This is an updated version of a story in the May 7 print edition.
Regulators and consumer activists fighting predatory lending face a dilemma: how to extract restitution on behalf of borrowers while ensuring that the lenders survive long enough to pay it.
Their concern is shared, to some degree, by the financial industry. If lenders go belly-up, credit providers securitizers, warehouse lenders, etc. could find themselves liable as hungry lawyers search for solvent parties.
The cases of two subprime lenders, Delta Financial Corp. of Woodbury, N.Y., and First Alliance Mortgage Co. of Irvine, Calif., illustrate the problem.
Eighteen months after the New York State Banking Department reached a settlement with Delta, many of the borrowers that the agency said were victims now have little chance of collecting anything.
The Banking Department, which accused Delta of violating state and federal consumer laws, created two funds for those borrowers. One of those funds, made up of 525,000 shares of Delta stock and dedicated to help those in foreclosure, has been all but wiped out.
The state agency claimed the fund was worth $4.8 million on a book-value basis, but its market value was only $3.3 million on Aug. 19, 1999, when the deal was announced. And the shares have plunged 95% since.
On Friday the stock was delisted from the New York Stock Exchange.
The other fund, which consisted of $7.25 million in cash, was meant to address racial discrimination. It was supposed to provide more than 600 borrowers with monthly mortgage payment reductions of $50 or more. That fund is still solvent, but only 250 of the borrowers have gotten relief.
The aftermath of the settlement and its bad publicity has left Delta on the brink of a financial abyss. Not only has its stock price plummeted, the company has lost $85 million in the last four quarters. This has raised the possibility that the shelling Delta has taken from regulators, consumer groups, and consumers themselves may have crippled the company and created the new layer of risk for its business partners.
One civil lawsuit, for example, filed in 1998 by the New York firm of Abbey, Gardy, & Squitieri, now Abbey, Gardy, names Bankers Trust of California (a unit of the New York company) and Norwest Bank Minnesota (now Wells Fargo Bank Minnesota), both of which acted as trustees on Deltas securitizations.
As for First Alliance, it declared bankruptcy last year after a barrage of lawsuits and unflattering media coverage. Plaintiff attorneys are pursuing Lehman Brothers, which underwrote First Alliances securitizations.
In Deltas case, however, the wisdom of the settlement has also come into question.
Consumer activists say they pointed to potential pitfalls when the settlement was made, and are now hoping for a better solution.
Many of the activists are steaming.
The Banking Department gambled that subprime lending would keep booming, said Ira Rheingold, supervisory attorney at the Legal Assistance Foundation of Chicago and soon to be executive director of the National Association of Consumer Advocates.
I cant imagine they didnt see the risk, he said. It would have been naive to think that after the settlement Deltas shares werent bound to drop precipitously.
The issue of the stock fund entirely misses the thrust of the settlement agreement, said Bethany Blankley, a spokeswoman for the Banking Department.
The point is that we took every penny we could in an effort to give as much money back as possible to the consumer, she said. We took all of the cash and then we did more. We wanted the borrowers to profit from the stock, if at all possible, rather than the company. It is naive to think the Banking Department was depending on the stock price to help consumers. The criticism misses the point entirely. We took away not only flesh and blood, but also bone. Delta officials declined to comment on the settlement.
Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project, said she sincerely hopes that the Banking Department finds a way to provide redress to borrowers in foreclosure, but she expressed disappointment at the current state of affairs.
The settlement is no doubt symbolic, but once you analyze its content, you see that it does not meet the caliber of what you would expect from a Banking Department based in New York, the headquarters of the global financial industry, she said. Its disappointing that the department did not craft a settlement that assured timely, meaningful redress to Delta borrowers.
The $4.75 million amelioration fund was created with 525,000 Delta shares. There were three ways the stock could have been valued, sources close to the settlement said: with a hypothetical higher number, at book value, or at the stocks trading price. The shares were originally valued at their book value of $9.10, rather than at the approximately $7 the stock market valued them at, because at the time there was reason to believe that the price would go up, these sources said.
Nonetheless, some banking attorneys said the deal is a unique arrangement.
Im not aware of any financial institution settlement, class-action or regulatory, that have been settled with equity in a company, said Todd Poland, a partner with the law firm McCarter & English in Newark, N.J. Basically its just cash.
One would expect a settlement agreement to include some features to address the consequences of the stock price going up or down dramatically, as is typical in equity-funded mergers, Mr. Poland said. If it is silent on that point, it sounds like the department bet on the stock of the company and it turned out to be a bad bet.
However, according to a copy of the settlement, there was no provision addressing a dropping stock price.
Josh Zinner, coordinator of South Brooklyn Legal Services Foreclosure Prevention Project for Seniors, said the reason some of the borrowers did not take the payment reduction offer is that to receive that benefit, they would have had to release Delta from all legal claims based on their loan.
In other words, if borrowers who accept the $50 reduction go into foreclosure on their loans and unfortunately, many probably will, because many of the loans were unaffordable at the outset they will have signed away their right to raise any defenses to their foreclosure, and Delta will be able to foreclose on their homes uncontested, Mr. Zinner said.
The Banking Department refused to say whether it was surprised at how many borrowers did not sign up for the option. It also denied that the low rate of signups indicated that the settlement was flawed.
Another issue the settlement raises is how to remunerate alleged victims when they are close to or already in foreclosure. Many consumer activists contend that though the stock fund was intended to help this type of borrower, they are in danger of not getting anything.
The tide may be turning to some degree. Barbara Kent, the Banking Departments director of consumer affairs and financial products, said that the stock fund was a problem, and the department is working on some remedy though she said she is not at liberty to say what that remedy is.
Still, some people involved with the settlement retain acrimonious feelings about it.
We raised serious concerns about the stock fund at the outset, Ms. Ludwig said. It did not take great imagination to predict then that we would end up where we are today. 
