More on the Fed and Subprime Lending

by Jeff Sovern

The Fed's role in regulating subprime lending--or not--continues to draw comment. Boston Globe cartoonist Dan Wasserman's take on the Fed's proposed regulations is on the right. Times columnist Paul Krugman's withering column on the Fed's failures to regulate can be found here.  Krugman refers to the Fed's proposal as "the Fed’s locking-the-barn-door-after-the-horse-is-gone decision to modestly strengthen regulation of the mortgage industry."  He adds:

With millions more foreclosures likely, it’s a good bet that homeownership will be lower at the Bush administration’s end than it was at the start.

* * *

So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.

* * *

In a 1963 essay for [Ayn] Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.

I'm not sure Mr. Greenspan still holds by what he wrote in 1963, especially since he recently said in an interview that the government should help homeowners facing foreclosure by giving them direct financial assistance (an account is here) but it's still interesting.  Krugman also discusses how federal regulators have preempted state attempts to stop predatory lending. 

Mother Jones on Cheney-Style Justice

by Deepak Gupta

We've posted recently about the horrifying story of Jamie Leigh Jones, a 20-year old Haliburton/KBR employee who was gang-raped by her co-workers in Iraq and is now being denied her constitutional right to seek justice in court because of a mandatory binding arbitration clause in her employment contract.  Ms. Jones recently told her story to the House Judiciary Committee.  At Mother Jones, reporter Stephanie Mencimer has dug a little deeper into the origins of Haliburton's mandatory arbitration policy.  Can everything bad be traced back to Dick Cheney?  Not quite, but sometimes it seems that way.

Avvo Wins First Amendment Defense in Lawyer-Ranking Suit

by Greg Beck

A while back I wrote about a lawsuit by Seattle attorneys against the website Avvo.com, which provides rankings of lawyers. This week the Western District of Washington solidly rejected all plaintiffs' claims and granted Avvo's motion to dismiss the case.

While expressing skepticism about the usefulness of lawyer rankings, the court held the ratings to be protected opinion under the First Amendment. As the court noted, it is obvious to any reasonable reader that Avvo's numerical ranking of lawyers is subjective and does not convey any facts capable of being proved true or false. That decision is good news for any websites or other media that provide reviews. A review of a product, service, lawyer, or anything else is inherently subjective, and the targets of unfavorable reviews shouldn't be able to recover damages any time they disagree with a reviewer's opinion.

The court also held that the website was not subject to Washington's Consumer Protection Act because providing an information clearinghouse about lawyers to the public is not "trade or commerce" as used in the Act. Like many other plaintiffs in Internet cases, the plaintiffs here made the mistake of claiming that placing advertising on the website made the site "commercial." But if communications became commercial whenever accompanied by advertising, even the New York Times would have to be regarded as commercial speech. Courts are wise to recognize that speakers sometimes like to be compensated for their time, and supporting communications with advertising does not change the nature of the underlying speech.

Lawyer ratings will never be perfect, but consumers generally benefit from access to more information about the products and services they use. This decision is therefore a victory for consumers.

Foreclosures over the Holidays

by Deepak Gupta

Last month, I mentioned a case in which Public Citizen, together with Baltimore-based Civil Justice Inc., is challenging the constitutionality of mortgage foreclosure notice procedures in Maryland.  This morning, the Washington Post ran a very moving profile of our client, Joyce Griffin. The story recounts how Joyce, a first-generation homeowner, saved up her whole life to buy a house, was tricked into a predatory refinanced mortgage with the now-defunct Ameriquest, and never learned until it was too late that her home was put up for sale at a foreclosure auction on the courhouse steps.  She first found out that she had lost her house when she and her young daughter returned home one day and found a handwritten note that had been tacked onto the front door by the investor who bought the house.  The lawyers that conducted the foreclosure proceedings never tried to personally serve Ms. Griffin (the procedure that would have been followed in virtually any other civil proceeding, even an action to collect a very small debt), never posted the house, and did nothing when the certified-mail notices they sent were returned undelivered.   I'll be presenting oral argument in Ms. Griffin's case in the Maryland Court of Appeals in Annapolis on January 8. 

