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Houpt paper, Schwab paper, Iowa paper
Single state consumer cases are pursued in some states with national impact.
  • 1 Should State AGs be setting the National Policy?

    Should State AGs Be Setting National Policy?

    A Case Study of Mandatory Consumer Credit-Card Arbitration

    Nicholas Houpt

    I. Introduction

    On July 14, 2009 the Minnesota State Attorney General (MN AG) filed suit against the National Arbitration Forum (NAF), alleging that NAF misled consumers with its representations of neutral arbitration practices because NAF had financial ties to the credit card companies for whom it was arbitrating.[1] Three days later, NAF signed a Consent Judgment with a proclaimed purpose of “the complete divestiture by the NAF entities of any business related to the arbitration of consumer disputes.” [2] That is, the state of Minnesota secured injunctive relief on a national scale by filing a lawsuit in state court. NAF’s quick agreement to stop accepting consumer arbitrations caused a domino effect. The MN AG sent a letter to the American Arbitration Association (AAA), the world’s largest arbitration service company, asking it to suspend its national debt collection operations voluntarily.[3] Although AAA had just finished a high-volume debt collection program in June of 2009, it decided to “place[] a moratorium on the administration of any consumer debt collection arbitration programs.”[4] Bank of America and JPMorgan Chase, creditors who employed arbitration clauses, soon followed suit by ceasing to file debt collection arbitration actions.[5] Congress is now considering regulation of consumer arbitration, perhaps as part of the planned federal consumer protection agency.[6]

    In one fell swoop, a single state Attorney General was able to bring the highly profitable world of credit card arbitration to its knees. The MN AG was not only able to secure reformed practices for its home state, but across the entire nation. This single action effectively put a halt to the national practice of collecting credit card debts through mandatory arbitrations. This result seems disproportionate to the MN AG’s responsibility to protect her own state’s citizens. With this case, the critics of state Attorneys General (AGs) have the perfect test case for a critique of AGs’ policymaking aggrandizement, with all of its democratic accountability and federalism components. I will discuss three separate critiques:

    1. A single state AG should not set national policy because it violates structural and textual principles of federalism;
    2. A single state AG should not set national policy because that AG is not democratically accountable to the entire nation or to the citizens of individual states;
    3. A single state AG should not set national policy because an AG does not have the institutional competency to do so, i.e. AGs unwisely rely on anecdotes instead of hard data when making policy.

    These criticisms apply to AGs involved in multistate litigation generally,[7] but this case magnifies these concerns. Single states have fewer frictions on decision-making. There are no other states in the litigation to provide contrary interests or more information based on the experiences of another state’s citizens. If a single state does consider national interests and make national policy, then the chain of accountability and principles of federalism might be destroyed. This type of state action seems to present a dilemma: a state either imprudently makes policy or violates constitutional principles.

    In this paper, I will describe the systemic problems of mandatory credit-card arbitration and the specific facts and alleged state law violations of the NAF case. This background will lay out the facts for subsequent argument and will demonstrate the strength and independent validity of Minnesota’s case against NAF. I will then compare two empirical studies of consumer arbitration, which will demonstrate the practical difficulties of regulating in the face of uncertainty and will frame the debate about proper policymaking.

    I will argue that the actions taken by the MN AG do not violate principles of federalism or democratic accountability, and, in fact, contribute to policymaking by creating an atmosphere of regulatory competition and cooperation. First, in terms of federalism, actions by a single state are more easily justified than in multistate litigation, because the state is pursuing a perfectly valid course of action by enforcing its own laws. No procedural, structural, or textual restrictions prevent this action. Second, practical frictions on policymaking and the corporation’s voluntary suspension of national activities dissolve the democratic accountability problems. Third, states serve an essential function in policymaking by acting on anecdotal evidence: gathering initial information and bringing problems to the attention of federal policymakers.

    II. Background

    A. Systemic Practices in Mandatory Credit-Card Arbitration

    In describing the systemic problems with mandatory credit-card arbitration, I will be using the example of NAF’s practices and procedures.[8] Although NAF appears to be a worst-case offender and hence potentially misleading as a representative example, AAA’s suggested national reforms and procedures and AAA’s concerns about fairness support the claim that these practices are widespread.[9] The systemic problems fall into three general categories: 1) bias, e.g. repeat-player bias and arbitrators’ favoring industry, 2) notice procedures, e.g. ignoring service requirements, and 3) failure to comply with state reporting requirements.[10]

    Several practices and procedures point to anti-consumer bias in the arbitration system. First, the arbitration organization assigns cases to arbitrators, allowing that organization, which has a financial stake in continued business with creditors, to choose the distribution of cases.[11] The data show that arbitrators who favor industry typically receive more cases than those who favor consumers.[12] Second, different arbitrators decided identical cases differently, providing a strong appearance of bias and reinforcing the potential for bias with assignment of cases.[13] Third, creditors can remove cases from consumer-friendly arbitrators by using peremptory challenges. [14] Fourth, the lack of respect for these procedures results in the exclusion of some legitimate defenses to a default judgment, such as identity theft. [15] Fifth, creditors need not provide proof of the debt amount when collecting a default judgment; the arbitrator is required to award the full amount requested by the creditor.[16] Sixth, NAF does not even require proof of an arbitration agreement before entering an award, nor does it require the statute of limitations to be satisfied.[17]

    Service of process and notice of proceedings present a microcosm of the systemic problems with mandatory credit-card arbitration. First, the creditor serves and verifies process, i.e. NAF often failed to independently verify delivery receipts and signatures before sending the case to the arbitrator.[18] The Staff Report found several troublesome instances of sending service to the wrong address, receiving signatures of “x” or “John Doe,” or delivering notices in English when the customer received bills in Spanish. [19] Second, even when deficiencies in service were found, NAF pushed the cases on to the arbitrators when procedures required dismissal. [20] If those arbitrators then dismissed the cases for insufficient service, they received fewer cases.[21] Third, these failures in service allow the creditor to obtain easy default judgments, giving the creditor a strong incentive to be lax in service procedure.[22]

    NAF has also failed to comply with California’s legally-mandated reporting requirements. NAF did not publish the results of thousands of arbitrations, which results in an incomplete set of data.[23] This failure to publish also aided creditors in “seeking and obtaining awards of attorney’s fees that violate Delaware Law.”[24] By having closed proceedings and no way to review the results, NAF has created an arbitration system rife with opportunity for arbitrariness and fraud.

