Attorneys: Lenders unprepared for lawsuit wave

Consumer litigation is up, and mortgage players aren't ready. 

Veteran industry attorneys say they don't believe lenders and servicers are prepared for an upcoming surge of borrower lawsuits over a variety of grievances. While artificial intelligence tools are making it easier than ever for consumers initiate legal actions, litigation will also persist in business disputes and regulatory oversight.

"I don't think that the industry is prepared, from what I'm seeing right now," said Marx David Sterbcow, a mortgage industry compliance attorney. "I've seen an inordinate amount of complaints."

The number of lawsuits filed concerning the "alphabet soup" of consumer protections is significantly up between January and May this year, compared to the same stretch last year, according to litigation risk intelligence firm WebRecon. That includes a nearly 30% rise in Telephone Consumer Protection Act complaints, which have pestered lenders this year.

National Mortgage News spoke with veteran mortgage attorneys about the biggest litigation risks facing lenders and servicers for the rest of 2026, and beyond. 

Pressure from competitors

Mortgage lenders will continue to face lawsuits from their peers over poaching claims and repurchase requests, said James Brody, founder and managing partner of California-based Brody Gapp LLP. While lawsuits over alleged branch raids and theft of loans in progress were common during the refinance boom, Brody suggested the cases are a year-round occurrence, no matter how the housing market is fairing. 

Brody also forecasted a rise in repurchase litigation, as the government-sponsored enterprises implement AI-powered fraud discovery tools and scrub older portfolios. United Wholesale Mortgage, in one such buyback case, cited the GSE's technology catching errors in a brokerage's loan submissions. 

Although lenders generally anticipate repurchase requests, they may not be anticipating additional requests fueled by AI-powered portfolio reviews, Brody said. Also, while lenders are more amenable to resolutions with counterparties in more prosperous lending environments, that goodwill can dry up in a slower market. 

"When you don't have a good market and those opportunities are not there, it makes people more willing to fight over it," said Brody. 

More servicing battles

Every attorney emphasized the explosion of servicing-related disputes, as foreclosures and mortgage distress continue to increase. Both consumers who self-represent, or pro se plaintiffs, and their lawyers, are using AI to beef up their complaints and create headaches for companies defending the charges. 

"They're challenging everything, from the mortgage lenders' licensing, accusing lenders of mortgage fraud or notary fraud, that they weren't the ones that signed the note or the deed of trust or security instrument," said Wendy Lee, managing partner of the LOGS Legal Group. 

Lawsuits generated with AI can also be riddled with errors, adding to opposing counsels' workloads and bills. 

"If you're a loan servicer, you better double down on the number of attorneys you have in your operation," said Sterbcow. "You better go back in and make sure that everything is operating in a compliant manner."

AI vulnerabilities

Lee said lenders with weaker information security departments or controls are going to be vulnerable to litigation around their internal AI systems.

Brody shared examples of executives' sensitive AI chat logs being exposed in litigation, or loan officers putting confidential borrower information into chatbots, a move akin to a data breach. 

The attorney said he's also anticipating a rise in litigation around vendors' use of artificial intelligence. With a lack of solid federal legislation around AI, TCPA and other fair lending laws still apply to AI use. Companies have previously been exposed to consumer litigation via their vendors in data breach lawsuits. 

"(Vendors) may not be subject to GSE regulations but their customers are," he said. "I see a lot of exposure there." 

State enforcement rising

Attorneys said they've seen a significant increase in state enforcement activity in the wake of the Consumer Financial Protection Bureau's wind down. Lee said state regulators are getting more aggressive with cease-and-desist letters and inquiries regarding a wide swath of regulations, particularly the Real Estate Settlement Procedures Act. 

While state probes are largely confidential, a few officials have gone public with their enforcement efforts against big lenders. The Ohio attorney general is suing UWM for alleged predatory lending behavior, although that case is in its earliest stages. 

Not all inquiries by regulators are panning out. Sterbbow described how state probes into potential RESPA violations have fared. 

"I saw an increase of state attorney general enforcement action post-CFPB, and those states have, after investigating, declined to pursue those matters further," he said. 

Additional risks

Data breach lawsuits are still common following a cybersecurity incident, but lenders are gaining some leverage in those cases. While some "aggressive" lawyers form classes of affected members of a breach soon after a hack, they may not be doing their proper research, said Lee. 

"I think one thing that's trending, in certain jurisdictions the judges are trying to see how (consumers) were actually harmed," she said. "You need to have more specifics."

Sterbcow issued a parting warning about two real estate practices that could lead to a wave of litigation in the far future. The attorney raised concern over automated appraisals, which can be susceptible to fraud, and title insurance waiver programs. Companies using AI tools for title insurance waivers may not have a perfect success rate, and borrowers may not realize problems with their titles until years later. 

"It's going to wind up costing lenders a lot of money in litigation and damages," he said.