Apple Rumor Site Shut Down

by Greg Beck

The New York Times covers Apple's settlement with a Harvard undergraduate that shut down a popular website devoted to rumors about the company. Apple has engaged in a long-running and costly legal battle against bloggers who publish details on unreleased Apple products. In January, Apple lost a case against two bloggers and was forced to pay $700,000 in legal fees under California's anti-SLAPP statute. Apple has now settled its case against another blogger, the operator of ThinkSecret, on confidential terms. And although the blogger and his lawyer are claiming that the First Amendment was vindicated, it's hard to see how that's the case with the website going offline and the terms of the settlement confidential. As my colleague Paul Levy told the Times: "It’s great for the individual critic to be paid to be quiet, but the public is worse off if we lose the ability to get more information in the marketplace of ideas."

Halliburton Victim Twice Over

by Angela Canterbury (advocacy director for Public Citizen's Congress Watch)
posted yesterday on The Hill's Congress Blog

Today, Jamie Leigh Jones will appear before the House Judiciary Committee and tell how she was gang raped by her co-workers in Iraq while working for a Halliburton subsidiary called KBR. Afterwards, her assaulters confined her to a shipping container and warned that if she left Iraq for medical treatment, she’d be fired. That’s where she was found by agents sent by the U.S. embassy to rescue her — after her father called their congressman, Representative Ted Poe (R-Texas).

Now, Jamie Leigh Jones has been victimized twice over. Because KBR/Halliburton requires employees to sign contracts containing a binding mandatory arbitration (BMA) in the fine print, Jones is being denied her constitutional right to bring her perpetrators before a jury and be heard.

But Jamie Leigh Jones will be heard by Congress today — and then, lawmakers should waste no time in re-opening the doors of justice for Jones and the rest of us. It’s time to ban binding mandatory arbitration in employment and consumer contracts once and for all. There may be no other device being used today by Halliburton and other corporate giants that does more to systematically deny rights to workers and consumers.

Congress has begun to focus. Last Wednesday, the Senate Judiciary Subcommittee on the Constitution held a hearing on the Arbitration Fairness Act — a bill that would ban most forms of binding mandatory arbitration introduced in the House by Rep. Hank Johnson (D-Ga.) and in the Senate by Sen. Russ Feingold (D-Wis.).

Senator Brownback called it a “where the rubber meets the road hearing.” He could not have been more right. While witnesses for the bill showed real-world harms from the system of biased, privatized justice that many companies force on their customers and employees, opponents offered scarecrow arguments crafted with cherry-picked data from out-dated studies. Still, it was impossible to ignore at least one hard fact: binding mandatory arbitration ruins lives.

One Reason for the Subprime Lending Mess

Here is an excerpt from the Senate Committee on Banking, Housing, and Urban Mortgage Market Hearing of March 22, 2007, available  at 2007 WL 892889 (FDHC). The speakers are Senator Dodd, Committee Chair and Sandy Samuels, Executive Managing Director of Countrywide Financial Corporation.

DODD: Let me ask all of you here -- the lenders, anyway -- one
of the arguments we frequently hear against underwriting at the fully
indexed rate is that the borrowers are not qualifying because the
debt-to-income ratios would be too high.

I wonder if you can each give me a ballpark figure of what the
debt-to-income ratio would look like if the hybrid-ARMs borrowers, if
they were underwriting at the fully indexed rate.

Mr. Samuels?

SAMUELS: I don't know what that number is, Mr. Chairman. I will
tell you that about 60 percent of the people who do qualify for the
hybrid ARMs would not be able to qualify at the fully indexed rate.

Now, there may be other products for which they might qualify,
but there is a not insubstantial number who would have difficulty
qualifying in any event. And that is the concern. And I think that
that's, I think, what Mr. Pollock was referring to; that we have to be
concerned, in adopting any kind of regulation or legislation, that we
don't make it harder for families to qualify for a home purchase or
refinance when they can qualify to do it and when we can be sure that
they can -- or we have a good idea that they can be successful in that
loan.

It appears that the "fully indexed rate" is the interest rate that the loan will jump to after the teaser rate expires two or three years down the road.  In other words,  60% of those who qualified for the hybrid ARMs would not be able to qualify for the rate they were to be charged in the relatively near future.  Of course some people's circumstances could be expected to change over that period, but it seems unlikely that most borrowers' situations would.  If lenders were making loans with the expectation that consumers would not be able to qualify for those loans under the terms (i.e., make the payments) they would switch to two or three years later, is that fraudulent?  Were lenders that confident that home prices would continue to rise so that consumers would be able to refinance before the bill came due (incidentally, generating new fees for the lender) or did they just not care because someone else (investors) would be left holding the bag?  Or am I missing something?

