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the financial crisis, foreclosures, securitization...

Carol Necole Brown Paper on Reverse Redlining Issues

Carol Necole Brown of North Carolina has written Intent and Empirics: Race to the Subprime.  Here's the abstract:

The United States’ history of racially discriminatory banking, housing, and property policies created a community of black Americans accustomed to exploitative financial services and vulnerable to victimization by subprime lenders. My thesis is that black borrowers are experiencing a new iteration of intentional housing discrimination in the twentieth and twenty-first centuries; lenders identified a vulnerable 'emerging market' of black homeowners and borrowers and knowingly targeted them to receive subprime or predatory loan products when equally situated white borrowers were given superior, prime mortgage products. This Article explores how disparate lending practices coupled with banking deregulation undermined the Congressional push for increased minority homeownership and widened the already burgeoning wealth divide. Millions of borrowers who accepted subprime loans between 1998 and 2006 already have or will lose their homes to foreclosure, resulting in a net loss in homeownership for nearly one million families. Blacks are disproportionately represented among the subprime victims, especially black women. The lending and financial services structure that caused this crisis is complicated by evidence of redlining and of steering blacks into subprime loans, all of which contributed to the present foreclosure crisis. This subprime dilemma merely adds new terminology to a long history of racial discrimination in housing in America. In the end, this Article argues that the search for an understanding of the cumulative events that facilitated the exploitation of blacks by subprime lenders illuminates the institutional and national impediments to reversing the present and future harm of the subprime crisis and to ensuring blacks equal access to one of the benefits of full citizenship - property. First, in Part II, I contend that the disparities in subprime lending experienced by black borrowers and especially by black women result from intentional reverse-redlining and steering by lending institutions, their loan officers, and brokers. Next, in Part III, I consider why blacks and black women are disproportionately victims of subprime mortgages and of predatory lending. Finally, Part IV concludes by discussing the after-effects of subprime and predatory lending and offers possible solutions for rethinking how blacks are to overcome this deeply profound experience with housing discrimination which I suggest made blacks prime subprime victims. It focuses on the property dilemma or rather the dilemma of the landless.

SCOTUS Takes Arbitration Case, Justice Department to Increase Fair Credit Enforcement, and Repoed Toddler

by Jeff Sovern

A few recent consumer law reports: The SCOTUS Blog has reported that the Supreme Court has granted cert in what could be an important arbitration case.  Here's their description:

Docket: 09-497
Title: Rent-A-Car, West, Inc. v. Jackson
Issue: Whether the district court is in all cases required to determine claims that an arbitration agreement subject to the Federal Arbitration Act (“FAA”) is unconscionable, even when the parties to the contract have clearly and unmistakably assigned this “gateway” issue to the arbitrator for decision.

• Opinion below (9^th Circuit)
• Petition for certiorari
• Brief in opposition
• Amicus brief of the Pacific Legal Foundation

One reason this may be significant is that arbitrators have an incentive to rule that such a contract is not unconscionable, since if the arbitrator finds the contract unconscionable the arbitrator would have to terminate the arbitration, thus eliminating the possibility of additional fees from the case, while if the arbitrator denies the unconscionability defense, the arbitrator can continue hearing the matter, and reap additional fees.  Consequently, a ruling that arbitrators can decide such matters is likely to reduce the number of contracts found unconscionable even in cases where such a finding would be warranted. 

The Times reports that the federal Department of Justice is creating a new unit to focus on unfair lending practices and especially reverse-redlining.  Among the reasons this seems like a particularly good move: First, it is difficult for private plaintiffs to bring successful actions under the Equal Credit Opportunity Act, and second, the subprime crisis has lent credence to claims that reverse redlining is common.

From time to time a car is repossessed with a child inside.  Here's another report on such an act.  Imagine how frightened the child must have been.  The UCC forbids self-help repossessions that breach the peace; this one, with a police helicopter search and chase involved, sounds like it qualified.

Obama Foreclosure Plan Still Falling Short

Treasury has issued its report on mortgage modifications under HAMP for December.  The total number of permanent HAMP mods rose from 31,000 at the end of November to 66,000 at the end of December.  In other words, HAMP is resulting in 33,000 permanent modifications per month.  A year ago, the industry was voluntarily and permanently modifying more than 100,000 mortgages per month.  In November and December, about 420,000 new foreclosures were started and about 170,000 foreclosure sales were completed.  HAMP is just not working.

