Consumer Law & Policy Blog

BK Court: Lender Can't Rely on Liar Loan App

A California couple with income of about $65,000 recently lost their home to foreclosure after having refinanced their mortgage debt up to about $680,000. How did they manage to borrow that much? Stated income (no-doc) mortgages, of course. After they lost their home, the lender took the rather aggressive tack of objecting to the couple's Chapter 7 discharge of the deficiency (the $250,000 alleged difference between the foreclosure proceeds and the mortgage debt.) The bank claimed that the couple had procured their mortgages by fraud, namely by lying about their income, and therefore were barred from discharging the debt under Section 523 of the Bankruptcy Code.

The couple claimed that they knew nothing of the false statements in their application, but the Bankruptcy Court's decision (Download) did not find their testimony credible on this point. However, the judge went on to find that the inflated income was so obviously implausible, given the borrowers' occupations, that the bank could not reasonably have relied on their stated income. The result was a finding against the bank, and a discharge of the unpaid debt.

HT to April Charney.

Loan Modifications and PSA contract limits

One of the obstacles to preventing foreclosures through loan modifications has been the restrictions in securitization contracts. The pooling and servicing agreements ("PSAs") that create securitization trusts usually limit the servicer's authority to rewrite mortgage terms on behalf of the investors, even when the modification will prevent a foreclosure and produce a higher return than foreclosure. PSA provisions vary, but it is not uncommon for the servicer's discretion to be limited by a percent-of-pool cap on modifications.

Residential Funding Corp., an affiliate of GMAC and securitizer of subprime mortgages, recently requested and obtained approval from bond rating agency Moody's (Download) to increase the 5% cap on loan modifications in seven loan pools.

The particular contract term in one of the RFC-sponsored trust agreements (Download) is interesting because although it contains a 5% modification cap, it permits the cap to be increased, with the consent of the rating agencies and the insurer (and without the need for consent of the investors). This farsighted PSA contract term solves at least one of the problems that has prevented mutually beneficial mortgage modifications by other servicers. Kudos to whoever drafted this contract! The pool in question has reached a 20% foreclosure rate and cumulative net losses of 2.38%.

HT to Kevin Byers for spotting this on HousingWire.

House and Senate Vote to Amend FCRA to Block Credit Card Truncation Suits

Congressional Quarterly's Weekly Report reports that the Senate has passed a bill, H.R. 4008, that would block credit card slip truncation suits--that is, the many suits that have been filed for violation of the FCRA provision added by FACTA barring retailers from printing on credit card receipts the full credit card number or credit card expiration date.  Because the House had already passed the bill, it now goes to the President for signature.  Blocking such suits makes sense, but if Congress was going to amend the FCRA, wouldn't it also have made sense to fix some of the other problems with the FCRA? (hat tip to Ira Rheingold)

Justice Department Forces Traditional Realtors To Give Up Stranglehold on Internet Home Listings

This article in yesterday's Washington Post discusses the National Association of Realtors' agreement with the U.S. Justice Department that will facilitation the listing of home sales by Internet-based realtors - - properties that were sometimes listed only by traditional brokers. The agreement may ultimately foster competition about realtors that will bring down real estate commissions.  Here's a taste of the article:

The National Association of Realtors has agreed to change its policies on Internet home-sale listings to settle a long legal battle with federal regulators who have accused the group of anti-competitive behavior that harms consumers.  The settlement, which awaits court approval, would resolve a 2005 Justice Department [antitrust] lawsuit that accused the association of undermining newer, lower-priced rivals by hampering their ability to post home-sale listings online. The Realtors association, which did not admit liability or wrongdoing and faces no fines, agreed not to treat Internet-based brokerages differently than traditional ones.

Upcoming Journal of Consumer Affairs Issue on Financial Literacy

Here is the table of contents for the upcoming Summer 2008 issue of the Journal of Consumer Affairs, Volume 42, Number 2 :

Special Issue on Financial Literacy: Public Policy and Consumers’ Self-Protection

Editorial Prelude: Financial Literacy, Public Policy, and Consumers’ Self-Protection—More Questions, Fewer Answers by John Kozup and Jeanne M. Hogarth

A Framework for Promoting Retirement Savings by Josh Wiener and Tabitha Doescher

Toward a General Model of Consumer Empowerment and Welfare in Financial Markets with an Application to Mortgage Servicers by Paula Fitzgerald Bone

Is Ignorance Bliss? Consumer Accuracy in Judgments about Credit Ratings by Vanessa Gail Perry

Saving for Retirement: The Effects of Fund Assortment Size and Investor Knowledge on Asset Allocation Strategies by Maureen Morrin, Susan Broniarczyk, J. Jeffrey Inman, and John Broussard

The Role of Self-Regulation, Future Orientation, and Financial Knowledge in Long-Term Financial Decisions by Elizabeth Howlett, Jeremy Kees, and Elyria Kemp

The Financial Rationality of Consumer Loan Choices: Revealed Preferences Concerning Interest Rates, Down Payments, Contract Length, and Rebates by Nicholas Wonder, Wendy Wilhelm, and David Fewings

Consumer Financial Literacy and the Impact of Online Banking on the Financial Behavior of Lower-Income Bank Customers by Lisa J. Servon and Robert Kaestner

Editorial Postlude: Financial literacy by Herbert Jack Rotfeld

April 2008 Auto Safety Recalls

Go here to view the National Highway Traffic Safety Administrations recalls for April 2008.