    B. Minnesota’s Case Against NAF

    The MN AG’s complaint and Congressional testimony paint a sordid picture of NAF’s role in the business of consumer credit-card arbitration. The core of the problem with NAF’s alleged practices is that NAF deceptively promotes itself as an independent and neutral party in the arbitration process.[25] For example, NAF’s advertisements and websites typically include a claim such as:

    “Q: Is the FORUM affiliated with credit card companies or other businesses that use pre-dispute arbitration agreements?
    A: No. The FORUM is an independent administrator of alternative dispute resolution services… We are not beholden to any company or individual that utilizes our services.”[26]

    NAF also claims that it does not receive any funds from other sources, except for the arbitration fees it collects.[27[Perhaps the greatest example of NAF’s proclamations of neutrality is its comparison with court procedures: “These arbitral procedures provide truly excellent due process protections, and meet or exceed the rights parties would have in any court or before an administrative law judge.”[28]

    NAF, however, is far from neutral. Through a tangled corporate web, NAF is affiliated with debt collection parties.[29] Essentially, a hedge fund owns both NAF and debt collection agencies, creating a conflict of interest which NAF and its ownership allegedly actively worked to conceal.[30]

    Beyond this structural affiliation, NAF also allegedly actively markets itself to businesses as an anti-consumer forum that will improve the bottom line for credit-card and debt collection companies. First, some NAF employees allegedly work on a commission basis for convincing companies to use pre-dispute mandatory arbitration clauses in their contracts.[31] Second, NAF markets itself as a cost-effective alternative to litigation.[32] Third, these marketing strategies also include statements of the coercive power of this method of arbitration:

    “The customer does not know what to expect from Arbitration and is more willing to pay”
    “They [customers] ask you to explain what Arbitration is then basically hand you the money”
    “You have all the leverage and the customer really has little choice but to take care of this account.”[33]

    Fourth, NAF assists in drafting the mandatory arbitration clauses, and promotes these clauses as a method of taking control of the risk associated with debt collection.[34] Fifth, NAF assists companies in preparing arbitration claims through, e.g., draft forms, advice on legal trends, and referrals to an affiliated debt collection law firm, Mann Bracken.[35]

    The MN AG argues that these allegations add up to multiple violations of three Minnesota statutes. First, NAF allegedly violated Minnesota’s Prevention of Consumer Fraud Act, which prohibits “The act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise…”[36] Second, NAF allegedly violated Minnesota’s Uniform Deceptive Trade Practices Act, which provides that “A person engages in a deceptive trade practice when, in the course of business, vocation, or occupation, the person: (5) represents that good or services have…characteristics…benefits…that they do not have…”[37 Third, NAF allegedly violated Minnesota’s False Statements in Advertising Act, which provides that “Any person, firm, corporation or association who with intent to sell or in anywise dispose of merchandise securities, service, or anything offered… to the public, … which advertisement contains any material assertion, representation, or statement of fact which is untrue, deceptive, or misleading, shall, … be guilty of a misdemeanor.”[38]

    Although NAF admits to no wrongdoing,[39] the MN AG obviously had a very strong case. NAF decided to settle mere days after the complaint was filed and did not even file an answer, which suggests an acknowledgement that a defense would likely be unsuccessful.[40] The plain language of the statute, as applied to the facts, also seems to be a clear-cut case: NAF represented itself as neutral when it, in fact, was not. This case is a clear example of a fraudulent action in violation of state law, and, when coupled with the magnitude of harm to consumers here, is sufficient reason for an AG to bring a case. Whatever theoretical interpretations of setting “national policy” one might proffer, this reasoning remains the practical reality. The MN AG had a strong case and an obligation to the people of Minnesota, she acted appropriately in bringing a lawsuit under state law, and the only “national” policy to come out of it is the consequence of a voluntary corporate action.

    C. Empirical Data: The Searle Study and the Center for Responsible Lending


    III. Critiques and Defenses of Single State AG’s Setting National Policy

    This section will flesh out the four critiques, apply them to the case of Minnesota v. NAF, and refute those critiques. The critiques, as described above, are: 1) the state violates principles of federalism, 2) the state is not democratically accountable to the nation or to other states, and 3) the state lacks the institutional competency to make national policy rationally. The corresponding refutations are: 1) there are no specific structural or textual violations of federalism, 2) the practical reality of the office of the AG and the voluntary action on the part of the corporation absolve the single state AG from democratic accountability problems, and 3) state policymaking based on anecdotes is an essential part of the nation’s system of policymaking, as this state action brings priorities to the fore and helps create the empirical data on which national policy is properly based.

    A. Federalism

    In the wake of the large multistate settlement involving tobacco, many critics have spoken out against AG multistate litigation as a state interference with federal power and a threat to the constitutional structure grounding our society.[41] Essentially, the argument is that the states, by setting national policy, usurp the proper role of Congress. In Minnesota v. NAF, the problem is magnified: a single state creates national policy instead of a group of 40 or even 50 states. Although rhetorically powerful, this critique lacks constitutional substance, as there is no specific federalism violation.

    Federalism consists of express constitutional restrictions on state action and implied or conditional structural restrictions.[42] Express restrictions are those restrictions listed in Article 1, Section 10, such as the prohibition on states engaging in foreign affairs and making treaties.[43] Implied structural or conditional restrictions include doctrines like the dormant commerce clause, preemption and the supremacy clause, and other rarities like state power over federal bodies, e.g. taxing a federal bank in McCulloch v. Maryland.[44]

    David Lynch, in his note on this topic, handily dismissed the applicability of each federalism restriction to multistate litigation.[45] None of the textual or implied limitations apply. The states are enforcing their own laws, pursuant to proper constitutional authority.[46] That is, each state is bringing an individual state lawsuit against a private party, which is clearly not a violation of federalism, assuming that no federal restrictions on enforcement are present, such as federal preemption. The “national policy” promulgated by these states is nothing more than the aggregation of these individually justified cases. In this sense, Minnesota v. NAF is an easier federalism case than multistate litigation, because there is no aggregation problem.[47]

    Furthermore, in Minnesota v. NAF, the “national policy” of striking down mandatory credit-card arbitration agreements stems not from some attempt by the state to legislate nationally, but from the voluntary action of the private party. When sued, NAF settled with Minnesota and voluntarily suspended its national arbitration practices.[48] Other arbitration organizations and creditors voluntarily followed suit.[49] In light of this practical reality, the critique disappears: there is no government-made national policy. In other words, Minnesota set the policy for its state by having and enforcing laws against fraud, but the private entity set the national policy for its own private activities, which in no way implicates federal government or federalism concerns. This voluntary change also defuses the problems with the national remedies in the consent judgment. As discussed above, the timing of the voluntary settlement and subsequent actions by AAA and other creditors suggests that the national consequences of the state action were the result of corporate decisions, not government actors.[50]

    B. National and State-to-State Democratic Accountability

    While structural federalism arguments did not pose much of an obstacle to justifying the national consequences of a state AG’s actions, democratic accountability arguments derived from federalism principles pose a much muddier and more difficult set of challenges. Democratic accountability, in the context of federalism, requires that an individual citizen be able to hold the right public official accountable, e.g. the federal government has violated this principle by blurring political accountability to the point where a state official would appear responsible for a federal policy.[51] To my knowledge, only cases involving a federal imposition on state authority have been decided under this rationale. Also, those cases have relied upon the text of the 10th Amendment as a constitutional hook, and it is not clear whether states could violate federalism principles without violating one of the structural or express restrictions discussed above. Nevertheless, it is possible to imagine that the courts could create a new principle from structural arguments in the Constitution, akin to the genesis of the dormant commerce clause, which could prevent states from interfering with democratic accountability at the federal level and from interfering with the responsibilities of other states.[52]

    Upon first glance, it appears that there is no accountability problem here. Minnesota has its own state laws, and the AG enforced those laws against a private entity.[53] Furthermore, NAF is a Minnesota corporation, and should fall squarely within the MN AG’s jurisdiction.[54] The citizens of Minnesota have a clear line of accountability to the state legislature for the statute and to the AG for its enforcement. Only when NAF decided to suspend its national arbitration operations did an issue of national accountability arise.[55] The claim that other states would see NAF change its practice and attribute that to the federal government is inapposite; NAF’s decision was not a political one, i.e. it has no political accountability. Essentially, the necessary intermediate step from state to national policy requires private action, which removes the political accountability problem.

