The meltdown of the housing market and the subsequent recession have brought on waves of home mortgage foreclosures. The foreclosures have revealed how easy it was to obtain a mortgage before the bursting of the bubble in 2006-08. A market for “subprime” mortgages, i.e., to non-creditworthy borrowers, developed in which abuses occurred on both sides. Borrowers lied about their incomes to the lenders. But the lenders did not care they were being lied to because they resold the mortgages in packages. The lenders offered adjustable rate mortgages with high closing costs which could quickly engulf the borrower with unanticipated expenses. Again, the lenders did not care if the borrowers were unable to pay these costs and stay out of foreclosure because they sold all of these mortgages to firms which bundled and securitized them before the problems erupted..
After the trouble hit the ultimate owners of the loans have had to bring massive numbers of foreclosure suits all over the country. Several problems with these loans are now in the news. Court rules generally require the lender to submit an affidavit as part of the foreclosure lawsuit swearing to key facts: the lender has complied with the terms of the loan, the amount sought from the lender is accurate, and the interest is properly calculated. In cases where the loans have been sold, and often resold, such statements are made by a person who does not have actual knowledge of the accuracy of these facts and usually churns out hundreds of such affidavits a day. Some judges have made news by refusing to sign foreclosure orders where these facts have been established by a person who merely reads the numbers off a computer screen and fibs about having the personal knowledge of their accuracy. This is an embarrassment for the lender and the firms associated with the foreclosure, but it is not a RICO violation. The sworn statement that a person is familiar with a transaction when he or she is not familiar with it, even if made through the federal mails and wires (mail and wire fraud are the most commonly used RICO “predicate acts”) cannot be said to have “proximately damaged” (the relatively stringent level of causation required in civil RICO) the borrower. The lender has the right to foreclose the loan. All it needs to do is get the right person to sign the statement. If the wrong person falsely states that the lender has the legal right to foreclose, the borrower has not been harmed, merely inconvenienced, because the lender simply has to redo the process with the right signature from the right person. But the lender is not invading the legal rights of the borrower as it would be if the loan was up to date and the foreclosure proceeding were being used to extort a higher interest rate from the borrower. So I don’t think in such a case there is a “scheme to defraud” as is required when a plaintiff brings a mail or wire fraud RICO case. I have not been able to find any published decisions from federal courts in such cases where RICO has been used. But there are some pending, and we will see them soon. I expect dismissals of all RICO claims
RICO claims have also been brought in many “mortgage fraud” cases where plaintiffs allege deceptive sales practices by lenders, essentially the failure to disclose terms to the lender or the insertion of additional terms and fees at the time of closing. I do not defend such tactics. I just don’t see them as good RICO cases. Misleading unsophisticated consumers in verbal representations or by burying unfavorable terms in small print in complex documents are not mail and wire fraud, the only RICO predicate offenses which could arguably be invoked in such a case. Loan documents will contain integration clauses, meaning that prior statements do not alter the terms of the written loan. And any consumer who argues that a lender verbally modified a written loan document after it was signed but did not put the post-writing agreement into a writing will have an almost impossible task of proving that partiucularly in a class action. One federal court has dismissed such a claim for failing to plead the specifics of the fraud. Clark v. Countrywide Home Loans, 2010 WL 3154119 (E.D. Cal. 2010).
In another federal case, which consolidated thousands of individual mortgage fraud claims for pretrial proceedings (discovery), in San Diego, the judge tossed out the RICO claims, In re Countrywide Financial Corp. Mortgage Marketing and Sales Practices Litigation,601 F. Supp.2d 1201 (S.D. Cal. 2009), believing that the fraud was not adequately shown. There the plaintiffs challenged several allegedly deceptive sales practices by Countrywide including the statements that the loans were the “best product” available to lenders. Such statements are uniformly regarded by courts as “puffing” and do not constitute fraud. I think the judge was right to dismiss the allegation that such statements constituted fraud necessary to sustain a RICO case. The judge also did not think much of allegations that the lender presented the borrowers with H.U.D. . closing statements which included previously undisclosed fees. This is common in real estate closings, and the lender still must sign off on the new charges before the closing occurs. It does not mean the earlier representations were fraudulent because closing a loan involves copying and recording an uncertain number of papers which is not finalized until closing day. Misstating these charges does not amount to fraud unless the lender was trying to deceive the borrower, not making an incomplete estimate of the overall costs. The court’s opinion does not suggest a scheme to defraud nor does it disclose how the plaintiffs would be able to prove the uses of the mails or wires to perpetrate the scheme, or that the borrowers were damaged if they specifically signed off on additional charges.
All of this should point out the necessity of alleging fraud specifically: what was the fraudulent statement(s), when was it made, how was it deceptive, and how it harmed the plaintiff. RICO requires that the mail or wires be used to effectuate the fraud, so this must be alleged too. These details are already required by Rule 9(b) of the Federal Rules of Civil Procedure and are all the more important in light of the Supreme Court’s recent cases on the need to make claims “plausible.” Lawyers who try the patience of federal judges with borderline RICO cases are likely to face dismissals, and if they can make it pass a motion to dismiss, encounter the nearly impossible task of obtaining class certification of fraud claims (or actually taking them to trial), that are not truly fraud. This just makes it harder for legitimate RICO cases to be heard.