Consumer Law & Policy Blog

Loan modifications: still not happening

by Alan White
Hundreds of thousands of homeowners facing foreclosure are calling mortgage servicers in the hopes of negotiating a solution to keep their homes. What happens when they call? The news is not good.

Moody’s rating agency reported in August that only 1% of mortgages facing rate resets and payment shock in 2007 had been modified. In a November update, Moodys now reports that number has increased—to 3%. The survey covered twelve servicers with 60% of the subprime market. Of all subprime mortgages scheduled for an interest rate reset (i.e. a payment increase) in the first eight months of 2007, and not already prepaid, about 50% were current in payments, and the other half were delinquent, in foreclosure, or already foreclosed.

Predatory Borrowing?

Sunday's Times reported here on a study by BasePoint Analytics of more than three million loans.  According to the article, the study found that "[a]s much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications . . . . Applications with misrepresentations were also five times as likely to go into default."  The article explains: "In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application . . . ."  The study is not posted on the web, but you can request a copy from BasePoint here.  In some cases, borrowers have claimed that the mortgage broker misrepresented facts in the applications without the borrower's knowledge, see e.g., Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874 (S.D.Oh. 2002), so I'm curious to see if the study sheds any light on who is responsible for the fabrications.

City of Baltimore Sues Wells Fargo Over Predatory and Discriminatory Mortgage Lending

by Brian Wolfman

Read this Baltimore Sun article about the City of Baltimore's suit alleging that Wells Fargo engaged in predatory and racially discriminatory lending against Baltimore citizens. Baltimore Mayor Sheila Dixon, pictured to the left, is behind the suit.

Baltimore claims that it reviewed foreclosure data and concluded that Wells Fargo was intentionally steering African-American Baltimoreans into subprime loans. Wells Fargo denies the allegations. The City alleges that it has been injured because it has been required to spend more social services funds on its citizens who have been victimized by Wells Fargo's allegedly unlawful conduct. I think you'll find the complaint very interesting. Note in particular page 34 of the complaint - - a full-color map of the city depicting the racial disparities alleged in the complaint. The New York Times has also covered the story.

P2P Lending

Check out this article about P2P (person-to-person) lending in today's Washington Post.

Mortgage Servicers, Bankruptcy, and Phony Evidence

At an almost comical December 20 hearing an attorney for Countrywide explained some fishy-looking documents to a Bankruptcy Court judge and trustee. The letters presented as evidence, sent to notify a homeowner of payment adjustments in 2003 during her Chapter 13 case, were actually "recreated", that is to say, created in 2007. Evidence of what? It's a bit hard to determine from the transcript. It appears that after this homeowner completed a Chapter 13 plan providing for a cure of her mortgage default, Countrywide asserted that she was still thousands of dollars in arrears. Countrywide seems to have blamed the problem on the debtor ignoring annual payment increases required by adjustments to the escrow for property taxes and insurance. The debtor and trustee, on the other hand, claim that Countrywide either lost payments made through the plan or misapplied them. More ominously for Countrywide, there is reference to 293 cases in the same district in which the trustee is questioning the proper application of mortgage payments.

The case illustrates a serious practical problem with Chapter 13 as a foreclosure prevention tool. Thirty years after Congress created Chapter 13, mortgage servicers still don't seem to have the software and systems capable of carrying out the terms of debtor's plans. Although the amount owed by a homeowner is supposed to be fixed by the claim process, in reality the amounts claimed by mortgage servicers are a constantly moving target. Questionable servicer fees are also a serious concern.

Meanwhile the rumors concerning Countrywide's future continue to fly. Will Bank of America buy the ailing mortgage lender? Will the FDIC put it in receivership (Banks, unlike their borrowers, cannot file bankrupty)? The answer will in all likelihood emerge soon. UPDATE And by soon I meant tomorrow. Bank of America announced on January 11 that it will now be buying Countrywide and thus taking on Countrywide's litigation problems.

Debt collectors in the US may not be so bad, after all

Not compared with debt collectors in India, anyway.

Vinod Kumar was sitting in a friend's car listening to the radio one evening last January when a stranger appeared, yanked him from the vehicle and beat him with an iron bar.

To collect a debt, that is. Here in the good ol' USA, debt collectors still rely on intimidation and mental abuse, which seems quaint and peaceful in comparison with the debt collectors in India. And get this for chutzpah: after a court awarded Mr. Kumar $140,000 for the beating he suffered, the bank who hired the thug (or "goonda") collection agency appealed the award as excessive.

While the 21-year-old college student lay bleeding in the parking lot, the assailant sped off with the tiny silver hatchback. But this was no ordinary mugging: Mr. Kumar's attacker was a /goonda/ -- a thug -- working on behalf of one of India's largest banks.