 

Despite Treasury’s fanfare about its drive to convert temporary modifications to permanent modifications, the pace of conversion did not increase significantly in December.  Treasury tries to mask the sad reality by reporting only cumulative numbers each month, rather than giving a more honest report of month-by-month numbers, requiring those of us who care about what is actually happening to do some arithmetic to get at the truth. 

 

Securitization is a Problem for Mortgage Workouts

By Alan White

The Office of the Comptroller of the Currency's 3rd quarter report on foreclosures and mortgage modifications reveals the huge disparities between workouts offered to homeowners whose mortgages are securitized, compared to those with mortgages held on the lender's own books, known as "portfolio" loans.  The report also confirms once again that if a modification reduces the borrower's payments it has a much better chance of succeeding, while modifications that increase debt burdens go back into default at discouraging rates (60% or more).

Two features of loan modifications illustrate the disparity between securitized and portfolio loans.  First is principal reduction.  Many economists and other pundits support principal reduction as the best means to insure sustainable mortgages over the long term.  Lenders holding their own mortgages offered principal reduction in some amount for about one-third of their modifications.  Servicers handling investor-owned mortgages, on the other hand, wrote down principal essentially never. 

Another problematic feature of modifications is the capitalization of unpaid interest and fees.  While investors understandably would prefer to add these amounts to borrower's balances rather than write them off, the result is to increase the homeowner's debt burden, and the likelihood of eventual default and foreclosure.  Lenders modifying their own loans used capitalization in fewer than 20% of their modifications, while securitized mortgage modifications included capitalization 70% to 80% of the time. 

Although portfolio loans are different in other ways (many option ARMs were held in portfolio, for example), these disparities suggest that there is something to the idea that securitization makes aggressive and effective loan modification more difficult.

More Regulation Z Amendments to Implement the Credit CARD Act

The Fed has announced new amendments to Regulation Z to implement the provisions of the Credit CARD Act that go into effect next month.  The Fed is still working on amendments to implement the Credit CARD Act measures that take effect in August.  Here's an excerpt from the Fed's press release summarizing the effect of the new amendments

Among other things, the rule will:

• Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance.
• Prohibit creditors from issuing a credit card to a consumer who is younger than the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.
• Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit.
• Limit the high fees associated with subprime credit cards.
• Ban creditors from using the "two-cycle" billing method to impose interest charges.
• Prohibit creditors from allocating payments in ways that maximize interest charges.

 

2010 Update to Consumer Law Casebook Available

by Jeff Sovern

Thomson/West should shortly make available via email the 2010 update to our consumer law casebook.  The update includes some developments from the last year, such as the Cuomo case, and of course earlier materials, such as problems based on the 2008 amendments to Regulation Z.  If you need the update before Thomson/West makes it available, feel free to email me.  The update is designed to be used with the 2009 edition of the Selected Consumer Statutes. 

A Consumer Protection Perspective on the AALS Conference

by Jeff Sovern

After attending the last three AALS conferences, I wanted to voice a consumer protection perspective. Professors attend the AALS conferences for three reasons that I know of: to learn from the programs; to network; and to travel somewhere else, typically someplace warm in the winter (that last, of course, is not a reason for law schools to pay for the travel, but it is an inducement for some).  Of these, the conference is probably weakest on the first.  Unlike conferences devoted to a single subject, like the National Consumer Law Center's terrific Consumer Litigation Conference, attendees are likely to encounter only a few panels on the subjects on which they teach and write about.  Accordingly, attendees are less likely to learn something that they find of value than at single-subject conferences.  In addition, if a few panels at a single-subject conference turn out not to be useful, attendees can still learn helpful information from the other panels.  But that is less likely at the AALS because other panels will cover other subjects.  To make matters worse, it is often difficult to tell in advance whether a particular panel will be useful.  Many of the program descriptions are written in very general terms, often to connect to a conference theme that may have nothing to do with what is worth discussing in a particular area of legal doctrine.  As a result, it can be hard to determine what the panelists will talk about.  From a consumer protection perspective, it would be much more helpful if the panel descriptions available at the time attendees must decide whether to attend the conference (say, two weeks before the early bird registration period expires), included at least a one-sentence description of what every speaker plans to discuss.  That would permit people to get a better sense of whether they will learn something useful from the conference, which would help them make a more-informed decision about whether to attend.  Unfortunately, it almost seems as if the AALS has a short-term incentive to be vague in the program descriptions, because that permits the illusion that the panels will cover more ground than they actually will, perhaps prompting more people to attend on the mistaken theory that more panels will touch something useful to them than is in fact the case.  Over the long term, as professors learn that the program descriptions are of limited predictive value, some may eschew attendance, including at conferences at which they would have learned something useful to them if they had attended.

