducting all collection costs and the additional 50% reduction, payment of the remaining net arrears will not have to be paid until the loan is fully matured. Id. Reduction of default interest rates. To the extent Named Plaintiffs promissory notes contain a provision that increases their interest rate in the event of a default, their notes will be amended to eliminate the default rate for delinquencies less than 120 days, and, in the case of delinquencies over 120 days, to allow Delta to charge them an addition % over their note rate of interest. 1, 8(b).

The most significant aspect of this relief is that, for the Named Plaintiffs, the threat of foreclosure is now gone, their defaults no longer exist, and they will pay substantially less in principal and interest over the life of their loans. In contrast to what is being done for the Named Plaintiffs, however, Class Members are to receive much more limited relief, depending first on whether they are Early Payment Default borrowers, defined as Class Members who never made six contractual payments on their loans. This subclass does not include all borrowers who defaulted prior to making six payments, but rather, includes only those borrowers whose loans Delta classified as HOEPA loans (HOEPA Early Payment Default Loans, or HEPDL), see 2, and a limited group of additional borrowers who Delta did not treat as HOEPA borrowers. This additional group includes those Disputed HOEPA Loans (DHEPD) where the HOEPA points and fees trigger would have been tripped had Delta not excluded a broker fee or a closing fee charged by someone named [Closing Agent]. See 3(a).13 Furthermore, to participate in the subclass relief,

In other words, a borrower who closed a loan with any of the probably hundreds of other settlement agents used by Delta nationally, and whose closing fees were not included in Deltas HOEPA calculation, will not be treated as a DHEPD Class Member.

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a Class Member must affirmatively file a claim form. 2(e), 3(e). Assuming a member of the subclass does file a claim, he/she will receive the following relief,: Debt reductions and restructuring. Subclass members will receive 10% reductions in the principal of their loans and a reamortization over thirty, but no change in their interest rate. Settlement Agreement, 2(b), 3(c). Waiver of foreclosure fees and costs. No subclass members receive any waivers of accrued collection charges. Arrears reduction. Subclass members will also receive a 50% reduction of their accumulated arrears. However, because the foreclosure fees and other collection charges are not being waived, this reduction will be significantly smaller than the reduction obtained by the Named Plaintiffs. Settlement Agreement, 2(b)-(c), 3(c). Repayment of unforgiven arrears. After receiving the 50% reduction in arrears, the Adjusted Arrears must be repaid over a term of three years, in addition to the subclass borrowers regular payment. Settlement Agreement, 2(d), 3(d).14 According to the Agreement, the arrears forgiveness and debt reduction being provided to the HEPD borrowers has a value of $1.15 million (Paragraph 2 Reduction Fund). 2(b). Changes in default interest rate. They will receive the same adjustments to their default rates that the Named Plaintiffs get.

For Class Members not in the Early Default subclass, i.e., the vast majority of Class Members, they will receive the following relief under the Settlement Agreement: Changes in default interest rate. Same as for the Named Plaintiffs. $500,000 Cash Payment Fund. The only other relief to Class Members is to be $500,000 in loan reductions or cash payments that will be divided pro rata, as follows: $200,000 to those Class Members who, according to Delta, had HOEPA loans and whose income either was not verified or was not large enough to show a debt-to-income ratio less than 50%, and $300,000 to everyone else.15 Since the

The notice that went out to class members did not explain this fact clearly. While the second paragraph of Section IIIB of the notice does state that the arrears are repayable over three years, the following paragraph contradicts that statement by suggesting that the arrears will be payable in a lump sum upon maturity of the loan. Undoubtedly, this contradiction has produced confusion among subclass members trying to decide how to respond to the notice. The $500,000 fund may grow larger, to the extent that the $1.15 million Paragraph 2 Reduction Fund is not depleted. Settlement Agreement, 4 13
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Class is estimated to include more than 10,000 members, Third Amended Complaint, 219, individual awards will be rather small. Objector [Class Member 1] has been notified that his share in this fund will be $6.04. Objector [Class Member 2] has been told that she will receive $9.30 Refund of foreclosure profits. Any Class Members of the Early Payment subclass who would have been eligible to receive the benefits offered to the subclass, but for the fact that they had already lost their house in a Delta foreclosure, will get a refund of any net profits Delta earned from taking their house. 5(a).16 The same refund right will apply to any other foreclosures that Delta completes within the first 18 months following approval of the settlement. 5(b).

