States Consider Suing Banks for Mortgage Fraud
Hit hard by the implosion of the housing market, several states are considering filing lawsuits again major mortgage lenders, charging them with fraud. States such as Arizona and Florida have been frustrated with banks’ inability to slow down or prevent foreclosures and their unwillingness to handle mortgage modifications. States can now take action against lenders, thanks to a Supreme Court decision handed down in June which allows states to start supervising banks.
If filed, the lawsuits would contend that mortgage lenders participated in massive consumer fraud by marketing hard to understand loans that banks knew borrowers would be unable to pay back. Banks profited from this process by pocketing short term loan fees and then selling the loans to syndicates of investors or to government-sponsored agencies like Fannie Mae and Freddie Mac.
One of the first suits to be brought since the Supreme Court ruling is a civil rights case filed in June by Lisa Madigan, the Illinois attorney general. The suit accuses Wells Fargo bank of predatory lending.
In response, the banks contend that lawsuits would only increase fees to borrowers because the suits will add to the banks’ cost of compliance. Banks are also lobbying Congress to stop states from being more aggressive in their prosecutions.