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Just as a private right of action under Section 5 of the FTC Act would be harmful to business, so too would a private right of action under a mortgage fraud law be harmful to mortgage lenders, the very entities mortgage fraud laws should aim to protect.

Putting aside the possibility of lawsuits that might directly and negatively impact lenders, there is the possibility that legal tools designed to protect lenders could be restricted in their usefulness by precedents established in a private litigation context. Federal prosecutors have indicated that they take great care to protect the statutes at their disposal and shape positively the development of precedent interpreting those statutes. For this reason, federal prosecutors are reluctant to put the enforcement of criminal statutes into private hands because of the possibility that abuse of discretion by private litigants will lead to damaging precedent — and the restriction in the power of prosecutors themselves.

A private right of action could spawn vexatious46 and frivolous litigation and would prove costly to the industry.

most infamous example is the Rodash case.47 The consumer in Rodash brought a class action under the Truth in Lending Act (TILA) arguing that a courier fee and mortgage tax should have been included in the finance charge. Even if these small fees had been included in the finance charge, the difference in the amount of finance charge disclosed would have been negligible. This claim was brought instead of one based on the real grievance underlying the suit no doubt because the TILA claim was easier to plead and could be converted into a class action. When the plaintiff in Rodash prevailed, the case spawned a host of similar class action lawsuits over technical and immaterial disclosure violations.48 This flow of class action law suits was only abated by Congress enacting a temporary class action moratorium49 and amending TILA (known as the Rodash amendments) to address Rodash.

Similarly, a federal private right of action for “mortgage fraud” (as redefined to include non-fraudulent lender conduct), particularly if it carried large penalties, easily could become a proxy for other claims, whether the other claims have merit or not. As a result, mortgage lenders — the primary victims of mortgage fraud — would become defendants in private litigation under statutes ostensibly intended to prevent mortgage fraud.

Since state laws already provide private litigants with an abundance of private rights of action to address mortgage fraud, the main impact of a federal private right of action would be the creation of new possibilities for nationwide class actions against mortgage lenders. As discussed above, if the meaning of “mortgage fraud” is expanded, there is a high risk that it would apply to activities that are not truly mortgage fraud, as that term is understood by law enforcement officials and industry, and even to practices that are not fraudulent in any way. Private litigants could — and likely would — use such a statute as a proxy for other claims (whether or not the other claims have merit) because such claims may be easier to bring — and, as a nationwide class, more threatening to lenders — than claims arising from any actual injury.

The use of federal statutes to bring class actions as proxies for other types of claims is sadly commonplace. Perhaps the


In the legal sense, “vexatious litigation” refers to litigation instituted without sufcient grounds and serving only to cause annoyance to the defendant.

The potential harm to mortgage lenders is exacerbated because, since the claims likely would be heavily fact based, any private right of action likely will not be capable of resolution by dispositive motion. A motion to dismiss generally is granted only if the moving party can show there is no genuine issue of material fact50 — a standard difficult to satisfy in cases that are heavily fact dependent. A motion for summary judgment generally is granted only if the moving party can show that it is entitled to judgment as a matter of law,51 which in fact- dependent cases often requires extensive fact discovery. As a result, lenders and other industry-related parties will not be able to resolve frivolous claims quickly and cheaply. Thus, lenders and others will be faced with a Hobson’s choice of trying a nationwide class action or settling. Because of the increased size and risk, nationwide class actions — even

47 48 49 50 51

Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994). See, e.g., H.R. Rep. 104-193, at 52 (1995). Pub. L. 104-12 (codied at 15 U.S.C. § 1640(i)). Fed. R. Civ. P. Rule 12(b)(6). Fed. R. Civ. P. Rule 56.

Mortgage Bankers Association

© Mortgage Bankers Association 2007. All Right Reserved.


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