    The rise of multistate litigation in the national consciousness, however, might alter that analysis. A full exploration of this argument is beyond the scope of this paper, but I will provide a rough sketch. First, in multistate litigations, one or two AGs often take the lead on negotiating for the rest of the states involved.[56] Second, this practical reality could pose an ethical issue, in that these AGs must now consider the welfare of states other than their own.[57] Third, multistate litigation has become so commonplace for certain types of cases that a single state AG has the responsibility to consider other states’ welfare, even when filing alone.[58] Fourth, this situation could create a democratic accountability problem, because the single AG could be seen as acting on a national level, thus blurring accountability. Or, similarly, there could be a horizontal democratic accountability problem, i.e. state to state, since citizens of other states do not have a political link to that single AG.[59]

    Whatever theoretical difficulties remain with the above argument, it seems to impugn Minnesota’s actions given the scope of the Consent Judgment and the MN AG’s subsequent request to AAA for complete cessation of arbitration activities.[60] That is, whether a single state has an ethical duty to consider the interests of other states is irrelevant here; the MN AG asked for national remedies, which could suggest that the MN AG had national interests in mind. It is possible, however, that the interests of Minnesota citizens alone could explain the request for national remedies meaning that adequate protection of Minnesota citizens would require a remedy beyond the borders of Minnesota.[61]

    Even without the theoretical possibility of a national remedy being necessary, the practical reality of the AG’s office eliminates the democratic accountability problem.[62] AGs start with the facts on the ground, and only move to multistate considerations if the case requires the help of other states, e.g. insufficient resources to handle a large case.[63] Minnesota’s sole focus on state law violations in this case absolves it of accountability problems; any national consequences following Minnesota’s lawsuit are the result of corporate action. There is no horizontal accountability problem, because Minnesota, like every other state, has the parens patriae power to bring public interest litigation, i.e. Minnesota is not stepping on other state’s toes. To find a horizontal accountability problem here would be to imperil all AG litigation that happens to affect something beyond the borders of the state. Similarly, there is no usurpation of federal power here, since Minnesota is acting only within its reserved powers and is not taking on a federal role. The only nationwide policy set here is the policy chosen by the corporation.

    This defense against the federalism and democratic accountability problems relies to some extent on the voluntary agreement to a settlement. Had this case been fully litigated, perhaps the critiques would still apply. The nationwide policy would not be set by the corporation, but by the AG and by the state court.

    Even if the case had gone to trial, any national consequences that flowed from the court’s decision would valid under theories of democratic accountability and federalism. The state court only has power to enforce remedies within the state’s borders,[64] so NAF could continue its actions outside of Minnesota (at its own peril, of course). This boundary of the court’s and AG’s power solves the democratic accountability and federalism issues: any national policy is set not by the single state court or AG, but by the corporation itself or by the courts and AGs of other states. That is, either NAF would voluntarily suspend its national operations, or other AGs would bring cases in their respective states and set policy for themselves.

    C. Institutional Competence for Policymaking

    The institutional competence critique does not stem from constitutional theory, but from a theory of prudent policymaking. A competent policymaking institution should not rely on anecdotal evidence, but should base its decisions on the available empirical data and rigorous analysis.[65] State AGs make policy through litigation, as opposed to holding hearings like a legislature or doing rigorous empirical analysis like an administrative agency. Even if AGs could adopt these methodologies, they likely would not have the resources to do them properly. It seems then, that AGs are constrained to making policy based on anecdotal evidence: citizens complain or the local news investigates a problem, and the AG responds by litigating (or using some extralegal means, such as the press, which I will not consider for the purposes of this argument).[66] By relying on anecdotal evidence, AGs lose several essential tools for national policymaking: picking the right priorities, predicting consequences, and understanding root causes of problems.

    With the big picture of the policymaking process in place, the rebuttal of this critique is simple: policymaking begins with anecdotes and moves to empirical data. Minnesota v. NAF is a perfect example of this phenomenon. The federal government did not regulate the presence of mandatory forced arbitration clauses in credit card contracts. A consumer protection problem concerning these clauses developed. The Minnesota AG, seeing the state’s citizens suffering, filled that regulatory void by bringing an action under state law.[67] This action resulted in a temporary stop to credit-card arbitration and caught the attention of federal policymakers.[68] Congress held hearings on this topic in July of 2009,[69] and could regulate this area soon. The genesis of policymaking from anecdotes is an essential component in the regulatory competition and cooperation between state and federal governments.[70]

    IV. Conclusion

    Much like the state AGs’ role in antitrust enforcement, the MN AG acted first, in an area unregulated by the federal government, and got it right.[71] It is precisely the AG’s different institutional competency – being on the ground with local problems and being able to respond quickly – that enables our nation’s policymaking process. This strong local concern also functions as a rebuff to critiques of federalism and democratic accountability. Minnesota v. NAF is not an example of a state AG eviscerating the dual-sovereign structure of our government, but rather an example of a state AG doing what’s best for her client, the people of Minnesota, within the parameters of power allocated to the state of Minnesota and the Office of the Attorney General.

    1 Complaint at ¶¶ 1-4, State of Minnesota by its Attorney General, Lori Swanson, v. Nat’l Arbitration Forum, Inc. [hereinafter Complaint] (Hennepin County Dist. Ct. Minn., July 14, 2009), available at

    2 Consent Judgment at ¶ 1 State of Minnesota by its Attorney General, Lori Swanson, v. Nat’l Arbitration Forum, Inc. [hereinafter Consent Judgment] (Hennepin County Dist. Ct. Minn., July 19, 2009) (No. 27-CV-09-18550), available at

    3 Press Release, Office of Minnesota Attorney General Lori Swanson, National Arbitration Forum Barred From Credit Card And Consumer Arbitrations Under Agreement With Attorney General Swanson:
    Swanson Also Wants Congress to Ban “Fine Print” Forced Arbitration Clauses [hereinafter Press Release] (July 20, 2009), available at; “Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 11th Cong. 1 (2009) (statement of Richard W. Naimark, on behalf of the American Arbitration Association).

    fn4.Naimark, supra note 3, at. 1-2.

    5 Carrick Mollenkamp, Dionne Searcey, and Nathan Koppel, Turmoil in Arbitration Empire Upends Credit-Card Disputes, WALL ST. J., Oct. 15, 2009, at A14. Available at

    6 The House of Representatives Domestic policy Subcommittee of the Oversight and Government Reform Committee held a hearing on this issue on July 22, 2009. See supra note 3.

