State Attorneys General - A Force to be Reckoned With
By: Paul F. Hancock
State attorneys general aspire to be the primary protectors of consumers. The housing collapse provided new opportunities for them to flex their muscles and seek a role in the development of solutions. Federal preemption remains a controversial issue, but the threat of preemption has only caused state attorneys general to be more aggressive in the areas where they have legal authority. Recently elected attorneys general have pledged to focus attention on the housing and financial markets, and we can reasonably expect attorneys general, as a group, to push the limits of their authority in addressing the issues. Some examples of their actions in recent months are described below.
Auction-Rate Securities
Allegations of deception have provided a basis for attorney general involvement in auction-rate securities markets. New York Attorney General Cuomo reached agreement with twelve financial institutions on claims that they “sold auction-rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.” The institutions agreed to buy back the securities from certain customers, generally individuals and foundations, and otherwise provide restitution to “individual investors who were fraudulently sold auction-rate securities.” Cuomo says that the settlements “returned over $50 billion back to investors’ hands.” Similar settlements were reached by attorneys general in Massachusetts and Michigan.
Mortgage Fraud
Attorneys general have identified mortgage fraud, particularly inflated appraisals, as a major contributor to the housing crisis. The Florida Attorney General sued ten companies and fifteen individuals that defrauded lenders by recruiting “straw buyers'” with good credit and conspiring with realtors to artificially inflate purchase prices. Other states have filed similar claims.
Foreclosures
The State Foreclosure Prevention Working Group released its third report on mortgage foreclosures at the end of September, contending that 80 percent of delinquent borrowers are not receiving meaningful foreclosure relief. Although the Group’s collaboration with servicers is described as cooperative, a stronger stick is laying in wait. After a number of states announced a settlement with Bank of America regarding the Countrywide portfolio that centers on loan modification, on October 7, the Group sent a letter to sixteen subprime servicers stating: “We urge you in the strongest possible terms to adopt a comprehensive, streamlined, and effective loan modification program as soon as possible.” The implicit threat of prosecution is clear.
State attorneys general investigated and prosecuted deceptive conduct by foreclosure rescue companies. This issue is a neat fit for traditional attorney general enforcement and is a priority in many states.
Loan Origination
The settlement with Bank of America regarding the Countrywide portfolio continues a trend of aggressive state attorney general action regarding home mortgage lending practices. The attorneys general already have extracted major business changes in the lending industry through lawsuits and compelled settlements. The monetary value of the attorney general settlements with Household ($484 million) and Ameriquest ($295 million), as well as the extensive loan modification relief obtained from Countrywide, certainly overshadow any action by federal agencies. The only real question is which firm will be the next target – perhaps one of the sixteen servicers that received the October 7 letter, or the originators of the loans that they are servicing.
2008 Attorney General Elections
Eleven seats were up for election and the announced plans of the winners indicate a continued, and perhaps increased, focus on mortgage and financial markets.
Chris Koster, newly elected in Missouri, and Richard Cordray, newly elected in Ohio, focused their campaigns on credit and foreclosure issues. Other well-known attorneys general who already enjoy a strong reputation in seeking mortgage reform and foreclosure relief – such as Roy Cooper in North Carolina and Rob McKenna in Washington – were reelected. Mark Shurtleff was reelected in Utah, as was Darrell McGraw in West Virginia; they have prioritized mortgage fraud and other credit-related issues.
First-term attorneys general were elected in Indiana (Greg Zoeller), Montana (Steve Bullock) and Oregon (John Kroger), and incumbents were reelected in Pennsylvania (Tom Corbett) and Vermont (William Sorrell). All emphasized the importance of consumer protection in seeking office.
Conclusion
The states want a place at the remedial table. Some offer an olive branch of cooperative efforts to work through the present crisis. Others are more aggressive from the start. But if conditions do not improve quickly, it can be expected that many states will join forces to compel reform, based on claims that consumers and investors were deceived or otherwise were victims of unfair practices of loan originators, servicers or secondary market participants.