Class Members that do not affirmatively opt-out of the settlement will be subject to a General Release. 12. The scope of this release is extremely broad. It covers any and all consumer claims that the borrower might be able to assert under any consumer protection theory, not just the three causes of action pleaded in the complaint. Indeed, it expressly includes claims under federal statutes not raised in this litigation, including ECOA, RICO, and the Fair Housing Act. 12(f).17 That means that Class Members subject to future foreclosure actions will not be able to defend themselves by raising defensively any federal or state law claim that their loan was predatory. And the release covers not simply claims against Delta and the one broker defendant, it covers any claim against a long list of third parties who were not named as defendants in this action, including all brokers and former brokers of Covered Loans. 12(b). The Settlement Agreement also provides for an attorneys fees to Class Counsel in the amount of $700,000. 8(a). III. Argument
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Neither the agreement, nor the motion seeking approval of the agreement, state whether any Class Member is entitled to this relief, and, if so, whether Delta knows where they live. The one relevant federal statute not mentioned is RESPA. It is not clear whether this omission was intentional or inadvertent.
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A.

The Settling Parties Have Failed to Meet Their Burden of Establishing that the Settlement is Fair, Adequate and Reasonable

Federal Rule of Civil Procedure 23(e) requires court approval of any proposed settlement that disposes of a class action. In reviewing a class action settlement agreement, the rights of absent class members must be "the dominant concern" of the court. Amchem Products, Inc. v. Windsor, 117 S. Ct. 2231, 2248 (1997). The district court must determine that a class action settlement is fair, adequate, and reasonable, and not a product of collusion. Joel A. v. Giuliani, 218 F.3d 132, 138 (2d Cir. 2000). The degree of vigilance that a district court must bring to bear on reviewing a proposed class action settlement is so high, it has been characterized as akin to the high duty of care that the law requires of fiduciaries. Reynolds v. Beneficial Natl Bank, 2002 U.S. App. LEXIS 7384 (7th Cir., filed 4/23/2002); Grant v. Bethlehem Steel Corp., 823 F.2d 20, 22 (2d Cir. 1987). In reviewing the fairness of a class action settlement, the district court is not free to rely on its gestalt judgment or overarching impression of the settlements fairness. Amchem Products v. Winsor, 117 S.Ct. at 2248. On the contrary, particularly, where, as in this case, the agreement includes the certification of a broad, previously uncertified class, the fairness analysis must be guided by careful and strict reliance on the criteria for class certification set forth in Rule 23(a) and (b). Id. In the words of the Supreme Court, [Rule 23 criteria]those designed to protect absentees by blocking unwarranted or overbroad class definitionsdemand undiluted, even heightened, attention in the settlement context. Such attention is of vital importance, for a court asked to certify a settlement class will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.

