Countrywide settles predatory lending complaint

by Richard Alderman

Countrywide Financial Corp. has agreed to make loan modifications for about 395,000 mortgage holders and pay $150 million into a foreclosure relief fund to settle predatory lending complaints filed by various states. For more information, click here.

Different Take on New RESPA Reg

by Jon Sheldon

 

This is NCLC’s take on HUD’s new RESPA Regulation changes.  (Although under my name, this was written by Diane Thompson with input from other NCLC staffers.)  The new Good Faith Estimate Statement (GFE) does seem much more user-friendly—with a couple of serious caveats.

First, the form doesn’t tell borrowers what their APR is and consistently overemphasizes settlement costs over interest rate costs. The problem, of course, is that how expensive a loan is depends mostly on interest costs, and then on how you make your payments—how long do you hold the loan, how much of the loan do you actually get the use of and how much is fees, etc.

Second, the YSP disclosure is confusing and untested.  HUD did several rounds of testing.  But it never tested its disclosures to see if borrowers could choose the cheaper loan when the interest rate varied!  Its tests all assumed that the payment of a YSP only changed the settlement costs, not the amount of the loan, or the interest rate, or the monthly payment.  This is simply not how YSPs work in the real world. (A final test did assume a difference in interest rate and YSP—but borrowers were not asked to choose the cheapest loan in this example—only compare the GFEs to the final settlement statement for discrepancies).  Worse, HUD chose to assume that YSPs always operate as a credit against settlement costs, when virtually all available research suggests that in most cases the presence of a YSP increases the total settlement costs beyond any offset created by the YSP.

There are other problems with the final rule, including the difficulties it introduces in evaluating loans for Truth-in-Lending compliance, particularly with respect to the disclosure of origination and title fees, the removal of caps on origination fees for FHA loans, its blessing of average charge pricing, and its failure to make the GFE binding (only some fees are fixed, no interest dependent fees are fixed, other fees can vary within a 10% tolerance; originators can cure most underdisclosures up to 30 days after closing; and brokers can withdraw any guarantee as to settlement costs whenever they convince the borrower to apply for a slightly different loan product).

NCLC's more detailed, but still short, summary analysis of the final rule can be found here.

 

NCLC’s detailed comments on the proposed rule can be found here. 

Times Articles on Credit and Other Matters

by Jeff Sovern

I have accumulated a huge pile of articles from the New York Times on consumer issues, so here goes an attempt to shrink it somewhat.  Today's Times includes an editorial, A Voice for the Consumer, urging the Obama Administration to reinstate the White House Office of Consumer Affairs.  Today's issue also had an article, The Senator Behind the Window Sticker, on the fiftieth anniversary of the law mandating "Monroney Stickers," the stickers on new car windows.  

Yesterday's edition brought Willing to Deal about the willingness of credit card companies to modify credit card debts, in the interest of collecting something rather than nothing.  An excerpt:

Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.

So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.

* * *

Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

Last Wednesday, December 31, the Times noted that Consumers Union [Was] to Buy Gawker Blog Consumerist.  And going back to last Sunday, December 28, the Times published Gretchen Morgenson's column, A Paper Trail That Often Leads Nowhere, about problems in obtaining mortgage loan modifications and proving that payments have been made.  The article described a Wells Fargo case in which Wells Fargo denied the borrowers' claim that they had made their payments and demanded proof beyond what the borrowers could supply.  An excerpt:

In his opinion, [Judge Sidney B. Brooks] fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers.

The only institution that could have the original checks is Wells Fargo, he concluded.

“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”

* * *

“This dispute might portend a widespread abuse of collection practices or creditor overreaching,” he wrote, “demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices.”

The day before Christmas, the Times printed Rules Set for Mortgage Loan Appraisals, about the new rules agreed to by Fannie and Freddie.  And, switching gears, that same day included an editorial, More Privacy Online, calling Yahoo's decision not to retain personally-identifiable search information for more than 90 days "a welcome step."

December 2008 CPSC Product Safety Recalls

Check out the Consumer Product Safety Commission's December 2008 product safety recalls.