    7 For a discussion of structural and textual federalism-based critiques, see Jason Lynch, Note: Federalism, Separation of Powers, and the Role of State Attorneys General in Multistate Litigation, 101 COLUM. L. REV. 1998 (2001) (discussing textual and structural federalism critiques of state AGs engaged in multistate litigation). For a democratic accountability critique of multistate litigation by AGs, see Timothy Meyer, Federalism and Accountability: State Attorneys General, Regulatory Litigation, and the New Federalism, 95 CAL. L. REV. 885 (2007).

    8 NAF’s problematic procedures were discovered well before the MN AG’s suit. Harvard Law Professor Elizabeth Bartholet worked as an arbitrator for NAF and experienced the bias against arbitrators who sometimes decided cases in favor of consumers. She blew the whistle on NAF after having cases taken from her and experiencing NAF’s efforts to prevent her from testifying in a related case. She brought national attention to the problems with this form of arbitration. See Courting Big Business: The Supreme Court’s Recent Decisions On Corporate Misconduct and Laws Regulating Corporations: Hearing Before the S. Comm. on the Judiciary, 110th Cong. (2008) (statement of Elizabeth Bartholet), available at

    9 Naimark, supra note 3.

    10 “Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 111th Cong. 1 (2009) (Staff Report: “Arbitration Abuse: an Examination of Claims Files of the National Arbitration Forum”, Domestic Policy Subcomm. Majority Staff, H. Oversight and Government Reform Comm..) [hereinafter Staff Report].

    11 Staff Report at 7.

    12 Id. at 7. See also Arbitration” or “Arbitrary”: The Misuse of Arbitration to Collect Consumer Debts before the H. Oversight and Government Reform Comm., Domestic Policy Subcomm., 11th Cong. 8-9 (2009) (statement of F. Paul Bland, Jr., Staff Attorney, Public Justice).

    13 Staff Report at 9. “There is no procedure to correct a decision that is against the law or a decision that totally different [sic] from another decision issued by that arbitrator or another arbitrator. Our review disclosed decisions that were totally opposite, depending on whether or not the arbitrator was concerned with deficiencies in the claim documents or ignored them entirely (citation omitted).”

    14 Id. at 8. “When a case is assigned to an arbitrator whom the creditor considers unfavorable, the creditor can remove the arbitrator with a simple form letter, without any need to recite a justification. …In Maine, one arbitrator who was actually following NAF’s rules, and dismissing cases that were deficient, found himself without any subsequent case assignments.” See also Bland at 7-8.

    15 Staff Report at 10; Bland, supra note 11, at 16.

    16 Bland, supra note 11, at 7, 14-15.

    17 Id. at 20-21.

    18 Staff Report at 7.

    19 Id. at 7.

    20 Id. at 9.

    21 Id. at 9.

    22 Id. at 7.

    23 Id. at 8.

    24 Id. at 8 (citing DEL. CODE ANN, tit. 10, § 3912).

    25 Complaint at ¶ 19.

    26 Id. at ¶ 21.

    27 Id. at ¶ 24.

    28 Id. at ¶ 25.

    29 Complaint at ¶¶ 26-85. See also Appendix A to this paper, which contains the corporate organizational charts used in the complaint.

    30 Id. at ¶ 87.

    31 Id. at ¶ 92.

    32 Id. at ¶ 94.

    33 Id. at ¶ 96.

    34 Id. at ¶¶ 99-106.

    35 Id. at ¶¶ 107-111.

    36 Minn. Stat. § 325F.69, subd. 1.

    37 Minn. Stat. § 325D.44, subd. 1.

    38 Minn. Stat. § 325F.67 (2008).

    39 Consent Judgment.

    40 Press Release, supra note 3. Other explanations for this decision are also possible, e.g. the corporation wanted to head off any further lawsuits and had to act quickly, or perhaps acting quickly and nationally would be a showing of good faith that could minimize reputational damage. Nevertheless, these alternate explanations still suggest the strong underlying merit of Minnesota’s case.

    41 Lynch, supra note 7, at 1998-99; Thomas C. O’Brien, Constitutional and Antitrust Violations of the Multistate Tobacco Settlement, Policy Analysis (Cato Institute, Washington, D.C.) May 18, 2000, at 1, 8-10, available at; Alabama Attorney General William H. Pryor, Jr., The Law is at Risk in Tobacco Suits, N.Y. TIMES, Apr. 27, 1997, 4, at 15.

    42 Lynch, supra note 7, at 2010-2018. I have excluded the argument about the Compact Clause from this discussion, since only one state is involved here.

    43 U.S. Const. art. I, 10, cl. 1.

    44 Lynch, supra note 7, at 2012-15; McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819).

    45 Id.

    46 Id. at 2032.

    47 The aggregation equivocation, i.e. the argument that individually justified actions remain justified when aggregated, might fail constitutional scrutiny. In commerce clause jurisprudence, it is permissible to regulate activities that are individually beyond Congress’ reach if those individual activities would substantially affect commerce in the aggregate. Wickard v. Filburn, 317 U.S. 111 (1942) (holding that regulation of purely intrastate homegrown wheat permissible because, when aggregated, has a substantial effect on interstate commerce); Gonzales v. Raich, 545 U.S. 1 (2005) (holding that homegrown marijuana is regulable by Congress under the commerce clause where regulation of that substance is essential to a comprehensive regulatory regime). Analogously, the character of the individual action in this case is no guarantee that aggregated action shares the same character.

    48 Press Release, supra note 3.

    49 Mollenkamp, supra note 5.

    50 See supra notes 3, 37 and accompanying text.

    51 Printz v. U.S., 521 U.S. 898, 920 (1997) (democratic accountability blurred where state executive official responsible for enforcing federal policy); New York v. U.S., 505 U.S. 144, 168-69 (1992) (democratic accountability blurred where state legislature required to take title to nuclear waste); U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779, 838 (1995) (Kennedy, J., concurring) (generally expositing theory of dual federalism in U.S. government and importance of democratic accountability); see generally JOHN HART ELY, DEMOCRACY AND DISTRUST: A THEORY OF JUDICIAL REVIEW (1980) (arguing that reinforcement of political representation is the cornerstone of judicial review).

    52 For an argument proposing constitutional restraints on state-state action, see Scott Fruehwald, The Rehnquist Court and Horizontal Federalism: An Evaluation and a Proposal for Moderate Constitutional Constraints on Horizontal Federalism, 81 DENV. U. L. REV. 289 (2003).

    53 See supra notes 33 and 34 and accompanying text.

    54 Complaint at ¶ 7. The fact that NAF is a Minnesota corporation might seem to undermine the democratic accountability critique completely, since AGs should protect citizens from threats within the borders of their states. This argument, however, fails to account for the company’s national operations, which would give every AG jurisdiction. Thus, the MN AG is still setting policy for those other states by achieving a national remedy.