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Id. Moreover, the plaintiffs seeking preliminary approval of a settlement agreement must come forward with two types of evidence, evidence regarding the substantive terms of the settlement relative to the likely recovery through litigation, and evidence pertaining to the negotiation process. In re General Motors Corp. Pick-up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 796-97 (3d Cir.), cert. denied, 116 S.Ct. 88 (1995); Reynolds v. Beneficial Natl Bank, supra.. Such evidence is considered essential in enabling the court to make findings and conclusions regarding the adequacy of the representation and regarding the range of possible outcomes at trial. Other than attaching copies of the settlement agreement and the proposed order, notice and claim forms, Plaintiffs submission to the Court in support of its motion for preliminary approval of the agreement consists of little more than a boilerplate memorandum of law. They provide no explanatory material regarding the negotiation process and their decision to settle, for example, material that might explain why the relief to Class Members is so limited while the General Release is far more broad than the claims they were litigating; instead, they provide only conclusory references to intensive arms-length negotiations18 and the uncertain outcome and risk of litigation. Plaintiffs Memorandum of Law, at 10-11. They offer no analysis regarding the strengths of their case and the range of possible damages, providing only the conclusory statement that the settlement has no obvious deficiencies and is well within the range of possible approval. Id., at 11. They state that the relief provided the Named Plaintiffs is not preferential, but rather, represent a recognition of Plaintiffs role in the case, but again, they provide no factual support for that assertion. Id., at 12. And, while acknowledging that a settlement class must meet the requirements of Rule 23, Plaintiffs provide no analysis of the They claim to have exchanged substantial information in discovery and outside of discovery, id. at 11, but none of this information is described.
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settlement class, commenting only that the Rule 23 elements are well met in this matter. Id., at 13. In short, Plaintiffs have provided the Court with nothing from which it can derive findings and conclusions upholding the fairness and adequacy of the proposed settlement. Besides not meeting their evidentiary burden, Plaintiffs have proposed a settlement that, on its face, should be rejected for an number of reasons. The token recoveries provided to the vast majority of class members are grossly inadequate in light of the damages provided by the relevant statutes and in light of the relief requested in the complaint. The limited contractual changes to class members default interest rates provides them less than they are entitled to under the relevant law. The limited additional relief provided to the early default subclass offers these borrowers little or no protection from foreclosure and is conditional on an unnecessary claims procedure. The so-called incentive relief provided to the class representatives, while representing a reasonable compromise of their own claims, cannot be fairly denied to the absent class members. And the scope of the release, covering claims never raised in the complaint, and parties who are not defendants and who have contributed nothing to the settlement, is grossly inappropriate. 1. Payments in the Range of $5-$10 to Class Members who Have Claims Worth Thousands of Dollars Are Grossly Inadequate

Mortgage lenders who violate TILA are subject to a $2,000 statutory penalty, in addition to actual damages, costs and attorneys fees. 15 U.S.C. 1640(a)(2)(A)(iii). HOEPA violations trigger an additional, enhanced penalty in the amount of all finance charges and fees paid by the consumer. 15 U.S.C. 1640(a)(4); Newton v. United Companies Fin. Corp., 24 F.Supp. 2d 444, 451 (E.D. Pa. 1998) (finding that all payments made by the borrowers were interest or prepaid finance charges, the court awarded HOEPA damages in the amount of the payments made on the loan, in addition to $2000 statutory penalty and rescission). A successful HOEPA claim can,

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therefore, produce rescission and, in addition, thousands of dollars in damages. See, e.g. Newton v. United Companies Fin. Corp., supra. In this case, Plaintiffs alleged that Delta violated TILA and HOEPA and sought rescission, statutory damages and enhanced HOEPA damages for the class. The Settlement Agreement, however, provides only that class members not in the Early Default subclass will be dividing up pro rata shares of the $500,000 Cash Payment Fund. According to Plaintiffs complaint, the numbers of class members are more than 10,000, Third Amended Complaint, 219, suggesting individual recoveries of less $50. Apparently, however, the number of class members is even higher and, therefore, the projected individual payments even lower, since Objector [Class Member 1] has been notified that his share is $6.04 and Objector [Class Member 2] has been notified that her share is $9.30. No declaratory or equitable relief accompanies these token payments, so class members like [Class Member 2], who find themselves facing foreclosure, obtain no loan modifications, not even reduction in their arrears. Moreover, given the scope of the General Release, the settlement actually leaves them more exposed to foreclosure than before the settlement. Given that the suit was filed for the purpose of preventing foreclosure through rescissions and of obtaining thousands of dollars in individual damages, such token payments, accompanied with no additional foreclosure protections, cannot be characterized as reasonable compromises of their claims. See, e.g., In re Ford Motor Co. Bronco II Product Liability Litigation, 981 F.Supp. 969, 971 (E.D. La. 1997) (rejecting proposed settlement that would require consumers to release all claims in return for negligible consideration); In re General Motors Corp. Pick-up Truck Fuel Tank Prods. Liab. Litig. (rejecting settlement that provided little in the way of monetary relief and did not require defendant to repair defective vehicles). These payments are even more