Jeffrey Stempel on Mandating Minimum Quality in Mass Arbitration

Jeffrey W. Stempel of UNLV has written Mandating Minimum Quality in Mass Arbitration, 76 Univ. Cincinnati L. Rev. 383 (2008).  Here's the abstract:

The Supreme Court's decision in McMahon and its progeny has led many businesses and employers to embrace what was once deemed a localized, industry-specific practice. The "new" or "mass arbitration" only mildly resembles the traditional system employed by niches in industry for settling commercial matters among commercial actors. While the "old" system involved parties who were relatively equal in bargaining power and knowledge, these systems for mass arbitration lack a freely entered bargain and resemble more closely, contracts of adhesion. Privatized arbitration resolves issues of both statutory and substantive law, and there is a strong argument, given the inexperience of the non-drafters, to impose both procedural and substantive due process controls on the system. The players arguably use arbitration as an alternative to litigation because of its efficiency and low costs as compared with litigation in the courts. However, the system cannot provide an equal forum for dispute resolution unless the relative outcomes are arguably the same. Otherwise, the system fails society's expectations of fairness, morality, effectiveness and market stability.

Several strides have been made, despite the Supreme Court's insistence that privatized arbitration is a fair system, to ensure that privatized arbitration produces fair results. Courts have invigorated the doctrine of unconconscionability to review arbitration clauses imposed on inexperienced players, judicial review of arbitration agreements, creation of due process protocols (both an Employment Protocol and Consumer Protocol), and various organization (AAA, JAMS) standards. While these advancements may better the system, they are of no use without some kind of lawful, meaningful enforcement. In particular, this article addresses the effect these concerns have had on securities arbitration. Securities investments have not declined, indicating that perhaps, the system is viewed as a fair means of resolution.

Even if the system is regarded as being beneficial to the market itself, it lacks the moral soundness necessary to be supported fully by the public and the legal community. To this end, it is suggested that the system provide neutral, quality, and independent arbitrators, provide equal access to sufficient information, eliminate unconscionable clauses (distant venue, high costs, one-sided arbitration rules), eliminate jurisdiction clauses that fail to provide adequate procedural and substantive due process, provide fairness in costs and fee shifting, allow the full range of remedies available in litigation, provide for equal access to representation and the legal market, and provide a meaningful, effective standard of review. Legislative authority may be the best solution for overall mass arbitration, but for securities arbitration, the SEC provides a legitimate, authoritative agency which could arguably effectuate these standards in a meaningful manner.

Collective Bargaining with Card Issuers?

by Alan White

Happy New Year to all, and may I say, good riddance to 2008 (economically speaking that is).  Yesterday's New York Times has a good story about the relationships between credit card issuers and universities.  Banks offer kickbacks to colleges who sign students up for credit cards, and also have arrangements to link student ID cards with debit card products.  While one could simply express Puritan outrage at the academy's complicity in the consumer debt crisis, it occurs to me that there is an opportunity here.  Those of us associated with higher education institutions who also value consumer protection might consider ways in which universities could set standards for good and bad credit and debit card practices, and insist that products offered to students provide safe and sustainable financial services at fair and transparent prices.  If anyone is aware of any college or university that has already taken steps to set standards for card companies with which it deals, please comment.  

Additional note (thx to Jeff Sovern): US PIRG has a white paper on fair campus credit card marketing practices here.  These provide a useful starting point for schools seriously interested in trying to set a new standard for credit card terms.  I would suggest also giving serious consideration to a similar list of standards for an acceptable debt card and deposit account agreement.

Buyology and Consumer Law

I've been listening to the audio version of Martin Lindstrom's Buyology, a book about the neurological basis of marketing.  Lindstrom is a branding expert and marketer and reports on what brain scans have contributed to the art of marketing.  For example, as Lindstrom recently wrote about in a New York Times op-ed, Inhaling Fear, brain scans of smokers indicated that not only did health warnings about smoking not light up the fear section of the brain, but they actually stimulated the brain's craving spot.  Lindstrom describes a host of other discoveries about how the brain responds to marketing.  Among these are "mirror neurons," neurons that fire in response to stimulation and cause us to feel what the people we observe are feeling.  For example, when we watch a movie with people who feel sad, we feel sad.  Similarly, when teens observe attractive models at Abercrombie and Fitch wearing Abercrombie clothes, their mirror neurons flash, and they think they too will feel attractive if they wear Abercrombie clothes (I still don't get why Abercrombie has shirtless guys at the front of their stores, though maybe I don't really want to know the answer to that one). 

