By Phillip Reese and Robert Lewis
[email protected]

Published: Sunday, Apr. 17, 2011 – 12:00 am | Page 1A Last Modified: Sunday, Apr. 17, 2011 – 1:03 pm

Sacramentans struggling to keep their homes increasingly are suing their lenders for fraud, even though judges rarely rule in their favor. Desperation has led some of these homeowners to pay thousands of dollars to people who are not lawyers to help prepare their cases.

Others hire attorneys in lawsuit mills that aggressively solicit for clients. “It’s the new scam,” said Tom Layton, an investigator for the State Bar of California.

The number of lawsuits filed by individuals against banks and mortgage companies in the Sacramento region has more than doubled, rising to about 250 in the last six months, up from about 115 from the same period two years ago, according to a Bee review of court records in Sacramento and Placer counties.

Many of the lawsuits are filed by frustrated owners tired of dealing with banks that repeatedly transfer calls or reject loan modifications after a successful trial. But homeowners don’t always know what they’re getting into when they go to court. Some unscrupulous operators, Layton said, are charging large fees for little work.

The Legislature barred lawyers and non-lawyers alike from charging upfront fees to file a loan modification; however, there is no ban on collecting such fees for preparing a lawsuit. “Now we’re seeing the loan mod people morph into the sue-your-bank people,” Layton said.

Stephen C. Ruehmann, a Folsom lawyer who has filed dozens of recent lawsuits against lenders, agreed that some people are taking advantage of homeowner desperation. Others, though, are fighting for homeowners who have no other recourse. “(Banks) don’t have any motivation to change; they’ve already been bailed out,” Ruehmann said.

Local judges, though, have traditionally been resistant to these types of fraud claims. In Sacramento County, 20 of the 24 homeowners who sued their lenders in Superior Court during a six-month period exactly two years ago have since lost their homes, according to court records and Foreclosures.com, a tracking firm.

Thirteen of those homeowners represented themselves in court; twelve of the 13 have lost their homes. Despite that record, the trend of homeowners representing themselves has accelerated. More than 50 local residents who filed lawsuits during the past six months don’t have counsel. “It’s a sad situation,” said Lawrence Green, professor of law at the University of California, Davis. “People not represented by a lawyer face a much harder time prevailing.”

Man paid paralegal $5,500

Sacramento resident Charles Ratliff is among those going it alone. He paid a Southern California paralegal $5,500 to prepare a complaint against IndyMac and others.

He filed his complaint in January. A judge denied his request for an order to stop the foreclosure, saying he was unlikely to win his case. The bank repossessed his house in March. Ratliff said he regrets filing his lawsuit, which has sat dormant since he lost his home. “I fault myself,” he said.

He said he was introduced to the paralegal, Camilla Williams, by Sacramento real estate agent Kathleen Petroff, who was working with him on a short sale. Petroff said she also introduced another one of her clients, Bay Area resident Clifton Constantine, to Williams, but never vouched for the paralegal’s services. She said she took a one-time payment of $200 from Williams but turned down an offer from Williams to pay her $500 per referral. “I told them all, ‘It’s your own choice,’ ” Petroff said of her clients.

Reached by phone, Constantine said Williams wanted more than he could afford to prepare a lawsuit against American Home Mortgage Servicing and North American Title Co. “She said, ‘Cliff, I’ve been praying about this and I want to help you guys,’ ” he said.

Even with an initial discount, Constantine said he wound up paying Williams more than $20,000 for his case in San Francisco Superior Court. The judge issued a preliminary ruling for Constantine’s lenders, but has given him a chance to amend his complaint.

Jim Towery, the State Bar’s chief trial counsel, said people without a law license should not be preparing lawsuits. “It is illegal,” he said. “It falls under the category of the unlicensed practice of law.” In a brief phone interview, Williams declined to answer questions about her business, including how many clients she has or where she received paralegal training. “I haven’t done anything illegal,” she said.

When informed of Towery’s comments, Williams said, “I’m not even aware of any law like that.”

While homeowners such as Ratliff and Constantine have tried to fight the banks on their own in court, others have turned to law firms that specialize in such cases.

Sacramento resident Maria Montoya-Cano, for instance, has been paying $1,500 a month to the Roseville-based United Law Center to pursue a fraud case against her lender. Montoya-Cano, who filed her case in late October, alleges her mortgage officer and bank incorrectly told her the only loan she could get had an adjustable rate. That rate has since reset to an untenable level, she said.

The bank that gave her the loan went under in 2008. Her original mortgage broker said her case lacks merit. A judge recently ruled against her request for an injunction against the current holders of her loan, saying Montoya-Cano’s case has little chance of success.

So Montoya-Cano has filed for bankruptcy protection to save her home. She’s selling a few rental properties she owns at rock-bottom prices to help pay her legal bills and other debts. She’s also taking care of her ailing mother and preparing for the return of her Marine son from Afghanistan. “He told me not to worry – that he would find a job and help me out,” she said.

Montoya-Cano said she is happy with United Law Center’s representation. Her lawyer did not return a call for comment. Asked why she continues to pursue her case, Montoya-Cano said, “I’m just not through fighting. We can’t let the banks get away with this.”

False claims usually alleged

Lawsuits against lenders generally are based on the same argument: Banks and mortgage brokers made false claims during the boom, telling borrowers they could easily refinance their loans before interest rates reset, or didn’t disclose the true terms of loans.

The lawsuits often allege that lenders knew these statements were untrue, but were interested in making a quick buck by selling the mortgage on the secondary market. Some of the lawsuits also allege that banks set conditions for trial loan modifications, then denied those modifications even after borrowers met the conditions.

Legal experts contacted by The Bee said it’s hard to prove fraud claims, even though dubious lending practices were widespread during the real estate boom. “After all, borrowers typically did sign loan applications, escrow instructions, promissory notes, trust deeds and disclosures,” said Green, the UC Davis law professor.

Another obstacle facing borrowers is that it’s tough to prove a fraud conspiracy between the mortgage brokers, banks and investors. Even if a bank committed fraud while giving a loan, the investors who bought that loan on the secondary market aren’t liable if they didn’t have direct knowledge of the fraud, said John Sprankling, a professor at the University of the Pacific’s McGeorge School of Law. And if the loan holders aren’t liable, the homeowner likely doesn’t have a shot of keeping the house.

The response of banks to these lawsuits is often uniform. They say that even if everything in the complaint is true, it doesn’t constitute fraud. They file a request, usually successful, to dismiss the case or deny an injunction keeping the bank from taking a home.

Michael P. Malloy, a McGeorge professor, said judges may be more amenable to fraud lawsuits after a spate of “robo-signing” scandals revealed some lenders’ shoddy foreclosure practices.”The courts are going to take their time and not treat these cases as routine,” Malloy said.

But, like other legal experts, Malloy cautioned that proving mortgage fraud takes a lot of work, and is tough to do without records outlining false promises. “If all you have is a batch of paperwork and a vague recollection of what someone said to you, you have a real tough road ahead,” he said.