18

inadequate when it is considered that Class Members are releasing claims not even plead in this litigation. According to the United States Department of Justice, just credit discrimination actual damage claims against Delta could alone be worth $1,500 per Class Member. See U.S. v. Delta Funding Corp., CV 00-1872 (Complaint, 18) (comparison of Deltas broker fees paid by 1,328 African American females and 262 white males in two New York counties during 1996-98 show that African American females paid over $1,500 more than their white male counterparts). For a contrasting example of an adequate distribution to a class of borrowers victimized by a predatory lender, see In re First Alliance Mortgage Co., S.A. Civ. 00-964, settlement agreement and summary published at http://www.ftc.gov/bcp/conline/edcams/famco/index.html ($60 million settlement fund being distributed to borrowers who will each receive, on average, $2,500). Objectors anticipate that Plaintiffs will attempt to justify the paucity of these token payments by arguing that, under 15 U.S.C. 1640, the recovery for the class is capped at $500,000 and that the majority of class members claims are time-barred. Each of these rationales, however, fall short for at least three reasons. First, in the case of the $500,000 cap on class recoveries, that limitation applies only to TILA statutory damage claims under 15 U.S.C. 1640(a)(2)(A), not to claims for the enhanced penalty for violating HOEPA under 1640(a)(4).19 Moreover, the release covers not just TILA and HOEPA claims, it covers all other consumer claims, as well. And, as to the argument that class members claims are time-barred by 1640(e), this statute of limitations would not come into play should class members assert their claims defensively, through a recoupment claim. 15 U.S.C. 1640(e) (one-year statute of limitations does not bar a person from asserting a violation of this title in an action to collect the If applicable, the $500,000 cap should be a factor against certifying a nationwide class. See Labbate-DAlauro v. GC Services L.P., 168 F.R.D. 451 (E.D. N.Y. 1996) (involving same $500,000 limit under Fair Debt Collection Practices Act, approving statewide, rather than national class, that thereby produced less diluted relief to individual class members).
19

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debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment...). See Van Pier v. Long Island Savings Bank, 20 F.Supp. 2d 535 (S.D.N.Y. 1998), affd, 159 F.3d 1349 (2d Cir. 1998). Thus, to the extent class members find themselves sued in future foreclosure actions, they would have the right to defend themselves by asserting their TILA and HOEPA claims as credits worth thousands of dollars, a right that this settlement would have them release less than $10 of consideration. This Court should not approve the settlement unless the Agreement is amended to provide for more substantial individual recoveries and to allow Class Members, at the very least, to assert consumer claims defensively in the event they find themselves facing foreclosure. 2. The Limited Relief Provided in Addition to the Token Payments under Paragraph 4 Does Little to Cure the Inadequacies of the Settlement Agreement

In addition to the token distribution under Paragraph 4, the Settlement Agreement also provides for some additional relief to the early default subclass, defined as those Class Members who never even made six loan payments. Under Paragraphs 2 and 3, Delta will provide some debt reduction and arrears deferral for those early default borrowers who Delta acknowledges were improperly denied the protections of HOEPA (2) and for some borrowers whose loans Delta continues to dispute coverage by HOEPA. (3), but only if they send in claim forms that contain various certifications that Delta apparently insisted on. See 2(e), 3(e). Responding subclass members are to receive a 10% reduction of their loan principal and a reamortization at the existing rate and a 50% reduction in their arrears, with all accrued collection charges being included within the meaning of arrears. The Adjusted Arrears will have to be paid monthly over the next three years, in addition to the scheduled payments, or, presumably, the borrower will again be in default. Plaintiffs have not come forward with any

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evidence concerning how high these additional monthly payments might be. In addition to this debt reduction, Subclass Members with disputed HOEPA loans will obtain changes in their contractual default interest rate. 1. As modest as this relief is for early default borrowers who Delta acknowledges it improperly denied HOEPA protection, many disputed HOEPA borrowers will not even get this relief due to the definition of Disputed HOEPA Loan in paragraph 3. The heart of Plaintiffs legal case against Delta has been the argument that the company denied HOEPA protections to its borrowers and, in some cases, improperly excluded various settlement charges from the HOEPA points and fees calculation in order to justify its noncompliance with HOEPA. Deltas improper classification of fees, Plaintiffs argued, provided them with powerful remedies, entitling Class Members to rescission, the $2,000 TILA statutory penalty, and the enhanced HOEPA penalty in 15 U.S.C. 1640(a)(4). This Court has already held that this legal claim had a substantial likelihood of success. Order granting preliminary injunction (12/23/1998), 1998 U.S. Dist. LEXIS 23318. Under the Settlement Agreement those Class Members whom the Court already determined were illegally denied HOEPA protection, and who are stuck with a 24% default interest rate will have their promissory notes amended to omit default rates where delinquencies are less than 120 days, but also, to authorize a default rate of 500 basis points higher than the note rate in the case of delinquencies longer than 120 days. This hardly represents a major concession by Delta. In addition, under Paragraph 3, some of the disputed HOEPA early default borrowersdifferentiated arbitrarilywill get the debt reduction but will have little ability to protect themselves from foreclosure.

