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State sues five big US lenders

AG alleges banks skirted rules, sped foreclosures

Josh Reynolds/Associated Press

Massachusetts Attorney General Martha Coakley is suing five major US banks for allegedly seizing properties unlawfully and failing to help struggling borrowers keep their homes by lowering mortgage payments.

The civil lawsuit — filed yesterday in Suffolk Superior Court — targets Bank of America Corp.,Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., and GMAC, a subsidiary of Ally Financial Inc. Also named are Mortgage Electronic Registration System Inc., a widely used mortgage recording firm, and its parent company.

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‘‘Our suit alleges that the banks have charted a destructive path by cutting corners and rushing to foreclose on homeowners without following the rule of law,’’ said Coakley, citing what she called their illegal behavior.

It is the first major legal action taken against the nation’s biggest banks since they started foreclosure-settlement negotiations with the 50 state attorneys general in the spring. The talks began after the attorneys general launched an investigation into reports of fraudulent and sloppy foreclosure-related practices by the banks.

Most of the lenders named by Coakley said they were disappointed by the suit. They pledged to keep working toward a settlement with the attorneys general, and talked about their efforts to prevent foreclosures.

‘Our suit alleges that the banks have charted a destructive path by cutting corners and rushing to foreclose on homeowners without following the rule of law.’

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‘‘We continue to believe that the collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery,’’ said Lawrence Grayson, a Bank of America spokesman.

GMAC and other defendants vowed to fight the allegations in court.

‘‘GMAC Mortgage believes it has strong legal and factual defenses against these claims and will vigorously defend its position in court,’’ the company said in a statement.

The suit comes more than a year after the multistate alliance of attorneys general began investigating lenders’ practices following admissions made by so-called robosigners — bank employees who said they signed thousands of foreclosure documents without properly reviewing the paperwork. Major lenders, including Bank of America, temporarily halted foreclosure proceedings to review their practices. The banks later said any procedural problems had been resolved and resumed seizing properties from delinquent borrowers.

While Massachusetts has not been affected by foreclosures as much as some other parts of the country, including California and Nevada, the rate of seizures has picked up this fall. And over the last four years, more than 40,000 homes have been taken back by lenders.

Coakley said she was forced to sue because negotiations had stalled. The banks taking part have failed to offer any meaningful restitution, she said, but insist on broad immunity from liability for the nation’s foreclosure crisis.

‘‘They have had more than a year to show they understood their role and their need to show accountability for this economic mess and they failed to do so,’’ she said. ‘‘Whether through the courts or negotiations, we will accept only one result, obtaining accountability from these banks and getting real relief for homeowners.’’

The suit includes allegations that lenders used false documents to foreclose upon homeowners, completed foreclosures without having the proper paperwork in place, and failed to assist homeowners in need.

Coakley also puts blame on Mortgage Electronic Registration System Inc. The lender-created company claims to be the official owner of tens of millions of mortgages nationwide. Because of that ownership, company officials have said, they don’t need to record every loan transfer between investors in county offices.

Coakley said the system has allowed lenders to avoid state requirements that they record mortgage transfers.

The firm also ‘‘unfairly conceals from borrowers the true identity of the holder of the debt,’’ Coakley’s office said in a statement.

Officials said they are confident they have acted properly.

‘‘The company has not engaged in or facilitated any violation of the Commonwealth’s statutes, including its consumer protection provisions,’’ said Janis Smith, a spokeswoman for the recording company’s parent, Merscorp Inc.

The lawsuit was praised yesterday by local housing advocates and attorneys who work with people struggling to save their homes.

Lewis Finfer, executive director of the Massachusetts Communities Action Network, a nonprofit housing advocacy group based in Boston, said it gives the attorneys general group more clout in its negotiations with the banks.

‘‘This will help the many tens of thousands of Massachusetts homeowners who are facing foreclosure, were illegally already foreclosed upon and the communities whose housing conditions and property values have deteriorated,’’ Finfer said.

Gary Klein, a Boston attorney who has represented Massachusetts homeowners in challenging foreclosure practices, said Coakley has become a leader among public officials in fighting for borrowers.

‘‘She is addressing issues that have generated immense costs, credit damage, and emotional pain for families across the Commonwealth’’ Klein said. ‘‘Other attorneys general are trying to settle these issues without a proper investigation and the leverage that actual litigation provides.’’

Meanwhile, Iowa Attorney General Tom Miller, who is leading the talks with banks, said he hopes to reach a settlement soon that Coakley will find acceptable.

‘‘We’re optimistic that we’ll settle on terms that will be in the interests of Massachusetts,’’ Miller said.

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