By KELLY BENNETT
Tuesday, Oct. 14, 2008

City Attorney Mike Aguirre made a big splash last week with his plans to sue Washington Mutual for predatory lending, but questions have been raised whether a local official has the authority to challenge the federally chartered bank.

The line between state and national jurisdiction has caused attorneys general, including California’s Jerry Brown and New York’s Andrew Cuomo, to stop short of suing national lenders. Restricted by a federal appeals court decision, Cuomo instead brought suit against appraisers used by the bank late last year.

Aguirre’s challenger in the race for city attorney, Jan Goldsmith, raised questions after Aguirre announced his suit Friday, calling the suit a campaign tactic and a waste of city resources. Aguirre called Goldsmith’s suggestions that the case wasn’t viable “salacious.”

The argument exposes a prominent issue in the current economic landscape in the country. Attorneys looking to curb the predatory lending or foreclosure activities of such banks in their states have been frustrated in court. Using a concept called federal preemption, courts have dismissed suits brought by states against federally chartered banks.

The reason: the federally chartered banks are already subject to exclusive investigation and regulation by federal overseers like the Office of Thrift Supervision. In December, a court of appeals ruled that Cuomo didn’t have jurisdiction to regulate or investigate the lending practices of big banks toward racial minorities.

Experts in predatory lending cases said it seemed likely Aguirre’s case would be dismissed.

Ann Graham, law professor at Texas Tech University, specializes in banking law and edits the Banking Law Prof Blog. She said Aguirre’s case seemed prone for dismissal, based on the Office of Thrift Supervision’s claim of exclusive rights to examine and enforce laws in the federally chartered banks. Courts have ruled that anything that interferes with that federal power, or with a federal bank’s ability to do business, would be exempted, she said.

But Graham is concerned with that trend, which has left all oversight up to federal regulators who have shown less vehemence in eradicating predatory lending practices.

“The troubling thing about this kind of lawsuit and the claim of preemption … is that it strips the state of their ability to address predatory lending,” she said. “And that, I think, has been at least a contributing factor in this subprime lending crisis.”

“I’m very disappointed that federal regulators did not permit the states to protect their residents from predatory lending,” she continued. “I think the courts have overused the exemption to the detriment of the borrowers.”

But proponents of Aguirre’s suit, filed on behalf of the people of California, were confident he’d be successful in the Washington Mutual case. Aguirre said he’s not trying to regulate the bank, just to bar it from using a state-regulated procedure — foreclosure — to evict borrowers from their homes in cases where the bank should have known the borrower wouldn’t be able to make its payments.

“I think for a lot of reasons, he’s going to be successful,” said Robert Gnaizda, general counsel for the Berkeley-based Greenlining Institute, a low-income and minority neighborhood advocacy group. Gnaizda has been a vocal supporter of Aguirre’s attempts to enact a “foreclosure sanctuary” in San Diego for the victims of predatory lending.

“There’s more winds behind Mike’s sailboat than there were a few weeks ago,” Gnaizda said, referring to recent calls for a foreclosure moratorium, including one from presidential candidate Barack Obama rolled out Monday.

Gnaizda said he plans to meet with officials from JPMorgan Chase, which recently acquired Washington Mutual, to discuss its policies for dealing with WaMu’s troubled loan portfolio.

“I believe they’ll be wanting to cooperate,” he said.

Goldsmith accused Aguirre of filing the suit just to attract voter attention a few weeks before the election, only to have it dismissed in court.

“After Nov. 4, it’s history,” Goldsmith said. “That’s a misuse of his office and it’s wrong.”

Paul Leonard, director of the Center for Responsible Lending, suggested Aguirre’s case would be dismissed, but said he couldn’t say it was necessarily a bad move to file the suit anyway.

“I don’t think we’re really in the position to judge the judiciousness of the use of those resources,” Leonard said. “There may very well be an appropriate role in bringing these kind of suits, to the extent that it brings attention to these issues and helps drive a larger state or national conversation about the need to take additional steps to avoid foreclosures.”

Aguirre, Brown and attorneys general from 11 states were able to sue Countrywide Financial Corp., even though it’s now owned by federally chartered Bank of America, because Countrywide was formally a state chartered bank, according to statements Brown made last week after announcing a settlement struck with the lender.

Aguirre said he will be able to successfully argue against Washington Mutual if it claims he doesn’t have jurisdiction.

“The procedural hurdles of these cases — all the same arguments could’ve been made for Bank of America, and we got a settlement,” he said. “We expect that this will be a settled case as well because of the extraordinary circumstances. The question is, can you engage in massive fraud and then argue that you should be preempted?”

Aguirre’s Countrywide case has not yet been settled; he was referring to Brown’s settlement with the bank. On Friday, Aguirre said he is “very close” to considering his Countrywide suit settled, but is still waiting for assurances from Countrywide that it has enough staff to deal with the influx of borrowers seeking workouts.

A spokesman for Washington Mutual declined comment on Aguirre’s suit, citing pending litigation.

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