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a.

The Limited Changes in Some Class Members Default Interest Rate Would Give Them Less than Federal Law Entitles Them To, and, Therefore, Does Not Represent a Real Benefit

The fact that some Class Members may have their default rate of interest lowered under Paragraph 1 of the Settlement Agreement is of little significance. Under HOEPA, covered loans are prohibited from containing any contractual clause under which the interest rate increases in the event of a default. 15 U.S.C. 1639(d); 12 C.F.R. 226.32(d)(4). While the new default rate would obviously be less onerous than the 24% rate, it would, nonetheless, still be illegal under HOEPA. Even more amazing, this change in the default interest rate is apparently prospective only. Borrowers who conceivably have paid or accrued hundreds or thousands of dollars in illegal interest payments to that Delta will receive no corrective adjustments to their accounts. On the contrary, under 24, Deltas accountings regarding their loans will be deemed conclusively correct. While perhaps Class Counsel has made some assessment that, notwithstanding their success at the preliminary injunction hearing, the affected loans would likely not be held to be covered by HOEPA, no such showing has been offered. The Settlement Agreement should not legitimize illegal loan terms. At the very least, the provision that allows for a default interest rate after a 120 days of nonpayment should be eliminated from the Agreement, and all default interest that has already been collected or accrued should be credited back to the Class Members accounts. b. Only Some, Arbitrarily Identified Class Members with Genuinely Disputed HOEPA Loans Receive Relief, and Even Those that Get Some Debt Reduction Remain in Substantial Risk of Foreclosure

While Delta initially sought to defend this case by claiming that the loans in dispute were not covered by HOEPA, this Court has already determined that Plaintiffs would likely prevail on

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their claim that Delta improperly omitted broker fees and the fee paid to Deltas closing attorney from the HOEPA points and fees calculation. Indeed, the law was so clear that broker fees are part of the points and fees calculation that Deltas legal position denying this was frivolous. See 15 U.S.C. 1602(aa); 12 C.F.R. 226.32(b)(ii) (points and fees includes all compensation paid to mortgage brokers). The only genuine dispute regarding Deltas HOEPA classifications involved its classification of other settlement fees. However, since the Court already decided that Plaintiffs would also likely succeed on their argument concerning the classification of excessive closing fees, it is hard to understand why any so-called disputed HOEPA loan should be considered anything but a HOEPA loan. Nonetheless, under Paragraph 3, only those Class Members whose loan was closed by [Closing Agent], the closing agent who testified at the preliminary injunction proceeding, will get the benefit of the doubt regarding the merits of their legal argument that they were improperly denied the protections of HOEPA. Under Paragraph 3, those Class Members who would have been treated as having HOEPA loans but for Deltas failure to include a broker fee in the calculation are included in the subclass, but those members whose dispute regarding treatment under HOEPA revolves around the classification of a closing fee are not included unless their closing was conducted by [Closing Agent]. Settlement Agreement, 3(a). In other words, for Class Members who might have identical claims, except that their closings were conducted by a different agent, Deltas HOEPA classifications and computations are deemed conclusively correct if they fail to opt-out of the Settlement Agreement. 24. Thus, for example, a Delta borrower in Pennsylvania, who obviously had a different closing agent, and who perhaps receives a credit of $5 on her account from the Cash Payment Fund, will be deemed to have given up perhaps the strongest protection she has against foreclosure, namely, the argument that Delta improperly failed to treat her as a

