I’m not exactly surprised at the bait and switch by Iowa’s Attorney General Tom Miller, who is leading the 50 state investigation by state attorney generals into mortgage abuses. Less than a month ago promised that he would “put people in jail” Now he’s apparently decided to adopt a “move along, nothing to see here” posture. Per Bloomberg (hat tip reader Duncan B, who also sent a copy of a stinging e-mail to his state AG):

The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said…..The group isn’t pursuing a criminal investigation, Miller said. “Our focus is to reform the servicing process and that’s inherently civil, not criminal,” he said.

That’s funny, reader and former bankruptcy litigator Fractal thinks it would not take a lot of effort to come up with criminal charges. His message was directed at the activities of the foreclosure mills, but since they were operating as the arms and legs of servicers, many of these theories would presumably apply to them as well, since the communication between those law firms and their clients was frequent and ongoing. And he also points out why civil actions (or the threat of mere civil actions, since the AGs are on their way to sweeping these abuses under the rug) are inadequate:

You should not waste precious web space on anything less than actual criminal investigations. If the AGs office wants to investigate any entity for fraud or other crimes, it can investigate any alleged crime regardless of whether the alleged defendant is a “trade or business” or a gang, criminal enterprise, racket or any other kind of entity or form of association. Criminal investigative jurisdiction is not limited in the ways that “regulation of commerce” inquiries may be. The scale & scope of the fraud by the foreclosure mills means they could be investigated by state or federal grand juries, such as the grand jury already convened in Jacksonville. I don’t recall whether the Jacksonville GJ is state or federal. A federal grand jury would have parallel jurisdiction under federal criminal law. The frauds committed by the foreclosure mills are so extensive, so intertwined with interstate communications, and so entangled with national banks, that wire fraud & mail fraud are obvious hooks for the FBI to commence wiretaps, mail covers, surveillance and to use cooperating witnesses to record conversations with targets. The essential point is that the law firms are entirely exposed to criminal liability & investigation; law firms, their partners & associates, their banks & their accounting firms do NOT have immunity from investigation or prosecution if there is probable cause to believe they engaged in, or aided & abetted, or concealed, or obstructed investigation of, fraud. The best recent example is what happened to the Ft. Lauderdale law firm Rothstein Rosenfeldt Adler, its partners & associates, its accounting firms, and the banks & hedge funds which enabled & participated in name partner Scott Rothstein’s Ponzi scheme which fleeced thousands of investors of more than a billion dollars.

And as we’ve written, attorneys representing homeowners have found evidence of widespread, and what appears to be systematic violations of contracts and Federal law in how servicers apply payments and charge fees to borrowers, with the net result in more than a few cases that homeowners lose their house due to the pyramiding junk fees rather than bona fide delinquency (as in any arrearage was minor and ex the abuses, could in many cases have been remedied). These attorneys are not able to do a systematic investigation; the state AGs could (and a pattern and practice of fraud would lend itself to criminal charges). But their rush to wrap this up says they indeed have not intent of cleaning up servicing, their pious claims to the contrary.

But the die was apparently cast with Miller from the get go. I was troubled in his testimony before the Senate Banking Committee when he went out of his way to lavish praise on Michael Barr of the lapdog Treasury Department. And this December e-mail gives some insight into Miller’s thinking:

I was w/ a European documentary maker this weekend who spoke to Miller a few days ago and said Miller relayed the fraud isn’t so bad, everything will be worked out .. the standard line; he’s already made up his mind. He doesn’t want those European governments demanding their money back.

So the same pattern continues: we’ll trash the rule of law and throw homeowners under the bus to save bank balance sheets. As reader Duncan put it:

So TBTF banks win yet again and the powerless taxpayers (what’s left of us) get stuck with he bill and screwed yet again. And the AG’s office is considered “law enforcement”, a sad joke on Americans. What is just as sad, is “we” know this goes beyond “Robo-Signers”, but apparently the AG’s offices across the country have thrown in the towel yet again. The banks and their servicers have done wrong, harm and injustices upon the American people, with this “settlement” it sends a strong message to financial institutions that they are now in fact, untouchable. Thanks for not having courage when it is needed most by far too many Americans.

Update 3:15 PM: An article by Abagail Field in DailyFinance shows how a federal circuit judge allows plaintiffs in a suit against debt collectors to include RICO claims. So pray tell what excuse does Miller and his cohorts have, exactly?

From DailyFinance:

Federal Circuit Court Judge Denny Chin just issued an opinion in a consumer class action case that should send chills down the spines of debt collectors, perhaps including foreclosure-mill law firms and their process servers, nationwide. Judge Chin decided that plaintiffs alleged enough information about the debt collectors in this case — a law firm, a process-serving company and a debt-buying company — to sue them for being a criminal enterprise under the Racketeer Influenced Corrupt Organization (RICO) law… Well, Monique Sykes and the other plaintiffs claim that the defendants’ business model is as follows: Buy debt with little documentation that the debt is accurate.

File lawsuits claiming personal knowledge of the debt but using robo-signed affidavits instead.

Deliberately fail to tell the “debtor” that the lawsuit is pending (a practice called “sewer service”).

Get a “default” judgment against the debtor when she fails to show up in court to defend herself.

Enforce the judgment, including by freezing the debtor’s bank account. And remember, JPMorgan Chase (JPM) whistle-blower Linda Almonte said Chase’s records about its customers’ debts were often false, and that executives routinely robo-signed debt-related documents. Also, the The New York Times has more generally reported that inaccurate debt records and robo-signed documents are common. Similarly, sewer service is a common enough practice to have a name. So it’s hard to imagine that the three businesses at the center of this case are the only ones that have this business model and thus are vulnerable to RICO charges.

You can read the opinion here.

The only difference I see between the debt collectors’ approach and that of the services is that the servicers are less frequent users of “sewer service” but instead in HAMP and other mods tell customers to ignore foreclosure notices, and they take the house rather than garnishing wages or attaching bank accounts.