Key California Assembly Committee to Receive Testimony Urging Passage of Foreclosure Moratorium Where Financial Institution Fraud Occurred

The legislation is simple. It would prevent any foreclosures where the Attorney General brings a statewide class action alleging fraud. Prior to the foreclosure, the financial institution subject to this legislation would have to notify all borrowers of their rights if the borrower believes the mortgage instrument was fraudulently induced. The borrower would then have the right to seek mediation and until the mediation was completed, would need to make only those payments he/she could afford. This legislation initially applies to the BofA/Countrywide acquisition but would also be applicable should the Attorney General file comparable suits against any other financial institution.

The City Attorney of San Diego recently filed a class action (July, 23, 2008) against BofA/Countrywide and on July 31st sent a letter to the BofA informing them that they would seek a preliminary injunction seeking the above remedies unless BofA voluntarily agreed to the above terms. Attorney General Jerry Brown is now negotiating with the BofA but has not yet threatened to bring a preliminary injunction as a follow up to his fraud suit against Mozilo and Countrywide filed at the end of June. Similarly, leadership of the California legislature is now engaged in discussions with the BofA leadership to achieve a voluntary ban on foreclosures based on fraud.

Recent Congressional action providing up to $300 billion in FHA backed loans is an important first step but it is voluntary. It is unclear that the BofA will aggressively use this legislation to assist distressed borrowers. State anti-foreclosure legislation will be an inducement for all financial institutions to participate in the FHA program.

Greenlining met with the President of BofA/Countrywide mortgage company on July 28th. Based on the meeting, Greenlining believes that legislation is required. In the alternative, the BofA is likely to slowly approach the problem of resolving mortgage terms that were fraudulently induced. It is unlikely to do so in a systemic way, as urged by FDIC Chair, Sheila Bair or as done by Sheila Bair in the IndyMac takeover.

Robert Gnaizda is a public interest attorney who helped co-found three major public interest institutions: California Rural Legal Assistance (1966), then the nation’s largest legal service program; Public Advocates (1971), the first public interest law firm in the West; and the Greenlining Institute (1994), the largest multiethnic public policy and advocacy center in the West. Gnaizda is a graduate of Yale Law School and Columbia University. He is presently General Counsel for the Greenlining Institute.