    55 Press Release, supra note 3.

    56 Jane Dattilo, Representing the Public’s Interest: Ethical Issues Confronting State Attorneys General Generally, and Multistate Litigators Specifically, 25 (unpublished seminar paper) (April 25, 2008), available at


    58 This claim contains two controversial premises: 1) that multistate litigation is practically inevitable for certain cases and 2) that states would then take on an ethical responsibility for other states before they enter the fray. As to 1), I offer two disjointed pieces of evidence: the recent boom of multistate litigation related to the economic crisis, see e.g. Ruth Simon, Countrywide’s Pressures Mount, WALL ST. J., June 26, 2008, at A3 (describing the beginning of multistate litigation against subprime lender, Countrywide), and the presence of counsel in private law firms for AG issues, e.g. former New York Attorney General Robert Abrams at Stroock & Stroock,& Lavan. (“Mr. Abrams has been of particular value to corporations that have been the subject of an investigation by a state attorney general or by multi-state investigations by numerous state attorneys general.”) As to 2), this premise seems unlikely, but, if a multistate litigation is likely to ensue, it would be prudent for the AG to consider the likely actions of other states. Still, the single AG is not yet an appointed agent for the other AGs, as in an active multistate litigation.

    59 For a theoretical exposition of horizontal accountability problems and an applied analysis concerning state tort law, see Samuel Issacharoff and Catherine M. Sharkey, Backdoor Federalization, 53 UCLA L. REV. 1353 (2006).

    60 Press Release, supra note 3; Consent Judgment at ¶¶ 1, 3.

    61 The national remedy might be justified because the MN AG is striking the corporation’s nerve center. That is, the fraudulent actions started at headquarters and should end there. Alternatively, creditors might be able to choose the forum for arbitration and avoid implicating Minnesota law.

    62 For a tax law example of practical realities explaining away theoretical confusion, see David Schizer, Frictions as a Constraint on Tax Planning, 101 COLUM. L. REV.1312 (2001)

    63 See generally Lynch, supra note 7; Rachel Rosenberg, A Model Multistate: Ford, Firestone, and the Attorneys General (unpublished student seminar paper) (January 6, 2002) (describing the practical nature of multistate litigation as fundamentally concerned with violations of state law, which is squarely within the AGs’ parens patriae power). Of course, multistate considerations could also come into play if other states independently join an ongoing litigation.

    64 See, e.g., 3-26 Minnesota Civil Practice § 26.24 (describing geographical limits on state court authority to execute a judgment).

    65 Rounds, supra note 40, at 1.

    66 Consumer Credit and Debt: The Role of the Federal Trade Commission, before the H. Comm. On Energy and Commerce, Subcomm. on Commerce, Trade and Consumer Protection, 110th Cong. 6 (2009) (statement of James Tierney, Director of the National State Attorney General Program, Columbia Law School).

    67 See generally Complaint.

    68 See supra note 5.

    69 See supra note 6.

    70 For another example where regulatory competition and cooperation have fostered better policymaking, see Stephen Calkins, Perspectives on State and Federal Antitrust Enforcement, 53 DUKE L.J. 673 (2003).

    71 See Tierney, supra note 86, at 6 (“State attorneys general saw the need for consumer protection in the area of credit. They got it first. And they got it right.”).

  • 2 The Road Less Travelled: Alternatives to Multi-State Litigation in Response to the American Mortgage Crisis

    The Road Less Travelled: Alternatives to Multi-State Litigation in Response to the American Mortgage Crisis

    John Schwab


    The mortgage crisis that began in late 2005 debilitated both the American and global economies. It also had major ramifications for large numbers of American homeowners who quickly found themselves owning homes that were worth significantly less than the mortgages used to purchase them. Due to the contemporaneous decline in overall economic conditions and the fact that many homeowners had secured mortgages they were unable to afford, foreclosures rose at an astronomical rate.

    Officials at all levels of American government have instituted various measures to “solve” this resulting foreclosure crisis. Some of the most high-profile attempts at forestalling the foreclosure of American homeowners came from the offices of State Attorney Generals. These high-profile actions took the form of multi-state investigations, backed up by the threat of multi-state litigation, of large mortgage brokers and servicers with a national real-estate presence. The investigations made headlines in newspapers around the country and resulted in foreclosure concessions as well as financial windfalls for the States involved. However, high-profile multi-state investigations are not the only, or even perhaps the optimal, response to the foreclosure crisis from a State’s Attorney General.

    This paper will explore the approach taken by the Massachusetts’ Attorney General’s Office under the leadership of AG Martha Coakley. Ms. Coakley’s actions against Fremont Investment & Loan were not national news, nor did they result in a headline-grabbing financial settlement. On the other hand, the Fremont lawsuit and a subsequent suit against H&R Block and its subsidiary, Option One Mortgage, accomplished something unique: they prevented foreclosures on the mortgages at issue in the suit while also setting a baseline template for what constituted a “presumptively unfair” mortgage in violation of the Commonwealth’s Unfair and Deceptive Practices Act. Thus, without the fanfare of a national investigation, the Massachusetts Attorney General’s Office obtained relief against particular mortgage brokers while establishing a legal precedent that individuals could use in negotiations or lawsuits with other lenders not party to the AG’s lawsuits. Part I of this paper will outline the mortgage crisis and the resulting tide of foreclosures and then briefly examine the prominent multi-state investigations and negotiations led by State Attorneys General in order to contrast those actions with the lawsuits in Massachusetts. Part II will explore the background of Fremont Investment & Loan and its presence in Massachusetts, before discussing the unique aspects of the Attorney General’s lawsuit and the resulting trial court and Massachusetts Supreme Judicial Court decisions. Part II will then detail the Attorney General’s lawsuit against H&R Block, which seeks to a establish a similar “baseline” of unfair mortgage lending but with respect to racial discrimination rather than financial practices. Part III will then discuss the various advantages and disadvantages of the Massachusetts Attorney General’s approach when compared with multi-state investigations.

    Part I— The Foreclosure Crisis and Multi-State Litigation

    The United States mortgage crisis has devastated home values across the country. Moreover, it has left numerous Americans unable to meet their mortgage payments. The hardest hit have been those with the types of risky loans that were major contributors to the mortgage crisis: adjustable rate mortgages (ARMs), interest only mortgages and payment option mortgages. Owners of these risk-laden loans are significantly more likely to become delinquent in their mortgage payments and face foreclosure. Moreover, the rising number of foreclosures has created a vicious cycle: mass foreclosures drive investors out of the real estate market, the withdrawal of capital makes it increasingly difficult for distressed mortgage holders to refinance and, thus, more individuals are forced into foreclosure.

    State Attorney Generals have sought to break this cycle in a variety of ways, most prominently through well-publicized multi-state investigations. The pursuit of multi-state actions is, perhaps, not surprising: multi-state lawsuits have been a popular “tool” of Attorneys General since the success of the massive tobacco litigation in the 1990s. Moreover, multi-state suits have produced large settlements in a number of predatory lending cases. However, multi-state litigation opens the door for criticism of Attorneys General on a number of levels. Multi-state actions in relation to the mortgage crisis are particularly vulnerable to charges that such settlements usurp legislative power and, perhaps more significantly, that they fail to provide proper levels of relief for individual homeowners.

