WASHINGTON -- Homeowners gained leverage for litigation against mortgage lenders through the financial reform law Congress passed this summer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act not only tightened mortgage rules, but it also multiplied potential damages against rule breakers.
Damages that ranged from $100 to $1,000 per violation now range from $200 to $2,000, according to a summary of the Act from Mayer Brown law firm of Chicago.
A lender who doesn't verify a borrower's ability to repay a loan faces liability for all interest and fees a borrower has paid, the authors wrote.
A lender who steers a borrower into an unreasonable or predatory loan faces the same liability, according to the Act's summary.
The summary also observed the following:
An originator who steers a customer into such a loan faces liability for three times his or compensation, plus legal fees and costs.
A borrower who claims either violation can assert it as a defense in a foreclosure action without regard to any statute of limitation.
Borrowers rather than lenders will compensate originators, and the amount cannot vary according to the terms of the loan.
A new Bureau of Consumer Financial Protection will adopt rules prohibiting practices that promote disparities in race, gender, age and ethnicity.
"Enhanced damages and double penalties might spur additional suits," Jeff Taft of Mayer Brown said in an interview.
"The cost of litigation will be higher for the banks and other creditors if they are found liable," he said.
Along with mortgage litigation, the bill invites consumer fraud litigation.
Any state attorney general can enforce the state's consumer fraud law against a national bank or a federal thrift, the authors wrote.
"This will subject national banks to state law requirements they otherwise would not be subject to," Taft said. "If they do not comply, there would be penalties under state and possibly federal law.
"This adds to the compliance burden."
Whether a private citizen can pursue a cause of action for consumer fraud could depend on state or federal law, he said.
The law also authorizes state attorneys general to enforce rules and regulations from a new Bureau of Consumer Financial Protection.
The authors call the bureau a cornerstone of the Obama Administration reform plan.
The bureau can examine bank holding companies, depository institution subsidiaries, and state licensed mortgage lenders, brokers and servicers.
Dodd-Frank overturns a Supreme Court decision, Watters v. Wachovia, that granted to a subsidiary of a national bank the same preemption as the bank itself.
"Operating subsidiaries will no longer enjoy or be able to rely on federal preemption of state laws after the effective date," Taft said. "Watters is vindicated.
"Operating subsidiaries will need to comply with all state laws, or banks may fold their operating subsidiaries into the banks themselves."
The law opens new avenues for the Securities Exchange Commission to litigate, but the commission gets to decide how far to go.
Jerome Roche of Mayer Brown said the act changed the enforcement powers of the SEC.
"You are going to see the SEC really stretch and adopt a more muscular approach," he said.
The act requires the SEC to study whether a broker dealer should owe a retail client the same fiduciary duty as an investment adviser.
Roche said the House would have imposed a duty immediately, and the Senate would have put it off by way of further study.
"The study carried the day," he said.
Broker dealers currently recommend investments under a duty of suitability, he said.
He predicted SEC would harmonize the treatment of broker dealers and investment advisers by crafting rules to close the gap between them.
SEC must also study whether private citizens can enforce provisions against fraud in transactions occurring outside the United States, involving only foreign investors, if those transactions have a substantial foreseeable effect in the United States.
SEC itself gained that far-reaching power through the act. Similarly, the SEC may apply its fraud and manipulation provisions against conduct in the United States that is directed outside the United States against foreign persons.
"It looks pretty deep on its face, but keep in mind that while it has never been laid out expressly in the federal securities laws before, it has been the view at SEC that these activities already were within their scope," Roche said. "SEC doesn't want the U.S. to be a base for fraud. They want to protect the good name of the U.S., so we aren't the boiler room of the world."
The Act gives companies other than banks a single opportunity to sue, and only from a defensive position.
If the new Federal Stability Oversight Council designates a nonbank for the same regulations as a big bank, the company can seek judicial review in federal court.
Taft doesn't expect many such suits.
"Resistance is futile," he said. "You have to show the decision was arbitrary and capricious, and it's unlikely that you are going to be successful," he said. "It's not as if there will be hundreds of entities."
He said most companies already have a sense about whether to expect designation.
Mayer Brown prepared the summary for clients and provided it to Legal Newsline.