Barack Obama’s quick decision Thursday not to sign the Interstate Notarization Act was announced after CNBC and others raised an alarm that the bill might be a covert "bailout" of the foreclosure documentation scandal that has ensnared many large mortgage lenders.
The foreclosure scandal is easy to explain. In many states, banks can avoid an evidentiary trial in a foreclosure proceeding by having bank officers sign a notarized affidavit affirming the particulars of the home loan and the borrower’s delinquency. As part of the affidavit, the loan officer must attest to personal knowledge and review of the loan documentation.
It turns out that, at least in some cases, the loan officers were merely signing the statements without reviewing the documentation—thus falsifying the affidavits and fraudulently obtaining foreclosure orders.
TheInterstate Notarization Act would require state and federal courts to recognize the legitimacy of notarizations from out-of-state notaries. That would likely have had the effect of complicating attempts by homeowners to contest foreclosure orders. Many of the cases would likely have been removed from state courts to federal courts on jurisdictional grounds, as the defendant notaries would be out-of-staters.
Banks tend to view federal courts as friendlier than local courts, some of which have shown a noted animus toward national banks foreclosing on local homeowners. Banks might also have been able to "forum shop," seeking out notarized foreclosure affidavits from jurisdictions with looser rules or friendly courts. Critics say the bill would have built a high-speed foreclosure fraud expressway.
We do not know with certainty that the bill would have accomplished any of the parade of horrors expressed in the paragraph above. The bill’s sponsor in the House, GOP Congressman Robert Anderholt of Alabama, claims that “there is absolutely no connection whatsoever between [the bill] and the recent foreclosure documentation problems.”
The fact is that we do not know much of anything about the effects of overriding longstanding rules requiring in-state notarization. As far as I can tell, there is no academic work on the subject. There are no policy papers on the subject. There was no debate in the House or Senate on it—it passed through the Senate by unanimous consent. On these grounds alone—the lack of any analysis of the likely effects of nationalizing notarization and depriving states of the right to make the decision about recognition of out-of-state notarization—the bill should have been highly contested, at least by Republicans who claim to be guardians of the 10th Amendment, states rights, and federalism.
My NetNet colleague Ash Bennington reasons that the controversyover this bill might be a tempest in a teapot. But I cannot agree with the premise that leads him to this conclusion: that because the bill’s sponsors were liberal Democrats, they shouldn’t be viewed as being under the direction of the banking lobby. A brief review of the funding of Harry Reid’s campaigns is enough to dismiss this notion—he is one of the top recipients of campaign cash from big banks. The Republican sponsor of the bill, Anderholt, received more PAC money from commercial banks than any other industry sector, excluding defense and trial lawyers. The provenance of this bill hardly exonerates it.
The question to ask is: how did this bill make it onto the agenda for the closing days of the U.S. Senate’s final pre-election session? If it were just a boring bill not addressing any pressing national problem, it could well have waited until the Senate’s post-election lame-duck session or until the next Congress. Instead, it appears to have been rushed through at a time when banks are grappling with a foreclosure documentation crisis. That timing could be a coincidence—but it sure stinks like something worse.
My bet is that if we thoroughly investigate the process by which this bill reached the White House, we’ll discover it is far better described as a modern Teapot Dome scandal than a tempest in a teapot.
» Read Ash Bennington's Point
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