Lawsuits Against Lenders Accelerate Amid U.S. Housing Crisis

The U.S. housing crisis has caused huge loan losses at big lenders but also spawned a slew of class-action lawsuits against them, many alleging noncompliance with consumer disclosure rules.

“The compliance issue is a ticking time bomb for some lenders,” said Louis Pizante, chief executive of Mavent Inc., an Irvine, California-based company that provides automated regulatory compliance reports for financial clients. “We have only just seen the beginning of the lawsuits.”

Lawsuits Tallied

Navigant Consulting said in a report last month that in the 15 months through March 2008 a total of 448 lawsuits had been filed related to the subprime crisis. Of the 170 cases filed in January-March 2008, 46 percent were borrower class actions.

That compared to 559 lawsuits related to the U.S. savings and loan association debacle in the 1980s and 1990s, it said.

“Each of the top 10 subprime mortgage lenders for 2006 was named in at least one borrower class action suit during 2007,” the Navigant report said.

Lenders targeted include Wachovia Corp. unit World Savings Bank, Bear Stearns Cos. Inc., Citigroup Inc.’s CitiMortgage, Wells Fargo & Co., Merrill Lynch & Co. Inc. unit First Franklin, and Countrywide Financial Corp., which agreed in January to be acquired by Bank of America Corp.

“Looking at the volume and scope of the claims, there is an all-out assault under way against the firms involved in subprime loans,” Navigant Managing Director Jeff Nielsen said.

Pizante and lawyers for plaintiffs said that if lenders lose such lawsuits, they may be obliged to return billions of dollars in interest and fees to borrowers. In some cases, homeowners could also have their loans declared unsecured debt by a bankruptcy court judge, allowing them to walk away.

Truth in Lending

Under a U.S. law known as The Truth in Lending Act, lenders must disclose the terms and cost of loans to consumers. But lawyers representing borrowers in the lawsuits claim lenders gave borrowers loans with hidden costs and consequences.

“The law requires lenders to disclose clearly and conspicuously what the ramifications are of a particular loan,” said Paul Kiesel, a partner at Kiesel, Boucher & Larson LLP.

“But in many cases they didn’t even come close,” he said.

Kiesel’s firm represents borrowers in more than 50 lawsuits involving Option Adjustable Rate Mortgages (ARMs), one of the more exotic loan products made available by lenders during the recent property boom.

Lawyers representing lenders said that compliance cases can often come down to the interpretation of a single word.

“This will be a long slog, but the industry will get through it,” said Tom Hefferon, a partner at law firm Goodwin Procter in Washington, D.C.