Does this have any implications for consumer law?  I'm not sure.  You could argue that brain-scan-based marketing raises questions for consumer law, like is it fair or deceptive to use marketing that is based on how the brain reacts to stimuli.  In terms of the FTC's deception analysis, is seeing an attractive model in Abercrombie clothes likely to deceive the teenage consumer acting reasonably under the circumstances into thinking that he or she will be more attractive in Abercrombie clothes, given that the teen's mirror neurons are flashing just that message, even though nothing to that effect is said or implied?  I think we have a while to go before the FTC and courts adopt that approach, if indeed they ever do, which may only mean that our consumer protection laws have become somewhat outmoded.  Similarly, does the use of mirror neurons, using the FTC's unfariness analysis, cause a substantial injury which cannot reasonably be avoided by the consumer that is not outweighed by countervailing benefits to consumers?  It's hard to see a benefit to consumers in the triggering of mirror neurons to stimulate purchases, and consumers can't reasonably avoid something that they're not aware of.  Manipulating a consumer into making a purchase the consumer would otherwise not make seems like a substantial injury.  But do we want regulators to prohibit the use of this technology to stimulate sales?  I'm not sure. 

This seems like a fruitful subject for a law review article, and perhaps for FTC study.  Science fiction meets consumer law.  I hope someone will have fun with it.

A Comment on HUD's New RESPA Regulations

Last month, when HUD came out with its new RESPA regs, we blogged about it here.  I've been going through the regs more carefully in connection with an update to our casebook that my co-authors and I are preparing (we're hoping to get something out in time for the spring semester), and I am struck once again by what an improvement the new Good Faith Estimate appears to be over the former form, in most respects.  HUD did extensive consumer testing of the new form and alternatives, and it shows.  The form comes in somewhat long at four pages, but I guess HUD thought that struck the right balance between information overload and leaving out important information.  I suspect the new form will do as good a job as can be done in acquainting consumers with the terms of their loans--at least, those consumers who learn from reading such forms .  The one uncertainty I have about the form is the disclosure of yield-spread-premiums.  YSPs are the fees mortgage brokers charge their borrowers that are then added to the principal of the loan.  YSPs don't seem objectionable in principle, but in practice they have been subject to abuse.  Brokers have sometimes charged huge fees--ostenstibly for securing a lower interest rate--and studies have shown that people of color often get charged higher YSPs than whites.  It appears that YSPs have enabled brokers to obtain much larger compensation than other forms of compensation, and under the former form, it's easy to see why.  The old HUD-1, provided at settlement, disclosed the yield-spread premium under the heading “POC,” or “payment outside closing.”  Few consumers knew what this meant.  The new form discloses, on the second page, the orginator’s origination charge, and describes it as the “charge for getting this loan for you.”  So far, so good.  Presumably consumers who see a high number in that line will negotiate for a lower fee or else switch brokers.  A second block then states the credit the consumer receives for the interest rate, which is described as reducing the settlement charges; and the charge the consumer pays for the interest rate, which is described as increasing the settlement charges.  I find that confusing.  I think, though I'm not sure, that the credit will reflect the YSP, since the YSP is added to the principal, and so is not included in the settlement charges.  I wonder if consumers will read a high total, and then see the YSP styled as a credit, and think it's OK then because it's a credit.  But again I'm not sure.  Let's hope HUD's consumer testing reflects what consumers understand in the real world, and that I'm wrong.

Times Article About WaMu's Striking Lending Decisions

The Times has an amazing article today, By Saying Yes, WaMu Built Empire on Shaky Loans, about Washington Mutual's loan decision-making process.  The article describes how one now-jailed supervisor kept drug paraphernalia on his desk, claims by borrowers were rarely confirmed--no matter how outrageous, and loans were made to many unqualified borrowers.  Just to give the flavor, here are some excerpts, but the article has a lot more of this and puts it in a broader context:

* * * The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

* * *

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

* * *

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Times Examines How the Bush Administration Contributed to the Subprime Crisis

Last Sunday, December 21, the Times published White House Philosophy Stoked Mortgage Bonfire, a lengthy study of how the Bush Administration contributed to the subprime bubble.  The article describes how the Bush administration policies of promoting both free enterprise and home ownership led to promoting home ownership by those who could not pay for those homes.  The entire article is worth reading, but here is an excerpt:

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”