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HOEPA borrower. This radically different treatment, depending on nothing more than the identity of the particular closing agent, is arbitrary and, thus, facially unfair. Moreover, the way Paragraph 3 is structured makes it likely that even those few Class Members who get the benefit of this arbitrary classification and are entitled to obtain relief under Paragraph 3, may not receive anything that helps them save their homes. First of all, unlike the arrears reduction given to the Named Plaintiffs, Paragraph 3 participants do not get any forgiveness of accrued foreclosure costs and fees, so, while they receive a 50% reduction of accrued arrears, what arrears means for them is different from--and potentially much higher thanwhat it means for the Named Plaintiffs.20 Compare definition of arrears in Settlement Agreement, 2(b) with 8(b). Second, that portion of the arrears that is not forgiven must be paid in its entirety over the next three years, on top of the borrowers regular loan payments. This, too, differs from the situation of the Named Plaintiffs who can defer payment of the Adjusted Arrears until after their loan is paid in full. Compare Settlement Agreement, 3(d) with 8(b). The 10% reduction in the principal will be of no meaning to a borrower who, by definition, was not able to make the original payment, and who now would face two monthly payments that could very likely end up adding up to a higher monthly obligation. In order to be fair, the Settlement Agreement should treat all the early default borrowers the same, regardless of where they closed their loan. And, it should provide, at a minimum, that any unforgiven arrears be deferred until the end of borrowers loans. 3. The Incentive Relief to the Named Plaintiffs, while Representing a Reasonable Compromise of Their Own Claims, Cannot Fairly Be Denied to Class Members

In a typical foreclosure case in Philadelphia, for example, the legal fee is often larger than $1,000, and court costs, particularly if a sheriffs sale has been scheduled, are often as high as $3,000.

20

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Settlement agreements that provide substantially greater benefits for named plaintiffs than for class member should not be approved. Plummer v. Chemical Bank, 91 F.R.D. 434 (S.D.N.Y. 1981), affd and remanded 668 F.2d 654 (2d Cir. 1982). What the Named Plaintiffs receive under this settlement$10,000 reductions of their principal, rate reductions down to 11% and partial waiver and deferral of arrears obligationsrepresents a modest, but reasonable compromise of their claims. As it has been said, successful HOEPA plaintiffs are entitled to far more dramatic relief, including rescission of their mortgage obligations and substantial damages. As has been explained above, however, the relief being offered class members is radically less advantageousonly prospective reductions in illegal default interest rates, token payments of $5$10, and some debt reduction for a small subclass. Due to this extreme disparity in relief, the Agreement should not be approved. The Agreement characterizes the preferential treatment of the Named Plaintiffs as incentive fees. 8(a). While undoubtedly their special treatment was helpful in getting them to approve the deal, this is not the kind of incentive payments that are ordinarily allowed in class action settlements. See, e.g., In re Bioscience Securities Litigation, 155 F.R.D. 116 (E.D. Pa. 1994) (incentive payments generally disfavored but allowed in the small amounts of $125-$250 per class representative). The settling parties are essentially trying to shift the Courts focus from the obvious disparity of treatment by labeling the Named Plaintiffs relief as incentive fees. This is not an incentive fee; it is just disparate treatment for which Plaintiffs have presented no justification whatsoever. See Plummer v. Chemical Bank, supra (substantial disparities between relief accorded named plaintiffs and class members must be regarded as prima facie evidence that settlement is unfair). 4. The Scope of the Release Is Unfair and Improper

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In return for receiving, in most cases, nothing more than prospective adjustments in their default interest rates and token payments from the Cash Payment Fund under paragraph 4, Class Members are deemed, under paragraph 12, to release any and all claims, demands, suits and actions that could have been asserted by any Named Plaintiff, 12(c). This includes, expressly, not only the HOEPA and TILA claims actually litigated in this case, but claims never even raised, such as claims under RICO, ECOA and the Fair Housing Act, and even individual fraud claims. 12(f). Moreover, the release covers not only Delta, but also its securitization trusts (i.e., the holders of the loans) and all brokers and former brokers of Delta loans. 12(b). Thus, for example, a Class Member who fails to opt out, and gets a $10 credit on her mortgage account, would, for that insignificant consideration, be barred from suing Delta for race discrimination, even though race discrimination was not litigated in this case and even though the Department of Justice believes that Delta did discriminate against black, female borrowers; she would be barred from litigating a fraud claim against a broker that was not a defendant in this action, even though there is not a chance in the world that a fraud case could ever have been certified as a class action; and, if she found herself defending a foreclosure action brought by the trust that owns her loan, she would be stripped of any legal defense she might have arising out of the origination of her loan. Such a result would be a gross miscarriage of justice and an inversion of the protection HOEPA was supposed to provide vulnerable homeowners. a. By Releasing Borrower Claims that Could Be Raised in Defense of Foreclosure, the Settlement Agreement Represents an Inappropriate Attempt by Delta and the Trustees of Its Loan Trusts to Launder Their Loan Portfolio