Ruling on Mr. Kumar's case in November, the Delhi State Consumer Commission fined ICICI Bank, India's largest privately owned bank by market value, almost $140,000 for what a judge called "the grossest kind of deficiency in service and unfair trade practice." ICICI Bank has appealed the decision to the Delhi High Court, arguing that the consumer court doesn't have the authority to impose such a large fine and that the collection agency should be held responsible for the attack, not the bank. It has also fired the collection agency responsible for the attack.

Read the rest of the WSJ article.

[crosspost: Caveat Emptor]

Social Security Moving to Debit Cards

Over at Credit Slips, Adam Levitin has this excellent post on the Social Security Administration's decision to begin to distribute some social security benefits in the form of debit cards rather than by traditional check. The move has the potential to save recipients money, but it also has the potential to hurt recipients if the private entities that issue the cards (or the merchants that accept them) charge fees.

Presidential candidates on toy safety

Carey Greenberg-Berger at the Consumerist followed up my digging into presidential candidates' participation in consumer legislation with some more digging, and looked into the candidates' rhetoric on toy safety, one of the "hot" consumer issues of 2007.

The Democrat front-runners gave the matter lip service, advocating better testing, more funding for the CPSC, and border controls. The Republican candidates largely sidestepped the issue, giving a lip service acknowledgment of the problem, at best.

In sum, if you want a president who cares about consumer issues, you are probably better voting for a Democrat and keeping your expectations low.

eBay Strikes Back, Sues for Frivolous DMCA Takedowns

by Greg Beck

A while back I wrote about a case in which an eBay seller sued a company called Innovate! Technology for wrongly invoking the Digital Millennium Copyright Act to cancel his eBay auctions. Although the company claimed that the eBay sales infringed its intellectual property rights, its real complaint was that the sales did not comply with its minimum pricing policy. In other words, the company claimed that its intellectual property rights were violated because its products were priced too low.

Innovate Technology! responded to the suit with what seems to have been a huge tactical blunder: it impleaded eBay, asserting that, if it were held liable to the eBay seller, it would be entitled to indemnification from the auction company. Probably not a good move. eBay generally stays out of DMCA disputes and simply follows the DMCA's statutory takedown provisions, which provide it with immunity from damages. But it could not ignore a lawsuit, and yesterday filed an answer and counterclaim against Innovate! for abuse of the DMCA process, seeking damages, attorneys' fees, and an injunction prohibiting Innovate! from filing any more DMCA notices.

From eBay's countersuit:

Innovate has repeatedly filed notices of claimed infringement ("NOCI") alleging that the sale . . . of Innovate products infringes Innovate’s intellectual property rights when in fact Innovate does not have a good faith belief that its intellectual property rights have been violated.

* * *

Instead, [the NOCI] are an effort by Innovate to impede the legitimate re-sale of Innovate product by bona fide purchasers . . . by knowingly misrepresenting itsintellectual property rights in an attempt to manipulate the secondary product market/s through artificially higher prices. Upon information and belief, to date, Innovate’s conduct has improperly caused the removal of more than 100 listings from the eBay website.

* * *

Innovate’s practices prevent buyers from purchasing genuine items at the best prices the market will bear.

Other cases like this have been brought before (some by Public Citizen), but as far as I know this is the first time that eBay has itself asserted a claim for abuse of the DMCA. It looks like eBay is using this case to make an example out of one of the many companies that are abusing the process at the expense of eBay sellers, consumers, and eBay itself. I think eBay has a strong case.

Would the Close-Connectedness Doctrine Help Defrauded Subprime Borrowers?

Apparently one of the big problems for defrauded subprime borrowers who seek redress is that the mortgage originators are judgment-proof while transferees with the assets to satisfy a judgment are protected by the holder in due course doctrine.  But what about the close-connectedness doctrine?  Decades ago, before the FTC adopted its holder rule, and before state legislatures abolished the holder in due course doctrine in many consumer transactions, state courts created the close-connectedness doctrine to subject lenders to consumer defenses when the lender had a sufficiently close relationship to the entity that dealt directly with the consumer.   See, e.g., Unico v. Owen, 50 N.J. 101, 232 A.2d 405 (1967).  The doctrine was sometimes cumbersome to work with--for one thing, it required proof of the requisite relationship--so it fell into disuse when the FTC promulgated its rule and legislatures enacted more helpful statutes, but so far as I know, it has never been overturned.  If borrowers can establish a similar relationship between securitizers and mortgage originators, could the borrowers get around the holder in due course status that way?  Is that something that borrowers are already trying to do?  I would be curious to read comments from those representing such borrowers.  Individual borrowers might be stymied by arbitration clauses barring class actions and the consequent need to litigate these loans one at a time, but perhaps governmental agencies can intervene to avoid that problem.