Cleveland to Sue Banks for Nuisance, Ohio Begs Off New Mortgage Lending Licensing System
ONB COLUMBUS: Cleveland Mayor Frank Jackson is striking back at lenders he says have “enabled the subprime lending and foreclosure crisis here” by using nuisance laws to sue 21 lenders, including big ones like Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo.
In a published report from The (Cleveland) Plain Dealer, Jackson accused the formidable bankers of irresponsibility in lending practices that are leaving “entire neighborhoods in ruins” and depleting the city’s tax base.
DON’T SUE ME, BRO!
The pot of gold at the end of Jackson’s lawsuit rainbow is the recovery of hundreds of millions of dollars that represents lost taxes, as a result of declining property values, and public funds spent demolishing or securing thousands of abandoned homes.
"To me, this is no different than organized crime or drugs. It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects." [Mayor Jackson, TCPD]
Cleveland isn’t the first big city to resort to this tactic to reclaim funds. Baltimore sued Wells Fargo bank in federal court, saying the bank “engaged in a pattern of predatory lending practices in Baltimore's poorest neighborhoods, leading to foreclosure rates nearly double the citywide average.”
These two old, industrial cities appear to the first ones to take on big banks through court challenges to their lending practices. Cleveland’s lawsuit differs from that of Baltimore’s because it is based on a state law about public nuisances, and tackles the investment side of banking, not just the mortgage-lending side.
Jackson said he understands the challenges, financial and otherwise, he faces in taking on these lenders, but he said “"We're in this for the long haul.”
LEGAL MOVES BY NEW YORK, CONNECTICUT AGs MAY GIVE OHIO AG IDEAS
Ohio Attorney General Marc Dann told the Plain Dealer that "a state filing is months away and probably wouldn't be submitted as a public-nuisance case," but is considering a state lawsuit against some of the very same people" identified in the city's suit.
"There's clearly been a wrong done, and the source is Wall Street.
Some of the people Dann says he'll sue, namely investment banks, seem to be in the cross hairs of New York prosecutors, who are being directed by Andrew Cuomo, Attorney General for the Empire State, to focus on whether Wall Street banks withheld crucial information about the risks posed by investments linked to subprime loans.
A published report in The New York Times could provide insight into what legal strategy Dann might consider viable in Ohio.
Reports commissioned by the banks raised red flags about high-risk loans known as exceptions, which failed to meet even the lax credit standards of subprime mortgage companies and the Wall Street firms, the Times reported. But credit-rating agencies were never told by details of these reports by the banks.
Richard Blumenthal, Attorney General for Connecticut, said he too was conducting a similar review. The Securities and Exchange Commission is also investigating.
CITING LOSS OF FUNDS, OHIO BEGS OFF NEW MORTGAGE LENDING LICENSING SYSTEM
In related news, Ohio, which led the nation in the overall rate of foreclosures on home mortgages in the first quarter of 2007, according to information supplied by The Mortgage Bankers Association, has tried to join other states, the federal government, advocacy and consumer groups, lenders and brokers in trying to find ways to help struggling homeowners, particularly those who took out riskier “subprime” adjustable-rate loans that required little or no down payment but now have much steeper interest rates kicking in, causing sticker shock for many borrowers, according to a report by Stateline.org, funded entirely by The Pew Charitable Trusts as a public service.
But while the launch of The Nationwide Mortgage Licensing System, an online database that will make it easier for states to monitor mortgage companies, has garnered a statement of commitment by 42 states who pledged their intent to participate in it, Ohio remains one of eight that have declined to so do.
A spokesman for the href="http://www.com.ohio.gov/">Ohio Department of Commerce, which regulates and licenses loan officers who work for mortgage brokers, said the his agency’s resistant to commit is based on the siphoning off of funds generated from fees that would flow to NMLS and that would put a big dent in the operating capital for the agency’s Division of Financial Institutions (DFI).
The difference between the fee structure of the DFI ($350 per company and each office location and an annual licensing fee for loan officers is $100) compared to what NMLS is charging participating states ($150 per mortgage broker company and $100 per loan officer) “would not leave the Division with the necessary resources to support all of its responsibilities,” according to Dennis Ginty, who responded to questions by email.
Ginty also pointed out that DFI upgraded its computer system in March 2006 with a database specific to mortgage brokers and loan officers. “This upgrade is serving the Division’s regulatory responsibilities,” he said.
PROGRESS REPORT ON FORECLOSURE PREVENTION TASK FORCE
Ginty also offered an update on the progress of Gov. Ted Strickland’s Foreclosure Prevention Task Force, a diverse group of stakeholders he asked last year to recommend solutions to prevent further default loans and foreclosures.
With the creation of the Compact to Help Ohioans Preserve Homeownership, announced in October 2007, Ginty said more outreach and education to borrowers will occur along with encouragement to lenders to engage in loan modifications or “work outs.”. Should lenders falter on loan modifications, he said the Compact calls for servicers to provide adequate and advanced notification of the intent to proceed with a foreclosure. A monthly report providing data associated with their foreclosure operations will give the agency a fact-based picture of the situation, enabling other corrective measures to be pursued.
Furthermore, DOC is in the process of drafting administrative rules to incorporate some of the provisions contained in the compact, Ginty said, adding that some of these provisions include requiring servicers to provide borrowers with a six-month notice prior to a reset and a toll-free number established by the servicers for borrowers to call regarding loss mitigation.
Collaborating with other parties, like the US Dept. of Housing and Urban Development and State Treasurer Richard Cordray, Ginty noted that five borrower outreach events have been held across the state. “The events, which have assisted more than 1,500 borrowers, are designed to help borrowers stay in their homes by facilitating one-on-one discussions between borrowers and their loan servicers,” Ginty said.
Using the courts as well to help tackle the problem that has and will continue to plague Ohio, Ginty said the state's Supreme Court is lending the weight of its robes by moving forward to implement a mediation program to encourage borrowers and lenders to resolve issues through mediation prior to a possible foreclosure.
John Michael Spinelli is a former Ohio Statehouse government and political reporter and business columnist. He now serves as the OhioNews Bureau Chief for ePluribus Media Journal. Find ONB archives here.
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