The proposed settlement class consists of all Delta borrowers who entered into loans between November 1992 and October 1999. Since Delta securitized all of these loans, and has sold all of its servicing rights, loan payments on outstanding loans of Class Members are

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collected by a servicer on behalf of a loan trust, both of which are independent from Delta. The question then becomes, should Delta, in consideration of its funding of this settlement, be able to release all claims that a Class Member might assert defensively in a future collection action instituted by a third party? In answering this question, the Court should start by considering the special legal characteristics of HOEPA loans. Congress viewed the passage of HOEPA as an effort to protect vulnerable homeowners from abusive lending practices. Supra at 5-6. One way it did this was to exert pressure on the secondary market to police lenders by subjecting all purchasers of HOEPA loans to all borrower claims and defenses that the borrower could assert against the original lender, not just HOEPA claims. 15 U.S.C. 1641(d); In re Jackson, 245 B.B. 23 (Bankr. E.D. Pa. 2000). Indeed, HOEPA mortgages must be endorsed with a warning to this effect. 15 U.S.C. 1641(d)(4). It was discussed above the ways in which loan securitization structures have been designed by Wall Street to try to insulate the purchases of mortgage pools from responsibility for lender wrongdoing, supra at 4-5. In the case of HOEPA loans, such insulation is prohibited, as a matter of federal law. Accordingly, it can be presumed that the special legal characteristics of HOEPA loans have been incorporated into the risk-allocation and pricing decisions made by the designers of Deltas securitization deals, to the extent that the Delta loan pools were composed of HOEPA loans, or, for that matter, of loans costly enough to carry the risk that a court might construe settlement charges as being over the 8% points and fees trigger for HOEPA coverage. The question for this case, therefore, is how to view a class action settlement agreement that would essentially change the character of the loans in the Delta loan trusts, loans that from their inception carried the attribute of possible assignee liability. It would be ironic, indeed, if the settlement of a class action brought under HOEPA, a law that imposes assignee liability for all

27

borrower claims, would become a vehicle for the trusts to cleanse their loan portfolios of all borrower defenses. As stated above, this Court must consider the rights of the Class Members in this case with the highest degree of care, akin to that of exercised by a fiduciary. Supra at 15. In performing this solemn fiduciary duty, there is nothing more important than trying to protect Class Members from future foreclosure. This can only be done by declaring that the General Release contained in the Settlement Agreement, if approved, does not apply to recoupment claims and defenses that Class Members can assert in foreclosure actions, chapter 13 proceedings and other defensive contexts. Accord, Folger Adam Security, Inc. v. Dematteis/MacGregor, JV, 209 F.3d 252 (3d Cir. 2000) (distinguishing defenses from claims in holding that general release contained in chapter 11 asset sale of accounts receivable should not be construed to release obligors recoupment claims and defenses). To do otherwise would be to turn HOEPA on its head, and to a provide an unjustifiable windfall to the loan trusts that hold Class Members loans. b. The Release Should Not Be Any Broader than the Claims that Could Have Been Certified for Class Treatment

It is Plaintiffs burden to demonstrate that the proposed settlement class complies with Rule 23(a) and (b). Amchem Products, Inc. v. Windsor, supra. In order to satisfy their burden under the predominance requirement in Rule 23(b)(3), it is not sufficient for the Plaintiffs here to claim that the Class Members shared a common experience of being exposed to harsh lending practices and that the proposed settlement is a fair compromise; they must meet the far more demanding burden of demonstrating that the proposed class is sufficiently cohesive to warrant adjudication by representation. Id., 117 S.Ct. at 2249-2250. These means that the specific legal