    The most recent and, in some ways, most wide ranging multi-state investigation, is a fifty-state effort to stop mortgage lenders from foreclosing on homes using flawed, or potentially flawed, documentation. The massive investigation made headlines and put the States Attorney Generals at the forefront of “combating” foreclosures.

    On the other hand, it isn’t at all clear that the AG’s actions in investigating “robo-signing” and other potentially illegal foreclosure procedures are actually getting to the heart of the foreclosure problem. Before initiating a foreclosure, mortgage brokers are required to produce a sworn affidavit that they own the mortgage in question and that payments are at least six months delinquent. When mortgages are “robo-signed,” brokers never even look at the documents in question—-instead, they pay large numbers of “walk-in hires so inexperienced they barely [know] what a mortgage is” to sign off on the documentation. While such a practice is clearly unethical and perhaps illegal, there is no causal link between mortgage holders whose brokers have “robo-signed” their documentation and mortgage holders who are delinquent on their payments because they were originally sold an unfair and deceptive loan. In other words, it’s not clear that the individuals who were victimized by predatory lending are those who would obtain relief from an injunction against “robo-signed” mortgages. While it is likely that the Attorneys General are simply using the “robo-signing” violations as leverage with which to negotiate wider-ranging concessions from mortgage holders, this is not necessarily a good thing. Such an approach is a clear example of the usurpation of legislative power that leads to criticism of the multi-state investigation: Attorney Generals are not enforcing the law so much as using the law to negotiate procedures and policy for the mortgage industry that might normally be dictated by legislative law-making.

    The approach of the Massachusetts Attorney General’s Office stands in stark contrast to this latest multi-state investigation, both in terms of the actions undertaken and the desired results. In particular, Attorney General Coakley took two distinctive steps: 1) she filed a lawsuit and then actually litigated it and 2) she sought, and won, a judicial ruling that would provide relief not just for victims of Fremont Investment & Loan, but for all Massachusetts citizens who had been victimized by predatory mortgage lending.

    Part II—- Litigation in Massachusetts

    The Commonwealth of Massachusetts was hit hard by the mortgage crisis and subsequent wave of foreclosures. In 2008, the Commonwealth saw 12, 430 foreclosures, the largest number in its history and rate of foreclosures did not decrease significantly from there. Massachusetts’ Attorney General, Martha Coakley, employed a number of approaches to help distressed borrowers in the Commonwealth. Perhaps the most unique of the Attorney General’s efforts was the investigation and subsequent lawsuit against major subprime lender Fremont Investment & Loan.

    A. Fremont Investment & Loan

    Fremont Investment & Loan was a national mortgage lender based in Brea, California. Fremont maintained a large presence in Massachusetts: they were the second largest subprime lender in the state. Fremont’s mortgage business was heavily reliant on subprime lending: somewhere between fifty and sixty percent of its residential loans were considered subprime. The company specialized in “pulse products,” meaning, as elucidated by a former Fremont employee, that “[i]f a borrower had a pulse, he or she could qualify for one of Fremont’s products.” Nearly forty percent of Fremont’s loans in Massachusetts were stated income loans, in which the borrower was allowed to state his or her income without any form of verification. Once the borrower had stated an occupation and income, Fremont checked the stated income against the average income for the claimed occupation in that geographic area, using the website

    The result of these lax underwriting practices was predictable: numerous individuals were given loans that they could in no way afford based on falsified occupation and income information. Mortgage brokers such as Fremont, as well as some politicians and journalists, claimed that the true fault in the mortgage morass lay with the borrowers who knowingly falsified their loan applications. Regardless, it is very clear that Fremont encouraged its brokers to sell the riskiest, highest yield mortgages they could by tying brokers’ bonuses directly to the mortgage rates of products they sold. Brokers were paid an additional fee for selling a buyer a mortgage at a rate higher than that buyer qualified for. Fremont also offered its brokers “bounties” for selling mortgages with large pre-payment penalties.

    Fremont Investment & Loan was not simply a Massachusetts problem. Before it filed for bankruptcy in 2008, Fremont was one of the five largest subprime mortgage lenders in the country. While Fremont did not, perhaps, have the same level of public visibility as Countrywide, there is no reason Fremont could not have been the target of a similar multi-state investigation. However, the Massachusetts Attorney General’s Office decided to take a very different tack in confronting the issues created by Fremont: they filed a lawsuit and then actually litigated it.

    B. The Lawsuit: Commonwealth v. Fremont Investment & Loan

    The Attorney General’s lawsuit against Fremont Investment & Loan did not materialize out of thin air. It was an outgrowth of a number of factors, including the mounting rate of foreclosures in Massachusetts, the particular behaviors of Fremont Investment, and the ineffectiveness of negotiated agreements between the company and the Commonwealth.

    1. The Lead-Up To the Lawsuit

    In early 2007, the Federal Deposit Insurance Corporation (FDIC) alleged that Fremont had engaged in unsound lending practices. The FDIC found that Fremont had been operating “without effective risk management policies and procedures . . . in relation to its subprime mortgage and commercial real estate lending operations.” The FDIC demanded Fremont undertake a number of “corrective actions” including altering its subprime lending policies and devising a plan for restructuring distressed mortgages. Without admitting any sort of wrongdoing, Fremont agreed to comply with the FDIC’s order.

    This agreement with the FDIC did not necessarily guarantee immediate relief from foreclosure for borrowers, and this was a significant concern in Massachusetts. By 2007, fully twenty percent of Fremont loans in Massachusetts were in default; the company was responsible for more foreclosures in Boston than any other lender. In response, the Massachusetts Attorney General’s Office negotiated a Term Sheet Agreement with Fremont. Under the Agreement, Fremont would provide the AG’s Office ninety days notice prior to instituting foreclosure proceedings on any residential real estate holding in Massachusetts. During those ninety days, the AG’s Office would review the loans in question and raise any pertinent objections. If the Attorney General did object to a specific loan or loans, Fremont agreed to attempt to negotiate reformation of the objectionable loans. If no reformation or other solution could be reached, Fremont would be allowed to proceed with foreclosure, unless the Attorney General sought to enjoin such an action.

    After the Term Sheet Agreement was in place, Fremont submitted one hundred ninety three loans to the Attorney General’s Office. The Attorney General objected to all one hundred and nineteen loans in which the residence in question was owner occupied. Fremont claimed that the Attorney General’s Office was not acting in good faith and terminated the agreement. In response, the Attorney General filed suit against Fremont, seeking to enjoin the lender from foreclosing on any Massachusetts residences without the AG’s consent.