A Lowest Common Denominator Approach to Insurance Regulation?

Check out this interesting and scary post by Elizabeth Warren over at Credit Slips.  Here are two key paragraphs to whet your appetite:

The effective repeal of usury laws in the US was accomplished in the quietest possible way:  In 1978, the Supreme Court interpreted an century-old banking law to determine that federally-chartered banks to lend to people in other states so long as they complied with their home state's usury rate.  It wasn't long until the Chairman of Citibank paid a call on the governor of South Dakota, who rammed through a new, high ceiling on interest rates.  Now Citibank was free to charge whatever it wanted--and states lost the right to protect their own citizens.

The usury story is old and famliar to commercial law types, but it is taking on a new importance.  It seems that John McCain wants to borrow the idea for use with insurance regulation.  According to a terrific piece by Robert Gordon in Slate, Senator McCain thinks federal law should be changed so that insurance companies in one state (say, South Dakota) could sell their products in all the other states, even if those insurance products don't meet the local standards for care.  In other words, just as exporting interest rates became a way to deregulate credit cards, exporting health insurance licensing can be a way to deregulate health insurance.

The effective repeal of usury laws in the US was accomplished in the quietest possible way:  In 1978, the Supreme Court interpreted an century-old banking law to determine that federally-chartered banks to lend to people in other states so long as they complied with their home state's usury rate.  It wasn't long until the Chairman of Citibank paid a call on the governor of South Dakota, who rammed through a new, high ceiling on interest rates.  Now Citibank was free to charge whatever it wanted--and states lost the right to protect their own citizens.

The usury story is old and famliar to commercial law types, but it is taking on a new importance.  It seems that John McCain wants to borrow the idea for use with insurance regulation.  According to a terrific piece by Robert Gordon in Slate, Senator McCain thinks federal law should be changed so that insurance companies in one state (say, South Dakota) could sell their products in all the other states, even if those insurance products don't meet the local standards for care.  In other words, just as exporting interest rates became a way to deregulate credit cards, exporting health insurance licensing can be a way to deregulate health insurance.

Supreme Court Rules in Favor of Plaintiffs in Two Key Employment Discrimination Cases

Although a bit off this blog's beaten path, I thought readers might want access here to the Supreme Court's important decisions issued yesterday in CBOCS West, Inc. v. Humphries, No. 06-1431, and Gomez-Perez v. Potter, No. 06-1321. CBOCS held by a 7 to 2 vote that 42 U.S.C. 1981 authorizes a plaintiff to claim that he was retaliated against for asserting a co-worker's right to be free from racial discrimination. Gomez-Perez held by a 6 to 3 vote that a federal employee may maintain a retaliation claim under the Age Discrimination in Employment Act -- specifically, the plaintiff claimed that her federal agency employer retaliated because she filed an administrative complaint alleging age discrimination. The decisions, taken together, seem to stand for the proposition that both private and federal employees have claims for retaliation even when the relevant anti-discrimination statute is silent on the question of retaliation. The majority in both cases rebuffed the defendants' arguments that the Court should narrow or effectively overrule the Court's earlier decisions in Sullivan v. Little Hunting Park (1968) and Jackson v. Birmingham Board of Education (2005), recognizing retaliation-based claims under 42 U.S.C. 1982 and Title IX, respectively.

Consumer Banktruptcies Soar Despite Restrictions Enacted by Congress in 2005

Check out this front page article in today's Washington Post discussing the significant increase in consumer bankruptcies, despite Congress's enactment in 2005 of legislation intended to tighten eligibility for bankruptcy.  As the article puts it:  "Despite the 2005 passage of a law that made it more difficult and expensive to file for personal bankruptcy, more Americans are choosing bankruptcy over destitution. Filings -- including Chapter 7, which wipes out debt, and Chapter 13, which reorganizes it -- totaled 822,590 last year, up 38 percent from 2006." The article discusses particular examples of working families so hard-pressed that bankruptcy was their only option.

Consumer advocate fights off trademark arbitration claim

by Greg Beck

Robert Arkow runs a website at the domain names metrolinkrider.com and metrolinksucks.com (no longer active) where riders and employees of Metrolink, the Southern California commuter rail system, share their gripes about services and fares. Metrolink filed a complaint under the Uniform Domain Name Dispute Resolution Policy (UDRP), an agreement imposed by ISPs that subjects domain-name owners to mandatory arbitration for challenges to their ownership of domain names. Metrolink claimed that the domain names were confusingly similar to its own and were registered in bad faith. Metrolink was particularly peeved about postings on the site "with such statements as 'Stupid Metrolink Tricks---Seen something really dumb on Metrolink?' and 'Are the Engineers that stupid?'"

The arbitration panel denied the complaint, siding with the pro se domain name owner. Noting a split in past decisions on the issue, the panel held that noncommercial use of a trademark in a domain name for purposes of comment or criticism did not violate the UDRP. It wrote: "[S]omething more than criticism is required to establish illegitimacy and bad-faith for purposes of the [UDRP]."

Use of trademark law to squelch criticism is an ongoing problem, and is of particular concern when claims are brought in international tribunals that aren't bound by the First Amendment. Here, it looks like the panel reached the right result. Public Citizen successfully defended another web critic against a similar UDRP claim by a homebuilder earlier this year.

The Citizen Media Law Project drew my attention to this case, and has lots more background on the UDRP.