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claims they sharenot simply their common interest in a settlementmust predominate over individual issues. Id. Plaintiffs filed this action as a case under HOEPA, TILA and New York law, and alleged a class only of borrowers with claims under those three theories. Essentially, the common issues that predominated in the case, prior to the Settlement Agreement, involved simply Deltas compliance with HOEPA and TILA.21 Issues about possible racial discrimination by Delta, to use one example of the kind of additional claim that Settlement Agreement seeks to release, were not plead. Nonetheless, the expanded General Release in the Agreement would include credit discrimination claims. It is certainly obvious that all Delta borrowers do not share common interests and claims regarding the possible racial targeting by Delta and its business partners, given that African American female borrowers may have paid as much as $1,500 more than comparable white borrowers in settlement charges. Supra at 19. It is also obvious that the General Release of a discrimination claim will have far different meaning for these two subgroups within the proposed settlement class. Absent some showing by Plaintiffs regarding the reasonableness of this expanded release and their compliance with the requirements of Rule 23, the all-encompassing General Release should not be approved. In addition to discrimination claims, the release should clearly not cover individual state fraud claims against Delta or its army of different brokers, i.e., claims which could not pass the Rule 23(b)(3) requirement of predominance. One can imagine a vast array of possible, inherently individual, claims or defensesthat the loan documents were forged, that Delta charged collection fees that were not actually incurred or that were unreasonable, that
21

Fraud and misrepresentation claims under New York law, let alone claims under the laws of all the different states would likely never have passed the predominance test. The same applies for state law claims against Deltas numerous brokers around the country.

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a particular broker engaged in particular oral misrepresentations, all of which would be released under this inappropriately broad General Release unless the Court requires it to be narrowed. D. Class Counsel Has Failed to Demonstrate Its Adequate Representation of the Class by Agreeing to a Settlement that Provides Little Relief to the Vast Majority of Class Members while Releasing All Possible Claims and Exposing Them to Foreclosure and that Lauders the Loan Portfolio Originated by Delta and that Provides a Windfall to Deltas Assignees

Rule 23 and Constitutional due process require that a class counsel fairly and adequately represent the interests of the entire class. Fed.R.Civ.P.23(a)(4); Amchem Products, Inc. v. Windsor, supra. These requirements have not been met here. For all the reasons described above, the Settlement Agreement appears to lack basic indicia of fairness. The Named Plaintiffs receive $10,000 in debt forgiveness, reamortization of their loans at a lower interest rate, waiver of all foreclosure costs and fees, deferment of the remaining arrears until their loans mature, and a lowering of their default interest rate. Class Members get only a couple of dollars each and a lowering of their default interest rates, while only a narrowly defined subclass of early defaulters get a lesser version of the relief accorded the Named Plaintiffs. In return for this limited relief, all Delta borrowers who do not opt out of the settlement are deemed to have released all consumer claims, whether or not raised in this case. Indeed, the Agreement is so suspect that it suggests the possibility of collusion between Class Counsel and Delta, demanding close scrutiny of the circumstances surrounding the negotiation. See Reynolds v. Beneficial National Bank, 2002 U.S. App. LEXIS 7384 (7th Cir. 2002). Nor does the alleged expertise of Class Counsel neutralize this appearance of collusion. While Class Counsel is undoubtedly experienced in class action litigation in general, there has been no submission demonstrating that he has previous experience defending foreclosure actions

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or is knowledgeable in the diverse substantive law involved in predatory lending work. It is, accordingly, his burden to come forward with actual evidence concerning his evaluation of the case, his reasons for agreeing to such limited relief for Class Members and such a broad release, and his negotiations with Deltas counsel. Absent convincing proof that demonstrates vigorous advocacy and sensible judgments, the Settlement Agreement should be rejected. It is the sacred duty of this Court to protected the absent Class Members from unjust or unfair settlements affecting their rights when the representatives become fainthearted before the action is adjudicated or are able to secure satisfaction of their individual claims by a compromise. Amchem Products, Inc. v. Winsor, 117 S.Ct. at 2249 (quoting from 7B Wright, Miller & Kane 1797, at 340-341. For all these reasons, the Settlement Agreement should be rejected. Respectfully submitted,

____________________________ [Attorney for the Objectors]

OF COUNSEL: [Counsel for the Objectors] Attorneys for the Objectors CERTIFICATION OF SERVICE I certify that on the below date I mailed copies of the foregoing Objections and Memorandum of Law to the below counsel: [Attorneys for the Defendants]

Dated: May 9, 2002 [Counsel for the Objectors]

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