More on the Fed's Proposed Subprime Lending Rules

Following up on Jeff Sovern's excellent post on the Federal Reserve's proposed rules on predatory lending, here is some more stuff:  (1) the proposed rule itself (which runs 163 pages); and (2) a Washington post story on the proposed rules.  Jeff's post referred to the Fed's press release.  That release links to places where the public can comment on the proposed rule and view the comments of others.  Comments are due within 90 days of the date the proposal is published in the Federal Register (which presumably will take sometime in the next few days).

Subprime Lending and the Fed

The Fed today proposed new regulations for subprime lending under the authority granted by HOEPA.  The Fed's press release is here.  Here are some excerpts:

The proposal includes four key protections for “higher-priced mortgage loans” secured by a consumer’s principal dwelling:

• Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
• Creditors would be required to verify the income and assets they rely upon in making a loan.
• Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
• Creditors would have to establish escrow accounts for taxes and insurance.

The rule would define “higher-priced mortgage loan” to capture loans in the subprime market but generally exclude loans in the prime market.  A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more.

* * *

The following protections would apply to all loans secured by a consumer’s principal dwelling, regardless of the loan’s APR:

• Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts.  A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.  The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees. 
• Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans would be prohibited from engaging in certain practices.  For example, servicers would be required to credit consumers’ loan payments as of the date of receipt and would have to provide a schedule of fees to a consumer upon request.

The proposed revisions to TILA’s advertising rules require additional information about rates, monthly payments, and other loan features.  The amendments also would ban seven deceptive or misleading advertising practices, including representing that a rate or payment is “fixed” when it can change.  * * *

The Times coverage is here.  Meanwhile, today's edition of the Times had a lengthy but important story about how regulators, and in particular the Fed, failed to act to prevent or at least reduce the severity of the subprime crisis.  The article is titled "Fed Shrugged as Subprime Crisis Spread."  The article provides a case study in how regulation can prevent a crisis created by market failures--but didn't (which offers further support for an Alan White comment last week).

The Hazards of Running a Consumer Review Website

by Greg Beck

Justin Leonard, the owner of InfomercialScams.com, has had his share of legal troubles over the past several months. First, he was sued in Florida by the infomercial company GlobalTec, which sells day-trading software. GlobalTec alleged that, by posting reviews of GlobalTec products that turned up in Google searches, Leonard was infringing the company's trademark. With the assistance of Public Citizen, Leonard filed a motion to dismiss, pointing out that, among many other problems with the lawsuit, he lived in Arizona and had no connection with the state where he had been sued. Last month, the court accepted Public Citizen's arguments and dismissed the case for lack of jurisdiction.

Next, Leonard received a subpoena from Video Professor, an infomercial company that sells video-based courses, demanding that Leonard turn over IP addresses and other personally identifying information about everyone who posted reviews of the company's products. Leonard objected, again with the help of Public Citizen, and yesterday Video Professor withdrew its subpoena, although it did not drop its lawsuit and is apparently still pursuing another subpoena to discover the identity of a Wikipedia user, who the company claims defamed it in the online encyclopedia.

So it came as no surprise to Leonard when he learned of yet another lawsuit against him, this time in Michigan, brought by the Infomercial company Lifestyle Lift, which performs a facelift procedure that it claims takes only about an hour. Predictably, negative reviews of the company began showing up on the Internet, and Lifestyle Lift was not happy. So the company sued Leonard, claiming as others had claimed before that the negative reviews infringed its trademark. Public Citizen again filed a motion to dismiss on Leonard's behalf, asking the court to dismiss the complaint because the First Amendment protects the mention of the company’s trademark on Leonard’s Web site, because Leonard has not violated trademark laws, and because the court has no jurisdiction over Leonard in Michigan.

In addition to the lawsuits, Leonard has received a steady stream of legal threats from other companies demanding that negative reviews be taken offline. Many of these threats are totally without legal basis and seem designed only to bully Leonard into submission. Public Citizen has now defended Leonard on several occasions because, we believe, the Internet's potential as a source for consumer information cannot be realized if website operators are too afraid to post negative reviews. Unfortunately, however, most people don't have access to pro bono trademark lawyers, and defending against a lawsuit or subpoena will often be impossibly expensive for a small website operator.

Unless companies start facing penalties, like judicial sanctions, for lawsuits that are filed for the purpose of squelching negative opinions, they will keep bringing these lawsuits until websites like InfomercialScams.com are no more. And that, you can bet, is exactly what they want.