Perhaps the idea of one person taking financial advantage of another really is a tale as old as time. A statement attributed to Augustine says, “The good Christian should beware of mathematicians and all those who make empty prophesies. The danger already exists that mathematicians have made a covenant with the devil to darken the spirit and to confine man in the bonds of Hell.” Augustine (400). Douglas M. Campbell, The Whole Craft of Number (Boston: Prindle, Weber & Schmidt, Inc., 1976), cited in Frank Swetz, Capitalism & Arithmetic: The new math of the 15th Century (LaSalle, Illinois: Open Court Publishing Company, 1987), p. 283.
No matter how old the practice of financial exploitation, the Seventh Circuit Court of Appeals struck a heavy blow against one of the money changers, affirming an arbitrator’s hairy eyeball even if the case was not quite an old-fashioned casting out of the temple. The opinion, Davis v. Fenton, is aptly discussed by noted Chicago attorney Edward X. Clinton, Jr. on his blog, http://clintonlawfirm.blogspot.com/?view=classic.
The idea of taking advantage of homeowners in foreclosure is a vexatious one. At one time, economically poor neighborhoods were slathered in signs offering cheap mortgages. These mortgages were almost universally predatory–offering high interest rates, high fees, negative amortization, and other features deadly to the dream of accruing home equity regardless of credit-worthiness. Some of the predatory lending activity is aptly discussed in a 2016 Pacific Standard article. As the credit crisis made mortgages less lucrative for scammers, many of them simply changed their garish banners to hawk illusory foreclosure relief. Many of the practices are described by the Illinois Appellate Court for the First District in a recent case upholding a trial court’s opinion that foreclosure relief scammers can be held accountable for racial discrimination.
In 2005, the United States Bankruptcy Code was amended. The amendments made it more difficult to file “cover sheet bankruptcies”–unverified petitions filed just to frustrate a creditor and never acted upon again. After the amendment, the very next court date I attended in the Chancery Division of Cook County, where foreclosures are heard, offered a buffet of buffoonery. Silly arguments, such as that the United States currency is not on the gold standard so the borrower’s mortgage was to be paid by the United States Treasury from the borrower’s share of gold at Fort Knox, were offered. (An intelligent person’s view of the history of the gold standard is offered in a review of a book on court packing by Judge Richard Posner.) The Chancery judge played whack-a-mole, rarely needing to even hear from the lender’s attorney. Stepping into the hallway after winning my motion, I asked opposing counsel, who was only able to talk to me after she spoke to hostile crowd of “defense” counsel, what was happening. She explained that the “gold standard” attorneys I had witnessed were former bankruptcy lawyers. A similar phenomenon took place after real estate closings took place. Many fine attorneys assist people with transactions and do a consistently good job; however, a subset has always acted as a “potted plant” at real estate closings, pushing documents through just to collect a fee. As fewer transactions were available, some of the plant material slimed over to the foreclosure courts. The connection between previously-reputable attorneys and scams has been explored by the ABA. In Illinois, the Attorney Registration and Disciplinary Commission warned attorneys of the dangers of becoming entrenched in scams.
The lawyers who hurt foreclosure defendants are an unrecalcitrant lot. One famously retaliated against me for representing one of his victims in a fair housing case against him. This is the same Ernest Fenton from the top of this post; the facts of the case, in which I was barred by a state court from talking to my client, my co-counsel, or a broad swath of the community, are summarized by the Seventh Circuit in Fenton v. Dudley, 761 F.3d 770 (2014). In another case, presently pending before the Seventh Circuit, the scammers (attorney and non-attorney alike) suggest they should not only escape accountability for deed fraud arising from a foreclosure, but that my head should be served up on a platter. The outcome of this Dance-of-Salome case remains to be seen, but it is interesting to note that the opposing counsel became obsessed with the very blog and submitted the entry Fortune and the Intrepid Lawyer as part of the logical and grammatical grotesquery that was the motion for sanctions. I suppose if one wants to develop a morbid fascination with a topic, the idea of me hiking my skirt up in public is as good as any.
Foreclosure defense, like mortgage lending, falls outside of the ordinary scope of market interactions. In “normal” predatory consumer transactions, consumers have opportunities to learn and correct behavior (arbitrage). If I purchase hosiery that shreds after one use, I choose another brand the next time. Whether consciously considered or not, I favor an item that can be used twice that costs $4.00 over an item that can be used once that costs $2.01–or even less, if I factor in my aversion to shopping. A homeowner, however, likely purchases one or two homes in a lifetime. There is no, or little, opportunity to apply learned information to mortgage loans.
In high-stakes transactions like mortgage lending, consumers rely on intermediaries such as mortgage brokers. This is even more true in defending the mortgage foreclosure, an event of nightmarish proportions. Seemingly fortunately, states regulate attorney admissions, and it would seem that attorneys, in their own self-interest (preserving their license) would avoid breaching their duty to the client. However, this self-interest has failed, and policing has been ineffective. Statistics are not available, but sanctions tend to be on a limited, hard-fought, case-by-case basis. As refreshing as cases like the Seventh Circuit’s In re Rinaldi are, they are few are far between. In addition, they are cold comfort to victims who lose their homes at the hands of foreclosure defense scammers.
There has been an utter regulatory shortcoming with regard to the breach of fiduciary duty, or, better, merciless gutting, of homeowners by foreclosure rescue scammers. Existing regulators will not or cannot protect the market. An optimal intermediary structure would require the intermediatry (attorney) provide some insurance, since the intermediary (whose home is not on the line) does not share the principal’s risk. (A good discussion of the role of intermediaries, although in a different context, can be found in Supipto Bhattacharya, Arnoud W.A. Boot, and Anjan V. Thakor, Credit, Intermediation, and the Macroeconomy: Models and perspectives (Oxford University Press, 2004). The absence of arbitrage in these once-in-a-lifetime transactions means market forces alone will not enable consumers to avoid exploitation. This leaves the courts.
Courts have been slow to intervene in these attorney-client relationships. However, one tool remains largely untested: the Fair Housing Act. A robust effort to hold foreclosure scammers accountable for targeting victims based on protected class is needed. In fact, the U.S. Department of Housing and Urban Development has done just that. In addition, the Illinois Attorney General’s People v. Wildermuth offers a civil-rights based approach to eliminating foreclosure scammers.
While arguments about the applicability of the civil rights act to this most invidious of behavior are easy to make, what may be overlooked is the unique economic deterrent aspect of the Fair Housing Act. The Fair Housing Act allows for a broad array of damages, including punitive damages and attorney fees and costs. It does not require medical proof to support an award of emotional damages. These features place the FHA in an excellent position to punish–and deter–the market failure reflected in foreclosure defense scams. Litigators may go where administrators fear to tread. Judge Posner has compiled an excellent comparative analysis of the costs and benefits of regulation and litigation. Here, however, it is clear: the regulators are treading water. In 16th century Italy, the predatory attorneys might be treated as usury, and their benches broken. The 14th-century solution was rougher: cutting off hands and noses and blinding (for the crime of debasing coins).
The key to the confines of Hell in which homeowners are now relegated lies in private litigation of the Fair Housing Act. The Act allows for economically deterrent damages, while leaving offenders’ body parts intact–a kind concession, indeed.