    2. Commonwealth v. Fremont Investment Loans, Superior Court Decision

    The Attorney General brought suit in Massachusetts Superior Court under the Commonwealth’s Unfair and Deceptive Practices Act, Section 93A. Section 93A is a standard Unfair Practices Act, similar to those found in most states. As in most states, lawsuits brought by the Massachusetts Attorney General under 93A are not uncommon. What made the Attorney General’s lawsuit in Fremont unique was the form of relief requested. The Attorney General actually requested two forms of relief. First, she asked Fremont Investment be enjoined from foreclosing any residential properties in the Commonwealth without the written consent of the AG’s Office. Second, she proposed a “limited preliminary injunction” that would enjoin Fremont from foreclosing on any mortgages that were “Presumptively Unfair.” This alternative proposal for relief, and its implicit creation of “Presumptively Unfair Loans,” is what makes Commonwealth v. Fremont Investment & Loan a unique and interesting legal response to the mortgage crisis.

    The Attorney General proposed that a loan should be considered “Presumptively Unfair” if it met certain criteria. Under the proposal, a loan would be presumed unfair if it were an adjustable rate mortgage with “a low introductory rate of three years or less in which either (a) the combined loan-to-value ratio was 90 percent or higher, (b) the loan was approved on a ‘stated income’ basis . . . or© the loan had a prepayment penalty.” If the borrower consented to foreclosure or the property in question was vacant, foreclosure against a presumptively unfair property could proceed.

    This argument was unique in a number of respects. First, it sought to enjoin Fremont from foreclosing on mortgages because those mortgages contained certain features, each of which was “expressly permitted by federal and Massachusetts law.” The Attorney General acknowledged this, but termed the legality of the various loan features “irrelevant.” Instead, the Attorney General asked the court to consider Fremont’s “wholesale failure to meaningfully disclose the material terms including, most significantly, the cumulative risk” created by compiling a multitude of high-risk features in a single mortgage. In other words, she claimed that practices that were not barred by law could still violate Section 93A because they were unfair and deceptive in combination.

    In support of her position, the Attorney General laid out, in her Complaint and supporting motions, a detailed list of the types of high-risk features common to Fremont loans, including loans of one hundred percent of the value of homes, “piggyback” loans and teaser-based qualifying loans. Of the ninety-eight loans examined by the Attorney General’s Office, every one would produce “payment shock”: once the teaser-rate period ended, interest rates on the loans rose as much as three percent, “with the potential for another 1.5 percent increase hike every six months.”

    The trial court adopted the Attorney General’s proposal that certain loans be considered presumptively structurally unfair. After examining the various high-risk features attached to many Fremont loans and detailed in the AG’s complaint, the trial court elucidated its own definition of what constituted a presumptively unfair mortgage. The court held that a loan would be presumed unfair if it met four criteria: 1) the loan was an adjustable rate mortgage with an introductory period of three years or less, 2) the loan had a teaser rate for the introductory period that was at least three percent less than the fully indexed rate (the rate over the lifetime of the loan), 3) the borrower had a debt-to-income ratio of more than fifty percent when calculated against the total value of the loan and 4) the “loan to value ratio [was] 100 percent” or the loan had a significant prepayment penalty. The court then provided the requested injunction, which required Fremont to give advance notice to the AG’s office of any potential foreclosure and, for any mortgage that met the four criteria for unfairness, to make good faith efforts to reform or restructure the loan. If reformation proved impossible, Fremont was required to obtain the AG’s permission to proceed with the foreclosure. Subsequently, the court modified the injunction to prevent Fremont from selling any of its residential loans unless the purchaser agreed to the terms imposed by the injunction.

    3. Commonwealth v. Fremont Investment & Loan, Supreme Judicial Court Decision

    Fremont immediately appealed the Superior Court’s ruling. After the Court of Appeal declined to reverse, the Massachusetts Supreme Judicial Court granted Fremont’s request for direct review. On appeal, Fremont’s “basic contention” was that the trial court improperly applied unfairness standards in a retroactive manner: in other words, Fremont’s loans were not unfair at the time they were made; they only appeared unfair in retrospect. The Supreme Judicial Court rejected this argument, primarily because it found that, in creating loans with all four criteria singled out by the trial court, Fremont knew that they had created a situation that virtually “guarantee[d] that the borrower would be unable to pay and default would follow. . . .” The Court found that the injunction properly served the public interest and affirmed.

    In 2009, the Attorney General reached a settlement agreement with Fremont Investment. Fremont agreed that the terms of the preliminary injunction, including the definition of what constituted unfair loans, would become permanent.

    4. The Aftermath— New Regulations & Lawsuits

    The Attorney General subsequently issued a series of regulations that, inter alia, codified the Fremont criteria for defining a presumptively unfair loan. The Fremont decision then provided the basis for a lawsuit against H&R Block and its subsidiary, Option One Mortgage, that sought to build on the foundation established in Fremont. H&R Block contains many of the same allegations as those leveled against Fremont Investment & Loan. Under the precedent of Fremont, the defendants had little recourse other than to make Constitutional claims: the defendants argued that the Attorney General’s interpretation of Mass. Gen. Laws c. 93A, as applied in Fremont, was so broad as to be unconstitutionally vague. The trial court rejected this contention in denying the defendants’ motion to dismiss and granting the Attorney General a preliminary injunction.

    H&R Block is particularly noteworthy for the inclusion of a new charge: violation of the Massachusetts Anti-Discrimination Act. The Attorney General’s Office claimed that the defendants had violated Section 4(3B) of the Act, which prohibits racial discrimination in the granting of mortgage loans. In her Complaint, the Attorney General outlined the defendant’s discriminatory marketing and mortgage practices. The marketing practices included distributing to its brokers materials urging sales of subprime mortgages to racial minorities because those individuals had limited financing opportunities and encouraging mortgage brokers to partner with real estate brokers of the same race as the targeted minority borrowers. The discriminatory mortgage practices resulted in a “substantial disparity” in fees charged to minority borrowers when compared to Caucasian borrowers. For example, a minority borrower paid roughly $3,500 more in fees than did a white borrower with a lower credit score on similar mortgages.

    The Attorney General did not, however, simply allege individual instances of discrimination. Instead, she charged the defendants with systemic discrimination, defined as “the maintenance of a general practice or policy aimed at members of a protected class.” The argument provided two benefits: 1) it could be applied to any minority borrowers who had done business with the defendants and 2) it allowed 151B—4(3B) discrimination claims to be brought after the statute of limitations had expired. The second benefit is particularly significant: Massachusetts law provides that housing-related lawsuits must be brought within a year of the occurrence of the alleged unlawful act unless there is a showing of systemic discrimination. While the H&R Block litigation is still ongoing, the trial court looked favorably on this systemic discrimination argument in granting the Attorney General’s requested preliminary injunction and denying the defendants’ motion to dismiss.

    Part III — Evaluating the Massachusetts Approach

    The Massachusetts Attorney General’s approach to helping distressed homeowners in the Commonwealth was unique both in its execution and in the result achieved. While it is impossible to say whether the AG’s litigation-based approach is superior to other techniques, such as the multi-state investigation and negotiation, it seems clear that Fremont and H&R Block create both benefits and drawbacks distinct from those achieved in multi-state actions.

