Borrowers of Subprime Loans and Predatory Lending Are Not the Guilty Parties

Borrowers of subprime mortgages who followed instructions from lenders in their applications were indicted for criminal behavior by the U.S. District Attorney of Sacramento in 2012. They were charged with filling out form fraudulently, reselling houses at inflated prices and defaulting on loans.

Jurors decided they were not guilty. This is according to a recent article appearing on called “Finally, Wall Street gets put on Trial,” by Thomas Frank.

Their story is similar to a civil class-action lawsuit brought by Wenatchee attorney Bob Parlette, where borrowers won damages by alleging a lender and its employees used predatory and fraudulent lending practices.

In Sacramento, Eastern European immigrants bought houses in California’s 2006 housing boom with loans from GreenPoint Financial Corp. (Capital One Financial Corp. purchased GreenPoint but closed GreenPoint’s mortgage lending in 2007.)

The borrowers were told by GreenPoint mortgage brokers they could state their incomes to qualify for mortgages with low down payments and adjustable-rate, interest-only loans. The borrowers believed they could resell houses in a get rich quick market.
Mortgage brokers got rich quickly with the company’s incentive system. Commissions on mortgages were higher with higher volume, so they advised applicants to state their incomes and not worry about completing all the information requested.

GreenPoint managers told underwriters to qualify applications based on stated income documentation. One underwriter testified management prohibited checking incomes with the borrowers’ employers. That’s absurd business for a legitimate bank, but defense attorneys argued GreenPoint’s incentives rewarded quickly processing loans, not carefully verifying information.

When the loan closed, the mortgage broker received a bonus. The underwriter received cash from the mortgage brokers for quick processing. Neither person had any more responsibility for the loan.

GreenPoint executives wanted mortgages processed rapidly because loans were combined with other loans to create securities, which GreenPoint sold to eager investment bankers as high-quality, asset-backed securities for resale to investors.
Sales of mortgage securities increased executive bonuses. Cash from the sales created more loans for more bonuses.

Except defaults on loans could be returned to GreenPoint and executives knew large numbers of defaults would disastrous. GreenPoint would have to refund investors, which it couldn’t afford because the money was invested in similar loans.
The business collapsed, costing billions of dollars in losses. GreenPoint executives, underwriters and brokers kept their compensation bonuses.

But GreenPoint corporation wasn’t the only victim.

“(GreenPoint executives) also pumped out at least 20 billion dollars of this toxic waste,” said Bill Black, a former regulator and expert on financial regulation at the University of Minnesota’s School of Law, who testified for the defense. “And they are one of the major contributors to the failure of Bear Stearns, one of the largest investment banks in the world.”

Despite the multiple layers of misrepresentation the U.S, District attorney decided to criminally charge the immigrants who defaulted on their loans and lost their investments.

Their defense attorneys decided to convince jurors that blaming borrowers was unfair. They asked jurors this question, paraphrased in Frank’s article: “How can the borrower have committed fraud on a mortgage application if the lender didn’t care whether their answers were truthful?”

The jurors decided they weren’t criminals. I agree.

Black told Frank, “So you finally have a case in which you are actually looking at the causes of the financial crisis. It’s the first criminal case.”

I think Parlette’s case, Luna, et al, v. Household Finance Corp., was an earlier civil case filed in Chelan County Superior Court in 2002. Borrowers sued for damages by alleging fraud and predatory lending by Household representatives.

As I wrote in the Oct. 27, 2011 issue of the Douglas County Empire Press, the case helped secure a nationwide $486 million judgment against Household by state regulatory offices in 2003. And Household ultimately agreed to pay more than $50 million to borrowers who transferred their lawsuit to Washington’s Whatcom County Superior Court. Household never admitted wrongdoing.

The two cases demonstrate that borrowers, prosecutors and defense attorneys can win criminal and civil cases against subprime and predatory lenders and their employees.
Author Frank said, “Maybe one day the courts of this land will acknowledge what the public has known for years. That the fraud that wrecked the world actually happened in the offices of the shadow banks and the Wall Street investment firms.”

Borrowers of Subprime Loans and Predatory Lending Are Not the Guilty Parties

About Russellsclearskies

Writing to poke fun at a retired klutz like me who's curiously exploring the absurdities and complexities of the good life. .
This entry was posted in Doing Justice and Having Compassion, Economics, Justice and tagged , , , , . Bookmark the permalink.

One Response to Borrowers of Subprime Loans and Predatory Lending Are Not the Guilty Parties

  1. Milo Klanke says:

    Thanks for this, I knew about GreenPoint and Household Finance and the manufacturing of liar loans but not the local connection. Kudos for Mr. Parlette.

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