A Supreme Court ruling devolving federal authority to bring suits against banks accused of being complicit in the mortgage crisis to the state level has led many states to plan for bringing consumer fraud cases against mortgage lenders.

This move is set to win popular support at a time when the foreclosure rate is up 30 percent from 2008. The ruling, made 5-to-4 in June 2009, will allow the attorney generals of states to bring lawsuits against banks they see as responsible for bad loans, as well as the slow pace of mortgage modifications.

A number of states, notably Illinois and California, have started cases against banks in their state for reasons ranging between targeting minorities for sub-prime mortgages to investment fraud. Though supporters say this would not have forestalled the mortgage crisis, they think it would have softened the blow.

“For the better part of eight years, the federal regulators were not being aggressive, and at the same time we were disabled,” said the Ohio attorney general, Richard Cordray. “There was nothing holding back irrational and irresponsible practices.”

While most states already have statutes against fraud in consumer lending, banking groups and the Office of the Comptroller of the Currency have argued that only a federal regulator should hold this authority.

The target of these grievances are the sub-prime loans given to customers with bad credit at rates that would be extremely difficult to repay. Banks earned short-term income from generating these loans, before selling them on. Fannie Mae and Freddie Mac, two government-sponsored housing agencies, were the ultimate buyer of the majority of these loans. They eventually required a taxpayer bailout.

Arizona’s attorney general, Terry Goddard, said they had tried other measures to work with the bank before considering suing. “We tried . . . but their waterfall of excuses, the abysmal numbers of modifications, tells us persuasion is not working . . . we’re moving much closer to litigation.”

This discussion stems from a case brought by then New York Attorney General Eliot Spitzer, and his successor Andrew Cuomo, against the Clearing House Association. In it, they demanded that banks disclose information about whether their lending practices on bad mortgages were predatory towards minorities. Both the U.S. District Court for the Southern District of New York and the U.S. Court of Appeals for the Second Circuit upheld the banks' right to be immune from judicial proceedings instituted by states.

The Supreme Court partly reversed this decision, saying that though states would not be able to subpeona banks for information, they could pursue legal action in the courts. Spitzer has called the ruling a victory for New York, and the 49 other states which backed its case.

Lisa Madigan, the Illinois Attorney General, filed a civil rights case in July accusing Wells Fargo of predatory lending. While the case was already in the works, Ms. Madigan said "it would have been much more difficult to bring" without the Supreme Court ruling.

The Mortgage Bankers Association, a trade group, declined to comment on the possibility of state fraud lawsuits, saying only that they see more payments falling to consumers if legal action is pursued. A spokesman, John Mechem, said, “lawsuits add to the patchwork of regulations that increases compliance costs for lenders, which in turn increases the cost of credit for borrowers."

The Supreme Court's decision fits well with the Obama administration's larger move towards giving states more authority to enact protective financial measures. The administration, which has also called for the creation of a Consumer Financial Protection Agency, said that following this decision, "States will be able to enforce their consumer protection and civil rights state laws with respect to national banks. And federal law will act as a floor, not a ceiling."

Terry Godard, attorney general of Arizona, where foreclosures are as high as 7,000 a month, does not think that legal action will be more than a band-aid, but is prepared to support any efforts made.

“Maybe," Goddard said, "the banks think we don’t have the gumption to pull the trigger."

--Yana Kunichoff