    1. Benefits of Litigation-Based Approach to the Foreclosure Crisis

    The Massachusetts Attorney General’s litigation in Fremont and H&R Block provided both “primary” benefits—those felt directly by homeowners in the Commonwealth-and “secondary” benefits—those that indirectly assisted homeowners or improved the Commonwealth generally. The “primary” benefits secured by AG Coakley are similar to those secured in a number of the multi-state negotiations: a slowdown of the foreclosure process and financial remuneration for the states. Obviously, both factors are significant for the Commonwealth and for individual homeowners.

    However, the most important part of the Attorney General’s lawsuit and the subsequent decision in Fremont was a “secondary” benefit: the creation of a baseline for what constituted an unfair loan in violation of Massachusetts law. The Fremont holding extends beyond Fremont Investment & Loan itself—it is potentially applicable to all loans made in the Commonwealth, regardless of the lender. On the other hand, a multi-state settlement such as that made with Countrywide is applicable only to loans made or held by Countrywide. Thus, while some Attorney Generals might hope that Countrywide could provide a “template” for future negotiations, the Fremont case established actual judicial precedent that would control all Massachusetts residential real estate actions from that point forward. Fremont provided individuals saddled with unfair loans a starting point from which to renegotiate their mortgages in a manner that suited their individual needs. The Fremont decision also incentivized private attorneys to take on clients with “presumptively unfair” mortgages—because the burden of proving unfairness was shifted to the defendants, attorneys with limited resources had the ability to take on large corporations on behalf of individual clients. Further, by enhancing individuals’ bargaining position, Fremont may allow homeowners to secure relief that meets their particular needs. This is not always the case with wide-ranging multi-state settlements.

    The “secondary” benefits of the H&R Block case could prove similarly effective. In particular, the Attorney General accomplished two things: 1) she used her office’s resources to investigate the racially discriminatory practices of certain mortgage lenders, thereby providing a factual template for individuals to use in the future and 2) she used the compiled data on race and lending to make an effective charge of systematic discrimination. As with the Fremont case, these benefits are important in the manner in which they incentivize individual action and, thus, offer the potential for more personalized and effective mortgage reformations. In particular, the Attorney General’s convincing argument that mortgage lenders engaged in systemic racial discrimination opened the door for individuals to bring discrimination suits that would have otherwise been barred by the statute of limitations. While each of these benefits is significant, a litigation-based approach to confronting the mortgage crisis has certain drawbacks when compared with multi-state negotiation.

    2. Drawbacks to Litigation Based Approach to the Foreclosure Crisis

    The major drawbacks to a Fremont-style approach are issues related to the nature of litigation itself. Perhaps the clearest problem is that litigation entails risk. In a negotiation, an Attorney General knows exactly what deal she is receiving. By actually litigating, the AG runs the risk of securing an unfavorable decision, which would potentially hamper both future litigation and future negotiations. On the other hand, this risk is mitigated by the very nature of the mortgage crisis. Companies like Fremont Investment & Loan were clearly “bad actors”—-they made reckless loans with little regard for even basic underwriting practices. An Attorney General bringing an action against companies such as these in a state trial court is likely in an advantageous position before the trial even begins.

    A second potential drawback is the feasibility of litigation. Not every Attorney General’s Office will have sufficient resources or trial experience to successfully litigate against large corporate entities. For states lacking in resources, joining a multi-state investigation may be the only reasonable option. But for states like Massachusetts, it is important to recognize that litigation does not foreclose other options such as regulation and negotiation—-in fact, successful litigation may improve a state’s position in future negotiations.


    The Fremont and H&R Block are unique in that they represent an uncommon approach to the foreclosure crisis and they achieved uncommon, and highly beneficial, results. The lawsuits provided direct relief against particular lenders while establishing a standard for unfairness and racial discrimination in lending that applied to all lenders. They created an opportunity for individual action against large corporations as well as improving the Attorney General’s position in future negotiations with other lenders. They did so not through negotiation and quasi-legislative action, but through the most traditional approach an Attorney General can take in combating unfairness: actual litigation.

    It is impossible to state whether one approach to America’s foreclosure crisis is clearly superior to another—-each action has its own set of benefits and drawbacks and there is no obvious solution for the millions of American homeowners “underwater” on their mortgages. However, the Fremont and H&R Block lawsuits are strong reminders that the option of actual litigation is one that State Attorneys General should consider as a part of their response to the crisis. While actual litigation is, perhaps, “the road less travelled” for the modern Attorney General facing down the foreclosure crisis, it is a road that more Attorneys General should consider exploring.

  • 3 Seller of Buying-Club Memberships Ordered to Repay Iowans $29.8 Million

    Seller of Buying-Club Memberships Ordered to Repay Iowans $29.8 Million

    By Lee Rood

    A Polk County judge this week ordered a Connecticut company with a long history of consumer fraud complaints to pay Iowans $29.8 million in restitution and stop soliciting new buying-club members in the state.

    Judge Robert Hutchison awarded the amount Monday after Iowa’s attorney general won a civil lawsuit last year against Vertrue Inc. and two subsidiaries.

    The lawsuit alleged the company used illegal sales tactics to enroll 497,683 Iowans in “discount buying programs” without their knowledge, then charged them monthly fees that grew over time. The company sold 863,970 club memberships over two decades, lawyers in the case said.

    Vertrue and Adaptive and Idaptive Marketing, co-defendants in the suit, have generated complaints to attorneys general across the country as well as to the U.S. Senate. But Iowa is the only state to sue for consumer fraud violations.

    George W.M. Thomas, the company’s general counsel, said in a statement that Vertrue planned to appeal the ruling.

    “It is important to note that this ruling from an Iowa state court is based almost entirely upon the unique – and never before interpreted – pre-Internet, Iowa buying club law,” he wrote. “Significantly, five federal courts, including two Courts of Appeals, have uniformly and forcefully declared that Adaptive’s Internet and telephone marketing materials are indisputably clear, unambiguous, and are not deceptive under federal and state law.”

    Hutchison ruled that Vertrue charged Iowans yearly or monthly membership fees for savings programs without their knowledge. The memberships offered purported savings for home improvement items, entertainment, dining out, fitness products, clothing, jewelry and other items.

    State attorneys said the company also used telemarketing calls to lure customers into memberships without their knowledge. The calls usually began with pitches for products advertised on television, or other solicitations.

    Hutchison found the company’s sales pitch violated a state law that requires written agreements to join a buying club, and notification about the right to cancel. Vertrue “memberships” typically cost $9.95 to $19.95 per month and are usually charged to consumers’ credit card or bank accounts.

    Thomas said Adaptive’s membership programs “provided consumers with access to significant and realizable benefits, including savings and services across a wide range of consumer interests.”

    Jeffrey Thompson, the state’s deputy attorney general for litigation, said the state has a database of past Vertrue customers and will begin figuring out how to distribute refunds. Customers would likely receive different amounts, since some were duped only briefly and others lost thousands of dollars, he said.

    The appeal could take a couple of years. But the company is required by law to post a bond worth 110 percent of the award while it is pending.

    If the state wins the appeal, it will also recoup at least $725,000 in attorneys’ fees and $2.8 million in penalties to use for consumer fraud programs and education.

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