A Multidisciplinary Team That Can Cope With The Subprime Crisis

Saturday, March 1, 2008 - 01:00

Editor: What is the background of the firm's Subprime Lending Team?

Kaplinsky: As you know, we have a very large and well recognized national consumer financial services practice going back for as long as I've been at Ballard Spahr which is about 14 years. In that practice, the firm not only provides regulatory counseling to residential mortgage lenders (including subprime mortgage lenders), but also defends some of the largest lenders in litigation throughout the country. This includes not only defending them in class action and other civil litigation, but also representing them in connection with investigations and enforcement actions involving federal, state or local enforcement authorities. So, at the time of the subprime mortgage meltdown, we already had a national reputation as a law firm that is very knowledgeable about the industry. We have a lot of expertise outside our Consumer Financial Services Group which we felt we could bring to the table in order to counsel and defend various parties affected by the meltdown. That is why we organized our Subprime Mortgage Team, which is composed of dozens of lawyers, from many practice groups, in all of our offices.

Hockeimer: And just to follow up on what Alan said, with Alan's and his Team's expertise and great reputation in the consumer finance area serving as a kind of hub, like spokes radiating out from the hub, we brought to bear the expertise of different practice groups that could complement Alan's Team and also, on a standalone basis, use their expertise to represent clients that may get involved in the subprime situation. For example, we, in the White Collar Group, have great depth, including a number of former prosecutors, four of whom are former federal prosecutors. Our group is experienced in conducting internal investigations and in defending cases brought by regulatory and enforcement entities, whether it's the SEC, U.S. attorney's offices or state attorneys general.

The White Collar Group has substantial experience in responding to inquiries by various regulatory entities. If a company gets an SEC subpoena, we have a lot of experience in gathering documents and interviewing witnesses. Most importantly, we have an excellent track record in bringing things to a favorable conclusion for our clients. Typically, the cases that we have handled have not resulted in the initiation of a formal investigation.

We felt if we marshaled within the firm all the areas of expertise that could contribute to assisting clients involved in the subprime mortgage crisis, we could offer those clients services that could not be matched by any other firm. This expertise is coupled with knowledge of the laws and local scene of areas that have been particularly hard hit as a result of having offices in Arizona, Nevada, California and Colorado. In the last year, we've opened offices in Las Vegas, Phoenix and Los Angeles that complement our other offices. However, the availability of our services is not limited to places where we have offices; our Consumer Financial Service Group has had a nationwide practice for years. A lot of the work that we've done in the consumer financial services area, including litigation, has been in jurisdictions where we don't have an office.

Editor: What practice groups are involved in the Subprime Lending Team?

Kaplinsky: It's multidisciplinary. I chair the Consumer Financial Services Group; Hank is a member of the White Collar Criminal Litigation Practice and Corporate Compliance and Investigations Groups. Our Bankruptcy Group is involved because there are a lot of subprime lenders that have gone bankrupt.

Our securities litigators are also very much involved as we are witnessing an onslaught of securities class actions and shareholder derivative lawsuits that have been filed against subprime mortgage lenders and against other participants in the industry, including investment banking firms and rating agencies. The Team also includes lawyers drawn from our Real Estate Finance, Investment Management and Tax Groups among others.Our website contains detailed information regarding the Team. Please visit http://www.ballardspahr.com/about/ groups.asp?id=147.

Editor: Describe the current litigation climate and the players involved.

Kaplinsky: Our Consumer Financial Services Group has for years represented subprime mortgage lenders who have been sued by borrowers either in individual or in class action litigation. The volume of that litigation has increased exponentially as the subprime mortgage situation has worsened. I think it's a result of the fact that many borrowers facing the risk of foreclosure and losing their homes have sought counsel and their counsel has told them that a good defense here is a good offense. Therefore, we are seeing an increasing number of counterclaims being filed in foreclosures. Sometimes the counterclaims even take the form of class actions. Borrowers are also filing affirmative lawsuits alleging that their rights have been violated in some fashion. Additionally, we are representing boards and officers in related shareholder lawsuits.

We have always handled litigation of the kind I described, but its volume doubled starting in about March or April of last year when things started to unravel. We are representing a lot of the major national residential mortgage lenders and we are defending close to 100 lawsuits against them filed by borrowers.

Hockeimer: Unfortunately when you have a situation like the current subprime mortgage crisis where financial losses that are being borne either by individuals or companies, those in enforcement and those who play an investigative role in Congress and state legislatures start looking backward casting a net and trying frankly to fix blame on one or more parties for the losses. This is not to say that at the end of the day there really is any blameworthy party, but, because of the publicity and the notoriety the situation has gained, it's obviously an opportunity for government entities to step in and convince the public that they're doing something about it.

Kaplinsky: I should mention that there is another lawyer in our firm who has been heavily involved in this area ever since he joined our firm. I'm referring to Jerry Pappert. Jerry served as the Attorney General of Pennsylvania prior to joining our firm about two and a half years ago. Jerry was one of a consortium of former attorneys general who represented a major national subprime mortgage lender in connection with a multistate investigation of that lender by multiple state attorneys general. The lender entered into a settlement with practically all the states and Jerry played a key role in negotiating the settlement. Several state attorneys general are investigating many other lenders and other parties who they believe share fault for the meltdown.

I think the current focus of the state attorneys general is on some of the peripheral players in the industry. These include the rating agencies, the appraisal companies, investment banking firms and bond insurers.

Editor: Hank, what role do you see the Department of Justice playing?

Hockeimer: Experience shows that typically the Department of Justice cherry picks cases they feel are the strongest and the most emblematic of the situation. So while it's probably likely that numerous companies across a wide industry swath will receive subpoenas for documents and individuals to appear before grand juries, at the end of the day the companies or individuals that are ultimately selected for prosecution may not be a significant number because the Department of Justice will try to take just those cases that it feels are the strongest to the mat.

At this point, because the meltdown stretches so widely across so many different industries, there really hasn't been a particular company or individual that has emerged as the poster child of this situation. Right now it's essentially a government fishing expedition to see who they can make a case against and at the end of the day maybe they won't, but it's certainly not going to be for lack of trying.

Editor: What kinds of borrower class actions are you seeing?

Kaplinsky: They run the gamut; some are brought under the Real Estate Settlement Procedures Act (RESPA) claiming it's a violation of RESPA to pay a yield spread premium to a mortgage broker based upon the interest rate that such broker has negotiated with the borrower. There are also many lawsuits claiming that it's illegal under RESPA to mark up settlement costs. For example, where a lender has to pay $150 to get an appraisal of the borrower's home, very often the lender will charge some amount on top of that to cover its overhead. There are also class actions challenging various mortgage fees, including prepayment penalties.

There continue to be a large volume of Truth in Lending lawsuits based on claims that various fees and charges should have been reflected in the finance charge and in the APR. Generally the Truth in Lending litigation is not quite as serious as some of the other litigation since there is a cap on class action liability under the Truth in Lending Act, which limits the amount recoverable as a statutory penalty to the lesser of a half a million dollars or one percent of the net worth of the company. There is no cap on class action liability under RESPA or under many of the other federal and state consumer protection statutes.

We're involved in many lawsuits that should not have been brought as class actions. Typical of such lawsuits are those based on claims that lenders, in evaluating the credit-worthiness of potential borrowers, didn't focus on whether or not the mortgage loan was going to be suitable for the borrower or whether he or she had the capacity to repay the loan over the term of the loan.

Please email the interviewees at hockeimerh@ballardspahr.com or kaplinsky@ballardspahr.com with questions about this interview.