Predatory-lending lawsuits on the rise

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NEW YORK (CNNMoney.com) -- During the housing boom, mortgage lenders were doling out the dough, giving loans to people who could never have qualified before.

Now, homeowners and government officials are increasingly taking these institutions to court, alleging unfair and predatory practices. While many of these suits are still winding their way through the legal system, some banks have already settled for millions of dollars.

The defendants include the biggest names in the business -- from Wells Fargo (WFC, Fortune 500) to Countrywide Financial to Citigroup (C, Fortune 500).

"Borrowers are looking to the legal system for help in keeping their houses," said Gary Klein, a partner in Boston-based Roddy Klein & Ryan, which focuses on consumer law. "There are more cases pending than I've ever seen in my 23-year career."

Homeowners are seeking the courts' help either individually or as part of class action lawsuits. With foreclosures continuing to rise, borrowers are looking to force banks to modify unaffordable loans or to stop them from foreclosing on homes. Often, they also seek money.

To be sure, banks have faced unfair lending lawsuits for years and have paid millions of dollars in settlements. But the recent housing boom was fueled by questionable and exotic loans that many borrowers had no hope of repaying.

Some of the cases involve the classic predatory lending schemes, where certain borrowers were given mortgages with high interest rates, while other suits are combating loans that are ultimately unaffordable.

In addition, the mortgage industry preyed on a wider group during the housing boom, capturing more middle-class borrowers. These homeowners have more means to hire attorneys.

Those in more dire financial straits are turning to lawyers who work for non-profit legal services agencies or who agree to seek payment from the banks if they win the case.

Some borrowers who hire lawyers to defend them against a foreclosure sale are successful in getting the courts to stop or delay the proceeding, at least until the bank considers whether a loan modification would be more appropriate.

Then, there are class action suits on behalf of hundreds or thousands of homeowners. In one of his current class action cases, Klein is suing Wells Fargo because one of the banks Wells Fargo now owns originated payment option adjustable-rate mortgages. This type of loan allows borrowers to make very low monthly payments, and the unpaid interest is then added to the principal. Many borrowers end up defaulting on their payments.

The suit's goal is to get Wells Fargo to restructure the borrowers' mortgages to make them affordable, Klein said.

"They are looking for a second chance," he said of the homeowners.

The suit also seeks damages, particularly for those borrowers who've already lost their homes or paid off their loans.

Wells Fargo said it was filing a motion to dismiss the case, calling the claims baseless and a mischaracterization of the bank's long-standing commitment to responsible lending and the pricing practices.

Meanwhile, state attorneys general are likewise filing suit against the mortgage industry's major players, alleging predatory lending and deceptive business practices. Banks are also getting hit with suits from the NAACP, some cities and individuals claiming discrimination against minority borrowers.

In Massachusetts, Attorney General Martha Coakley reached a $10 million settlement in June with subprime lender Fremont Investment & Loan for its unfair lending practices. The state will distribute $5 million to state residents with Freemont loans, and another $3 million will go foreclosure relief and homeowners education. The rest will go to the state and to cover costs.

The California-based lender agreed to do more loan modifications and not to foreclose upon up to 2,200 loans without notifying the attorney general's office first and seeking court approval in certain circumstances.

"The American dream of homeownership has turned into a nightmare for many borrowers because of predatory lending practices," said Massachusetts Attorney General Martha Coakley, when the settlement was announced in June. "We will continue to hold companies responsible for their role in the foreclosure crisis."

The Fremont settlement came a few months after Coakley negotiated a $60 million settlement with Goldman Sachs (GS, Fortune 500) over its role in bundling subprime loans into securities and selling them to investors. As part of the deal, the Wall Street investment bank agreed to modify loans of more than 700 troubled borrowers.

Attorneys general reached the largest predatory lending settlement a year ago. Bank of America agreed to spend $8.4 billion to lower the interest rates or loan balances of nearly 400,000 Countrywide customers with subprime loans or payment option ARMs.

"This settlement holds the number-one mortgage lender in the country accountable for deceptively putting borrowers into loans they didn't understand, couldn't afford and couldn't get out of," Illinois Attorney General Lisa Madigan, one of the lead negotiators, said at the time. "These are the very practices that have created the economic crisis we're currently experiencing."

Bank of America said the agreement was in the best interest of its customers and investors in mortgage-backed securities, though a group of investors is suing the bank over the settlement terms.

Despite the increase, there aren't as many lending lawsuits as one might expect, considering the subprime mortgage explosion during the housing boom, experts said.

That's because these suits are expensive and difficult to win. Cases could take anywhere from months to years to resolve. Also, there are not that many attorneys who specialize in consumer law and who want to take on these labor-intensive cases.

Therefore, many troubled homeowners cannot hire attorneys to help them.

"These are not easy cases," said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Also, many of the biggest subprime lenders -- such as New Century Financial --have gone out of business, declared bankruptcy or been put into receivership by the Federal Deposit Insurance Corp.

So there's no one worth suing, said Stuart Rossman, director of litigation at the National Consumer Law Center.

"Litigation has not been the primary avenue for getting someone to pay for what took place," Rossman said.