Fact Sheet | How the Legal Services Restrictions are Impeding Foreclosure Prevention Efforts

Legal Services Restrictions Hamper Efforts to Combat Predatory Lending and Prevent Foreclosures

Low-income homeowners, disproportionately the elderly and minorities, are losing their homes to foreclosure at alarming rates.  Many of these foreclosures are the result of predatory and illegal loan practices.  These families need legal help protecting their homes in court; however, legal services available to the poor are dramatically underfunded and draconian restrictions on providers inhibit their effectiveness and waste resources.  Among other things, federal restrictions prohibit lawyers in LSC-funded legal aid programs from filing class action lawsuits and lobbying for lending reforms, tools that would help put the unscrupulous perpetrators of these schemes out of business and help families keep their homes.

Ban Class Actions Prevents Legal Services Providers from Shutting Down Repeat Bad Actors and Halting Large-Scale, Racially Discriminatory Lending Practices

• Fraudulent Contractor Continues to Target Elderly Homeowners Because Class Relief Unavailable.  Mae Turner, a 75 year-old Chicago homeowner of 30 years was forced into foreclosure in 2002, when she refused to repay a bogus $50,000 loan that had been fraudulently taken out in her name by a contractor who claimed to be financing necessary home improvements.  Not only did the contractor keep the cash, he never did the work.

A series of lawsuits brought for Ms. Turner and other clients by LSC-funded Legal Assistance Foundation of Metropolitan Chicago (“LAFMC”), and a set of complaints filed by Chicago and by the Illinois Attorney General, were not powerful enough to stop this contractor’s lawless activities. For the contractor, these small interferences are a cost of doing business, and it is easier to pay an occasional damages award, or a government fine, than to abandon the fraudulent scheme, which includes sending thousands of deceptive mailings to low-income homeowners throughout Chicago.

A class action lawsuit could compel the contractor to disclose the names of all of the victims, lead to damages and attorneys’ fees payments to the victims, and even produce a cease and desist order preventing the contractor from further scheming. Unfortunately for scores of vulnerable Chicago residents like Ms. Turner, their most likely advocate, LAFMC, is barred from filing such a lawsuit.

• Broad Relief from Reverse Redlining Out of Reach.  Represented by LSC-funded South Brooklyn Legal Services (“SBLS”), eight first-time homebuyers brought suit against United Homes, LLC, a self-titled “one-stop shop” of real estate companies, lenders, appraisers, and lawyers.  The homebuyers claim that the defendant conspired to sell them over-valued, defective homes financed with predatory loans.  United Homes failed to disclosure their properties’ histories, inflated the homes’ values with inaccurate appraisals, overstated the buyers assets and incomes on loan applications, concealed information about loan terms, sold the homes in uninhabitable conditions, and refused to make agreed upon repairs.  The homebuyers also allege that United Homes targeted them because they are minorities and exploited the racially segregated housing market to engage in “reverse redlining,” the practice of intentionally extending credit to members of minority communities on unfair terms. 

A District Court judge found the homebuyers’ allegations against United Homes’ “conspiratorial endeavor” enough to warrant moving the case forward, and refused to dismiss the majority of the claims.  This case is ongoing.

 As a result of United Homes’ fraud, the eight named homebuyers were scammed into agreeing to mortgages they could not afford and now risk losing their homes under terms not met by the lender.  It is unlikely that they are the only buyers who have been scammed by this group.  However, unable to file a class action against United Homes due to federal restrictions, SBLS cannot seek more widespread relief for other homebuyers potentially taken advantage of by United Homes.

 Lending Reform Efforts Suffer When Legal Services Experts Are Excluded

• Immersed in the day-to-day legal issues faced by low-income communities, legal aid attorneys are keenly aware of the true impact of state and federal regulatory policy.  The current foreclosure crisis is no exception; obvious to those fighting to prevent foreclosures is the fact that many of the bad practices that contributed to the foreclosure crisis could have been prevented by more stringent state laws.  The attorneys at Maryland Legal Aid Bureau (“MDLAB”) have witnessed many of the lending abuses that have been occurring over the last 10 years, but restrictions on legislative and administrative advocacy prevent them from actively pursuing reforms.  Under current legal services restrictions, MDLAB attorneys may not participate in legislative reform efforts unless they are responding to a written request from a legislator or other official.

However, when legal services attorneys are able to participate in legislative reform efforts, they provide expertise that would not otherwise be available to legislators.  In 2008, there was a dramatic overhaul of Maryland state foreclosure and lending laws.  MDLAB did receive an invitation, as required by the restrictions, to participate in the legislative reform effort and took part in State Senate Finance committee work group that analyzed changes to credit and lending laws.  The MDLAB attorney was the only advocate at the work group meeting and the only person in attendance representing the interests of borrowers.  The lending, mortgage, and banking industry representatives present advocated for limiting proposed new safeguards to only the worst types of loan products—a proposal that would have left out a large number of loans, including Freddie Mae and Fannie Mae loans, from new consumer protections.  Luckily, the MDLAB attorney present was able to inform the group and the Finance Chair of the need to subject these other loans to the expanded consumer protections.

Subsequently, the Maryland legislature agreed that the thousands of loans identified by the attorney should be subject to greater consumer protections and included them in the final reform legislation.  Legal Aid was able to play a significant role in this legislative effort and, in doing so, helped to protect many borrowers from falling into lending traps.  However, too often this is not the case.  With LSC-funded legal aid lawyers unable to actively push for changes, they can only respond to requests for input from legislators.  Muzzling this expert voice of the poor while lobbyists for the lending community have comparative free reign, the restrictions hurt the prospects for structural change in the lending industry.  Far from the voice of yet another “lobbyist,” input from legal services providers represents communities of the underserved and underrepresented.  As the MDLAB attorney put it, “When Legal Aid shows up, it’s not about personal enrichment.”