There's also the issue of price.  Brian Leiter has expressed the view that the AALS registration fee is "quite a bit higher than the norm," and has posted a poll seeking comment.  Beyond that, the cost of the breakfast session at which Pat McCoy and I spoke was $40; for that, we received some mediocre scrambled eggs, bacon, hash browns, rolls, coffee, and juice.  I can only hope that the discussion merited the $40, for the food certainly did not.

Baltimore Fair Lending Suit Rejected

By Alan White

In an interesting application of the Iqbal/Twombley "I know it when I see it" plausibility standard, a second judge granted a motion to dismiss filed on essentially the same grounds as the motion that was denied by a different judge earlier in the case. 

Judge Motz's decision addresses many interesting questions of interest not only to consumer credit and civil rights specialists but also concerning the constitutional and prudential standing doctrines.  Among the facts whose plausibility the court determines under Rule 12 is whether the lender's reverse redlining and foreclosures caused home vacancies and resulting burdens on the City, or whether instead the City's distress was the result of "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." 

The plaintiffs are not out of court, because the ruling permits Baltimore to file an amended complaint, alleging more specific harms flowing from the particular homes left vacant after Wells Fargo foreclosures, an invitiation plaintiffs will no doubt accept. 

I recently posted a paper on SSRN discussing some related issues, "Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing."

Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers

A draft of my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, parts of which I spoke about at the AALS, is now available on SSRN.  Here's the abstract:

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages - which were commonly used for subprime loans - and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous in reporting that borrowers never withdrew from a loan after reading the final TILA disclosures at the closing, and never used those disclosures for their stated purpose of comparison shopping for loans. In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans.

The paper suggests several measures to increase the likelihood that borrowers will attend to and understand their loan terms. At present, disclosures are mandated by governmental entities that do not participate in the loan transaction - thereby reducing their control over how the disclosures are presented; provided by lenders who do not have a stake in having consumers understand the disclosures and in some cases have an interest in obscuring them; and received by consumers who may not appreciate their importance and may even have reasons to overlook them. The paper therefore suggests a switch from the current TILA disclosure regime to a comprehension regime under which lenders would be obliged to insure that borrowers understand their loan terms. Alternatively, the paper suggests that lenders should be required to determine what proportion of their borrowers understands their loan terms and disclose those figures in the hope of generating competition among lenders for better comprehension scores. The hope is that either choice would give a party to the loan transaction - the lender - a stake in borrowers understanding their loan terms. Creation of such an incentive might cause lenders to reduce distractions to consumers reading disclosure forms, enlist the aid of lenders in conveying key terms to consumers, increase the intelligibility of loan terms, and lead lenders to abandon loan terms that consumers cannot comprehend.

If such a proposal proves politically unfeasible, the paper also draws on the work of Cass Sunstein and Richard H. Thaler to suggest “nudges” that might enhance the current disclosure regime. Specifically, the paper advocates requiring borrowers to view a video of the pain and risk of default and foreclosure to make those risks more salient and increase the likelihood that consumers attend to disclosures. The paper also suggests that loan applicants be obliged to draft a budget, taking into account any future increases in loan payments, so that they will understand the consequences of their payment obligations. Finally, the paper calls for requiring borrowers to take a “placement exam” to demonstrate their mastery of their loan terms and the budgetary consequences. Those who fail the exam would not be permitted to borrow unless a neutral credit counselor worked with them and certified that they understand their loan terms.