“Stacked Deck Against Homeowners”

A feature article in the January 11th issue of The Nation looks at the daunting legal obstacles faced by homeowners under threat of foreclosure as a result of complex predatory lending scams and deceptive sales practices. Author Alex Ulam explores the role of current restrictions on the work of LSC-funded legal service providers in exacerbating the crisis, and calls Congressional authorization of the Legal Services Corporation “long overdue.” Meghan Faux, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services, is quoted.

(Above right: Illustration by Karen Caldicott for The Nation) 

An excerpt from the article: 

Unfortunately, the legal remedies under existing anti-predatory lending laws are often not strong enough to save defrauded homeowners from losing their homes. In many cases the amount of money that homeowners owe on their mortgage outweighs whatever damages they may be entitled to. In others, the statutes of limitations may have run out by the time the violation is detected.

According to a recent report from the Brennan Center for Justice at New York University Law School, “Foreclosures: A Crisis in Legal Representation,” the crisis is exacerbating an already existing crisis in legal representation that is disproportionately hitting the poor. Low-income people ought to be able to find help through the Legal Services Corporation, which has 137 federally funded programs and 918 offices spread throughout the country. The LSC’s mission is to serve the growing number of Americans who live below 125 percent of the poverty line (an income of $27,563 for a family of four). Currently, approximately 54 million people fall into that bracket.

But the increasing number of low-income homeowners seeking help is swamping the LSC, which has been plagued by severe funding shortages since 1996, when, seeking to fulfill the agenda of Newt Gingrich’s Contract With America, Congress slashed almost a third of the corporation’s budget and imposed restrictions that severely curtailed its operations. A year later LSC was serving 1 million fewer people.

Under the restrictions dating from the Gingrich-era assault–which, with the exception of the recently overturned ban on collecting statutory attorneys’ fees, have been reapproved in every subsequent appropriations cycle of Congress–LSC lawyers are prohibited from engaging in many basic legal activities that are open to all other lawyers, such as lobbying for legislative changes before government officials and filing class-action lawsuits. There is even a poison pill that prohibits LSC offices receiving federal funds from using money they raise elsewhere to engage in any of the prohibited activities or services [see Peter Edelman, “…And a Law for Poor People,” August 3/10, 2009].

Currently the LSC is able to serve less than half of the low-income people who contact its member programs seeking help. Of those it is able to help, most get only general legal advice, not full representation. And for the handful of predatory lending cases an LSC attorney is able to litigate at any one time, “winning” generally means years in court followed by a sealed out-of-court settlement, which simply becomes a cost of doing business for major financial institutions.

“Of the number of clients we intake, we are probably able to accept a third of them. Not all of the ones we reject have strong legal claims, but most of the loans we see are subprime loans with abusive terms,” says Meghan Faux, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services. “There are a lot of homeowners we cannot represent who have valid claims against their originating lender.”

This past summer Faux won a sealed out-of-court settlement for a homeowner facing foreclosure after a major lawsuit that lasted nearly four years and included charges against Credit Suisse for aiding and abetting a fraudulent scheme. She says her office has won other settlements against large banks on behalf of individual homeowners. However, the LSC restrictions, especially the ones on class-action suits and attorneys’ fees, have hampered the ability of her office to win widespread relief for victims of predatory lending and mortgage-servicing abuses. “Without the threat of having to pay our attorneys’ fees, there is not a lot of incentive for the defendants to settle early or really settle, because their liability isn’t increasing,” she said in an interview conducted before the restriction on attorneys’ fees was overturned.

Read the rest at TheNation.com.