Historically, foreclosures were relatively rare and legally simple. The plaintiff was the lender and the defendant was the defaulted homeowner. But now it's often borrowers, even those clearly in default, who claim to be the aggrieved parties, victims of predatory lending and unscrupulous business practices.
An article in Monday's Daily Business Review examines at length the crisis in the country's mortgage system, and quotes Miami Law Professor Sergio Campos as predicting that class actions – in which thousands of foreclosure cases would be bundled together – could spring to life, with homeowners seeking relief through statutes such as the Truth in Lending Act. Another option, Campos said, might be the Real Estate Settlement Procedures Act, a consumer protection law that was passed in 1974.
Still, he went on, the hurdles are high for such cases. To certify a class, a judge must find a common harm or a common question of law. The problem is, the mortgage market is essentially millions of individual contracts. And households fall into foreclosure for different reasons – everything from unemployment to strategic default. "It's hard for me to see what's tying them together," Campos told the Daily Business Review's Gregg Fields.
The bar for certifying class actions appears to have been raised more this summer by the U.S. Supreme Court. In a discrimination case involving female Wal-Mart employees, the court denied class action status to potentially 1.5 million plaintiffs. Justice Antonin Scalia, writing for the majority, found that any discriminatory activity resulted from "literally millions of employment decisions" made by individual managers. The case needed evidence of systemic discrimination, or as Scalia wrote, "some glue holding the alleged reasons for all those decisions together.
"Taken to its logical extreme, it could make it very difficult to certify classes like this," Campos said of the Wal-Mart decision.
With either the AGs or a potential class action, a problem will be determining who's in and who's out, Campos added. "How they define the class is crucial," he said. "I'm sure the banks will definitely want to get rid of as much liability as possible."
However, large settlement pools have been known for creating what's nicknamed "the Field of Dreams" syndrome. Translation: "If you build it they will come," Campos said. People will "come out of the woodwork," saying they belong to the class, he added.
Another legal option that could be holding back foreclosure activity is the U.S. Judicial Panel on Multidistrict Litigation. Created in 1968, the panel determines if civil actions in different federal districts involve enough common questions of fact that they can be transferred to one court for pretrial proceedings. The goal is to conserve resources by avoiding things like duplicate discovery. Even then, "it's not uncommon for these cases to last seven or eight years," Campos said in the interview with the Daily Business Review.
For the full text of the article, which requires a subscription to the Daily Business Review, click here.